U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB

              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                  For the fiscal year ended September 30, 1999

                        Commission File Number 000-25999

                          WAKE FOREST BANCSHARES, INC.
                 (Name of small business issuer in its charter)


        FEDERALLY CHARTERED                              56-2131079
   State or other jurisdiction of              IRS Employer Identification No.
          Incorporation

                             302 South Brooks Street
                        Wake Forest, North Carolina 27587
                    (Address of Principal Executive Offices)

Issuer's telephone, including area code:  (919) 556-5146

Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                                 Title of Class

         Check whether the issuer (1) filed all reports  required to be filed by
Section  13 or 15(d) of the  Exchange  Act  during  the 12  months  (or for such
shorter period that the issuer was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of the registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this 10-KSB or
any amendment to this Form 10-KSB. |X|

         The revenues for the issuer's  fiscal year ended September 30, 1999 are
$6,245,650.

         The issuer  had  1,190,462  shares of common  stock  outstanding  as of
September  30,  1999.   The  aggregate   value  of  the  voting  stock  held  by
non-affiliates  of the Registrant,  computed by reference to the average bid and
asked  prices of  the common stock as of December 21 , 1999 was  $5,562,000  and
$6,136,000, respectively.

                      DOCUMENTS INCORPORATED BY REFERENCE.

         Portions  of the  Annual  Report  to  Stockholders  for the year  ended
September  30, 1999 are  incorporated  by reference  into Parts I and II of this
Form 10-KSB.

         Portions  of the  Proxy  Statement  for  the  2000  Annual  Meeting  of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.

Transitional Small Business Disclosure Format (check one): Yes  |_|  No  |X|



<PAGE>



                                TABLE OF CONTENTS


<TABLE>
<S>                                                                                                               <C>
PART I
         ITEM 1.  DESCRIPTION OF BUSINESS.......................................................................  1
         ITEM 2.  PROPERTIES.................................................................................... 29
         ITEM 3.  LEGAL PROCEEDINGS............................................................................. 29
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 29

PART II
         ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS....................................... 29
         ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.......................................................... 29
         ITEM 7.  FINANCIAL STATEMENTS.......................................................................... 30
         ITEM 8.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
                     ACCOUNTING AND FINANCIAL DISCLOSURE........................................................ 30

PART III
         ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                     COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.......................................... 30
         ITEM 10. EXECUTIVE COMPENSATION........................................................................ 30
         ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                      AND MANAGEMENT............................................................................ 30
         ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 30
         ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K....................................................... 31

SIGNATURES
</TABLE>




















This annual report on Form 10-KSB contains  certain  forward-looking  statements
consisting  of estimates  with respect to the  financial  condition,  results of
operations and other business of the Company that are subject to various factors
which could cause  actual  results to differ  materially  from those  estimates.
Factors which could influence the estimates include changes in general and local
market conditions, legislative and regulatory conditions and an adverse interest
rate environment.



<PAGE>



                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         Wake Forest Bancshares,  Inc. (the "Company") is a  federally-chartered
stock holding  company for Wake Forest Federal Savings & Loan  Association  (the
"Association"),  a federally  chartered stock savings and loan association which
conducts  business from its one office located in Wake Forest,  North  Carolina.
The office is located in Wake County, North Carolina.  The Company was formed on
May 7, 1999  pursuant to an  Agreement  and Plan of  Reorganization  whereby the
Company  exchanged  its common  stock for all  outstanding  common  stock of the
Association.  The Company is a majority owned subsidiary of Wake Forest Bancorp.
M.H.C.,  a federal  mutual  holding  company (the "MHC").  The  Association  was
founded in 1922 as a building and loan  association.  In 1982,  the  Association
converted from a North Carolina chartered mutual savings and loan association to
a federally  chartered mutual savings and loan  association.  During fiscal year
1996, the Association  converted from a federally  chartered  mutual savings and
loan  association to a federally  chartered stock savings and loan  association.
The Association is the Company's sole subsidiary. The Association's deposits are
insured by the  Savings  Association  Insurance  Fund  ("SAIF")  of the  Federal
Deposit  Insurance  Corporation  (the "FDIC") to the maximum extent permitted by
law. At September 30, 1999, the Company had total assets of $72.4 million, total
deposits of $57.7 million and equity of $13.5 million.

         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 primary focus of the Association is to provide financing for single
family housing in its market area of northern Wake County and southern  Franklin
and Granville Counties.  The Association has concentrated its lending activities
on real  estate  loans  secured  by single  family  residential  properties  and
construction loans on primarily residential properties.  To a lesser extent, the
Association invests in commercial real estate, land, multifamily residential and
savings account loans.  The Association  also invests its excess funds primarily
in Federal Home Loan Bank ("FHLB") stock, Federal Home Loan Mortgage Corporation
("FHLMC")  stock,  U.S.  Treasury and Agency  obligations,  and other short term
interest-bearing  deposits.  The  Association's  principal  sources of funds are
deposits and principal and interest  payments on loans.  The principal source of
income  is  interest  on loans  and  investment  securities.  The  Association's
principal expenses are interest paid on deposits and compensation and benefits.

         The Association's  results of operations are dependent primarily on net
interest income,  which is the difference  between the interest income earned on
its  interest-earning  assets,  such as loans and  securities,  and the interest
expense on its interest-bearing  liabilities,  such as deposits. The Association
also generates  non-interest  income such as service charges and other fees. The
Association's  non-interest  expenses  primarily  consist  of  compensation  and
benefits, occupancy expenses, data processing fees and other operating expenses.
The  Association's  results of  operations  are also  significantly  affected by
general  economic and  competitive  conditions  (particularly  changes in market
interest  rates),  government  policies,  changes in  accounting  standards  and
actions of regulatory  agencies.  The Association exceeded all of its regulatory
capital  requirements  at September 30, 1999.  See  "Regulation -- Regulation of
Federal Savings Association -- Capital Requirements."

         The  Association  is primarily  engaged in the  business of  attracting
retail deposits from the general public in the Association's marketing area, and
investing  those  deposits,  together with other sources of funds,  primarily in
loans secured by one- to  four-family  residential  real estate for retention in
its loan portfolio. For further details, see below under "Lending Activities."


                                     - 1 -
<PAGE>

REORGANIZATION

         On  October  23,  1995,  the  Board of  Directors  adopted  the Plan of
Reorganization  from  Mutual  Savings  and Loan  Association  to Mutual  Holding
Company,  pursuant to which the  Association  (i) exchanged  its federal  mutual
savings  and loan  association  charter  for a federal  stock  savings  and loan
association  charter and (ii) formed Wake Forest Bancorp,  M.H.C. (the "MHC"), a
federally  chartered  mutual holding company which owned in excess of 50% of the
common stock of the  Association.  In connection  with the  reorganization,  the
Association  sold  shares  of its  common  stock to  certain  depositors  of the
Association and the  Association's  Employee Stock Ownership Plan ("ESOP").  The
Association completed the reorganization on April 3, 1996.

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

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

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

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

MARKET AREA AND COMPETITION

         The  Association  is a  community-oriented  savings  institution  which
primarily  gathers  deposits  and  originates  one- to  four-family  residential
mortgage loans and construction  loans within its market area. The Association's
market area for deposit  gathering and lending is  concentrated in northern Wake
County and southern Franklin and Granville Counties, North Carolina.

         The  Association's  market area has benefitted from its close proximity
to the "Research Triangle Park" (the "Park") which includes the cities of Chapel
Hill,  Durham and Raleigh.  The commuting  distance from the Park to the town of
Wake  Forest  is  approximately  twenty  miles.  While  most  of the  commercial
development within the Research Triangle Park has been in Durham County, most of
the  residential  development  for the  employees of the Park has taken place in
Wake  County.  Northern  Wake County is expected to benefit  from the  continued
expansion of this area.


                                     - 2 -
<PAGE>

         Currently,   employment   within  the  region   varies,   from  a  more
service-oriented   industry   near  the  Research   Triangle   Park  to  a  more
agricultural/manufacturing   base  further  away  from  the  Park.  The  largest
employers in the northern Wake County area include  Weavexx,  Athey Products and
Mallinckrodt. Proximity to the Park, to Raleigh-Durham International Airport and
to the city of Raleigh, the state capital, should result in the future growth in
the Association's market area.

         The population of the Association's market area grew rapidly during the
1980s and early 1990s and is  expected  to continue  its growth at the same pace
over the next five years.  Wake County is  anticipated to grow by 16.4% over the
next five  years  while the town of Wake  Forest is  expected  to grow even more
rapidly (from its current population of almost 7,000).  Nearly 70% of the growth
within  the region is related to  residential  development.  The recent  housing
developments  within the Association's  market area include a wide range of home
prices.  The market area is  becoming  more  suburbanized  as  evidenced  by the
increasing number of residential  subdivisions located within the region and the
decreasing acreage devoted to farm land.

         The Association faces substantial  competition for both the deposits it
accepts  and the loans it makes.  Located  within  the town of Wake  Forest  are
branch offices of three other  depository  institutions,  all three of which are
commercial  banks. The Association also encounters  significant  competition for
deposits from commercial banks, savings banks, savings and loan associations and
credit unions located in the Raleigh-Durham  area. Due to the Association's size
relative to its competitors, the Association offers a more limited product line,
with an emphasis on product  delivery  and  customer  service.  The  Association
competes  for  deposits by offering a variety of customer  services  and deposit
accounts  at  competitive  interest  rates.  The  Association,  as  well  as its
competitors, is affected by general economic conditions, particularly changes in
market  interest  rates,  real estate  market  values,  government  policies and
regulatory  authorities'  actions.  Changes in the ratio of the demand for loans
relative to the  availability of credit may affect the level of competition from
financial  institutions  which may have greater  resources than the Association,
but which have not generally engaged in lending  activities in the Association's
market  area in the  past.  Competition  may also  increase  as a result  of the
lifting of restrictions on the interstate operations of financial  institutions.
See "--Regulation."

LENDING ACTIVITIES

         Loan Portfolio  Composition.  The Association's loan portfolio consists
primarily  of  conventional   one-  to  four-family  first  mortgage  loans  and
construction  loans. To a lesser extent, the Association also makes multi-family
residential  loans,  commercial real estate loans, land loans, and loans secured
by savings accounts at the Association.

         The types of loans that the  Association  may  originate are subject to
federal  and  state  laws  and  regulations.   Interest  rates  charged  by  the
Association  on loans are  affected by the demand for such loans,  the supply of
money available for lending purposes and the rates offered by competitors. These
factors are in turn  affected  by,  among  other  things,  economic  conditions,
monetary  policies  of the federal  government,  including  the Federal  Reserve
Board, and legislative tax policies.


                                     - 3 -
<PAGE>

         The following  table sets forth the  composition  of the  Association's
mortgage and other loan  portfolios  in dollar  amounts and  percentages  at the
dates indicated.

<TABLE>
<CAPTION>
                                                                            AT SEPTEMBER 30,
                                              -----------------------------------------------------------------------------
                                                              1999                                   1998
                                              -------------------------------------- --------------------------------------
                                                                       % OF                                   % OF
                                                   AMOUNT              TOTAL              AMOUNT              TOTAL
                                              -------------------------------------- ----------------- --------------------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                            <C>                 <C>                  <C>                  <C>
Type of loans:
   One- to four-family
     residential............................   $24,394             39.71%               $  25,479            46.04%
   Multi-family residential.................       184              0.30                      289             0.52
   Commercial real estate...................     8,460             13.76                    5,831            10.53
   Land.....................................     8,232             13.39                    4,840             8.74
   Commercial Construction..................     2,351              3.82                    2,247             4.06
   Residential Construction.................    24,693             40.17                   25,340            45.77
   Equity Line Mortgages....................     3,107              5.05                    1,296             2.34
   Lines of Credit..........................     2,719              4.42                      866             1.56
   Savings Account..........................       222              0.36                      201             0.36
                                               -------             ------               ---------            ------
Total loans.................................   $74,362             120.98%              $  66,389            119.92%
                                               =======             ======               =========            ======

Less:
   Deferred loan fees.......................       172               0.28%                   160               0.29%
   Undisbursed portion of
      loans in process......................    12,460              20.27%                10,602              19.15%
   Allowance for loan losses................       263               0.43%                   263               0.48%
                                                ------              -----                 ------              -----
                                                12,895              20.98%                11,025              19.92%
                                                ------              -----                 ------              -----
Total loans receivable, net.................   $61,467             100.00%             $  55,364             100.00%
                                               =======             ======              =========             ======
</TABLE>

         Loan Maturity.  The following table shows the  contractual  maturity of
the  Association's  loans at September 30, 1999.  The table  reflects the entire
unpaid  principal  balance in the maturity  period that  includes the final loan
payment  date  and,  accordingly,  does not give  effect to  periodic  principal
repayments or possible prepayments. Principal repayments and prepayments totaled
$45.8 million and $31.3 million for the years ended September 30, 1999 and 1998,
respectively.


<TABLE>
<CAPTION>
                                                                  AT SEPTEMBER 30, 1999
                       ------------------------------------------------------------------------------------------------------------
                       RESIDENTIAL RESIDENTIAL                                                    EQUITY             SAVINGS
                          1 TO 4-   MULTI-    COMMERCIAL             COMMERCIAL    RESIDENTIAL     LINE    LINES OF  ACCOUNT
                          FAMILY    FAMILY    REAL ESTATE  LAND  CONSTRUCTION(1) CONSTRUCTION(1) MORTGAGES  CREDIT    LOANS   TOTAL
                          ------    ------    -----------  ----  --------------- --------------- ---------  ------    -----   -----
                                                      (DOLLARS IN THOUSANDS)
<S>                      <C>         <C>        <C>        <C>        <C>            <C>          <C>       <C>      <C>    <C>
Contractual maturity:
One year or less.......  $ 3,193     $  -       $    -     $1,307     $1,556         $24,693      $    -    $2,719   $141   $33,609
                         -------     ----       ------     ------     ------         -------      ------    ------   ----   -------
After one year:
   1 year to 3 years...    15,658        -            -      1,774          -               -           -         -     69    17,501
   3 years to 5 years..    3,179        -          101        278          -               -           -         -     12     3,570
   5 years to 10 years.    1,326        -        1,139      4,512          -               -           -         -      -     6,977
   10 years to 20 years    1,038        -        4,560        361        795               -       3,107         -      -     9,861
   Over 20 years.......        -      184        2,660          -          -               -           -         -      -     2,844
                         -------     ----       ------     ------     ------         -------      ------    ------   ----   -------
   Total after one year   21,201      184        8,460      6,925        795               -        3,107        -     81    40,753
                         -------     ----       ------     ------     ------         -------      ------    ------   ----   -------
Total amount due.......   24,394      184        8,460      8,232      2,351          24,693        3,107    2,719    222    74,362
Less undisbursed loans.        -        -            -     (1,168)    (1,111)        (10,181)           -        -      -   (12,460)
                         -------     ----       ------     ------     ------         -------      ------    ------   ----   -------
Net loans outstanding..  $24,394     $184       $8,460     $7,064     $1,240         $14,512       $3,107   $2,719   $222   $61,902
                         =======     ====       ======     ======     ======         =======       ======   ======   ====   =======
</TABLE>


(1)      Net of undisbursed loans in process.  Certain  construction loans which
         mature in periods  beyond one year are lines of credit to  contractors,
         the purpose of which is to provide for construction related funds.

         The following table sets forth the dollar amounts in each loan category
at September 30, 1999 that are  contractually  due after September 30, 2000, and
whether such loans have fixed interest rates or adjustable interest rates.


                                     - 4 -
<PAGE>

<TABLE>
<CAPTION>
                                                                         DUE AFTER SEPTEMBER 30, 2000
                                                          -------------------------------------------------------
                                                              FIXED RATES       ADJUSTABLE RATES          TOTAL
                                                          -------------------------------------------------------
                                                                            (DOLLARS IN THOUSANDS)

<S>                                                            <C>                 <C>                   <C>
One- to four-family residential..........................      $3,240              $17,961               $21,201
Multi-family residential.................................         184                    -                   184
Commercial Real Estate...................................         630                7,830                 8,460
Land.....................................................       2,762                4,163                 6,925
Commercial Construction..................................         795                    -                   795
Residential Construction.................................           -                    -                     -
Equity line mortgages....................................           -                3,107                 3,107
Lines of credit..........................................           -                    -                     -
Savings account loans....................................          81                    -                    81
                                                               ------              -------              --------
Total....................................................      $7,692              $33,061              $ 40,753
                                                               ======              =======              ========
</TABLE>


         Origination,  Purchase,  Sale and Servicing of Loans. The Association's
lending  activities  are  conducted  through  its office in Wake  Forest,  North
Carolina.  The Association  originates both  adjustable-rate  mortgage loans and
fixed-rate  mortgage  loans.   Adjustable-rate  mortgage  loans  and  fixed-rate
mortgage loans carry maximum  maturities of 30 years and 15 years  respectively.
The  Association's  ability to originate  loans is  dependent  upon the relative
customer  demand for  fixed-rate or  adjustable-rate  mortgage  loans,  which is
affected by the current  and  expected  future  levels of  interest  rates.  The
Association  currently holds for its portfolio all loans it originates and, from
time to time,  purchases  participations  in mortgage loans  originated by other
institutions or affordable  housing  consortiums.  The determination to purchase
participations  in  specific  loans or pools  of  loans is based  upon  criteria
substantially similar to the Association's underwriting policies, which consider
the financial condition of the borrower, the location of the underlying property
and the appraised  value of the property,  among other factors.  The Association
has no  current  plans to sell loans it  originates.  The  Association  does not
service loans for others and has no current plans to begin such activities.

         One- to  Four-Family  Mortgage  Lending.  The  Association  offers both
fixed-rate and  adjustable-rate  mortgage loans,  with maturities up to 15 years
and 30 years, respectively, which are secured by one- to four-family residences,
which generally are owner-occupied.  Substantially all such loans are secured by
property  located in northern  Wake County and southern  Franklin and  Granville
Counties, North Carolina. Loan originations are generally obtained from existing
or past  customers  and members of the local  communities.  See  "--Origination,
Purchase, Sale and Servicing of Loans."

         At  September  30,  1999,  the  Association's  total  loans  were $61.5
million, of which $24.4 million, or 39.71% were one- to four-family  residential
mortgage  loans.  Of  the  one-  to  four-family   residential   mortgage  loans
outstanding at that date,  13.11%,  or $3.2 million,  were fixed-rate  loans and
86.89%, or $21.2 million,  were  adjustable-rate  loans. The Association  offers
three to five year balloon  loans,  which are either called or modified based on
the Association's  interest rates currently in effect at the balloon date. These
loans are similar to adjustable rate loans in that the loans generally  amortize
over terms of up to 30 years but are not indexed to any widely  recognized rate,
such as the one year U.S.  Treasury  securities  rate,  and do not have interest
rate caps or floors.  Instead,  the  majority of such loans are  modified at the
balloon date and the rate is adjusted to the Association's  current rate offered
for similar loans being  originated  on such dates.  For purposes of the tabular
presentations  throughout  this  document,  such  loans  are  considered  to  be
adjustable. Such loans involve risks similar to more traditional adjustable rate
loans  because the  Association  modifies  the loan  documents at the end of the
three  and  five  year  terms to  adjust  for  rates  currently  offered  by the
Association for similar loans being  originated on such dates. The loans are not
generally  underwritten again at modification unless the Association is aware of
collateral or ability-to-pay issues.

         In view of its operating strategy, the Association adheres to its Board
approved underwriting guidelines for loan origination,  which, though prudent in
approach  to  credit  risk  and  evaluation  of  collateral,   allow  management
flexibility  with respect to documentation of certain matters and certain credit
requirements.  As a result,  such  underwriting  guidelines  in certain  lending
situations are less rigid than comparable Federal National


                                     - 5 -
<PAGE>

Mortgage  Association  ("Fannie  Mae") or  FHLMC  underwriting  guidelines.  The
Association's  loans  are  typically  originated  under  terms,  conditions  and
documentation which permit them to be sold to U.S. government sponsored agencies
such as the Fannie Mae or the FHLMC however, the Association has no intention to
sell loans in the secondary  market.  The  Association's  policy is to originate
one- to four-family residential mortgage loans in amounts up to 80% of the lower
of the appraised  value or the selling price of the property  securing the loan.
Mortgage  loans  originated by the  Association  generally  include  due-on-sale
clauses which provide the  Association  with the  contractual  right to deem the
loan immediately due and payable in the event the borrower  transfers  ownership
of the property without the Association's  consent.  Due-on-sale  clauses are an
important means of adjusting the rates on the Association's  fixed-rate mortgage
loan  portfolio and the  Association  has  generally  exercised its rights under
these clauses.

         Construction Lending. The Association originates loans for construction
to local real estate contractors in its market area,  generally with whom it has
an established  relationship  and to  individuals  for  construction  of one- to
four-family residences. The Association's construction loans primarily have been
made to finance the construction of one- to four-family  residential  properties
which are generally  owner-occupied.  These loans are generally fixed-rate loans
with  maturities  of six  months  with  an  automatic  six  month  renewal.  The
Association's policies provide that construction loans may be made in amounts up
to 80% of the  appraised  value of the  property  or the  cost of  construction,
whichever is less,  for  construction  of one- to  four-family  residences.  All
construction  loans are subject to the limitation on  loans-to-one-borrower  and
the Association  considers the location of the proposed construction in order to
avoid  over-concentration in a single area. Prior to making a commitment to fund
a construction  loan, the Association  requires an independent  appraisal of the
property  by  a  state-certified  appraiser  if  the  requested  amount  exceeds
$125,000.  The  Association's  Chairman  of the Board  generally  inspects  each
project at the  commencement  of  construction  and  throughout  the term of the
construction.   Loan  proceeds  are  disbursed  in  increments  as  construction
progresses and as inspections warrant based upon a percentage of completion.  At
September 30, 1999, the Association  had $14.5 million (net of undisbursed  loan
funds of $10.2  million) of  residential  construction  loans which  amounted to
23.58% of the  Association's  net loans  outstanding.  The  largest  residential
construction  loan in the  Association's  portfolio  at  September  30, 1999 was
$731,000,  is secured by a single family  residence  under  construction  and is
performing according to its terms.

         Construction loans to individuals are typically made in connection with
the granting of the  permanent  loan on the  property.  Such loans  convert to a
fully  amortizing  adjustable- or fixed-rate loan at the end of the construction
term. In most cases,  the Association  requires that the closing with respect to
permanent  financing occur  simultaneously  with the closing of any construction
loan to an individual.

         The  Association's  construction  loans to local  builders  are made on
either a pre-sold  or  speculative  (unsold)  basis.  However,  the  Association
generally limits the number of unsold homes under  construction by its builders,
with the amount dependent on the reputation of the builder, the present exposure
of the  builder,  the location of the  property,  the size of the loan and prior
sales of homes in the development.  The Association estimates that approximately
75% of its construction loans to builders are on a speculative basis.

         The  Association  also  originates  construction  loans  on  commercial
properties.  The  underwriting  requirements  are similar to those  required for
construction loans on residential properties. However, the loan to value may not
exceed 75% of the property's  appraised  value,  certain debt service and income
ratios  are  considered,  and  financial  projections  and  business  plans  are
reviewed.  At  September  30,  1999,  the  Association  had $1.2 million (net of
undisbursed loan funds of $1.1 million) of commercial  construction  loans which
amounted  to 1.95% of the  Association's  net  loans  outstanding.  The  largest
commercial  construction  loan in the  Association's  portfolio at September 30,
1999 was $1.6  million,  is  secured by  commercial  strip  office and  shopping
center, and is performing according to its terms.

         Construction loans are generally  considered to involve a higher degree
of credit  risk than one- to  four-family  residential  mortgage  loans  because
circumstances  outside the  borrower's  control may adversely  affect the market
value of the property. The Association has attempted to minimize these risks by,
among  other  things,  limiting  the  extent of its  construction  lending  as a
proportion of lending and by limiting its construction lending


                                     - 6 -
<PAGE>

to primarily residential  properties.  In addition,  the Association has adopted
underwriting guidelines which impose stringent  loan-to-value,  debt service and
other  requirements  for loans which are believed to involve higher  elements of
credit risk, by limiting the geographic  area in which the  Association  will do
business to its existing  market and by working with  builders  with whom it has
established relationships. It is also the Association's general policy to obtain
personal  guarantees  from  the  principal  of its  corporate  borrowers  on its
construction loans.

         Commercial Real Estate  Mortgage  Lending.  The Association  originates
commercial real estate  mortgage loans that are generally  secured by properties
used  for  business  purposes  and  retail  facilities,  such  as  small  office
buildings,  located in the  Association's  market area as well as a  significant
number of church loans. The Association's  underwriting  procedures provide that
commercial  real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised  value or purchase price of the property and (ii)
the Association's current loans-to-one-borrower limit. These loans are generally
originated as three or five year balloon loans with  amortization  periods of up
to 20 years. The Association's  underwriting  standards and procedures for these
loans are similar to those applicable to its construction  lending,  whereby the
Association considers factors such as the borrower's  expertise,  credit history
and  profitability.  At September 30, 1999, the  Association's  commercial  real
estate  mortgage   portfolio  was  $8.5  million,   or  13.76%  of  total  loans
outstanding.  The  largest  commercial  real  estate  loan in the  Association's
portfolio  at  September  30,  1999 was $1.5  million  and is secured by a local
church property.

         Mortgage  loans  secured  by  commercial  real  estate  properties  are
generally  larger and involve a greater  degree of risk than one- to four-family
residential   mortgage  loans.  This  risk  is  attributable  to  the  uncertain
realization  of  projected  income-producing  cash flows  which are  affected by
vacancy rates, the ability to maintain rent levels against  competitively-priced
properties  and the  ability to  collect  rent from  tenants on a timely  basis.
Because payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater  extent to adverse  conditions  in the
real estate market or the economy. The Association seeks to minimize these risks
through its underwriting standards,  which require such loans to be qualified on
the basis of the property's income and debt service ratio.

         Equity Lines and Commercial Lines of Credit. The Association originates
equity  line loans on one- to four-  residential  properties  and line of credit
loans on commercial real estate. The Association's underwriting policies require
that equity line loans on one-to four- residential properties be secured by real
estate  where  the  Association  may or may not have the first  mortgage  on the
property.  The equity line loans on one-to four-  residential  properties may be
made in amounts up to 80% of the  appraised  value or adjusted  tax value of the
property,  and take into  consideration  any outstanding first mortgage liens in
determining the loan-to-value  ratio. At September 30, 1999, the Association was
originating the equity line loans on one- to four-  residential  properties at a
special  introductory rate of 6.75%, which adjust to prime plus 1% one year from
the date of origination, and adjust for changes in prime thereafter on the first
day of the month following a change in prime. The terms on the equity line loans
on one- to  four-  residential  properties  are for a  period  of 15  years.  At
September 30, 1999, the Association's equity line portfolio was $3.1 million, or
5.05% of total loans outstanding.

         The  risks   associated  with  equity  line  loans  on  one-  to  four-
residential  properties are generally similar to the risks associated with other
forms of  single-family  residential  lending  due to the loan-to  value  limits
placed  on such  loans.  The  lines  are  revolving  and may or may not be fully
disbursed at any given time.

         The Association's  underwriting  policies require that commercial lines
of credit be secured by commercial real estate where the Association has a first
mortgage  position.  Commercial lines of credit are made in amounts up to 75% of
the appraised value of developed  commercial real estate or 65% of the appraised
value of  undeveloped  land.  Commercial  lines of credit are made with terms of
between 3 and 10 years at prime plus 1%, with  adjustments  to prime made on the
first day of the month  following a change in prime.  At September 30, 1999, the
Association's  commercial  line of credit  portfolio was $2.7, or 4.42% of total
loans outstanding.


                                     - 7 -
<PAGE>

         The risks  associated with lines of credit on commercial real estate is
substantially the same as the risks described above on the  Association's  other
forms of commercial real estate lending.

         Other Mortgage  Lending.  The Association  also offers loans secured by
land and multi-family  residences.  Land loans generally  consist of residential
building lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for speculative purposes and a
minor amount of farm land.  Multi-family  loans generally consist of residential
properties  with more than four  units,  typically  small  apartment  complexes,
located in the  Association's  primary lending areas.  The Association  does not
solicit such loans which do not  constitute an active part of its business,  and
generally  offers such loans to accommodate its present  customers or to fulfill
commitments  to  affordable  housing  consortiums.  At September  30, 1999,  the
Association's  total  land loan  portfolio  was $8.2  million or 13.39% of total
loans and its multi-family loan portfolio was $184,000 or 0.30% of total loans.

         The  Association   requires   appraisals  of  all  properties  securing
multi-family  residential  loans  if  the  requested  amount  exceeds  $125,000.
Appraisals  are  performed  by  an  independent   appraiser  designated  by  the
Association,  all of which are reviewed by management. The Association considers
the quality and location of the real  estate,  the credit of the  borrower,  the
cash  flow of the  project  and the  quality  of  management  involved  with the
property.

         The Association  originates  multi-family  residential  loans with both
fixed and adjustable  interest  rates which vary as to maturity.  Such loans are
typically  income-producing  investment  loans.  Loan  to  value  ratios  on the
Association's  multi-family  residential  loans are generally limited to 75%. As
part of the criteria for  underwriting  these loans, the  Association's  general
policy is to obtain  personal  guarantees  from the  principals of its corporate
borrowers.

         Multi-family  residential lending entails significant  additional risks
as  compared  with  single-family   residential  property  lending.  Such  loans
typically  involve large loan balances to single  borrowers or groups of related
borrowers.  The payment  experience on such loans is typically  dependent on the
successful operation of the real estate project. The success of such projects is
sensitive  to  changes  in supply  and  demand,  conditions  in the  market  for
multi-family  residential properties as well as regional and economic conditions
generally.

         Savings Account Loans. The Association  offers loans secured by savings
accounts at the  Association.  Interest  rates  charged on such loans are set at
competitive rates, taking into consideration the amount and term of the loan and
are available in amounts up to 95% of the value of the account.  Savings account
loans are reviewed and approved in  conformity  with  standards  approved by the
Association's  Board of  Directors.  At September  30, 1999,  the  Association's
savings  account  loan  portfolio  totaled  $222,000  or 0.36%  of  total  loans
outstanding.

         Loan  Approval  Procedures  and  Authority.   The  Board  of  Directors
establishes  the lending  policies  of the  Association  and reviews  properties
offered as  security.  The Board of  Directors  has  established  the  following
lending  authority:  the lending  officers  may  approve  loans in amounts up to
$500,000  while loans above  $500,000  require  Board  approval.  The  foregoing
lending  limits are reviewed  annually  and, as needed,  revised by the Board of
Directors. The Board generally ratifies all loans on a monthly basis.

         For  all  loans  originated  by  the  Association,  upon  receipt  of a
completed  loan  application  from a  prospective  borrower,  a credit report is
ordered and certain  other  information  is  verified by an  independent  credit
agency, and, if necessary,  additional  financial  information is required to be
submitted by the  borrower.  An appraisal of any real estate  intended to secure
the proposed  loan is  required,  which  appraisal  currently is performed by an
independent appraiser designated and approved by the Association. Loans of up to
$125,000 may be approved by the  Association's  loan officers using property tax
values and drive-by  appraisals.  The Board  annually  approves the  independent
appraisers  used by the  Association  and approves the  Association's  appraisal
policy. It is the  Association's  policy to obtain title and hazard insurance on
all real estate loans. In connection with a borrower's  request for a renewal of
a mortgage loan, the Association evaluates the borrower's ability to service the


                                     - 8 -
<PAGE>

renewed  loan  applying  an  interest  rate  that  reflects   prevailing  market
conditions.   The  current  value  of  the  underlying  collateral  property  is
considered and the Association reserves the right to reappraise the property.

ASSET QUALITY

         Non-Performing  Loans. Loans are considered  non-performing if they are
in  foreclosure or are 90 or more days  delinquent.  Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Association  with respect to  delinquencies  vary depending on the nature of
the loan and period of delinquency. The Association's policies generally provide
that delinquent mortgage loans be reviewed and that a written late charge notice
be mailed no later than the 30th day of delinquency.  The Association's policies
provide that  telephone  contact will be attempted to ascertain  the reasons for
delinquency  and the  prospects  of  repayment.  When  contact  is made with the
borrower at any time prior to foreclosure,  the  Association  attempts to obtain
full  payment  or work  out a  repayment  schedule  with the  borrower  to avoid
foreclosure.

         It is the Association's  general policy to place all loans which are 90
days past due on nonaccrual  status through the  establishment  of a reserve for
uncollected  interest  unless  collectibility  of  all  delinquent  interest  is
assured.  Exceptions to placing a loan on  non-accrual  status are made when the
loan officer or  management  believe that no loss will be incurred on such loan.
Any such  exceptions  are reported to the Board of Directors on a monthly basis.
Circumstances  under which such an  exception  may be granted  include  when the
underlying  property is being actively marketed for sales, when a sales contract
has  been  executed  and is  pending  closing  or when the  Association  and the
borrower are actively  negotiating a work-out  schedule and all such interest is
considered collectible.

         The  Association,  as part of its loan review  process,  including  the
decision whether to place a loan on nonaccrual status, attempts to determine the
underlying  cause of the borrower's  delinquency  and ability to repay the loan.
The Association  has been able to take this approach  because it is a relatively
small  institution  and its  problem  loans  have been  historically  relatively
insignificant as a percentage of the Association's total loan portfolio.  As the
Association  grows, it may be necessary for the Association to take a more rigid
approach and  automatically  place loans on non-accrual  status upon becoming 90
days or more  past due and  evaluate  only  those  loans  that  trigger  certain
mechanisms  that  might  indicate  that  an  exception  is  warranted.  However,
management believes that its current approach keeps it better informed as to the
progress  of a  problem  loan  and its  underlying  difficulties  and  that  its
non-accrual   policy  results  in  an  accurate  depiction  of  loans  that  are
collectible or likely to result in a loss.  There can be no assurances  that the
Association  will be able to maintain its problem  loans at or below  historical
levels.


                                     - 9 -
<PAGE>

         Non-Accrual  and Other Past Due Loans.  The following  table sets forth
information  regarding  non-accrual  loans,  other past due loans and REO. There
were no troubled debt restructurings within the meaning of SFAS No.
15 at any of the dates presented below.



<TABLE>
<CAPTION>
                                                          AT OR FOR THE YEAR ENDED SEPTEMBER 30,
                                                        -------------------------------------------
                                                                1999                 1998
                                                        -------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                                 <C>                  <C>
Non-accrual loans:                                                  $   -                $   -
Accruing loans past due 90 days or more:
        Single family, One- to four-family residential.               294                  134
                                                                    -----                -----
Total non-performing loans.............................             $ 294                $ 134
                                                                    =====                =====
Allowance for loan losses..............................             $ 263                $ 263
                                                                    =====                =====
Real estate owned, net.................................             $   -                $   -
                                                                    =====                =====
Ratios:
    Non-accrual loans to total loans...................                 -                    -
    Non-performing loans to total loans................              0.48%                0.24%
    Non-performing loans and real estate owned to
      total assets.....................................              0.41%                0.18%
    Allowance for loan losses to:
      Non-accrual loans................................                 -                    -
      Non-performing loans.............................             89.51%              196.79%
      Total loans......................................              0.42%                0.47%
Contractual interest income that would have been
  recognized on non-accrual loans......................             $   -                $   -
Actual interest income recognized......................                 -                    -
                                                                    -----                -----
Interest income not recognized.........................             $   -                $   -
                                                                    =====                =====
</TABLE>


         Classified   Assets.   Federal   regulations   and  the   Association's
Classification of Assets Policy require that the Association utilize an internal
asset  classification  system  as a means of  reporting  problem  and  potential
problem  assets.   The  Association  has   incorporated  the  Office  of  Thrift
Supervision  ("OTS")  internal  asset  classifications  as a part of its  credit
monitoring  system. The Association  currently  classifies problem and potential
problem assets as "Special Mention," "Substandard," "Doubtful" or "Loss" assets.
An asset is  considered  "Substandard"  if it is  inadequately  protected by the
current equity and paying capacity of the obligor or of the collateral  pledged,
if any.  "Substandard"  assets  include  those  characterized  by the  "distinct
possibility"  that the  insured  institution  will  sustain  "some  loss" if the
deficiencies are not corrected.  Assets classified as "Doubtful" have all of the
weaknesses   inherent  in  those   classified   "Substandard"   with  the  added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets  classified as "Loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
which do not currently  expose the insured  institution  to  sufficient  risk to
warrant  classification  in one of the  aforementioned  categories  but  possess
weaknesses are required to be designated "Special Mention."

         When an insured institution  classifies one or more assets, or portions
thereof,  as Substandard  or Doubtful,  it is required to establish an allowance
for loan losses in an amount deemed  prudent by  management.  Allowance for loan
losses  ("ALL")  represent  loss  allowances  which  have  been  established  to
recognize  the inherent  risk  associated  with lending  activities,  but which,
unlike  specific  allowances,  have not been  allocated  to  particular  problem
assets.  When  an  insured  institution   classifies  one  or  more  assets,  or
proportions  thereof,  as "Loss," it is required  either to establish a specific
ALL equal to 100% of the amount of the asset so classified or to charge off such
amount.


                                     - 10 -
<PAGE>

         A savings  institution's  determination as to the classification of its
assets and the amount of its ALL is subject to review by the OTS which can order
the  establishment  of additional  allowances.  The OTS, in conjunction with the
other federal banking agencies, recently adopted an interagency policy statement
on ALL. The policy  statement  provides  guidance for financial  institutions on
both the  responsibilities of management for the assessment and establishment of
adequate  allowances  and  guidance  for  banking  agency  examiners  to  use in
determining  the  adequacy  of  valuation  guidelines.   Generally,  the  policy
statement  recommends that  institutions  have effective systems and controls to
identify,  monitor and address  asset  quality  problems;  that  management  has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the  Association  believes that it has  established an adequate ALL, there
can be no  assurance  that  regulators,  in  reviewing  the  Association's  loan
portfolio  as part of a future  regulatory  examination,  will not  request  the
Association to materially  increase its ALL,  thereby  negatively  affecting the
Association's financial condition and earnings at that time. Although management
believes  that adequate ALL have been  established,  actual losses are dependent
upon future events and, as such,  further  additions to the level of specific or
ALL may become necessary.

         The Association's  management  reviews and classifies the Association's
assets quarterly and reports the results to the Association's Board of Directors
on a quarterly basis. The Association  classifies  assets in accordance with the
management guidelines described above. The Association had $293,800 and $320,686
of assets classified as Substandard and no assets classified as Special Mention,
Doubtful or Loss at September 30, 1999 and 1998, respectively.

         Allowance for Loan Losses.  The ALL is established  through a provision
for loan losses based on  management's  evaluation of the risks  inherent in the
Association's  loan portfolio and the general economy.  The ALL is maintained at
an amount  management  considers  adequate to cover loan losses which are deemed
probable  and  estimable.  The  allowance  is based  upon a number  of  factors,
including  asset  classifications,  economic  trends,  industry  experience  and
trends,  industry and geographic  concentrations,  estimated  collateral values,
management's assessment of the credit risk inherent in the portfolio, historical
loan loss experience,  and the Association's underwriting policies. At September
30,  1999,  the  Association's  ALL was  $263,000,  or .43% of total  loans,  as
compared to  $263,000 or .48%,  at  September  30,  1998.  The  Association  had
non-performing  loans  of  $293,800  and  $134,000  at  September  30,  1999 and
September 30, 1998, respectively. The Association's level of nonperforming loans
has  historically  been low and there were no charge-offs to the ALL during 1999
or 1998.  Accordingly,  management  elected  to  leave  the ALL  unchanged.  The
Association  will continue to monitor and modify its ALL as conditions  dictate.
Various regulatory  agencies,  as an integral part of their examination process,
periodically  review the  Association's  ALL.  These  agencies  may  require the
Association  to  establish  additional  valuation  allowances,  based  on  their
judgments of the information available at the time of the examination.

         Real Estate Owned.  Property acquired by the Association as a result of
foreclosure on a mortgage loan is classified as real estate owned ("REO") and is
initially recorded at the fair value of the property at the date of acquisition,
establishing  a new cost  basis  with any  resulting  writedown  charged  to the
allowance  for loan  losses.  Thereafter,  an  allowance  for  losses  on REO is
established  if the cost of a  property  exceeds  its  current  fair  value less
estimated sales costs. The Association obtains an appraisal on a REO property as
soon as  practicable  after  it  takes  possession  of the  real  property.  The
Association  will  generally  reassess  the  value  of  REO at  least  quarterly
thereafter. The policy for loans secured by real estate, which comprise the bulk
of the Association's portfolio, is to establish loss reserves in accordance with
the Association's asset classification  process, based on GAAP. At September 30,
1999, the Association held no REO.


                                     - 11 -
<PAGE>

         The following  table sets forth activity in the  Association's  ALL and
the allowance for losses on REO at or for the periods indicated.


<TABLE>
<CAPTION>
                                                                               FOR THE YEAR ENDED SEPTEMBER 30,
                                                                          --------------------------------------------
                                                                                  1999                  1998
                                                                          --------------------------------------------
                                                                                        (IN THOUSANDS)
<S>                                                                           <C>                   <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year.............................................       $  263                $  263
Provision for loan losses................................................            -                     -
Charge-offs..............................................................            -                     -
Recoveries...............................................................            -                     -
                                                                                ------                ------
Balance at end of year...................................................       $  263                $  263
                                                                                ======                ======
Ratio of net charge-offs to average loans outstanding....................            -                     -
                                                                                ======                ======
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
Balance at beginning of year.............................................       $    -                $    -
Provision for losses.....................................................            -                     -
Recoveries...............................................................            -                     -
Charge-offs..............................................................            -                     -
                                                                                ------                ------
Balance at end of year...................................................       $    -                $    -
                                                                                ======                ======
</TABLE>


         Accrued  interest  receivable on accruing  loans past due by 90 days or
more   amounted  to  $28,300  and  $15,500  at  September  30,  1999  and  1998,
respectively.  Accordingly,  if the  Association  had  placed  all such loans on
non-accrual  status at those dates,  interest  income for the fiscal years ended
September  30,  1999 and 1998  would  have  decreased  by  $12,800  and  $9,500,
respectively.

         The following table sets forth the  Association's ALL allocated by loan
category  and the percent of loans in each  category to total loans at the dates
indicated.


<TABLE>
<CAPTION>
                                                                   AT SEPTEMBER 30,
                                 ---------------------------------------------------------------------------------------
                                                    1999                                         1998
                                 ---------------------------------------------------------------------------------------
                                                               PERCENT OF                                    PERCENT OF
                                                                LOANS IN                                      LOANS IN
                                                 PERCENT OF       EACH                       PERCENT OF         EACH
                                                  ALLOWANCE     CATEGORY                      ALLOWANCE       CATEGORY
                                   ALLOWANCE      TO TOTAL       TO TOTAL      ALLOWANCE      TO TOTAL        TO TOTAL
                                     AMOUNT       ALLOWANCE       LOANS        AMOUNT         ALLOWANCE         LOANS
                                 -------------- --------------  ---------   -------------    ------------   -----------
                                                                (DOLLARS IN THOUSANDS)
<S>                                  <C>              <C>            <C>       <C>              <C>            <C>
Mortgage loans:
  One- to four- family residential   $  35            13.31%         32.80%    $  40            15.21%         38.38%
  Multi-family residential......         3             1.14           0.24         5             1.90           0.44
  Commercial real estate........        55            20.91          11.38        50            19.01           8.78
  Land..........................        37            14.07          11.07        30            11.41           7.29
  Commercial construction.......        10             3.80           3.16        10             3.80           3.38
  Residential construction......       113            42.97          33.21       118            44.87          38.17
  Equity line mortgages ........         5             1.90           4.18         5             1.90           1.95
  Lines of Credit...............         5             1.90           3.66         5             1.90           1.31
                                      ----          -------        -------      ----          -------        -------
Total mortgage loans............       263           100.00          99.70       263           100.00          99.70
Savings account loans...........         -                -           0.30         -                -           0.30
                                      ----          -------        -------      ----          -------        -------
Total allowance for loan losses.     $ 263           100.00%        100.00%   $  263           100.00%        100.00%
                                     =====           ======         ======    ======           ======         ======
</TABLE>


                                     - 12 -
<PAGE>

INVESTMENT ACTIVITIES

         The  Association's  investment  policy  permits  it to  invest  in U.S.
government  obligations,  certain  securities  of  various  government-sponsored
agencies,  certificates  of deposit of insured  banks and savings  institutions,
federal  funds,  and overnight  deposits at the FHLB. At September 30, 1999, the
Association  held:  FHLMC stock with an amortized  cost of $15,200 and a current
market  value  of  $806,200  and FHLB  stock  with a cost  and  market  value of
$280,400.   At  September  30,  1999,  the  Association  held  $9.6  million  in
investments, including short-term interest earning deposits.

         The  following   table  sets  forth   activity  in  the   Association's
investments portfolio for the periods indicated:


<TABLE>
<CAPTION>
                                                                FOR THE YEAR ENDED SEPTEMBER 30,
                                                          ---------------------------------------------
                                                                   1999                   1998
                                                          ---------------------------------------------
                                                                     (IN THOUSANDS)
<S>                                                               <C>                    <C>
Amortized cost at beginning of period................             $16,758                $ 8,130
Purchases/(Sales), net...............................              (7,885)                 8,616
Premium and discount amortization, net...............                  (1)                    12
                                                                  -------               --------
Amortized cost at end of period......................               8,872                 16,758
Net unrealized gain(1)...............................                 763                    770
                                                                  -------               --------
Total securities, net................................             $ 9,635               $ 17,528
                                                                  =======               ========
</TABLE>

----------
(1)      The net  unrealized  gain at  September  30,  1999 and 1998  relates to
         available for sale securities in accordance with Statement of Financial
         Accounting  Standards  ("SFAS")  No. 115.  The net  unrealized  gain is
         presented  in  order  to  reconcile   the   "Amortized   Cost"  of  the
         Association's securities portfolio to the "Carrying Cost," as reflected
         in the Statements of Financial Condition.


         The following table sets forth the amortized cost and fair value of the
Association's investments at the dates indicated.


<TABLE>
<CAPTION>
                                                        AT SEPTEMBER 30,
                                    ----------------------------------------------------
                                               1999                       1998
                                     ------------------------   ------------------------
                                     AMORTIZED                  AMORTIZED
                                        COST      FAIR VALUE       COST       FAIR VALUE
                                     ----------   -----------   ----------    ----------
                                                         (IN THOUSANDS)
<S>                                   <C>           <C>           <C>            <C>
FHLB Overnight Deposits............   $5,827        $5,827        $14,379        $14,379
U.S. Treasury Obligations..........    2,750         2,722          2,000          2,018
Equity securities(1)...............       15           806             15            767
Federal Home Loan Bank Stock.......      280           280            364            364
                                      ------        ------        -------        -------
Total Investments, net(2)..........   $8,872        $9,635        $16,758        $17,528
                                      ======        ======        =======        =======
</TABLE>
-----------------
(1)      Equity securities consist of FHLMC common stock.
(2)      The difference between "Amortized Cost" and "Fair Value" represents net
         unrealized  gains at September  30, 1999 and 1998 on available for sale
         securities in accordance with SFAS No. 115.


                                     - 13 -
<PAGE>

         The following table sets forth the amortized cost and fair value of the
Association's investments, by accounting classification and by type of security,
at the dates indicated.


<TABLE>
<CAPTION>
                                                        AT SEPTEMBER 30,
                                    ----------------------------------------------------
                                               1999                       1998
                                     ------------------------   ------------------------
                                     AMORTIZED                  AMORTIZED
                                        COST      FAIR VALUE       COST       FAIR VALUE
                                     ----------   -----------   ----------    ----------
                                                         (IN THOUSANDS)
<S>                                   <C>           <C>           <C>            <C>
Held to Maturity
  Other debt securities                $   -         $   -         $    -        $    -
                                      ------        ------        -------       -------
    Total held to maturity                 -             -              -             -
                                      ------        ------        -------       -------

Available-for-Sale:
  Debt securities...                   2,750         2,722          2,000         2,018
  Equity securities.                      15           806             15           767
                                      ------        ------        -------       -------
    Total available-for-sale           2,765         3,528          2,015         2,785
                                      ------        ------        -------       -------

FHLB Overnight deposits..........      5,827         5,827         14,379        14,379
                                      ------        ------        -------       -------
Federal Home Loan Bank Stock.....        280           280            364           364
                                      ------        ------        -------       -------

  Total Investments, net(1)           $8,872        $9,635        $16,758       $17,528
                                      ======        ======        =======       =======
</TABLE>


----------
(1)      The difference between "Amortized Cost" and "Fair Value" represents net
         unrealized  gains at September  30, 1998 and 1998 on available for sale
         securities in accordance with SFAS No. 115.


         The  following  table  sets forth  certain  information  regarding  the
amortized cost, fair value and weighted average yield of the Association's  debt
securities at September 30, 1999, by remaining period to contractual maturity.


<TABLE>
<CAPTION>
                                                                              AT SEPTEMBER 30, 1999
                                          ------------------------------------------------------------------------------------------
                                                        HELD-TO-MATURITY                                 AVAILABLE FOR SALE
                                          ----------------------------------------------              ------------------------------
                                                                           WEIGHTED                                      WEIGHTED
                                            AMORTIZED        FAIR          AVERAGE        AMORTIZED        FAIR          AVERAGE
                                              COST           VALUE          YIELD           COST           VALUE          YIELD
                                          -------------- -------------- --------------- -------------- -------------- --------------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                          <C>            <C>              <C>            <C>            <C>               <C>
U.S. Treasury:
   Due within 1 year....................     $  -           $  -              -%            $  500         $  501            5.50%
   Due after 1 year but within 5 years..        -              -              -              2,250          2,221            5.44
   Due after 5 years but within 10 years        -              -              -                  -              -               -
   Due after 10 years...................        -              -              -                  -              -               -
                                             ----           ----            ---              -----          -----            ----
      Total.............................        -              -              -              2,750          2,722               -
Equity Securities.......................        -              -              -                 15            806               -
FHLB Overnight Deposits.................        -              -              -              5,827          5,827               -
                                             ----           ----                            ------         ------            ----
      Total.............................     $  -           $  -              -%            $8,592         $9,355            5.45%
                                             ====           ====            ===             ======         ======            ====
</TABLE>


                                     - 14 -
<PAGE>

SOURCES OF FUNDS

         General.  Deposits,  loan and security  repayments and  prepayments and
cash  flows   generated  from   operations  are  the  primary   sources  of  the
Association's funds for use in lending and for other general purposes.

         Deposits.  The Association  offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of regular
(passbook)  savings  accounts,  NOW accounts,  checking  accounts,  money market
deposit  accounts,  IRAs and  certificates  of  deposit.  In recent  years,  the
Association  has offered  certificates  of deposit with  maturities  of up to 60
months.  At September  30, 1999,  the  Association's  core  deposits  (which the
Association considers to consist of NOW accounts,  money market deposit accounts
and regular savings accounts) constituted 22.91% of total deposits.  The flow of
deposits is influenced significantly by general economic conditions,  changes in
money market rates, prevailing interest rates and competition. The Association's
deposits are obtained  predominantly  from the areas nearby its office location.
The  Association   relies  primarily  on  customer  service  and   long-standing
relationships  with  customers  to attract and retain these  deposits;  however,
market  interest  rates and rates  offered by competing  financial  institutions
significantly  affect the Association's  ability to attract and retain deposits.
The Association does not use brokers to obtain deposits.

         The following  table presents the deposit  activity of the  Association
for the periods indicated.


<TABLE>
<CAPTION>
                                                       FOR THE YEAR ENDED SEPTEMBER 30,
                                                ------------------------------------------------
                                                         1999                     1998
                                                ------------------------------------------------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                    <C>                       <C>
Total deposits at beginning of period..........        $60,038                   $50,056
Net increase (decrease) before interest                 (4,315)                    6,936
credited.......................................
Interest credited..............................          1,931                     3,046
                                                         -----                     -----
Total deposits at end of period................        $57,654                   $60,038
                                                       =======                   =======
</TABLE>


         At September 30, 1999, the Association had approximately  $10.2 million
in Jumbo certificate of deposits (accounts in amounts over $100,000) maturing as
follows:



<TABLE>
<CAPTION>
                                                                                             WEIGHTED
                                                                       AMOUNT             AVERAGE RATE
                                                               ----------------------------------------------
                                                                          (DOLLARS IN THOUSANDS)
Maturity Period
--------------------------------------------------------------
<S>                                                                    <C>                       <C>
Within three months...........................................         $  2,305                  5.32%
After three but within six months.............................            1,915                  5.72
After six but within twelve months............................            1,939                  5.29
After twelve but within twenty-four months....................            2,538                  5.51
After twenty-four months......................................            1,526                  5.88
                                                                       --------
           Total..............................................         $ 10,223                  5.52%
                                                                       ========
</TABLE>


                                     - 15 -
<PAGE>

         The following table sets forth the  distribution  of the  Association's
deposit  accounts and the related  weighted  average interest rates at the dates
indicated.

<TABLE>
<CAPTION>
                                                       AT SEPTEMBER 30,
                         ------------------------------------------------------------------------------
                                          1999                                  1998
                         ------------------------------------------------------------------------------
                                        PERCENT      WEIGHTED                    PERCENT      WEIGHTED
                                        OF TOTAL      AVERAGE                    OF TOTAL      AVERAGE
                           AMOUNT       DEPOSITS       RATE         AMOUNT       DEPOSITS       RATE
                         -----------  ------------ ------------- ------------  ------------ ------------
                                                    (DOLLARS IN THOUSANDS)
<S>                        <C>            <C>          <C>          <C>            <C>          <C>
Passbook accounts.......   $3,554         6.17%        3.00%        3,599          6.00%        3.00%
MMDA accounts...........    7,923        13.76%        4.15%        7,100         11.84%        3.50%
NOW accounts............    1,413         2.45%        2.50%        1,277          2.13%        2.50%
Noninterest-bearing
accounts................      304         0.53%           -           334          0.56%           -
Certificate accounts....   44,402        77.09%        5.35%       47,676         79.47%        5.87%
                           ------        -----                     ------         -----
             Totals       $57,596        100.0%        4.98%       59,986        100.00%        5.15%
                          =======        =====                     ======        ======
</TABLE>

         The following  table presents,  by interest rate ranges,  the amount of
certificate  accounts  outstanding  at the  dates  indicated  and the  period to
maturity of the certificate accounts outstanding at September 30, 1999.

<TABLE>
<CAPTION>
                                                                                                          TOTAL AT
                               PERIOD TO MATURITY AT SEPTEMBER 30, 1999                                 SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------
   INTEREST RATE RANGE        2000           2001            2002         THEREAFTER        TOTAL            1998
-------------------------- ------------- -------------- -------------- ---------------- -------------- -----------------
                                             (DOLLARS IN THOUSANDS)
<S>                           <C>           <C>             <C>              <C>            <C>           <C>
3.00% to 5.00%...........     $12,474       $ 4,095         $  248           $  102         $16,919       $   600
5.01% to 7.00%...........      13,472         7,475          1,918            4,514          27,379        46,862
7.01% to 8.00%...........         104             -              -                -             104           214
                              -------       -------         ------           ------         -------        -------
   Total.................     $26,050       $11,570         $2,166           $4,616         $44,402        $47,676
                              =======       =======         ======           ======         =======        =======
</TABLE>

         Borrowings.  The Association  historically has not used borrowings as a
source of funds.  However,  the Association may obtain advances from the FHLB as
an  alternative  to retail  deposit funds and may do so in the future as part of
its operating  strategy.  These  advances would be  collateralized  primarily by
certain of the Association's mortgage loans and secondarily by the Association's
investment in capital stock of the FHLB. See  "Regulation--Regulation of Federal
Savings  Associations--Federal Home Loan Bank System." Such advances may be made
pursuant  to  several  different  credit  programs,  each of  which  has its own
interest  rate and range of  maturities.  The maximum  amount that the FHLB will
advance to member institutions,  including the Association, fluctuates from time
to time in  accordance  with the policies of the OTS and the FHLB.  At September
30,  1999,   neither  the  Company  nor  the   Association  had  any  borrowings
outstanding.

PERSONNEL

         As of  September  30,  1999,  the  Company  had no  employees  who were
compensated through the Company.

         As  of  September  30,  1999,  the  Association  had  eleven  full-time
employees.  In the last three  years,  the  Association  has  experienced  a low
turnover  rate among its employees  and, as of September 30, 1999,  seven of the
Association's  employees had been with the  Association for more than six years.
The  employees  are not  represented  by a  collective  bargaining  unit and the
Association  considers  its  relationship  with its  employees  to be good.  See
"Executive  Compensation" for a description of certain  compensation and benefit
programs offered to the Association's employees.

                                     - 16 -
<PAGE>

                                   REGULATION

            The  Company,  MHC and the  Association  are  subject  to  extensive
regulation,  examination and  supervision by the OTS, as its chartering  agency.
The  Association's  deposit accounts are insured up to applicable  limits by the
SAIF and it is a member  of the  FHLB of  Atlanta.  The  Association  must  file
reports with the OTS concerning  its  activities and financial  condition and it
must obtain  regulatory  approvals prior to entering into certain  transactions,
such as mergers with, or acquisitions of, other depository institutions. The OTS
conducts  periodic  examinations  to assess the  Association's  compliance  with
various regulatory  requirements.  This regulation and supervision establishes a
comprehensive  framework of activities in which a savings institution can engage
and is intended  primarily for the protection of the deposit  insurance fund and
depositors.  The Company and the MHC, as a savings and loan  holding  companies,
are required to file certain reports with, and otherwise  comply with, the rules
and regulations of the OTS.

            The  OTS  has  significant   discretion  in  connection  with  their
supervisory  and  enforcement  activities and  examination  policies,  including
policies with respect to the  classification  of assets and the establishment of
adequate  loan  loss  reserves  for  regulatory  purposes.  Any  change  in such
policies,  whether by the OTS or the  Congress,  could  have a material  adverse
impact on the Company, the Association or the MHC.

            The following discussion is intended to be a summary of the material
statutes and  regulations  applicable  to savings  institutions  and it does not
purport to be a comprehensive description of all such statutes and regulations.

REGULATION OF FEDERAL SAVINGS ASSOCIATIONS

            Business  Activities.   The  Association  derives  its  lending  and
investment powers from the Home Owner's Loan Act ("HOLA") and the regulations of
the OTS thereunder. Under these laws and regulations, the Association may invest
in mortgage  loans  secured by  residential  and  non-residential  real  estate,
commercial  and consumer  loans,  certain types of debt  securities  and certain
other assets.  The Association may also establish service  corporations that may
engage in activities not otherwise  permissible for the  Association,  including
certain real estate equity  investments and securities and insurance  brokerage.
These  investment  powers are subject to various  limitations,  including  (a) a
prohibition  against the  acquisition of any corporate debt security that is not
rated in one of the four highest  rating  categories;  (b) a limit of 400% of an
association's   capital   on  the   aggregate   amount  of  loans   secured   by
non-residential  real estate  property;  (c) a limit of 20% of an  association's
assets on commercial loans, with the amount of commercial loans in excess of 10%
of  assets  being  limited  to small  business  loans;  (d) a limit of 35% of an
association's  assets on the aggregate amount of consumer loans and acquisitions
of certain debt securities;  (e) a limit of 5% of assets on non-conforming loans
(loans in excess of the specific  limitations  of HOLA);  and (f) a limit of the
greater of 5% of assets or an  association's  capital  on  certain  construction
loans  made for the  purpose  of  financing  what is or is  expected  to  become
residential property.

            Loans  to  One  Borrower.   Under  HOLA,  savings  institutions  are
generally  subject to the same limits on loans to one borrower as are imposed on
national banks.  Generally,  under these limits,  a savings  institution may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of the association's  unimpaired capital and surplus.  Additional amounts
may be lent,  not  exceeding  10% of the  association's  unimpaired  capital and
surplus,   if  such  loans  and  extensions  of  credit  are  fully  secured  by
readily-marketable  collateral.  Such  collateral is defined to include  certain
debt and equity  securities  and bullion,  but  generally  does not include real
estate. At September 30, 1999, the Association's  limit on loans to one borrower
was approximately $2.0 million. At September 30, 1999, the Association's largest
aggregate  amount  of loans to one  borrower  was $2.0  million,  consisting  of
various  loans  secured  by farm and  residential  tracts.  The  second  largest
borrower had an aggregate  balance of  approximately  $2.0  million,  secured by
various  residential  and commercial  tracts.  At September 30, 1999, all of the
loans in both of these lending  relationships were performing in accordance with
their terms.

            QTL Test.  HOLA requires a savings  institution  to meet a Qualified
Thrift  Lender  ("QTL")  test.  Under the QTL test,  a  savings  institution  is
required  to  maintain  at  least  65%  of its  "portfolio  assets"  in  certain
"qualified


                                     - 17 -
<PAGE>

thrift  investments"  in at least 9 months of the most recent  12-month  period.
"Portfolio assets" means, in general, an association's total assets less the sum
of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other
intangible   assets,  and  (c)  the  value  of  property  used  to  conduct  the
association's business. The term "Qualified thrift investments" includes various
types of loans made for residential and housing purposes, investments related to
such purposes,  including certain  mortgage-backed and related  securities,  and
loans for personal,  family,  household and certain other  purposes up to 20% of
the association's  portfolio assets.  Recent legislation  broadened the scope of
"qualified thrift  investments" to include 100% of an institution's  credit card
loans, education loans, and small business loans. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal  Revenue Code of 1986.  At  September  30, 1999,  the
Association  maintained  73.96%  of its  portfolio  assets in  qualified  thrift
investments.  The  Association had also met the QTL test in each of the prior 12
months and, therefore, was a qualified thrift lender.

            A savings  association  that fails the QTL test must either  operate
under certain  restrictions on its activities or convert to a bank charter.  The
initial  restrictions  include  prohibitions  against  (a)  engaging  in any new
activity  not  permissible  for  a  national  bank,  (b)  paying  dividends  not
permissible under national bank regulations, (c) obtaining new advances from any
FHLB and (d)  establishing  any new branch in a location not  permissible  for a
national bank in the association's  home state. In addition,  within one year of
the  date a  savings  association  ceases  to meet  the QTL  test,  any  company
controlling the association  would have to register under, and become subject to
the  requirements  of, the  Association  Holding Company Act of 1956, as amended
("BHC Act").  If the savings  association  does not requalify under the QTL test
within the three-year  period after it failed the QTL test, it would be required
to terminate any activity and to dispose of any investment not permissible for a
national  bank and would have to repay as promptly as possible  any  outstanding
advances  from an FHLB. A savings  association  that has failed the QTL test may
requalify under the QTL test and be free of such  limitations,  but it may do so
only once.

            Capital   Requirements.   The  OTS   regulations   require   savings
institutions to meet three minimum capital  standards:  a tangible capital ratio
requirement  of 1.5% of total assets as adjusted  under the OTS  regulations,  a
leverage  ratio  requirement of 3% of core capital to such adjusted total assets
and a  risk-based  capital  ratio  requirement  of 8% of core and  supplementary
capital to total risk-based  assets. The FDIC and the federal banking regulators
have proposed  amendments to their minimum  capital  regulations to provide that
the minimum  leverage  capital ratio for a depository  institution that has been
assigned  the  highest  composite  rating  of  1  under  the  Uniform  Financial
Institutions  Rating  System  will be 3% and that the minimum  leverage  capital
ratio for any other depository  institution will be 4%, unless a higher leverage
capital ratio is warranted by the  particular  circumstances  or risk profile of
the depository  institution.  In determining the amount of risk-weighted  assets
for purposes of the risk-based capital  requirement,  a savings institution must
compute its risk-based assets by multiplying its assets and certain  off-balance
sheet items by risk-weights, which range from 0% for cash and obligations issued
by the  United  States  Government  or its  agencies  to 100% for  consumer  and
commercial  loans, as assigned by the OTS capital  regulation based on the risks
that the OTS has  determined to be inherent in the type of asset or  off-balance
sheet item. The OTS and the other federal banking regulators adopted,  effective
October 1, 1998,  an  amendment  to their  risk-based  capital  guidelines  that
permits insured depository  institutions to include in supplementary  capital up
to 45% of the pretax net unrealized holding gains on certain  available-for-sale
equity securities, as such gain are computed under the guidelines.

            Tangible  capital is  defined,  generally,  as common  stockholder's
equity (including retained earnings), certain non-cumulative perpetual preferred
stock and related  earnings and minority  interests in equity  accounts of fully
consolidated   subsidiaries,   less  intangibles  other  than  certain  mortgage
servicing  rights  and  investments  in and  loans to  subsidiaries  engaged  in
activities  not  permissible  for a  national  bank.  Core  capital  is  defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory   goodwill  and  certain   purchased   credit  card   relationships.
Supplementary  capital currently includes cumulative preferred stock,  long-term
perpetual preferred stock, mandatory convertible  securities,  subordinated debt
and   intermediate   preferred   stock  and  the  ALL.  The  ALL  includible  in
supplementary  capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of  supplementary  capital that may be included as total  capital
cannot exceed the amount of core capital.


                                     - 18 -
<PAGE>

            The OTS regulations  require that a savings  institution with "above
normal"   interest  rate  risk,   when   determining  its  compliance  with  the
risk-based-capital  requirement,  to deduct a portion of such  capital  from its
total  capital to account for the "above  normal"  interest rate risk. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value  of its  assets  (i.e.,  the  difference  between  incoming  and  outgoing
discounted cash flows from assets,  liabilities and off-balance sheet contracts)
resulting  from a  hypothetical  2%  increase  or  decrease  in market  rates of
interest,  divided by the estimated economic value of the association's  assets,
as calculated in accordance  with  guidelines set forth by the OTS. At the times
when the 3-month  Treasury bond equivalent  yield falls below 4%, an association
may compute its interest rate risk on the basis of a decrease  equal to one-half
of that  Treasury  rate  rather  than on the basis of 2%. A savings  institution
whose  measured  interest rate risk  exposure  exceeds 2% would be considered to
have "above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between the association's measured interest rate risk
and 2%, multiplied by the estimated economic value of the association's  assets.
That  dollar  amount  is  deducted  from  an  association's   total  capital  in
calculating  compliance with its risk-based  capital  requirement.  Any required
deduction for interest rate risk becomes  effective on the last day of the third
quarter  following the reporting  date of the  institution's  financial  data on
which the interest rate risk was computed.  A savings institution with assets of
less than $300  million and a risk-based  capital  ratio in excess of 12% is not
required,  unless the OTS  determines  otherwise,  to comply  with the  standard
reporting requirements for the interest rate risk component, and the institution
may provide such selected  information  as the OTS  determines.  Currently,  the
Association  qualifies for this  exemption from the filing  requirements  but as
part of its interest rate risk management strategy, the Association  voluntarily
files these reports with the OTS. See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations--Asset/Liability  Management." The
regulations  also  authorize  the  Director  of the OTS to  waive  or  defer  an
association's  interest rate risk component on a case-by-case basis. The OTS has
indefinitely deferred the implementation of the IRR component in the computation
of an institution's risk-based capital requirement. The OTS continues to monitor
the IRR of individual  institutions  and retains the right to impose  additional
capital on individual institutions.

            The table below  presents the  Association's  regulatory  capital as
compared to the OTS regulatory capital requirements at September 30, 1999:

<TABLE>
<CAPTION>
                                                                     CAPITAL          EXCESS
                                                   AMOUNT          REQUIREMENTS       CAPITAL
                                              --------------------------------------------------
                                                              (IN THOUSANDS)
<S>                                                <C>                <C>             <C>
Tangible capital..............................     $12,475            $1,075          $11,400
Core capital..................................      12,475             2,149           10,326
Risk-based capital............................      12,738             4,016            8,722
</TABLE>

         A  reconciliation  between  regulatory  capital  and  GAAP  capital  at
September 30, 1999 in the accompanying financial statements is presented below:


<TABLE>
<CAPTION>
                                                  TANGIBLE            CORE            RISK-BASED
                                                   CAPITAL           CAPITAL            CAPITAL
                                              ---------------- ------------------  -----------------
                                                                  (IN THOUSANDS)
<S>                                               <C>             <C>                 <C>
GAAP capital..................................    $  13,468       $  13,468           $  13,468
Standalone equity in Holding Company..........         (520)           (520)               (520)
Net unrealized gain on available for
 sale investment securities, net of tax.......         (473)           (473)               (473)
Allowance for loan losses included as
 supplementary capital........................            -               -                 263
                                                   ---------       ---------           ---------
Regulatory capital............................     $  12,475       $  12,475           $  12,738
                                                   =========       =========           =========
</TABLE>


                                     - 19 -
<PAGE>

         Limitation on Capital  Distributions.  Effective April 1, 1999, the OTS
amended its capital  distribution  regulations to reduce  regulatory  burdens on
savings  associations.  The  regulations  being  replaced,  which were effective
throughout 1998,  established  limitations upon capital distributions by savings
associations,  such as cash  dividends,  payments  to  repurchase  or  otherwise
acquire its shares, payments to shareholders of another institution in a cashout
merger,  and other  distributions  charged  against  capital.  At least  30-days
written notice to the OTS was required for a proposed capital  distribution by a
savings association,  and capital  distributions in excess of specified earnings
or by certain  institutions  were subject to approval by the OTS. An association
that  had  capital  in  excess  of  all  fully  phased  in  regulatory   capital
requirements  before and after a proposed capital  distribution and that was not
otherwise restricted in making capital distributions,  could, after prior notice
but  without  the  approval  of the OTS,  make  capital  distributions  during a
calendar  year  equal to the  greater  of (a) 100% of its net  earnings  to date
during the calendar  year plus the amount that would reduce by half its "surplus
capital   ratio"  (the  excess   capital   over  its  fully  phased  in  capital
requirements)  at the  beginning  of the  calendar  year,  or (b) 75% of its net
earnings for the previous four quarters.  Any additional  capital  distributions
would  require  prior OTS  approval.  Under the  amendments  adopted by the OTS,
certain  savings  associations  will be permitted  to pay capital  distributions
during a calendar year that do not exceed the  association's net income for that
year plus its retained net income for the prior two years, without notice to, or
the approval of, the OTS. However, a savings association subsidiary of a savings
and loan holding company, such as the Association, will continue to have to file
a notice unless the specific capital  distribution  requires an application.  In
addition,  the OTS can  prohibit  a  proposed  capital  distribution,  otherwise
permissible under the regulation, if the OTS has determined that the association
is in need of more than normal  supervision or if it determines  that a proposed
distribution by an association  would constitute an unsafe or unsound  practice.
Furthermore,  under the OTS prompt corrective action regulations, the Bank would
be prohibited from making any capital  distribution if, after the  distribution,
the Bank failed to meet its minimum capital  requirements,  as described  above.
See "--Prompt Corrective Regulatory Action."

         Liquidity.  The  Association  is required to maintain an average  daily
balance of liquid assets (cash,  certain time  deposits,  bankers'  acceptances,
specified United States Government, state and federal agency obligations, shares
of certain  mutual funds and certain  corporate  debt  securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net  withdrawable  deposit accounts plus short-term  borrowings.  This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending  upon economic  conditions and the savings flows of
member institutions,  and is currently 4%. Monetary penalties may be imposed for
failure  to  meet  these  liquidity  requirements.   The  Association's  average
liquidity ratio for the month ended September 30, 1999 was approximately  18.02%
which  exceeded the  applicable  requirements.  The  Association  has never been
subject to monetary penalties for failure to meet its liquidity requirements.

         Assessments. Savings institutions are required by OTS regulation to pay
assessments  to  the  OTS  to  fund  the  operations  of the  OTS.  The  general
assessment,   paid  on  a  semi-annual  basis,  is  computed  upon  the  savings
institution's total assets, including consolidated subsidiaries,  as reported in
the association's  latest quarterly Thrift Financial Report. The OTS has adopted
amendments to its regulations,  effective  January 1, 1999, that are intended to
assess savings  associations on a more equitable basis. The new regulations will
base the assessment for an individual  savings  association on three components:
the size of the  association,  on which the basic assessment would be based; the
association's  supervisory  condition,  which  would  result  in  an  additional
assessment  based  of a  percentage  of the  basic  assessment  for any  savings
institution  with a composite  rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
would result in an  additional  assessment  based of a  percentage  of the basic
assessment for any savings  association  that managed over $1.0 billion in trust
assets,  serviced for others loans  aggregating  more than $1.0 billion,  or had
certain off-balance sheet assets aggregating more than $1.0 billion. In order to
avoid a disproportionate  impact on the smaller savings institutions,  which are
those whose total assets never  exceeded  $100.0  million,  the new  regulations
provide  that the  portion  of the  assessment  based on asset  size will be the
lesser of the assessment under the amended regulations or the regulations before
the  amendment.  Management  believes  that  any  change  in  its  rate  of  OTS
assessments  under the amended  regulations  will not be  material.  The deposit
insurance  premium  expense,  including  operating  assessments  incurred by the
Association  for the fiscal  years ended  September  30,  1999 and 1998  totaled
$59,850 and $55,300, respectively.


                                     - 20 -
<PAGE>

         Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally  chartered  savings  institutions to establish  branches in any
state of the  United  States.  The  authority  to  establish  such a  branch  is
available  (a)  in  states  that   expressly   authorize   branches  of  savings
institutions  located in another state and (b) to an association  that qualifies
as a "domestic building and loan association" under the Internal Revenue Code of
1986 (the "Code"), which imposes qualification requirements similar to those for
a "qualified  thrift  lender"  under HOLA.  See " QTL Test." The authority for a
federal  savings  institution  to establish an interstate  branch  network would
facilitate a geographic  diversification of the association's  activities.  This
authority under HOLA and the OTS  regulations  preempts any state law purporting
to regulate branching by federal savings institutions.

         Community  Reinvestment.  Under the Community Reinvestment Act ("CRA"),
as implemented by OTS  regulations,  a savings  institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire  community,  including  low and  moderate  income
neighborhoods.  The CRA does not  establish  specific  lending  requirements  or
programs  for  financial   institutions  nor  does  it  limit  an  institution's
discretion  to develop the types of products and  services  that it believes are
best  suited  to its  particular  community,  consistent  with the CRA.  The CRA
requires the OTS, in connection with its  examination of a savings  institution,
to assess the association's  record of meeting the credit needs of its community
and to take such record into account in its  evaluation of certain  applications
by such  association.  The CRA also  requires  all  institutions  to make public
disclosure of their CRA ratings.  The Association  received a "Satisfactory" CRA
rating in its most recent examination on June 15, 1998.

         The CRA  regulations  establish  an  assessment  system  that  bases an
association's  rating on its actual  performance in meeting  community needs. In
particular, the assessment system focuses on three tests: (a) a lending test, to
evaluate the  institution's  record of making loans in its assessment areas; (b)
an  investment  test,  to evaluate  the  institution's  record of  investing  in
community development projects, affordable housing, and programs benefitting low
or moderate  income  individuals  and  businesses;  and (c) a service  test,  to
evaluate the institution's delivery of services through its branches,  ATMs, and
other  offices.  Small  savings  institutions  would be  assessed  pursuant to a
streamlined  approach  focusing on a lesser range of information and performance
standards.  The  term  "small  savings  institution"  is  defined  as  including
associations  with less than $250 million in assets or an affiliate of a holding
company  with  banking and thrift  assets of less than $1  billion,  which would
include  the   Association.   The  amended  CRA   regulations   clarify  how  an
institution's CRA performance would be considered in the application process.

         Transactions  with  Related  Parties.  The  Association's  authority to
engage in transactions  with its  "affiliates" is limited by the OTS regulations
and by Sections 23A and 23B of the Federal Reserve Act ("FRA").  In general,  an
affiliate of the Association is any company that controls the Association or any
other company that is  controlled  by a company that  controls the  Association,
excluding  the  Association's  subsidiaries  other than  those that are  insured
depository  institutions.  Currently,  a subsidiary of a bank that is not also a
depository  institution  is not treated as an affiliate of the bank for purposes
of Sections 23A and 23B, but the FRB has proposed  treating any  subsidiary of a
bank that is engaged in activities not  permissible  for bank holding  companies
under the BHCA as an  affiliate  for  purposes of Sections  23A and 23B. The OTS
regulations  prohibit  a  savings  institution  (a) from  lending  to any of its
affiliates  that is  engaged in  activities  that are not  permissible  for bank
holding  companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities  of any  affiliate  other than a  subsidiary.  Section 23A limits the
aggregate  amount of  transactions  with any individual  affiliate to 10% of the
capital  and surplus of the savings  institution  and also limits the  aggregate
amount of transactions  with all affiliates to 20% of the savings  institution's
capital and  surplus.  Extensions  of credit to  affiliates  are  required to be
secured by collateral  in an amount and of a type  described in Section 23A, and
the purchase of low quality  assets from  affiliates  is  generally  prohibited.
Section 23B provides that certain transactions with affiliates,  including loans
and asset purchases, must be on terms and under circumstances,  including credit
standards,  that are  substantially  the same or at  least as  favorable  to the
association  as those  prevailing at the time for comparable  transactions  with
non-affiliated  companies.  In the  absence  of  comparable  transactions,  such
transactions  may only occur under  terms and  circumstances,  including  credit
standards,   that  in  good  faith  would  be  offered  to  or  would  apply  to
non-affiliated companies.


                                     - 21 -
<PAGE>

         The  Association's   authority  to  extend  credit  to  its  directors,
executive officers,  and 10% shareholders,  as well as to entities controlled by
such persons,  is currently  governed by the  requirements of Sections 22(g) and
22(h) of the FRA and  Regulation O of the FRB  thereunder.  Among other  things,
these  provisions  require that  extensions of credit to insiders (a) be made on
terms  that are  substantially  the  same as,  and  follow  credit  underwriting
procedures  that are not less stringent  than,  those  prevailing for comparable
transactions  with  unaffiliated  persons and that do not involve  more than the
normal risk of  repayment  or present  other  unfavorable  features  and (b) not
exceed  certain  limitations  on the amount of credit  extended to such persons,
individually  and in the  aggregate,  which  limits are based,  in part,  on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.

         Enforcement.  Under the Federal Deposit  Insurance Act ("FDI Act"), the
OTS has primary enforcement responsibility over savings institutions and has the
authority  to  bring  enforcement  action  against  all  "institution-affiliated
parties,"  including any controlling  stockholder or any shareholder,  attorney,
appraiser  or  accountant  who  knowingly  or  recklessly  participates  in  any
violation of applicable law or regulation or breach of fiduciary duty or certain
other  wrongful  actions that causes or is likely to cause a more than a minimal
loss or other  significant  adverse  effect on an insured  savings  institution.
Civil  penalties  cover a wide range of  violations  and  actions and range from
$5,000 for each day during which  violations of law,  regulations,  orders,  and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial  pecuniary gain as a result
of such  violation or knowingly or recklessly  caused a substantial  loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million  and  imprisonment  for up to 30 years.  In  addition,
regulators have  substantial  discretion to take  enforcement  action against an
institution that fails to comply with its regulatory requirements,  particularly
with respect to its capital  requirements.  Possible  enforcement  actions range
from the  imposition  of a capital plan and capital  directive to  receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the  authority to  recommend  to the  Director of OTS that  enforcement
action be taken with respect to a particular savings  institution.  If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.

         Standards for Safety and Soundness.  The FDI Act, as amended by Federal
Deposit Insurance Corporation  Improvement Act of 1991 ("FDICIA") and the Riegle
Community  Development  and  Regulatory  Improvement  Act  of  1994  ("Community
Development  Act"),  requires  the OTS,  together  with the other  federal  bank
regulatory  agencies,  to prescribe  standards,  by  regulations  or guidelines,
relating to internal controls,  information  systems and internal audit systems,
loan  documentation,  credit  underwriting,  interest rate risk exposure,  asset
growth, asset quality,  earnings,  stock valuation,  and compensation,  fees and
benefits and such other  operational  and  managerial  standards as the agencies
deem appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines  prescribing  safety and soundness
standards  pursuant  to FDICIA as  amended.  The  guidelines  establish  general
standards relating to internal controls and information systems,  internal audit
systems, loan documentation,  credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks  and  exposures  specified  in the  guidelines.  The  guidelines  prohibit
excessive   compensation  as  an  unsafe  and  unsound   practice  and  describe
compensation   as  excessive   when  the  amounts  paid  are   unreasonable   or
disproportionate  to the services performed by an executive  officer,  employee,
director or principal shareholder. In addition, the OTS adopted regulations that
authorize,  but do not require,  the OTS to order an  institution  that has been
given  notice  by the OTS  that it is not  satisfying  any of  such  safety  and
soundness standards to submit a compliance plan. If, after being so notified, an
institution  fails  to  submit  an  acceptable  compliance  plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order  directing  action  to  correct  the  deficiency  and may  issue  an order
directing other actions of the types to which an undercapitalized association is
subject  under the  "prompt  corrective  action"  provisions  of  FDICIA.  If an
institution fails to comply with such an order, the OTS may seek to enforce such
order in judicial  proceedings  and to impose civil money  penalties.  Effective
October 1, 1996, the OTS and the other federal bank regulatory  agencies adopted
guidelines for identifying and monitoring asset quality and earnings standards.


                                     - 22 -
<PAGE>

         Real Estate Lending  Standards.  The OTS and the other federal  banking
agencies  adopted  regulations  to prescribe  standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the  construction of improvements  on real estate.  The OTS regulations  require
each savings  institution to establish and maintain written internal real estate
lending  standards that are consistent with safe and sound banking practices and
appropriate to the size of the  association and the nature and scope of its real
estate  lending   activities.   The  standards  also  must  be  consistent  with
accompanying  OTS  guidelines,   which  include  loan-to-value  ratios  for  the
different types of real estate loans.  Associations are also permitted to make a
limited  amount  of loans  that do not  conform  to the  proposed  loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending  situations in which  exceptions to
the loan-to-value standards are justified.

         Prompt Corrective  Regulatory  Action.  Under the OTS prompt corrective
action  regulations,  the OTS is required to take certain,  and is authorized to
take other,  supervisory actions against  undercapitalized savings institutions.
For  this  purpose,  a  savings  institution  would  be  placed  in one of  five
categories based on the association's capital.  Generally, a savings institution
is treated as "well  capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to  risk-weighted  assets is
at least 6.0%,  its ratio of core capital to total assets is at least 5.0%,  and
it is not  subject  to any  order  or  directive  by the OTS to meet a  specific
capital level. A savings institution will be treated as "adequately capitalized"
if its ratio of total  capital to  risk-weighted  assets is at least  8.0%,  its
ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association  receives
the highest rating on the CAMEL financial institutions rating system). A savings
institution that has a total risk-based  capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0%  leverage  ratio if
the association receives the highest rating on the CAMEL financial  institutions
rating  system) is considered to be  "undercapitalized."  A savings  institution
that has a total  risk-based  capital  of less than 6.0% or a Tier 1  risk-based
capital  ratio  or a  leverage  ratio  of less  than  3.0% is  considered  to be
"significantly  undercapitalized."  A savings  institution  that has a  tangible
capital  to assets  ratio  equal to or less than 2% is deemed to be  "critically
undercapitalized."  The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements."

         The severity of the action authorized or required to be taken under the
prompt  corrective  action  regulations  increases as an  association's  capital
deteriorates within the three undercapitalized  categories. All associations are
prohibited  from  paying  dividends  or other  capital  distributions  or paying
management fees to any controlling person if, following such  distribution,  the
association  would  be  undercapitalized.  An  undercapitalized  association  is
required  to file a  capital  restoration  plan  within  45 days of the date the
association receives notice that it is within any of the three  undercapitalized
categories.  The  OTS  is  required  to  monitor  closely  the  condition  of an
undercapitalized  association  and to restrict the asset  growth,  acquisitions,
branching,  and new  lines of  business  of such an  association.  Significantly
undercapitalized  associations  are subject to  restrictions  on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or  provide  compensation  to any senior  executive  officer at a rate
exceeding the officer's average rate of compensation  (excluding bonuses,  stock
options and  profit-sharing)  during the 12 months  preceding the month when the
association   became   undercapitalized.    A   significantly   undercapitalized
association  may also be subject,  among other things,  to forced changes in the
composition  of  its  board  of  directors  or  senior  management,   additional
restrictions  on  transactions  with  affiliates,  restrictions on acceptance of
deposits from correspondent associations,  further restrictions on asset growth,
restrictions  on rates paid on  deposits,  forced  termination  or  reduction of
activities  deemed  risky,  and  any  further  operational  restrictions  deemed
necessary by the OTS.

         If one or more grounds exist for  appointing a conservator  or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets, be acquired by a depository  association  holding company
or combine  with  another  depository  association.  The OTS and the FDIC have a
broad range of grounds  under  which they may appoint a receiver or  conservator
for an insured  depositary  association.  Under  FDICIA,  the OTS is required to
appoint a receiver (or with the  concurrence of the FDIC, a  conservator)  for a
critically  undercapitalized  association  within 90 days after the  association
becomes  critically  undercapitalized  or, with the  concurrence of the FDIC, to
take such other  action that would  better  achieve  the  purposes of the prompt
corrective


                                     - 23 -
<PAGE>

action provisions.  Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on  average  during the  quarter  that  begins  270 days  after it first  became
critically undercapitalized,  a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the  association  is viable.  In addition,  an
association  that is  critically  undercapitalized  is  subject  to more  severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC from, among other things,  entering into certain  material  transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.

         Where  appropriate,  the OTS can impose  corrective action by a savings
and loan holding  company  under the "prompt  corrective  action"  provisions of
FDICIA.

         Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established
a new  risk-based  assessment  system  for  determining  the  deposit  insurance
assessments  to be  paid  by  insured  depositary  institutions.  Under  the new
assessment  system,  the FDIC  assigns an  institution  to one of three  capital
categories based on the institution's  financial information as of the reporting
period  ending seven months  before the  assessment  period.  The three  capital
categories consist of (a) well capitalized,  (b) adequately capitalized,  or (c)
undercapitalized.  The  FDIC  also  assigns  an  institution  to  one  of  three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory  evaluation  provided
to the FDIC by the institution's  primary federal regulator and information that
the FDIC determines to be relevant to the institution's  financial condition and
the risk posed to the deposit insurance funds. An institution's  assessment rate
depends  on the  capital  category  and  supervisory  category  to  which  it is
assigned.  Under the regulation,  there are nine assessment risk classifications
(i.e.,  combinations  of capital  groups  and  supervisory  subgroups)  to which
different  assessment  rates  are  applied.  Assessment  rates for both the Bank
Insurance Fund ("BIF") and the SAIF  currently  range from 0.00% of deposits for
an institution in the highest  category (i.e.,  well capitalized and financially
sound,  with no more than a few minor  weaknesses)  to 0.27% of deposits  for an
institution  in the lowest  category  (i.e.,  undercapitalized  and  substantial
supervisory  concern).  The FDIC is authorized to raise the assessment  rates as
necessary to maintain the required  reserve ratio of 1.25%, and both the BIF and
the SAIF currently satisfy the reserve ratio requirement.

         The Deposit Funds Insurance Act of 1996 (the "1996 Funds Act") expanded
the  assessment  base for the payments on the bonds ("FICO bonds") issued in the
late 1980s by the Financing  Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance  Corporation to include,  beginning  January 1, 1997,
the  deposits of both BIF- and  SAIF-insured  institutions.  Until  December 31,
1999,  or such  earlier  date on which the last  savings  association  ceases to
exist, the rate of assessment for BIF-assessable  deposits shall be one-fifth of
the rate imposed on SAIF-assessable  deposits. The Association's SAIF assessment
just for first quarter of year 2000 will be 2.12% for FICO.

         The 1996 Funds Act also provides  that the FDIC cannot  assess  regular
insurance  assessments  for an insurance fund unless  required to maintain or to
achieve the  designated  reserve  ratio of 1.25%,  except on those of its member
institutions  that are not  classified as "well  capitalized"  or that have been
found to have "moderately severe" or "unsatisfactory" financial,  operational or
compliance weaknesses. The Association has not been so classified by the FDIC or
the OTS.  Accordingly,  assuming that the designated reserve ratio is maintained
by the BIF and by the SAIF after the collection of the special SAIF  assessment,
the Association will have to pay substantially  lower regular assessments on its
deposits  compared  to those paid in recent  years,  as long as the  Association
maintains its regulatory status.

         Under the FDI Act,  insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound  practices,
is in an unsafe or unsound condition to continue  operations or has violated any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice,  condition
or violation that might lead to termination of deposit insurance.


                                     - 24 -
<PAGE>

         Federal Home Loan Bank System.  The Association is a member of the FHLB
of Atlanta,  which is one of the regional FHLBs composing the FHLB System.  Each
FHLB provides a central credit facility  primarily for its member  institutions.
The Association,  as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital  stock in the FHLB of Atlanta in an amount at least equal
to the greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar  obligations at the beginning of each year or 1/20 of
its  advances  (borrowings)  from the FHLB of Atlanta.  The  Association  was in
compliance with this  requirement with an investment in FHLB of Atlanta stock at
September  30, 1999,  of $280,400.  Any advances  from a FHLB must be secured by
specified types of collateral,  and all long-term  advances may be obtained only
for the purpose of providing funds for residential housing finance.

         The FHLBs are required to provide funds for the resolution of insolvent
thrifts  and  to  contribute  funds  for  affordable  housing  programs.   These
requirements  could  reduce  the  amount of  earnings  that the FHLBs can pay as
dividends to their members and could also result in the FHLBs  imposing a higher
rate of  interest  on  advances  to their  members.  For the fiscal  years ended
September  30,  1999  and  1998  dividends  from  the  FHLB  of  Atlanta  to the
Association  amounted to $24,500 and $26,000  respectively.  If  dividends  were
reduced,  or interest on future FHLB advances  increased,  the Association's net
interest income would likely also be reduced. Further, there can be no assurance
that the impact of FDICIA  and  Financial  Institutions  Reform,  Recovery,  and
Enforcement  Act of 1989  ("FIRREA") on the FHLBs will not also cause a decrease
in the value of the FHLB of Atlanta stock held by the Association.

         Federal Reserve System. The Association is subject to provisions of the
FRA and the FRB's regulations  pursuant to which depositary  institutions may be
required  to  maintain   non-interest-earning  reserves  against  their  deposit
accounts and certain other liabilities.  Currently,  reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts).  The
FRB regulations  generally  require that reserves be maintained in the amount of
3% of the aggregate of transaction  accounts up to $46.5 million.  The amount of
aggregate  transaction accounts in excess of $46.5 million are currently subject
to a reserve  ratio of 10%,  which ratio the FRB may adjust  between 8% and 12%.
The FRB  regulations  currently  exempt  $4.9  million of  otherwise  reservable
balances from the reserve  requirements,  which exemption is adjusted by the FRB
at the end of each year.  The  Association  is in compliance  with the foregoing
reserve  requirements.  Because required reserves must be maintained in the form
of either  vault  cash,  a  non-interest-bearing  account  at a Federal  Reserve
Association, or a pass-through account as defined by the FRB, the effect of this
reserve requirement is to reduce the Association's  interest-earning assets. The
balances maintained to meet the reserve  requirements  imposed by the FRB may be
used to satisfy liquidity  requirements  imposed by the OTS. FHLB System members
are also  authorized to borrow from the Federal Reserve  "discount  window," but
FRB  regulations  require such  institutions  to exhaust all FHLB sources before
borrowing from a Federal Reserve Association.

REGULATION OF OTS HOLDING COMPANIES

         General.  The  Company  and  the  MHC  are  federal  holding  companies
chartered  under Section 10(o) of the HOLA. As such, the Company and the MHC are
registered  with and  subject  to OTS  examination  and  supervision  as well as
certain reporting  requirements.  In addition, the OTS has enforcement authority
over the Company, the MHC and any of their non-savings institution subsidiaries.
Among  other  things,  this  authority  permits  the OTS to restrict or prohibit
activities  that are  determined to be a serious risk to the  financial  safety,
soundness, or stability of a subsidiary savings institution. Unlike bank holding
companies,  federal mutual  holding  companies are not subject to any regulatory
capital requirements or to supervision by the Federal Reserve System.

         Restrictions  Applicable  to Activities  of Mutual  Holding  Companies.
Pursuant to Section 10(o) of the HOLA, a mutual holding  company may engage only
in  the  following  activities:   (i)  investing  in  the  stock  of  a  savings
institution;  (ii)  acquiring  a mutual  association  through the merger of such
association into a savings institution  subsidiary of such holding company or an
interim savings  institution  subsidiary of such holding company;  (iii) merging
with or  acquiring  another  holding  company,  one of whose  subsidiaries  is a
savings institution;  (iv) investing in a corporation the capital stock of which
is available  for purchase by a savings  institution  under federal law or under
the law of any state where the subsidiary savings institution or associations


                                     - 25 -
<PAGE>

have their home offices; (v) furnishing or performing  management services for a
savings institution subsidiary of such holding company; (vi) holding,  managing,
or liquidating assets owned or acquired from a savings institution subsidiary of
such company; (vii) holding or managing properties used or occupied by a savings
institution subsidiary of such company; (viii) acting as trustee under a deed of
trust;  (ix) any other activity (a) that the FRB, by regulation,  has determined
to be permissible for bank holding  companies under Section 4(c) of the BHC Act,
unless the  Director of the OTS,  by  regulation,  prohibits  or limits any such
activity  for  savings  and loan  holding  companies,  or (b) in which  multiple
savings and loan holding  companies  were  authorized  by regulation to directly
engage on March 5, 1987;  and (x)  purchasing,  holding,  or  disposing of stock
acquired in connection  with a qualified  stock issuance if the purchase of such
stock by such  holding  company is  approved  by the  Director  of the OTS. If a
mutual holding  company  acquires or merges with another  holding  company,  the
holding company  acquired or the holding  company  resulting from such merger or
acquisition may only invest in assets and engage in activities listed above, and
it has a period of two years to cease any  non-conforming  activities and divest
any non-conforming investments.

         Restrictions Applicable to All Savings and Loan Holding Companies.  The
HOLA  prohibits a savings and loan holding  company,  including a federal mutual
holding company, directly or indirectly,  from acquiring (i) control (as defined
under HOLA) of another savings institution (or a holding company parent thereof)
without  prior OTS  approval;  (ii) more than 5% of the voting shares of another
savings   institution  (or  holding  company  parent  thereof)  that  is  not  a
subsidiary,  subject to certain exceptions; (iii) through merger, consolidation,
or purchase of assets, another savings institution or a holding company thereof,
or acquiring all or  substantially  all of the assets of such  institution (or a
holding  company  thereof)  without prior OTS  approval;  or (iv) control of any
depository institution not insured by the FDIC (except through a merger with and
into the holding  company's savings  institution  subsidiary that is approved by
the OTS).

         A savings  and loan  holding  company  may not  acquire  as a  separate
subsidiary an insured  institution  that has a principal  office  outside of the
state  where the  principal  office of its  subsidiary  institution  is located,
except (i) in the case of certain emergency acquisitions (as defined under HOLA)
approved  by  the  FDIC;  (ii)  if  such  holding  company  controls  a  savings
institution  subsidiary that operated a home or branch office in such additional
state as of March  5,  1987,  and  (iii) if the laws of the  state in which  the
savings institution to be acquired is located  specifically  authorize a savings
institution  chartered  by that state to be  acquired  by a savings  institution
chartered by the state where the acquiring  savings  institution  or savings and
loan holding  company is located or by a holding  company that  controls  such a
state chartered association. The conditions imposed upon interstate acquisitions
by those  states that have enacted  authorizing  legislation  vary.  Some states
impose  conditions of  reciprocity,  which have the effect of requiring that the
laws of both the state in which the  acquiring  holding  company is located  (as
determined by the location of its subsidiary savings  institution) and the state
in  which  the  association  to  be  acquired  is  located,  have  each  enacted
legislation  allowing its savings  institutions  to be acquired by  out-of-state
holding  companies on the condition  that the laws of the other state  authorize
such  transactions  on terms  no more  restrictive  than  those  imposed  on the
acquiror  by the state of the  target  association.  Some of these  states  also
impose regional limitations, which restrict such acquisitions to states within a
defined  geographic  region.  Other states allow full nationwide banking without
any  condition  of  reciprocity.   Some  states  do  not  authorize   interstate
acquisitions of savings institutions.  In evaluating an application by a holding
company to acquire a savings  institution,  the OTS must  consider the financial
and  managerial  resources  and future  prospects  of the  company  and  savings
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community, and competitive factors.

         If the  savings  institution  subsidiary  of a federal  mutual  holding
company  fails to meet the QTL test set forth in  Section  10(m) of the HOLA and
regulations of the OTS, the holding company must register with the FRB as a bank
holding  company under the BHC Act within one year of the savings  institution's
failure to so  qualify.  For  additional  information  in this  regard,  see "--
Regulation of Federal Savings Associations -- QTL Test."

         For a description of certain  restrictions on transactions  between the
Association and its affiliates,  including,  without limitation, the Company and
the MHC, see "-- Regulation of Federal Savings Associations  --Transactions with
Related Parties."


                                     - 26 -
<PAGE>

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         General.  The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive  description of the tax rules
applicable to the Company,  the Association or the MHC. The Association was last
audited for its taxable year ended September 30, 1993.

         For federal income tax purposes, the Company and the Association report
their income using a taxable year ending  September 30 and the accrual method of
accounting.  The  Company,  the  Association  in  its  stock  form  (the  "Stock
Association")  and the MHC file separate income tax returns and each reports its
income on the same basis as the Association now reports its income.  Because the
MHC owns less than 80% of the outstanding  common stock of the Company,  the MHC
and the Company are not permitted to file such returns on a consolidated  basis.
The Company and the Stock  Association  may file their returns on a consolidated
basis,  but during  1999 have  elected to file  separately.  The Company and the
Stock  Association  have entered into a tax sharing  agreement which governs the
apportionment of taxable income between the entities.  The Company,  the MHC and
the Stock  Association are subject to federal income taxation in the same manner
as other  corporations  with some exceptions,  including  particularly the Stock
Association's tax reserve for bad debts discussed below.

         Bad Debt Reserves. The Association,  as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general, are
loans  secured  by  certain  interests  in real  property,  and to make,  within
specified  formula limits,  annual additions to the reserve which are deductible
for purposes of computing  the  Association's  taxable  income.  Pursuant to the
Small Business Job Protection  Act of 1996, the  Association is now  recapturing
(taking into  income)  over a multi-year  period a portion of the balance of its
bad debt reserve as of September 30, 1998.

         Distributions.  To the extent that the Association makes  "non-dividend
distributions"  to the Company,  such  distributions  will be considered to have
been made from the  Association's  "base year reserve,"  i.e., its reserve as of
September 30, 1988,  and then from the  Association's  supplemental  reserve for
losses on loans,  to the  extent  thereof,  and an  amount  based on the  amount
distributed  (but not in excess of the amount of such reserves) will be included
in the Association's income. Non-dividend distributions include distributions in
excess of the  Association's  current and accumulated  earnings and profits,  as
calculated  for federal  income tax  purposes,  distributions  in  redemption of
stock, and distributions in partial or complete liquidation.  Dividends paid out
of the Association's  current or accumulated earnings and profits will not be so
included in the Association's income.

         The amount of additional  taxable  income  created from a  non-dividend
distribution  is an amount  that,  when reduced by the tax  attributable  to the
income,  is equal  to the  amount  of the  distribution.  Thus,  if,  after  the
Reorganization, the Association makes a non-dividend distribution to the Holding
Company,  approximately  one and one-half times the amount of such  distribution
(but not in excess of the amount of such reserves) would be includible in income
for federal  income tax purposes,  assuming a 34% federal  corporate  income tax
rate.  The  Association  does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserves.

         Corporate  Alternative  Minimum  Tax. The Code imposes a tax ("AMT") on
alternative  minimum  taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be  offset  by net  operating  loss  carryovers  of  which  the  Association
currently has none. AMTI is adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items.  Thus, the  Association's  AMTI is increased by an
amount equal to 75% of the amount by which the  Association's  adjusted  current
earnings  exceeds its AMTI  (determined  without  regard to this  adjustment and
prior to reduction for net operating losses). The Association does not expect to
be subject to the AMT.


                                     - 27 -
<PAGE>

         Although the corporate environmental tax of 0.12% of the excess of AMTI
(with  certain  modifications)  over $2.0  million has  expired,  under  current
Administration  proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.

         Dividends  Received  Deduction.  As the  owner of more  than 20% of the
stock of the  Company,  the MHC may  deduct  from its  income  80% of  dividends
received from the Company. (A 70% dividends received deduction generally applies
with respect to dividends  received by a corporation  if such  corporation  owns
less than 20% of the stock of the corporation paying the dividend).

STATE TAXATION

         Under North Carolina law, the corporate  income tax is 7.25% of federal
taxable  income as  computed  under  the Code,  subject  to  certain  prescribed
adjustments. An annual state franchise tax is imposed at a rate of .0015 applied
to the greatest of the  institution's  (i) capital stock,  surplus and undivided
profits,  (ii) investment in tangible property in North Carolina or (iii) 55% of
the appraised valuation of property in North Carolina.


                                     - 28 -
<PAGE>

ITEM 2.  PROPERTIES

         The Company conducts its business  through its sole office,  located in
Wake Forest,  North Carolina,  which was renovated in 1995. The Company owns the
main office with net book value for  property  and  equipment  of $452,000 as of
September 30, 1999.  Management  believes that the Company's current  facilities
are  adequate  to meet the  present  and  immediately  foreseeable  needs of the
Company,  the Association and the MHC. However, the Company may consider opening
a branch office in the future.



<TABLE>
<CAPTION>
                                                                                  NET BOOK
                                                                                  VALUE AT
                                    LEASED OR                DATE               SEPTEMBER 30,
                                      OWNED                ACQUIRED                 1999
                               --------------------------------------------------------------------
                                                                                (IN THOUSANDS)
<S>                                   <C>                    <C>                     <C>
Main Office...................        Owned                  1961                    $420
302 S. Brooks Street
Wake Forest, NC  27587
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

         At September  30, 1999,  there were no material  legal  proceedings  to
which the Company was a party or to which any of its property was subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.

                                     PART II

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         Information  relating  to the market for  Company's  common  equity and
related  stockholder  matters  appears under "Common Stock  Information"  in the
Company's  1999 Annual Report to  Stockholders  on page 44, and is  incorporated
herein by reference.

         Information relating to the payment of dividends by the Company appears
under  "Common  Stock  Information"  in the  Company's  1999  Annual  Report  to
Stockholders  on page 44, and is  incorporated  herein by reference.  A dividend
declared  by the Board of  Directors  of the  Company  is  considered  a capital
distribution  from  the  Company  to the  stockholders,  including  Wake  Forest
Bancorp,  M.H.C., its mutual holding company. Under the requirements of the OTS,
there are  certain  restrictions  on the ability of the Company to pay a capital
distribution. See "Regulation--Limitation on Capital Distributions."

         The  Association's  dividend payout ratios were 47.1% and 51.7% and the
equity to asset ratios were 18.4% and 17.6% for years ended  September  30, 1999
and 1998, respectively.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

         Certain of the above-captioned  information appears under "Management's
Discussion and Analysis" in the Registrant's  1999 Annual Report to Stockholders
on pages 3 through 16 and is incorporated herein by reference.


                                     - 29 -
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

         The following financial statements are incorporated by reference to the
indicated pages of the 1999 Annual Report to Stockholders.
<TABLE>
<CAPTION>
                                                                                                            Page(s) in
                                                                                                           Annual Report
                                                                                                           -------------
<S>                                                                                                            <C>
                  o        Independent Auditor's Report.........................................................17
                  o        Consolidated Statements of Financial Condition,
                                    September 30, 1999 and 1998.................................................18
                  o        Consolidated Statements of Income,
                                    Years Ended September 30, 1999 and 1998.....................................19
                  o        Consolidated Statements of Stockholders' Equity,
                                    Years Ended September 30, 1999 and 1998.....................................20-21
                  o        Consolidated Statements of Cash Flows,
                                    Years Ended September 30, 1999 and 1998.....................................22-23
                  o        Notes to Consolidated Financial Statements...........................................24-43
</TABLE>

ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE

         Not applicable.

                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT.

         The  information  relating to Directors and  Executive  Officers of the
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual  Meeting of  Shareholders  to be held on February  22,  2000  ("Proxy
Statement"),  on pages 8 through 10. The information related to Section 16(a) of
the Exchange Act is  incorporated  herein by reference to the Proxy Statement on
page 18.


ITEM 10. EXECUTIVE COMPENSATION

         The  information  relating to executive  compensation  is  incorporated
herein by reference to the Company's Proxy Statement on pages 13 through 17.


                                     - 30 -
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information  relating to security  ownership of certain  beneficial
owners and management is incorporated herein by reference to the Company's Proxy
Statement  on  pages 6  through  7 under  the  heading  "Security  Ownership  of
Beneficial Owners and Management".


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information   relating  to  certain   relationships   and  related
transactions  is  incorporated  herein  by  reference  to  the  Company's  Proxy
Statement on page 17.


                                     - 31 -
<PAGE>

ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  2.1      Plan  of Reorganization (Incorporated by reference to
                           Exhibit 2.1 of the Company's  Registration  Statement
                           on Form 8-A, filed with the SEC on May 7, 1999).

                  3.1      Federal Stock Charter of the Company (Incorporated by
                           reference  to Exhibit  3.1 of the Form 8-A filed with
                           the SEC on May 7, 1999).

                  3.2      Bylaws of the Company  (Incorporated  by reference to
                           Exhibit 3.2 of the Form 8-A filed with the SEC on May
                           7, 1999 ).

                  4.3      Common Stock Certificate of the Company (Incorporated
                           by  reference  to  Exhibit  4.3 of the Form 8-A filed
                           with the SEC on May 7, 1999).

                  10.1     Employment Agreement with Anna O. Sumerlin, President
                           and Chief Executive Officer.

                  10.2     Employment  Agreement with Carlton E. Chappell,  Vice
                           President, Secretary and Treasurer.

                  10.3     Employment  Agreement  with  Robert  C.  White,  Vice
                           President and Chief Financial Officer.

                  10.4     Employee Stock  Ownership Plan of Wake Forest Federal
                           Savings & Loan Association.

                  10.5     Wake Forest Federal Savings & Loan  Association  1997
                           Recognition  and  Retention  Plan   (Incorporated  by
                           reference  to  the  Form S-8  filed   with the SEC on
                           July 27, 1999).

                  10.6     Wake Forest Federal Savings & Loan  Association  1997
                           Stock Option Plan  (Incorporated  by reference to the
                           Form S-8 filed with SEC on July 27, 1999).

                  13       1999 Annual Report to Stockholders

                  21       Subsidiaries   of  the   Company   (Incorporated   by
                           reference    to    Part    1    -    "General"    and
                           "Reorganization").

                  27       Financial Data Schedule  (filed in electronic  format
                           only)

         (b)      REPORTS ON FORM 8-K

         No reports on Form 8-K were filed  during the three month  period ended
September 30, 1999.


                                     - 32 -
<PAGE>

                                   SIGNATURES

         Pursuant to the  Requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

                                     WAKE FOREST BANCSHARES, INC.
                                     (Small Business Issuer)



Date:  December 20, 1999          By:      /s/ Anna O. Sumerlin
      ------------------------           --------------------------------
                                           Anna O. Sumerlin
                                           President and Chief Executive Officer



         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.


<TABLE>
<S>                                                                             <C>
/s/ Anna O. Sumerlin                                                            December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Anna O. Sumerlin                                                                Date
President, Chief Executive Officer
         and Director
(Principal Executive Officer)



/s/ Carlton E. Chappell                                                         December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Carlton E. Chappell                                                             Date
Vice President, Secretary and Treasurer



/s/ Robert C. White                                                             December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Robert C. White                                                                         Date
Chief Financial Officer and Vice President
(Principal Financial Officer)
</TABLE>


                                     - 33 -
<PAGE>

<TABLE>
<S>                                                                             <C>
/s/ Paul K. Brixhoff                                                            December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Paul K. Brixhoff - Director                                                     Date



/s/ Harold R. Washington                                                        December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Harold R. Washington - Director                                                 Date








/s/  John D. Lyon                                                               December 20, 1999
-----------------------------------------------------                           -------------------------------------------
John D. Lyon - Director                                                         Date


/s/  R.W. Wilkinson, III                                                        December 20, 1999
-----------------------------------------------------                           -------------------------------------------
R.W. Wilkinson, III - Vice-Chairman and Director                                Date


/s/ Howard L. Brown                                                             December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Howard L. Brown -Chairman of the Board                                          Date
and Director

/s/ Leelan A. Woodlief                                                          December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Leelan A. Woodlief - Director                                                   Date


/s/ William S. Wooten                                                           December 20, 1999
-----------------------------------------------------                           -------------------------------------------
William S. Wooten - Director                                                    Date


/s/ Rodney M. Privette                                                          December 20, 1999
-----------------------------------------------------                           -------------------------------------------
Rodney M. Privette - Director                                                   Date
</TABLE>


                                     - 34 -