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, 2001

                        Commission File Number 000-25999

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

              UNITED STATES                                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, 2001 were
$7,752,900.

         The issuer had 1,155,026 shares of common stock outstanding as of
September 30, 2001. 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 7, 2001 was $6,660,224 and
$7,492,752, respectively.

                      DOCUMENTS INCORPORATED BY REFERENCE.

         Portions of the Annual Report to Stockholders for the year ended
September 30, 2001 are incorporated by reference into Parts I and II of this
Form 10-KSB.

         Portions of the Proxy Statement for the 2002 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

         FORWARD-LOOKING STATEMENTS...............................................................................1
         Item 1.  Description of Business.........................................................................1
         Item 2.  Properties.....................................................................................27
         Item 3.  Legal Proceedings..............................................................................28
         Item 4.  Submission of Matters to a Vote of Security Holders............................................28

PART II

         Item 5.  Market for Common Stock and Related Stockholder Matters........................................28
         Item 6.  Management's Discussion and Analysis...........................................................28
         Item 7.  Financial Statements...........................................................................28
         Item 8.  Changes in and Disagreement with Accountants on Accounting
                  and Financial Disclosure.......................................................................29

PART III

         Item 9.  Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act..............................................29
         Item 10. Executive Compensation.........................................................................29
         Item 11. Security Ownership of Certain Beneficial Owners and Management.................................29
         Item 12. Certain Relationships and Related Transactions.................................................29
         Item 13. Exhibits, Lists and Reports on Form 8-K........................................................29

SIGNATURES

</TABLE>


<PAGE>


                                     PART I


FORWARD-LOOKING STATEMENTS

         This document, including information incorporated by reference,
contains, and future filings by Wake Forest Bancshares, Inc. (the "Company") on
Form 10-QSB and Form 8-K and future oral and written statements by the Company
and its management may contain forward-looking statements about the Company and
its subsidiary which we believe are within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by management. Words
such as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward-looking statements. Forward-looking statements by the Company and
its management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report to Shareholders (attached to this document as
Exhibit 13) and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:

         o   the strength of the United States economy in general and the
             strength of the local economies in which we conduct operations;
         o   the effects of, and changes in, trade, monetary and fiscal policies
             and laws, including interest rate policies of the Federal Reserve
             Board ("FRB");
         o   inflation, interest rate, market and monetary fluctuations;
         o   the timely development and acceptance of our new products and
             services and the perceived overall value of these products and
             services by users, including the features, pricing and quality
             compared to competitors' products and services;
         o   the willingness of users to substitute our products and services
             for products and services of our competitors;
         o   our success in gaining regulatory approval of our products and
             services, when required;
         o   the impact of changes in financial services' laws and regulations
             (including laws concerning taxes, banking, securities and
             insurance);
         o   the impact of technological changes;
         o   acquisitions;
         o   changes in consumer spending and saving habits; and
         o   our success at managing the risks involved in the foregoing.

ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

         Wake Forest Bancshares, Inc. 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,


                                      -1-

<PAGE>

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 of
the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. At September 30, 2001, the Company had total assets of $93.3
million, total deposits of $77.2 million and total stockholders' equity of $14.5
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
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 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 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, 2001. 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."

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 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") on November 16, 1998. The
Plan of Reorganization provided for the establishment of the Company as a stock
holding company parent of the Association. The Company is majority owned
(approximately 55%) 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.

                                      -2-

<PAGE>


         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 initially 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 Counties, North Carolina.

         The Association's market area has benefited from its close proximity to
the "Research Triangle Park" which includes the cities of Chapel Hill, Durham
and Raleigh. The commuting distance from the Research Triangle Park to the town
of Wake Forest is approximately 20 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 Research Triangle Park has
taken place in Wake County. Northern Wake County is expected to benefit from the
continued expansion of this area. Access to the Research Triangle Park will be
enhanced when a segment of the Federal interstate highway system (the "outer
loop") is completed, currently anticipated to be in approximately a year. The
outer loop will cut driving time between Wake Forest and the Research Triangle
Park by about 50%.

         Currently, employment within the region varies, from a more high tech
and service-oriented industry near the Research Triangle Park to a more
agricultural/manufacturing base further away from the Research Triangle Park.
The largest employers in the northern Wake County area include Sprint, Weavexx,
and Mallinckrodt. Proximity to the Research Triangle 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
1990's and is expected to continue its growth over the next five years. Based on
information provided by the Economic Development Program of the Wake Forest
Chamber of Commerce, the town of Wake Forest's population was 5,851 in 1990 and
doubled in size to 11,750 during 2000. This data also provides that the current
population within a five mile radius of Wake Forest is 24,482 and is expected to
grow by approximately 20% over the next five years. Residential owner-occupied
households totaled 6,820 within a five mile radius of Wake Forest and are
expected to increase by approximately 20% over the next five years.

                                      -3-

<PAGE>


         The Association faces substantial competition for both the deposits it
accepts and the loans it makes. Located within the Wake Forest area are branch
offices of six other depository institutions, all six 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.

         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>

                                                                                           AT SEPTEMBER 30,
                                                                        -------------------------------------------------
                                                                               2001                         2000
                                                                        ---------------------       ---------------------
                                                                                       % OF                        % OF
                                                                        AMOUNT         TOTAL        AMOUNT         TOTAL
                                                                        -------        ------       -------        ------
<S>                                                                     <C>            <C>          <C>            <C>
                                                                                       (DOLLARS IN THOUSANDS)
Type of loans:
   One- to four-family
      residential ..................................................    $27,251         36.51%      $27,073         37.31%
   Multi-family residential ........................................        325          0.44           187          0.26
   Commercial real estate ..........................................     15,104         20.24        10,595         14.60
   Land ............................................................      4,539          6.08         6,342          8.74
   Commercial construction .........................................      3,884          5.20         3,933          5.42
   Residential construction ........................................     28,597         38.32        26,859         37.01
   Equity line  mortgages ..........................................      2,461          3.30         3,338          4.60
   Lines of credit .................................................      5,030          6.74         5,786          7.97
   Savings account .................................................        144          0.19           644          0.89
                                                                        -------        ------       -------        ------
Total loans ........................................................     87,335        117.02        84,757        116.80
                                                                        -------        ------       -------        ------

Less:
   Deferred loan fees ..............................................        226          0.30           204          0.28
   Undisbursed portion of
      loans in process .............................................     12,158         16.29        11,709         16.14
   Allowance for loan losses .......................................        319          0.43           280          0.38
                                                                        -------        ------       -------        ------
                                                                         12,703         17.02        12,193         16.80
                                                                        -------        ------       -------        ------
Total loans receivable, net ........................................    $74,632        100.00%      $72,564        100.00%
                                                                        =======        ======       =======        ======

</TABLE>

                                      -4-

<PAGE>

         Loan Maturity. The following table shows the contractual maturity of
the Association's loans at September 30, 2001. 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
$35.8 million and $36.4 million for the years ended September 30, 2001 and 2000,
respectively.

<TABLE>


                                                                   AT SEPTEMBER 30, 2001
                    ----------------------------------------------------------------------------------------------------------------
                    RESIDENTIAL RESIDENTIAL                                                       EQUITY             SAVINGS
                      1 - 4      MULTI-     COMMERCIAL           COMMERCIAL       RESIDENTIAL      LINE     LINES OF ACCOUNT
                      FAMILY     FAMILY     REAL ESTATE  LAND  CONSTRUCTION(1)  CONSTRUCTION(1)  MORTGAGES   CREDIT   LOANS  TOTAL
                    ----------------------------------------------------------------------------------------------------------------
<S>                   <C>       <C>          <C>        <C>       <C>               <C>          <C>       <C>      <C>     <C>

                                                                     (DOLLARS IN THOUSANDS)
Contractual maturity:
  One year or
    less.........    $ 5,094    $    --      $    --    $   31    $  2,217          $28,597      $    --   $  952   $  108  $36,999
                     -------    -------      -------    ------    --------          -------      -------   ------   ------  -------
  After one year:
   1 year to
    3 years......     18,633         --           23        19         872               --           --    2,203       21   21,771
   3 years to
    5 years......      1,637         --           90        40          --               --           --       92       15    1,874
   5 years to
    10 years.....        764         --          992     3,988          --               --           --    1,348       --    7,092
   10 years to
    20 years.....      1,123         --       10,666       461         795               --        2,461      435       --   15,941
   Over 20
    years........         --        325        3,333        --          --               --           --       --       --    3,658
                     -------    -------      -------    ------    --------          -------      -------   ------   ------  -------
   Total after one
    year.........     22,157        325       15,104     4,508       1,667               --        2,461    4,078       36   50,336
                     -------    -------      -------    ------    --------          -------      -------   ------   ------  -------
  Total amount
    due..........     27,251        325       15,104     4,539       3,884           28,597        2,461    5,030      144   87,335
                                -------
  Less undisbursed
   loans.........         --         --           --        --      (2,061)         (10,097)          --       --       --  (12,158)
                     -------    -------      -------    ------    --------          -------      -------   ------   ------  -------
  Net loans
   outstanding...    $27,251    $   325      $15,104     4,539    $  1,823          $18,500      $ 2,461   $5,030   $  144  $75,177
                     =======    =======      =======    ======    ========          =======      =======   ======   ======  =======

</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, 2001 that are contractually due after September 30, 2002, and
whether such loans have fixed interest rates or adjustable interest rates.

                                          DUE AFTER SEPTEMBER 30, 2002
                                     --------------------------------------
                                     FIXED RATES   ADJUSTABLE RATES  TOTAL
                                     -----------   ---------------- -------
                                             (DOLLARS IN THOUSANDS)

One- to four-family residential ...    $ 1,996         $20,161      $22,157
Multi-family residential ..........        325              --          325
Commercial Real Estate ............        699          14,405       15,104
Land ..............................        112           4,396        4,508
Commercial construction ...........                      1,667        1,667
Residential construction ..........         --              --           --
Equity line mortgages .............         --           2,461        2,461
Lines of credit ...................         --           4,078        4,078
Savings account loans .............         36              --           36
                                       -------         -------      -------
Total .............................    $ 3,168         $47,168      $50,336
                                       =======         =======      =======

         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.

                                      -5-

<PAGE>



         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 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, 2001, the Association's total loans were $74.6
million, of which $27.3 million, or 36.51% were one- to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 7.33%, or $2.0 million, were fixed-rate loans and
92.67%, or $25.3 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 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. The Association, however, 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

                                      -6-

<PAGE>


disbursed in increments as construction progresses and as inspections warrant
based upon a percentage of completion. At September 30, 2001, the Association
had $18.5 million (net of undisbursed loan funds of $10.1 million) of
residential construction loans which amounted to 38.32% of the Association's net
loans outstanding. The largest residential construction loan in the
Association's portfolio at September 30, 2001 was $1.0 million, 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, 2001, the Association had $1.8 million (net of
undisbursed loan funds of $2.1 million) of commercial construction loans which
amounted to 5.20% of the Association's net loans outstanding. The largest
commercial construction loan in the Association's portfolio at September 30,
2001 was $1.2 million, is secured by an area restaurant 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 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, 2001, the Association's commercial real
estate mortgage portfolio was $15.1 million, or 20.24% of total loans
outstanding. The largest commercial real estate loan in the Association's
portfolio at September 30, 2001 was $1.9 million and is secured by a local
retail shopping center.

         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

                                      -7-

<PAGE>


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. Equity line loans are originated at prime
plus 1% 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, 2001, the
Association's equity line portfolio was $2.5 million, or 3.30% 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, 2001, the
Association's commercial line of credit portfolio was $5.0 million, or 6.74% of
total loans outstanding.

         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 apartment complexes, in which
the Association has a participating interest through an affordable housing
consortium. 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, 2001, the Association's total land loan portfolio
was $4.5 million or 6.08% of total loans and its multi-family loan portfolio was
$325,000 or 0.44% of total loans.

         The Association requires appraisals of all properties securing
multi-family residential loans. 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.

                                      -8-

<PAGE>


         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, 2001, the Association's
savings account loan portfolio totaled $144,000 or 0.19% 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 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
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 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

                                      -9-

<PAGE>

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.

         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>


                                                                               AT OR FOR THE YEAR ENDED SEPTEMBER 30,
                                                                               --------------------------------------
                                                                                   2001                      2000
                                                                               ------------               ----------
                                                                                       (DOLLARS IN THOUSANDS)
                <S>                                                               <C>                      <C>

                Non-accrual loans: .............................................  $      --                $    --
                Accruing loans past due 90 days or more:
                   Single family, One- to four-family residential .............   $   1,009                $    --
                                                                                  ---------                -------
                Total non-performing loans .....................................  $   1,009                $    --
                                                                                  =========                =======
                Allowance for loan losses ......................................  $     319                $   280
                                                                                  =========                =======
                Real estate owned, net .........................................  $     391                $    --
                                                                                  =========                =======
                Ratios:
                 Non-accrual loans to total loans .............................        0.00%                  0.00%
                 Non-performing loans to total loans ..........................        1.35%                  0.00%
                 Non-performing loans and real estate owned to
                  total assets ................................................        1.50%                  0.00%
                 Allowance for loan losses to: ................................        0.00%
                  Non-accrual loans ...........................................       31.62%                  0.00%
                  Non-performing loans ........................................        0.00%                  0.00%
                  Total loans .................................................        0.43%                  0.38%
                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 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 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 allowance for loan losses
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 allowance for loan losses 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 allowance for loan losses. 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 allowance for loan
losses, 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 allowance for loan
losses, thereby negatively affecting the Association's financial condition and
earnings at that time. Although management believes that adequate allowance for
loan losses have been established, actual losses are dependent upon future
events and, as such, further additions to the level of specific or allowance for
loan losses 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 $1.4 million of
assets classified as substandard or classified as Special Mention, Doubtful or
Loss at September 30, 2001. All of the assets classified at September 30, 2001
are residential properties, the largest being a $222,750 loan on nine
residential lots. Of the total $1.4 million in classified assets, $391,000 is
for real estate owned. The Association had no assets classified as Substandard
and no assets classified as Special Mention, Doubtful or Loss at September 30,
2000.

         Allowance for Loan Losses. The allowance for loan losses 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
allowance for loan losses 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, 2001, the Association's
allowance for loan losses was $319,000, or 0.43% of total loans, as compared to
$280,000 or 0.38%, at September 30, 2000. The Association had non-performing
loans of $1.0 and $0 at September 30, 2001 and September 30, 2000, respectively.
The Association's level of nonperforming loans has historically been low. The
Association provided $39,000 in additional loan loss provisions during 2001.
During the current year, the Association did not charge off any loans. The
Association provided $34,250 in additional loan loss provisions during 2000 and
charged off $17,300 against its loan loss allowance during the period. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for loan losses. 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 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 real estate
owned is established if the cost of a property exceeds its current fair value
less estimated sales costs. The Association obtains an appraisal on a real
estate owned property as soon as practicable

                                      -11-

<PAGE>


after it takes possession of the real property. The Association will generally
reassess the value of real estate owned 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,
2001, the Association had three REO properties totaling $391,000. All of the
properties were for one- to four-residential properties. The largest REO
property had a cost basis of $150,350 at September 30, 2001. At September 30,
2000, the Association held no real estate owned.

         The following table sets forth activity in the Association's allowance
for loan losses and the allowance for losses on real estate owned at or for the
periods indicated.

<TABLE>

                                                                                   FOR THE YEAR ENDED SEPTEMBER 30,
                                                                                   --------------------------------
                                                                                      2001                  2000
                                                                                   ----------            ----------
                                                                                          (IN THOUSANDS)
<S>                                                                                   <C>                  <C>

   ALLOWANCE FOR LOAN LOSSES:
      Balance at beginning of year ......................................             $  280               $  263
      Provision for loan losses .........................................                 39                   34
      Charge-offs .......................................................                 --                  (17)
      Recoveries ........................................................                 --                   --
                                                                                      ------               ------
      Balance at end of year ............................................             $  319               $  280
                                                                                      ======               ======
      Ratio of net charge-offs to average loans outstanding .............               0.00%                0.03%
                                                                                      ======               ======
   ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
      Balance at beginning of year ......................................             $   --               $   --
      Provision for losses ..............................................              5,000                   --
      Recoveries ........................................................                 --                   --
      Charge-offs .......................................................                 --                   --
                                                                                      ------               ------
      Balance at end of year ............................................             $5,000               $   --
                                                                                      ======               ======

</TABLE>


         Accrued interest receivable on accruing loans past due by 90 days or
more amounted to $54,536 and $0 at September 30, 2001 and 2000, 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, 2001
and 2000 would have decreased by $54,536 and $0, respectively.



                                      -12-

<PAGE>


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

<TABLE>


                                                                                  AT SEPTEMBER 30,
                                              ----------------------------------------------------------------------------------
                                                                2001                                     2000
                                              ----------------------------------------------------------------------------------
                                                                           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 ........     $ 50            15.67%         31.20%     $ 36            12.86%         31.94%
  Multi-family residential ................        2             0.63           0.37         2             0.71           0.22
  Commercial real estate ..................       75            23.51          17.29        65            23.21          12.50
  Land ....................................       40            12.54           5.20        30            10.71           7.48
  Commercial construction .................       12             3.76           4.45        12             4.29           4.64
  Residential construction ................      125            39.19          32.74       120            42.86          31.69
  Equity line mortgages ...................        5             1.57           2.82         5             1.79           3.94
  Lines of Credit .........................       10             3.13           5.76        10             3.57           6.83
                                                ----           ------         ------      ----           ------         ------
Total mortgage loans ......................      319           100.00          99.83       280           100.00          99.24
Savings account loans .....................       --            --              0.17        --            --              0.76
                                                ----           ------         ------      ----           ------         ------
Total allowance for loan losses ...........     $319           100.00%        100.00%     $280           100.00%        100.00%
                                                ====           ======         ======      ====           ======         ======

</TABLE>



                                      -13-


<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 Federal Home Loan Bank. At
September 30, 2001, the Association held: FHLMC stock with an amortized cost of
$15,200 and a current market value of $1,007,750 and Federal Home Loan Bank
stock with a cost and market value of $330,400. At September 30, 2001, the
Association held $16.6 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>

                                                              FOR THE YEAR ENDED SEPTEMBER 30,
                                                              --------------------------------
                                                                  2001                 2000
                                                              -----------           ----------
                                                                         (IN THOUSANDS)
             <S>                                              <C>                   <C>
             Amortized cost at beginning of period.........   $     8,806           $    8,872
             Purchases/(Maturities or Sales), net..........         6,843                  (66)
             Premium and discount amortization, net........            --                   --
                                                              -----------            ---------
             Amortized cost at end of period...............        15,649                8,806
             Net unrealized gain(1)........................           995                  801
                                                              -----------            ----------
             Total securities, net.........................   $    16,644            $   9,607
                                                              ===========            =========
</TABLE>

------------------
(1)      The net unrealized gain at September 30, 2001 and 2000 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>


                                                                      AT SEPTEMBER 30,
                                                    --------------------------------------------------
                                                              2001                       2000
                                                    -----------------------    -----------------------
                                                    AMORTIZED                  AMORTIZED
                                                       COST      FAIR VALUE      COST       FAIR VALUE
                                                    ---------    ----------    ---------    ----------
                                                                     (IN THOUSANDS)
             <S>                                    <C>           <C>          <C>           <C>
             Federal Home Loan Bank
               Overnight Deposits                   $ 14,804      $ 14,804     $  6,250      $ 6,250
             U.S. Treasury Obligations........           500           502        2,250        2,228
             Equity securities(1).............            15         1,008           15          838
             Federal Home Loan Bank Stock.....           330           330          291          291
                                                    --------      --------     --------      -------
             Total Investments, net(2)........      $ 15,649      $ 16,644     $  8,806      $ 9,607
                                                    ========      ========     ========      =======
</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, 2001 and 2000 on available for sale
     securities in accordance with SFAS No. 115.

                                      -14-

<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>


                                                                  AT SEPTEMBER 30,
                                                    --------------------------------------------
                                                            2001                   2000
                                                    --------------------   ---------------------
                                                    AMORTIZED              AMORTIZED
                                                      COST    FAIR VALUE      COST    FAIR VALUE
                                                    --------- ----------   ---------  ----------
                                                                   (IN THOUSANDS)
          <S>                                       <C>        <C>          <C>         <C>
          Held to Maturity:
             Debt securities.................       $     --   $     --     $     --    $    --
                                                    --------   --------     --------    -------
                 Total held to maturity......             --         --           --         --
                                                    --------   --------     --------    -------

          Available-for-Sale:
             Debt securities.................            500        502        2,250      2,228
             Equity securities...............             15      1,008           15        838
                                                    --------   --------     --------    -------
                 Total available-for-sale....            515      1,510        2,265      3,066
                                                    --------   --------     --------    -------

          Federal Home Loan Bank
             Overnight deposits..............         14,804     14,804        6,250      6,250
                                                    --------   --------     --------    -------
          Federal Home Loan Bank Stock.......            330        330          291        291
                                                    --------   --------     --------    -------

                 Total Investments, net(1)...       $ 15,649   $ 16,644     $  8,806    $ 9,607
                                                    ========   ========     ========    =======

</TABLE>

------------------
(1)  The difference between "Amortized Cost" and "Fair Value" represents net
     unrealized gains at September 30, 2001 and 2000 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, 2001, by remaining period to contractual maturity.

<TABLE>

                                                                         AT SEPTEMBER 30, 2001
                                                ---------------------------------------------------------------------------
                                                      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       $   502       5.56%
  Due after 1 year but within 5 years .....            --              --       --            --            --         --
  Due after 5 years but within 10 years ...            --              --       --            --            --         --
  Due after 10 years ......................            --              --       --            --            --         --
                                                ---------       ---------     ----       -------       -------       ----
     Total ................................            --              --       --           500           502         --
Equity Securities .........................            --              --       --            15         1,008         --
Federal Home Loan Bank stock ..............            --              --       --           330           330         --
Federal Home Loan Bank deposits ...........            --              --       --        14,804        14,804         --
                                                ---------       ---------     ----       -------       -------       ----
     Total ................................     $      --       $      --       --%      $15,649       $16,644       5.56%
                                                =========       =========     ====       =======       =======       ====


</TABLE>


                                      -15-
<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, 2001, the Association's core deposits (which the
Association considers to consist of NOW accounts, money market deposit accounts
and regular savings accounts) constituted 18.78% 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 located near 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.

                                           FOR THE YEAR ENDED SEPTEMBER 30,
                                           --------------------------------
                                               2001                2000
                                           -----------        -------------
                                              (DOLLARS IN THOUSANDS)

Total deposits at beginning of period ....... $67,874            $57,654
Net increase (decrease) before interest
   credited .................................   6,035              7,737
Interest credited ...........................   3,312              2,483
                                              -------            -------
Total deposits at end of period ............. $77,221            $67,874
                                              =======            =======

         At September 30, 2001, the Association had approximately $19.2 million
in "Jumbo" certificate of deposits (accounts in amounts over $100,000) maturing
as follows:

<TABLE>


                                                                                            WEIGHTED
                                                                       AMOUNT             AVERAGE RATE
                                                                    -----------           ------------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                                                 <C>                        <C>
MATURITY PERIOD
---------------
Within three months........................................         $    2,951                 5.81%
After three but within six months..........................              3,339                 5.65
After six but within twelve months.........................              5,503                 6.67
After twelve but within twenty-four months.................              2,613                 6.37
After twenty-four months...................................              4,818                 6.49
                                                                    ----------
   Total....................................................        $   19,224                 6.27%
                                                                    ==========
</TABLE>


                                      -16-

<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>


                                                                         AT SEPTEMBER 30,
                                           ---------------------------------------------------------------------------
                                                           2001                                  2000
                                           -------------------------------------  ------------------------------------
                                                          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...........   $   3,192        4.13%      3.00%     $   3,276        4.83%      3.00%
            MMDA accounts...............       9,302       12.05%      3.00%         7,766       11.44%      4.65%
            NOW accounts................       1,458        1.89%      2.50%         1,590        2.34%      2.50%
            Noninterest-bearing accounts         552        0.71%      0.00%           681        1.00%      0.00%
            Certificate accounts........      62,671       81.16%      6.07%        54,505       80.30%      6.27%
            Accrued Interest............          46        0.06%                       56        0.09%
                                           ---------     -------                 ---------      ------
              Totals...................    $  77,221     $100.00%      5.45%     $  67,874      100.00%      5.77%
                                           =========     =======                 =========      ======

</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, 2001.

<TABLE>


                                       PERIOD TO MATURITY AT SEPTEMBER 30, 2001                             TOTAL AT
       -----------------------------------------------------------------------------------------------    SEPTEMBER 30,
        INTEREST RATE RANGE         2001          2002           2003         THEREAFTER       TOTAL         2000
       -----------------------    --------      --------       --------       ----------      --------    -------------
                                                 (DOLLARS IN THOUSANDS)
      <S>                         <C>           <C>            <C>             <C>            <C>           <C>
      3.00% to 5.00%.........     $ 11,462      $  2,168       $    915        $    626       $ 15,171      $  5,134
      5.01% to 7.00%.........       18,504        11,456          1,758           8,116         39,834        43,322
      7.01% to 8.00%.........        7,036           100              -             530          7,666         7,049
                                  --------      --------       --------        --------       --------      --------
        Total................     $ 37,002      $ 13,724       $  2,673        $  9,272       $ 62,671      $ 54,505
                                  ========      ========       ========        ========       ========      ========

</TABLE>


         Borrowings. The Association historically has not used borrowings as a
source of funds. However, the Association may obtain advances from the Federal
Home Loan Bank 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 Federal Home Loan Bank. 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 Federal Home Loan Bank will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the OTS and the Federal Home Loan Bank. At
September 30, 2001, neither the Company nor the Association had any borrowings
outstanding, except for the ESOP loan amounting to $88,300.

PERSONNEL

         As of September 30, 2001, the Company had no employees who were
compensated through the Company.

         As of September 30, 2001, the Association had 11 full-time employees.
In the last three years, the Association has experienced a low turnover rate
among its employees and, as of September 30, 2001, 7 of the Association's
employees had been with the Association for more than 8 years. The employees are
not represented by a collective bargaining unit and the Association considers
its relationship with its employees to be good. See Part III, Item 10 "Executive
Compensation" for a description of certain compensation and benefit programs
offered to the Association's employees.


                                      -17-

<PAGE>


GENERAL

         The Company and the MHC are regulated as savings and loan holding
companies by the OTS. The Association, as a federal stock savings association,
is subject to the regulation, examination and supervision by the OTS. The
Association must file reports with the OTS concerning its activities and
financial condition. The Company and the MHC are also required to file reports
with, and otherwise comply with the rules and regulations of the OTS. The
Company is also required to file reports with, and otherwise comply with, the
rules and regulations of the SEC under the federal securities laws.

         On November 12, 1999, the landmark financial services legislation,
titled the Gramm-Leach-Bliley Act ("GLB Act"), became law. The GLB Act repeals
depression-era laws restricting affiliations among banks, securities firms,
insurance companies and other financial services providers. The impact of the
GLB Act on the Company, the MHC, and the Association where relevant, is
discussed throughout the regulation section below.

         Any change in such laws and regulations, whether by the OTS, the FDIC,
or through legislation, could have a material adverse impact on the Company and
the Association and their operations and stockholders.

FEDERAL BANKING REGULATION

         Activity Powers. The Association derives its lending and investment
powers from the Home Owners' Loan Act, as amended, and the regulations of the
OTS. Under these laws and regulations, The Association may invest in mortgage
loans secured by residential and commercial 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. The
Association's authority to invest in certain types of loans or other investments
is limited by federal law.

         Loans-to-One-Borrower Limitations. The Association is generally subject
to the same limits on loans to one borrower as a national bank. With specified
exceptions, the Association's total loans or extensions of credit to a single
borrower cannot exceed 15% of The Association's unimpaired capital and surplus
which does not include accumulated other comprehensive income. The Association
may lend additional amounts up to 10% of its unimpaired capital and surplus, if
the loans or extensions of credit are fully-secured by readily-marketable
collateral. The Association currently complies with applicable
loans-to-one-borrower limitations.

         QTL Test. Under federal law, the Association must comply with the
qualified thrift lender, or "QTL" test. Under the QTL test, the Association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, the Association's total
assets less the sum of:

         o specified liquid assets up to 20% of total assets;

         o goodwill and other intangible assets; and

         o the value of property used to conduct The Association's business.


                                      -18-

<PAGE>


         The 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. The Association met the QTL test at September 30, 2001, and in each of
the prior 12 months, and, therefore, qualifies as a thrift lender. If the
Association fails the QTL test it must either operate under certain restrictions
on its activities or convert to a bank charter.

         Capital Requirements. OTS regulations require the Association to meet
three minimum capital standards:

         o  a tangible capital ratio requirement of 1.5% of total assets, as
            adjusted under the OTS regulations;

         o  a leverage ratio requirement of 3% of core capital to such adjusted
            total assets, if a savings association has been assigned the highest
            composite rating of 1 under the Uniform Financial Institutions
            Ratings System; and

         o  a risk-based capital ratio requirement of 8% of core and
            supplementary capital to total risk-weighted assets.

         The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining compliance with the risk based
capital requirement, the Association must compute its risk-weighted 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 believes
are inherent in the type of asset.

         Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings, nonwithdrawable accounts and pledged deposits that qualify
as core capital 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.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible debt securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. In
addition, up to 45% of unrealized gains on available-for-sale equity securities
with a readily determinable fair value may be included in supplementary capital.
The allowance for loan and lease losses includable 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.

         At September 30, 2001, the Association met each of its capital
requirements.

         Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), as implemented by OTS regulations, the Association has a continuing and
affirmative obligation 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 The Association nor does it limit
its 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 the Association, to
assess the Association's record of meeting the credit needs of its community and
to take the record into account in its evaluation of certain applications by the
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.

                                      -19-

<PAGE>


         CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests:

         o  lending test, to evaluate the institution's record of making loans
            in its assessment areas;

         o  an investment test, to evaluate the institution's record of
            investing in community development projects, affordable housing and
            programs benefiting low or moderate income individuals and
            businesses; and

         o  a service test, to evaluate the institution's delivery of services
            through its branches, ATMs and other offices.

         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 (the "FRA"). In general,
these transactions must be on terms which are as favorable to the Association as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the Association's
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the Association. In addition, the OTS regulations
prohibit a savings association from lending to any of its affiliates that is
engaged in activities that are not permissible for bank holding companies and
from purchasing the securities of any affiliate, other than a subsidiary.

         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 Federal Reserve Board. 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. The OTS has primary enforcement responsibility over
savings associations, including the Association. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.

         Standards For Safety And Soundness. Under federal law, the OTS has
adopted, a set of guidelines prescribing safety and soundness standards. These
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings
standards, compensation, fees and benefits and excessive compensation or
compensation leading to material financial loss. In general, the guidelines
require appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines.

                                      -20-

<PAGE>


         In addition, the OTS adopted regulations that authorize, but do not
require, the OTS to order an institution that has been given notice that it is
not satisfying these safety and soundness standards to submit a compliance plan.
If, after being notified, an institution fails to submit an acceptable plan or
fails in any material respect to implement an accepted 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 federal law. If an
institution fails to comply with such an order, the OTS may seek to enforce such
order in judicial or administrative proceedings and to impose civil money
penalties.

         Limitation on Capital Distributions. The OTS imposes various
restrictions or requirements on the Association's ability to make capital
distributions, including cash dividends. A savings institution that is the
subsidiary of a savings and loan holding company must file an application or a
notice with the OTS at least 30 days before making a capital distribution. The
Association must file an application for prior approval if the total amount of
its capital distributions, including the proposed distribution, for the
applicable calendar year would exceed an amount equal to the Association's net
income for that year plus the Association's retained net income for the previous
two years. A savings association subsidiary of a savings and loan holding
company, such as the Association, must file a notice of intended capital
contribution, unless the specific capital distribution requires an application.

         The OTS may disapprove of a notice or application if:

         o  the Association would be undercapitalized following the
            distribution;

         o  the proposed capital distribution raises safety and soundness
            concerns; or

         o  the capital distribution would violate a prohibition contained in
            any statute, regulation or agreement.

         Liquidity. The Association is required to maintain a sufficient amount
of liquid assets to ensure its safe and sound operation.

         Prompt Corrective Action Regulations. 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 associations.
For this purpose, a savings association would be placed in one of the following
five categories based on the association's capital:

         o  well capitalized;

         o  adequately capitalized;

         o  undercapitalized;

         o  significantly undercapitalized; and

         o  critically undercapitalized.

         At September 30, 2001, the Association met the criteria for being
considered "well-capitalized."

         When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
federal law.

                                      -21-

<PAGE>

         Insurance of Deposit Accounts. The Association is a member of the
Savings Association Insurance Fund, and the Association pays its deposit
insurance assessments to the SAIF. The FDIC also maintains another insurance
fund, the Bank Insurance Fund, which primarily insures the deposits of banks and
state chartered savings banks.

         Under federal law, the FDIC established a risk based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the quarter ending three months before the beginning
of the assessment period. 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 currently range from 0.0% 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%.

         In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0184% of insured
deposits to fund interest payment on bonds issued by the Financing Corporation,
an agency of the federal government established to recapitalize the predecessor
to the SAIF. These assessments will continue until the Financing Corporation
bonds mature in 2017.

         Federal Home Loan Bank System. The Association is a member of the
Federal Home Loan Bank (the "FHLB") of Atlanta, which is one of the regional
FHLBs making up the FHLB System. Each FHLB provides a central credit facility
primarily for its member institutions. The Association is required to acquire
and hold shares of capital stock in the FHLB of Atlanta in an amount equal to
the greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home-purchase contracts and similar obligations, but not less
than $500 or 5% of outstanding advances. The Association was in compliance with
this requirement with an investment in the capital stock of the FHLB of Atlanta
at September 30, 2001, of $330,400. 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.

         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. If dividends were reduced, or
interest on future FHLB advances increased, the Association's net interest
income would be affected.

         Under the GLB Act, membership in the FHLB System is now voluntary for
all federally-chartered savings associations, such as the Association. The GLB
Act also replaces the existing redeemable stock structure of the FHLB System
with a capital structure that requires each FHLB to meet a leverage limit and a
risk-based permanent capital requirement. Two classes of stock are authorized:
Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years
notice).

         At the request of the Federal Housing Finance Board (the "Finance
Board"), FHLB approved and submitted a capital plan to the Finance Board. The
capital plan calls for a flexible capital structure whereby member institutions
will be required to convert existing FHLB stock into "Class B Capital Stock."
Members institutions must retain a minimum investment in Class B Capital Stock
equal to the

                                      -22-

<PAGE>


sum of (a) the institution's Members Stock Requirement, calculated as the lesser
of a defined percentage of the member institution's total assets (between .05%
and .15%) and a specified cap (between $15 million and $35 million) and (b) the
member institution's Activity-Based Stock Requirement, calculated as a defined
percentage of the outstanding principal balance as a result of advances or
acquired assets. As a condition of FHLB membership, all member institutions must
comply with any adjustments to the foregoing requirements made by FHLB's Board
of Directors.

         As of September 30, 2001, the capital plan was approved by FHLB's Board
of Directors and forwarded to the Finance Board for review and approval. The
capital plan will be implemented by FHLB pursuant to applicable laws and
regulations within three years of the date of Finance Board approval or on a
date specified by the Finance Board.

         Prohibitions Against Tying Arrangements. Federal savings associations
are subject to the prohibitions of 12 U.S.C. ss. 1972 on certain tying
arrangements. A depository institution is prohibited, subject to some
exceptions, from extending credit to or offering any other service, or fixing or
varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or its affiliates or not obtain services of a competitor of the institution.

FEDERAL RESERVE SYSTEM

         Under regulations of the Federal Reserve Board (the "FRB"), The
Association is required to maintain non-interest-earning reserves against its
transaction accounts. FRB regulations generally require that reserves of 3% must
be maintained against aggregate transaction accounts of $41.3 million or less,
subject to adjustment by FRB, and an initial reserve of $1.239 million plus 10%,
subject to adjustment by FRB between 8% and 14%, against that portion of total
transaction accounts in excess of $41.3 million. The first $5.5 million of
otherwise reservable balances, subject to adjustments by FRB, are exempted from
the reserve requirements. The Association is in compliance with these
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at an Federal Reserve bank or a
pass-through account as defined by FRB, the effect of this reserve requirement
is to reduce The Association's interest-earning assets, to the extent the
requirement exceeds vault cash.

HOLDING COMPANY REGULATION

         The Company and the MHC are savings and loan holding companies
regulated by the OTS. As such, the Company and the MHC registered with and are
subject to OTS examination and supervision, as well as certain reporting
requirements. In addition, the OTS has enforcement authority over the Company
and 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 savings and loan holding companies are not subject to any regulatory
capital requirements or to supervision by the Federal Reserve System.

         Restrictions Applicable to the Company. Because the Company was
acquired after May 4, 1999, under the GLB Act it is prohibited from engaging in
non-financial activities. Unitary savings and loan associations acquired before
this date are "grandfathered" under the GLB Act and generally have no
restrictions on their business activities. The Company's activities, however,
will be restricted to:

                                      -23-

<PAGE>


         o  furnishing or performing management services for a savings
            institution subsidiary of such holding company;

         o  conducting an insurance agency or escrow business;

         o  holding, managing or liquidating assets owned or acquired from a
            savings institution subsidiary of such company;

         o  holding or managing properties used or occupied by a savings
            institution subsidiary of such company;

         o  acting as trustee under a deed of trust;

         o  any other activity (a) that the FRB, by regulation, has determined
            to be permissible for bank holding companies under Section 4(c) of
            the Association Holding Company Act of 1956 ("BHC"), 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;

         o  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; and

         o  any activity permissible for financial holding companies under
            section 4(k) of the Association Holding Company Act.

         Permissible activities which are deemed to be financial in nature or
incidental thereto under section 4(k) of the Bank Holding Company Act include:

         o  lending, exchanging, transferring, investing for others or
            safeguarding money or securities;

         o  insurance activities or providing and issuing annuities, and acting
            as principal, agent or broker;

         o  financial, investment or economic advisory services;

         o  issuing or selling instruments representing interests in pools of
            assets that a bank is permitted to hold directly;

         o  underwriting, dealing in or making a market in securities;

         o  activities previously determined by the FRB to be closely related to
            banking;

         o  activities that bank holding companies are permitted to engage in
            outside of the U.S.;

         o  merchant banking activities; and

         o  portfolio investments made by an insurance company.

                                      -24-

<PAGE>


         In addition, the Company cannot be acquired or acquire a company unless
the acquirer is engaged solely in financial activities.

         Restrictions Applicable to Activities of Mutual Holding Companies.
Under federal law, a mutual holding company may engage only in the following
activities:

         o  investing in the stock of a savings institution;

         o  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;

         o  merging with or acquiring another holding company, one of whose
            subsidiaries is a savings institution;

         o  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
            association is located; and

         o  the permissible activities described above for non-grandfathered
            savings and loan holding companies.

         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.
Federal law prohibits a savings and loan holding company, including the Company
and the MHC, directly or indirectly, from acquiring:

         o  control (as defined under HOLA) of another savings institution (or a
            holding company parent) without prior OTS approval;

         o  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) without prior OTS approval; or

         o  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:

         o  in the case of certain emergency acquisitions approved by the FDIC;

         o  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; or

                                      -25-

<PAGE>


         o  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.

         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.

FEDERAL SECURITIES LAW

         The Company's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to information, proxy solicitation, insider trading
restrictions, and other requirements under the Exchange Act.


                           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 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 Association may file their
returns on a consolidated basis, but have elected to file separately. The
Company and the Association have entered into a tax sharing agreement which
governs the apportionment of taxable income between the entities. The Company,
the MHC and the Association are subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly the
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, 1988.

         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.

                                      -26-

<PAGE>


         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.

         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 7.00% 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.

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 $[ ] as of
September 30, 2001. 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.

                                      -27-

<PAGE>

<TABLE>
                                                                                             NET BOOK
                                                                                             VALUE AT
                                                 LEASED OR               DATE             SEPTEMBER 30,
                                                   OWNED               ACQUIRED               2001
                                                 ---------             --------           --------------
                                                                                          (IN THOUSANDS)
             <S>                                      <C>                   <C>                   <C>

             Main Office................           Owned                 1961                  $424
             302 S. Brooks Street
             Wake Forest, NC  27587

</TABLE>


ITEM 3.      LEGAL PROCEEDINGS

         At September 30, 2001, 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 2001 Annual Report to Stockholders on page 38, 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 2001 Annual Report to
Stockholders on page 38, 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 the MHC, 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 48.42% and 41.87% and the
equity to asset ratios were 15.68% and 17.74% for years ended September 30, 2001
and 2000, 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 2001 Annual Report to Stockholders
on pages 3 through 13 and is incorporated herein by reference.

ITEM 7.      FINANCIAL STATEMENTS

         The following financial statements are incorporated by reference to the
indicated pages of the 2001 Annual Report to Stockholders.

<TABLE>


                                                                                                     Page(s) in
                                                                                                    Annual Report
                                                                                                    -------------
             <S>                                                                                       <C>

             o      Independent Auditor's Report............................................................14
             o      Consolidated Statements of Financial Condition,
                          September 30, 2001 and 2000.......................................................15
             o      Consolidated Statements of Income, Years Ended
                          September 30, 2001 and 2000.......................................................16
             o      Consolidated Statements of Stockholders' Equity,
                          Years Ended September 30, 2001 and 2000......................................17 - 18
             o      Consolidated Statements of Cash Flows,
                          Years Ended September 30, 2001 and 2000......................................19 - 20
             o      Notes to Consolidated Financial Statements.........................................21 - 37

</TABLE>

                                      -28-

<PAGE>


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 19, 2002. The
information related to Section 16(a) of the Exchange Act is also incorporated
herein by reference to the Proxy Statement.

ITEM 10.    EXECUTIVE COMPENSATION

         The information relating to executive compensation is incorporated
herein by reference to the Company's Proxy Statement.

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 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

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. (Incorporated by reference to Exhibit
                  10.1 of the Form 10-KSB for the fiscal year ended September
                  30, 1999 filed with the SEC on December 28, 1999).

            10.2  Employment Agreement with Billy B. Faulkner, Vice President.

                                      -29-

<PAGE>


            10.3  Employment Agreement with Robert C. White, Vice President and
                  Chief Financial Officer. (Incorporated by reference to Exhibit
                  10.3 of the Form 10-KSB for the fiscal year ended September
                  30, 1999 filed with the SEC on December 28, 1999).

            10.4  Employee Stock Ownership Plan of Wake Forest Federal Savings &
                  Loan Association. (Incorporated by reference to Exhibit 10.4
                  of the Form 10-KSB for the fiscal year ended September 30,
                  1999 filed with the SEC on December 28, 1999).

            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).

            13.1  2001 Annual Report to Stockholders

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

            23.1  Independent Auditor's Consent



                                      -30-

<PAGE>


            (b)   REPORTS ON FORM 8-K

            1.    None.









                                      -31-
<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.
                                       (Registrant)



 Date: December 21, 2001                   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.



 /s/ Anna O. Sumerlin                                 December 21, 2001
--------------------------------------------------    --------------------------
 Anna O. Sumerlin                                     Date
 President, Chief Executive Officer
 and Director
 (Principal Executive Officer)



 /s/ Robert C. White                                  December 21, 2001
--------------------------------------------------    --------------------------
 Robert C. White                                      Date
 Chief Financial Officer and Vice President
 (Principal Accounting Officer)



 /s/ Paul K. Brixhoff                                 December 21, 2001
--------------------------------------------------    --------------------------
 Paul K. Brixhoff - Director                          Date



 /s/ Harold R. Washington                             December 21, 2001
--------------------------------------------------    --------------------------
 Harold R. Washington - Director                      Date


 /s/  John D. Lyon                                    December  21, 2001
--------------------------------------------------    --------------------------
 John D. Lyon - Director                              Date


 /s/  R.W. Wilkinson, III                             December 21 , 2001
--------------------------------------------------    --------------------------
 R.W. Wilkinson, III - Vice-Chairman and Director     Date


                                      -32-

<PAGE>


 /s/ Howard L. Brown                                  December  21, 2001
--------------------------------------------------    --------------------------
 Howard L. Brown -Chairman of the Board               Date
 and Director

 /s/ Leelan A. Woodlief                               December  21, 2001
--------------------------------------------------    --------------------------
 Leelan A. Woodlief - Director                        Date


 /s/ William S. Wooten                                December  21, 2001
--------------------------------------------------    --------------------------
 William S. Wooten - Director                         Date

 /s/ Rodney M. Privette                               December 21, 2001
--------------------------------------------------    --------------------------
 Rodney M. Privette - Director                        Date







                                      -33-