WAKE FOREST BANCSHARES, INC.
CONTENTS

1

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2007 and September 30, 2006

See Notes to Consolidated Financial Statements.
* Derived from Audited Consolidated Financial Statements.

1

2

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 2007 and 2006

See Notes to Consolidated Financial Statements.

2

3

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended March 31, 2007 and 2006

See Notes to Consolidated Financial Statements.

3

4

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three and Six Months Ended March 31, 2007 and 2006

See Notes to Consolidated Financial Statements.

4

5

WAKE FOREST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended March 31, 2007 and 2006

See Notes to Consolidated Finanical Statements.

5

6

Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements

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

Note 2. Organizational Structure

The Company is majority owned by the Wake Forest Bancorp, M.H.C., (the “MHC”) a mutual holding company. Members of the MHC consist of depositors and certain borrowers of the Association, who have the sole authority to elect the board of directors of the MHC for as long as it remains in mutual form. Initially, the MHC’s principal assets consisted of 635,000 shares of the Association’s common stock (now converted to the Company’s common stock) and $100,000 in cash received from the Association as initial capital. Prior to 2003 (see Note 4), the MHC received its proportional share of dividends declared and paid by the Association (now the Company), and such funds are invested in deposits with the Association. The MHC, which by law must own in excess of 50% of the stock of the Company, currently has an ownership interest of 54.7% of the Company. The mutual holding company is registered as a savings and loan holding company and is subject to regulation, examination, and supervision by the OTS.

The Company was formed on May 7, 1999 solely for the purpose of becoming a savings and loan holding company and had no prior operating history. The formation of the Company had no impact on the operations of the Association or the MHC. The Association continues to operate at the same location and is subject to all the rights, obligations and liabilities of the Association which existed immediately prior to the formation of the Company. The Board of Directors of the Association capitalized the Company with $100,000. Future capitalization of the Company will depend upon dividends declared by the Association based on future earnings, or the raising of additional capital by the Company through a future issuance of securities, debt or by other means. The Board of Directors of the Company has no present plans or intentions with respect to any future issuance of securities or debt at this time.

Note 3. Basis of Presentation

The accompanying unaudited consolidated financial statements (except for the consolidated statement of financial condition at September 30, 2006, which is derived from audited consolidated financial statements) have been prepared in accordance with generally accepted accounting principles for interim financial information and Regulation S-B. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The results of operations for the three and six month periods ended March 31, 2007 are not necessarily indicative of the results of operations that may be expected for the Company’s fiscal year ending September 30, 2007. The accounting policies followed are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s September 30, 2006 Annual Report to Stockholders.

Note 4. Dividends Declared

On March 19, 2007, the Board of Directors of the Company declared a cash dividend of $0.19 a share for stockholders of record as of March 29, 2007 and payable on April 10, 2007. The dividends declared were accrued and reported as dividends payable in the March 31, 2007 Consolidated Statement of Financial Condition. Wake Forest Bancorp, Inc., the mutual holding company, waived the receipt of the dividend declared by the Company this quarter.

6

7

Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 5. Earnings Per Share

Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assumes the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. This presentation has been adopted for all periods presented. There were no adjustments required to net income for any period in the computation of diluted earnings per share. The reconciliation of weighted average shares outstanding for the computation of basic and diluted earnings per share for the three and six month periods ended March 31, 2007 and 2006 is presented below.

Note 6. Stock Option Plan

In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Awards to most non-employee directors will be accounted for as employee awards. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the current interim periods. The adoption of the statement did not have had an impact on the Company’s financial statements for the three and six months ended March 31, 2007 because all of the Company’s stock options were issued and vested in periods earlier than the current interim periods.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which contains guidance on applying the requirements in SFAS No. 123(R) including valuation techniques, development of assumptions used in valuing employee stock options and related MD&A disclosures. SAB No. 107 is effective for the period in which SFAS No. 123(R) is adopted. The adoption of SAB No. 107 did not have an impact on the Company’s financial statements for the current interim periods.

The Company has a stock option plan for the benefit of its officers, directors, and key employees. Options totaling 54,000 at an exercise price of $12.75 were granted on January 22, 1997. No options have been granted since that date. The options became exercisable at an annual rate of 20% during periods of service as an employee, officer, or director, and expire after ten years. Accelerated vesting may occur in certain circumstances as disclosed in the plan documents. Options are exercisable at the fair value on the date of grant.

7

8

Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 6. Stock Option Plan (continued)

A summary of the changes in the Company’s options during the three and six month periods ended March 31, 2007 and 2006 is presented below:

8

9

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Forward Looking Statements

Information set forth below contains various forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements represent the Company’s judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “anticipate”, “estimate”, “believe”, or “continue”, or the negative thereof or other variations thereof or comparable terminology. The Company cautions that such forward-looking statements are further qualified by important factors that could cause the Company’s actual operating results to differ materially from those in the forward-looking statements, as well as the factors set forth in the Company’s periodic reports and other filings with the SEC.

Comparison of Financial Condition at September 30, 2006 and March 31, 2007

Total assets increased by $3.6 million to $107.9 million at March 31, 2007 from $104.3 million at September 30, 2006. The increase in total assets during the six month period ended March 31, 2007 was funded primarily from an increase in deposits of approximately $2.9 million and cash generated from internal operating activities during the same period. Due to adequate levels of current liquidity, deposits were priced to meet competition and retain certain accounts but not to aggressively attract additional funds. The Company attempts to maintain a certain level of liquidity to fund loan growth and to provide a cushion for its construction loan commitments. During the current quarter, cash and short term cash investments increased by approximately $2.5 million.

Net loans receivable increased by $1.0 million to $77.6 million at March 31, 2007 from $76.6 million at September 30, 2006. The increase occurred primarily because of a $1.6 million increase in the Company’s construction loan portfolio, which typically expands during early spring and throughout the summer months. However, commercial lines and other real estate loans tied to Prime declined by $1.1 million because at current rates these types of loans are less desirable. Due to interest rate risk exposure, the Company generally does not offer commercial or investment loans with long-term fixed rates. The Company’s primary lending area continues to demonstrate signs of a healthy real estate market. The area’s high-tech sector recently incurred several lean years but the employment base has now begun to recover. However, population growth and employment expansion across a wide spectrum of the local economic base combined with moderate interest rate levels will ultimately determine whether loan demand can be sustained. Assuming local economic conditions continue to improve, management believes that the long-term fundamentals of its lending markets provide potential for future loan growth. However, there can be no assurances that such loan demand can or will materialize in the future.

Investment securities decreased by $61,950 to $676,500 at March 31, 2007 from $738,450 at September 30, 2006. The decrease is attributable to a $55,750 unrealized loss in the Company’s investment in FHLMC stock during the past six months and a required $6,200 redemption of FHLB stock during the same period. The Company has decided to maintain higher levels of short term liquidity in order to minimize interest rate risk and due to the relatively minor differential in investment rates available on extended maturities. As a result, the Company has not been actively involved in the buying and selling securities. At March 31, 2007, the Company’s investment portfolio, which consisted of FHLB stock and FHLMC stock, had approximately $477,000 in unrealized gains.

The Company had no borrowings outstanding during the period because its current level of liquidity was sufficient to fund lending and other cash commitments. The Company has recorded a liability of $519,750 at March 31, 2007 for the ESOP put option which represents the potential liability owed to participants based on the current market value of the Company’s stock if all participants were to request the balance of their account from the Company in cash instead of stock.

9

10

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Comparison of Financial Condition at September 30, 2006 and March 31, 2007 (Continued)

The Company has an ongoing stock repurchase program authorizing management to repurchase shares of its outstanding common stock. The repurchases are made through registered broker-dealers from shareholders in open market purchases at the discretion of management. The Company intends to hold the shares repurchased as treasury shares, and may utilize such shares to fund stock benefit plans or for any other general corporate purposes permitted by applicable law. At March 31, 2007 the Company had repurchased 92,755 shares of its common stock. The program continues until completed or terminated by the Board of Directors.

Retained earnings increased by $677,450 to $14.9 million at March 31, 2007 from $14.2 million at September 30, 2006. The increase is primarily attributable to the Company’s earnings of $843,100 during the six month period ended March 31, 2007, reduced by $199,550 in dividends declared during the period and a $33,900 recovery of prior charges to retained earnings to reflect the change in the fair value of the ESOP shares subject to the put option. At March 31, 2007 the Company’s capital amounted to $19.5 million, which as a percentage of total assets was 18.08%. The Company and the Association are both required to meet certain capital requirements as established by the OTS. At March 31, 2007, all capital requirements were met.

Asset Quality

The Company’s level of non-performing loans, consisting of loans past due 90 days or more, amounted to $637,850 or 0.81% as a percentage of loans outstanding at March 31, 2007. At March 31, 2006, the Company had no loans past due 90 days or more. Non-performing loans amounted to $666,400 or 0.86% as a percentage of loans outstanding at September 30, 2006. At March 31, 2007, non-performing loans consisted of four residential construction loans amounting to $618,400 and one lot loan totaling $19,450. Three of the four construction loans are with one builder and foreclosure proceedings have commenced on all four loans. We believe that the fair market value of all these properties is higher than the outstanding loan balances and we will not incur a loss on the ultimate disposition of these loans. All of the loans have been placed on non-accrual status.

Non-performing assets also includes real estate acquired through foreclosure. At March 31, 2007, foreclosed real estate included a residential building lot ($31,850), a residential property ($43,250), and a foreclosed commercial property ($1,003,800) which consisted of a convenience store and an adjacent tract of land, in total 3.81 acres located on a major highway outside of Wake Forest, North Carolina. While the commercial property’s location is considered highly desirable, the Company decided that an environmental assessment was necessary to properly market the tract due to the historical uses of the property. As a result, site assessment reports were filed with various state environmental agencies. Petroleum contamination and other trace elements consistent with operating a gas station and a truck maintenance facility over an extended period of time were found on parts of the property. The Company is in the process of applying for brownfields status for the site which should make the tract more attractive to prospective developers of the property. Although the Company does not currently believe the contamination will have a detrimental effect on the potential development of the property, the agencies are expected to be able to assist the Company in determining the extent of any required clean-up and ongoing monitoring steps that will be required. At this time, the Company does not believe that the ongoing environmental costs will materially impact the value of the property and no loss is expected on its ultimate sale. During the current quarter, the Company expensed $10,150 in environmentally related cost for this property. In addition, the Company believes it will be able to dispose of the two foreclosed residential properties without incurring a loss.

The Company had no loan charge-offs during the current quarter or six months ended March 31, 2007. The Company’s loan loss allowance amounted to $1,135,000 at March 31, 2007 and management believes that it has sufficient allowances established to cover losses associated with its loan portfolio. The allowance for loan losses is established based upon probable losses that are estimated to have occurred through a provision for loan losses charged to earnings. During the past five years, the Association’s loan portfolio has gradually trended towards a greater concentration of residential construction and land loans, which generally involve a greater degree of credit risk and collection issues. As a result, the Company has provided relatively higher levels of loan loss provisions and resulting allowances during this period than what has historically been considered necessary. The allowance for loan losses is evaluated on a regular basis by management.

10

11

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Asset Quality (Continued):

The Company records provisions for loan losses based upon known problem loans and estimated deficiencies in the existing loan portfolio. The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key components which are a specific allowance for identified problem or impaired loans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan”, and a formula allowance for the remainder of the portfolio under the provisions of SFAS No. 5, “Accounting for Contingencies.” Because the Company only originates loans secured by real estate, specific problem loans are graded using the standard regulatory classifications and are evaluated for impairment under SFAS No. 114 based upon the collateral’s fair value less estimated cost of disposal.

All other loans with unidentified impairment issues are pooled and segmented by major loan types (single-family residential properties, construction loans, commercial real estate, land, etc.). Loan loss rates for these categories are then generated by capturing historical loan losses net of recoveries over a five and ten year period, with added weight given to the more recent five year period. Qualitative factors that may affect loan collectibility such as geographical and lending concentrations, local economic conditions, and delinquency trends are also considered in determining the Company’s best estimate of the range of credit losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate values and other conditions differ substantially from the current operating environment. In addition, regulatory examiners may require the Association to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2007 and 2006

General. Net income for the three month period ended March 31, 2007 was $411,550, or $28,450 more than the $383,100 earned during the same quarter in 2006. Net income for the six month period ended March 31, 2007 was $843,100, or $73,600 more than the $769,500 earned during the same period in 2006. As discussed below, changes in net interest income between the comparable periods were primarily responsible for the change in net income during the current quarter and six month period end March 31, 2007 when compared to the same periods a year earlier.

Interest income. Interest income increased by $228,200 from $1,699,300 for the three months ended March 31, 2006 to $1,927,500 for the three months ended March 31, 2007. The increase in interest income resulted from both a 56 basis point increase in the average yield on interest earning assets between the quarters and an increase of $6.3 million in the average balance of interest-earning assets outstanding between the periods. Interest income increased by $517,500 from $3,381,400 for the six months ended March 31, 2006 to $3,898,900 for the six months ended March 31, 2007. The increase in interest income resulted from both an 72 basis point increase in the average yield on interest earning assets between the six month periods and an increase of $6.1 million in the average balance of interest-earning assets outstanding between the periods. The Company’s yield on interest earning assets was 7.30% and 7.28% for the quarter and six month period ended March 31, 2007; respectively, and 6.74% and 6.56% for the quarter and six month period ended March 31, 2006; respectively. The changes in yield occurred primarily due to fluctuations in market rates outstanding during the periods. A significant portion of the Company’s assets are able to re-price quickly when market rates influenced by Federal Reserve rate movements change.

11

12

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Comparison of Operating Results for the Three and Six Months Ended March 31, 2007 and 2006
(Continued)

Interest Expense. Interest expense increased by $216,100 from $691,650 for the three months ended March 31, 2006 to $907,750 for the three months ended March 31, 2007. Interest expense increased by $430,150 from $1,371,650 for the six months ended March 31, 2006 to $1,801,800 for the six months ended March 31, 2007. The increases were the result of both an increase in the Company’s cost of funds between the periods and an increase in the average balance of deposits outstanding between the periods. The Company’s cost of funds increased by 75 basis points and 84 basis points for the three and six month periods ended March 31, 2007; respectively, as compared to the same periods a year earlier. As a result of overall higher market rates, the Company’s cost of funds increased from 3.57% and 3.44% for the quarter and six month period ended March 31, 2006; respectively, to 4.32% and 4.28% for the quarter and six month period ended March 31, 2007, respectively. The Company’s average balance of deposits outstanding increased by $5.1 million and $4.7 million for the three and six month periods ended March 31, 2007, respectively, as compared to the same periods a year earlier.

Net interest income. Net interest income increased by $12,100 from $1,007,650 for the three months ended March 31, 2006 to $1,019,750 for the three months ended March 31, 2007. Net interest income increased by $87,350 from $2,009,750 for the six months ended March 31, 2006 to $2,097,100 for the six months ended March 31, 2007. As explained above, the changes in net interest income resulted primarily from fluctuations in both the yields on interest-earning assets and the cost of funds on interest-bearing liabilities between the periods as well as changes in the level of interest earning assets and interest-bearing liabilities. The Company’s net interest margin was 3.92% and 4.07% for the current quarter and six months ended March 31, 2007 versus 4.13% and 4.14% for the same quarter and six month period a year earlier.

Provision for loan losses. The Company provided $37,500 and $92,500 in loan loss provisions during the current quarter and six month period ended March 31, 2007; respectively, as compared to $35,000 and $95,000 during the three and six month periods; respectively, a year earlier. Provisions, which are charged to operations, and the resulting loan loss allowances are amounts the Company’s management believes will be adequate to absorb losses that are estimated to have occurred in the portfolio. Loans are charged off against the allowance when management believes that uncollectibility is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Association’s loan portfolio has gradually trended towards a greater concentration of builder construction loans, land and land development loans, and commercial loans which generally involve a greater degree of credit risk and collection issues. Also, many of these types of loans involve lending relationships which are larger than what the Company has traditionally maintained. As a result, the Company has provided relatively higher levels of loan loss provisions and resulting allowances during this period than what has historically been considered necessary. None of the provisions provided during the reported periods occurred due to the impairment of specific loans as required by SFAS No. 114.

Non-interest income. The Company’s non-interest income is primarily comprised on various fees and service charges on customer accounts, income from bank owned life insurance products, as well as security gains and fees earned from secondary market originations. The Company did not have any investment sales during any of the periods being reported upon. In addition, the Company has been originating residential mortgage loans for its own portfolio over the periods being reported upon and therefore very little secondary marketing income has been generated over those same periods.

12

13

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Non-interest expense. Non-interest expense decreased by $12,400 to $383,250 for the three month period ended March 31, 2007 from $395,650 for the comparable quarter in 2006. Non-interest expense decreased by $6,750 to $763,050 for the six month period ended March 31, 2007 from $769,800 for the same period a year earlier. Decreases in data processing costs and REO expenses offset increases in other operating expense during the three and six months ended March 31, 2007 as compared to the same periods a year earlier.

Data processing cost decreased by $14,800 and $21,050, respectively, during the quarter and six month period ended March 31, 2007 as compared to the same periods a year earlier primarily because the Company incurred additional cost in the prior periods associated with a computer system upgrade and conversion. REO provisions and expense decreased by $25,900 and $45,350, respectively, during the three and six months ended March 31, 2007 as compared to the same periods one year earlier primarily because the majority of the environmental testing on the Company’s foreclosed commercial tract was completed during the prior year. Other operating expense increased by $21,700 and $49,900, respectively, during the three and six months ended March 31, 2007 as compared to the same periods a year ago primarily because of increased cost associated with depreciation expense on new computer equipment, additional contributions, and planned seminar and other convention-related expenses.

Capital Resources and Liquidity

The term “liquidity” generally refers to an organization’s ability to generate adequate amounts of funds to meet its needs for cash. More specifically for financial institutions, liquidity ensures that adequate funds are available to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses, and provide funds for debt service, dividends to stockholders, and other institutional commitments. Funds are primarily provided through financial resources from operating activities, expansion of the deposit base, borrowings, through the sale or maturity of investments, the ability to raise equity capital, or maintenance of shorter term interest-earning deposits.

During the six month period ended March 31, 2007, cash and cash equivalents, a significant source of liquidity, increased by approximately $2.5 million. A net increase in customer deposits of $2.9 million and net cash provided by operating activities of $916,600 were the primary factors which contributed to the increase in cash during the current six month period. There most significant use of cash during the six month period ended March 31, 2007 was a $1.2 million net increase in loans receivable. Given its excess liquidity and its ability to borrow from the Federal Home Loan Bank of Atlanta, the Company believes that it will have sufficient funds available to meet anticipated future loan commitments, unexpected deposit withdrawals, and other cash requirements.

Off-Balance Sheet Transactions

In the normal course of business, the Association engages in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. Primarily the Association is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, revolving lines of credit, and the undisbursed portion of construction loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Association has in particular classes of financial instruments. The Association’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Association uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At March 31, 2007, the Association had outstanding loan commitments amounting to approximately $2.3 million. The undisbursed portion of construction loans amounted to $14.3 million and unused lines of credit amounted to $6.5 million at March 31, 2007.

13

14

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Critical Accounting Policies and Estimates

The accounting policies followed are as set forth in Note 1 of the Notes to Financial Statements in the Company’s 2006 Annual Report on Form 10-KSB. The Company has not experienced any material change in its critical accounting policies since September 30, 2006. The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates which are based upon historical experience and on other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company considers the following accounting policies to be most critical in their potential effect on its financial position or results of operations:

Allowance for Loan Losses

The most critical estimate concerns the Company’s allowance for loan losses. The Company records provisions for loan losses based upon known problem loans and estimated deficiencies in the existing loan portfolio. The Company’s methodology for assessing the appropriations of the allowance for loan losses consists of two key components, which are a specific allowance for identified problem or impaired loans and a formula allowance for the remainder of the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Association will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Association does not separately identify individual residential loans for impairment disclosures.

The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrower’s ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

Interest Income Recognition:

Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due unless the loans are adequately secured and in the process of collection. Interest is not accrued on other loans when management believes collection is doubtful. All loans considered impaired are non-accruing. Interest on non-accruing loans is recognized as payments are received when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on non-accrual status, all interest previously accrued is reversed against current-period interest income.

14

15

Wake Forest Bancshares, Inc.
March 31, 2007

Item 3. Controls and Procedures

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

15

16

Wake Forest Bancshares, Inc.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not engaged in any material legal proceedings at the present time. Occasionally, the Association is a party to legal proceedings within the normal course of business wherein it enforces its security interest in loans made by it, and other matters of a similar nature.

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

On February 20, 2007, the annual meeting of stockholders was held to consider and vote upon the election of four directors of the Company and to ratify the appointment of Dixon Hughes PLLC as independent auditors for the Company’s fiscal year ending September 30, 2007. All items were approved by the stockholders as shown below.

Vote concerning the election of directors of the Company:

Vote concerning ratification of Dixon Hughes PLLC as independent auditors for
the year ending September 30, 2007:

The foregoing matters are described in detail in the Company’s proxy statement
dated January 19, 2007 for the 2007 Annual Meeting of stockholders.

Item 5. Other Information

None

Item 6. Exhibits

16

17

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Wake Forest Bancshares, Inc.

Dated May 14, 2007

By: /s/ Robert C. White                                                       
Robert C. White
Chief Executive Officer and Chief Financial Officer

17

18

EXHIBIT INDEX

19