<PAGE>

                                 UNITED STATES
                        SECURITIES EXCHANGE COMMISSION
                            Washington, D.C. 20549
                    ---------------------------------------

                                   FORM 10-K

                ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934


                  For the fiscal year ended December 31, 1996
                               -----------------

                       Commission file number   1-14230
                                 ------------

                          STONE STREET BANCORP, INC.
                          --------------------------
            (Exact name of registrant as specified in its charter)

             NORTH CAROLINA                             56-1949352
      ------------------------------        -----------------------------------

      State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization

          232 SOUTH MAIN STREET
     MOCKSVILLE, NORTH CAROLINA                                 27028
    ----------------------------------------                  ----------
    (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code (704) 634-5936

       Securities Registered Pursuant to Section 12(b) of the Act:  None
                              ----
          Securities Registered Pursuant to Section 12(g) of the Act:

                          Common Stock, no par value
                          --------------------------
                               (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.         Yes  X      No
                                               -----     -----

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant.  The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and ask prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$39,578,682 common stock, no par value, based on the closing price of such
--------------------------------------------------------------------------
common stock on March 17, 1997.
-------------------------------

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.  1,825,050 shares of common
                                                  --------------------------
stock, no par value, outstanding at March 17, 1997.
---------------------------------------------------



<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Annual Report of Stone Street Bancorp, Inc. for the year ended
December 31, 1996 (the "1996 Annual Report"), are incorporated by reference into
Part I, Part II and Part IV.

Portions of the Proxy Statement for the 1997 (the "Proxy Statement") Annual
Meeting of Shareholders of Stone Street Bancorp, Inc. to be held on April 15,
1997, are incorporated by reference into Part III.

                                       1
<PAGE>

                                     PART I

ITEM 1. BUSINESS


General

     Prior to March 29, 1996, Mocksville Savings Bank, Inc., SSB, (the Bank)"
operated as a mutual North Carolina-chartered savings bank.  On March 29, 1996,
the Bank converted from a North Carolina-chartered mutual savings bank to a
North Carolina-chartered stock savings bank (the "Conversion").  In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by Stone Street Bancorp, Inc., a North Carolina corporation (the
"Company") which was organized to become the holding company for the Bank.  At
that time, the Company had an initial public offering of its common stock, no
par value (the "Common Stock").

     The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina.  The Company's and the Bank's principal
office is located at 232 South Main Street, Mocksville, North Carolina.  The
Company's activities consist of investing the proceeds of its initial public
offering which were retained at the holding company level and owning the Bank.
The Company's principal sources of income include earnings on its investments.
In addition, the Company will receive any dividends which are declared and paid
by the Bank on its capital stock.  The Company did not commence operations until
March 29, 1996 and conducted business from that date through the year ended
December 31, 1996 in its first year.  The following general business discussion
pertains primarily to Mocksville Savings.

     The Bank was originally chartered in 1921.  It has been a member of the
Federal Home Loan Bank ("FHLB") system since 1946 and its deposits are federally
insured up to allowable limits.

     The Bank is engaged primarily in the business of attracting deposits from
the general public and using such deposits to make mortgage loans secured by
real estate.  Mocksville makes mortgage loans secured by residential real
property, including one-to-four family residential real estate loans, home
equity line of credit loans and other subordinate lien loans, loans secured by
improved nonresidential real property, loans secured by undeveloped real
property  and construction loans.  Mocksville also makes a limited number of
loans which are not secured by real property, such as loans secured by pledged
deposit accounts, and other personal property, mobile home loans and unsecured
loans.  Mocksville's primary source of revenue is interest income from its
lending activities.  Mocksville's other major sources of revenue are interest
and dividend income from investments and mortgage-backed securities, interest
income from its interest-bearing deposit balances in other depository
institutions and fee income from its lending and deposit activities.  The major
expenses of Mocksville are interest on deposits and borrowings and noninterest
expenses such as compensation and fringe benefits, federal deposit insurance
premiums, data processing expenses and branch occupancy and related expenses.

     The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the
North Carolina Administrator, Savings Institutions Divisions, North Carolina
Department of Commerce (the "Administrator").  Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest.  Lending activities are affected by the demand for financing
of real estate and other types of loans, which in turn are affected by the
interest rates at which such financing may be offered and other factors
affecting local demand and availability of funds.

                                       2
<PAGE>

Market Area

     The Bank's primary market area consists of Davie County, North  Carolina.
Mocksville is located between Winston-Salem, North Carolina and Statesville,
North Carolina on Interstate 40.  Employment in Davie County includes furniture
manufacturing, machine tooling, equipment assembly, and the opportunities
generated by Wake Forest University and Bowman Grey Medical School in Winston-
Salem.  In addition, home construction and real estate development are major
industries because Davie County attracts many retirees.  Bermuda Run Golf and
Country Club in Davie County is the home of the Bing Crosby Invitational Golf
Tournament.  In addition, six other golf courses are in or near Davie County,
including Tanglewood Park Golf Course, the site of the PGA Vantage Tournament.
Major area employers include Lee Jeans, Jockey International, Reynolds Tobacco,
and Hanes Hosiery.

Lending Activities

     General.  The Bank's primary source of revenue is interest and fee income
from its lending activities, consisting primarily of mortgage loans for the
purchase or refinancing of single family homes located in its primary market
area.  The Bank also makes loans secured by multi-family residential properties,
improved nonresidential real estate, construction loans, loans secured by
undeveloped real estate, unsecured loans, and other personal property, mobile
home loans, savings account loans and other loans.  Over 99.6% of the Bank's net
loan portfolio is secured by real estate.  As of December 31, 1996, all of the
loans in the Bank's real estate loan portfolio were secured by properties in
North Carolina.  On December 31, 1996, the Bank's largest single outstanding
loan had a balance of approximately $1,303,000.  This loan was performing in
accordance with its original terms.  In addition to interest earned on loans,
the Bank receives fees in connection with loan originations, loan servicing,
loan modifications, late payments, loan assumptions and other miscellaneous
services.

     Loan Portfolio Composition.  The Bank's net loan portfolio totalled
approximately $83.0 million at December 31, 1996 representing 78.44% of
Mocksville's total assets at such date.  At December 31, 1996, 81.75% of
Mocksville's net loan portfolio was composed of one-to-four family residential
mortgage loans.  Home equity and subordinate lien loans represented 2.98% of the
Bank's net loan portfolio, and nonresidential real estate loans represented
6.89% of the Bank's net loan portfolio on such date.

     As part of its interest rate risk management program, the Bank has
increased the amount of adjustable rate mortgage loans in its portfolio in
recent years.  As of June 30, 1990, the Bank had approximately $1,566,000 of
adjustable rate mortgage loans outstanding, as compared to approximately
$2,820,000 as of December 31, 1996.

     The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.

                                       3
<PAGE>

<TABLE>
<CAPTION>

                                                              At December 31,
                          ----------------------------------------------------------------------------------------
                                    1996              1995              1994              1993         1992
                          ----------------------------------------------------------------------------------------

                                     % of              % of              % of              % of            % of
                           Amount   Total    Amount   Total    Amount   Total    Amount   Total    Amount  Total
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
(Dollars in Thousands)
Real estate loans:

 Residential
 1-4 family.............  $67,844   81.75%  $63,329   84.33%  $54,321   82.34%  $45,724   81.81%  $41,355   82.70%

 Residential multi-
  family and
  nonresidential
  real estate...........    5,716    6.88     4,260    5.67     4,987    7.56     5,312    9.50     5,059   10.12

 Home Equity and
  other subordinate
  lien loans............    2,473    2.98     2,185    2.91     1,423    2.16     1,447    2.59     1,492    2.98

 Residential
  construction..........   12,492   15.05    11,735   15.63    11,589   17.56     8,033   14.37     6,433   12.87
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------

 Total real estate
  loans:                   88,525  106.66    81,509  108.54    72,320  109.62    60,516  108.27    54,339  108.67
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------

 Other installment
  loans.................      372     .45       222     .30       197    0.30       133    0.24       201    0.40
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------

Less:

 Unearned fees and
 discounts..............    1,009    1.22       962    1.29     1,095    1.66       711    1.27       577    1.15

 Loans in process .         4,385    5.28     5,211    6.94     5,334    8.09     3,959    7.08     3,894    7.79

 Allowance for
  loan losses...........      511     .61       462     .61       115    0.17        89    0.16        65    0.13
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------

  Total reductions......    5,905    7.11     6,635    8.84     6,544    9.92     4,759    8.51     4,536    9.07
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
  Total loans
   receivable, net......  $82,992  100.00%  $75,096  100.00%  $65,973  100.00%  $55,890  100.00%  $50,004  100.00%
                          -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
</TABLE>

     The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 1996.  Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change while fixed rate and other loans are shown as due over the contractual
maturity.  Demand loans, loans having no stated maturity and overdrafts are
reported as due in one year or less.  The table does not include prepayments,
however, it does include scheduled principal repayments.  Prepayments and
scheduled repayments in the loan portfolio totaled $16.2 million, $12.2 million
and $13.6 million in fiscal years ended December 31, 1996, 1995 and 1994,
respectively.  Amounts in the table are net of loans in process and are net of
unamortized loan fees.

                                       4
<PAGE>

<TABLE>
<CAPTION>

                                                           At December 31, 1996
                                       ----------------------------------------------------------
                                                    Over 1    Over 3   Over 5
                                       One Year    Year to  Years to  Years to   Over 10
                                        Or less    3 Years   5 Years  10 Years    Years     Total
                                       --------    ------   --------  --------  --------    -----
<S>                                    <C>         <C>      <C>       <C>       <C>         <C>
Mortgage loans:
 Fixed rate 1-4 family
   residential                         $ 6,260     $  479     $1,356   $21,647   $36,465  $66,207

 Adjustable rate 1-4 family
  residential                              629                                                629

 Adjustable home equity
  loans                                  2,191                                              2,191

 Other fixed rate loans                  2,158         48        841       815    10,243   14,105

Other loans                                 45         55        115       137        20      372

Less:
 Allowance for loan losses                (511)                                              (511)
                                       -------     ------   --------  --------  --------    -----
                                       $10,772     $  582     $2,312   $22,599   $46,728  $82,993
                                       =======     ======   ========  =======   ========  =======
</TABLE>
     The following table sets forth the dollar amount at December 31, 1996 of
all loans maturing or repricing on or after December 31, 1997.
<TABLE>
<CAPTION>
                                                            Fixed   Adjustable
                                                            Rates     Rates
                                                           -------  ----------
<S>                                                        <C>      <C>

(In Thousands)

Mortgage loans                                             $59,947  $        -

Other loans                                                 12,274           -
                                                           -------  ----------

                                                           $72,221  $        -
                                                           =======  ==========
</TABLE>

     ORIGINATION OF LOANS.  Historically, the Bank has not originated its one-
to-four family residential mortgage or other loans with the intention that they
will be sold in the secondary market.  Accordingly, the Bank originates fixed
rate one-to-four family residential real estate loans which satisfy the Bank's
underwriting requirements and are tailored to its local community, but do not
necessarily satisfy various technical FHLMC and FNMA underwriting requirements
and purchase requirements not related to documentation.

     Although the Bank believes that many of its nonconforming loans are
saleable in the secondary market, some of such nonconforming loans could be sold
only after the Bank incurred certain costs and/or discounted the purchase price.
As a result, the Bank's loan portfolio is less liquid than would be the case if
it was composed entirely of loans originated in conformity with secondary market
requirements.  In addition, certain types of nonconforming loans are generally
thought to have greater risks of default and nonperformance.  However, such
loans generally produce a higher yield than would be produced by conforming
loans, and the Bank has historically found that its origination of such loans
has not resulted in a high level of nonperforming assets.  These nonconforming
loans satisfy a need in the Bank's local community, and the Bank intends to
continue to originate nonconforming loans.

                                       5
<PAGE>

     Substantially all of the one-to-four family residential mortgage loans
originated by the Bank have a fixed rate of interest because there is very
little demand for adjustable rate loans in the Bank's market area.  As a result,
Mocksville limits the term of substantially all of its fixed rate residential
real estate loans to a shorter term, 15 years, and, includes a 10-year call
provision in all other fixed rate residential real estate loans.

     The Bank has instituted a new marketing program in which all of the Bank's
loan officers visit local realtors to promote the Bank's residential mortgage
products.

     The table below sets forth the Bank's loan origination, purchase activity
and loan portfolio repayment experience during the periods indicated.
<TABLE>
<CAPTION>

                                                        December 31,
                                             ------------------------------
                                               1996       1995       1994
                                             --------   --------   --------
                                                     (In Thousands)

<S>                                          <C>        <C>        <C>
Loans receivable, net beginning of period    $ 75,096   $ 65,973   $ 55,890

Loan originations:

 Residential 1-4 family                        11,880      7,812      9,372

 Residential multifamily and
  nonresidential real estate                    1,730      1,736      1,863

 Home equity and second mortgage                  901      1,005        327

 Residential construction                       8,412     10,117     12,304

 Consumer                                         410        469        231
                                             --------   --------   --------

  Total loan originations                      23,333     21,439     24,127

Principal repayments                          (16,167)   (12,225)   (13,635)

Other changes, net                                730        (91)      (409)
                                             --------   --------   --------

Increase in loans receivable                  (15,437)   (12,316)   (14,044)
                                             --------   --------   --------

Loans receivable, net, end of period         $ 82,992   $ 75,096   $ 65,973
                                             ========   ========   ========

</TABLE>

                                       6
<PAGE>

     ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING.  The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance single family homes.  The Bank also makes loans secured by
two-to-four family residential properties.  Consistent with the Bank's emphasis
on being a community-oriented financial institution, it is and has been the
Bank's strategy to focus its lending efforts in Davie County, North Carolina and
in contiguous counties.  On December 31, 1996, approximately 81.75% of the
Bank's total net real estate loan portfolio consisted of one-to-four family
residential real estate loans.  These include both loans secured by detached
single-family residences and condominiums and loans secured by housing
containing not more than four separate dwelling units.  Of such loans .93% had
adjustable interest rates.

     The Bank originates some adjustable rate mortgage loans secured by owner
occupied property generally having terms of 30 years in amounts of up to 90% of
the value of the property.  Private mortgage insurance is generally required if
the loan amount exceeds 80% of the value of the property.

     Interest rates on adjustable rate residential mortgage loans are tied to
the weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year.  Rates are subject to change annually.  The loans
have rate adjustment caps which limit the amount of rate adjustments at any one
time and over the lives of the loans.

     Adjustable rate loans are generally considered to involve a greater degree
of risk than fixed rate loans because borrowers may have difficulty meeting
their payment obligations if interest rates and required payment amounts
increase substantially.

     The Bank primarily originates fixed-rate mortgage loans secured by owner
occupied property having terms generally ranging from 15 to 30 years in amounts
of up to 90% of the value of the property.  Any fixed rate loan with a term
greater than 20 years includes a ten-year call option.  Private mortgage
insurance is generally required if the loan amount exceeds 80% of the value of
the property.  In addition, the Bank makes fixed-rate loans secured by non-owner
occupied residential real estate generally having terms of 15 years in amounts
of up to 80% of the value of the property.  Substantially all of the fixed-rate
loans in the Bank's mortgage loan portfolio have due on sale provisions allowing
the Bank to declare the unpaid balance due and payable in full upon the sale or
transfer of an interest in the property securing the loan.

     While one-to-four family residential loans are normally originated for 15
or 30 year terms with a ten-year call option, such loans customarily remain
outstanding for substantially shorter periods because borrowers often prepay
their loans in full upon sale of the property pledged as security or upon
refinancing the original loan.  Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates, and the interest rates payable on outstanding
loans.  The thrift and mortgage banking industries have generally used 12-year
and 7-year average loan lives in calculations calling for prepayment assumption
for 30-year residential loans and 15-year residential loans, respectively.
Management believes that the Bank's recent loan prepayment experience has been
shorter than these assumed average loan lives due to recent periods of low
interest rates and resulting high rates of refinancing.

     The Bank generally requires title insurance for its one-to-four family
residential loans.  The Bank generally requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the loan amount or replacement cost, whichever is less,
of the improvements on the property securing the loans.

     Multifamily Residential and Nonresidential Real Estate Lending.  On
December 31, 1996, the Bank had $5.7 million in outstanding loans secured by
nonresidential real estate, including undeveloped land, comprising approximately
of 6.89% of its net loan portfolio as of that date.  Most of these loans are
secured

                                       7
<PAGE>

by land, church properties, apartments and commercial real estate, and normally
have fixed interest rates.  The loans generally do not exceed 75% of the
appraised value of the real estate securing the loans.  Loans secured by
commercial real estate and undeveloped land generally are larger than one-to-
four family residential loans and involve a greater degree of risk.  Payments on
these loans depend to a large degree on results of operations and management of
the properties and may be affected to a greater extent by adverse conditions in
the real estate market or the economy in general.  As a result, the Bank has re-
evaluated its nonresidential lending policies and revised its commercial loan
underwriting procedures in order to, among other things, improve loan
documentation.  As of December 31, 1996, the largest nonresidential real estate
loan in the Bank's loan portfolio totalled $1,303,000.  This loan was performing
in accordance with the original loan contract.  See "-Lending Activities-
Nonperforming Assets and Asset Classification."

     HOME EQUITY LINES OF CREDIT AND SUBORDINATE LIEN LOANS. At December
31, 1996, the Bank had approximately $2.5 million in home equity and other
subordinate lien loans, representing approximately 2.98% of its net loan
portfolio. Of this amount, $2.2 million was composed of home equity line of
credit loans. These loans are often originated at the time of the closing of a
one-to-four family residential real estate loan secured by the same property.
The Bank's home equity lines of credit have adjustable interest rates tied to
prime interest rates plus a margin. The home equity lines of credit require
monthly payments of 2% of the outstanding balance or $100, whichever is greater.
These loans mature in fifteen years. Home equity lines of credit are generally
secured by subordinate liens against residential real property. The Bank may
require title insurance in connection with these loans, but in the past only
required opinions of title from attorneys. The Bank requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least sufficient to cover its loan. Home equity loans
are generally limited so that the amount of such loans, along with any senior
indebtedness, does not exceed 80% of the value of the real estate security.
Because home equity loans involve revolving lines of credit which can be drawn
over a period of time, the Bank faces risks associated with changes in the
borrower's financial condition. The Bank intends to continue to emphasize its
home equity program. The presence of home equity loans in the Bank's portfolio
has assisted the institution in improving the interest sensitivity of its assets
and liabilities because home equity liens of credit have adjustable rates which
are subject to change monthly and without any significant rate caps.

     CONSTRUCTION LENDING.  The Bank makes construction loans primarily for the
construction of single-family dwellings.  The aggregate outstanding balance of
such loans on December 31, 1996 was approximately $12.5 million, representing
approximately 15.05% of the Bank's net loan portfolio.  Most of these loans were
made to persons who are constructing properties for the purpose of occupying
them; some were made to builders who were constructing properties for sale.
Loans made to individual property owners and builders are "construction-
permanent" loans which generally provide for the payment of interest only during
a construction period, after which the loans convert to a permanent loan at
fixed interest rates having terms similar to other one-to-four family
residential loans.

     Construction loans made to builders who are building to resell generally
have a maximum loan-to-value ratio of 80% of the appraised value of the
property.  Construction loans to persons who intend to occupy the finished
premises generally have a maximum loan-to-value ratio of 80% without private
mortgage insurance and up to 90% with private mortgage insurance.

     Construction loans are generally considered to involve a higher degree of
risk than long-term financing secured by real estate which is already occupied.
A lender's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at the completion of
construction and the estimated cost (including interest) of construction.  If
the estimate of construction costs proves to be inaccurate, the lender may be
required to advance funds beyond the amount originally committed in order to
permit completion of construction.  If the estimate of anticipated value proves
to be inaccurate, the lender

                                       8
<PAGE>

may have security which has value insufficient to assure full repayment.  In
addition, repayment of loans made to builders to finance construction of
properties is often dependent upon the builder's ability to sell the property
once construction is completed.

     OTHER INSTALLMENT LOANS. In addition to the loans described above, the Bank
also offers loans which are primarily secured by savings deposits held by the
Bank or which are unsecured. As of December 31, 1996, the Bank had approximately
$127,000 of such loans outstanding, representing approximately .15% of its net
loan portfolio.

     Financing of new mobile homes generally does not exceed 75% of the purchase
price or the retail invoice value of the mobile home, including land value, and
has a maximum term of 15 years.

     The Bank also makes other secured consumer loans such as automobiles,
campers and boats and generally lends up to 80% of the purchase price.

     The Bank makes unsecured consumer loans in amounts of up to $25,000.  These
loans require monthly payments and have a term of up to 24 months.  In addition,
the Bank provides overdraft lines of credit in amounts of up to $10,000.
Payments are required in amounts of 2% of the outstanding balance or $100,
whichever is greater.

     LOAN SOLICITATION, PROCESSING AND UNDERWRITING.  Loan originations were
derived from a number of sources such as referrals form real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.

     During its loan approval process, the Bank assesses the applicant's ability
to make principal and interest payments on the loan and the value of the
property securing the loan.  The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations.  Under current practice, the responsible officer or loan officer
of the Bank analyzes the loan application and the property involved, and an
appraiser inspects and appraises the property.  The Bank requires independent
fee appraisals on all loans originated primarily on the basis of real estate
collateral.  The Bank also requires independent fee appraisals on all loans
originated primarily on the basis of real estate collateral.  The Bank also
obtains information concerning the income, financial condition, employment and
the credit history of the applicant.

     Mortgage loans, other than home equity loans, of up to $50,000 may be
approved by certain designated loan officers of the Bank in cases where the loan
meets all of the Bank's underwriting guidelines.  Mortgage loans of over $50,000
up to $85,000 may be approved by the Officers' Loan Committee.  The Officers'
Loan Committee also reviews all other mortgage loan approvals.  All mortgage
loans of over $85,000 up to $200,000 may be approved by the Bank's Directors'
Loan Committee which is composed of its President and three outside directors
appointed by the Chairman of the Board.  All mortgage loans of over $200,000
must be approved by the Bank's full Board of Directors.  Loans secured by
savings deposits follow the same approval procedures as mortgage loans.

     All consumer loans of up to $2,500 may be approved by designated loan
officers.  Consumer loans in excess of $2,500 up to $5,000 may be approved by
the Officers' Loan Committee.  Consumer loans in excess of $5,000 up to $50,000
may be approved by the Directors' Loan Committee.  Consumer loans greater than
$50,000 must be approved by the full Board of Directors.

     All employee, church and commercial loans, including loans secured by
apartments, of up to $200,000 are approved by the Directors' Loan Committee, and
above $200,000, by the full Board of Directors.

     Home equity loans up to $25,000 may be approved by loan officers; between
$25,000 and $50,000 by the Officers' Loan Committee; between $50,000 and
$200,000 by the Directors' Loan Committee; and over $200,000, by the full Board
of Directors.

                                       9
<PAGE>

     Normally, upon approval of a residential mortgage loan application,
Mocksville gives a commitment to the applicant that it will make the approved
loan at a stipulated rate any time within a 30-day period.  The loan is
typically funded at such rate of interest and on other terms which are based on
market conditions existing as of the date of the commitment.  As of December 31,
1996, the Bank had $4.4 million in such unfunded mortgage loan commitments.  In
addition, on such date the Bank had $1.7 million in unfunded commitments for
unused lines of credit and letters of credit.

     INTEREST RATES, TERMS, POINTS AND FEES.  Interest rates and fees charged on
the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds.  These factors are affected by, among other things, general
economic conditions and the policies, of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.

     In addition to earning interest on loans, the Bank receives fees in
connection with originating loans.  Fees for loan servicing, loan modifications,
late payments, loan assumptions and other miscellaneous services in connection
with loans are also charged by the Bank.

     NONPERFORMING ASSETS AND ASSET CLASSIFICATION.  When the Bank fails to make
a required payment on a loan and does not cure the delinquency promptly, the
loan is classified as delinquent.  In this event, the normal procedure followed
by the Bank is to make contact with the borrower at prescribed intervals in an
effort to bring the loan to a current status, and late charges are assessed as
allowed by law.  In most cases, delinquencies are cured promptly.  If a
delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrowers, commences foreclosure proceedings.  If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale.  In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable to the borrower than those
normally offered.  Any property acquired as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold or otherwise disposed of by the Bank to recover its investment.  As of
December 31, 1996, the Bank did not own any real estate acquired in settlement
of loans.  Real estate acquired through, or in lieu of, loan foreclosure is
initially recorded at the lower cost or fair value at the date of foreclosure,
establishing a new cost basis.  After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of cost or
fair value minus costs to sell.  Revenue and expenses from holding the
properties and additions to the valuation allowance are included in operations.

     Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest income on loans is suspended, when, in management's
judgment, doubts exist as to the collectibility of additional interest within
reasonable time.  Loans are returned to accrual status when management
determines, based upon an evaluation of the underlying collateral, together with
the borrower's payment record and financial condition, that the borrower has the
capability and intent to meet the contractual obligations of the loan agreement.
The Bank continues to accrue interest on loans delinquent 90 days or more if the
loans are well secured and the Bank is in the process of collecting payments on
the loans.  Interest on loans placed on nonaccrual status is generally charged
off.  The allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to the
extend cash payments are received until the loan is returned to accrual status.

     The following table sets forth information with respect to nonperforming
assets identified by the Bank, including nonaccrual loans and real estate owned
at the dates indicated.

                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                                At December 31,
                                              -----------------------------------------------
                                                1996      1995      1994      1993      1992
                                              --------  --------  --------  --------  --------
                                                            (Dollars in Thousands)
<S>                                           <C>       <C>       <C>       <C>       <C>
Total nonaccrual loans
 Mortgage loans delinquent 90 days or more    $      -   $     -   $     -   $     -   $    53
 Consumer loans delinquent 90 days or more           -         -         -         -         -

Real estate owned                                    -         -         -         -         -
                                              --------   -------   -------   -------   -------
 Total non-performing assets                  $      -   $     -   $     -   $     -   $    53
                                              ========   =======   =======   =======   =======

Accruing loans, delinquent 90 days or more    $    423   $   201   $   280   $   292   $   437
                                              ========   =======   =======   =======   =======

Non-performing loans to total loans               0.00%     0.00%     0.00%     0.00%     0.11%

Non-performing assets to total assets             0.00%     0.00%     0.00%     0.00%     0.08%

Total assets                                  $105,807   $87,751   $81,560   $75,826   $64,445
Total loans, net                              $ 82,992   $75,097   $65,973   $55,890   $50,004

</TABLE>
     Applicable regulations require the Bank to "classify" its own assets on a
regular basis.  In addition, in  connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them.  Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.

     An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or 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 "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a loss reserve is not warranted.

     As of December 31, 1996, the Bank had approximately $423,000 of
loans internally classified as "substandard", and no loans classified as
"doubtful" or "loss".  The Bank also identifies assets which possess credit
deficiencies or potential weaknesses deserving close attention by management.
These assets may be considered "special mention" assets and do not yet warrant
adverse classification.  At December 31, 1996, the Bank had no loans in the
"special mention" category.

     When an insured institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management.  These allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities and the risks associated with particular problem assets.
When an insured institution classifies problem assets as "loss," it charges off
the balance of the asset.  The Bank's determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by
the FDIC and the Administrator which can order the establishment of additional
loss allowances.

                                       11
<PAGE>

     The following table sets forth at December 31, 1996, the Bank's aggregate
carrying value of the assets classified as substandard, doubtful, loss or
"special mention":

<TABLE>
<CAPTION>


                                  Special Mention List     Substandard          Doubtful           Loss
                                  --------------------   ---------------  -------------------  ----------------
                                   Number    Amount      Number   Amount    Number     Amount   Number   Amount
                                  -------    ------      ------   ------  -----------  ------  --------  ------
<S>                               <C>        <C>         <C>      <C>     <C>          <C>     <C>       <C>

(In Thousands)
Real estate loans:
 Residential 1-4 family                -      $    -         14   $  423         -     $    -         -  $    -
 Residential multifamily
  and nonresidential
  real estate                          -           -          -        -         -          -         -       -
 Home equity and second
  mortgage                             -           -          -        -         -          -         -       -
 Residential construction              -           -          -        -         -          -         -       -
                                  ------      ------       ----   ------    ------     ------    ------  ------

  Total real estate loans              -           -         14      423         -          -         -       -
                                  ------      ------       ----   ------    ------     ------    ------  ------

Consumer loan                          -           -          -        -         -          -         -       -
                                  ------      ------       ----   ------    ------     ------    ------  ------

Total                                  -      $    -         14     $423         -     $    -    $    -  $    -
                                  ======      ======       ====   ======    ======     ======    ======  ======

</TABLE>
ALLOWANCE FOR LOAN LOSSES.  In originating the loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions.  It
is management's policy to maintain an adequate allowance for loan losses based
on, among other things, the Bank's historical loan loss experience, evaluation
of economic conditions and regular reviews of delinquencies and loan portfolio
quality.  Specific allowances are provided for individual loans when ultimate
collection is considered in doubt by management after reviewing the current
status of loans which are contractually past due and considering the fair value
of the security for the loans.

     Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary.  Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.

                                       12
<PAGE>

     The following table describes the activity related to the Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>

                                                                                Six Months      Year
                                                                                  Ended         Ended
                                               Year Ended December 31,          December 31,   June 30,
                                       -------------------------------------    -----------    --------
                                        1996        1995        1994    1993       1992         1992
                                       -----        -----      -----   -----      -----         -----
<S>                                    <C>          <C>        <C>     <C>        <C>           <C>

Balance, beginning of period           $ 462        $ 115      $  89   $  65      $  48         $  38

Provision for loan losses                 50          350         26      25         17            10

Charge-offs:

Residential 1-4 family                     -            -          -       -          -             -

  Consumer                                 1            3          -       1          -             -

Recoveries:

  Residential 1-4 family                   -            -          -       -          -             -

  Consumer                                 -            -          -       -          -             -
                                       -----        -----      -----   -----      -----         -----

Balance, end of period                 $ 511        $ 462      $ 115   $  89      $  65         $  48
                                       =====        =====      =====   =====      =====         =====

Net charge-offs as a % of average
  loans outstanding                        -            -          -       -          -             -

Allowance at period end as a % of
  nonperforming loans                      -            -          -       -          -             -

Allowance at period end as a % of
  nonperforming assets                     -            -          -       -          -             -

Allowance at period end as a % of
  total gross loans                      .57%         .57%       .16%    .15%       .12%          .09%

</TABLE>

     The following table sets forth the composition of the allowance for loan
losses by type of loan at the dates indicated.  The allowance is allocated to
specific categories of loans for statistical purposes only, and may be applied
to loan losses incurred in any loan category.

                                       13
<PAGE>

<TABLE>
<CAPTION>


                                                                        At December 31,
                            ------------------------------------------------------------------------------------------------------
                                   1996                  1995                 1994                1993                 1992
                            -------------------  -------------------  --------------------  -------------------  ------------------
                                        Amount               Amount                Amount               Amount              Amount

                                          of                   of                    of                   of                  of

                                       Loans to             Loans to              Loans to             Loans to            Loans to

                            Amount of   Gross    Amount of   Gross    Amount of    Gross    Amount of   Gross    Amount of  Gross

                            Allowance   Loans    Allowance   Loans    Allowance    Loans    Allowance   Loans    Allowance  Loans

                            ---------  --------  ---------  --------  ---------   --------  ---------  --------  ---------  -------
<S>                         <C>        <C>       <C>        <C>       <C>         <C>       <C>        <C>       <C>        <C>

Real estate loans:
 Residential
  1-4 family                  $ 138      76.32%     $ 127     77.48&      $ 45      74.91%      $35      75.39%     $26     75.82%

 Residential multifamily
  and nonresidential
  real estate                   153       6.43        138       5.21        23       6.88        19       8.76       15      9.28

 Home equity and
  second mortgage                52       2.78         46       2.67        12       1.96        10       2.39        7      2.73

 Residential construction       128      14.05        115      14.36        24      15.98        16      13.24       11     11.80
                              -----     ------      -----     ------      ----     ------       ---     ------      ---    ------

Total real estate loans         471      99.58        426      99.72       104      99.73        80      99.78       59     99.63

Consumer loans                   40        .42         36        .28        11       0.27         9       0.22        6      0.37
                              -----     ------      -----     ------      ----     ------       ---     ------      ---    ------

Total allowance for loan
 losses                       $ 511     100.00%     $ 462     100.00%     $115     100.00%      $89     100.00%     $65    100.00%
                              =====     ======      =====     ======      ====     ======       ===     ======      ===    ======

</TABLE>

                                       14
<PAGE>

INVESTMENT SECURITIES

     Interest and dividend income from investment securities generally provides
the second largest source of income to the Bank after interest on loans.  In
addition, the Bank receives interest income from deposits in other financial
institutions.  On December 31, 1996, the carrying value of the Bank's investment
securities portfolio totaled $19.6 million and consisted of interest-bearing
deposits, U.S. government and agency securities, mortgage-backed securities, and
stock in the FHLB of Atlanta.  The mortgage-backed securities consist of
mortgage-backed securities issued by the GNMA and FHLMC.

     The investment securities portfolio includes interest-bearing deposits of
$7.9 million at December 31, 1996 which includes amounts received from the
Company's stock offering in connection with the Conversion.

     Investments in mortgage-backed securities involve a risk that, because of
changes in the interest rate environment, actual prepayments may be greater than
estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the interest yield on such
securities.  There is also reinvestment risk associated with the cash flows from
such securities.  In addition, the market value of such securities may be
adversely affected by changes in interest rates.

     The FASB has issued Statement of Financial Accounting Standards No. 115
(SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities"
which addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities.  These investments are to be classified in three categories and
accounted for as follows:  (1)  debt securities that the entity has the positive
intent and ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost;  (2) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with net unrealized gains and
losses included in earnings; and (3) debt securities not classified as either
held-to-maturity or trading securities and equity securities not classified as
trading securities are classified as securities available-for-sale and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of equity.  The Bank has no trading securities.
The Bank adopted SFAS 115 on January 1, 1993.  The adoption affected only the
held-to-maturity and available-for-sale classifications, with the net unrealized
securities gains (loss) on the securities available-for-sale of $122,855, net of
related deferred taxes of $25,230, reported as a separate component of equity in
its financial statements at December 31, 1993.  See Note 8 of "Notes to
Financial Statements".

     The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security.  Such amortization is included in interest
income from investments.  Realized gains and losses, and declines in value
judged to be other than temporary are included in net securities gains (losses).
The cost of securities sold is based on the specific identification method.

     As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances form the FHLB of
Atlanta.  No ready market exists for such stock, which is carried at cost.  As
of December 31, 1996, the Bank's investment in stock of the FHLB of Atlanta was
$667,000.

     North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities.  The
Bank is also permitted to make certain other securities investments.  The Bank's
current investment policy states that the Bank's investments will be limited to
U.S. Treasury obligations, federal agency securities, mortgage backed
securities, municipal securities, corporate notes and time deposits in the FHLB.

                                       15
<PAGE>

     Investment decisions are made by authorized officers of the Bank under
policies established by the Board of Directors.  Such investments are managed in
an effort to produce the highest yield consistent with maintaining safety of
principal and compliance with regulations governing the savings industry.

     The following table sets forth certain information regarding the Bank's
interest-bearing deposits and the amortized cost and market values of the Bank's
investment and mortgage-backed securities portfolios at the dates indicated.

                                       16
<PAGE>

<TABLE>
<CAPTION>


                                                                        At December 31,
                              --------------------------------------------------------------------------------------------------
                                      1996               1995               1994                1993                1992
                              -----------------  -----------------  -----------------  ----------------   -----------------------
                              Amortized  Market  Amortized  Market  Amortized  Market  Amortized  Market  Amortized   Market
                                Cost     Value     Cost     Value     Cost     Value     Cost     Value     Cost      Value
                              ---------  ------  ---------  ------  ---------  ------  ---------  ------  ---------   ------
<S>                           <C>        <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>        <C>

Interest-bearing
 deposits in other
          financial
          institutions        $7,916     $7,916   $2,737    $2,737   $3,941    $3,941   $9,125    $9,125   $6,971     $6,971

Securities available-
          for-sale:
          Obligations of
           states
            and political
            subdivisions      $2,019     $2,011   $1,629    $1,630   $2,644    $2,521   $    -    $    -   $    -          -
Mutual fudns                     712        712      670       672      616       616        -         -        -          -
                              ------     ------   ------    ------   ------    ------   ------    ------   ------     ------

          Total securities
            available-for-
            sale              $2,731     $2,723   $2,299    $2,302   $3,260    $3,137   $    -    $    -   $    -     $    -
                              ------     ------   ------    ------   ------    ------   ------    ------   ------     ------

Securities held-
          to-maturity:
          U.S. government
            and agency
            securities        $4,753     $4,756   $2,995    $3,016   $4,799    $4,635   $5,013    $5,057   $3,007     $3,086
          Mortgage-backed
            securities         2,983      3,024      274       274      319       334      479       479      898        968
          Obligations of
           states
            and political
            subdivisions                                                  -         -    1,310     1,318      566        561
          Mutual funds                                                    -         -      605       605        -          -
                              ------     ------   ------    ------   ------    ------   ------    ------   ------     ------

Total securities
          held-to-maturity    $7,736     $7,780   $3,236    $3,290   $5,118    $4,969   $7,407    $7,459   $4,471     $4,615
                              ======     ======   ======    ======   ======    ======   ======    ======   ======     ======
</TABLE>

(1)  The net unrealized gain (loss) at December 31, 1996 and 1995 relates to
     available for sale securities in accordance with SFAS No. 115.  The Net
     unrealized gain (loss) is represented in order to reconcile the "Amortized
     Cost" of the Bank's securities portfolio in the "carrying Cost," as
     reflected in the Statements of Financial Condition.

          The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the Bank's
interest-bearing deposits, investment and mortgage-backed securities as of
December 31, 1996.


                                       17
<PAGE>
<TABLE>
<CAPTION>


                                                     After One Year      After One Year
                                                         through             through
                              One Year or Less         Five Years           Ten Years        After Ten Years          Total
                             ------------------   -------------------   -----------------   ----------------   -------------------
                                       Weighted              Weighted             Weighted            Weighted            Weighted
                             Carrying   Average   Carrying   Average    Carrying  Average   Carrying  Average   Carrying   Average
                              Value      Yield     Value      Yield      Value     Yield     Value     Yield     Value      Yield
                             --------  ---------  --------  ----------  --------  --------  --------  --------  --------  ---------
<S>                          <C>       <C>        <C>       <C>         <C>       <C>       <C>       <C>       <C>       <C>


Interest-bearing deposits
 in other financial
 institutions                 $ 7,916      5.20%    $    -          -%      $  -        -%  $-        %          $ 7,916      5.20%
                              -------      ----   --------  ---------   --------  -------   --------  -------    -------      ----

Securities available-
    for-sale:
    Obligations of
     states and
      political
     subdivisions(1)          $   164      5.90%    $1,088       6.38%      $759     6.16%    $    -        -%   $ 2,011      6.26%
    Mutual funds                  712      5.87          -          -          -        -          -        -        712       587
                              -------      ----     ------       ----       ----     ----     ------     ----    -------      ----

   Total securities
     available-for-sale       $   876      5.88%    $1,088       6.38%      $759     6.16%    $    -         %   $ 2,723      6.16%
                              -------      ----     ------       ----       ----     ----     ------     ----    -------      ----

Securities held-to-
    maturity:
    U.S. government
     and agency
     securities               $ 2,009      6.54%    $2,744       5.59%      $  -        -%    $    -         %   $ 4,753      5.99%
    Mortgage-backed
     securities                                                                               $2,983     7.03%   $ 2,983      7.03
                              -------      ----     ------       ----       ----     ----     ------     ----    -------      ----

     Total securities
      held-to-maturity        $ 2,009      6.54%    $2,744       5.59%      $  -        -     $2,983     7.03%   $ 7,736      6.39%
                              -------      ----     ------       ----       ----     ----     ------     ----    -------      ----


 Total investments, at
   carrying value             $ 2,885      6.34%    $3,832       5.81%      $759    $6.16%    $2,983     7.03%   $10,459      6.33%
                              -------      ----     ------       ----       ----     ----     ------     ----    -------      ----


Total interest-bearing
    deposits and
     investments              $10,801      5.50%    $3,832       5.81%      $759     6.16%    $2,983     7.03%   $18,375      5.84%
                              =======      ====   ========  =========   ========  =======   ========  =======    =======      ====

------------------------
</TABLE>
(1) Yields on obligations of states and political subdivisions are not
calculated on a tax-equivalent basis.

                                       18
<PAGE>

DEPOSITS AND BORROWINGS

     GENERAL.  Deposits are the primary source of the Bank's funds for lending
and other investment purposes.  In addition to deposits, the Bank derives funds
from loan principal repayments, loan interest income, the stock offering,
investment income, interest-bearing deposit income, interest income from
mortgage-backed securities and otherwise from its operations.  Loan repayments
are a relatively stable source of funds while deposit inflows and outflows may
be significantly influenced by general interest rates and money market
conditions.  Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds form other sources.  They may also be
used on a longer term basis for general business purposes.  The Bank has no
borrowings outstanding at December 31, 1996; however, it does maintain borrowing
capabilities through the FHLB of Atlanta.

     DEPOSITS.  On December 31, 1996, 1995 and 1994, the Bank's deposits totaled
$66.5 million, $73.0 million and $69.1 million, respectively.

     The following table sets forth information relating to the Bank's deposit
flows during the periods shown and total deposits at the end of the periods
shown.
<TABLE>
<CAPTION>

                                                                            Six Months      Year
                                                                               Ended       Ended
                                   At or For the Year Ended December 31,    December 31,  June 30,
                                  ----------------------------------------
                                      1996       1995       1994      1993      1992        1992
                                    -------     -------    -------   -------  -------     -------
<S>                                 <C>         <C>        <C>       <C>      <C>         <C>
Total deposits at
 beginning of period                $73,035     $69,140    $64,282   $54,475   $52,367    $47,111

Net increase (decrease)
 before interest credited            (9,518)        914      3,021     7,842     1,067      2,138

Interest credited                     3,047       2,981      1,837     1,965     1,041      3,118
                                    -------     -------    -------   -------   -------    -------

Total deposits at end of
 period                             $66,564     $73,035    $69,140   $64,282   $54,475    $52,367
                                    =======     =======    =======   =======   =======    =======

</TABLE>

     The Bank attracts both short-term and long-term deposits from the general
public by offering a variety of accounts and rates.  The Bank offers passbook
savings accounts, negotiable order of withdrawal accounts, money market
accounts, and fixed interest rate certificates with varying maturities.  All
deposit flows are greatly influenced by economic conditions, the general level
of interest rates, competition, and other factors, including the restructuring
of the thrift industry.  The Bank's savings deposits traditionally have been
obtained primarily from its primary market area.  The Bank utilizes traditional
marketing methods to attract new customers and savings deposits, including print
media advertising, local radio and direct mailings. The Bank does not advertise
for deposits outside of its local market area or utilize the services of deposit
brokers. The vast majority of the Bank's depositors are residents of North
Carolina. In the unlikely event the Bank is liquidated following the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to stockholders.


     The following table sets forth certain information regarding the Bank's
savings deposits at the dates indicated.

                                       19
<PAGE>

<TABLE>
<CAPTION>

                                                                  At December 31,
                                   ------------------------------------------------------------------------------------------
                                                 1996                          1995                            1994
                                   ----------------------------   ----------------------------   ----------------------------
                                            Weighted                       Weighted                       Weighted
                                            Average      % of              Average      % of              Average     % of
                                   Amount     Rate     Deposits   Amount     Rate     Discount   Amount     Rate     Deposit
                                   ------   --------   --------   ------   --------   --------   -------  --------   --------
                                                                         (Dollars In Thousands)
<S>                                <C>      <C>        <C>        <C>      <C>        <C>        <C>      <C>        <C>
Demand Accounts:

Passbook and statement accounts    $11,377     3.00%     16.06%  $ 9,309     3.00%     12.75%    $11,382   3.00%     16.46%
NOW accounts                         1,514     0.73       2.14     1,762     0.69       2.41       1,592   7.82       2.30
Money market deposit accounts        2,416     2.45       3.41     2,584     2.46       3.54       3,254   2.47       4.71
                                   -------     ----     ------   -------     ----     ------     -------   ----     ------
  Total demand deposits             15,307     2.69      21.61    13,655     2.60      18.70      16,228   3.36      23.47
                                   -------     ----     ------   -------     ----     ------     -------   ----     ------

Time Deposits:
Certified accounts with
 original maturities of:
  3 months or less                   3,786     4.86       5.34     1,253     5.22       1.72         205   5.07       0.30
  3-6 months                         9,205     5.23      12.99     7,823     5.53      10.71       9,285   4.97      13.43
  11-12 months                      17,089     5.40      24.13    21,950     6.11      30.05      16,560   5.07      23.95
  18 months                          5,183     5.59       7.32     5,607     5.98       7.68       5,994   5.07       8.66
  24 months                          3,483     5.98       4.92     4,510     5.97       6.17       4,291   5.45       6.21
  30 months                         16,781     6.16      23.69    18,235     6.00      24.97      16,566   5.63      23.96
  60 months                              -        -          -         -        -          -          11   8.00       0.02
                                   -------     ----     ------   -------     ----     ------     -------   ----     ------

   Total certificates               55,527     5.62      78.39    59,378     5.96      81.30      52,912   5.26      76.53
                                   -------     ----     ------   -------     ----     ------     -------   ----     ------

   Total deposits                  $70,834     4.99%    100.00%  $73,033     5.33%    100.00%    $69,140   4.81%    100.00%
                                   =======     ====     ======   =======     ====     ======     =======   ====     ======
</TABLE>

                                       20
<PAGE>

     As of December 31, 1996, the aggregate amount of time certificates of
deposit in amounts greater than or equal to $100,000 was $5.1 million.

<TABLE>
<CAPTION>

                                               At
                                        December 31, 1996
                                        -----------------
<S>                                     <C>

(In Thousands)

3 Months or less                              $1,989
Over three months through 6 months             1,264
Over 6 months through 12 months                1,032
Over 12 months                                   860
                                              ------
 Total                                        $5,145
                                              ======

</TABLE>

     BORROWINGS.  The FHLB system functions in a reserve credit capacity for
savings institutions.  As a member, the Bank is required to own capital stock in
the FHLB of Atlanta and its authorized to apply for advances from the FHLB of
Atlanta on the security of that stock and a floating lien on certain of its real
estate secured loans and other assets.  Each credit program has its own interest
rate and range of maturities.  Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of an institution's
net worth or on the FHLB of Atlanta's assessment of the institution's
creditworthiness.  The Bank has not had any outstanding borrowings from the FHLB
of Atlanta or any other source in the last five years.

                                       21
<PAGE>

SUBSIDIARIES

     The Bank is the only subsidiary of the Company. The Bank has no
subsidiaries.

COMPETITION

     The Bank faces strong competition both in attracting deposits and making
real estate and other loans.  Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them.  The
Bank has also faced additional significant competition for investors' funds for
short-term money market securities and other corporate and government
securities.  At December 31, 1996 there were at least six other commercial
banks, credit unions and mortgage companies as well as numerous other financial
services providers located in the Bank's market area.  At December 31, 1996, the
Bank had a deposit market share of approximately 27% in Davie County.  The
ability of the Bank to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.

     The Bank experiences strong competition for real estate loans form other
savings institutions, commercial banks, and mortgage banking companies.  The
Bank competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards.  Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.

EMPLOYEES

     As of December 31, 1996, the Bank had 18 full-time employees.  All full-
time employees of the Bank are covered as a group for basic hospitalization,
including major medical, dental, accidental death and dismemberment insurance as
well as life and long term disability insurance. Optional medical and dental
insurance is available for dependents which must be partially paid by the
employee. In addition, in connection with the Conversion, the Bank adopted an
employment stock ownership plan which will provide benefits to the Bank's
employees.

     Employees are not represented by any union or collective bargaining group,
and the Bank considers its employee relations to be good.


FEDERAL INCOME TAXATION

     Savings institutions such as the Bank are subject to the taxing provisions
of the Code, for corporations, as modified by certain provisions specifically
applicable for financial or thrift institutions.  Income is reported using the
accrual method of accounting.  The maximum corporate federal income tax rate is
34%.

     For fiscal years beginning prior to December 31, 1995, thrift institutions
which qualified under certain definitional tests and other conditions of the
Code were permitted certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve.  A reserve could
be established for bad debts on qualifying real property loans (generally loans
secured by interests in real property improved or to be improved) under (i) a
method based on a percentage of the institution's taxable income as adjusted
(the "percentage of taxable income method") or (ii) a method based on actual
loss experience (the "experience method").  The reserve for nonqualifying loans
was computed using the experience method.

                                       22
<PAGE>

     The percentage of taxable income method was limited to 8% of taxable
income.  This method could not raise the reserve to exceed 6% of qualifying real
property loans at the end of the year.  Moreover, the additions for qualifying
real property loans, when added to nonqualifying loans, could not exceed 12% of
the amount by which total deposits or withdrawable accounts exceed the sum of
surplus, undivided profits and reserves at the beginning of the year.  This
limitation precluded the Bank from taking a bad debt deduction in its 1996 and
1995 tax returns.  The experience method was the amount necessary to increase
the balance of the reserve at the close of the year to the greater of (i) the
amount which bore the same ratio to loans outstanding at the close of the year
as the total net bad debts sustained during the current and five preceding years
bore to the sum of the loans outstanding at the close of such six years or (ii)
the balance in the reserve account at the close of the last taxable year
beginning before 1988 (assuming that the loans outstanding have not declined
since such date).

     In order to qualify for the percentage of income method, an institution had
to have at least 60% of its net assets as "qualifying assets" which generally
included, cash, obligations of the United States government or an agency or
instrumentality thereof or of a state or political subdivision, residential real
estate-related loans, or loans secured by savings accounts and property used in
the conduct of its business.  In addition, it had to meet certain other
supervisory tests and operate principally for the purpose of acquiring savings
and investing loans.

     Institutions which became ineligible to use the percentage of income method
had to change to either the reserve method or the specific charge-off method
that applied to banks.  Large thrift institutions, those generally exceeding
$500 million in assets, had to convert to the specific charge-off method.  In
computing its bad debt reserve for federal income taxes, the Bank used the
reserve method in fiscal years 1996, 1995 and 1994.

     Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") require inclusion in taxable income upon
certain distributions to its stockholders.  Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve.  When such a
distribution takes place and it is treated as from the excess bad debt reserve,
the thrift is required to reduce its reserve by such amount and simultaneously
recognize the amount as a item of taxable income increased by the amount of
income tax imposed on the inclusion.   Dividends not in excess of earnings and
profits accumulated since December 31, 1951 will not require inclusion in part
or all of the bad debt reserve in taxable income.  The Bank has accumulated
earnings and profits since December 31, 1951 and has an excess in its bad debt
reserve.   Distribution in excess of current and accumulated earnings and
profits will increase taxable income.  Net retained earnings at December 31,
1996 includes approximately $2.6 million for which no provision for federal
income tax has been made.  See Note 12 to "Notes to Financial Statements".

     Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995.  The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period.  At December 31, 1996, the
Bank had no post-1987 excess reserves. A special provision suspends recapture of
post-1987 excess reserves for up to two years if, during those years, the
institution's residential loans exceeds a base year amount, which is determined
by reference to the average of the institution's residential loans during the
six taxable years ending January 1, 1996.  However, notwithstanding this special
provision, recapture will begin no later than the first taxable year beginning
after December 31, 1997.

     The Bank may also be subject to the corporate alternative minimum tax
("AMT").  This tax is applicable only to the extent it exceeds the regular
corporate income tax.  The AMT is imposed at the rate of 20% of the
corporation's alternative minimum taxable income ("AMTI") subject to applicable
statutory exemptions.  AMTI is calculated by adding certain tax preference items
and making certain adjustments to the corporation's regular taxable income.
Preference items and adjustments generally applicable to financial

                                       23
<PAGE>

institutions include, but are not limited to, the following:  (i) the excess of
the bad debt deduction over the amount that would have been allowable on the
basis of actual experience; (ii) interest on certain tax-exempt bonds issued
after August 7, 1986; and (iii) 75% of the excess, if any, of a corporation's
adjusted earnings and profits over its AMTI (as otherwise determined with
certain adjustments).  Net operating loss carryovers, subject to certain
adjustments, may be utilized to offset up to 90% of the AMTI.  Credit for AMT
paid may be available in future years to reduce future regular federal income
tax liability.  The Bank has not been subject to the AMT in recent years.

     The Bank's federal income tax returns have not been audited in over ten
years.

State Taxation

     Under North Carolina law, the corporate income tax is 7.75% 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 0.15%
applied to the greatest of the institutions (i) capital stock, surplus and
undivided profits, (ii) investment in tangible property in North Carolina or
(iii) appraised valuation of property in North Carolina.

     The North Carolina corporate tax rate will drop to 7.50% in 1997, 7.25% in
1998, 7.00% in 1999 and 6.90% thereafter.

                           SUPERVISION AND REGULATION

REGULATION OF THE COMPANY

     GENERAL.  The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion.  As
a bank holding company subject to the Bank Holding Company Act of 1956, as
amended ("BLHCA"), the Company will become subject to certain regulations of the
Federal Reserve.  Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.

     Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in nonbanking business unless such business is determined by the
Federal Reserve to be so closely related to banking as to be properly incident
thereto.  The BHCA generally does not place territorial restrictions on the
activities of such nonbanking related activities.

     Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company.  Control
is conclusively presumed to exist if, among other things, a person acquired more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.

     There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default.  For example, under the
1991 Banking Law, to avoid

                                       24
<PAGE>

receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all acceptable capital standards as of the
time the institution fails to comply with such capital restoration plan.  Under
a policy of the Federal Reserve with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy.  The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.

     In addition, the "cross-guarantee" provisions of the Federal Deposit Act,
as amended ("FDIA") require insured depository institutions under common control
to reimburse the FDIC for any loss suffered by either the Savings Association
Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF") as a result
of the default of a commonly controlled insured depository institution or for
any assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default.  The FDIC may decline to enforce the cross-
guarantee provisions if it determines that a waiver is in the best interest of
the SAIF of the BIF or both.  The FDIC's claim for damages is superior to claims
of stockholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.

     As a result of the Company's ownership of the Bank, the Company will be
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.

     Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of 10% of
its net worth during a rolling 12 month period.  Also, no stock repurchases may
be made for at least one year after Conversion unless approved by the
Administrator, who may approve such repurchases only upon a finding that the
safety and soundness of the Bank would not be adversely affected thereby.

     CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES.  The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies.  For bank
holding companies with less than $150 million in consolidated assets, the
guidelines are applied on a bank-only basis unless the parent bank holding
company (i) is engaged in nonbank activity involving significant leverage or
(ii) has a significant amount of outstanding debt that is held by the general
public.

     Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines.  Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%.  At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items and other intangible assets.  The remainder ("Tier II capital") may
consist of a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock, and a limited
amount of the general loan loss allowance.  In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I capital
(leverage) ratio, under which a bank holding company must maintain a minimum
level of Tier I capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion.  All other bank
holding companies are expected to maintain a Tier I capital (leverage) ratio of
at least 1% to 2% above the stated minimum.

                                       25
<PAGE>

FEDERAL SECURITIES LAW.  The Company has registered its Common Stock with the
SEC pursuant to Section 12(b) of the Exchange Act and will not deregister the
Common Stock for a period of three years following the completion of the
Conversion.  As a result of such registration, the proxy and tender offer rules,
insider trading reporting requirements, annual and periodic reporting and other
requirements of the Exchange Act are applicable to the Company.

     The registration under the Securities Act of the Offerings of the Common
Stock does not cover the resale of such shares.  Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration.  Shares purchased by an affiliate of the Company are subject to
the resale provisions of Rule 144 under the Securities Act.  So long as the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.  Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.  There are currently no demand
registration rights outstanding.  However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.

REGULATION OF THE BANK

     GENERAL.  Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services.  In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competiveness of savings institutions
with other financial institutions, including commercial banks and their holding
companies.  The operations of regulated depository institutions, including the
Bank, will continue to be subject to changes in applicable statutes and
regulations form time to time.

     The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF.  It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority.  Generally, North Carolina state chartered savings banks whose
deposits are insured by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations.  Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.

     The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings).  As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.

     The FDIC has extensive enforcement authority over North Carolina state-
chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and unsafe or unsound practices.

                                       26
<PAGE>

     The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include:   (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.

     TRANSACTIONS WITH AFFILIATES.  Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
types of companies are not considered to be affiliates.  Generally, Sections 23A
and 23B (i) establish certain collateral requirements for loans to affiliates;
(ii) limit the extent to which the Bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
the Bank's capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the Bank or the subsidiary
as those provided to a nonaffiliate.  The term "covered transaction" includes
the making of loans or other extensions of credit to an affiliate, the
acceptance of securities of an affiliate as collateral for a loan or extension
of credit to any person, or issuance of a guarantee, acceptance or letter of
credit on behalf or an affiliate.

     Further, current federal law has extended to saving banks the restrictions
contained in Section 22(h) of the Federal Reserve Act with respect to loans to
directors, executive officers and principal stockholders.  Under Section 22(h),
loans to directors, executive officers and stockholders who, directly or
indirectly, own more than 10% of any class of voting securities of a savings
bank, and certain affiliated entities of any of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law (as discussed below).  Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers or stockholders who own more than 10% of a savings bank, and
their respective affiliates, unless such loan is approved in advance by a
majority of the disinterested directors of the board of directors of the savings
bank and the Company.  Any "interested" director may not participate in the
voting.  The Federal Reserve has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior board of
director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000).  Further, pursuant
to Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders based on underwriting standards not less
stringent than those applied in comparable transactions with other persons and
made on terms substantially the same as offered in comparable transactions to
other persons and not involve more than the normal risk of repayment or present
other unfavorable features.

     INSURANCE OF DEPOSIT ACCOUNTS.  The FDIC administers two separate deposit
insurance funds.   The SAIF maintains a fund to insure the deposits of
institutions the deposits of which were insured by the Federal Savings and Loan
Insurance Corporation (the "FSLIC") prior to the enactment of FIRREA, and the
BIF maintains a fund to insure the deposits of institutions the deposits of
which were insured by the FDIC prior to the enactment of FIRREA.  The Bank is a
member of the SAIF of the FDIC.

     As a SAIF-insured institution, the Bank is subject to insurance assessments
imposed by the FDIC.  Effective January 1, 1993, the FDIC replaced its uniform
assessment rate with a transitional risk-based assessment schedule issued by the
FDIC pursuant to the 1991 Banking Law, which imposes assessments ranging from
0.23% to 0.31% of an institution's average assessment base.  The actual
assessment to be paid by each SAIF member is based on the institution's
assessment risk classification, which will be determined based on whether the
institution is considered "well capitalized," "adequately capitalized" or
"undercapitalized" (as such terms have been defined in federal regulations), and
whether such institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns.

                                       27
<PAGE>

     As a result of subsequent changes to the assessment schedule, financial
institutions such as the Bank that are members of the SAIF, are currently
required to pay higher deposit insurance premiums than financial institutions
which are members of the BIF (primarily commercial banks), because the BIF has
higher reserves than the SAIF and has been responsible for fewer troubled
institutions.  This had created a disparity between SAIF and BIF assessments.
Annual assessments for BIF members in the lowest risk categories are now only
$2,000.  For the years ended December 31, 1996 and 1995, the Bank's federal
deposit insurance premium expense was approximately $125,000 and $158,000, not
including a one time special SAIF assessment totaling $456,000 for the year
ended December 31, 1996. The FDIC has noted that the premium differential may
have adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in capital markets. In addition, SAIF members,
such as the Bank, could be placed at a substantial competitive disadvantage to
BIF members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.

     A comprehensive continuing appropriations bill enacted on September 30,
1996 reduced this premium differential between BIF-and SAIF-insured institutions
but did not eliminate it.  As a result of this legislation, it is now
anticipated that, beginning on January 1, 1997, BIF-insured institutions, except
those in higher risk categories, will pay deposit insurance premiums equal to
approximately 1.3 cents per $100 of insured domestic deposits and SAIF-insured
institutions, except those in higher risk categories, will pay deposit insurance
premiums equal to approximately 6.4 cents per $100 of insured domestic deposits.
This premium differential is expected to exist until at least January 1, 1999.

     The above-described comprehensive continuing appropriations bill enacted on
September 30, 1996 also provided for a one-time assessment on SAIF members to
recapitalize the SAIF.  The assessment was equal to 65.7 cents per each $100 of
insured domestic deposits.  Such premium had the effect of immediately reducing
the capital of SAIF-member institutions by the amount of the assessment.  SAIF-
member institutions were allowed to amortize the expense of the one-time
assessment over a period of years.  The one-time assessment, was based on the
Bank's deposits as of March 31, 1995, and was approximately $456,000 on a before
tax basis and was paid prior to December, 1996.  This one-time assessment to
recapitalize the SAIF had an adverse effect on the operating expenses and
results of operations of the bank during the quarter ended September 30, 1996.

     COMMUNITY REINVESTMENT ACT.  The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA").  A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low-and moderate-income
neighborhoods.  During the Bank's last compliance examination, which was
performed by the FDIC under the old CRA regulations in January 1994, the Bank
received a "satisfactory" rating with respect to CRA compliance.  The Bank's
rating with respect to CRA compliance would be a factor to be considered by the
Federal Reserve and FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and could result in the denial of such applications.

     The federal banking regulatory agencies have issued a rewrite of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs.  Under the regulations, a savings bank will be
evaluated and rated under three categories: a lending test, an investment test
and a service test.  For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
needs to improve" or "substantial noncompliance".  A set of criteria for each
rating has been developed and is included in the regulation.  If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantative measures do not
accurately present its actual performance or that demographics, competitive
conditions or economic or legal limitations peculiar to the service area should
be considered.  The ratings received under the three tests will be used to
determine the overall composite CRA rating.  The composite ratings will be the
same as those that are currently given:  "outstanding," "satisfactory," "needs
to improve" or "substantial noncompliance."

                                       28
<PAGE>

     CAPITAL REQUIREMENTS APPLICABLE TO THE BANK.  The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%.  The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%.  At least
half of the total capital is required to be Tier I capital.  The remainder (Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.

     An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC.  If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsold condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership.  At December 31,1996,
the Bank had a leverage ratio of 25.90%.

     The Administrator requires that net worth equal at least 5% of total
assets.  Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.

     At December 31, 1996, the Bank complied with each of the capital
requirements of the FDIC and the Administrator.

     The 1991 Banking Law required each federal banking agency to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages.  On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk based capital
rules to take account of interest rate risk.  The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualative risk factors.  The
final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure.

     Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time.  Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.  The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.

     The FDIC has adopted a final rule changing its risk-based capital rules to
recognize the effect of bilateral netting agreements in reducing the credit risk
of two types of financial derivatives - interest and exchange rate contracts.
Under the rule, savings banks are permitted to net positive and negative mark-
to-market values of rate contracts with the same counterparty, subject to
legally enforceable bilateral netting contracts that meet certain  criteria.
This represents a change from the prior rules which recognized only a very
limited form of netting.  The Bank does not anticipate that this rule will have
a material effect upon its financial statements.

     LOANS-TO-ONE-BORROWER.  The Bank is subject to the Administrator's loans-
to-one-borrower limits.  Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and

                                       29
<PAGE>

extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of net worth.  These limits also authorize savings banks to
make loans-to-one-borrower, for any purpose, in an amount not to exceed
$500,000.  A savings bank also is authorized to make loans-to-one-borrower  to
develop domestic residential housing units, not to exceed the lesser of $30
million or 30% of the savings bank's net worth, provided that the purchase price
of each single-family dwelling in the development does  not exceed $500,000 and
aggregate amount of loans made under this authority does not exceed 150% of net
worth.  These limits also authorize a savings bank to make loans-to-one-borrower
to finance the sale or real property acquired in satisfaction of debts in an
amount up to 50% of net worth.

     As of December 31, 1996, the largest aggregate amount of loans which the
Bank had to any one borrower was $1.3 million. The Bank had no loans outstanding
which management believes violate the applicable loans-to-borrower limits. The
Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.

     LIMITATIONS ON RATES PAID FOR DEPOSITS.  Regulations promulgated by the
FDIC pursuant to the 1991 Banking Law place limitations on the ability of
insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area.  Under these regulations, "well capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over.   The definitions of "well capitalized," "adequately
capitalized" and "undercapitalized" are the same as the definitions adopted by
the FDIC to implement the corrective action provisions of the 1991 Banking Law.

     FEDERAL HOME LOAN BANK SYSTEMS.  The FHLB system provides a central credit
facility for member institutions.  As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, of 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta.  On December 31, 1996, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of approximately
$667,000.

     FIRREA has had the effect of reducing the dividends that the Bank receives
on its stock in the FHLB of Atlanta.  During fiscal 1996 and 1995, the Bank
recorded dividend income of $46,900 and $40,500 respectively, with respect to
its FHLB of Atlanta stock.  FIRREA requires the FHLB to contribute a certain
amount of its reserves and undivided profits to fund the principal and a portion
of the interest on certain bonds and certain other obligations which are used to
fund the resolution of troubled savings association cases.  In addition, FIRREA
requires each FHLB to transfer a percentage of its annual net earnings to the
Affordable Housing Program.  That amount will increase from 5% of the annual net
income of the FHLB in 1990 to at least 10% of its annual net income in 1995 and
subsequent years.  As a result of these FIRREA requirements, it is anticipated
that the FHLB of Atlanta's earnings will be reduced and that the Bank will
receive reduced dividends on its FHLB of Atlanta stock in future periods.

     FEDERAL RESERVE SYSTEMS.  Federal Reserve regulations require savings
banks, not otherwise exempt from the regulations, to maintain reserves against
their transaction accounts (primarily negotiable order of withdrawal accounts)
and certain nonpersonal time deposits.  The reserve requirements are subject to
adjustment by the Federal Reserve.  As of December 31, 1996, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.

                                       30
<PAGE>

     RESTRICTIONS ON ACQUISITIONS.  Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of an insured institution, such as the Bank, without giving at
least 60 days' written notice to the FDIC and providing the FDIC an opportunity
to disapprove the proposed acquisition.  Pursuant to regulations governing
acquisitions of control, control of an insured institution is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock.  In addition, control generally is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class voting stock.  Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the saving bank or
prejudice the interests of its depositors; or (iii) the competency, experience
or integrity of the acquiring person or the proposed management personnel
indicates that it would not be in the interest of the depositors or the public
to permit the acquisition of control by such person.

     For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank.  If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote.  Approval is
not required for (i) any offer with a view toward public resale made exclusively
to the bank or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of the Bank by a corporation whose ownership is or will
be substantially the same as the ownership of the Bank, provided that the offer
or acquisition is made more than one year following the consummation of the
Conversion.  The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution.  During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Boards of Directors of the Company and the Bank support the
acquisition, (ii) the acquiror is of good character and integrity and possesses
satisfactory managerial skills, and will be a source of financial strength to
the Company and the Bank; and (iii) the public interests will not be adversely
affected.

     LIQUIDITY.  The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%.  The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years.  On December 31, 1996, the Bank's liquidity ratio,calculated in
accordance with North Carolina regulations, was approximately 10.14%.

     ADDITIONAL LIMITATIONS ON ACTIVITIES.  Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks.  The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities.  Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.

     Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not investment grade
(generally referred to as "junk bonds").  State savings banks are also required
to notify the FDIC at least 30 days prior to the establishment or acquisition of
any subsidiary, or at least 30 days prior to conducting any such new activity.
Any such activities must be conducted in accordance with the regulations and
orders of the FDIC and the Administrator.

                                       31
<PAGE>

     IMPACT OF THE 1991 BANKING LAW.  The 1991 Banking Law became effective on
December 19, 1991.  Among other things, the 1991 Banking Law provided increased
funding for the BIF and provided for expanded regulation of depository
institutions and their affiliates, including bank holding companies.

     The 1991 Banking Law provided the federal banking agencies with broad
powers to take corrective action to resolve problems of insured depository
institutions.  The extent of these powers will depend upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized."  Under the FDIC regulations applicable to the Bank, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure.  An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating and which is not experiencing or anticipating significant growth).  An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% or 3% in the case of an
institution with the highest examination rating and which is not experiencing or
anticipating significant growth); (B) "significantly undercapitalized" if the
institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of
less than 3% and (C) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets equal to or less than 2%.

     To facilitate the early identification of problems, the 1991 Banking Law
required the federal banking agencies to review and, under certain
circumstances, prescribe more stringent accounting and reporting requirements
than those required by generally accepted accounting principles.  The FDIC
issued a final rule, effective July 2, 1993, implementing those provisions.  The
rule, among other things, requires that management of institutions with $500
million or more in assets report on the institution's responsibility for
preparing financial statements and establishing and maintaining an internal
control structure and procedures for financial reporting and compliance with
designated laws and regulations concerning safety and soundness, and that
independent auditors attest to and report separately on assertions in
management's reports concerning compliance with such laws and regulations, using
FDIC-approved audit procedures.

     The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities.  The 1991 Banking Law
also requires annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators.  Moreover, the 1991 Banking Law, as modified by the Federal Housing
Enterprises Financial Security and Soundness Act, requires the federal banking
agencies to set operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions and depository
institution holding companies, as well as compensation standards (but not dollar
levels of compensation) for insured depository institutions that prohibit
excessive compensation, fees or benefits to officers, directors, employees, and
principal stockholders.  The federal banking agencies have issued final
regulations, effective August 9, 1995, implementing these standards in
accordance with the 1991 Banking Law.  Those agencies have also issued a joint
advance notice of proposed rule making soliciting comments on the addition of
asset quality and earnings guidelines to these safety and soundness standards.

     The foregoing necessarily is a general description of certain provisions of
the 1991 Banking Law and does not purport to be complete.  The effect of the
1991 Banking Law on the Bank has not yet been fully ascertained.

     INTERSTATE BRANCHING.  A bank or savings bank holding company and its
subsidiaries are currently prohibited from acquiring any voting shares of, or
interest in, any banks or savings banks located outside of the state in which
the operations of the savings bank holding company's subsidiaries are located,
unless the

                                       32
<PAGE>

acquisition is specifically authorized by the statutes of the state in which the
target bank is located.  However, in September 1994, Congress passed the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act").  The Interstate Banking Act permitted adequately capitalized bank
and savings bank holding companies to acquire control of banks and savings banks
in any state beginning on September 29, 1995, one year after the effectiveness
of the Interstate Banking Act.  In addition, states may specifically permit
interstate acquisitions prior to September 29, 1995, by enacting legislation
that provides for such transactions.  North Carolina adopted nationwide
reciprocal interstate acquisition legislation in 1994.

     Such interstate acquisitions are subject to certain restrictions.   States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years.  In addition, no
bank or savings bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap.  States are free to
legislate stricter deposit caps and, at present, 18 states have deposit caps
lower than 30%.

     The Interstate Banking Act also provides for interstate branching.  The
McFadden Act of 1927 established state lines as the ultimate barrier to
geographic expansion of a banking network by branching.  The Interstate Banking
Act withdraws these barriers, effective June 1, 1997, allowing interstate
branching in all states, provided that a particular state has not specifically
denied interstate branching by legislation prior to such time.  Unlike
interstate acquisitions, a state may deny interstate branching if it
specifically elects to do so by June 1, 1997.  States may choose to allow
interstate branching prior to June 1, 1997 by opting-in to a group of states
that permits these transactions.  These states generally allow interstate
branching via a merger of an out-of-state bank with an in-state bank, or on a de
novo basis.  North Carolina has enacted legislation permitting branching
transactions.

     It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.  In addition, there can be no assurance as to whether, or
in what form, legislation may be enacted in North Carolina in reaction to the
Interstate Banking Act or what impact such legislation or the Interstate Banking
Act might have upon the Bank.

     The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to write regulations governing such
topics as internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation and fees and whatever else those
agencies determined to be appropriate.  The legislation exempts bank holding
companies from these provisions and requires the agencies to write guidelines,
as opposed to regulations, dealing with these areas.  It also gives more
discretion to the banking regulatory agencies with regard to prescribing
standards for banks' asset quality, earnings and stock valuation.

     The Interstate Banking Act also expands current exemptions from the
requirement that banks be examined on a 12 month cycle.  Exempted banks will be
inspected every 18 months.  Other provisions address paperwork reduction and
regulatory improvements, small business and commercial real estate loan
securitization, truth-in-lending amendments on high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.

     RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS.  A North
Carolina state-chartered stock savings bank may not declare or pay a cash
dividend on, or repurchase any of, its capital stock if the effect of such
transaction would be to reduce the net worth of the institution to an amount
which is less than the minimum amount required by applicable federal and state
regulations. In addition, a North Carolina-chartered stock savings bank, for a
period of five years after its conversion from mutual to stock form, must obtain
the written approval from the Administrator before declaring or paying a cash
dividend on its capital stock in an amount in excess of one-half of the greater
of (i) the institution's net income for the most recent fiscal year end, or (ii)
the average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.

                                       33
<PAGE>

     Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock.  The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.

     In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.

     In connection with the Conversion, the Company and the Bank have agreed
with the FDIC that, during the first year after the Conversion, the Bank will
not pay any dividend or make any other distribution to its stockholder which
represents, is characterized as or is treated for federal tax purposes as, a
return of capital.

     OTHER NORTH CAROLINA REGULATIONS.  As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator.  The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions.  The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest.  North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.

     The Administrator conducts regular annual examinations of North Carolina-
chartered savings banks. The purpose of such examinations is to assure that
institutions are being operated in compliance with applicable North Carolina law
and regulations and in a safe and sound manner. These examinations are usually
conducted on an alternating basis with the FDIC. In addition, the Administrator
is required to conduct an examination of any institution when he has good reason
to believe that the standing and responsibility of the institution is of
doubtful character or when he otherwise deems it prudent. The Administrator is
empowered to order the revocation of the license of an institution if he finds
that it has violated or is in violation of any North Carolina law or regulation
and that revocation is necessary in order to preserve the assets of the
institution and protect the interests of its depositors. The Administrator has
the power to issue cease and desist orders if any person or institution is
engaging in, or has engaged in, and unsafe or unsound practice or unfair and
discriminatory practice in the conduct of its business or in violation of any
other law, rule or regulation.

     A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above.  Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves ins the same amounts as required by the
FDIC.

     Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions.  However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans.  In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.

                                       34
<PAGE>

     North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator.  The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions.  North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.

                                       35
<PAGE>

ITEM 2.  PROPERTIES

     At December 31, 1996, the Company conducted its business from its two
offices in Mocksville and Advance, North Carolina.  The following table sets
forth certain information regarding the Company's properties as of December 31,
1996.  All properties are owned by the Company.
<TABLE>
<CAPTION>

                                    Net Book Value     Deposits
Address                              of Property    (In Thousands)
-------                             --------------  --------------
<S>                                 <C>             <C>

Mocksville:                               $ 67,947        $54,112
232 South Main Street
Mocksville, North Carolina 27028

Advance:                                  $637,943        $12,452
5361 U.S. Highway 158
Advance, North Carolina 27006
</TABLE>

     The Bank's management considers the property to be in very good condition.
The total net book value of the Bank's furniture, fixtures, equipment and
vehicles on December 31, 1996 was $193,661.

ITEM 3.  LEGAL PROCEEDINGS

     In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.

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

     No matter was submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1996.

                                       36
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    See the information under the section captioned "Capital Stock"
in the Company's 1996 Annual Report, which section is incorporated herein by
reference. See "Item 1, BUSINESS--Regulation of the Bank--Restrictions on
Dividends and Other Capital Distributions" above for regulatory restrictions
which limit the ability of the Bank to pay dividends to the Company.

ITEM 6.  SELECTED FINANCIAL DATA

    The information required by this Item is set forth in the table captioned
"Selected Financial Data" in the Company's 1996 Annual Report which is
incorporated herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         OPERATING RESULTS

    See also the information set forth under Item 1 above and the information
set forth under the section captioned "Management's Discussion and Analysis"
on pages 5 through 17 in the Company's 1996 Annual Report which section is
incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

    The consolidated financial statements of the Bank set forth on pages 18
through 40 of the Company's 1996 Annual Report is incorporated herein by
reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    There were no changes in or disagreements with accountants on accounting and
financial disclosure during the fiscal year ended December 31, 1996 and
subsequent interim period.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors-General" and "-Executive officers" contained in the Proxy
Statement, which sections are incorporated herein by reference.

    The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement, which is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION AND TRANSACTIONS

    The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Compensation" and
"-Executive Compensation" contained in the Proxy Statement, which sections are
incorporated herein by reference.

                                       37
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" contained in
the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    There have been no reportable transactions during the two most recent fiscal
years nor are any reportable transactions proposed as of the date of this Form
10-K.  See also the section captioned "Proposal 1 - Election of Directors -
Certain Indebtedness and Transactions of Management" contained in the Proxy
Statement, which section is incorporated herein by reference.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

14(a)1  Consolidated Financial Statements are contained in the Bank's 1996
        Annual Report attached hereto as Exhibit (13) and incorporated
        herein by reference

         (a)  Independent Auditors' Report

         (b) Consolidated Balance Sheets as of December 31, 1996 and 1995

         (c) Consolidated Statements of Income for the Years Ended December 31,
             1996, 1995 and 1994

         (d) Consolidated Statements of Stockholders' Equity for the Years Ended
             December 31, 1996, 1995 and 1994

         (e) Consolidated Statements of Cash Flows for the Years Ended
             December 31, 1996, 1995 and 1994

         (f) Notes to Consolidated Financial Statements

14(a)2  Financial Statement Schedules

      All schedules have been omitted as the required information is either
      inapplicable or included in the Notes to Consolidated Financial
      Statements.

                                       38
<PAGE>

<TABLE>
<CAPTION>
14(a)3  Exhibits
<S>                                                  <C>
          Exhibit (3)(i)                             Articles of Incorporation, incorporated herein by reference to Exhibit 3.1
                                                     of the Company's Registration Statement on Form S-1 (No. 33-80085) filed on
                                                     December 5, 1995 and amended on January 31, 1996 and February 8, 1996

          Exhibit (3)(ii)                            Bylaws, incorporated herein by reference to Exhibit 3.2 of the Company's
                                                     Registration Statement on Form S-1 (No. 33-80085) filed on December 5, 1995
                                                     as amended January 31, 1996 and February 8, 1996

          Exhibit (4)                                Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.1 of
                                                     the Company's Registration Statement on Form S-1 (No. 33-80085) filed on
                                                     December 5, 1995 and amended on January 31, 1996 and February 8, 1996

          Exhibit (10)(ii)(a)                        Stone Street Bancorp, Inc. Stock Option Plan

          Exhibit (10)(ii)(b)                        Mocksville Savings Bank, Inc., SSB Management Recognition Plan

          Exhibit (10)(ii)(c)                        Employment Agreeemnt between Mocksville savings Bank, Inc., SSB and J.
                                                     Charles Dunn, incorporated herein by  reference to Exhibit 10.2 of the
                                                     Company's Registration Statement on Form  S-1 (No. 33-80085) filed on
                                                     December 5, 1996 and amended on January 31, 1996 and February 8, 1996

          Exhibit (11)                               Statement Regarding Computation of Per Share Earnings

          Exhibit (12)                               Statement Regarding Computation of Ratios

          Exhibit (13)                               Portions of 1996 Annual Report to Security Holders

          Exhibit (21)                               Subsidiaries of the Registrant

          Exhibit (27)                               Financial Data Schedule

</TABLE>

14(b) The Company filed no reports on Form 8-K during the last quarter of the
      fiscal year ended December 31, 1996.

                                       39
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.



                                 STONE STREET BANCORP, INC.

Date:  March 27, 1997        By:  /s/ J. Charles Dunn
                                  ____________________________________________
                                  President and Chief Executive Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:


Signature                              Title                      Date
---------                                                         -----


/s/ J. Charles Dunn                President and Director     March 27, 1997
----------------------             (Principal Executive
J. Charles Dunn                    Officer)

/s/ Allen W. Carter
----------------------             Senior Vice President      March 27, 1997
Allen W. Carter


/s/ Marjorie D. Foster             Vice President and         March 27, 1997
----------------------             Controller (Principal
Marjorie D. Foster                 Financial Officer and
                                   Principal Accounting
                                   Officer)

/s/ Robert B. Hall
----------------------             Director                   March 27, 1997
Robert B. Hall

/s/ William F. Junker
----------------------             Director                   March 27, 1997
William F. Junker

/s/ Donald G. Bowles
----------------------             Director                   March 27, 1997
Donald G. Bowles

/s/ J. Roy Harris
----------------------             Director                   March 27, 1997
J. Roy Harris

/s/ Claude R. Horn, Jr.
----------------------             Director                   March 27, 1997
Claude R. Horn, Jr.

/s/ George W. Martin
----------------------             Director                   March 27, 1997
George W. Martin

/s/ Lois C. Shore
----------------------             Director                   March 27, 1997
Lois C. Shore

/s/ Ronald H. Vogler
----------------------             Director                   March 27, 1997
Ronald H. Vogler

                                       40