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, 1998

                         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 
 incorporation or organization                             Identification No.)

          232 South Main Street
     Mocksville, North Carolina                                  27028
     --------------------------                                  -----
    (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code (336) 751-5936

           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.
$23,143,135  common  stock,  no par value,  based on the  closing  price of such
common stock on March 18, 1999.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock,  as of the latest  practicable  date.  1,638,452  shares of common
stock, no par value, outstanding at March 18,1999.
<PAGE> 

                       DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Annual Report of Stone Street  Bancorp,  Inc. for the year ended
December 31, 1998, (the "1998 Annual Report") are incorporated by reference into
Part I, Part II and Part IV.

Portions of the Proxy Statement for the 1999,  Annual Meeting of Shareholders of
Stone Street Bancorp, Inc. to be held on April 20, 1999 (the "Proxy Statement"),
are incorporated by reference into Part III.
<PAGE>
                                     PART I

ITEM 1.  BUSINESS


General

         Prior to  March  29,  1996,  Stone  Street  Bank  and  Trust  (formerly
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  source of income is 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 Stone Street Bank and Trust.

         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.  Stone Street 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.  Stone Street 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.  Stone  Street's  primary  source of revenue is interest  income from its
lending  activities.  Stone Street'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 Stone Street 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.
<PAGE>

         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>
Interest Rate Risk Management

         Quantitative  Aspects  of Market  Risk.  The Bank does not  maintain  a
trading  account  for any  class of  financial  instrument.  Further,  it is not
currently  subject to foreign  currency  exchange  rate risk or commodity  price
risk.  The stock in the FHLB of Atlanta  does not have equity price risk because
it is issued  only to members  and is  redeemable  for its $100 par  value.  The
following table illustrates  quantitative  sensitivity to interest rate risk for
financial  instruments  other  than cash and cash  equivalents,  FHLB  stock and
demand accounts for the Bank as of December 31, 1998.
<TABLE>
<CAPTION>
                                                     Maturing or Repricing in Years Ended December 31,
                                ----------------------------------------------------------------------------------------
                                                   2000-            2002-         2004-
                                   1999            2001             2003          2008        Thereafter        Total
                                ----------       ---------        --------      ----------    ----------      ----------
                                                                      (Dollars in Thousands)
<S>                             <C>              <C>              <C>           <C>           <C>             <C>        
         Assets
Loans receivable:
    Amount ..................   $    4,394       $   1,649        $  4,559      $  42,350     $   49,597      $   102,549
    Average interest rate ...         8.66%           8.72%           8.40%          7.52%          7.47%            7.60%
Mortgage-backed securities:
    Amount ..................        9,662              --              --             --          1,744           11,406
    Average interest rates ..         5.79%             --%             -- %           --           7.24%            6.02%
Investment Securities:
    Amount ..................          748             386             378             --             --            1,512
    Average interest rates ..         6.35%           4.73%           4.25%            --             -- %           5.41%

         Liabilities
Deposit Certificate Accounts:
    Amount ..................        49,853          7,965           1,454             --             --           59,272
    Average interest rates ..         5.48%           5.51%           5.30%            --             --%            5.48%
FHLB Advances: 
    Amount ..................         6,967             --           2,000          15,000            --           23,967
    Average interest rates ..         5.78%             --%           5.52%          5.09%            --%            5.33%
</TABLE>

         Qualitative  Aspects  of  Market  Risk.  One  of the  Bank's  principal
financial  objectives is to achieve long-term  profitability  while reducing its
exposure  to  fluctuations  in  interest  rates.  The Bank has  sought to reduce
exposure of its  earnings to changes in market  interest  rates by managing  the
mismatch  between  asset  and  liability  maturities  and  interest  rates.  The
principal  element  in  achieving  this  objective  has  been  to  increase  the
interest-rate  sensitivity  of the  Bank's  assets  by  originating  loans  with
interest rates subject to periodic repricing to market conditions and shortening
the term of its fixed rate loans to 20 years and including a 10 year call option
on all other fixed rate residential real estate loans. Accordingly, the Bank has
emphasized the origination of home equity loans, adjustable rate mortgage loans,
shorter term fixed rate residential  loans with call provisions,  short term and
adjustable-rate  commercial  loans,  and  consumer  loans for  retention  in its
portfolio.
<PAGE>
         An asset or liability is interest rate sensitive within a specific time
period if it will  mature or  reprice  within  that time  period.  If the Bank's
assets  mature  or  reprice  more  quickly  or  to a  greater  extent  than  its
liabilities,  the Bank's net portfolio  value and net interest income would tend
to increase  during the periods of rising  interest  rates but  decrease  during
periods of falling  interest  rates. If the Bank's assets mature or reprice more
slowly or to a lesser  extent  than its  liabilities,  the Bank's net  portfolio
value and net interest  income would tend to decrease  during  periods of rising
interest rates but increase during periods of falling interest rates.

         The Bank's  Board of Directors  has  formulated  in Interest  Rate Risk
Management  policy designed to promote  long-term  profitability  while managing
interest-rate  risk. The Board of Directors has  established an  Asset/Liability
Committee  which  consists  primarily of the management  team of the Bank.  This
committee  meets  periodically  and reports to the Board of Directors  quarterly
concerning asset/liability policies,  strategies and the Bank's current interest
rate risk position. The committee's first priority is to structure and price the
Bank's assets and  liabilities  to maintain an  acceptable  interest rate spread
while reducing the net effects of changes in interest rates.

                                       3
<PAGE>
         Management's  principal  strategy in managing the Bank's  interest rate
risk has been to maintain short and  intermediate  term assets in the portfolio,
including one year adjustable  rate mortgage loans, as well as increased  levels
of commercial and consumer loans,  which typically are for short or intermediate
terms and carry  higher  interest  rates than  residential  mortgage  loans.  In
addition,  in  managing  the  Bank's  portfolio  of  investment  securities  and
mortgage-backed and related securities,  management seeks to purchase securities
that mature on a basis that  approximates  as closely as possible the  estimated
maturities of the Bank's liabilities or purchase securities that have adjustable
rate provisions. The Bank does not engage in hedging activities.

         In addition to shortening the average repricing of its assets, the Bank
has sought to lengthen  the average  maturity of its  liabilities  by adopting a
tiered pricing program for its  certificates  of deposit,  which provides higher
rates of  interest  on its  longer  term  certificates  in  order  to  encourage
depositors  to invest in  certificates  with longer  maturities.  This policy is
blended  with  management's   strategy  for  reducing  the  overall  balance  in
certificate accounts in order to reduce the Bank's interest expense.

         There have been no  significant  changes in the Bank's  primary  market
risk exposures or methods for managing those exposures since December 31, 1998.

         The Board of Directors is  responsible  for  reviewing the Bank's asset
and  liability  policies.  On at least a  quarterly  basis,  the  Board  reviews
interest  rate risk and trends,  as well as  liquidity  and  capital  ratios and
requirements.  The management is responsible for  administering the policies and
determinations of the Board of Directors with respect to its asset and liability
goals and strategies.

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 Gray 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, Sara Lee and Ingersol-Rand.

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,  and other personal  property,  mobile home (including
land) loans,  savings  account loans and other loans.  Over 98.77% of the Bank's
net loan  portfolio is secured by real estate.  As of December 31, 1998,  all of
the loans in the Bank's real estate loan portfolio were secured by properties in
North Carolina. On December 31, 1998, the Bank's largest single outstanding loan
had  a  balance  of  approximately  $1,223,400.  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  modifications,
late payments, loan assumptions and other miscellaneous services.
<PAGE>
         Loan  Portfolio  Composition.  The  Bank's net loan  portfolio  totaled
approximately  $102.5 million at December 31, 1998 representing  80.57% of Stone
Street's  total  assets at such date.  At  December  31,  1998,  82.00% of Stone
Street's net loan  portfolio  was  composed of  one-to-four  family  residential
mortgage loans.  Home equity and subordinate lien loans represented 2.42% of the
Bank's net loan  portfolio,  and  nonresidential  real estate loans  represented
9.38% of the Bank's net loan portfolio on such date.


                                       4
<PAGE>
         As  part  of its  interest  rate  risk  management  program,  the  Bank
continues  to offer  adjustable  rate  mortgage  loans to its  customers.  As of
December  31,  1998,  the Bank had  approximately  $926,000 of  adjustable  rate
mortgage loans outstanding.

         The  following  table sets  forth the  composition  of the Bank's  loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
                                                                      At December 31,
                        ---------------------------------------------------------------------------------------------------------
                               1998                  1997                  1996                  1995                 1994
                        -------------------   ------------------   --------------------  -------------------  -------------------  
                                     % of                 % of                   % of                   % of                % of
                         Amount      Total     Amount     Total     Amount       Total    Amount       Total   Amount       Total
                        --------     ------   --------    ------   --------      ------  --------     ------  --------     ------
                                                                   (Dollars in Thousands) 
<S>                     <C>          <C>     <C>          <C>      <C>          <C>      <C>         <C>      <C>         <C>   
Real estate loans:

 Residential
 1-4 family .......     $ 84,094     82.00%  $ 76,894      82.71%  $ 67,844      81.75%  $ 63,329     84.33%  $ 54,321     82.34%

 Residential multi-
  family and
  nonresidential
  real estate .....        9,619      9.38      9,541      10.26      5,716       6.88      4,260      5.67      4,987      7.56

 Other subordinate
  lien loans ......        2,477      2.42      2,675       2.88      2,473       2.98      2,185      2.91      1,423      2.16

 Residential
  construction ....       12,670     12.35      8,571       9.22     12,492      15.05     11,735     15.63     11,589     17.56
                        --------    ------   --------     ------   --------     ------   --------    ------   --------    ------

 Total real estate
  loans: ..........      108,860    106.15     97,681     105.07     88,525     106.66     81,509    108.54     72,320    109.62
                        --------    ------   --------     ------   --------     ------   --------    ------   --------    ------

 Other installment
  loans ...........        1,265      1.23        632        .68        372        .45        222       .30        197      0.30
                        --------    ------   --------     ------   --------     ------   --------    ------   --------    ------

Less:

 Unearned fees and
 discounts ........        1,212      1.18      1,058       1.14      1,009       1.22        962      1.29      1,095      1.66

 Loans in process .        5,614      5.47      3,718       4.00      4,385       5.28      5,211      6.94      5,334      8.09

 Allowance for
  loan losses .....          750       .73        570        .61        511        .61        462       .61        115      0.17
                        --------     ------  --------     ------   --------     ------   --------    ------   --------    ------

 Total reductions .        7,576      7.38      5,346       5.75      5,905       7.11      6,635      8.84      6,544      9.92
                        --------     ------  --------     ------   --------     ------   --------    ------   --------    ------

 Total loans
  receivable net ..     $102,549    100.00%  $ 92,967     100.00%  $ 82,992     100.00%  $ 75,096    100.00%  $ 65,973    100.00%
                        ========    ======    ========    ======   ========     ======   ========    ======   ========    ======
</TABLE>
<PAGE>
         The following table sets forth the time to contractual  maturity of the
Bank's loan portfolio at December 31, 1998.  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 $33.7 million,  $18.1 million
and $16.2  million in fiscal  years  ended  December  31,  1998,  1997 and 1996,
respectively.  Amounts in the table are net of loans in  process  and are net of
unamortized loan fees.



                                       5

<PAGE>
<TABLE>
<CAPTION>
                                                                At December 31, 1998
                                 --------------------------------------------------------------------------------

                                                               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 ............     $      22      $   1,134     $   4,246     $  38,953     $  44,249     $  88,604

  Adjustable rate 1-4 family
    residential ............         1,455           --            --            --            --           1,455

  Adjustable home equity
   loans ...................         2,356           --            --            --            --           2,356

  Other fixed rate loans ...            46            515           313         3,397         5,348         9,619

Other loans ................         1,265           --            --            --            --           1,265

Less:
  Allowance for loan losses           (750)          --            --            --            --            (750)
                                 ---------      ---------     ---------     ---------     ---------     ---------

                                 $   4,394      $   1,649     $   4,559     $  42,350     $  49,597     $ 102,549
                                 =========      =========     =========     =========     =========     =========
</TABLE>

         The  following  table sets forth the dollar amount at December 31, 1998
of all loans maturing or repricing on or after December 31, 1999.
<TABLE>
<CAPTION>
                                           Fixed            Adjustable
                                           Rates              Rates
                                         -----------       -----------
                                                (In Thousands)
<S>                                      <C>               <C>       
  Mortgage loans                         $    88,582       $        -

  Other loans                                  9,573                 -
                                         -----------       -----------

                                         $    98,155       $         -
                                         ===========       ===========
</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.
<PAGE>
         Although the Bank  believes  that many of its  nonconforming  loans are
salable 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.



                                       6
<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,  20 years,  and,  includes a 10-year call
provision in all other fixed rate residential real estate loans over 20 years.

         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.
December 31,
<TABLE>
<CAPTION>
                                                                 December 31,
                                                   -------------------------------------
                                                       1998         1997          1996
                                                   ----------   ----------   -----------
                                                               (In Thousands)
<S>                                                <C>          <C>          <C>        
Loans receivable, net beginning of period          $   92,967   $   82,992   $    75,096

Loan originations:

  Residential 1-4 family                               26,932       12,575        11,880

  Residential multifamily and
    nonresidential real estate                          3,818        4,772         1,730
  Home equity and second mortgage                         793        1,038           901

  Residential construction                             10,019        7,975         8,412

  Consumer                                              2,079        1,195           410
                                                   ----------   ----------   -----------

    Total loan originations                            43,641       27,555        23,333
Principal repayments                                  (33,725)     (18,139)      (16,167)
Other changes, net                                       (334)         559           730
                                                   ----------   ----------   -----------
Increase in loans receivable                            9,582        9,975         7,896
                                                   ----------   ----------   -----------

Loans receivable, net, end of period               $  102,549   $   92,967   $    82,992
                                                   ==========   ==========   ===========
</TABLE>

         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, 1998, approximately 82.00% 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 .35% had adjustable  interest
rates.
<PAGE>

         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

                                       7
<PAGE>
         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, 1998,  the Bank had $9.6 million in  outstanding  loans  secured by
nonresidential real estate, including undeveloped land, comprising approximately
of 9.38% of its net loan  portfolio  as of that  date.  Most of these  loans are
secured 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
<PAGE>
nonresidential  lending  policies and revised its commercial  loan  underwriting
procedures in order to, among other things,  improve loan  documentation.  As of
December 31,  1998,  the largest  nonresidential  real estate loan in the Bank's
loan portfolio totaled  $1,223,400.  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,
1998,  the  Bank  had  approximately  $2.5  million  in home  equity  and  other
subordinate  lien  loans,  representing  approximately  2.42%  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


                                       8
<PAGE>
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, 1998 was approximately $12.7 million, representing
approximately 12.35% 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 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,  1998,  the  Bank had
approximately  $235,200 of such loans  outstanding,  representing  approximately
 .23% 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
90% of the purchase price.
<PAGE>
         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  from real estate  brokers,
present depositors and borrowers,  builders, attorneys, walk-in customers and in
some instances, other lenders.

                                       9
<PAGE>
         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  generally  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.

         The Bank has  developed  the  following  lending  thresholds to approve
loans.  All loans,  regardless  of type,  are  approved  based on the  following
lending  limits,  assuming  the  loan  meets  all  of  the  Bank's  underwriting
guidelines.  Loan  officers  may approve  loans up to  $85,000.  The Senior Vice
President of lending  approves  loans up to $100,000.  The  President and Senior
Vice  President of the bank have the  authority to approve loans up to $150,000.
The Bank's  Directors'  Loan  Committee,  which is composed of its President and
three outside  directors  appointed by the Chairman of the Board,  approve loans
from $150,000 to $250,000.  All remaining  loan requests over $250,000 up to the
legal  lending  limit of the bank must be  approved  by the bank's full Board of
Directors.

         Normally,  upon  approval of a residential  mortgage loan  application,
Stone Street 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, 1998,
the Bank  had $5.6  million  in such  unfunded  mortgage  loan  commitments.  In
addition,  on such date the Bank had $2.8  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  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 a borrower 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
<PAGE>
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, 1998,  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

                                       10
<PAGE>
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.
<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                   -------------------------------------------------------------------------------
                                                      1998             1997             1996             1995              1994
                                                   ----------      -----------      -----------       ----------       -----------
                                                                               (Dollars in Thousands)
<S>                                                <C>             <C>              <C>               <C>              <C>         
Total nonaccrual loans
  Mortgage loans delinquent 90 days or more        $        -      $         -      $         -       $        -       $         - 
  Consumer loans delinquent 90 days or more                 -                -                -                -                 - 
Real estate owned                                           -                -                -                -                 - 
                                                   ----------      -----------      -----------       ----------       ----------- 
  Total non-performing assets                      $        -      $         -      $         -       $        -       $         - 
                                                   ==========      ===========      ===========       ==========       =========== 
Accruing loans, delinquent 90 days or more         $      243      $       295      $       423       $      201       $       280 
                                                   ==========      ===========      ===========       ==========       =========== 
Non-performing loans to total loans                     0.00%            0.00%            0.00%            0.00%              0.00%
Non-performing assets to total assets                   0.00%            0.00%            0.00%            0.00%              0.00%
Total assets                                       $  127,273      $   108,092      $   105,807       $   87,751       $    81,560 
Total loans, net                                   $  102,549      $    92,967      $    82,992       $   75,097       $    65,973 
                                                                                                                     
</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
"uncollectable"  and of such  little  value  that  their  continuance  as assets
without the establishment of a loss reserve is not warranted.
<PAGE>
         As of December 31, 1998, the Bank had  approximately  $243,000 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,  1998,  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 

                                       11
<PAGE>
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.

         The  following  table  sets  forth at  December  31,  1998,  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
                                ---------      ---------     ---------     --------    ---------     ---------  ---------  ---------
                                                                                (In thousands)
<S>                             <C>            <C>           <C>           <C>         <C>           <C>        <C>        <C>      
Real estate loans:   
Residential 1-4 family                  -      $      --             -     $    243            -     $       -          -  $       -
   Residential multifamily                                                                                                          
     and nonresidential                                                                                                             
     real estate                        -              -             -            -            -             -          -          -
   Home equity and second                                                                                                           
     mortgage                           -              -             -            -            -             -          -          -
   Residential construction             -              -             -            -            -             -          -          -
                                ---------      ---------     ---------     --------    ---------     ---------  ---------  ---------
                                                                                                                                    
     Total real estate loans            -              -             -     $    243            -             -          -          -
                                ---------      ---------     ---------     --------    ---------     ---------  ---------  ---------
                                                                                                                                    
Consumer loan                           -              -             -            -            -             -          -          -
 
                                ---------      ---------     ---------     --------    ---------     ---------  ---------  ---------
                                                                                                                                    
Total                                   -      $       -             -     $    243            -     $       -          -  $       -
                                =========      =========     =========     ========    =========     =========  =========  =========
</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>
                                                                        Year Ended December 31,
                                                     -------------------------------------------------------------
                                                       1998        1997         1996          1995          1994
                                                     --------    --------     --------       ------       -------- 
<S>                                                  <C>         <C>          <C>            <C>          <C>     
Balance, beginning of period                         $    570    $    511     $    462       $   115      $     89

Provision for loan losses                                 180          60           50           350            26

Charge-offs:

Residential 1-4 family                                      -           -            -             -             -

 Consumer                                                   -           1            1             3             -

Recoveries:

 Residential 1-4 family                                     -           -            -             -             -

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

Balance, end of period                               $    750    $    570     $    511       $   462      $    115
                                                     ========    ========     ========       =======      ========

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                                       .69%        .58%         .57%          .57%          .16%

</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,
                              -----------------------------------------------------------------------------------------------------
                                        1998                      1997                    1996                      1995
                              -------------------------  -----------------------  -----------------------   -----------------------
                                                                           (In Thousands)
                                             Amount of                Amount of                Amount of                 Amount of 
                              Amount of     Loans to     Amount of    Loans to    Amount of     Loans to     Amount of    Loans to 
                              Allowance    Gross Loans   Allowance   Gross Loans  Allowance   Gross Loans   Allowance   Gross Loans
                              ---------    -----------   ---------   -----------  ---------   -----------   ---------   -----------
<S>                            <C>             <C>       <C>             <C>        <C>         <C>         <C>            <C>      
Real estate loans:
  Residential
    1-4 family                 $   188         76.37%    $   154         78.21%     $  138      76.32%      $    127       77.48%   


  Residential multifamily
    and nonresidential
    real estate                    263         8.74          171         9.71          153       6.43            138        5.21    


  Home equity and
    second mortgage                 53         2.25           58         2.72           52       2.78             46        2.67    


  Residential construction         188        11.50          143         8.72          128      14.05            115       14.36    
                               -------        ------     -------        ------      ------     ------       --------      ------    


Total real estate loans            692        98.86          526        99.36          471      99.58            426       99.72    


Consumer loans                      58         1.14           44          .64           40        .42             36         .28    
                               -------       ------      -------       ------       ------     ------       --------      ------    


  Total                        $   750       100.00%     $   570       100.00%      $  511     100.00%      $    462      100.00%   
                               =======       ======      =======       ======       ======     ======       ========      ======    

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                        At December 31,
                                   ------------------------
                                                  Amount of              
                                   Amount of      Loans to             
                                   Allowance    Gross Loans             
                                   ---------    -----------                                     
<S>                                <C>             <C>       
Real estate loans:                                           
  Residential                                                
    1-4 family                     $    45         74.91%    
                                                             
                                                             
  Residential multifamily                                    
    and nonresidential                                       
    real estate                         23          6.88     
                                                             
                                                             
  Home equity and                                            
    second mortgage                     12          1.96     
                                                             
                                                             
  Residential construction              24         15.98     
                                   -------        ------     
                                                             
                                                             
Total real estate loans                104         99.73     
                                                             
                                                             
Consumer loans                          11          0.27     
                                   -------        ------     
                                                             
                                                             
  Total                            $   115        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, 1998, the carrying value of the Bank's
investment   securities   portfolio  totaled  $19.7  million  and  consisted  of
interest-bearing    deposits,    U.S.    government   and   agency   securities,
mortgage-backed securities, federal funds sold and stock in the FHLB of Atlanta.
The mortgage-backed  securities consist of mortgage-backed  securities issued by
the GNMA, FHLMC and SBA.

         The investment securities portfolio includes  interest-bearing deposits
of $4.4 million at December 31, 1998. 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 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 but the
Bank may redeem the stock with the FHLB at its par  value.  As of  December  31,
1998, the Bank's investment in stock of the FHLB of Atlanta was $1,569,800.
<PAGE>
         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.

         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.



                                       15
<PAGE>
         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.
<TABLE>
<CAPTION>
                                                               December 31, 
                                 --------------------------------------------------------------------
                                          1998                     1997                  1996    
                                 --------------------    --------------------   ---------------------  
                                  Amortized    Market    Amortized     Market   Amortized     Market 
                                    Cost       Value       Cost        Value      Cost        Value
                                  -------     -------     -------     -------     -------     -------
<S>                               <C>         <C>         <C>         <C>         <C>         <C>    
Interest-bearing
 deposits in other
   financial
   institutions .............     $ 4,406     $ 4,406     $ 2,701     $ 2,701     $ 7,916     $ 7,916
                                  -------     -------     -------     -------     -------     -------

Securities available-
   for-sale:
   Obligations of states
     and political
     subdivisions ...........     $   764     $   783     $ 1,854     $ 1,859     $ 2,019     $ 2,011
   Mortgage-backed securities       9,662       9,575        --          --          --          --   
   Mutual funds .............           0           0           0           0         712         712
                                  -------     -------     -------     -------     -------     -------

Total securities
     available-for-
     sale ...................     $10,426     $10,358     $ 1,854     $ 1,859     $ 2,731     $ 2,723
                                  -------     -------     -------     -------     -------     -------

Securities held-
   to-maturity:
   U.S. government
     and agency
     securities .............     $   748     $   750     $ 3,489     $ 3,494     $ 4,753     $ 4,756
   Mortgage-backed
     securities .............       1,744       1,741       2,400       2,446       2,983       3,024
                                  -------     -------     -------     -------     -------     -------

Total securities
   held-to-maturity .........     $ 2,492     $ 2,491     $ 5,889     $ 5,940     $ 7,736     $ 7,780
                                  =======     =======     =======     =======     =======     =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                 December 31
                                 --------------------------------------------
                                           1995                  1994
                                 --------------------------------------------
                                 Amortized     Market   Amortized      Market
                                   Cost        Value       Cost        Value 
                                  -------     -------     -------     -------
<S>                               <C>         <C>         <C>         <C>    
Interest-bearing
 deposits in other
   financial
   institutions .............     $ 2,737     $ 2,737     $ 3,941     $ 3,941
                                  -------     -------     -------     -------

Securities available-
   for-sale:
   Obligations of states
     and political
     subdivisions ...........     $ 1,629     $ 1,630     $ 2,644     $ 2,521
   Mortgage-backed securities        --          --          --          --
   Mutual funds .............         670         672         616         616
                                  -------     -------     -------     -------

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

Securities held-
   to-maturity:
   U.S. government
     and agency
     securities .............     $ 2,995     $ 3,016     $ 4,799     $ 4,635
   Mortgage-backed
     securities .............         274         274         319         334
                                  -------     -------     -------     -------

Total securities
   held-to-maturity .........     $ 3,269     $ 3,290     $ 5,118     $ 4,969
                                  =======     =======     =======     =======
</TABLE>
(1)  The net  unrealized  gain (loss) at December  31, 1998 and 1997  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.

                                       16
<PAGE>
         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, 1998.
<TABLE>
<CAPTION>
                                                         After One Year Through   After Five Years Through
                                  One Year or Less            Five Years                 Ten Years               After Ten Years    
                               ---------------------     ---------------------    -----------------------    ---------------------- 
                                            Weighted                  Weighted                 Weighted                    Weighted 
                               Carrying      Average     Carrying     Average     Carrying      Average      Carrying       Average 
                                 Value        Yield        Value       Yield        Value        Yield         Value        Yield  
                                 -----        -----        -----       -----        -----        -----         -----        -----  
<S>                            <C>            <C>         <C>         <C>          <C>            <C>        <C>            <C>
Interest-bearing deposits
   in other financial
   institutions                $   4,406      4.90%       $    -          -%       $     -            -%     $        -        -%   

Securities available-
   for-sale:
   Obligations of states
     and political
     subdivisions(1)           $       -         -%       $  386       4.73%       $   378         4.25%     $        -        -%  
   Mortgage backed securities          -         -             -          -              -            -           9,662     5.79   
 
     Total securities
     available-for-sale        $       -         -%       $  386       4.73%       $   378         4.25%     $    9,662     5.79%  


Securities held-to-
   maturity:
   U.S. government and
     agency securities         $     748      6.35%       $    -          -%       $     -            -%     $        -        -%  
   Mortgage-backed
     securities                        -         -             -          -              -            -           1,744     7.24   
                              
     Total securities
       held-to-maturity        $     748      6.35%       $    -          -%       $     -            -%     $    1,744     7.24%  
 

Total investments, at
   carrying value              $     748      6.35%       $  386       4.73%       $   378         4.25%     $   11,406     6.01%  


Total interest-bearing
   deposits and
   investments                 $   5,154      5.11%       $  386       4.73%       $   378         4.25%     $   11,406     6.01%  
 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             Total                 
                                     ----------------------                            
                                                   Weighted    
                                     Carrying       Average   
                                       Value         Yield     
                                       -----         -----     
<S>                                 <C>             <C>                                   
Interest-bearing deposits    
   in other financial        
   institutions                     $  4,406        4.90%           
                                                                
Securities available-                                           
   for-sale:                                                    
   Obligations of states                                        
     and political                                              
     subdivisions(1)                $    764        4.49%       
   Mortgage backed securities          9,662        5.79        
                                                                
     Total securities                                           
     available-for-sale             $ 10,426        5.69%       
                                                                
                                                                
Securities held-to-                                             
   maturity:                                                    
   U.S. government and                                          
     agency securities              $    748        6.37%       
   Mortgage-backed                                              
     securities                        1,744        7.24        
                                                                
     Total securities                                           
       held-to-maturity             $  2,492        6.98%       
                                                                
                                                                
Total investments, at                                           
   carrying value                   $ 12,918        5.94%       
                                                                
                                                                
Total interest-bearing                                          
   deposits and                                                 
   investments                      $ 17,324        5.68%       
                               
</TABLE>

(1) Yields on obligations of sates and political subdivisions are not calculated
on a tax-equivalent basis.


                                       17
<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 from other  sources.  They may also be
used on a  longer  term  basis  for  general  business  purposes.  The  Bank had
borrowings  outstanding  of $24.0  million at December 31, 1998 with the FHLB of
Atlanta.

          Deposits.  On December 31, 1998,  1997 and 1996,  the Bank's  deposits
totaled $73.2 million, $67.0 million and $66.5 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>
                                                                At or For the Year Ended December 31,
                                             ----------------------------------------------------------------------
                                                  1998          1997          1996         1995            1994
                                             ------------  ------------  ------------  ------------  --------------
<S>                                          <C>           <C>           <C>           <C>           <C>           
Total deposits at
   beginning of period                       $     66,973  $     66,564  $     73,035  $     69,140  $       64,282

Net increase (decrease)
   before interest credited                         3,823        (2,713)       (9,518)          914           3,021

Interest credited                                   2,380         3,122         3,047         2,981           1,837
                                             ------------  ------------  ------------  ------------  --------------

Total deposits at end of
   period                                    $     73,176  $     66,973  $     66,564  $     73,035  $       69,140
                                             ============  ============  ============  ============  ==============
</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  and  statement  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.

                                       18
<PAGE>
         The following table sets forth certain information regarding the Bank's
savings deposits at the dates indicated.
<TABLE>
<CAPTION>
                                                                           At December 31,
                                    ------------------------------   -----------------------------    -----------------------------
                                                  1998                          1997                              1996
                                    ------------------------------   -----------------------------    -----------------------------
                                              Weighted                        Weighted                         Weighted  
                                               Average     % of                Average     % of                 Average     % of   
                                    Amount       Rate     Deposits   Amount      Rate     Deposits    Amount      Rate     Deposits
                                    ------       ----     --------   ------      ----     --------    ------      ----     --------
                                                                          (Dollars in Thousands)
<S>                                 <C>          <C>        <C>     <C>          <C>        <C>       <C>          <C>      <C> 
Demand Accounts                                                                                                                    
Passbook and statement accounts     $ 8,696      2.84%      12.26%  $ 9,189      3.00%      13.72%    $11,377      3.00%    16.06% 
NOW accounts ..................       4,367       .54        5.90     2,242       .61        3.35       1,514      0.73      2.14  
Money market deposit accounts .         841      2.45        1.14     2,463      2.46        3.68       2,416      2.45      3.41  
                                    -------      ----      ------   -------      ----      ------     -------      ----    ------  
     Total demand deposits ....      13,904      2.09       19.30    13,894      2.61       20.75      15,307      2.69     21.61  
                                    -------      ----      ------   -------      ----      ------     -------      ----    ------  
                                                                                                                                   
Time Deposits:                                                                                                                     
Certified accounts with                                                                                                            
   original maturities of:                                                                                                         
     3 months or less .........         599      4.67        1.54     1,348      4.80        2.01       3,786      4.86      5.34  
     3-6 months ...............      13,502      4.90       18.22     7,894      5.33       11.79       9,205      5.23     12.99  
     11-12 months .............      13,853      5.38       18.69    14,924      5.53       22.28      17,089      5.40     24.13  
     13 months ................      10,128      5.72       13.66     3,494      5.94        5.22                                  
     18 months ................       3,658      5.49        4.93     4,908      5.74        7.33       5,183      5.59      7.32  
     24 months ................       3,171      5.64        4.28     3,508      5.70        5.24       3,483      5.98      4.92  
     25 months ................       2,035      5.94        2.75     2,017      5.84        3.01                                  
     30 months ................      12,197      5.75       16.46    14,986      5.7        22.37      16,781      6.16     23.69  
     36 months ................         129      5.00         .17        --                                --                      
                                    -------      ----      ------   -------      ----      ------     -------      ----    ------  
                                                                                                                                   
       Total certificates .....      59,272      5.44       80.70    53,079      5.62       79.25      55,527      5.62     78.39  
                                    -------      ----      ------   -------      ----      ------     -------      ----    ------  
                                                                                                                                   
          Total deposits ......     $73,176      4.80%     100.00%  $66,973      4.88%     100.00%    $70,834      4.99%   100.00% 
                                    =======      ====      ======   =======      ====      ======     =======      ====    ======  
                                                                                                     
</TABLE>
                                       19
<PAGE>
          As of December 31, 1998, the aggregate amount of time  certificates of
deposit in amounts greater than or equal to $100,000 was $8.3 million.
<TABLE>
<CAPTION>
                                                                   Amount
                                                                -----------
                                                               (In Thousands)

<S>      <C>                                                     <C>        
         3 Months or less                                        $       958
         Over three months through 6 months                            1,065
         Over 6 months through 12 months                               1,831
         Over 12 months                                                4,419
                                                                 -----------
             Total                                               $     8,273
                                                                 ===========
</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 is  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.  At December 31, 1998 the Bank had outstanding borrowings from
the FHLB of Atlanta totaling $23,967,000.

         The  following  table sets forth  information  relating to the weighted
average rates and the maturities of the borrowings at December 31, 1998:
<TABLE>
<CAPTION>
                                                                    Amount
                                                                 ------------
                                                                (In thousands)
<S>                                                              <C>         
         5.78% due on or before December 31, 1999                $      6,967
         5.52% due on or before August 2, 2003                          2,000
         5.09% due on or before August 28, 2008                        15,000
                                                                 ------------
             Total                                               $     23,967
                                                                 ============
</TABLE>
Subsidiaries

          The  Bank is the  only  subsidiary  of the  Company.  The Bank has one
wholly-owned  subsidiary,  Stone  Street  Financial  Services,  Inc.  which  was
established in 1997 to provide  investment  discount  brokerage  services to the
public.

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
<PAGE>
has also faced  additional  significant  competition  for  investors'  funds for
short-term   money  market   securities  and  other   corporate  and  government
securities. At December 31, 1998 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, 1998, the
Bank had a deposit  market share of  approximately  25.14% 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 

                                       20
<PAGE>
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,  1998,  the Bank had 22  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.

         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 1998 and
1997 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.
<PAGE>
         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 1998, 1997 and 1996.

         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 

                                       21
<PAGE>
and  simultaneously  recognize the amount as an 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,
1998  includes  approximately  $2.6 million for which no  provision  for federal
income tax has been made. See Note 8 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, 1998, 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.

         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  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 years to reduce 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 7.25% of federal
taxable  income as  computed  under  the Code,  subject  to  certain  prescribed
adjustments. An annual state franchise tax is imposed at a rate of 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 7.00% in 1999 and
6.90% thereafter.
<PAGE>
                           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.

                                       22
<PAGE>
         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  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  ("FDA") 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 or 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.
<PAGE>
         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.

         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


                                       23
<PAGE>
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.

         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  competitiveness  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.
<PAGE>
         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


                                       24
<PAGE>
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.

         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
<PAGE>
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 be based on underwriting standards not less
stringent than those applied in comparable  transactions  with other persons and
be 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.

         Deposit Insurance.  The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum  extent  permitted  by law.  The Bank pays deposit
insurance  premiums  to  the  FDIC  based  on  a  risk-based  assessment  system
established  by the  FDIC for all  SAIF-member  institutions.  Under  applicable
regulations,  institutions  are assigned to one of three capital groups that are
based  solely  on the level of an  institution's  capital  

                                       25
<PAGE>
("well capitalized," "adequately capitalized" or "undercapitalized"),  which are
defined in the same manner as the regulations establishing the prompt corrective
action system  discussed below. The matrix so created results in nine assessment
risk  classifications,  with rates that,  until September 30, 1996,  ranged from
0.23% for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for  undercapitalized  institutions  that pose a substantial
risk to the SAIF unless effective corrective action is taken.

         Pursuant to the DIF Act,  which was enacted on September 30, 1996,  the
FDIC  imposed  a  special   assessment  on  each  depository   institution  with
SAIF-assessable  deposits  which  resulted in the SAIF  achieving its designated
reserve ratio. In connection therewith, the FDIC reduced the assessment schedule
for SAIF members,  effective  January 1, 1997,  to a range of 0% to 0.27%,  with
most  institutions  paying 0%. This assessment  schedule is the same as that for
the BIF, which reached its designated reserve ratio in 1995. In addition,  since
January  1,  1997,   SAIF  members  are  charged  an  assessment  of  0.065%  of
SAIF-assessable  deposits for the purpose of paying  interest on the obligations
issued  by the  Financing  Corporation  ("FICO")  in the  1980s to help fund the
thrift industry cleanup.  BIF-assessable  deposits will be charged an assessment
to help pay  interest on the FICO bonds at a rate of  approximately  .013% until
the  earlier  of  December  31,  1999 or the date upon  which  the last  savings
association  ceases to exist,  after which time the assessment  will be the same
for all insured deposits.

         The DIF Act  provided  for the  merger of the BIF and the SAIF into the
Deposit  Insurance  Fund on January 1, 1999,  but only if no insured  depository
institution is a savings  association on that date. The DIF Act contemplates the
development  of  a  common  charter  for  all  federally  chartered   depository
institutions  and the  abolition of separate  charters  for  national  banks and
federal savings  associations.  It is not known what form the common charter may
take and what effect,  if any,  the adoption of a new charter  would have on the
operation of the Bank.

         The FDIC may terminate the deposit insurance of any insured  depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance  temporarily during the hearing process for the permanent  termination
of  insurance,  if the  institution  has no tangible  capital.  If  insurance of
accounts  is  terminated,  the  accounts  at  the  institution  at the  time  of
termination,  less  subsequent  withdrawals,  shall continue to be insured for a
period of six months to two years,  as  determined  by the FDIC.  Management  is
aware of no  existing  circumstances  that could  result in  termination  of the
deposit insurance of the Bank.

         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. A savings bank is 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 is given a rating of either  "outstanding,"
"high  satisfactory,"  "low  satisfactory,"  "needs to improve" or  "substantial
non-compliance."  A  set  of  criteria  for  each  rating  is  included  in  the
<PAGE>
regulation.   If  an  institution   disagrees  with  a  particular  rating,  the
institution has the burden of rebutting the presumption by clearly  establishing
that the quantitative 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 are used to  determine  the  overall  composite  CRA  rating or
"outstanding,"    "satisfactory,"    "needs   to   improve"   or    "substantial
non-compliance."

         During the Bank's last compliance  examination,  which was performed by
the FDIC under the new CRA  regulations  in October  1997,  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.

         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


                                       26
<PAGE>
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, 1998,
the Bank had a leverage ratio of 21.35%.

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,  1998,  the Bank  complied  with each of the  capital
requirements of the FDIC and the Administrator.

         Each  federal  banking  agency  was  required  by  law  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 qualitative  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.
<PAGE>
         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  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.


                                       27
<PAGE>
         As of December 31, 1998,  the largest  aggregate  amount of loans which
the  Bank  had to any one  borrower  was  $1.2  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.

         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, or 5% of its  outstanding  advances  (borrowings)
from the FHLB of Atlanta.  On December 31, 1998, the Bank was in compliance with
this  requirement  with an investment in FHLB of Atlanta stock of  approximately
$1,569,800.

         FIRREA  has had the  effect of  reducing  the  dividends  that the Bank
receives on its stock in the FHLB of Atlanta.  During fiscal 1998 and 1997,  the
Bank recorded dividend income of $79,449 and $52,600 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,  1998,  the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.

         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 savings 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.
<PAGE>
         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 

                                       28
<PAGE>
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, 1998, the Bank's  liquidity
ratio,   calculated  in  accordance   with  North  Carolina   regulations,   was
approximately 11.39%.

         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.

         Prompt Corrective  Regulatory Action.  Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured  depository  institutions.  The extent of these  powers  depends 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 of  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
<PAGE>
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) total risk-based capital ratio of less that 8%,
(ii) a Tier I risk-based capital ratio or less than 4% of (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%. As of December  31,  1998,  the most
recent  notification  received by the Bank from the FDIC categorized the Bank as
well-capitalized.

         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  


                                       29
<PAGE>
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  Banking.  The Riegle-Neal  Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate  Banking Act"),  effective September 29,
1995, permits adequately  capitalized bank and savings bank holding companies to
acquire  control  of banks  and  savings  banks in any  state.  The  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.

         The  Interstate  Banking Act also  provides for  interstate  branching,
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.

         Restrictions  on Benefit  Plans.  FDIC  regulations  provide that for a
period of one year from the date of the  Conversion,  the Bank may not implement
or  adopt  a  stock  option  plan  or  restricted   stock  plan,  other  than  a
tax-qualified  plan or ESOP,  unless:  (1) the plans are fully  disclosed in the
Conversion proxy soliciting and stock offering material,  (2) all such plans are
approved by a majority of the Company's stockholders prior to implementation and
no earlier than six months following the Conversion, (3) for stock option plans,
the  exercise  price must be at least equal to the market  price of the stock at
the time of  grant,  and (4) for  restricted  stock  plans,  no stock  issued in
connection with the Conversion may be used to fund the plan.
<PAGE>
         The FDIC regulations  provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the Conversion,  the FDIC
will  presume that  excessive  compensation  will result if stock based  benefit
plans fail to satisfy percentage  limitations on management  stock-based benefit
plans set forth in the regulations of the Office of Thrift Supervision  ("OTS").
Those  regulations  provide that (1) for stock option plans, the total number of
shares for which  options may be granted may not exceed 10% of the shares issued
in the  Conversion,  (2) for restricted  stock plans,  the shares issued may not
exceed 3% of the  shares  issued in the  Conversion  (4% for  institutions  with
tangible  capital of 10% or greater  after the  Conversion),  (3) the  aggregate
amount  of  stock   purchased   by  the  ESOP  shall  not  exceed  10%  (8%  for
well-capitalized  institutions  utilizing a 4%  restricted  stock plan),  (4) no
individual  employee may receive more than 25% of the available awards under any
plan,  and (5)  directors  who are not  employees  may not receive  more than 5%
individually  or 25% in the  aggregate of the awards under any plan.  The awards
and grants to be made under the  Management  Recognition  Plan ("MRP") and Stock
Option Plan will conform to these  requirements  if such plans are submitted for
stockholder approval within one year after the Conversion is consummated.


                                       30
<PAGE>
         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.

         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 had agreed
with the FDIC that,  during the first year after the Conversion,  the Bank would
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. Subsequent to this one year period, in July, 1997 the Company
did pay a  special  dividend  representing  a $4.00  return  of  capital  to its
stockholders.

         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
<PAGE>
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 in the same amounts as required by the
FDIC.


                                       31
<PAGE>
         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  statutory  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.

         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.

         Future Requirements.  Statutes and regulations are regularly introduced
which contain  wide-ranging  proposals for altering the structures,  regulations
and competitive relationships of financial institutions.  It cannot be predicted
whether or what form any proposed  statute or regulation  will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.

ITEM 2.  PROPERTIES

         At December 31, 1998,  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,
1998. All properties are owned by the Company.
<TABLE>
<CAPTION>
                                             Net Book Value           Deposits
            Address                           of Property         (In Thousands)
            -------                           -----------         --------------
<S>                                           <C>                  <C>          
Mocksville:                                   $   44,875           $      57,279
232 South Main Street
Mocksville, North Carolina 27028

Advance:                                      $  591,613           $      15,897
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, 1998 was $258,690.
<PAGE>

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, 1998.



                                       32
<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 1998 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  1998  Annual  Report  which  is
incorporated herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         OPERATING RESULTS
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                ---------------------------------------------------
                                                                  1998       1997       1996      1995        1994
                                                                -------    -------    -------    ------     ------- 
<S>                                                             <C>        <C>        <C>        <C>        <C>    
         Return on Average Assets (Net income divided
           by average total assets)                               1.37%      1.45%      1.43%       .88%      1.40%

         Return on Average Equity (Net income divided
           by average shareholders' equity)                       4.97%      4.52%      4.48%      6.00%      9.78%

         Average Equity to Average Assets Ratio
           (Average shareholders' equity divided by
           average total assets)                                 27.53%     32.07%     31.88%     14.64%     14.34%

         Interest Rate Spread for the Period                      3.20%      3.16%      2.62%      2.86%      3.59%

         Average Interest-Earning Assets to Average
           Interest-Bearing Liabilities                         133.32%    147.04%    147.90%    117.49%    114.11%

         Net Interest Margin                                      4.48%      4.77%      4.32%      3.62%      4.12%
</TABLE>

         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 4 through  16 in the  Company's  1998  Annual  Report  which
section is incorporated herein by reference.


ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         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 4 through  16 in the  Company's  1998  Annual  Report  which
section is incorporated herein by reference.
<PAGE>
         Interest Rate Risk Management

         The Company's net income is dependent on its net interest  income.  Net
interest  income  is  susceptible  to  interest  rate  risk to the  degree  that
interest-bearing  liabilities  mature  or  reprice  on a  different  basis  than
interest-earning  assets.  When  interest-bearing  liabilities mature or reprice
more quickly  than  interest-earning  assets in a given  period,  a  significant
increase in market rates of interest could adversely affect net interest income.
Similarly, 

                                       33
<PAGE>
when   interest-earning   assets   mature   or   reprice   more   quickly   than
interest-bearing liabilities,  falling interest rates could result in a decrease
in net income.

         In an attempt  to manage its  exposure  to changes in  interest  rates,
management  monitors the Company's interest rate risk.  Management meets monthly
to review the Company's  interest rate risk position and  profitability,  and to
recommend  adjustments for  consideration by the Board of Directors.  Management
also reviews the Bank's securities portfolio,  formulates investment strategies,
and oversees the timing and  implementation of transactions to assure attainment
of the Board's  objectives in the most  effective  manner.  Notwithstanding  the
Company's interest rate risk management  activities,  the potential for changing
interest rates is an uncertainty that can have an adverse effect on net income.

         In adjusting  the  Company's  asset/liability  position,  the Board and
management  attempt to manage the Company's  interest rate risk while  enhancing
net  interest  margins.  At times,  depending  on the level of general  interest
rates,  the  relationship  between long and short-term  interest  rates,  market
conditions and  competitive  factors,  the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin.  The Company's  results of operations and net portfolio
values remain  vulnerable to increases in interest rates and to  fluctuations in
the difference between long-and short-term interest rates.

         Consistent with the  asset/liability  management  philosophy  described
above,  the Company has taken  several  steps to manage its interest  rate risk.
First, the Company has structured the security portfolio to shorten the lives of
its interest-earning assets. The Company recently purchased securities, includes
$9.7 million of  adjustable  rate  mortgage-backed  securities.  At December 31,
1998, the Company had securities  totaling $12.9 million, of which $10.4 million
either have  adjustable  rates or mature in five years of less.  Mortgage-backed
securities  amortize and experience  prepayments  of principal;  the Company has
received  average  cash flows from  principal  paydowns,  sales,  maturities  of
securities  of $2.6  million  annually  over the past three  fiscal  years.  The
Company   also   controls   interest   rate  risk   reduction   by   emphasizing
non-certificate  depositor accounts.  The Board and management believe that such
accounts  carry a lower  cost than  certificate  accounts,  and that a  material
portion of such accounts may be more resistant to changes in interest rates than
are certificate  accounts. At December 31, 1998, the Company had $8.7 million of
regular  savings  accounts,  and $5.2  million of money  market,  demand and NOW
accounts representing 1.90% of total depositor accounts.

         The Company  does not  currently  engage in trading  activities  or use
derivative   instruments  to  control  interest  rate  risk.  Even  though  such
activities  may be permitted  with the approval of the Board of  Directors,  the
Company does not intend to engage in such  activities in the  immediate  future.
Interest rate risk is the most  significant  market risk  affecting the Company.
Other types of market  risk,  such as foreign  currency  exchange  rate risk and
commodity  price  risk,  do not  arise in the  normal  course  of the  Company's
business activities.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

         The consolidated financial statements of the Bank set forth on pages 17
through  39 of the  Company's  1998  Annual  Report are  incorporated  herein by
reference.
<PAGE>
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,  1998 and
subsequent interim period.



                                       34
<PAGE>
                                    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.

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
               1998  Annual   Report   attached   hereto  as  Exhibit  (13)  and
               incorporated herein by reference

                  (a) Independent Auditors' Report

                  (b)  Consolidated  Balance  Sheets as of December 31, 1998 and
                       1997

                  (c)  Consolidated  Statements  of Income  for the Years  Ended
                       December 31, 1998, 1997 and 1996

                  (d) Consolidated  Statements of  Stockholders'  Equity for the
                      Years Ended December 31, 1998, 1997 and 1996

                  (e) Consolidated  Statements of Cash Flows for the Years Ended
                      December 31, 1998, 1997 and 1996

                  (f) Notes to Consolidated Financial Statements
<PAGE>
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.



                                       35
<PAGE>
14(a)3       Exhibits

             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 (Previously Filed)

             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 and amended January 31, 1996
                                   and February 8, 1996 (Previously Filed)

             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 (Previously Filed)

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

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

             Exhibit (10)(ii)(c)   Employment   Agreement   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 (Previously Filed)

             Exhibit (11)          Statement  Regarding Computation of Per Share
                                   Earnings

             Exhibit (12)          Statement Regarding Computation of Ratios

             Exhibit (13)          Portions  of 1998  Annual  Report to Security
                                   Holders

             Exhibit (23)          Consent  of  Independent   Certified   Public
                                   Accountants

             Exhibit (21)          Subsidiaries of the Registrant

             Exhibit (27)          Financial Data Schedule

14(b)        The Company filed no reports on Form 8-K during the last quarter of
             the fiscal year ended December 31, 1998.



                                       36
<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 29, 1999                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, Chief Executive Officer      March 29, 1999
-------------------       and Director
J. Charles Dunn           

/s/ Allen W. Carter       Senior Vice President                   March 29, 1999
------------------ 
Allen W. Carter

/s/ Marjorie D. Foster    Vice President and Controller           March 29, 1999
---------------------- 
Marjorie D. Foster

/s/ Robert B. Hall        Director                                March 29, 1999
------------------ 
Robert B. Hall

/s/ William F. Junker     Director                                March 29, 1999
--------------------- 
William F. Junker

/s/ Donald G. Bowles      Director                                March 29, 1999
-------------------- 
Donald G. Bowles

/s/ Claude R. Horn, Jr.   Director                                March 29, 1999
-----------------------
Claude R. Horn, Jr.
<PAGE>




/s/ George W. Martin      Director                                March 29, 1999
-------------------- 
George W. Martin

/s/ Terry Bralley         Director                                March 29, 1999
Terry B. Bralley

/s/ Ronald H. Vogler      Director                                March 29, 1999
-------------------- 
Ronald H. Vogler


                                       37
<PAGE>



                                INDEX TO EXHIBITS


Exhibit No.                Description

Exhibit (11)               Statement Regarding Computation of Per Share Earnings

Exhibit (12)               Statement Regarding Computation of Ratios

Exhibit (13)               1998 Annual Report

Exhibit (21)               Subsidiary of the Registrant

Exhibit (23)               Consent of Independent Certified Public Accountants

Exhibit (27)               Financial Data Schedule







                                       38