UNITED STATES
                       SECURITIES AND 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 June 30, 1997

                         Commission file number 1-14070


                             PIEDMONT BANCORP, INC.
             (Exact name of registrant as specified in its charter)

              North Carolina                              56-1936232
     (State or other jurisdiction of                   (I.R.S. Employer 
      incorporation or organization)                   Identification No.)

 260 South Churton Street, P.O. Box 1000
       Hillsborough, North Carolina                          27278
 (Address of principal executive office)                   (Zip Code)

       Registrant's telephone number, including area code (919) 732-2143


           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 asked  prices of such
stock,  as of a  specified  date  within  60 days  prior to the date of  filing.
$24,822,996  common  stock,  no par value,  based on the  closing  price of such
common stock on September 2, 1997.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock,  as of the latest  practicable  date.  2,750,800  shares of common
stock, no par value, outstanding at September 2, 1997.
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of Piedmont Bancorp,  Inc. for the year ended June
30, 1997, are incorporated by reference into Part I, Part II and Part IV.

Portions of the Proxy  Statement for the 1997 Annual Meeting of  Shareholders of
Piedmont  Bancorp,  Inc. to be held on November 12, 1997,  are  incorporated  by
reference into Part III.
<PAGE>
                                     PART I


ITEM 1.           BUSINESS

General

         Piedmont  Bancorp,  Inc. (the "Parent") is a one-bank  holding  company
whose principal business is the ownership and operation of Hillsborough  Savings
Bank, Inc., SSB (the "Bank") located in Hillsborough, North Carolina. The Parent
was  incorporated  in July 1995 for the purpose of  acquiring  all of the common
stock of the Bank in its recent mutual to stock  conversion  which was completed
on December 7, 1995 (the "Conversion"). The Conversion occurred through the sale
of 2,645,000 shares of Piedmont Bancorp, Inc. common stock (no par value). Total
proceeds of $26,450,000 were reduced by Conversion  expenses of $1,052,395.  The
Parent retained 50% of the net Conversion  proceeds after deducting the proceeds
of a loan to the Bank's  Employee  Stock  Ownership Plan and paid the balance of
$11,353,464  to the Bank in  exchange  for all of the  common  stock of the Bank
issued in the Conversion.

         Hillsborough  Savings  Bank is a  state-chartered  stock  savings  bank
originally  organized  under  the laws of North  Carolina  in 1913.  The Bank is
headquartered in Hillsborough,  North Carolina  centrally located in its primary
market of central and northern  Orange  County,  North  Carolina.  The Bank is a
community-oriented  financial  institution  which  offers a variety of financial
services to meet the needs of the community it serves.  The Bank is  principally
engaged in the business of attracting deposits from the general public and using
those deposits to make one-to-four  family  residential real estate loans, loans
secured by  nonresidential  real estate,  home equity line of credit loans,  and
other loans and  investments.  At June 30, 1997,  all of the loans in the Bank's
portfolio  which were secured by real estate were secured by properties  located
in North Carolina.  Revenues are derived  primarily from interest on loans.  The
Bank also receives interest income from investment  securities,  mortgage-backed
securities,  and  interest-bearing  deposit balances.  The major expenses of the
Bank are interest on deposits and  borrowings and  noninterest  expenses such as
salaries, employee benefits, federal deposit insurance premiums, data processing
expenses,  and occupancy  expenses.  The Bank conducts its business  through its
office in Hillsborough, North Carolina.

         Piedmont   Bancorp,   Inc.  and  its   wholly-owned   bank  subsidiary,
Hillsborough  Savings  Bank,  Inc.,  SSB are  collectively  referred  to as "the
Company".  For additional  information regarding the Company's business, see the
1997  Annual  Report  to  Security  Holders  and  the   accompanying   financial
statements.

Market Area and Competition

         The  Company's  primary  market area  consists of central and  northern
Orange County, North Carolina.  Hillsborough is located  approximately ten miles
northwest of Durham,  North  Carolina and ten miles north of Chapel Hill,  North
Carolina.  North  Carolina's  Research  Triangle  Park is located about 20 miles
eastward between the cities of Chapel Hill, Durham and Raleigh.  Chapel Hill and
Durham are home to the  University  of North  Carolina  at Chapel  Hill and Duke
University, respectively. The economy of Orange County is significantly impacted
by these universities and the employment  opportunities they generate.  However,
the  economy  in  Orange   County  is  varied  with   employment   spread  among
manufacturing,  agricultural,  retail and wholesale trade, government,  services
and utilities.
<PAGE>
         The Company 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
Company has also faced additional  significant  competition for investors' funds
from  short-term  money market  securities  and other  corporate and  government
securities.  The ability of the Company 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 Company
experiences  strong  competition  for  real  estate  loans  from  other  savings
institutions,  commercial banks, and mortgage banking companies. Competition may
increase  as a  result  of  the  continuing  reduction  of  restrictions  on the
interstate operations of financial institutions.

         Management  believes  that its image as "the  hometown  bank"  gives it
certain  advantages over its local competition.  The Company,  its directors and
employees actively  participate in local civil affairs.  Long-time employment of
local  personnel  have  enabled the Bank to  establish  and  maintain  long-term
relationships  with  customers.  The Bank offers quick local  decisions and more
flexible underwriting standards than the competition.

                           SUPERVISION AND REGULATION 

Regulation of the Parent

         Bank  holding   companies  and  state  savings  banks  are  extensively
regulated  under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the Parent
and the Bank.  This  summary is  qualified  in its  entirety by reference to the
particular  statute  and  regulatory  provisions  referred  to below  and is not
intended  to be  an  exhaustive  description  of  the  statutes  or  regulations
applicable to the business of the Parent and the Bank.  Supervision,  regulation
and  examination  of the  Parent  and the Bank by the  regulatory  agencies  are
intended  primarily for the protection of depositors rather than shareholders of
the Parent.

         General.  The Parent was  organized  for the purpose of  acquiring  and
holding all of the capital stock of the Bank. As a savings bank holding  company
subject to the Bank Holding Company Act of 1956, as amended ("BHCA"), the Parent
is subject to certain  regulations of the Federal  Reserve.  Under the BHCA, the
Parent'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 Parent from acquiring
direct or indirect  control of more than 5% of the  outstanding  voting stock or
substantially  all of the  assets  of any bank or  savings  bank or  merging  or
consolidating  with another bank holding company or savings bank holding company
without prior approval of the Federal Reserve.

         Additionally,  the BHCA  prohibits  the  Parent  from  engaging  in, or
acquiring  ownership or control of, more than 5% of the outstanding voting stock
of any  company  engaged  in a  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.
<PAGE>
         Similarly,   Federal   Reserve   approval   (or,   in  certain   cases,
non-disapproval)  must be obtained prior to any person acquiring  control of the
Parent.  Control is  conclusively  presumed to exist if, among other  things,  a
person  acquires  more than 25% of any class of  voting  stock of the  Parent or
controls  in any  manner the  election  of a majority  of the  directors  of the
Parent.  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 Federal Deposit Insurance  Corporation  Improvement Act of 1991 ("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
Insurance Act, as amended ("FDIA") require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the Savings
Association  Insurance  Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as  a  result  of  the  default  of a  commonly  controlled  insured  depository
institution or for any assistance  provided by the FDIC to a commonly controlled
insured  depository  institution  in danger of default.  The FDIC may decline to
enforce the cross-guarantee  provisions if it determines that a waiver is in the
best  interest of the SAIF 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.

         The Parent must notify the Federal Reserve prior to repurchasing Common
Stock in excess of 10% of its net worth during any twelve-month period.

         The Parent is also  registered  under the savings bank holding  company
laws of North  Carolina.  Accordingly,  the Parent is also subject to regulation
and supervision by the Administrator.
<PAGE>
         Capital Adequacy Guidelines for Holding Companies.  The Federal Reserve
has adopted  capital  adequacy  guidelines for bank holding  companies and banks
that are members of the Federal Reserve system and have  consolidated  assets of
$150 million or more. 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  subject  to  the  Federal  Reserve's  capital
adequacy guidelines are required to comply with the Federal Reserve's risk-based
capital regulations. Under these regulations, the minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be "Tier I capital,"  principally  consisting of common stockholders' equity,
noncumulative  perpetual  preferred  stock,  and a limited  amount of cumulative
perpetual  preferred stock, less certain goodwill items. 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 (leverage)
capital 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 (leverage)  capital ratio of
at least 1% to 2% above the stated minimum.

         Dividend  Limitations.  In  connection  with the  Conversion,  the FDIC
required the Company to agree that, during the first year after  consummation of
the  Conversion,  the  Company  would  not pay any  dividend  or make any  other
distribution to its stockholders which represented,  was characterized as or was
treated for federal tax  purposes  as, a return of  capital.  In  addition,  the
Parent must obtain Federal Reserve  approval prior to repurchasing  Common Stock
for in excess of 10% of its net worth during any twelve-month  period unless the
Parent (i) both before and after the redemption  satisfies capital  requirements
for "well  capitalized" state member banks; (ii) received a one or two rating in
its last examination; and (iii) is not the subject of any unresolved supervisory
issues. The Parent is prohibited,  under the North Carolina Business Corporation
Act,  from  paying a dividend if such  payment  would (i) cause the Parent to be
unable to pay its debts as they become due in the ordinary course of business or
(ii)  reduce the  Parent's  total  assets  below the sum of the  Parent's  total
liabilities  plus any amounts  which  would be needed,  if the Parent were to be
dissolved at the time of distribution,  to satisfy the preferential  rights that
are  superior  to  holders  of the  Common  Stock.  Except  as set forth in this
paragraph,   neither  the  Administrator  nor  the  FDIC  have  promulgated  any
regulations  specifically  limiting the right of the Parent to pay dividends and
repurchase shares.  However,  at the  Administrator's  request,  the Company has
provided prior notice to the Administrator of each dividend paid by the Company.

         The Parent's sources of income consist of dividends paid by the Bank to
the  Parent  and  income  from  investments.  Following  the  payment of special
dividends  totalling $17.8 million in 1997, the Parent's income from investments
was substantially reduced.  Consequently,  declarations of cash dividends by the
Parent may depend upon  dividend  payments by the Bank to the Parent,  which are
subject to various restrictions. See " -- Regulation of the Bank -- Restrictions
on Dividends and Other Capital Distributions."
<PAGE>
         Capital Maintenance  Agreement.  In connection with the Administrator's
approval of the Parent's  application to acquire control of the Bank, the Parent
was required to execute a Capital Maintenance Agreement whereby it has agreed to
maintain  the  Bank's  capital  in an amount  sufficient  to enable  the Bank to
satisfy all regulatory capital requirements.

         Federal Securities Law. The Parent has registered its Common Stock with
the SEC pursuant to Section  12(g) 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 Parent.

         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 Parent may be resold
without registration. Shares purchased by an affiliate of the Parent are subject
to the resale  provisions of Rule 144 under the  Securities  Act. So long as the
Parent meets the current public  information  requirements of Rule 144 under the
Securities  Act,  each  affiliate  of the  Parent  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
Parent 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 Parent
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 Parent at some future
time  determines to issue  additional  shares from its  authorized  but unissued
shares, the Parent 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 from time to time.

         The Bank is a North Carolina-chartered savings bank, is a member of the
Federal Home Loan Bank ("FHLB") system, and its deposits are insured by the FDIC
through  the  Savings  Association  Insurance  Fund  ("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-chartered savings banks whose deposits are
<PAGE>
insured by the SAIF are subject to  restrictions  with respect to activities and
investments,  transactions with affiliates and loans-to-one  borrower similar to
those  applicable to SAIF-insured  savings  associations.  Such  examination and
regulation  is intended  primarily  for the  protection  of  depositors  and the
federal deposit insurance funds.

         The Bank is subject to various  regulations  promulgated by the Federal
Reserve including, without limitation,  Regulation B (Equal Credit Opportunity),
Regulation D (Reserves),  Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders),  Regulation
Z (Truth in Lending),  Regulation CC  (Availability  of Funds) and Regulation DD
(Truth in Savings).  As holders 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-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 savings  institutions and any affiliate are governed by Sections 23A and
23B of the Federal  Reserve Act. An affiliate  of a savings  institution  is any
company or entity that  controls,  is controlled  by or is under common  control
with the savings  institution.  In a holding company context, the parent holding
company of a savings  institution and any companies which are controlled by such
parent  holding  company are affiliates of the savings  institution.  Generally,
Sections 23A and 23 B (i) establish certain collateral requirements for loans to
affiliates;  (ii)  limit  the  extent to which the  savings  institution  or its
subsidiaries may engage in "covered  transactions"  with any one affiliate to an
amount equal to 10% of such savings institution'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  savings  institution  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  purchase  of assets from an
affiliate, the purchase of, or an investment in, the securities of 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 of an affiliate.
<PAGE>
         Further,  current federal law has extended to savings  institutions 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 own
more than 10% of a savings institution 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 institution's  loans-to-one borrower
limit as established by federal law (generally equal to 15% of the institution's
unimpaired  capital  and  surplus).  Section  22(h) also  prohibits  loans above
amounts  prescribed  by the  appropriate  federal  banking  agency to directors,
executive  officers  and  stockholders  who  own  more  than  10%  of a  savings
institution,  and their respective  affiliates,  unless such loan is approved in
advance by a majority of the board of directors of the savings institution.  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 made on
terms  substantially  the same as offered in  comparable  transactions  to other
persons and not involve more than the normal risk of repayment or present  other
unfavorable features.

         Insurance of Deposit Accounts.  The 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  ("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 Deposit  Insurance Fund Act (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,  including the Bank, 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  0.013% 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.
<PAGE>
         The DIF Act  provides  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
regulation.   If  an  institution   disagrees  with  a  particular  rating,  the
institution has the burden of rebutting the presumption by clearly  establishing
that the quantative  measures do not accurately present its actual  performance,
or that  demographics,  competitive  conditions or economic or legal limitations
peculiar to the service area should be  considered.  The ratings  received under
the three  tests 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 old CRA  regulations  in September  1995, 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.  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 and goodwill items), to total
assets of at least 3%; provided, however that all institutions, other than those
(i) receiving the highest  rating  during the  examination  process and (ii) not
anticipating or experiencing any significant  growth, are required to maintain a
ratio of 1% or 2% above the stated minimum,  with an absolute  minimum  leverage
ratio of not less than 4%.  The FDIC also  requires  the Bank to have a ratio of
<PAGE>
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 general 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
institution  may be deemed to be  operating  in an unsafe or unsound  condition,
allowing  the  FDIC to take  various  enforcement  actions,  including  possible
termination of insurance or placement of the institution in receivership.

         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  June  30,  1997,  the  Bank  complied  with  each  of  the  capital
requirements of the FDIC and the Administrator.  For a description of the Bank's
required  and  actual  capital  levels on June 30,  1997,  see Note 8  captioned
"Stockholders Equity" on page 33 of the 1997 Annual Report.

         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.  The  final  regulation  has not had a
material impact on the Bank's capital requirements.

         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.

         In December 1994, the FDIC 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  condition  or
results of operations.
<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 institution 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  institution's net worth,  provided that (i) the
purchase price of each single-family dwelling in the development does not exceed
$500,000; (ii) the savings institution is in compliance with its fully phased-in
capital  requirements;  (iii) the loans  comply  with  applicable  loan-to-value
requirements;  (iv) the aggregate amount of loans made under this authority does
not exceed  150% of net worth;  and (v) the  institution's  regulator  issues an
order permitting the savings  institution to use this higher limit. These limits
also authorize a savings bank to make loans-to-one  borrower to finance the sale
of real property acquired in satisfaction of debts in an amount up to 50% of net
worth.

         As of June 30, 1997,  the largest  aggregate  amount of loans which the
Bank had to any one borrower was $1.5 million. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one borrower limits.

         Federal  Home Loan Bank  System.  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 June 30, 1997, the Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $920,000.

         Federal Reserve System.  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 June  30,  1997,  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 a state  savings 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,
among other things, upon the acquisition of more than 25% of any class of voting
stock.  In  addition,  control is  presumed  to have been  acquired,  subject to
rebuttal,  upon the  acquisition  of more than 10% of any class of voting stock,
and the issuer's  securities are registered under Section 12 of the Exchange Act
or the person would be the single  largest  shareholder.  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 the Bank's  conversion  from mutual to stock
form, 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.  During the second and third years
after the conversion,  the Administrator may approve such an acquisition of more
than 10% of  beneficial  ownership  upon a finding that (i) the  acquisition  is
necessary  to protect the safety and  soundness  of the Holding  Company and the
Bank or the Boards of Directors of the Holding  Company and the Bank support the
acquisition  and (iii) the  acquiror  is of good  character  and  integrity  and
possesses  satisfactory  managerial  skills,  the  acquiror  will be a source of
financial  strength to the Holding Company and the Bank and 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.  At June 30,  1997,  the Bank's  liquidity
ratio,   calculated  in  accordance   with  North  Carolina   regulations,   was
approximately 15%.

         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 for savings banks are permitted to
engage are limited to those of service corporations for national banks.

         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.
Savings  banks  are  also  generally  prohibited  from  directly  or  indirectly
acquiring or retaining  any  corporate  debt  security that is not of investment
grade (generally referred to as "junk bonds").
<PAGE>
         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 or  written  directive  to meet and  maintain  a  specific
capital level for any capital measure. An "adequately  capitalized"  institution
is  defined  as one  that  has (i) a total  risk-based  capital  ratio  of 8% or
greater,  (ii) a Tier I  risk-based  capital  ratio of 4% or greater and (iii) a
leverage  ratio of 4% or greater (or 3% or greater in the case of an institution
with  the  highest   examination   rating  and  which  is  not  experiencing  or
anticipating   significant   growth).   An   institution   is   considered   (A)
"undercapitalized"  if it has (i) a total risk-based  capital ratio of less than
8%, (ii) a Tier I risk-based  capital  ratio of less than 4% or (iii) a leverage
ratio of less  than 4% (or 3% in the  case of an  institution  with the  highest
examination  rating and which is not  experiencing or  anticipating  significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based  capital  ratio of less than 6%, or (ii) a Tier I risk-based  capital
ratio  of  less  than 3% or  (iii)  a  leverage  ratio  of less  than 3% and (C)
"critically  undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.

         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.
<PAGE>
         Restrictions  on Dividends  and Other  Capital  Distributions.  A North
Carolina-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.  See
"--Capital  Requirements." 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.   The  Bank  has  obtained  the
Administrator's prior approval for each dividend paid by the Bank to the Parent.
Under FDIC  regulations,  stock repurchases may be made by the savings bank only
upon receipt of FDIC approval.

         Retained income at June 30, 1997,  includes  approximately $2.8 million
for which no  provision  for  federal  income  tax has been  made.  This  amount
represents an allocation of income to bad debt deductions for tax purposes only.
Payment of  dividends by the Bank out of this bad debt  allocation  would create
taxable income equal to approximately 164% of the dividend for the Bank.

         At the time of the  Conversion,  the  Bank  established  a  liquidation
account in an amount  equal to its net worth at June 30, 1995.  The  liquidation
account is maintained for the benefit of eligible  deposit  account  holders who
continue to maintain  their deposit  accounts in the Bank after the  Conversion.
Only in the event of a complete  liquidation would each eligible deposit account
holder be entitled to receive a  liquidating  distribution  in the amount of the
then current  adjusted  subaccount  balance for the deposit  accounts before any
liquidation distribution may be made with respect to the Common Stock. Dividends
paid by the Bank to the Parent cannot reduce the net worth of the Bank below the
amount required for this liquidation account.

         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.

         Other North Carolina Regulation. 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.
<PAGE>
         The    Administrator    conducts   regular    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 a joint basis with the FDIC.

         In addition, the Administrator is required to conduct an examination of
any  institution  when he has good  reason  to  believe  that the  standing  and
responsibility of the institution is of doubtful  character or when he otherwise
deems it prudent.  The Administrator is empowered to order the revocation of the
license of an institution if he finds that it has violated or is in violation of
any North Carolina law or regulation  and that  revocation is necessary in order
to preserve  the assets of the  institution  and protect  the  interests  of its
depositors.  The Administrator has the power to issue cease and desist orders if
any person or  institution  is  engaging  in, or has  engaged  in, any 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.

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

         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 may be affected by such  statute or
regulation.
<PAGE>
Subsidiaries

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

Employees

         As of June  30,  1997,  the  Bank had 29  full-time  employees  and two
part-time  employees.  The Bank  provides  its  employees  with  basic and major
medical  insurance,  life  insurance,  sick  leave  and  vacation  benefits.  In
addition, the Bank maintains a 401(k) retirement plan pursuant to which the Bank
matches one-half of employees'  contributions,  with its contribution limited to
3% of each employee's salary.

         In connection with the  Conversion,  the Bank adopted an Employee Stock
Ownership Plan (the "ESOP"),  which provides  benefits to employees of the Bank.
Also,  the directors,  officers and employees of the Company  participate in the
Management  Recognition  Plan and the Stock  Option  Plan,  under which  105,800
shares of  restricted  stock have been  awarded and options to purchase  262,354
shares of Common Stock have been granted, respectively.

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

Federal Income Taxation

         Savings  institutions  such  as the  Bank  are  subject  to the  taxing
provisions of the Internal  Revenue Code of 1986,  as amended (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 35%.

         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.  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).
<PAGE>
         In order to qualify for the percentage of income method, an institution
had to have at least 60% of its 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 in loans.

         As a result of changes in law,  thrift  institutions  were  required 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 1994, 1995, 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   shareholders.   Distributions  in  redemption  or
liquidation  of stock or  distributions  with  respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated  as a  distribution  from the  excess  bad  debt  reserve.  When  such a
distribution  takes place and it is treated as from the excess bad debt reserve,
the thrift is required  to reduce its reserve by such amount and  simultaneously
recognize  the amount as 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 of 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. Distributions in excess of current and accumulated earnings and profits
will increase  taxable income.  Net retained  earnings at June 30, 1997 includes
approximately  $2.8  million for which no provision  for federal  income tax has
been made.

         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 June 30, 1997, the Bank's
post-1987  excess  reserves  amounted  to  approximately   $281,000.  A  special
provision  suspends  recapture of post-1987  excess reserves for up to two years
if,  during  those  years,  the  institution   satisfies  a  "residential   loan
requirement."  This  requirement  will  be met if the  principal  amount  of 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 before January 1, 1996. However,  notwithstanding  this
special  provision,  recapture  must begin no later than the first  taxable year
beginning after December 31, 1997.

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

State Taxation

         Under North Carolina law, the corporate  income tax is 7.75% of federal
taxable  income as  computed  under  the Code,  subject  to  certain  prescribed
adjustments.  In addition, for tax years beginning in 1994, 1993, 1992 and 1991,
corporate  taxpayers  were  required to pay a surtax equal to 1%, 2%, 3% and 4%,
respectively,  of the state income tax otherwise  payable by it. An annual state
franchise  tax is imposed  at a rate of 0.15%  applied  to the  greatest  of the
institution's (i) capital stock, surplus and undivided profits,  (ii) investment
in tangible property in North Carolina or (iii) appraised  valuation of property
in North Carolina.

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

ITEM 2.           PROPERTIES

         At June 30,  1997,  the Company  conducted  its  business  from its one
office in Hillsborough,  North Carolina.  The following table sets forth certain
information  regarding the Company's property as of June 30, 1997. This property
is owned by the Company.


                                                                   Net Book
                                                                   Value of
         Address                                                   Property
         -------                                                   --------

260 South Churton Street                                          $1,019,000
Hillsborough, North Carolina  27278

         In addition to the  properties  described  above,  the Company owns two
additional office buildings located in Hillsborough,  North Carolina, one at 112
North Churton Street (former branch location) and another  directly  adjacent to
the North Churton  Street  building.  These  properties  have net book values of
$42,000 and  $15,000,  respectively,  as of June 30, 1997 and were both used for
rental  office  space.  The total  net book  value of the  Company's  furniture,
fixtures  and  equipment  on June 30,  1997 was  $186,000.  The  properties  are
considered by the Company's management to be in good condition.
<PAGE>
ITEM 3.           LEGAL PROCEEDINGS

         In the  opinion  of  management,  the  Company is not  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 June 30, 1997.

                                     PART II

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

         The high and low stock price for the Company's  common stock was $10.75
and $10.375,  respectively,  on September 2, 1997. The  information  required by
this  Item is set forth  under  the  section  captioned  "Capital  Stock" in the
Company's 1997 Annual Report which is incorporated herein by reference.

ITEM 6.           SELECTED FINANCIAL DATA

         The  information  required  by this  Item  is set  forth  in the  table
captioned  "Five Year Summary" on the inside cover of the Company's  1997 Annual
Report which is incorporated herein by reference.

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

         See the  information  set forth under Item 1 above and the  information
set forth under the section captioned  "Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operation"  in the  Company's  1997 Annual
Report which section is incorporated herein by reference.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated  financial statements of the Company and supplementary
data set forth in the Company's  1997 Annual Report are  incorporated  herein by
reference.

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

         There  were  no  changes  in  or  disagreements   with  accountants  on
accounting and financial  disclosure  during the fiscal year ended June 30, 1997
and the interim subsequent period.

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required  by this Item is set forth under the section
captioned  "Proposal 1 - Election of Directors"  in the Proxy  Statement for the
1997 Annual  Meeting of  Shareholders  of Piedmont  Bancorp,  Inc. to be held on
November 12, 1997 (the "Proxy Statement") and the section captioned  "Compliance
with Section  16(a) of the Exchange Act of 1934" in the Proxy  Statement,  which
sections are incorporated herein by reference.
<PAGE>
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 " -
Management Compensation" 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  herein  by
reference from the section captioned  "Security  Ownership of Certain Beneficial
Owners" 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.  [CONFIRM]  See also the  section  captioned  "Proposal 1 Election of
Directors - Certain  Indebtedness  and  Transactions of Management" 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 (contained in the Company's
                  1997  Annual  Report  attached  hereto  as  Exhibit  (13)  and
                  incorporated herein by reference)

                  (a)      Independent Auditors' Report

                  (b)      Consolidated  Balance  Sheets as of June 30, 1997 and
                           1996

                  (c)      Consolidated Statements of Income for the Years Ended
                           June 30, 1997, 1996 and 1995

                  (d)      Consolidated  Statements of Stockholders'  Equity for
                           the Years Ended June 30, 1997, 1996
                           and 1995

                  (e)      Consolidated  Statements  of Cash Flows for the Years
                           Ended June 30, 1997, 1996 and 1995

                  (f)      Notes to Consolidated Financial Statements


14(a)2.           Financial Statement Schedules

                  All schedules have been omitted as the required information is
                  either  inapplicable  or included in the Notes to Consolidated
                  Financial Statements.
<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.  33-94512)  filed  on July 12,
                                             1995 and amended on  September  27,
                                             1995 and October 6, 1995

                  Exhibit (3)(ii)            Bylaws,   incorporated   herein  by
                                             reference  to  Exhibit  3.2  of the
                                             Company's Registration Statement on
                                             Form  S-1 (No.  33-94512)  filed on
                                             July  12,   1995  and   amended  on
                                             September  27,  1995 and October 6,
                                             1995

                  Exhibit (4)                Specimen     Stock     Certificate,
                                             incorporated herein by reference to
                                             Exhibit   4.1  of   the   Company's
                                             Registration  Statement on Form S-1
                                             (No.  33-94512)  filed  on July 12,
                                             1995 and amended on  September  27,
                                             1995 and October 6, 1995

                  Exhibit (10)(ii)(a)        Piedmont Bancorp, Inc. Stock Option
                                             Plan,    incorporated   herein   by
                                             reference to Exhibit (10)(ii)(a) of
                                             the Registrant's  Form 10-K for the
                                             year ended June 30, 1996

                  Exhibit (10)(ii)(b)        Hillsborough  Savings  Bank,  Inc.,
                                             SSB  Management  Recognition  Plan,
                                             incorporated herein by reference to
                                             Exhibit    (10)(ii)(b)    of    the
                                             Registrant's Form 10-K for the year
                                             ended June 30, 1996

                  Exhibit (10)(ii)(c)        Employment     Agreement    between
                                             Hillsborough  Savings  Bank,  Inc.,
                                             SSB   and   D.    Tyson    Clayton,
                                             incorporated herein by reference to
                                             Exhibit   10.2  of  the   Company's
                                             Registration  Statement on Form S-1
                                             (No.  33-94512)  filed  on July 12,
                                             1995 and amended on  September  27,
                                             1995 and October 6, 1995

                  Exhibit (10)(ii)(d)        Employment     Agreement    between
                                             Hillsborough  Savings  Bank,  Inc.,
                                             SSB   and    Peggy    S.    Walker,
                                             incorporated herein by reference to
                                             Exhibit   10.2  of  the   Company's
                                             Registration  Statement on Form S-1
                                             (No.  33-94512)  filed  on July 12,
                                             1995 and amended on  September  27,
                                             1995 and October 6, 1995
<PAGE>
                  Exhibit (10)(ii)(e)        Employment     Agreement    between
                                             Hillsborough  Savings  Bank,  Inc.,
                                             SSB and Ted R. Laws

                  Exhibit (10)(ii)(f)        Employment     Agreement    between
                                             Hillsborough  Savings  Bank,  Inc.,
                                             SSB and Eric J. Schuppenhauer

                  Exhibit (11)               Statement Regarding  Computation of
                                             Per Share Earnings

                  Exhibit (12)               Statement Regarding Computation of 
                                             Ratios

                  Exhibit (13)               Portions of 1997  Annual  Report to
                                             Security Holders

                  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 June 30, 1997.
<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.

                                           PIEDMONT BANCORP, INC.


Date:     September 23, 1997           By: D. Tyson Clayton
                                           ----------------
                                           D. Tyson Clayton
                                           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:
<TABLE>
<CAPTION>

Signature                                            Title                             Date
---------                                            -----                             ----
<S>                                         <C>                                 <C>
/s/D. Tyson Clayton                         President, Chief Executive          September 23, 1997
-------------------                         Officer and Director
D. Tyson Clayton                            

/s/Peggy S. Walker                          Executive Vice President,           September 23, 1997
------------------                          Secretary and Director
Peggy S. Walker                             

/s/Eric J. Schuppenhauer                    Vice President, Treasurer and       September 23, 1997
------------------------                    Principal Financial Officer
Eric J. Schuppenhauer                       

/s/M. Marion Clark                          Director                            September 23, 1997
------------------
M. Marion Clark

/s/Robert B. Nichols, Jr.                   Director                            September 23, 1997
-------------------------
Robert B. Nichols, Jr.

/s/Alfred L. Carr                           Director                            September 23, 1997
-----------------
Alfred L. Carr

/s/Everett H. Kennedy                       Director                            September 23, 1997
---------------------
Everett H. Kennedy
<PAGE>

/s/Donald W. Pope                           Director                            September 23, 1997
-----------------
Donald W. Pope

/s/James P. Ray                             Director                            September 23, 1997
---------------
James P. Ray

/s/William Larry Rogers                     Director                            September 23, 1997
-----------------------
William Larry Rogers
</TABLE>
<PAGE>



                                INDEX TO EXHIBITS 



Exhibit No.                                 Description                         
-----------                                 -----------                         

(10)(ii)(e)                Employment Agreement between Hillsborough Savings
                           Bank, Inc., SSB and Ted R. Laws

(10)(ii)(f)                Employment Agreement between Hillsborough Savings
                           Bank, Inc., SSB and Eric J. Schuppenhauer

(11)                       Statement Regarding Computation of Per Share Earnings

(12)                       Statement Regarding Computation of Ratios

(13)                       1997 Annual Report to Security Holders

(27)                       Financial Data Schedule


Copies of exhibits are available upon written request to Eric J.  Schuppenhauer,
Vice President,  Treasurer, and Principal Financial Officer of Piedmont Bancorp,
Inc.