TABLE OF CONTENTS

    President's Message.....................................................   3

    Management's Discussion and Analysis....................................   5

    Independent Auditors' Report............................................  24

    Consolidated Financial Statements.......................................  25

    Notes to Consolidated Financial Statements..............................  32

    Directors, Officers and Office Locations................................  54

    Corporate Information...................................................  54

    Capital Stock...........................................................  55




This Annual Report to Stockholders contains  forward-looking  statements.  These
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual   results   to  differ   materially   from  those   anticipated   in  the
forward-looking statements.  Factors that might cause such a difference include,
but are not limited to, changes in the interest rate  environment,  management's
business  strategy,   national,   regional,  and  local  market  conditions  and
legislative and regulatory conditions.

Readers should not place undue  reliance on  forward-looking  statements,  which
reflect  management's view only as of the date hereof. The Company undertakes no
obligation  to  publicly  revise  these  forward-looking  statements  to reflect
subsequent  events or  circumstances.  Readers should also carefully  review the
risk factors  described in other  documents  the Company files from time to time
with the Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
                                                    SELECTED FINANCIAL DATA


                                                            1997            1996           1995           1994           1993
                                                        ---------       ---------      ---------      ---------      ---------
                                                                                   (dollars in thousands)
<S>                                                     <C>             <C>            <C>            <C>            <C>
Summary of Operations:
Interest income ...................................     $   9,535       $   9,248      $   7,811      $   6,864      $   6,728
Interest expense ..................................         4,603           4,414          3,682          3,262          3,506
                                                        ---------       ---------      ---------      ---------      ---------
Net interest income ...............................         4,932           4,834          4,129          3,602          3,222
Provision for loan losses .........................           658              96            120             87             60
                                                        ---------       ---------      ---------      ---------      ---------
Net interest income after provision for loan losses         4,274           4,738          4,009          3,515          3,162
Other income ......................................           225             255            336            255            683
Other expenses ....................................         4,716           2,449          2,265          2,027          1,832
                                                        ---------       ---------      ---------      ---------      ---------
Income (loss) before income tax expense ...........          (217)          2,544          2,080          1,743          2,013
Income tax expense ................................           317             849            837            710            803
   Net income (loss) ..............................     $    (534)      $   1,695      $   1,243      $   1,033      $   1,210
                                                        =========       =========      =========      =========      =========

Selected Year-end Balances:
Total assets ......................................     $ 122,761       $ 128,711      $ 104,013      $  97,368      $  95,094
Loans receivable, net .............................       100,173          91,187         84,713         81,733         80,937
Investments (1) ...................................        17,973          32,564         15,043         11,338          9,910
Deposits ..........................................        84,860          73,361         76,745         74,287         72,262
FHLB Advances .....................................        16,500          17,250         13,000         10,500         11,000
Stockholders' equity ..............................        20,416          37,050         13,646         12,195         11,347

Average Balance Sheet Data:
Total assets ......................................     $ 123,896       $ 119,252      $ 100,359      $  97,827      $  90,876
Total earning assets ..............................       120,700         116,010         96,745         95,046         87,265
Loans receivable, net .............................        95,937          87,917         83,326         83,534         76,642
Investments (1) ...................................        23,869          27,297         12,633         10,733          9,976
Deposits ..........................................        78,720          77,221         75,110         73,137         71,505
Borrowings ........................................        16,481          13,248         10,628         11,603          7,074
Stockholders' equity ..............................        25,893          27,557         12,810         11,959         10,971

Selected Financial Ratios:
Return on average assets ..........................         (0.43)%          1.42%          1.24%          1.06%          1.33%
Return on average equity ..........................         (2.06)           6.15           9.70           8.64          11.03
Average equity to average assets ..................         20.90           23.11          12.76          12.22          12.07
Interest rate spread (tax equivalent basis) .......          3.13            3.16           3.72           3.32           3.25
Net interest margin (tax equivalent basis) ........          4.24            4.33           4.29           3.80           3.69
Dividend payout ratio .............................           n/a           48.89            n/a            n/a            n/a
Cash dividends declared per common share ..........     $    7.42            0.22            n/a            n/a            n/a


(1)   Includes   investment   securities,    mortgage-backed   securities,   and
interest-bearing deposits.
</TABLE>
<PAGE>
{Graphic-Company Logo}

President's Message


     To Our Stockholders


     The Board of  Directors  and  Management  of Piedmont  Bancorp,  Inc.  (the
     "Parent") and its  subsidiary,  Hillsborough  Savings Bank,  Inc., SSB (the
     "Bank")  (collectively  referred to as the "Company") have as their primary
     goal increasing  value to both  stockholders  and customers.  During fiscal
     year 1997, we demonstrated our commitment to increasing  stockholder  value
     through the payment of a $7.00 special  dividend.  Primarily as a result of
     payment of this special  dividend,  the Company's equity level, as measured
     by the ratio of total equity to total assets, decreased from 28.79% at June
     30, 1996 to 16.63% at June 30,  1997.  However,  along with  payment of the
     special dividend came large non-recurring expenses including  approximately
     $132,000 in losses on the sale of investment securities to fund the special
     dividend  and  approximately   $1.4  million  of  additional   ESOP-related
     compensation  expense as a result of  prepayment  of the ESOP loan from the
     Parent to the Bank, a large portion of which was  non-deductible for income
     tax purposes.

     Additionally,  in September  1996,  President  Clinton  signed into law the
     Deposit  Insurance Fund Act designed to  recapitalize  the Federal  Deposit
     Insurance   Corporation's   ("FDIC")  Savings  Association  Insurance  Fund
     ("SAIF") of which the Bank is a member.  This  resulted in a  non-recurring
     assessment to the Bank of approximately $487,000. With the recapitalization
     of the SAIF,  the Bank expects to  experience  lower levels of FDIC deposit
     insurance premiums going forward.

     Also  occurring  in the  fiscal  year  was a  charge-off  of  approximately
     $510,000 of loans to a single  borrower and  subsequent  reprovisioning  of
     this amount to the  allowance  for loan losses to maintain the allowance at
     what  management  considers to be an adequate level.  Management  considers
     this  charge-off as  non-recurring  in nature due to the fact that the Bank
     has in place underwriting standards, on-going credit review procedures, and
     monitoring systems to analyze the quality of the loans that are held in the
     Bank's portfolio.

     These  events  position  the Bank  well for the  future  even  though  they
     resulted in a net loss in the  current  year of  approximately  $534,000 or
     $0.20 per share.  The return on equity of the  Company  is  expected  to be
     enhanced in future  periods due to the  occurrence  of the above  mentioned
     events through decreased equity levels, decreased ESOP-related compensation
     expense,   decreased  FDIC  insurance   premiums,   and  further  increased
     underwriting scrutiny and monitoring of loans in the Bank's portfolio. This
     coupled  with  the  initiatives  that  management  is  in  the  process  of
     implementing  to grow the Bank are intended to result in increased  value -
     to stockholders and customers.







                                       3
<PAGE>
     These initiatives  include  increased  marketing of the Bank's products and
     services  in  Hillsborough  and  surrounding  areas,   product  development
     designed at meeting the evolving  financial services needs of the community
     that we serve,  implementation  of new  technology  to assist  employees in
     identifying  sales  opportunities,  and  analysis of  strategic  options to
     expand the  Bank's  presence  in one of the  fastest  growing  areas in the
     country.

     We thank you for your investment in Piedmont Bancorp,  Inc. and continue to
     seek your support and  suggestions on how we can provide the greatest value
     to both our stockholders and customers.


     Sincerely,


     /s/D. Tyson Clayton
     ----------------
     D. Tyson Clayton
     President and Chief Executive Officer






































                                       4
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS 


         The purpose of this  discussion  and  analysis is to provide the reader
with a description of the financial  conditions and changes  therein and results
of operations of Piedmont  Bancorp,  Inc.  (the  "Parent") and its  wholly-owned
subsidiary,  Hillsborough  Savings Bank,  Inc.,  SSB (the "Bank")  (collectively
referred  to as the  "Company").  This  discussion  and  analysis  of  financial
condition  and  results  of  operation  should be read in  conjunction  with the
audited  consolidated  financial  statements and accompanying  notes included in
this  report and the  supplemental  financial  data  appearing  throughout  this
discussion and analysis.


RESULTS OF OPERATIONS

         The Company's  results of operations  depend  primarily on net interest
income,  which is the difference  between interest income from  interest-earning
assets and interest expense on interest-bearing liabilities. Operations are also
affected by non-interest  income,  such as income from customer service charges,
loan  servicing  fee  income,  gains  and  losses  on  the  sale  of  loans  and
investments,  and other  sources of income.  The Company's  principal  operating
expenses,  aside from interest  expense,  consist of  compensation  and employee
benefits,  federal deposit insurance premiums, data processing expenses,  office
occupancy costs, and income taxes.


Performance Overview

         The Company ended fiscal year 1997 with a net loss of $534,000 or $0.20
per share  compared  with net income of $1.7 million for the year ended June 30,
1996 and $1.2 million in 1995. Earnings per share for the post conversion period
from  December  7, 1995 to June 30,  1996 were $0.45 per  share.  Net income was
adversely impacted by three  non-recurring items which occurred in the first and
second  quarters of the 1997 fiscal year: (1) investment  securities  losses and
compensation-related  expenses  associated with the payment of the $7.00 special
dividend  in  December  1996,  (2) the  Federal  Deposit  Insurance  Corporation
("FDIC") special  assessment to recapitalize the Savings  Association  Insurance
Fund ("SAIF"),  and (3) the charge-off of unsecured loans to a single  borrower.
Without these  non-recurring  items, net income,  on an after-tax basis, for the
fiscal year would have been approximately $1,569,000 or $0.61 per share.


Net Interest Income

         Net  interest  income  is one of the  major  determining  factors  in a
financial  institution's  performance as it is its principal source of earnings.
Net interest income is impacted by a variety of elements: volume, yield/cost and
relative  mix  of  both   interest-earning   assets  and   interest-bearing  and
noninterest-bearing  sources of funds.  Table 1 presents  average balance sheets
and a net interest  income  analysis on a  tax-equivalent  basis for each of the
years in the three-year period ended June 30, 1997.

         As shown in Table 1, net  interest  income,  on a fully  tax-equivalent
basis,  amounted to $5.1 million in 1997, $5.0 million in 1996, and $4.1 million



                                       5
<PAGE>
in 1995.  The slight  growth in  tax-equivalent  net interest  income in 1997 is
attributable to a $4.7 million or 4.0% growth in average interest-earning assets
during the year, mitigated by a 2.1% decrease in the tax-equivalent net interest
margin to 4.24% in 1997 from 4.33% in 1996.
 
         Growth in average  loans  receivable  of $8.0  million or 9.1% in 1997,
mitigated by a decrease in average investments and interest-bearing  deposits of
$3.4 million or 12.6% in 1997, accounts for the net increase in interest-earning
assets.  Average loans account for 79.5% of the  interest-earning  assets of the
Company in 1997 compared to 75.8% of interest-earning  assets in 1996. Even with
this  shift  of  interest-earning  assets  toward  higher-yielding  assets,  the
weighted average  tax-equivalent  yield on interest-earning  assets decreased by
eight basis points in 1997.  This decrease is due to loan  originations at lower
rates than the existing yield in the portfolio due to market pressures.

         The  increase in  interest  expense of $189,000 or 4.3% in 1997 was due
primarily to the  increased  volume of both  deposits and FHLB  advances to fund
loan growth. Average  interest-bearing  liabilities increased by $4.7 million or
5.3% in 1997 while the average rate paid on those liabilities  decreased by five
basis points.

         Interest rate spread (on a  tax-equivalent  basis) declined to 3.13% in
1997  from  3.16% in 1996  and  3.72% in 1995 as the  decrease  in the  yield on
interest-earning  assets  outpaced the decrease in the cost of  interest-bearing
liabilities.  The net interest margin (on a  tax-equivalent  basis) decreased to
4.24% in 1997 from 4.33% in 1996, and 4.29% in 1995 due to increased  funding of
interest-earning  asset growth with deposits and FHLB  advances  compared to the
use of conversion proceeds in the prior year. Through the payment of the special
dividend in December 1996,  average  equity to assist in funding  decreased $1.7
million  or 6.0% to $25.9  million  or 21.5%  of total  interest-earning  assets
compared to $27.6 million or 23.8% of total interest-earning assets in 1996.

         In 1996, the increase in tax-equivalent  interest income as compared to
1995 was primarily  the result of a $19.3  million or 19.9%  increase in earning
assets.  Average  loans  increased  by $4.6  million  or 5.5% to $87.9  million.
Average  investments  increased  by $11.8  million  or 107% as stock  Conversion
proceeds  were  invested  primarily  in both taxable and  tax-exempt  investment
securities.  The weighted average yield on interest-earning  assets increased by
five basis points in 1996,  largely due to an upward adjustment of the Company's
portfolio  of  adjustable  rate  loans in a rising  rate  environment.  In 1995,
tax-equivalent  interest  income rose 14.0%  primarily  due to  increases in the
average  yield which  increased  by 86 basis  points.  Average  interest-bearing
liabilities  increased  by $4.4  million or 5.2% in 1996 while the average  rate
paid on those liabilities increased by 61 basis points, resulting in an increase
of  $732,000  or 19.9% in  interest  expense.  Interest  rate  spread  (on a tax
equivalent  basis)  declined to 3.16% in 1996 from 3.72% in 1995 as the increase
in the cost of interest-bearing  liabilities  outpaced the increase in the yield
on  interest-earning  assets.  Despite the decline in interest rate spread,  net
interest  margin (on a tax  equivalent  basis)  increased  to 4.33% in 1996 from
4.29% in 1995. While  Conversion  proceeds were invested at yields somewhat less
than  the  weighted  average  yield  on  total  interest-earning  assets,  those
investments contributed to the increase in net interest margin.






                                       6
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
NET INTEREST INCOME ANALYSIS - TAX EQUIVALENT

                                                       1997                             1996                           1995
                                          ----------------------------    -----------------------------    -------------------------
                                                               Average                          Average                      Average
                                          Average               Yield/     Average               Yield/    Average            Yield/
                                          Balance    Interest    Rate      Balance    Interest    Rate     Balance   Interest  Rate
                                          -------    --------    ----      -------    --------    ----     -------   --------  ----
Assets:                                                                       (dollars in thousands)
<S>                                      <C>         <C>       <C>        <C>         <C>       <C>        <C>       <C>     <C>
Interest-earning assets:
   Loans receivable                      $ 95,937    $ 8,060     8.40%    $ 87,917    $ 7,591     8.63%    $ 83,326  $ 6,969   8.36%
   Taxable investment securities           14,271        959     6.72       14,993      1,020     6.80       10,160      688   6.77
   Tax-exempt investment securities(1)      7,193        542     7.54        7,754        546     7.04          821       54   6.58
   Interest-bearing deposits                2,405         99     4.12        4,550        226     4.97        1,652       64   3.87
   FHLB common stock                          894         65     7.27          796         58     7.29          786       55   7.00
                                         --------    -------              --------    -------              --------  -------        
Total interest-earning assets             120,700      9,725     8.06      116,010      9,441     8.14       96,745    7,830   8.09
Non-interest-earning assets                 3,196                            3,242                            3,614
                                         --------                         --------                         --------                 
         TOTAL                           $123,896                         $119,252                         $100,359
                                         ========                         ========                         ========

Liabilities and retained earnings:
Interest-bearing liabilities:
   Deposit accounts                      $ 76,819    $ 3,615     4.71%    $ 75,365    $ 3,614     4.80%    $ 73,569  $ 3,101   4.21%
   FHLB advances                           16,481        988     5.99       13,248        800     6.04       10,628      581   5.47
                                         --------    -------              --------    -------              --------  -------        
Total interest-bearing liabilities         93,300      4,603     4.93       88,613      4,414     4.98       84,197    3,682   4.37
Non-interest-bearing liabilities            4,703                            3,082                            3,352
Stockholder's equity                       25,893                           27,557                           12,810
                                         --------                         --------                         --------                 
         TOTAL                           $123,896                         $119,252                         $100,359
                                         ========                         ========

Net interest income and interest
   rate spread                                       $ 5,122     3.13%                $ 5,027     3.16%             $  4,148   3.72%
                                                     =======                          =======                       ======== 
Net interest-earning assets
   and net interest margin               $ 27,400                4.24%    $ 27,397                4.33%    $ 12,548            4.29%
                                         ========                         ========                         ========
Ratio of interest-earning assets
   to interest-bearing liabilities                             129.37%                          130.92%                      114.90%
-----------------
(1) Interest earned on tax-exempt  investment  securities has been adjusted to a
tax-equivalent  basis using the applicable  combined  federal and state rates of
34.00% and 7.75%,  respectively,  and  reduced by the  nondeductible  portion of
interest expense.
</TABLE>






                                       7
<PAGE>
         While primary  reasons for increases  have been  discussed  above,  the
total increase in net interest  income in the current year is attributable to an
increase in net interest-earning assets, mitigated by decreases in interest rate
spread over the  three-year  period.  Table 2 shows the effect of  variances  in
volume and rate on taxable-equivalent interest income, interest expense, and net
interest  income.  The table shows that  increases in net  interest  income were
primarily due to volume in both 1997 and 1996.
<TABLE>
<CAPTION>
TABLE 2
RATE / VOLUME ANALYSIS

                                                         1997                                     1996
                                        ---------------------------------------      ------------------------------------ 
                                                               Rate/                                     Rate/
                                        Volume      Rate       Volume       Net      Volume     Rate     Volume      Net
                                        ------      ----       ------       ---      ------     ----     ------      ---
                                                                        (dollars in thousands)
<S>                                      <C>       <C>        <C>        <C>        <C>       <C>        <C>       <C>
Interest income (tax-equivalent) on:
  Loans ............................    $  693     $ (205)    $  (19)    $  469     $  384    $  225     $   13    $  622

  Taxable investment securities ....       (49)       (12)      --          (61)       327         3          2       332
  Tax-exempt investment securities .       (40)        38         (2)        (4)       455         4         33       492
  Interest-bearing deposits ........      (107)       (39)        19       (127)       112        18         32       162
  FHLB common stock ................         7       --         --            7          1         2       --           3
                                        ------     ------     ------     ------     ------    ------     ------    ------
     Total interest income .........       504       (218)        (2)       284      1,279       252         80     1,611
                                        ------     ------     ------     ------     ------    ------     ------    ------

  Deposit accounts .................        70        (68)        (1)         1         76       434          3       513
  FHLB advances ....................       195         (7)      --          188        143        61         15       219
                                        ------     ------     ------     ------     ------    ------     ------    ------
     Total interest expense ........       265        (75)        (1)       189        219       495         18       732
                                        ------     ------     ------     ------     ------    ------     ------    ------

Increase (decrease) in net .........    $  239     $ (143)    $   (1)    $   95     $1,060    $ (243)    $   62    $  879
  interest income                       ======     ======     ======     ======     ======    ======     ======    ======

</TABLE>

Provisions for Loan Losses

         The  provision  for loan losses is charged to earnings to maintain  the
total  allowance  for loan losses at a level  considered  adequate to cover loan
losses  based  on  existing   loan  levels  and  types  of  loans   outstanding,
nonperforming loans, prior loan loss experience, industry standards, and general
economic  conditions.  Provisions  for  loan  losses  totaled  $658,000  in 1997
compared to $96,000 in 1996, and $120,000 in 1995. This unusually high provision
resulted  primarily from the  reprovision of the allowance for loan losses after
charge off of  approximately  $510,000 of loans to a single borrower in December
1996.  No further  charge offs  related to this  borrower  have  occurred or are
anticipated  at  this  time.  The  Company  received  approximately  $45,000  of
recoveries from this single borrower during the year. In both 1996 and 1995, the
provision for loan losses was recorded based primarily on loan portfolio growth.



                                       8
<PAGE>
Other Income

         Other income decreased to $225,000 in 1997 compared to $255,000 in 1996
and  $337,000 in 1995.  Other  income  included  losses  realized on the sale of
investments and mortgage-backed  securities of $135,000,  $47,000, and $100,000,
in 1997, 1996, and 1995, respectively. The net losses on the sale of investments
and  mortgage-backed  securities in 1997 were primarily  attributable to partial
liquidation of invested conversion proceeds to facilitate payment of the special
dividend  in  December  1996.  Net  losses  were  incurred  in  prior  years  as
management, in response to higher prevailing market interest rates, restructured
the Company's  investment  portfolio to achieve higher yields in future periods.
Other  income  also  includes   lower-of-cost-or-market   adjustments  on  loans
held-for-sale.   In  1997,  the  Bank  had  $4,000  in   lower-of-cost-or-market
recoveries  resulting from the falling interest rate environment during the year
compared   to   $40,000   of   lower-of-cost-or-market   writedowns   in   1996.
Lower-of-cost-or-market  recoveries of $19,000 were recorded during 1995.  Other
income was positively  affected by the growth in customer service and other fees
of  $26,000  or 14.9% to  $201,000  from  $175,000  in 1996.  This  increase  is
attributable to both an increase in the volume of deposit accounts with the Bank
and the implementation of a new deposit-related fee schedule in July 1996.

Other Expenses

         Other  expenses  totaled  $4,716,000 in 1997 compared to $2,449,000 and
$2,265,000  in 1996  and  1995,  respectively.  This  significant  increase  was
primarily  attributable to two large non-recurring expenses that occurred in the
first and second  quarters  of fiscal  year 1997.  First,  in 1997,  the Company
recorded  $1,702,000 of compensation  expense related to the Company's  employee
stock  ownership  plan  ("ESOP"),  primarily  associated  with the  release  and
allocation  of  approximately  126,000  shares of common  stock of the Parent to
participants of the ESOP during the second quarter of 1997. The special dividend
paid on the Parent's stock on December 6, 1996 and management's  decision to use
the special  dividends  paid on the  unallocated  shares of the Parent's  common
stock  held by the ESOP to  pre-pay  the ESOP loan  from the  Parent to the ESOP
resulted in a significant portion of that share release,  approximately  103,000
shares. As a result,  approximately $1,428,000 of the ESOP-related  compensation
expense is deemed to be non-recurring in nature.

         The second  non-recurring  other expense was the $487,000 one-time FDIC
special  assessment  for the  recapitalization  of the SAIF.  The assessment was
levied on all depository institutions with SAIF-insured deposits and amounted to
65.7 basis points on  assessable  deposits as of March 31, 1995.  The  Company's
quarterly FDIC premiums have decreased since the recapitalization of the SAIF.

         Without  the  effect  of the  non-recurring  SAIF  assessment  and  the
non-recurring portion of ESOP-related compensation expense, other expenses would
have totaled $2,801,000,  a $352,000 increase from 1996. Compensation and fringe
benefits,  excluding  non-recurring  items,  increased by $371,000 to $1,724,000
compared to $1,353,000 in 1996,  primarily related to the ESOP and the Company's
management  recognition  plan  ("MRP").  The  ESOP,  which  was  established  in
conjunction with the Conversion in the middle of the prior fiscal year, provides
a potentially higher level of retirement benefits to employees than the previous
retirement plan. The recurring portion of ESOP-related  compensation expense for
1997 totaled $274,000  compared to $179,000 recorded for 1996. Also contributing
to the increase in compensation expense was $237,000 of amortization of deferred
compensation associated with the MRP implemented August 29, 1996.


                                       9
<PAGE>
         "Other"  other  expenses  increased  $70,000 to  $408,000  in 1997 from
$338,000 in 1996 due to increases in marketing expenses,  shareholder  reporting
expenses, and franchise tax expenses.  These increased expenses are mitigated to
a degree by a $105,000 decrease in  FDIC-insurance  premiums to $71,000 for 1997
from $176,000 for 1996.  Deposit insurance  premiums decreased starting with the
quarter ended December 31, 1996. The reduced level of FDIC-insurance premiums is
anticipated to continue into the future.

         For  1996,  other  expenses  increased  by 8.1%  from the 1995  levels.
Contributing  to  increased  expenses  in  the  prior  year  were  increases  in
compensation  and  fringe  benefits,  data and  items  processing  expense,  and
professional fees. Compensation and fringe benefits,  consistently  representing
over 50% of total other expenses, increased by $55,000 or 4.2% in 1996. Salaries
increased by $57,000  while  retirement  expense  increased  by  $120,000.  1996
retirement expense reflects the implementation of the Bank's ESOP which provides
a higher level of  retirement  benefits to employees  than the  retirement  plan
which  was in place in  previous  years.  Directors'  compensation  declined  by
$113,000 to a more normal level from 1995 when extra  meetings  associated  with
the Conversion were held. Data and items processing expense increased by $31,000
due  to  both  increased  transaction  volume  and  investments  in  technology.
Professional  fees  increased by $30,000 as the Company  obtained  assistance in
making the transition from mutual to stock ownership during the year.


Income Tax Expense

         The Company  recorded income tax expense of $317,000 in 1997,  compared
to $849,000 in 1996 and  $837,000 in 1995.  The  decrease in tax expense in 1997
reflects  the  pre-tax  loss  and the fact  that a  significant  portion  of the
ESOP-related compensation expense is not tax-deductible.


ANALYSIS OF FINANCIAL CONDITION

         During 1997,  total assets of the Company  decreased by $6.0 million or
4.6% as a result of the special  dividend of $7.00 per share paid by the Company
in December  1996  resulting  in a reduction  in assets of  approximately  $17.8
million.  This  reduction in assets was  mitigated by strong  growth in loans of
$9.0  million or 9.9%.  Also as a result of the  dividend  paid during the year,
total equity has decreased  from $37.1 million to $20.4 million  representing  a
$16.6 million or 44.9%  decrease.  Equity to assets at the end of 1997 is 16.63%
compared  to 28.79% at the end of the prior year.  Funding in 1997 was  provided
through an $11.5  million or 15.7%  increase in deposit  accounts  with deposits
totaling $84.9 million at the end of 1997 compared with $73.4 million at the end
of 1996.


Loans

         The Company's primary source of revenue is interest and fee income from
lending  activities,  consisting  primarily of  one-to-four  family  residential
mortgage  loans located in its primary market area. The Company also makes loans
secured by  improved  nonresidential  real  estate,  construction  loans,  loans
secured by undeveloped real estate,  home equity loans, and consumer loans, both
secured and unsecured.



                                       10
<PAGE>
         At June 30,  1997,  the  loan  portfolio  totaled  $100.2  million  and
represented 81.6% of total assets.  During 1997, loans increased by $9.0 million
or 9.9% . Loan  originations  increased  from  $21.2  million  in 1996 to  $33.2
million in 1997, largely in response to the Company's efforts to expand its loan
programs into adjacent  counties through  increased  marketing.  As presented in
Table 3, the relative composition of the loan portfolio began to change slightly
in 1997 as compared to prior  years.  One-to-four  family  loans  increased as a
percentage  of the  portfolio in the current year to 77.48% from 73.58% in 1996.
This trend is  attributable  to the growth in the  Hillsborough  and surrounding
market  areas.  Also  reflecting  the  growth  in  the  area  is the  amount  of
construction lending, mostly consisting of construction-to-permanent loans, that
have been made  during  the past  year,  growing  from  5.51% of the total  loan
portfolio in 1996 to 9.62% in 1997.  Table 3 sets forth the  composition  of the
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
TABLE 3
TYPES OF LOANS

                                                                              June 30,
                               -----------------------------------------------------------------------------------------------------
                                      1997                 1996                 1995                 1994                1993
                               ------------------   ------------------   ------------------   ------------------  ------------------
                                                                    (dollars in thousands)
<S>                            <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>      <C>        <C>
Real estate loans:                                         
  Residential 1-4 family       $ 77,621    77.48%   $ 67,095    73.58%   $ 62,379    73.63%   $ 59,842    73.22%  $ 58,500    72.28%
  Nonresidential real estate      6,649     6.64       8,818     9.67       8,623    10.18       7,574     9.27      7,242     8.95
  Home equity and other
     second mortgage             10,997    10.98      11,616    12.74      11,916    14.07      12,027    14.71     11,244    13.89
  Construction                    9,638     9.62       5,026     5.51       1,805     2.13       2,769     3.39      5,762     7.12
                               --------   ------    --------   ------    --------   ------    --------   ------   --------   ------ 
    Total real estate loans     104,905   104.72      92,555   101.50      84,723   100.01      82,212   100.59     82,748   102.24
Other installment loans           1,061     1.06       1,719     1.89       1,635     1.93       1,635     2.00      1,460     1.80
Less:
   Unearned fees and discounts      348     0.35         281     0.31         185     0.22         268     0.33        305     0.38
   Loans in process               4,649     4.64       2,198     2.41         945     1.11       1,442     1.76      2,649     3.27
   Allowance for loan losses        796     0.79         608     0.67         515     0.61         404     0.50        317     0.39
                               --------   ------    --------   ------    --------   ------    --------   ------   --------   ------ 
  Total reductions                5,793     5.78       3,087     3.39       1,645     1.94       2,114     2.59      3,271     4.04
                               --------   ------    --------   ------    --------   ------    --------   ------   --------   ------ 
                              
     Total loans, net          $100,173   100.00    $ 91,187   100.00    $ 84,713   100.00    $ 81,733   100.00   $ 80,937   100.00
                               ========   ======    ========   ======    ========   ======    ========   ======   ========   ======
</TABLE>
In order to protect the Company's net interest  margin,  management has, as part
of its interest rate risk management program,  placed an emphasis on maintaining
adjustable rate mortgage loans and home equity lines of credit in its portfolio.
This  strategy has  resulted in more  consistent  net interest  income and lower
interest sensitivity than experienced by most traditional fixed-rate residential
mortgage  lenders.  In both of the most recent fiscal years,  1997 and 1996, the
Company has not sold any of its  mortgage  loan  production  into the  secondary
market as sufficient liquidity and interest rate protection was provided through





                                       11
<PAGE>
the  investment of  conversion  proceeds in shorter term  investments.  With the
liquidation  of  approximately  $17.8  million of shorter term assets during the
year to pay the special  dividend,  the  Company is  expected  to sell  selected
current loan production to both provide for sufficient  liquidity and protection
of the net interest margin.

The following table sets forth the time to contractual maturity of the Company's
loan portfolio at June 30, 1997. All loans, fixed and floating, are shown as due
in the period of  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 or scheduled principal repayments.  Amounts in the table
are net of loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
TABLE 4
LOAN MATURITIES
                                                                      June 30, 1997
                                     --------------------------------------------------------------------------------
                                                      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
                                     ---------      ---------     ---------     ---------     ---------     ---------
                                                                    (dollars in thousands)
<S>                                  <C>            <C>           <C>           <C>           <C>           <C>
Real estate loans:
  Residential 1-4 family
     Fixed .....................     $     185      $     217     $     540     $   5,125     $  36,010     $  42,077
     Floating ..................           100            226           646         3,890        30,294        35,156
  Nonresidential real estate
     Fixed .....................             3             11          --             260         1,385         1,659
     Floating ..................           746            231            23         2,166         1,824         4,990
  Home equity and other second
    mortgage
     Fixed .....................            37            148           201           269            31           686
     Floating ..................            73            136         1,799         8,176           127        10,311
  Construction
     Fixed .....................          --             --            --            --           2,523         2,523
     Floating ..................           840            350          --            --           1,316         2,506
                                     ---------      ---------     ---------     ---------     ---------     ---------
         Total real estate loans         1,984          1,319         3,209        19,886        73,510        99,908

Other installment loans:
     Fixed .....................           396            346           158            59           102         1,061
     Floating ..................          --             --            --            --            --            --

Less:
  Allowance for loan losses ....          (796)          --            --            --            --            (796)
                                     ---------      ---------     ---------     ---------     ---------     ---------

       Total loans, net ........     $   1,584      $   1,665     $   3,367     $  19,945     $  73,612     $ 100,173
                                     =========      =========     =========     =========     =========     =========

</TABLE>





                                       12
<PAGE>
Asset Quality and Allowance for Loan Losses

The following table sets forth information with respect to nonperforming assets,
including  nonaccrual  loans and real estate owned, and risk assets at the dates
indicated.
<TABLE>
<CAPTION>
TABLE 5
SUMMARY OF NONPERFORMING AND RISK ASSETS

                                                                                         June 30,
                                                            -----------------------------------------------------------------
                                                               1997          1996          1995          1994          1993
                                                            --------      --------      --------      --------      --------
                                                                                   (dollars in thousands)
<S>                                                         <C>           <C>           <C>           <C>           <C>
Total nonaccrual loans ................................     $    803      $    758      $     30      $    139      $    158
Total restructured loans ..............................           --            --            --            --            --
                                                            --------      --------      --------      --------      --------
      Total nonperforming loans .......................          803           758            30           139           158
                                                            --------      --------      --------      --------      --------
Real estate owned .....................................           --            --            --           161           108
                                                            --------      --------      --------      --------      --------
       Total nonperforming assets .....................     $    803      $    758      $     30      $    300      $    266
 Accruing loans, delinquent 90 days or more ...........          244           301           571            41           266
                                                            --------      --------      --------      --------      --------
      Total risk assets ...............................     $  1,047      $  1,059      $    601      $    341      $    532
                                                            ========      ========      ========      ========      ========

Nonperforming loans to total loans ....................         0.80%         0.83%         0.04%         0.17%         0.20%
Nonperforming assets to total assets ..................         0.65          0.59          0.03          0.31          0.28
Risk assets to total assets ...........................         0.85          0.82          0.58          0.35          0.56

Allowance for loan losses to:
    Total nonperforming assets ........................         0.99x         0.80x        17.17x         1.35x         1.19x
    Total risk assets .................................         0.76x         0.57x         0.86x         1.18x         0.60x
                                                  
Total assets ..........................................     $122,761      $128,711      $104,013      $ 97,368      $ 95,094
Total loans, net ......................................      100,173        91,187        84,713        81,733        80,937
Allowance for loan losses .............................          796           608           515           404           317
</TABLE>

         Nonperforming assets increased to $803,000 at June 30, 1997 compared to
$758,000 and $30,000 at June 30, 1996 and 1995,  respectively.  One large credit
totaling  $461,000 secured by commercial real estate and several smaller credits
secured by residential  real estate where the borrowers have declared Chapter 13
bankruptcy comprise the nonperforming assets total at June 30, 1997.  Management
has reviewed the collateral for  nonaccrual  loans and believes that  collateral
values related to the nonperforming  loans exceed the loan balances.  Management
has included this review among the factors  considered in the  evaluation of the
allowance for possible loan losses as discussed below.

         Effective July 1, 1995, the Company adopted the provisions of Statement
of  Financial  Accounting  Standards  No.  114,  "Accounting  by  Creditors  for
Impairment of a Loan", as amended by Statement of Financial Accounting Standards
No. 118,  "Accounting by Creditors for Impairment of a Loan: Income Recognition"


                                       13
<PAGE>
(collectively  referred to  hereafter as "SFAS No.  114").  At June 30, 1997 and
1996, the recorded  investment in loans that are considered to be impaired under
SFAS No. 114 was $580,000 and $826,000,  respectively.  Impaired  loans totaling
$458,000  and  $457,000  were in  non-accrual  status at June 30, 1997 and 1996,
respectively.  There was no related  allowance for credit losses associated with
these  loans  as  determined  in   accordance   with  SFAS  No.  114;   however,
approximately  $87,000 and $124,000 of the general  allowance for loan losses is
allocated  to  impaired  loans as of June 30, 1997 and 1996,  respectively.  The
average  recorded  investment  in impaired  loans during the year ended June 30,
1997 and 1996 was approximately  $779,000 and $864,000.  The Company  recognized
interest  income on the  impaired  loans of  approximately  $25,000  and $65,000
during the year ended June 30, 1997 and 1996, respectively.

         The allowance for loan losses  represents  management's  estimate of an
amount adequate to provide for potential  losses inherent in the loan portfolio.
The  adequacy of the  allowance  for loan losses and the related  provision  are
based  upon  management's  evaluation  of the risk  characteristics  of the loan
portfolio under current economic  conditions with  consideration to such factors
as  financial  condition  of  the  borrower,   collateral  values,   growth  and
composition of the loan  portfolio,  the  relationship of the allowance for loan
losses to outstanding loans, and delinquency  trends.  Management  believes that
the allowance for loan losses is adequate.  While  management uses all available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on  changes  in  economic  conditions.  Various  regulatory
agencies, as an integral part of their examination process,  periodically review
the Company's  allowance for loan losses.  Such agencies may require the Company
to  recognize  additions  to  the  allowance  based  on  their  judgments  about
information available to them at the time of their examination.

         The provision for loan losses is calculated  and charged to earnings to
maintain the total allowance for loan losses at a level  considered  adequate to
cover potential loan losses based on an analysis of existing loan levels,  types
of loans outstanding,  nonperforming loans, prior loan loss experience, industry
standards  and  general  economic  conditions.  Provisions  for loan losses were
$658,000  in 1997,  compared  to  $96,000 in 1996,  and  $120,000  in 1995.  The
unusually  high  provision  in 1997  resulted  primarily  from the charge off of
approximately  $510,000  of loans to a single  borrower  in  December  1996.  No
further charge offs related to this borrower have occurred or are anticipated at
this time. The Company  received  approximately  $45,000 of recoveries from this
single  borrower  during the year. In both 1996 and 1995, the provision for loan
losses was recorded  based  primarily on loan  portfolio  growth.  At this time,
management is unaware of any significant potential problem loans except as noted
above  or any  other  concentrations  of  credit  risk  which  may  exist in the
portfolio.

         The following tables describe the activity related to the allowance for
loan  losses and the  allocation  of the  allowance  for loan  losses to various
categories of loans for the periods indicated.










                                       14
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
                                                                       Year Ended June 30,
                                               --------------------------------------------------------------------
                                                1997          1996            1995            1994             1993
                                                ----          ----            ----            ----             ----
                                                                    (dollars in thousands)
<S>                                            <C>           <C>             <C>             <C>              <C>
Balance, beginning of period                   $ 608         $ 515           $ 404           $ 317            $ 277
Provision for loan losses                        658            96             120              87               60
Charge-offs                                      519             4              14               4               21
Recoveries                                        49             1               5               4                1
                                               -----         -----           -----           -----            ----- 
Balance, end of period                         $ 796         $ 608           $ 515           $ 404            $ 317
                                               =====         =====           =====           =====            =====
                                                 
Allowance as a percentage of loans              0.79%         0.66%           0.60%           0.49%            0.39%

<CAPTION>
TABLE 7
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
                                                                           June 30,
                                              --------------------------------------------------------------------
                                               1997          1996            1995            1994             1993
                                               ----          ----            ----            ----             ----
                                                                     (dollars in thousands)
<S>                                           <C>           <C>             <C>             <C>              <C>
Residential 1-4 family                        $ 382         $ 256           $ 216           $ 170            $ 132
Nonresidential real estate                      233           170             155             121               95
Home equity and other second mortgage            83            97              82              65               51
Construction                                     54            36              16              12               10
                                              -----         -----           -----           -----            ----- 
     Total real estate loans                    752           559             469             368              288
Other installment loans                          44            49              46              36               29
                                              -----         -----           -----           -----            ----- 
     Total allowance for loan losses          $ 796         $ 608           $ 515           $ 404            $ 317
                                              =====         =====           =====           =====            =====
</TABLE>
     The  allocation  of the allowance  for loan losses to the  respective  loan
classifications  is not  necessarily  indicative  of  future  losses  or  future
allocations. Refer to Table 3 for percentages of loans in each category to total
loans.


Investment Securities

         Interest  and  dividend  income from  investment  securities  generally
provides the second  largest  source of income to the Company after  interest on
loans. The Company's portfolio of investment securities includes U.S. government
and agency securities, mortgage-backed securities, and obligations of states and
local  governments.  The  mortgage-backed  securities consist of mortgage-backed
securities issued by the FNMA and collateralized  mortgage obligations issued by
the  Federal  National  Mortgage  Association  ("FNMA")  and  Federal  Home Loan
Mortgage Corporation  ("FHLMC") which are secured by mortgage-backed  securities
guaranteed by the FNMA or FHLMC.

                                       15
<PAGE>
         Investment  securities  totaled  $14.2  million  at June  30,  1997,  a
decrease of $16.4 million from $30.6 million at June 30, 1996.  This decrease is
attributable  to  liquidation  of  investments  in the current year resulting in
realized  losses of $135,000 to  facilitate  payment of the special  dividend in
December  1996.  Approximately  76% of the  Company's  investment  portfolio  is
classified  as  available-for-sale  in  order  to  provide  flexibility  to meet
liquidity needs. Generally only securities issued by the state of North Carolina
and local  municipalities  in North  Carolina are  classified  by the Company as
held-to-maturity.  At June 30,  1997,  net  unrealized  losses of $138,000  were
included  in the  carrying  value of  securities  classified  available-for-sale
compared to net  unrealized  losses of $951,000 on such  securities  at June 30,
1996.  These net  unrealized  losses  are the result of  fluctuations  in market
interest  rates rather than  concerns  about the issuers'  ability to meet their
obligations.

         Table 8 shows  maturities of investment  securities held by the Company
at June 30, 1997 and the weighted average tax-equivalent yields for each type of
security and maturity.  Additional  information  about the Company's  investment
securities  as of June 30, 1997 and 1996 is  presented in Note 2 of the notes to
the consolidated financial statements.
<TABLE>
<CAPTION>
TABLE 8
INVESTMENT SECURITIES - MATURITY/YIELD SCHEDULE

                                                         More than              More than
                                  One year or Less    1 Year to 5 Years   5 years to 10 years   Over 10 Years           Total
                                 ------------------- ------------------  --------------------  ------------------  -----------------
                                            Weighted           Weighted             Weighted             Weighted           Weighted
                                 Carrying   Average  Carrying  Average    Carrying  Average    Carrying  Average   Carrying  Average
                                  Value      Yield     Value    Yield      Value    Yield       Value    Yield      Value    Yield
                                  -----      -----     -----    -----      -----    -----       -----    -----      -----    -----
                                                                       (dollars in thousands)
<S>                               <C>       <C>       <C>        <C>     <C>        <C>      <C>        <C>       <C>       <C> 
Available-for-sale:  
U.S. government and agency        $   -        -%     $  504     6.55%   $5,149     6.43%    $   -        - %     $ 5,653   6.44%
State and local government (1)        -        -           -        -         -        -      1,016     8.75        1,016   8.75
Mortgage-backed securities (2)        -        -       1,945     6.42       808     7.47      1,444     6.72        4,197   6.73
                                  -----     ----      ------     ----    ------     ----     ------     ----      -------   ----
   Total available-for-sale       $   -        -      $2,449     6.45    $5,957     6.57     $2,460     7.56      $10,866   6.76
                                  -----     ----      ------     ----    ------     ----     ------     ----      -------   ---- 

Held-to-maturity:
U.S. government and agency        $   -        -      $    -        -%   $    -        -%    $    -        -%     $     -      -%
State and local  government (3)     327     6.15         798     6.33     1,524     8.43        692     7.95        3,341   7.61
Mortgage-backed securities            -        -           -        -         -        -          -        -            -      -
                                  -----     ----      ------     ----    ------     ----     ------     ----      -------   ---- 
   Total held-to-maturity         $ 327     6.15      $  798     6.33    $1,524     8.43     $  692     7.95      $ 3,341   7.61
                                  -----     ----      ------     ----    ------     ----     ------     ----      -------   ---- 
                             
Total investments,
    at carrying value             $ 327               $3,247             $7,481              $3,152               $14,207
                                  =====               ======             ======              ======               =======





                                       16
<PAGE>
(1)  Yields are stated on a taxable  equivalent  basis  assuming  statutory  tax
     rates of 34% for federal and 7.75% for state purposes.  Book yields without
     regard to  tax-equivalent  adjustments  are: over ten years,  5.62%;  total
     5.62%.

(2)  Mortgage-backed  securities  are shown at their weighted  average  expected
     life obtained from an outside  evaluation of the average  remaining life of
     each  security  based  on  historic  prepayment  speeds  of the  underlying
     mortgages at June 30, 1997.

(3)  Yields are stated on a taxable  equivalent  basis  assuming  statutory  tax
     rates of 34% for federal and 7.75% for state purposes.  Book yields without
     regard to tax- equivalent  adjustments are: one year or less, 4.04%; one to
     five years,  5.30%; six to ten years,  4.85%, over ten years, 5.13%; total,
     4.94%.
</TABLE>

         In addition to the investment  securities  discussed above, the Company
also earns interest on its  correspondent  bank account at the Federal Home Loan
Bank ("FHLB") of Atlanta and  dividends on its FHLB stock.  The Bank is required
to maintain, as a condition of membership, an investment in stock of the FHLB of
Atlanta equal to the greater of 1% of its  outstanding  home loan balances or 5%
of its  outstanding  advances.  No ready market exists for such stock,  which is
carried at cost. As of June 30, 1997,  the Company's  investment in stock of the
FHLB of Atlanta was $920,000.


Funding Sources

         Deposits are the primary source of the Company's  funds for lending and
other  investment  purposes.  The Company attracts both short-term and long-term
deposits  from the general  public by  offering a variety of accounts  and rates
including  savings  accounts,  NOW accounts,  money market  accounts,  and fixed
interest rate certificates with varying maturities. Deposit inflows and outflows
are  significantly  influenced  by  general  interest  rates  and  other  market
conditions,  primarily  competition.  As competition  for deposits has increased
both from larger financial  institutions in the Company's local market place and
from mutual funds and other investments,  borrowings have provided an additional
source of funding.  The use of borrowed funds to provide  liquidity  assists the
Company in matching the interest rates on its assets and liabilities because the
interest rates on most borrowed  funds are fixed and therefore more  predictable
than the  costs of  deposits  which are  subject  to change  based  upon  market
conditions and other factors.


Deposits

         Deposits  totaled  $84.9  million at June 30,  1997  compared  to $73.4
million at June 30,  1996,  and $76.7  million at June 30, 1995.  The  following
table sets forth certain  information  regarding the Company's  average  savings
deposits for the last three years.







                                       17
<PAGE>
<TABLE>
<CAPTION>
TABLE 9
AVERAGE DEPOSITS
                                              1997                      1996                      1995
                                      --------------------      --------------------      --------------------  
                                       Average     Average       Average     Average       Average     Average
                                       Amount       Rate         Amount       Rate         Amount       Rate
                                                               (dollars in thousands)
<S>                                   <C>           <C>         <C>           <C>         <C>           <C>
Interest-bearing checking accounts    $ 6,011       1.48%       $ 6,412       1.84%       $ 5,305       2.32%
Savings and money market deposits      20,050       3.36         18,980       3.22         17,592       2.72
Certificates of deposit ..........     50,758       5.62         49,973       5.78         50,672       4.91
                                      -------       ----        -------       ----        -------       ----
   Total interest-bearing deposits     76,819       4.71         75,365       4.80         73,569       4.20
Non-interest-bearing deposits ....      1,901         --          1,856         --          1,541         --
                                      -------       ----        -------       ----        -------       ----
     TOTAL DEPOSITS ..............    $78,720       4.59        $77,221       4.68        $75,110       4.11
                                      -------       ----        -------       ----        -------       ----
</TABLE>

         As of June 30, 1997, the Company held  $9,636,000 in time  certificates
of deposit of  $100,000  or more.  Maturities  of  certificates  of  deposits of
$100,000  or more at June  30,  1997  were as  follows:  three  months  or less,
$2,789,000  over three months  through six months,  $4,348,000;  over six months
through  twelve  months,  $1,190,000;  over twelve  months  through  twenty-four
months, $310,000; and over twenty-four months, $999,000.


Borrowings

         The Company's  principal  source of long-term  borrowings  are advances
from the FHLB of Atlanta. As a requirement for membership,  the Bank is required
to own  capital  stock in the FHLB of  Atlanta  and is  authorized  to apply for
advances  on the  security  of that stock and a floating  lien on its 1-4 family
residential  mortgage  loans.  Each credit program has its own interest rate and
range of maturities.  At June 30, 1997, FHLB of Atlanta  advances  totaled $16.5
million compared to $17.25 million at June 30, 1996.  Additional  information on
borrowings  is  provided  in Note 6 of the notes to the  consolidated  financial
statements.


Liquidity and Interest Rate Risk Management

         Liquidity  is the ability to raise  funds or convert  assets to cash in
order to meet customer and operating  needs.  The Company's  primary  sources of
liquidity  are  its  portfolio  of  investment  securities   available-for-sale,
principal  and  interest  payments  on  loans  and  mortgage-backed  securities,
interest income from investment securities,  maturities of investment securities
held-to-maturity,  increases in deposits, and advances from the FHLB of Atlanta.
At June 30, 1997, the Bank had  $8,500,000 of credit  available from the FHLB of
Atlanta  which would be  collateralized  by a blanket lien on  qualifying  loans
secured by first mortgages on 1-4 family  residences.  Additional amounts may be
made  available  under  this  blanket  floating  lien  or  by  using  investment
securities as collateral. Management believes that it will have sufficient funds
available  to meet its  anticipated  future  loan  commitments  as well as other
liquidity needs.

                                       18
<PAGE>
         Interest rate risk is the  sensitivity of interest  income and interest
expense to changes in interest  rates.  Management has structured its assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated  with  changes  in  interest  rates.  Table 10 shows  the  amount  of
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1997 which are projected to reprice or mature in each of the future time periods
shown.   At  June  30,   1997,   the   Company   had  a   cumulative   one  year
liability-sensitive  gap position of $2.7  million or 2.24% of  interest-earning
assets.  This  generally  indicates  that net interest  income would  experience
downward pressure in a rising rate environment and would increase in a declining
rate  environment as  interest-sensitive  liabilities  would  generally  reprice
faster than interest-sensitive assets.

         It should be noted that this table reflects the interest-sensitivity of
the balance  sheet as of a specific  date and is not  necessarily  indicative of
future results. Because of this and other limitations,  management also monitors
interest rate sensitivity  through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest  sensitivity  measures as of
June  30,  1997,  management  believes  that  its  interest  rate  risk is at an
acceptable level.
<TABLE>
<CAPTION>
TABLE 10
INTEREST SENSITIVITY
                                                                                June 30, 1997
                                                ------------------------------------------------------------------------------
                                                                           More than      More than
                                                3 Months       4 to 12     1 Year to     3 Years to        Over
                                                 Or Less        Months       3 Years      5 Years        5 Years       Total
                                                --------       --------      --------      ---------     --------     --------  
                                                                              (dollars in thousands)
<S>                                              <C>           <C>           <C>           <C>           <C>          <C>
Interest-earning assets:
   Loans receivable .........................    $ 16,101      $ 42,989      $ 14,454      $  8,078      $ 19,347     $100,969
   Interest-bearing deposits ................       3,766          --            --            --            --          3,766
   Investment securities (1) ................        --             327           798         2,449        10,633       14,207
   FHLB common stock ........................        --            --            --            --             920          920
                                                 --------      --------      --------      --------      --------     --------
       Total interest-earning assets ........    $ 19,867      $ 43,316      $ 15,252      $ 10,527      $ 30,900     $119,862
                                                 ========      ========      ========      ========      ========     ========

Interest-bearing liabilities:
   Deposits:
     Fixed maturity deposits ................    $ 17,994      $ 23,090      $ 12,434      $    674      $   --       $ 54,192
     NOW accounts ...........................         694         1,661         2,155           577         1,277        6,364
     Savings and money market accounts ......       1,972         3,957         5,175         3,355         7,771       22,230
                                                 --------      --------      --------      --------      --------     --------
       Total deposits .......................      20,660        28,708        19,764         4,606         9,048       82,786
   FHLB advances ............................       7,500         9,000          --            --            --         16,500
                                                 --------      --------      --------      --------      --------     --------
       Total interest-bearing liabilities ...    $ 28,160      $ 37,708      $ 19,764      $  4,606      $  9,048     $ 99,286
                                                 ========      ========      ========      ========      ========     ========
</TABLE>




                                       19
<PAGE>
<TABLE>
<CAPTION>
TABLE 10
INTEREST SENSITIVITY (continued)
                                                                                June 30, 1997
                                                ------------------------------------------------------------------------------
                                                                           More than      More than
                                                3 Months       4 to 12     1 Year to     3 Years to        Over
                                                 Or Less        Months       3 Years      5 Years        5 Years       Total
                                                --------       --------      --------      ---------     --------     --------  
                                                                              (dollars in thousands)
<S>                                              <C>           <C>           <C>           <C>           <C>          <C>

Interest sensitivity gap per period .........    $ (8,293)     $  5,608      $ (4,512)     $  5,921      $ 21,852     $ 20,576
Cumulative interest sensitivity gap .........      (8,293)       (2,685)       (7,197)       (1,276)       20,576       20,576
Cumulative gap as a percentage of
   total interest-earning assets ............       (6.92)%       (2.24)%       (6.00)%       (1.06)%       17.17%       17.17%
Cumulative interest-earning assets as a
   percentage of interest-bearing liabilities       70.55%        95.92%        91.60%        98.59%       120.72%      120.72%

(1) Includes investment and mortgage-backed securities
</TABLE>

This table was prepared using the assumptions  regarding loan prepayment  rates,
loan  repricing and deposit decay rates which are used by the FHLB of Atlanta in
making  its gap  computations.  These  assumptions  should  not be  regarded  as
indicative of the actual  prepayments and withdrawals that may be experienced by
the Company.  However,  management  believes that these assumptions  approximate
actual experience.


Capital Resources

         Stockholders'  equity  decreased  from  $37,050,000 at June 30, 1996 to
$20,416,000 at June 30, 1997,  largely as a result of the payment of the special
dividend in December 1996.

         As a state savings bank holding company, the Parent is regulated by the
Board of  Governors  of the  Federal  Reserve  Board  ("FRB")  and is subject to
securities  registration and public reporting  regulations of the Securities and
Exchange  Commission.  The  Bank  is  regulated  by the  FDIC  and  the  Savings
Institutions   Division,   North   Carolina   Department   of   Commerce   ("the
Administrator").

         The Bank must comply with the capital  requirements of the FDIC and the
Administrator.  The FDIC requires the Bank to maintain  minimum ratios of Tier I
capital to total risk-weighted  assets and total capital to risk-weighted assets
of 4% and 8%, respectively.  To be "well-capitalized",  the FDIC requires ratios
of  Tier  I  capital  to  total  risk-weighted   assets  and  total  capital  to
risk-weighted  assets of 6% and 10%,  respectively.  Tier I capital  consists of
total  stockholders'  equity  calculated in accordance  with generally  accepted
accounting  principles less intangible assets, and total capital is comprised of
Tier I capital plus certain adjustments, the only one of which applicable to the
Bank is the allowance for loan losses.  Risk-weighted  assets reflect the Bank's




                                       20
<PAGE>
on- and off-balance  sheet exposures after such exposures have been adjusted for
their  relative risk levels using  formulas set forth in FDIC  regulations.  The
Bank is also  subject  to a  leverage  capital  requirement,  which  calls for a
minimum  ratio of Tier I capital (as defined  above) to quarterly  average total
assets  of 3% and a  ratio  of 5% to be  "well-capitalized".  The  Administrator
requires a net worth equal to at least 5% of assets.

         At June 30, 1997 and 1996,  the Bank was in compliance  with all of the
aforementioned  capital  requirements of both the FDIC and the Administrator and
is  deemed  to be  "well-capitalized".  Refer  to  note  8 to  the  consolidated
financial statements for additional discussion of the Bank's capital resources.


Impact of Inflation and Changing Prices

         The consolidated  financial statements and accompanying  footnotes have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial  position and operating results in terms of
historical dollars without  consideration of changes in the relative  purchasing
power of money over time due to  inflation.  The assets and  liabilities  of the
Company are primarily  monetary in nature,  and changes in interest rates have a
greater impact on the Company's performance than do the effects of inflation.


Regulatory Matters

         Management is not presently aware of any current  recommendation to the
Company by regulatory authorities, which, if they were implemented, would have a
material effect on the Company's liquidity, capital resources, or operations.


Accounting Issues

         The Company prepares its consolidated  financial statements and related
disclosures  in conformity  with  standards  established  by, among others,  the
Financial  Accounting  Standards  Board (the  "FASB").  Because the  information
needed by users of financial  reports is dynamic,  the FASB  frequently  has new
rules  and  proposed  new  rules  for  companies  to  apply in  reporting  their
activities.  The following discussion addresses such changes as of June 30, 1997
that will affect the Company's future reporting.

         In August 1996,  the  Financial  Accounting  Standards  Board  ("FASB")
issued  Statement  of  Financial  Accounting  Standards  No. 125  ("SFAS  125"),
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities".  This statement provides accounting and reporting standards for
transfers and servicing of financial assets and  extinguishments  of liabilities
based on consistent application of a financial-components  approach that focuses
on control.  It distinguishes  transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components  approach,
after a transfer of financial  assets,  an entity  recognizes  all financial and
servicing  assets it  controls  and  liabilities  it has  incurred  and does not
recognize  financial assets it no longer controls and liabilities that have been
extinguished.  The  financial-components  approach  focuses  on the  assets  and
liabilities  that exist  after the  transfer.  If a  transfer  does not meet the




                                       21
<PAGE>
criteria for a sale,  the transfer is accounted for as a secured  borrowing with
pledge of collateral.  This statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively.  The Company adopted this statement on
January 1, 1997 without any impact on its consolidated financial statements.

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),  "Earnings per
Share". SFAS 128 establishes  standards of computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously  found in APB Opinion No. 15,  "Earnings per Share",  and makes
them comparable to international EPS standards.  It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income  statement  for all  entities
with complex capital  structures and requires a reconciliation  of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS  computation.  SFAS 128 is effective  for  financial  statements
issued for periods  ending after  December 15, 1997 and requires  restatement of
all prior  period EPS data  presented.  The  Company  plans to adopt SFAS 128 in
fiscal year 1998 without any significant  impact on its  consolidated  financial
statements.

         In February  1997,  the FASB issued  Statement of Financial  Accounting
Standards  No.  129 ("SFAS  129"),  "Disclosure  of  Information  about  Capital
Structure".  SFAS 129 establishes standards for disclosing  information about an
entity's  capital  structure and is  applicable to all entities.  It contains no
change in disclosure  requirements for entities that were previously  subject to
the  requirements of APB Opinion No. 10, "Omnibus  Opinion - 1966",  APB Opinion
No. 15, "Earnings Per Share",  and Statement of Financial  Accounting  Standards
No.  47,  "Disclosure  of  Long-Term  Obligations".  SFAS 129 is  effective  for
financial  statements  for periods  ending after  December 15, 1997. The Company
plans to adopt SFAS 129 in fiscal  year 1998 with no impact on its  consolidated
financial statements.

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No. 130 ("SFAS  130"),  "Reporting  Comprehensive  Income".  SFAS 130
establishes standards for reporting and displaying  comprehensive income and its
components   (revenues,   expenses,   gains,  and  losses)  in  a  full  set  of
general-purpose financial statements. This Statement requires that an enterprise
(a)  classify  items of  other  comprehensive  income  by  their  nature  in the
financial   statement  and  (b)  display  the   accumulated   balance  of  other
comprehensive   income   separately   from  retained   earnings  and  additional
paid-in-capital in the equity section of a statement of financial position. SFAS
130  is  effective  for  fiscal  years   beginning   after  December  15,  1997.
Reclassification  of  financial  statements  for earlier  periods  provided  for
comparative  purposes is  required.  The Company  plans to adopt the SFAS 130 in
fiscal year 1999 and has not determined the impact on its consolidated financial
statements.

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related  Information".  SFAS 131  establishes  standards for the way that public
businesses  report  information  about  operating  segments in annual  financial
statements and requires that those enterprises report selected information about



                                       22
<PAGE>
operating segments in interim financial reports issued to shareholders.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997 and in the initial year
of application, comparative information for earlier years is to be restated. The
Company  plans to adopt SFAS 131 in fiscal  year 1999  without  any  significant
impact on its consolidated financial statements.



















































                                       23
<PAGE>

                          INDEPENDENT AUDITORS' REPORT 









The Board of Directors and Stockholders
Piedmont Bancorp, Inc.:


We have audited the accompanying consolidated balance sheets of Piedmont Bancorp
Inc. and subsidiary as of June 30, 1997 and 1996,  and the related  consolidated
statements of income,  stockholders' equity and cash flows for each of the years
in the  three-year  period ended June 30,  1997.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Piedmont Bancorp,
Inc.  and  subsidiary  as of June 30,  1997 and 1996,  and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  June  30,  1997,  in  conformity  with  generally   accepted   accounting
principles.


                                                       /s/ KPMG Peat Marwick LLP
                                                       -------------------------
                                                       KPMG Peat Marwick LLP




 
Raleigh, North Carolina
July 18, 1997
 







                                       24
<PAGE>
<TABLE>
<CAPTION>
                                 CONSOLIDATED BALANCE SHEETS
                                    June 30, 1997 and 1996

                                                                       1997           1996  
                                                                    ---------      ---------
                                                                      (dollars in thousands)
<S>                                                                 <C>            <C>     
ASSETS
Cash ..........................................................     $     879      $     723
Interest-bearing deposits in other financial institutions .....         3,766          1,947
Investment securities (note 2):
   Available-for-sale (cost:  $11,004 in 1997 and
       $28,049 in 1996) .......................................        10,866         27,098
   Held-to-maturity (market value: $3,395 in 1997
       and $3,477 in 1996) ....................................         3,341          3,519
Loans receivable (net of allowance for loan losses of
     $796 in 1997 and $608 in 1996) (note 3) ..................       100,173         91,187
Federal Home Loan Bank stock, at cost .........................           920            863
Premises and equipment (note 4) ...............................         1,205          1,324
Prepaid expenses and other assets (note 9) ....................         1,611          2,050
                                                                    ---------      ---------
                   Total assets ...............................     $ 122,761      $ 128,711
                                                                    =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits (note 5):
     Demand, non-interest bearing .............................         2,074          1,643
     Savings, NOW and MMDA ....................................        28,594         23,302
     Certificates of deposit ..................................        54,192         48,416
                                                                    ---------      ---------
                                                                       84,860         73,361
Advances from the Federal Home Loan Bank (note 6) .............        16,500         17,250
Accrued expenses and other liabilities ........................           985          1,050
                                                                    ---------      ---------
                   Total liabilities ..........................       102,345         91,661
                                                                    ---------      ---------
Stockholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized;
   none issued (note 1) .......................................          --             --
Common stock, no par value, 20,000,000 shares authorized;
   2,750,800 and 2,645,000 shares issued and outstanding,
   respectively (note 1) ......................................         9,143         25,398
Unearned ESOP shares ..........................................          (933)        (2,552)
Unamortized deferred compensation .............................        (1,269)          --
Unallocated restricted stock ..................................           (21)          --
Retained earnings, substantially restricted (notes 8 and 9) ...        13,580         14,783
Unrealized holding losses on available-for-sale securities, net           (84)          (579)
                                                                    ---------      ---------
                   Total stockholders' equity .................        20,416         37,050
                                                                    ---------      ---------
Commitments and contingencies (note 3)
                   Total liabilities and stockholders' equity .     $ 122,761      $ 128,711
                                                                    =========      =========
                See accompanying notes to consolidated financial statements.
</TABLE>
                                             25
<PAGE>
<TABLE>
<CAPTION>
                                     CONSOLIDATED STATEMENTS OF INCOME
                                 Years ended June 30, 1997, 1996 and 1995


                                                                     1997         1996         1995
                                                                   -------      -------      -------
                                                            (dollars in thousands, except per share data)
<S>                                                                <C>          <C>          <C>
Interest income:
     Interest on loans .......................................     $ 8,060      $ 7,591      $ 6,969
     Interest on deposits in other financial institutions ....          99          226           64
     Interest and dividends on investment securities:
         Taxable .............................................       1,024        1,078          743
         Non-taxable .........................................         352          353           35
                                                                   -------      -------      -------
      Total interest income ..................................       9,535        9,248        7,811
                                                                   -------      -------      -------

Interest expense:
     Interest on deposits (note 5) ...........................       3,615        3,614        3,101
     Interest on borrowings ..................................         988          800          581
                                                                   -------      -------      -------
         Total interest expense ..............................       4,603        4,414        3,682
                                                                   -------      -------      -------

Net interest income ..........................................       4,932        4,834        4,129
Provision for loan losses (note 3) ...........................         658           96          120
                                                                   -------      -------      -------
         Net interest income after provision for loan losses .       4,274        4,738        4,009
                                                                   -------      -------      -------
Other income:
     Customer service and other fees .........................         201          175          178
     Mortgage loan servicing fees ............................          87           96          115
     Losses on sales of investment securities ................        (135)         (47)        (100)
     Lower-of-cost or market adjustment on loans held-for-sale           4          (40)          19
     Other ...................................................          68           71          125
                                                                   -------      -------      -------

         Total other income ..................................         225          255          337
                                                                   -------      -------      -------















</TABLE>
                                                    26
<PAGE>
<TABLE>
<CAPTION>
                                     CONSOLIDATED STATEMENTS OF INCOME
                                 Years ended June 30, 1997, 1996 and 1995
                                               (continued)


                                                                     1997         1996         1995
                                                                   -------      -------      -------
                                                            (dollars in thousands, except per share data)
<S>                                                                <C>          <C>          <C>
Other expenses:
     Compensation and fringe benefits (note 7) ...............       3,152        1,353        1,298
     SAIF recapitalization assessment (note 5) ...............         487         --           --
     Data and items processing ...............................         241          239          208
     Deposit insurance premiums ..............................          71          176          172
     Occupancy expense .......................................         113          123          113
     Furniture and equipment expense .........................         115          100          108
     Professional fees .......................................         129          120           90
     Other ...................................................         408          338          276
                                                                   -------      -------      -------
         Total other expenses ................................       4,716        2,449        2,265
                                                                   -------      -------      -------

         Income (loss) before income tax expense .............        (217)       2,544        2,081

Income tax expense (note 9) ..................................         317          849          837
                                                                   -------      -------      -------

  Net income (loss) ..........................................     $  (534)     $ 1,695      $ 1,244
                                                                   =======      =======      =======

Net income (loss) per share (note 1) .........................     $ (0.20)     $  0.45        N/A
                                                                   =======      =======      =======


                       See accompanying notes to consolidated financial statements.
</TABLE>




















                                                    27
<PAGE>
<TABLE>
<CAPTION>
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                          For the years ended June 30, 1997, 1996 and 1995
                                               

                                                                                                                                    
                                                                                   Unearned      Unamortized         Unallocated    
                                                Shares           Common              ESOP         Deferred            Restricted    
                                              Outstanding         Stock             Shares       Compensation           Stock       
                                              -----------         -----             ------       ------------           -----  
                                                                            (dollars in thousands)     
<S>                                            <C>              <C>               <C>               <C>               <C>     
Balance at June 30, 1994 ..............             --          $    --           $    --           $    --           $    --   

 Net income ...........................             --               --                --                --                --   
 Change in unrealized holding gains
  (losses), net of income taxes of $144             --               --                --                --                --   
                                               ---------        ---------         ---------         ---------         ---------

Balance at June 30, 1995 ..............             --               --                --                --                --   

 Net income ...........................             --               --                --                --                --   
 Net proceeds from issuance of no par .        2,645,000           25,398              --                --                --   
  common stock
 Common stock acquired by ESOP ........             --               --              (2,731)             --                --    
 Release of ESOP shares ...............             --               --                 179              --                --   
 Cash dividends ($0.22 per share) .....             --               --                --                --                --   
 Change in unrealized holding gains ...             --               --                --                --                -- 
  (losses), net of income taxes of $387             --               --                --                --                --
                                               ---------        ---------         ---------         ---------         ---------

Balance at June 30, 1996 ..............        2,645,000           25,398            (2,552)             --                --   

 Net loss .............................             --               --                --                --                --   
 Issuance of restricted stock .........          105,800            1,587              --              (1,587)             --   
 Release of ESOP shares ...............             --                 83             1,619              --                --   
 Amortization of unearned compensation              --               --                --                 237              --   
 Forfeiture of restricted stock and
  related dividends ...................             --                107              --                 224              (224)
 Allocation of restricted stock .......             --                (60)             --                (143)              203
 Tax benefit of dividends on
  restricted stock ....................             --                261              --                --                --   

 Cash dividends ($7.42 per share)** ...             --            (18,233)             --                --                --   
 Change in unrealized holding gains           
  (losses), net of income taxes of $318             --               --                --                --                --
                                               ---------        ---------         ---------         ---------         ---------

Balance of June 30, 1997 ..............        2,750,800        $   9,143         $    (933)        $  (1,269)        $     (21)
                                                =========        =========         =========         =========         ========= 

</TABLE>




                                       28
<PAGE>
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      For the years ended June 30, 1997, 1996 and 1995
                                        (continued)


                                                               Unrealized                 
                                                                 holding         Total      
                                                Retained          gains      Stockholders'  
                                                Earnings        (losses)        Equity     
                                               ----------      ---------       ---------
<S>                                            <C>             <C>             <C>
Balance at June 30, 1994 ..............        $  12,380       $    (185)      $  12,195  
                                                                                          
 Net income ...........................            1,244            --             1,244  
 Change in unrealized holding gains                                                       
  (losses), net of income taxes of $144             --               207             207  
                                               ---------       ---------       ---------  
                                                                                          
Balance at June 30, 1995 ..............           13,624              22          13,646  
                                                                                          
 Net income ...........................            1,695            --             1,695       
 Net proceeds from issuance of no par 
  common stock.........................             --              --            25,398 
 Common stock acquired by ESOP ........             --              --            (2,731) 
 Release of ESOP shares ...............             --              --               179  
 Cash dividends ($0.22 per share) .....             (536)           --              (536) 
 Change in unrealized holding gains ...                                                   
  (losses), net of income taxes of $387             --              (601)           (601)  
                                               ---------       ---------       ---------   
                                                                                          
Balance at June 30, 1996 ..............           14,783            (579)         37,050  
                                                                                          
 Net loss .............................             (534)           --              (534) 
 Issuance of restricted stock .........             --              --              -- 
 Release of ESOP shares ...............             --              --             1,702  
 Amortization of unearned compensation              --              --               237  
 Forfeiture of restricted stock and                                                       
  related dividends ...................             --              --               107  
 Allocation of restricted stock .......             --              --              --    
 Tax benefit of dividends on                                                              
  restricted stock ....................             --              --               261  
                                                                                          
 Cash dividends ($7.42 per share)** ...             (669)           --           (18,902) 
 Change in unrealized holding gains  .                                                   
  (losses), net of income taxes of $318             --               495             495  
                                               ---------       ---------       ---------  
                                                                                          
Balance at June 30, 1997 ..............        $  13,580       $     (84)      $  20,416  
                                               =========       =========       =========  


**  includes $7.00 special dividend paid on December 6, 1996.

See accompanying notes to consolidated financial statements.

</TABLE>
                                       29
<PAGE>
<TABLE>
<CAPTION>
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       For the years ended June 30, 1997, 1996, and 1995

                                                                                            1997           1996          1995
                                                                                          --------      --------      --------
                                                                                                  (dollars in thousands)
<S>                                                                                       <C>           <C>           <C>
Operating activities:         
     Net income (loss) ..............................................................     $   (534)     $  1,695      $  1,244
     Adjustments  to  reconcile  net income to net cash
      provided  by  operating
       activities:
         Depreciation ...............................................................           93            90            88
         Net amortization (accretion) ...............................................           98           154           (48)
         Provision for loan losses ..................................................          658            96           120
         Deferred income taxes ......................................................         (163)          (56)          (60)
         Net loss on sale of investment and mortgage-backed securities ..............          135            47           100
         Release of ESOP shares .....................................................        1,702           179          --
         Compensation earned under MRP ..............................................          237          --            --
         Net decrease (increase) in mortgage loans held for sale ....................          519        (1,667)         (232)
         Decrease (increase) in other assets ........................................          585          (291)         (109)
         (Decrease) increase in other liabilities ...................................          (40)          136           236
                                                                                          --------      --------      --------
              Net cash provided by operating activities .............................        3,290           383         1,339
                                                                                          --------      --------      --------

Investing activities:
     Net increase in loans held for investment ......................................      (10,230)       (4,995)       (2,776)
     Principal collected on mortgage-backed securities ..............................          628           753           149
     Purchases of investment securities classified as available-for-sale ............         (504)      (23,968)         (485)
     Purchases of investment securities classified as held-to-maturity ..............         --          (1,815)       (1,416)
     Purchases of mortgage-backed securities classified as available-for-sale .......       (1,658)       (1,482)       (1,990)
     Proceeds of sales of investment securities classified as available-for-sale ....       13,601         2,946           466
     Proceeds from maturities of investment securities ..............................           78            75            75
     Proceeds from investment securities called by issuer ...........................        1,085         4,500          --
     Proceeds of sales of mortgage-backed securities classified as available-for-sale        3,847          --             942
     Purchases of FHLB Stock ........................................................          (57)          (77)         --
     Purchases of premises and equipment ............................................          (34)          (75)          (70)
                                                                                          --------      --------      --------
              Net cash provided (used) by investing activities ......................        6,756       (24,138)       (5,105)
                                                                                          --------      --------      --------

Financing activities:
     Net increase (decrease) in time deposits .......................................        5,776        (4,703)        3,971
     Net increase (decrease) in other deposits ......................................        5,723         1,319        (1,513)
     Proceeds from borrowings .......................................................       14,000        12,750        13,000
     Repayments of borrowings .......................................................      (14,750)       (8,500)      (10,500)
     Proceeds from issuance of no par common stock ..................................         --          25,398          --
     Purchase of common stock for ESOP ..............................................         --          (2,731)         --
     Cash dividends paid to shareholders ............................................      (18,820)         (244)         --
                                                                                          --------      --------      --------
         Net cash (used) provided by financing activities ...........................       (8,071)       23,289         4,958
                                                                                          --------      --------      --------


</TABLE>
                                       30
<PAGE>
<TABLE>
<CAPTION>
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       For the years ended June 30, 1997, 1996, and 1995
                                                           (continued)

                                                                                            1997           1996          1995
                                                                                          --------      --------      --------
                                                                                                  (dollars in thousands)
<S>                                                                                       <C>           <C>           <C>
                  Increase (decrease) in cash and cash equivalents ..................        1,975          (466)        1,192
Cash and cash equivalents at beginning of period ....................................        2,670         3,136         1,944
                                                                                          --------      --------      --------
Cash and cash equivalents at end of period ..........................................     $  4,645      $  2,670      $  3,136
                                                                                          ========      ========      ========

Supplemental  disclosure of cash flow  information:
   Cash paid during the period for:
     Interest .......................................................................     $  4,592      $  4,448      $  3,615
                                                                                          ========      ========      ========
     Income taxes ...................................................................     $    342      $    828      $    775
                                                                                          ========      ========      ========
Supplemental disclosure of noncash transactions:
   Unrealized gains (losses) on available-for-sale securities, net of deferred
     taxes of $318 for 1997, $387 for 1996 and $144 for 1995 ........................     $    495      $   (601)     $    207
                                                                                          ========      ========      ========

   Dividends declared but unpaid ....................................................     $   (267)     $   (292)     $   --
                                                                                          ========      ========      ========
   Transfer of bank premises no longer in use from fixed assets to other
      assets at net book value ......................................................     $     60      $   --        $   --
                                                                                          ========      ========      ========



                                 See accompanying notes to consolidated financial statements.
</TABLE>





















                                       31
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 



(1)      Significant Accounting Policies

(a)      Organization and Operations

In December 1995,  pursuant to a Plan of Conversion  approved by its members and
regulators,  Hillsborough  Savings  Bank,  Inc.,  SSB (the  "Bank")  amended and
restated its charter to effect its conversion  from a North  Carolina  chartered
mutual  savings  bank to a North  Carolina  chartered  stock  savings  bank (the
"Conversion"),  and became a wholly-owned  subsidiary of Piedmont Bancorp,  Inc.
(the "Parent"), a holding company formed in connection with the Conversion.  The
Bank is  primarily  engaged in the business of  obtaining  savings  deposits and
providing loans to the general public.  The principal  activity of the Parent is
ownership of the Bank.

(b)      Basis of Presentation

The consolidated financial statements include the accounts of the Parent and the
Bank,  together  referred  to as "the  Company".  All  significant  intercompany
transactions  and balances are eliminated in  consolidation.  The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities  as of the date of the balance  sheets and the  reported  amounts of
income and  expenses  for the periods  presented.  Actual  results  could differ
significantly  from those  estimates.  Material  estimates that are particularly
susceptible to significant  changes in the near-term relate to the determination
of the allowance for loan losses.

(c)      Investment and Mortgage-Backed Securities

Management   determines  the  appropriate   classification   of  investment  and
mortgage-backed securities at the time of purchase. Securities are classified as
held-to-maturity  when the Company has both the  positive  intent and ability to
hold the  securities  to  maturity.  Held-to-maturity  securities  are stated at
amortized cost.  Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. The Company 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.








                                       32
<PAGE>
(1)      Significant Accounting Policies, Continued

(d)      Loan Sales

At the  time of  origination,  when  specific  loans  or  groups  of  loans  are
identified  for sale,  the  Company  classifies  such loans as held for sale and
values these at the lower of aggregate cost or market value as determined by the
current investor yield  requirements  calculated on an aggregate loan basis. The
Company  recognizes  gains and losses at the time of sale if loans  selected for
sale have an average interest rate,  adjusted for servicing costs, which differs
substantially from the actual yield to the purchaser.  Any resulting discount or
premium is  amortized  using a  level-yield  method over the actual life of such
loans.  Normal  servicing  fees are  recognized as income in the period  earned.
Prepayment  assumptions  are reviewed in view of actual rates of  prepayment  of
loans sold and  amortization  of the excess  servicing on loans sold is adjusted
accordingly.

(e)      Loans Receivable

Loans held for investment are carried at their principal amount outstanding, net
of deferred loan origination fees.

Interest on loans is recorded as borrowers' monthly payments become due. Accrual
of interest  income on loans  (including  impaired  loans) is suspended when, in
management's  judgment,  doubts exist as to the  collectibility of principal and
interest.  Interest  received on  nonaccrual  and  impaired  loans is  generally
applied  against  principal or may be reported as interest  income  depending on
management's judgment as to the collectibility of principal.  Loans are returned
to accrual  status when  management  determines,  based on an  evaluation of the
underlying  collateral together with the borrower's payment record and financial
condition,  that  the  borrower  has the  capability  and  intent  to  meet  the
contractual obligations of the loan agreement.

Loan fees are accounted for in accordance with Statement of Financial Accounting
Standards  No. 91. Loan  origination  fees and certain  direct loan  origination
costs are deferred and the net amount  amortized as an adjustment of the related
loans'  yield over the life of the  related  loans using a  level-yield  method.
Unamortized net loan fees or costs on loans sold are recorded as gain or loss on
sale in the year of disposition.

(f)      Allowance for Loan Losses

The Company provides for loan losses on the allowance method.  Accordingly,  all
loan losses are charged to the allowance and all  recoveries are credited to it.
Additions to the  allowance for loan losses are provided by charges to operating
expense.  The  provision  is  based  upon  management's  evaluation  of the risk
characteristics  of the loan  portfolio  under current  economic  conditions and
considers  such  factors as  financial  condition  of the  borrower,  collateral
values,  growth and composition of the loan portfolio,  the  relationship of the
allowance for loan losses to outstanding loans, and delinquency trends.

 
At June 30, 1997,  substantially all of the Company's loans were  collateralized
by real estate in Orange  County,  North  Carolina  and adjacent  counties.  The
collateral is predominately  owner-occupied residential real estate in which the
borrower  does not rely on  underlying  cash flows from the  property to satisfy


                                       33
<PAGE>
(1)       Significant Accounting Policies, Continued

(f)      Allowance for Loan Losses, Continued

debt service.  The ultimate  collectibility of a substantial portion of the loan
portfolio is susceptible to changes in market conditions in the Company's market
area. While management uses available  information to recognize losses on loans,
future  additions to the allowance may be necessary based on changes in economic
conditions.   Various  regulatory  agencies,   as  an  integral  part  of  their
examination  processes,  periodically  review the  Company's  allowance for loan
losses.  Such  agencies  may require the Company to  recognize  additions to the
allowance based on their judgments  about  information  available to them at the
time of their examinations.

For all specifically  reviewed loans for which it is probable that the Bank will
be  unable  to  collect  all  amounts  due  according  to the  terms of the loan
agreement,  the Bank determines fair value either based on discounted cash flows
using the loans'  initial  interest rate or the fair value of the  collateral if
the loan is collateral  dependent.  Large groups of smaller  balance  homogenous
loans  that are  collectively  evaluated  for  impairment  (such as  residential
mortgage  and  consumer   installment   loans)  are  excluded  from   impairment
evaluation, and their allowance for loan losses is calculated in accordance with
the allowance for loan losses policy described above.


(g)      Investment in Federal Home Loan Bank Stock

 
As a requirement for  membership,  the Bank invests in stock of the Federal Home
Loan Bank of Atlanta (FHLB) in the amount of 1% of its  outstanding  residential
loans or 5% of its outstanding  advances from the FHLB, whichever is greater. At
June 30, 1997,  the Bank owned 9,200 shares of the FHLB's $100 par value capital
stock. No ready market exists for such stock, which is carried at cost.
 

(h)      Premises and Equipment

Premises and  equipment  are stated at cost.  Provisions  for  depreciation  are
computed  principally using the  straight-line  method and charged to operations
over the estimated useful lives of the assets which range from 5 to 40 years for
office  buildings and 3 to 10 years for furniture,  fixtures,  and equipment and
other improvements.

(i)      Income Taxes

The  provision  for income  taxes is based on income and  expense  reported  for
financial statement purposes after adjustment for permanent  differences such as
tax exempt interest  income.  Deferred income taxes are provided when there is a
difference  between the  periods  items are  reported  for  financial  statement
purposes  and when they are  reported  for tax  purposes and are recorded at the
enacted tax rates  expected  to apply to taxable  income in years in which these
temporary  differences  are  expected to be  recovered  or  settled.  Subsequent
changes in tax rates will require adjustment to these assets and liabilities.





                                       34
<PAGE>
(j)      Retirement Plans
 

The Bank has an employee stock ownership plan which covers  substantially all of
its employees. Contributions to the plan are determined annually by the Board of
Directors based on employee compensation. Prior to establishment of the employee
stock ownership plan, the Company had a self-administered,  defined contribution
retirement plan that covered all eligible employees. This plan was terminated as
of July 31, 1995 in conjunction with the Conversion.  The Bank also has a 401(k)
plan  that  covers  all  eligible   employees.   The  Bank   matches   voluntary
contributions by participating employees.

 
The Company records compensation expense for shares released to employees,  as a
result of contributions by the Company or dividends paid on unreleased shares in
the employee stock ownership plan, equal to the fair value of the shares.
  

(k)      Cash and Cash Equivalents

For  purposes  of  reporting  cash  flows,   the  Company   considers  cash  and
interest-bearing  deposits in other  institutions  with  original  maturities of
three months or less to be cash equivalents.

 
(l)      Earnings (Loss) Per Share

Loss per common  share of $0.20 for the year ended June 30, 1997 was  calculated
by  dividing  net loss of  $534,000  for the  year  ended  June 30,  1997 by the
weighted-average  number of common and common equivalent  shares  outstanding of
2,665,277.  Earnings  per common share of $0.45 for the year ended June 30, 1996
was  calculated  by dividing  post-conversion  net income of  $1,102,000  by the
weighted-average  number of common and common equivalent  shares  outstanding of
2,446,832.   For  purposes  of  the   weighted-average   number  of  common  and
common-equivalent shares outstanding,  common stock equivalents consist of stock
options.  The number of shares  purchased by the employee  stock  ownership plan
which  have not been  allocated  or  committed  to be  released  to  participant
accounts are not assumed to be outstanding.
 

(m)      Reclassifications

Certain  reclassifications  have been made for 1996 and 1995 to conform with the
1997 presentation.  The  reclassifications  had no effect on previously reported
net income or stockholders' equity.








                                       35
<PAGE>
(2)      Investment Securities


 
The  following is a summary of the  investment  securities  portfolios  by major
classification:
<TABLE>
<CAPTION>
                                                                            June 30, 1997
                                                       ----------------------------------------------------
                                                                       (dollars in thousands)
                                                                                                 Estimated
                                                       Amortized    Unrealized     Unrealized      market
                                                          cost         gains          losses       value
                                                       ---------    ----------      ---------    ---------
<S>                                                     <C>           <C>           <C>           <C>
Securities available for sale:
     US government and agency securities ........       $ 5,754       $  --         $   101       $ 5,653
     Mortgage-backed securities (1) .............         4,275            10            88         4,197
     State and local governments ................           975            41          --           1,016
                                                        -------       -------       -------       -------
       Total securities available-for-sale ......        11,004            51           189        10,866
                                                        =======       =======       =======       =======
Securities held-to-maturity:
     State and local governments ................       $ 3,341            58             4       $ 3,395
                                                        =======       =======       =======       =======
<CAPTION>
                                                                            June 30, 1996
                                                       ----------------------------------------------------
                                                                       (dollars in thousands)
                                                                                                 Estimated
                                                       Amortized    Unrealized     Unrealized      market
                                                          cost         gains          losses       value
                                                       ---------    ----------      ---------    ---------
<S>                                                     <C>           <C>           <C>           <C>
Securities available for sale:
     US government and agency securities ........       $10,695       $    14       $   400       $10,309
     Mortgage-backed securities (1) .............         7,086            37           177         6,946
     State and local governments ................        10,268          --             425         9,843
                                                        -------       -------       -------       -------

       Total securities available-for-sale.......        28,049            51         1,002        27,098
                                                        =======       =======       =======       =======
Securities held-to-maturity:
     State and local governments ................       $ 3,519            17            59       $ 3,477
                                                        =======       =======       =======       =======
</TABLE>
(1)  At June 30, 1997 and 1996,  the Company  owned  mortgage-backed  securities
     issued by the Federal National Mortgage  Association (FNMA) and the Federal
     Home Loan Mortgage  Corporation (FHLMC) with an aggregate amortized cost of
     $4,275,000  and $4,595,000  respectively,  and a market value of $4,197,000
     and $4,527,000. In addition, in 1996 the Bank owned collateralized mortgage
     obligations issued by FNMA and FHLMC secured by mortgage-backed  securities
     guaranteed by FNMA and FHLMC, respectively. The securities had an amortized
     cost of $2,491,000 and a market value of $2,419,000 at June 30, 1996.


                                       36
<PAGE>
(2)      Investment Securities, Continued

The   aggregate   amortized   cost   and   approximate   market   value  of  the
available-for-sale and held-to-maturity  securities portfolios at June 30, 1997,
by remaining contractual maturity are as follows:
<TABLE>
<CAPTION>

                                                 Securities available-for-sale     Securities held-to-maturity
                                                 -----------------------------     ---------------------------
                                                                     (dollars in thousands)
                                                                   Estimated                       Estimated
                                                    Amortized        market        Amortized         market
                                                      cost           value            cost           value
                                                      ----           -----            ----           -----
<S>                                                 <C>            <C>               <C>            <C>
US government and agency securities:
       Due in 1 year or less ...............        $  --          $  --             $  --          $  --
       Due in 1 year through 5 years .......            504            504              --             --
       Due after 5 through 10 years ........          5,250          5,149              --             --
       Due after 10 years ..................           --             --                --             --
Obligations of states and local governments:
       Due in 1 year or less ...............           --             --                327            328
       Due 1 year through 5 years ..........           --             --                798            795
       Due after 5 through 10 years ........           --             --              1,524          1,567
       Due after 10 years ..................            975          1,016              692            705
Mortgage-backed securities .................          4,275          4,197             --             --   
                                                    -------        -------          -------        -------
                        Total securities ...        $11,004        $10,866          $ 3,341        $ 3,395
                                                    =======        =======          =======        =======

</TABLE>

At June 30, 1997 and 1996,  investment securities with book values of $4,825,000
and $1,925,000, respectively, were pledged as collateral for public deposits.



Summarized below is the sales activity in investment securities:
<TABLE>
<CAPTION>

                                                                        Year ended June 30,
                                                            ------------------------------------------
                                                               1997             1996             1995
                                                                        (dollars in thousands)
<S>                                                         <C>              <C>              <C>
Proceeds from sales of available-for-sale securities        $ 17,448         $  2,946         $  1,408
Realized gains .....................................             (55)              (7)            --
Realized  losses ...................................             190               54              100
                                                            --------         --------         --------
Cost of available-for-sale securities sold .........        $ 17,583         $  2,993         $  1,508
                                                            ========         ========         ========

</TABLE>



                                       37
<PAGE>
(3)      Loans Receivable


                                          
Loans receivable consist of the following: 

<TABLE>
<CAPTION>
                                                                                        June 30,
                                                                                1997             1996
                                                                             ---------         ---------
                                                                                (dollars in thousands)
<S>                                                                          <C>               <C>
Loans secured by first mortgages on real estate:
     Mortgage loans held for sale ...................................        $   2,986         $   3,505
     Mortgage loans held for investment, primarily one-to-four family           74,635            63,590
     Construction loans .............................................            9,638             5,026
     Commercial and agricultural loans ..............................            6,379             8,600
     Participation loans purchased ..................................              270               218
                                                                             ---------         ---------
                                                                                93,908            80,939
Home equity lines of credit .........................................           10,423            10,816
Other second mortgage loans .........................................              574               800
Other installment loans .............................................            1,061             1,719
                                                                             ---------         ---------
                                                                               105,966            94,274
Undisbursed proceeds on loans in process ............................           (4,649)           (2,198)
Deferred loan fees ..................................................             (348)             (281)
Allowance for loan losses ...........................................             (796)             (608)
                                                                             ---------         ---------
                                                                             $ 100,173         $  91,187
                                                                             =========         =========
</TABLE>

An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>

                                                   1997          1996          1995
                                                   ----          ----          ----
                                                         (dollars in thousands)
<S>                                               <C>           <C>           <C>
Balance at beginning of period ...........        $ 608         $ 515         $ 404
Provision for loan losses ................          658            96           120
Loans charged off ........................         (519)           (4)          (14)
Recoveries ...............................           49             1             5
                                                  -----         -----         -----
                  Balance at end of period        $ 796         $ 608         $ 515
                                                  =====         =====         =====
</TABLE>

At June 30, 1997 and 1996, the Company had loans totaling approximately $803,000
and $758,000,  respectively,  which were in  nonaccrual  status and $244,000 and
$301,000,  respectively, which were contractually delinquent for 90 days or more
and still accruing.



                                       38
<PAGE>
(3)      Loans Receivable, Continued

Additional interest income that would have been recorded on nonaccrual loans for
the years ended June 30, 1997,  1996 and 1995 had they  performed in  accordance
with  their  original  terms   throughout  each  of  the  periods   amounted  to
approximately $61,000, $57,000 and $2,000, respectively.

At June 30,  1997,  the Company had mortgage  loan  commitments  outstanding  of
$2,622,000,  of which  $724,000 are for  floating  rate loans.  Preapproved  but
unused lines of credit totaled $9,046,000, and standby letters of credit totaled
$589,000  at June  30,  1997.  The  Company's  exposure  to  credit  losses  for
commitments  to extend credit and standby  letters of credit is the  contractual
amount of those financial instruments. The Company uses the same credit policies
for making  commitments  and  issuing  standby  letters of credit as it does for
on-balance  sheet financial  instruments.  Each customer's  creditworthiness  is
evaluated on an individual  basis. The amount and type of collateral,  if deemed
necessary by  management,  is based upon this  evaluation  of  creditworthiness.
Collateral obtained varies but may include marketable securities, deposits, real
estate,  investment assets, and property and equipment. In management's opinion,
these commitments, and undisbursed proceeds on loans in process reflected above,
represent  no more than  normal  lending  risk to the Company and will be funded
from normal sources of liquidity.

At June 30, 1997 and 1996, the recorded  investment in loans that are considered
to be  impaired  under SFAS No. 114 was  $580,000  and  $826,000,  respectively.
Impaired loans totaling  $458,000 at June 30, 1997 and $457,000 at June 30, 1996
were in  non-accrual  status.  There was no related  allowance for credit losses
associated  with these  loans as  determined  in  accordance  with SFAS No. 114;
however,  approximately  $87,000 and $124,000 of the general  allowance for loan
losses is allocated to impaired  loans at June 30, 1997 and 1996,  respectively.
The average recorded investment in impaired loans during the year ended June 30,
1997 and 1996 was approximately  $779,000 and $864,000.  The Company  recognized
interest  income on the  impaired  loans of  approximately  $25,000  and $65,000
during the years ended June 30, 1997 and 1996, respectively.

The Company serviced loans for others of approximately $10,913,000, $12,719,000,
and $15,413,000 at June 30, 1997, 1996 and 1995, respectively. The June 30, 1997
balance of loans sold with recourse was approximately $142,000.

Certain of the Company's  mortgage  loans are pledged as collateral for advances
from the Federal Home Loan Bank (see note 6).

The Bank makes loans to executive  officers and  directors of the Company and to
their  associates.  It is  management's  opinion  that  such  loans  are made on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for comparable transactions with unrelated persons and do
not  involve  more  than  the  normal  risk of  collectibility.  Following  is a
reconciliation of loans outstanding to executive officers,  directors, and their
associates for the year ending June 30, 1997:

         Balance at June 30, 1996                              $  573,000
         New loans                                                 89,000
         Repayments                                              (227,000)
                                                               ----------
         Balance at June 30, 1997                              $  435,000
                                                               ==========


                                       39
<PAGE>
(4)      Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                    June 30, 1997                        June 30, 1996
                                          ---------------------------------     ---------------------------------
                                                     Accumulated   Net book               Accumulated    Net book
                                            Cost     depreciation    value        Cost    depreciation     value
                                            ----     ------------    -----        ----    ------------     -----
                                                                   (dollars in thousands)
<S>                                       <C>           <C>       <C>           <C>           <C>       <C>
Land and land improvements                $   407       $  57     $   350       $   443       $  53     $   390
Office buildings and improvements             891         222         669         1,013         295         718
Furniture, fixtures, and equipment            752         566         186           735         519         216
                                          -------       -----     -------       -------       -----     -------
                                          $ 2,050       $ 845     $ 1,205       $ 2,191       $ 867     $ 1,324
                                          =======       =====     =======       =======       =====     =======
</TABLE>
(5)      Deposits

Contractual maturities of time deposits are as follows:
<TABLE>
<CAPTION>

                                                      Total
        Year Ending June 30                         Maturities           
        -------------------                         ----------           
                                                (dollars in thousands)
<S>                                                 <C>
               1998                                 $  40,663            
               1999                                     8,497            
               2000                                     4,458            
               2001                                       574            
               2002 and thereafter                         --            
                                                    ---------
                  Total time deposits               $  54,192            
                                                    =========
</TABLE>
 

Time deposits of $100,000 or more totaled  $9,636,000 and $6,072,000 at June 30,
1997 and 1996, respectively.

Interest expense on deposits includes $406,000,  $312,000,  and $326,000 for the
years ended June 30, 1997,  1996,  and 1995,  respectively,  on time deposits of
$100,000 or more.

 
On September 30, 1996,  President  Clinton signed into law the Deposit Insurance
Funds Act allowing a special assessment to be levied by the FDIC to recapitalize
the SAIF.  The  special  assessment  was based on the level of SAIF  deposits  a
financial  institution  had as of March 31, 1995 subject to a 20%  reduction for
certain qualifying deposits.  The Bank's special assessment totaled $487,000. On
December 11, 1996, the FDIC approved a final rule retroactive to October 1, 1996
which lowered rates on assessments paid to the SAIF.

                                       40
<PAGE>
(6)      Advances from the Federal Home Loan Bank
 

Advances  from the Federal  Home Loan Bank of  Atlanta,  with  weighted  average
interest rates, are as follows:
<TABLE>
<CAPTION>

                                                                June 30,
                                                    ----------------------------
                                                       1997                1996
                                                        ----               ----
                                                        (dollars in thousands)
<S>                                                 <C>                 <C>
5.78% due on or before June 30, 1997                $    -              $ 15,250
5.96% due on or before June 30, 1998                  16,500                 -
6.16% due on or before June 30, 1998                     -                 2,000
                                                    --------              ------
                                                    $ 16,500            $ 17,250
                                                    ========            ========
</TABLE>
At June 30, 1997, the Bank had additional  credit  availability from the Federal
Home Loan Bank of $8,500,000.

All  advances  are secured by stock in the Federal  Home Loan Bank and a blanket
floating lien on the Bank's one-to-four family residential mortgage loans.

(7)      Employee and Director Benefit Plans

Defined Contribution Retirement Plan

The Bank had a  self-administered,  defined  contribution  retirement  plan that
covered all eligible  employees.  The Bank's policy has been to fund  retirement
costs accrued.  Under the plan, the Bank contributed an amount equivalent to 10%
of the eligible employees' annual salaries.  In conjunction with the Conversion,
the defined  contribution  retirement  plan was  terminated as of July 31, 1995.
Funds  were  distributed  in  October  1995.  There was no gain or loss upon the
termination of the defined contribution  retirement plan. Retirement expense for
this plan totaled approximately $9,000 in 1996 and $79,000 in 1995.

401(k) Plan

The Bank  sponsors a 401(k) plan that covers all  eligible  employees.  The Bank
matches 50% of employee  contributions,  with the Bank's contribution limited to
3% of each employee's  salary.  Matching  contributions are funded when accrued.
Matching expense totalled  approximately  $18,000 in 1997,  $16,000 in 1996, and
$17,000 in 1995.

Employee Stock Ownership Plan ("ESOP")

The Bank has an ESOP whereby an aggregate  number of shares amounting to 211,600
were purchased for future allocation to employees. Contributions to the ESOP are
made  by the  Bank  on a  discretionary  basis  and  are  allocated  among  ESOP
participants  on the basis of relative  compensation  in the year of allocation.
Benefits  under the ESOP vest in full upon five  years of  service  with  credit
given for years of service prior to the conversion.


                                       41
<PAGE>
(7)  Employee  and  Director  Benefit Plans, Continued

The ESOP was funded by a $40,000 cash  contribution made by the Bank in December
1995 and a loan from the Parent in the amount of $2,690,677. The loan is secured
by  shares of stock  purchased  by the ESOP and is not  guaranteed  by the Bank.
Principal  and  interest  payments  on  this  loan  are  funded  primarily  from
discretionary  contributions by the Bank. Dividends, if any, paid on shares held
by the ESOP may also be used to reduce the loan. Dividends on unallocated shares
are used by the ESOP to repay the debt to the  Parent  and are not  reported  as
dividends  in the  consolidated  financial  statements.  Dividends  on allocated
shares  are  credited  to the  accounts  of the  participants  and  reported  as
dividends in the consolidated financial statements.
 
On December  31,  1996,  the Bank made a  $1,710,000  contribution  to the ESOP,
representing the normal  principal  payment due for the year and the application
of dividends on unallocated  shares to the principal  balance of the loan.  This
contribution resulted in the release of 125,819 shares to individual participant
accounts.  At June 30,  1997, a total of 128,919  shares have been  released and
allocated to participants and 82,681 shares remain unallocated,  of which 18,725
shares are committed to be released on December 31, 1997.

Total compensation  expense associated with the ESOP for the year ended June 30,
1997 was $1,702,000. At June 30, 1997, there were 82,681 unallocated ESOP shares
with a total fair value of approximately $847,000

In fiscal year 1996, the $40,000 cash  contribution made as of December 31, 1995
was used to release  3,100  shares to ESOP  participants.  During the six months
ended June 30, 1996,  21,566 shares were considered  committed to be released to
ESOP participants,  and compensation  expense of $139,000  associated with those
shares was recorded.

Management Recognition Plan ("MRP")
 
The Bank's MRP was  approved by  stockholders  of the Parent and by the Parent's
and the Bank's Boards of Directors  during fiscal year 1997. The MRP serves as a
means  of  providing  existing  directors  and  employees  of the  Bank  with an
ownership interest in the Company.  Shares of the Company's common stock awarded
under the MRP vest equally over a five year period. Compensation expense related
to those shares is recognized on a straight-line  basis  corresponding  with the
vesting period. Prior to vesting,  each participant granted shares under the MRP
may direct the voting of the shares  allocated  to the  participant  and will be
entitled to receive any dividends or other distributions paid on such shares. On
August 29, 1996,  105,800 shares were awarded under the MRP.  During fiscal year
1997,  14,914 shares were  forfeited  under the MRP.  13,500 of those  forfeited
shares were  subsequently  reallocated to new participants  under the MRP. Total
compensation  expense  associated  with the MRP for the year ended June 30, 1997
was $237,000.
 

Stock Option Plan
 
The  Company  adopted a Stock  Option  Plan which has also been  approved by the
stockholders  of the  Parent  and by the  Parent's  and  the  Bank's  Boards  of
Directors.  The Stock Option Plan makes  available  options to purchase  264,500
shares,  or  10%  of the  shares  issued  in the  conversion  to  employees  and



                                       42
<PAGE>
(7)  Employee  and  Director  Benefit Plans, Continued

directors.  Options granted under the Stock Option Plan have a vesting  schedule
which  provides that 20% of the options  granted vest in the first year, and 20%
will  vest  on each  subsequent  anniversary  date,  so that  options  would  be
completely vested within five years from the date of grant.  Options become 100%
vested upon death or disability,  if earlier.  Unexercised options expire within
ten years from the date of grant.

The Company has elected to follow APB Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees"  and related  interpretations  in accounting  for its
stock  options as permitted  under SFAS No. 123 ("SFAS  123"),  "Accounting  for
Stock-Based  Compensation."  In accordance with APB 25, no compensation  cost is
recognized  by the Company when stock  options are granted  because the exercise
price of the Company's  stock options  equals the market price of the underlying
common  stock on the date of grant.  As  required by SFAS 123,  disclosures  are
presented below for the effect on the net loss and net loss per share that would
result from the use of the fair value based method to measure  compensation cost
related to stock option grants in 1997.  The effects of applying the  provisions
of SFAS 123 in 1997 are not necessarily indicative of future effects.
                           
                  Net loss                                     
                     As reported                   $ (534,000)      
                     Pro forma                       (569,000) 
                                                                          
                  Net loss per share              
                     As reported                        (0.20)  
                     Pro forma                          (0.21)

The weighted-average fair value per share of options granted in 1997 amounted to
$2.74.  Fair values were estimated on the date of grant using the  Black-Scholes
option-pricing model with the following weighted average assumptions:

               Risk-free interest rate           6.75%
               Dividend yield                    3.90
               Volatility                       30.00
               Expected life                  7 years
                                                     
A summary of the Company's stock option activity and related information for the
year ended June 30, 1997 follows:
<TABLE>
<CAPTION>
                                 Outstanding                 Exercisable
                              --------------------       -----------------------
                                          Weighted                     Weighted
                                           Average                       Average
                              Option      Exercise       Option        Exercise
                              Shares        Price         Shares          Price
                              ------        -----         ------          -----
<S>                           <C>         <C>            <C>           <C>
  At June 30, 1996              --        $   --            --         $   --
  Granted                     262,354        9.52                     
  Exercised                     --            --                   
  Forfeited                     --            --                    
  At June 30, 1997                                   
                              262,354     $  9.52           --         $   --               
                              =======     =======        =======       =======                      
</TABLE>

                                       43
<PAGE>
(7)      Employee  and  Director  Benefit Plans, Continued

Directors' Deferred Compensation Plan

The Bank has in place two deferred  compensation plans for its directors.  Under
the first plan  directors are to be paid  specified  amounts during the ten-year
period  following  the latter of the date that the director  becomes 65 years of
age, or five years from adoption of the plan.  During 1995, the Bank established
another deferred  compensation plan for certain of its directors under which the
directors would be paid specified  amounts during the ten-year period  following
the latter of the date that the director meets a specified age  requirement,  or
five years from  adoption of the plan.  The Bank has  purchased  life  insurance
policies  with the Bank named as  beneficiary  to fund the  benefits  under both
plans. Total expense related to these plans was approximately  $73,000 for 1997,
$89,000 for 1996, and $162,000 for 1995.

Employment Agreements
 
The Bank has entered into employment  agreements with four executive officers in
order to ensure a stable and competent  management base. The agreements  provide
for a three-year term, but upon each anniversary,  the agreements  automatically
extend so that the remaining  term shall always be three years.  The  agreements
provide  that the  nature  of the  covered  employee's  compensation,  duties or
benefits  cannot be  diminished  following  a change in control of the  Company.
These employement agreements are considered contingent liabilities which are not
reflected in the consolidated financial statements.

Severance Plan
 
In connection  with the  Conversion,  the Bank adopted a Severance  Plan for the
benefit of its  employees.  The Plan  provides for severance pay benefits in the
event of a change in control which results in the  termination of such employees
or diminished compensation,  duties, or benefits within two years of a change in
control.  The employees  covered would be entitled to a severance benefit of the
greater of (a) the amount equal to two weeks' salary at the existing salary rate
multiplied  by the  employee's  number of  complete  years of service or (b) the
amount  of one  month's  salary  at the  employee's  salary  rate at the time of
termination,  subject  to a maximum  payment  equal to two times the  employee's
annual salary. This severance plan is considered a contingent liability which is
not reflected in the consolidated financial statements.

(8)      Stockholders' Equity

Common Stock

The Company is authorized to issue 20,000,000 shares of common stock. The common
stock has no par value.  As of June 30, 1997 and 1996,  there were 2,750,800 and
2,645,000  shares of common  stock  issued and  outstanding,  respectively.  The
increase is attributable to an additional  105,800 shares of common stock issued
for the  MRP on  August  29,  1996 as  discussed  in Note 7 to the  consolidated
financial statements.

Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock. No
shares of preferred stock have been issued or were  outstanding at June 30, 1997
or 1996.  Such  preferred  stock may be issued in one or more  series  with such


                                       44
<PAGE>
(8)      Stockholders' Equity, Continued

rights,  preferences,  and  designations as the Board of Directors of the Parent
may from time to time determine  subject to applicable law and  regulations.  If
and when such  shares  are  issued,  holders  of such  shares  may have  certain
preferences,  powers,  and rights (including voting rights) senior to the rights
of the holders of the common stock of the Company. The Board of Directors of the
Parent can (without stockholder  approval) issue preferred stock with voting and
conversion rights which could,  among other things,  adversely affect the voting
power of the holders of the common stock of the Company and assist management in
impeding an  unfriendly  takeover or attempted  change in control of the Company
that some  stockholders  may consider to be in their best  interest but to which
management  is  opposed.  The Company  has no current  plans to issue  preferred
stock.

Capital Adequacy

The Parent is regulated by the Board of Governors of the Federal  Reserve System
("FRB")  and  is  subject  to  securities   registration  and  public  reporting
regulations of the Securities and Exchange Commission.  The Bank is regulated by
the FDIC and the Administrator,  Savings Institutions  Division,  North Carolina
Department of Commerce (the "Administrator").

The  Bank  is  subject  to  the  capital   requirements  of  the  FDIC  and  the
Administrator.  The FDIC requires the Bank to maintain  minimum ratios of Tier 1
capital to total risk-weighted  assets and total capital to risk-weighted assets
of 4% and 8%,  respectively.  Tier 1  capital  consists  of total  shareholders'
equity calculated in accordance with generally  accepted  accounting  principles
less  intangible  assets,  and total capital is comprised of Tier 1 capital plus
certain  adjustments,  the  only  one of  which  applicable  to the  Bank is the
allowance  for possible loan losses.  Risk-weighted  assets refer to the on- and
off-balance  sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement,  which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly  average total assets of 3% and a ratio of 5% to
be "well-capitalized".  The Administrator requires a net worth equal to at least
5% of total assets.

As summarized  below, at June 30, 1997 and 1996, the Bank was in compliance with
all of the aforementioned capital requirements.

As of June 30, 1997, the FDIC categorized the Bank as  "well-capitalized"  under
the  regulatory  framework for prompt  corrective  action.  To be categorized as
well-capitalized,  the Bank must meet minimum ratios for total  risk-based,  and
Tier I leverage (the ratio of Tier I capital to average  assets) as set forth in
the following  table.  There are no events or conditions  since the notification
that management believes have changed the Bank's category.











                                       45
<PAGE>
(8)      Stockholders' Equity, Continued
<TABLE>
<CAPTION>
                                                                                                               Minimum Ratios
                                                                                                       -----------------------------
                                                                                                         For         To Be Well
                                                      Capital Amount                 Ratio             Capital     Capitalized Under
                                                --------------------           -------------------     Adequacy    Prompt Corrective
                                                  1997          1996           1997         1996       Purposes   Action Provisions
                                                  ----          ----           ----         ----       --------   -----------------
                                                                             (dollars in thousands)
<S>                                             <C>           <C>              <C>          <C>          <C>          <C>
As of June 30:
 Tier I Capital (to risk-weighted assets):      $18,942       $23,870          27.66%       35.90%        4.00%       6.00%

 Total Capital - Tier II capital (to risk-
    weighted assets): ....................       19,738        24,478          28.82        36.81         8.00       10.00

 Leverage - Tier I capital (to average
    assets): .............................       18,942        23,870          15.67        19.49         4.00        5.00

</TABLE>

Liquidation Account

At the time of  Conversion,  the Bank  established a  liquidation  account in an
amount equal to its net worth at June 30, 1995. The liquidation  account will be
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  will each eligible  deposit  account holder be
entitled to receive a liquidation  distribtuion from the liquidation  account in
the amount of the then current adjusted  subaccount balance for deposit accounts
then held before any liquidation distribution may be made to stockholders of the
Parent's common stock. Dividends cannot be paid from this liquidation account.

Dividends

Subject to  applicable  law,  the Boards of Directors of the Bank and the Parent
may each  provide  for the payment of  dividends.  Future  declarations  of cash
dividends,  if any, by the Parent may depend upon dividend  payments by the Bank
to the Parent.  Subject to  regulations of the  Administrator,  the Bank may not
declare or pay a cash dividend on or  repurchase  any of its common stock if its
stockholders'  equity would thereby be reduced below either the aggregate amount
then  required for the  liquidation  account or the minimum  regulatory  capital
requirements imposed by federal and state regulations. In addition, for a period
of five years after the  Conversion,  the Bank will be required,  under existing
North   Carolina   regulations,   to  obtain  prior  written   approval  of  the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of  one-half of the greater of (i) its net income for the
most recent fiscal year,  or (ii) the average of its net income after  dividends
for the  most  recent  fiscal  year and not  more  than  two of the  immediately
preceding fiscal years, if applicable. As a result of this limitation,  the Bank
cannot pay a dividend  without the approval of the  Administrator.  The Bank has
obtained the Administrator's  approval for each dividend paid by the Bank to the
Parent.


                                       46
<PAGE>
(9)      Income Taxes

The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>

                                                   Year ended June 30,
                                          -------------------------------------
                                                  (dollars in thousands)
                                           1997            1996            1995
                                          -----           -----           -----
<S>                                       <C>             <C>             <C>
Currently payable:
       Federal .................          $ 419           $ 782           $ 760
       State ...................             61             123             137
                                          -----           -----           -----
                                            480             905             897
                                          -----           -----           -----
Deferred:
       Federal .................           (136)            (45)            (48)
       State ...................            (27)            (11)            (12)
                                          -----           -----           -----
                                           (163)            (56)            (60)
                                          -----           -----           -----
                                          $ 317           $ 849           $ 837
                                          =====           =====           =====

</TABLE>

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are shown below:

<TABLE>
<CAPTION>
                                                                        June 30
                                                                  ----------------
                                                                   1997       1996
                                                                  -----      -----
                                                               (dollars in thousands)
<S>                                                               <C>        <C>
Allowance for loan losses (net) .............................     $ 166      $ 108
Unrealized holding losses on securities available-for-sale ..        54        372
Deferred compensation accruals ..............................       165        152
Management recognition plan .................................        92       --
Capital loss carryforward ...................................        28       --
Excess servicing ............................................        23         23
Other temporary differences creating deferred tax assets ....        42       --
                                                                  -----      -----
         Gross deferred tax assets ..........................       570        655
Valuation allowance .........................................      --         --
                                                                  -----      -----
         Net deferred tax assets ............................       570        655
                                                                  -----      -----
</TABLE>




                                       47
<PAGE>
(9)      Income Taxes, Continued
<TABLE>
<CAPTION>
                                                                        June 30
                                                                  ----------------
                                                                   1997       1996
                                                                  -----      -----
                                                               (dollars in thousands)
<S>                                                               <C>        <C>
Accelerated depreciation ....................................       (47)       (46)
FHLB stock dividends ........................................      (106)      (106)
Deferred loan origination fees, net of deferred costs .......       (46)        (6)
Other temporary differences creating deferred tax liabilities        (8)       (23)
                                                                  -----      -----
         Gross deferred tax liabilities .....................      (207)      (181)
                                                                  -----      -----

         Net deferred tax asset .............................     $ 363      $ 474
                                                                  =====      =====
</TABLE>
 
The Company has no  valuation  allowance at June 30, 1997 or 1996 because it has
sufficient  taxable income in the carryback period to support the  realizability
of the net deferred tax asset.
 

The  reconciliation of income taxes at statutory tax rates to income tax expense
reported in the statements of income follows:
<TABLE>
<CAPTION>
                                                                                June 30,
                                                                ----------------------------------------
                                                                 1997             1996              1995
                                                                 ----             ----              ----
                                                                        (dollars in thousands)
<S>                                                             <C>              <C>               <C>
 
Income taxes at the statutory federal tax rate                  $ (74)           $ 865             $ 707
State income taxes less federal benefit                            23               74                83
Nondeductible ESOP compensation                                   518                -                 -
Tax exempt interest                                              (104)            (107)                9
Other                                                             (46)              17                38
                                                                 -----            ----              ----
              Total tax expense                                 $ 317            $ 849             $ 837
                                                                  ===              ===               ===

</TABLE>
 
Retained earnings at June 30, 1997 includes  approximately  $2,777,000 for which
no  provision  for  federal  income tax has been made.  This  amount  represents
allocations of income to bad debt deductions for tax purposes only. Reduction of
such amount for purposes  other than tax bad debt losses  could  create  taxable
income in certain  remote  instances,  which will be subject to the then current
corporate income tax rate. 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.


                                       48
<PAGE>
(10)     Quarterly Financial Data (Unaudited)

Summarized  unaudited  quarterly financial data for the year ended June 30, 1997
is as follows:
<TABLE>
<CAPTION>

                                                          First         Second          Third          Fourth
                                                         Quarter        Quarter        Quarter         Quarter
                                                        ---------      ---------      ---------      ---------
                                                            (dollars in thousands, except per share amounts)
<S>                                                     <C>            <C>            <C>            <C>
Operating Summary:
Interest income ...................................     $   2,463      $   2,430      $   2,298      $   2,344
Interest expense ..................................         1,111          1,148          1,158          1,186
                                                        ---------      ---------      ---------      ---------
Net interest income ...............................         1,352          1,282          1,140          1,158
Provision for loan losses .........................            21            597             20             20
                                                        ---------      ---------      ---------      ---------
Net interest income after provision for loan losses         1,331            685          1,120          1,138
Other income ......................................           102            (19)            70             72
Other expenses ....................................         1,214          2,261            617            624
                                                        ---------      ---------      ---------      ---------
Income (loss) before income tax expense ...........           219         (1,595)           573            586
Income taxes ......................................            36           (164)           201            244
                                                        ---------      ---------      ---------      ---------
Net income (loss) .................................     $     183      $  (1,431)     $     372      $     342
                                                        =========      =========      =========      =========
Per Share Data:
Earnings (Loss)....................................          0.07          (0.54)          0.14           0.13
Cash dividends declared ...........................          0.12           7.10           0.10           0.10
Dividend payout ...................................           171%           n/a             71%            77%
Book value per share ..............................         13.54           7.14           7.31           7.42

Selected Average Balances:
Assets ............................................     $ 129,823      $ 128,579      $ 118,974      $ 119,454
Investment securities .............................        30,897         27,202         16,116         15,335
Loans .............................................        93,110         94,422         96,657         98,087
Interest-bearing deposits .........................        72,231         73,953         79,217         80,171
Advances ..........................................        16,889         16,731         16,713         15,752
Stockholders' equity ..............................        37,462         31,644         19,928         20,358
</TABLE>
















                                       49
<PAGE>
(10)     Quarterly Financial Data (Unaudited), Continued
 
Summarized  unaudited  quarterly financial data for the year ended June 30, 1996
is as follows:
<TABLE>
<CAPTION>

                                                          First       Second        Third        Fourth
                                                         Quarter      Quarter      Quarter       Quarter
                                                        --------     --------     --------      --------
                                                        (dollars in thousands, except per share amounts)
<S>                                                     <C>          <C>          <C>           <C>
Operating Summary:
Interest income ...................................     $  2,137     $  2,378     $  2,363      $  2,370
Interest expense ..................................        1,124        1,191        1,033         1,066
                                                        --------     --------     --------      --------
Net interest income ...............................        1,013        1,187        1,330         1,304
Provision for loan losses .........................           30           24           21            21
                                                        --------     --------     --------      --------
Net interest income after provision for loan losses          983        1,163        1,309         1,283
Other income ......................................           84           82           79            10
Other expenses ....................................          573          622          642           612
                                                        --------     --------     --------      --------
Income before income tax expense ..................          494          623          746           681
Income taxes ......................................          187          219          243           200
                                                        --------     --------     --------      --------
Net income ........................................     $    307     $    404     $    503      $    481
                                                        ========     ========     ========      ========
Per Share Data:
Earnings ..........................................          n/a         0.05         0.20          0.20
Cash dividends declared ...........................          n/a          n/a         0.10          0.12
Dividend payout ...................................          n/a          n/a           50%           60%
Book value per share ..............................          n/a        14.05        14.05         14.01

Selected Average Balances:
Assets ............................................     $104,824     $121,715     $123,372      $127,095
Investment securities .............................       13,100       18,307       28,390        31,191
Loans .............................................       86,107       87,648       87,818        90,096
Interest-bearing deposits .........................       74,833       84,623       70,387        71,617
Advances ..........................................       12,893       13,082       11,912        15,105
Stockholders' equity ..............................       13,860       21,846       37,351        37,173

</TABLE>















                                       50
<PAGE>
(11)    Parent Company Financial Data

Condensed financial  information for Piedmont Bancorp,  Inc. (Parent Company) is
as follows:
<TABLE>
<CAPTION>


                                                                                June 30,
                                                                            1997        1996
                                                                          -------     -------
                                                                        (dollars in thousands)
<S>                                                                       <C>         <C>
Condensed Balance Sheet
   Assets:
     Cash on deposit with bank subsidiary ...........................     $   486     $ 5,615
     Investment securities available for sale at market value:
         Obligations of states and local governments, cost $5,624,000        --         5,398
     Investment in bank subsidiary ..................................      19,839      26,120
   Other ............................................................         366         322
                                                                          -------     -------
         Total assets ...............................................      20,691      37,455
                                                                          =======     =======

   Liabilities and stockholders' equity:
     Accrued taxes, expenses and other liabilities ..................         275         405
     Stockholders' equity ...........................................      20,416      37,050
                                                                          -------     -------
         Total liabilities and stockholders' equity .................     $20,691     $37,455
                                                                          =======     =======
<CAPTION>
                                                                             June 30,
                                                                      --------------------
                                                                        1997         1996
                                                                      -------      -------
                                                                     (dollars in thousands)
<S>                                                                   <C>          <C> 
Condensed Statement of Income
   Dividends from bank subsidiary ...............................     $ 8,050      $  --
   Interest income from bank subsidiary .........................         153          200
   Interest on loan from bank subsidiary ESOP ...................         172          148
   Interest on investment securities ............................          88          115
                                                                      -------      -------
     Total income ...............................................       8,463          463
   Interest on short-term borrowing .............................          41         --
   Loss on sale of investment securities ........................          81         --
   Operating expenses ...........................................          84           50
                                                                      -------      -------
     Income before income taxes .................................       8,257          413
   Income tax expense ...........................................          47          117
                                                                      -------      -------
   Income before equity in undistributed net income of subsidiary       8,210          296
   Equity in undistributed net income (loss) of bank subsidiary        (8,744)       1,399
                                                                      -------      -------
         Net income (loss) ......................................     $  (534)     $ 1,695
                                                                      =======      =======
</TABLE>

                                       51
<PAGE>
(11)     Parent Company Financial Data, Continued
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                                                              1997           1996
                                                                            --------      --------
                                                                             (dollars in thousands)
                                                                                      
<S>                                                                         <C>           <C>
Condensed Statement of Cash Flows
Cash flows from operating activities:
    Net income (loss) .................................................     $   (534)     $  1,695
    Adjustments  to  reconcile  net  income to net
      cash  provided  by  operating activities:
          Undistributed earnings of bank subsidiary ...................        8,744        (1,399)
          Loss on sale of available-for-sale securities ...............           81          --
          Payments on note receivable from ESOP .......................        1,709          -- 
          Increase in other assets ....................................         (132)         (238)

          (Decrease) increase in other liabilities ....................         (105)          113
                                                                            --------      --------
              Net cash provided by operating activities ...............        9,763           171
                                                                            --------      --------
Cash flows from investing activities:
    Purchases of available-for-sale securities ........................         --          (5,626)
    Proceeds from sale of available-for-sale securities ...............        5,543          --
                                                                            --------      --------
              Net cash provided (used) by investing activities.........        5,543        (5,626)
                                                                            --------      --------
Cash flows from financing activities:
    Proceeds of issuance of no par common stock .......................         --          25,398
    Purchase of common stock for ESOP .................................         --          (2,731)
    Capital contribution to bank subsidiary ...........................         --         (11,353)
    Cash dividends paid to stockholders ...............................      (20,435)         (244)
                                                                            --------      --------

              Net cash provided (used) by financing activities ........      (20,435)       11,070
                                                                            --------      --------

              Net increase (decrease) in cash and cash equivalents ....       (5,129)        5,615
Cash and cash equivalents at beginning of year ........................        5,615          --
                                                                            --------      --------
Cash and cash equivalents at end of year ..............................     $    486      $  5,615
                                                                            ========      ========
Supplemental disclosure of cash flow information:
   Cash paid during the year for income taxes .........................     $    160      $     29
                                                                            ========      ========
Supplemental disclosure of noncash transactions:
   Unrealized gains (losses) on securities available for sale
       net of deferred taxes of $88 and $88 ...........................     $    138      $   (138)
                                                                            ========      ========
   Unrealized gains (losses) on bank subsidiary's securities available-
      for-sale net of deferred taxes of $105 and $299 .................     $    357      $   (463)
                                                                            ========      ========
   Dividends declared but unpaid ......................................     $   (267)     $   (292)
                                                                            ========      ========

</TABLE>


                                       52
<PAGE>
(12)     Fair Value of Financial Instruments

Fair value  estimates are made by management at a specific point in time,  based
on relevant  information  about the financial  instrument and the market.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the  Company's  entire  holdings of a particular  financial
instrument nor are protential taxes and other expenses that would be incurred in
an actual sale considered. Fair value estimates are based on judgments regarding
future   expected   loss   experience,   current   economic   conditions,   risk
characteristics  of various  financial  instruments,  and other  factors.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant judgment and therefore cannot be determined with precision.  Changes
in  assumptions  and/or  the  methodology  used could  significantly  affect the
estimates   disclosed.   Similarly,   the  fair  values   disclosed  could  vary
significantly from amounts realized in actual transactions.

Fair value estimates are based on existing on- and  off-balance  sheet financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial instruments.

The following  table  presents the carrying  values and estimated fair values of
the Company's financial instruments at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                         1997                             1996
                                                         ----                             ----
                                             Carrying       Estimated Fair    Carrying      Estimated Fair
                                               Value           Value            Value           Value
                                               -----           -----            -----           -----
                                                            (dollars in thousands)
<S>                                           <C>             <C>             <C>             <C>
Financial assets:
   Cash and interest bearing  deposits        $  4,645        $  4,645        $  2,670        $  2,670
   Investment securities:
     Available-for-sale ..............          10,866          10,866          27,098          27,098
     Held-to-maturity ................           3,341           3,395           3,519           3,477
   Net loans .........................         100,173         100,949          91,187          90,775
   Federal Home Loan Bank Stock ......             920             920             863             863


Financial liabilities:
   Deposits ..........................          84,860          82,579          73,361          73,475
   Federal Home Loan Bank advances ...          16,500          16,510          17,250          17,242

</TABLE>
The  estimated  fair  values of net loans and  deposits  are based on cash flows
discounted at market  interest  rates.  The carrying  values of other  financial
instruments, including various receivables and payables, approximate fair value.

At June 30,  1997,  the Company had  outstanding  standby  letters of credit and
commitments to extend credit. These off-balance sheet financial  instruments are
generally  exercisable at the market rate  prevailing at the date the underlying
transaction will be complete, and, therefore, they are deemed to have no current
fair market value. Refer to note 3.



                                       53
<PAGE>
                              CORPORATE INFORMATION


                               BOARD OF DIRECTORS
                     M. Marion Clark, Chairman of the Board
             Retired President, Hillsborough Savings Bank, Inc., SSB

Robert B. Nichols, Jr.                     D. Tyson Clayton
Vice Chairman of the Board                 President and Chief Executive Officer
Retired Farmer                             of Company and Bank

Peggy S. Walker                            James P. Ray
Secretary of Company                       Owner and Operator
Executive Vice President of Bank           Occoneechee Golf Club, Inc.

William L. Rogers                          Donald W. Pope
Farmer                                     Owner, Pope's Tire Service

Alfred L. Carr                             Everett H. Kennedy
Retired Merchant                           Retired Realtor

                               EXECUTIVE OFFICERS

D. Tyson Clayton                           Peggy S. Walker
President and Chief Executive Officer      Secretary of Company
of Company and Bank                        Executive Vice President of Bank


Eric J. Schuppenhauer                      Ted R. Laws
Treasurer of Company                       Vice President of Company 
Vice President and Chief Financial         and Bank
Officer of Bank

--------------------------------------------------------------------------------
 


CORPORATE OFFICE                        INDEPENDENT CERTIFIED
PIEDMONT BANCORP, INC.                  PUBLIC ACCOUNTANTS
260 South Churton Street                KPMG Peat Marwick LLP
Hillsborough, NC 27278-2507             Suite 1200, 150 Fayetteville Street Mall
(919) 732-2143                          Raleigh, NC  27601
                                        

STOCK TRANSFER AGENT                    FORM 10-K
Registrar and Transfer Company          A copy of the Form 10-K as filed with 
10  Commerce  Drive                     the  Securities and Exchange Commis-
Cranford, New Jersey  07016-3572        sion  will  be  furnished without charge
                                        to stockholders upon written request to:
 
SPECIAL LEGAL COUNSEL
Brooks, Pierce, McLendon, Humphrey          D. Tyson Clayton
and Leonard, LLP                            260 South Churton Street 
Post Office Box 26000                       Hillsborough, NC  27278-2507 
Greensboro, North Carolina 27420


                                       54
<PAGE>
                                 ANNUAL MEETING

The 1997 Annual Meeting of stockholders of Piedmont  Bancorp,  Inc. will be held
at 6:00 p.m. on November 12, 1997 at the  Corporate  Office,  260 South  Churton
Street, Hillsborough North Carolina.


                                  CAPITAL STOCK

 
The Parent's  common stock is traded on the American  Stock  Exchange  under the
symbol "PDB". As of June 30, 1997, there were 2,750,800  shares  outstanding and
699  shareholders  of record,  not  including  the number of persons or entities
whose stock is held in nominee or street name through various brokerage firms or
banks.  Payment of dividends by the Bank  subsidiary to the Parent is subject to
various  restrictions.  Under applicable banking  regulations,  the Bank may not
declare a cash  dividend if the effect  thereof would be to reduce its net worth
to an  amount  less than the  minimum  required  by  federal  and state  banking
regulations.  In addition,  for a period of five years after the consummation of
the Bank's stock  conversion,  which occurred on December 7, 1995, the Bank will
be required to obtain  prior  written  approval  from the  Administrator  of the
Savings Institutions Division, North Carolina Department of Commerce,  before it
can declare a cash  dividend  in an amount in excess of one-half  the greater of
(i) its net income for the most  recent  fiscal  year or (ii) the average of its
net income after dividends for the most recent fiscal year and not more than two
of the immediately  preceding  fiscal years, as applicable.  As a result of this
limitation,  the  Bank  cannot  pay a  dividend  without  the  approval  of  the
Administrator.  The Bank has  obtained  the  Administrator's  approval  for each
dividend paid by the Bank to the Parent.
 

<TABLE>
<CAPTION>
                 Quarterly Common Stock Performance and Dividends Declared
                              For the Year Ended June 30, 1997

                                           Stock Price       Dividends Declared, Per Share
                                       --------------------  -----------------------------
                                        High          Low         
                                        ----          ---         
<S>                                    <C>          <C>            <C>
First quarter ended September 30       $16 1/4      $12 1/2           $ 0.12
Second quarter ended December 31       19 1/8        10 3/8        **   7.10
Third quarter ended March 31           11 1/8         9 1/4             0.10
Fourth quarter ended June 30           11            10 1/8             0.10


**  includes $7.00 special dividend paid on December 6, 1996.
</TABLE>









                                            55