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

                                    FORM 10-K


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


                     For the fiscal year ended June 30, 1999

                         Commission file number 1-14070


                             PIEDMONT BANCORP, INC.
             (Exact name of registrant as specified in its charter)
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               North Carolina                                    56-1936232
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     (State or other jurisdiction of                         (I.R.S. Employer
      incorporation or organization)                        Identification No.)


      260 South Churton Street, P.O. Box 1000
            Hillsborough, North Carolina                           27278
     (Address of principal executive office)                     (Zip Code)
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Registrant's telephone number, including area code       (919) 732-2143


           Securities Registered Pursuant to Section 12(g) of the Act:

                           Common Stock, No Par Value
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
State the aggregate market value of the voting and non-voting common equity held
by  non-affiliates  of the  registrant.  The  aggregate  market  value  shall be
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such common  equity,  as of a specified  date within 60
days prior to the date of filing.  $17,519,250 common stock, no par value, based
on the closing price of such common stock on September 1, 1999.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock,  as of the latest  practicable  date.  2,502,700  shares of common
stock, no par value, outstanding at September 1, 1999.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the Annual  Report of  Piedmont  Bancorp,  Inc.  (the "1999  Annual
Report") for the year ended June 30, 1999,  are  incorporated  by reference into
Part I, Part II and Part IV.

Portions of the Proxy  Statement for the 1999 Annual Meeting of  Shareholders of
Piedmont  Bancorp,  Inc. to be held on November 19, 1999,  are  incorporated  by
reference into Part III.
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

General

         Piedmont  Bancorp,  Inc. (the "Parent") is a one-bank  holding  company
whose principal business is the ownership and operation of Hillsborough  Savings
Bank, Inc., SSB (the "Bank") located in Hillsborough, North Carolina. The Parent
was  incorporated  in July 1995 for the purpose of  acquiring  all of the common
stock of the  Bank in its  mutual  to stock  conversion  that was  completed  on
December 7, 1995 (the "Conversion").

         The Bank is a state-chartered  stock savings bank originally  organized
under  the  laws of  North  Carolina  in  1913.  The  Bank is  headquartered  in
Hillsborough,  North Carolina and is centrally  located in its primary market of
central  and  northern   Orange   County,   North   Carolina.   The  Bank  is  a
community-oriented  financial  institution  which  offers a variety of financial
services to meet the needs of the community it serves.  The Bank is  principally
engaged in the business of attracting deposits from the general public and using
those deposits to make one-to-four  family  residential real estate loans, loans
secured by  nonresidential  real estate,  home equity line of credit loans,  and
other loans and  investments.  At June 30, 1999,  all of the loans in the Bank's
portfolio  which were secured by real estate were secured by properties  located
in North Carolina.  Revenues are derived  primarily from interest on loans.  The
Bank  also   receives   interest   income   from   investment   securities   and
interest-bearing  deposit balances.  The major expenses of the Bank are interest
on deposits and borrowings and  noninterest  expenses such as  compensation  and
fringe benefits,  data processing  expenses,  and occupancy  expenses.  The Bank
conducts its business through three offices in  Hillsborough,  Durham and Chapel
Hill, North Carolina.

         Piedmont   Bancorp,   Inc.  and  its   wholly-owned   bank  subsidiary,
Hillsborough  Savings  Bank,  Inc.,  SSB  are  collectively  referred  to as the
"Company".  For additional information regarding the Company's business, see the
1999  Annual  Report  and  the  accompanying  financial  statements,  which  are
incorporated herein by reference.

Market Area and Competition

         The  Company's  primary  market area  consists of central and  northern
Orange County, North Carolina.  Hillsborough is located  approximately ten miles
northwest of Durham,  North  Carolina and ten miles north of Chapel Hill,  North
Carolina.  North  Carolina's  Research  Triangle  Park is located about 20 miles
eastward between the cities of Chapel Hill, Durham and Raleigh.  Chapel Hill and
Durham are home to the  University  of North  Carolina  at Chapel  Hill and Duke
University,  respectively.  These universities and the employment  opportunities
they generate  significantly  impact the economy of Orange County.  However, the
economy in Orange County is varied with employment  spread among  manufacturing,
agricultural, retail and wholesale trade, government, services and utilities.

         As of June 30, 1998,  there were 17  depository  institutions  with 287
offices  in  Wake,  Orange  and  Durham  Counties.  Based  upon  June  30,  1998
comparative  data,  the Bank had 8.5% market  share in Orange  County and a 0.0%
market share in Wake and Durham Counties. The Bank had no market share in Durham
county as its Durham office did not open until April of 1999.
<PAGE>
         The Company faces strong  competition  both in attracting  deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions,  credit unions and commercial
banks located in its primary market area, including large financial institutions
that have greater  financial  and  marketing  resources  available to them.  The
Company has also faced additional  significant  competition for investors' funds
from  short-term  money market  securities  and other  corporate and  government
securities.  The ability of the Company to attract and retain  savings  deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing  investment  opportunities.  The Company
experiences  strong  competition  for  real  estate  loans  from  other  savings
institutions,  commercial banks, and mortgage banking companies. Competition may
increase  as a  result  of  the  continued  reduction  of  restrictions  on  the
interstate operations of financial institutions.

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


                           SUPERVISION AND REGULATION

Regulation of the Parent

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

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

         Additionally,  the BHCA  prohibits  the  Parent  from  engaging  in, or
acquiring  ownership or control of, more than 5% of the outstanding voting stock
of any  company  engaged  in a  nonbanking  business  unless  such  business  is
determined by the Federal  Reserve Board to be so closely  related to banking as
to be properly incident  thereto.  The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
<PAGE>
         Similarly,  Federal  Reserve  Board  approval  (or,  in certain  cases,
non-disapproval)  must be obtained prior to any person acquiring  control of the
Parent.  Control is  conclusively  presumed to exist if, among other  things,  a
person  acquires  more than 25% of any class of  voting  stock of the  Parent or
controls  in any  manner the  election  of a majority  of the  directors  of the
Parent.  Control is presumed to exist if a person  acquires more than 10% of any
class of voting  stock  and the  stock is  registered  under  Section  12 of the
Exchange  Act  or the  acquiror  will  be  the  largest  shareholder  after  the
acquisition.

         As a result  of the  Parent's  ownership  of the  Bank,  the  Parent is
registered  under the  savings  bank  holding  company  laws of North  Carolina.
Accordingly,  the Parent is also subject to regulation  and  supervision  by the
North Carolina Administrator, Savings Institutions Division, North Carolina
Department of Commerce (the "Administrator").

         Capital Maintenance. There are a number of obligations and restrictions
imposed on bank holding companies and their depository institution  subsidiaries
by law and regulatory policy that are designed to minimize potential loss to the
depositors of such depository  institutions  and the Federal  Deposit  Insurance
Corporation (the "FDIC") insurance funds in the event the depository institution
becomes in danger of default  or in  default.  For  example,  under the  Federal
Deposit Insurance  Corporation  Improvement Act of 1991 ("1991 Banking Law"), to
avoid  receivership  of an insured  depository  institution  subsidiary,  a bank
holding  company  is  required  to  guarantee  the  compliance  of  any  insured
depository  institution subsidiary that may become  "undercapitalized"  with the
terms  of any  capital  restoration  plan  filed  by such  subsidiary  with  its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of  the  institution's   total  assets  at  the  time  the  institution   became
undercapitalized  or (ii) the  amount  which is  necessary  (or would  have been
necessary) to bring the institution into compliance with all acceptable  capital
standards  as of the time the  institution  fails to comply  with  such  capital
restoration  plan.  Under a policy of the Federal  Reserve Board with respect to
bank holding company operations,  a bank holding company is required to serve as
a source of financial strength to its subsidiary depository  institutions and to
commit resources to support such  institutions in  circumstances  where it might
not do so absent such policy. The Federal Reserve Board under the BHCA, also has
the authority to require a bank holding  company to terminate any activity or to
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the  Federal  Reserve  Board's  determination  that such  activity or
control  constitutes a serious risk to the financial  soundness and stability of
any bank subsidiary of the bank holding company.

         In addition,  the  "cross-guarantee"  provisions of the Federal Deposit
Insurance Act, as amended ("FDIA") require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the Savings
Association  Insurance  Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as  a  result  of  the  default  of a  commonly  controlled  insured  depository
institution or for any assistance  provided by the FDIC to a commonly controlled
insured  depository  institution  in danger of default.  The FDIC may decline to
enforce the cross-guarantee  provisions if it determines that a waiver is in the
best  interest of the SAIF or the BIF or both.  The FDIC's  claim for damages is
superior to claims of stockholders of the insured depository  institution or its
holding  company but is subordinate to claims of depositors,  secured  creditors
and  holders of  subordinated  debt  (other  than  affiliates)  of the  commonly
controlled insured depository institutions.
<PAGE>
         In  connection  with  the  Administrator's  approval  of  the  Parent's
application to acquire control of the Bank, the Parent was required to execute a
Capital  Maintenance  Agreement  whereby  it has agreed to  maintain  the Bank's
capital in an amount  sufficient  to enable the Bank to satisfy  all  regulatory
capital requirements.

         Capital Adequacy Guidelines for Holding Companies.  The Federal Reserve
Board has adopted  capital  adequacy  guidelines for bank holding  companies and
banks that are members of the Federal Reserve Board system and have consolidated
assets of $150 million or more.  Bank holding  companies  subject to the Federal
Reserve  Board's  capital  adequacy  guidelines  are required to comply with the
Federal Reserve Board's risk-based capital regulations. Under these regulations,
the minimum ratio of total capital to risk-weighted  assets  (including  certain
off-balance  sheet  activities,  such as  standby  letters  of  credit) is eight
percent.  At least half of the total capital is required to be "Tier I capital,"
principally consisting of common stockholders' equity,  noncumulative  perpetual
preferred stock, and a limited amount of cumulative  perpetual  preferred stock,
less certain  goodwill items. The remainder ("Tier II capital") may consist of a
limited amount of  subordinated  debt,  certain hybrid capital  instruments  and
other debt  securities,  perpetual  preferred stock, and a limited amount of the
general loan loss allowance.  In addition to the risk-based capital  guidelines,
the Federal Reserve Board has adopted a minimum Tier I (leverage) capital ratio,
under  which a bank  holding  company  must  maintain a minimum  level of Tier I
capital to average  total  consolidated  assets of at least three percent in the
case of a bank  holding  company  which has the highest  regulatory  examination
rating and is not contemplating  significant growth or expansion. All other bank
holding companies are expected to maintain a Tier I (leverage)  capital ratio of
at least one percent to two percent above the stated minimum.

         Dividend and  Repurchase  Limitations.  The Parent's  sources of income
consist of dividends paid by the Bank to the Parent. Consequently,  declarations
of cash dividends by the Parent may depend upon dividend payments by the Bank to
the Parent,  which are subject to various  restrictions.  See " -- Regulation of
the Bank --  Restrictions  on Dividends  and Other Capital  Distributions."  The
Parent must obtain Federal Reserve Board approval prior to  repurchasing  Common
Stock for in excess of ten  percent  of its net worth  during  any  twelve-month
period  unless  the Parent (i) both  before and after the  redemption  satisfies
capital  requirements for "well capitalized" state member banks; (ii) received a
one or two rating in its last  examination;  and (iii) is not the subject of any
unresolved supervisory issues.

         The Parent is prohibited, under the North Carolina Business Corporation
Act,  from  paying a dividend if such  payment  would (i) cause the Parent to be
unable to pay its debts as they become due in the ordinary course of business or
(ii)  reduce the  Parent's  total  assets  below the sum of the  Parent's  total
liabilities  plus any amounts  which  would be needed,  if the Parent were to be
dissolved at the time of distribution,  to satisfy the preferential  rights that
are superior to holders of the Common Stock.

         Neither the  Administrator nor the FDIC has promulgated any regulations
specifically  limiting the right of the Parent to pay dividends  and  repurchase
shares. However, at the Administrator's  request, the Company has provided prior
notice to the Administrator of each dividend paid by the Company.
<PAGE>
         Federal Securities Law. The Parent has registered its Common Stock with
the SEC pursuant to Section  12(g) of the  Securities  Exchange Act of 1934,  as
amended  (the  "Exchange  Act") and will not  deregister  the Common Stock for a
period of three years following the completion of the Conversion. As a result of
such registration,  the proxy and tender offer rules,  insider trading reporting
requirements,  annual  and  periodic  reporting  and other  requirements  of the
Exchange Act are applicable to the Parent.

         The  registration  under the  Securities  Act of 1933,  as amended (the
"Securities  Act") of the Common Stock does not cover the resale of such shares.
Shares of the Common Stock  purchased by persons who are not  affiliates  of the
Parent may be resold without  registration.  Shares purchased by an affiliate of
the Parent are subject to the resale provisions of Rule 144 under the Securities
Act. So long as the Parent meets the current public information  requirements of
Rule 144 under the  Securities  Act,  each  affiliate of the Parent who complies
with the  other  conditions  of Rule  144  (including  those  that  require  the
affiliate's  sale to be aggregated  with those of certain other persons) will be
able to sell in the public market, without registration,  a number of shares not
to exceed,  in any  three-month  period,  the  greater of (i) one percent of the
outstanding shares of the Parent or (ii) the average weekly volume of trading in
such shares during the preceding four calendar  weeks.  Provision may be made in
the future by the Parent to permit  affiliates  to have their shares  registered
for sale  under  the  Securities  Act  under  certain  circumstances.  There are
currently no demand registration  rights outstanding.  However, in the event the
Parent at some  future  time  determines  to issue  additional  shares  from its
authorized but unissued shares,  the Parent might offer  registration  rights to
certain of its affiliates who want to sell their shares.

Regulation of the Bank

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

         The Bank is a North Carolina-chartered savings bank, is a member of the
Federal Home Loan Bank ("FHLB") system, and its deposits are insured by the FDIC
through the SAIF. It is subject to  examination  and  regulation by the FDIC and
the  Administrator  and  to  regulations   governing  such  matters  as  capital
standards, mergers,  establishment of branch offices, subsidiary investments and
activities, and general investment authority. Such examination and regulation is
intended  primarily for the  protection of  depositors  and the federal  deposit
insurance funds.
<PAGE>
         The Bank is subject to various  regulations  promulgated by the Federal
Reserve  Board  including,  without  limitation,   Regulation  B  (Equal  Credit
Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers),
Regulation   O  (Loans  to   Executive   Officers,   Directors   and   Principal
Shareholders),  Regulation Z (Truth in Lending),  Regulation CC (Availability of
Funds) and Regulation DD (Truth in Savings). As holders of loans secured by real
property and as owners of real property,  financial institutions,  including the
Bank,  may  be  subject  to  potential  liability  under  various  statutes  and
regulations  applicable to property  owners  generally,  including  statutes and
regulations relating to the environmental condition of real property.

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

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

         Transactions with Affiliates.  Under current federal law,  transactions
between savings  institutions and any affiliate are governed by Sections 23A and
23B of the Federal  Reserve Act. An affiliate  of a savings  institution  is any
company or entity that  controls,  is controlled  by or is under common  control
with the savings  institution.  In a holding company context, the parent holding
company of a savings  institution and any companies which are controlled by such
parent  holding  company are affiliates of the savings  institution.  Generally,
Sections 23A and 23 B (i) establish certain collateral requirements for loans to
affiliates;  (ii)  limit  the  extent to which the  savings  institution  or its
subsidiaries may engage in "covered  transactions"  with any one affiliate to an
amount equal to 10% of such savings institution's capital stock and surplus, and
contain an aggregate  limit on all such  transactions  with all affiliates to an
amount equal to 20% of such capital stock and surplus and (iii) require that all
such  transactions be on terms  substantially the same, or at least as favorable
to  the  savings  institution  or  the  subsidiary,   as  those  provided  to  a
nonaffiliate.  The term  "covered  transaction"  includes the making of loans or
other  extensions  of credit to an  affiliate,  the  purchase  of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate,
the  acceptance  of  securities  of an  affiliate  as  collateral  for a loan or
extension  of credit to any person,  or issuance of a guarantee,  acceptance  or
letter of credit on behalf of an affiliate.

         Further,  current federal law has extended to savings  institutions the
restrictions  contained in Section 22(h) of the Federal Reserve Act with respect
to loans to  directors,  executive  officers and principal  stockholders.  Under
Section 22(h),  loans to directors,  executive officers and stockholders who own
more than 10% of a savings institution and certain affiliated entities of any of
the foregoing, may not exceed, together with all other outstanding loans to such
<PAGE>
person and affiliated entities, the savings institution's  loans-to-one borrower
limit as established by federal law (generally equal to 15% of the institution's
unimpaired  capital  and  surplus).  Section  22(h) also  prohibits  loans above
amounts  prescribed  by the  appropriate  federal  banking  agency to directors,
executive  officers  and  stockholders  who  own  more  than  10%  of a  savings
institution,  and their respective  affiliates,  unless such loan is approved in
advance by a majority of the board of directors of the savings institution.  Any
"interested"  director may not  participate in the voting.  The Federal  Reserve
Board has prescribed the loan amount (which includes all other outstanding loans
to such person),  as to which such prior board of director approval is required,
as being the  greater of  $25,000 or 5% of  unimpaired  capital  and  unimpaired
surplus (up to $500,000). Further, pursuant to Section 22(h) the Federal Reserve
Board  requires  that loans to  directors,  executive  officers,  and  principal
stockholders  be made on terms  substantially  the same as offered in comparable
transactions  to other  persons  and not  involve  more than the normal  risk of
repayment or present other  unfavorable  features.  Section 22(h) also generally
prohibits a  depository  institution  from paying the  overdrafts  of any of its
executive officers or directors.

         Insurance  of  Deposit  Accounts.  The FDIC  administers  two  separate
insurance  funds.  The SAIF  maintains  a fund to insure the  deposits  for most
savings institutions and the BIF maintains a fund to insure the deposits of most
commercial banks. The Bank is a member of the SAIF of the FDIC.

         The  Bank  is  required  to pay  assessments  to the  FDIC  based  on a
percentage  of  its  insured  deposits.  Under  the  FDIC's  risk-based  deposit
insurance  assessment  system,  the  assessment  rate for an insured  depository
institution  depends  on the  assessment  risk  classification  assigned  to the
institution by the FDIC, which is determined by the institution's  capital level
and  supervisory  evaluations.  Based on the data reported to regulators for the
date closest to the last day of the seventh  month  proceeding  the  semi-annual
assessment period, institutions are assigned to one of three capital groups well
capitalized,  adequately  capitalized  or  undercapitalized  -  using  the  same
percentage  criteria  as  in  the  prompt  corrective  action  regulations.  See
"--Prompt Corrective Regulatory Action."

         Within each capital  group,  institutions  are assigned to one of three
subgroups on the basis of  supervisory  evaluations by the  instution's  primary
supervisory  authority and such other  information as the FDIC  determines to be
relevant  to the  institution's  financial  condition  and the risk posed to the
deposit insurance fund.  Subgroup A consists of financially  sound  institutions
with only a few minor  weaknesses.  Subgroup B  consists  of  institutions  that
demonstrate  weaknesses  which,  if not  corrected,  could result in significant
deterioration  of the  institution  and  increased  risk of loss to the  deposit
insurance  fund.  Subgroup C consists of  institutions  that pose a  substantial
probability of loss to the deposit  insurance fund unless  effective  corrective
action is taken.

         The assessment  rate for SAIF members had ranged from 0.23% of deposits
for well  capitalized  institutions  in  Subgroup  A to 0.31%  of  deposits  for
undercapitalized  institutions  in Subgroup C while  assessments for over 90% of
the BIF had been the  statutory  minimum of $2,000.  However,  recently  enacted
legislation  provided for a one-time assessment equal to 65.7 basis points times
insured  deposits as of March 31, 1995.  This assessment  fully  capitalized the
<PAGE>
SAIF.  Accordingly,  although  the  special  assessment  resulted  in a $487,000
one-time charge to the Bank, the  recapitalization of the SAIF had the effect of
reducing the Bank's future  deposit  insurance  premiums to the SAIF.  Under the
recently enacted  legislation,  most BIF members will be assessed  approximately
1.3 basis points while the rate for most SAIF members will be approximately  6.4
basis points until  January 1, 2000.  At that time,  BIF and SAIF will begin pro
rata sharing of the payment at an expected rate of 2.43 basis points.

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

         Community   Reinvestment   Act.   The  Bank,   like   other   financial
institutions,  is subject to the Community Reinvestment Act, as amended ("CRA").
A purpose of the CRA is to  encourage  financial  institutions  to help meet the
credit  needs  of  its  entire  community,  including  the  needs  of  low-  and
moderate-income  neighborhoods.  Financial institutions' compliance with the CRA
is regularly  evaluated by their  regulatory  agencies.  Under recently  adopted
regulations,  institutions are first evaluated and rated under three categories:
a lending test, an investment  test and a service test.  For each of these three
tests,  the  savings  bank is  given a rating  of  either  "outstanding,"  "high
satisfactory,"   "low   satisfactory,"   "needs  to  improve"  or   "substantial
non-compliance."  A  set  of  criteria  for  each  rating  is  included  in  the
regulation.   If  an  institution   disagrees  with  a  particular  rating,  the
institution has the burden of rebutting the presumption by clearly  establishing
that the quantative  measures do not accurately present its actual  performance,
or that  demographics,  competitive  conditions or economic or legal limitations
peculiar to the service area should be  considered.  The ratings  received under
the three  tests are used to  determine  the  overall  composite  CRA  rating of
"outstanding,"    "satisfactory,"    "needs   to   improve"   or    "substantial
non-compliance."

         During the Bank's last compliance  examination,  which was performed by
the FDIC  under the new CRA  regulations  in August  1998,  the Bank  received a
"satisfactory"  rating with respect to CRA  compliance.  The Bank's  rating with
respect to CRA  compliance  would be a factor to be  considered  by the  Federal
Reserve  Board and FDIC in  considering  applications  submitted  by the Bank to
acquire branches or to acquire or combine with other financial  institutions and
take other actions and could result in the denial of such applications.

         Capital  Requirements.  The FDIC  requires  the Bank to have a  minimum
leverage ratio of Tier I capital (principally consisting of common stockholders'
equity,  noncumulative  perpetual  preferred  stock and  minority  interests  in
consolidated subsidiaries, less certain intangible and goodwill items), to total
assets of at least three percent; provided, however that all institutions, other
than those (i) receiving the highest rating during the  examination  process and
(ii) not  anticipating or experiencing any significant  growth,  are required to
<PAGE>
maintain a ratio of one percent or two percent above the stated minimum, with an
absolute  minimum  leverage  ratio of not less than four percent.  The FDIC also
requires  the Bank to have a ratio of total  capital  to  risk-weighted  assets,
including  certain  off-balance  sheet  activities,  such as standby  letters of
credit,  of at least  eight  percent.  At least  half of the  total  capital  is
required to be Tier I capital.  The remainder (Tier II capital) may consist of a
limited amount of subordinated debt, certain hybrid capital  instruments,  other
debt  securities,  certain  types of  preferred  stock and a  limited  amount of
general loan loss allowance.

         An institution  that fails to meet minimum capital  requirements may be
subject to a capital  directive  which is  enforceable in the same manner and to
the same  extent as a final  cease and desist  order,  and must submit a capital
plan within 60 days to the FDIC.  If the leverage  ratio falls to two percent or
less,  the  institution  may be deemed to be  operating  in an unsafe or unsound
condition,  allowing the FDIC to take  various  enforcement  actions,  including
possible   termination   of  insurance  or  placement  of  the   institution  in
receivership.

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

         At  June  30,  1999,  the  Bank  complied  with  each  of  the  capital
requirements of the FDIC and the Administrator.  For a description of the Bank's
required  and  actual  capital  levels  on June 30,  1999,  see  Note  captioned
"Stockholders Equity" on pages 40-41 of the 1999 Annual Report.

         Each  federal  banking  agency  was  required  by  law  to  revise  its
risk-based  capital  standards  to ensure  that those  standards  take  adequate
account of interest  rate risk,  concentration  of credit risk,  and the risk of
nontraditional  activities,  as well  as  reflect  the  actual  performance  and
expected risk of loss on multi-family  mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final  risk-based  capital
rules to take account of interest rate risk.  The final  regulation  required an
assessment  of  the  need  for  additional  capital  on  a  case-by-case  basis,
considering  both the level of measured  exposure and qualitative  risk factors.
The final rule also  stated an intent to, in the future,  establish  an explicit
minimum  capital  charge for  interest  rate risk based on the level of a bank's
measured  interest  rate  risk  exposure.  The  final  regulation  has not had a
material impact on the Bank's capital requirements.

         Effective June 26, 1996, the federal  banking  agencies  issued a joint
policy statement  announcing the agencies'  election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time. Rather,
the policy  statement (i)  identifies  the main elements of sound  interest rate
risk  management,  (ii) describes  prudent  principles and practices for each of
those elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement has not had a material impact on the Bank's
management of interest rate risk.
<PAGE>
         In December 1994, the FDIC adopted a final rule changing its risk-based
capital  rules to  recognize  the  effect of  bilateral  netting  agreements  in
reducing  the credit risk of two types of  financial  derivatives  interest  and
exchange  rate  contracts.  Under the rule,  savings  banks are permitted to net
positive  and negative  mark-to-market  values of rate  contracts  with the same
counterparty,  subject to legally  enforceable  bilateral netting contracts that
meet  certain  criteria.  This  represents  a change  from the prior rules which
recognized only a very limited form of netting. This rule has not had a material
effect upon its financial condition or results of operations.

         Loans-to-One-Borrower.  The  Bank  is  subject  to the  Administrator's
loans-to-one-borrower  limits.  Under these limits,  no loans and  extensions of
credit to any borrower  outstanding at one time and not fully secured by readily
marketable  collateral  shall  exceed 15% of the net worth of the savings  bank.
Loans and  extensions of credit fully secured by readily  marketable  collateral
may comprise an  additional  10% of net worth.  Notwithstanding  the limits just
described,  savings banks may make loans to one borrower, for any purpose, in an
amount up to $500,000. A savings institution also is authorized to make loans to
one borrower to develop  domestic  residential  housing units, not to exceed the
lesser of $30 million, or 30% of the savings  institution's net worth,  provided
that (i) the purchase price of each  single-family  dwelling in the  development
does not exceed $500,000; (ii) the savings institution is in compliance with its
fully  phased-in  capital  requirements;  (iii) the loans comply with applicable
loan-to-value  requirements;  (iv) the aggregate amount of loans made under this
authority does not exceed 150% of net worth; and (v) the institution's regulator
issues an order  permitting  the savings  institution  to use this higher limit.
These  limits  also  authorize a savings  bank to make loans to one  borrower to
finance the sale of real property acquired in satisfaction of debts in an amount
up to 50% of net worth.

         As of June 30, 1999,  the largest  aggregate  amount of loans which the
Bank had to any one borrower was $2,100,000.  The Bank had no loans  outstanding
which management believes violate the applicable loans to one borrower limits.

         Federal  Home Loan Bank  System.  The FHLB  system  provides  a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is  required  to own  capital  stock in the FHLB of Atlanta in an amount at
least equal to the greater of one percent of the aggregate  principal  amount of
its unpaid  residential  mortgage  loans,  home  purchase  contracts and similar
obligations at the end of each calendar year, or five percent of its outstanding
advances  (borrowings) from the FHLB of Atlanta.  On June 30, 1999, the Bank was
in compliance with this  requirement with an investment in FHLB of Atlanta stock
of $1,036,000.

         Federal  Reserve  System.  Regulation  D,  promulgated  by the  Federal
Reserve Board,  imposes  reserve  requirements  on all depository  institutions,
including  savings banks and savings  institutions,  which maintain  transaction
accounts or  non-personal  time deposits.  Checking  accounts,  NOW accounts and
certain  other types of  accounts  that permit  payments or  transfers  to third
parties fall within the  definition of  transaction  accounts and are subject to
Regulation  D  reserve  requirements,  as are  any  non-personal  time  deposits
(including certain money market deposit accounts) at a savings institution.  For
1998, a depository  institution must maintain average daily reserves equal to 3%
of the first $47.8 million of net transaction accounts, plus 10% of that portion
of total transaction accounts in excess of $47.8 million. The first $4.7 million
of otherwise reservable balances are exempt from the reserve requirements. These
percentages  and  threshold  limits are  subject to  adjustment  by the  Federal
Reserve Board.
<PAGE>
         Restrictions on  Acquisitions.  Federal law generally  provides that no
"person,"  acting  directly or  indirectly  or through or in concert with one or
more  other  persons,  may  acquire  "control,"  as that term is defined in FDIC
regulations,  of a insured  institution without giving at least 60 days' written
notice to the FDIC and  providing  the FDIC an  opportunity  to  disapprove  the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured  institution is conclusively deemed to have been acquired,
among other things, upon the acquisition of more than twenty five percent of any
class of voting stock.  In addition,  control is presumed to have been acquired,
subject to rebuttal,  upon the acquisition of more than ten percent of any class
of voting  stock.  Such  acquisitions  of control  may be  disapproved  if it is
determined,  among other things,  that (i) the acquisition  would  substantially
lessen  competition;  (ii) the financial condition of the acquiring person might
jeopardize  the  financial  stability  of the  savings  bank  or  prejudice  the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring  person or the proposed  management  personnel  indicates  that it
would not be in the  interest  of the  depositors  or the  public to permit  the
acquisition of control by such person.

         Liquidity. The Bank is subject to the Administrator's  requirement that
the  ratio of liquid  assets to total  assets  equal at least ten  percent.  The
computation of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed  securities  and  investments  which,  in  the  judgment  of the
Administrator,  have a readily  marketable  value,  including  investments  with
maturities  in excess of five  years.  At June 30,  1999,  the Bank's  liquidity
ratio,   calculated  in  accordance   with  North  Carolina   regulations,   was
approximately 29%.

         Prompt Corrective  Regulatory Action. The 1991 Banking Law provided the
federal banking agencies with broad powers to take corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly   undercapitalized,"   or
"critically  undercapitalized."  Under the FDIC  regulations  applicable  to the
Bank, an  institution  is considered  "well  capitalized"  if it has (i) a total
risk-based  capital  ratio of ten percent or greater,  (ii) a Tier I  risk-based
capital ratio of six percent or greater,  (iii) a leverage ratio of five percent
or greater and (iv) is not subject to any order or written directive to meet and
maintain  a specific  capital  level for any  capital  measure.  An  "adequately
capitalized"  institution  is  defined  as one that  has (i) a total  risk-based
capital  ratio of eight  percent or greater,  (ii) a Tier I  risk-based  capital
ratio of four  percent or greater and (iii) a leverage  ratio of four percent or
greater  (or three  percent or greater  in the case of an  institution  with the
highest  examination  rating  and  which  is not  experiencing  or  anticipating
significant growth). An institution is considered (A)  "undercapitalized"  if it
has (i) a total risk-based capital ratio of less than eight percent, (ii) a Tier
I risk-based  capital ratio of less than four percent or (iii) a leverage  ratio
of less than four percent (or three percent in the case of an  institution  with
the highest  examination  rating and which is not  experiencing  or anticipating
significant growth); (B) "significantly undercapitalized" if the institution has
(i) a total risk-based capital ratio of less than six percent,  or (ii) a Tier I
risk-based capital ratio of less than three percent or (iii) a leverage ratio of
less than three percent and (C) "critically undercapitalized" if the institution
has a ratio of  tangible  equity  to  total  assets  equal  to or less  than two
percent.  The Bank is  considered to be "well  capitalized"  under the rules set
forth above.
<PAGE>
         Interstate  Banking.  The Riegle-Neal  Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate  Banking Act"),  effective September 29,
1995, permits adequately  capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state.

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

         The  Interstate  Banking Act also  provides for  interstate  branching,
effective June 1, 1997,  allowing interstate  branching in all states,  provided
that a particular  state has not  specifically  denied  interstate  branching by
legislation prior to such time. Unlike  interstate  acquisitions,  a state could
deny interstate  branching if it specifically  elected to do so by June 1, 1997.
States  could  choose  to allow  interstate  branching  prior to June 1, 1997 by
opting-in to a group of states that permitteds these transactions.  These states
generally allow interstate  branching via a merger of an out-of-state  bank with
an in-state  bank, or on a de novo basis.  North  Carolina  enacted  legislation
permitting  branching  transactions  prior to June 1,  1997,  and did not  adopt
legislation electing to deny interstate branching.

         It is  anticipated  that  the  Interstate  Banking  Act  will  increase
competition  within the  markets in which the Bank now  operates,  although  the
extent to which such  competition will increase in such markets or the timing of
such  increase  cannot  be  predicted.  To date  the  Bank  has not  experienced
significant  increased competition at its Hillsborough office as a result of the
passage of the  Interstate  Banking  Act.  However,  the Durham and Chapel  Hill
offices recently opened by the Bank have had much more increased  competition as
a result of the Interstate Banking Act.

         Restrictions  on Dividends  and Other  Capital  Distributions.  A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction  would
be to reduce the net worth of the  institution  to an amount  which is less than
the minimum amount  required by applicable  federal and state  regulations.  See
"--Capital  Requirements." In addition, a North Carolina-chartered stock savings
bank, for a period of five years after its conversion from mutual to stock form,
must obtain the written  approval  from the  Administrator  before  declaring or
paying a cash  dividend on its capital  stock in an amount in excess of one-half
of the greater of (i) the  institution's  net income for the most recent  fiscal
year end, or (ii) the average of the  institution's  net income after  dividends
for the most  recent  fiscal  year end and not more than two of the  immediately
preceding   fiscal  year  ends,  if  applicable.   The  Bank  has  obtained  the
Administrator's prior approval for each dividend paid by the Bank to the Parent.

         Retained  income at June 30, 1999,  includes  approximately  $2,777,000
million for which no provision for federal income tax has been made. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Payment of  dividends by the Bank out of this bad debt  allocation  would create
taxable income equal to approximately 164% of the dividend for the Bank.
<PAGE>
         At the time of the  Conversion,  the  Bank  established  a  liquidation
account in an amount  equal to its net worth at June 30, 1995.  The  liquidation
account is maintained for the benefit of eligible  deposit  account  holders who
continue to maintain  their deposit  accounts in the Bank after the  Conversion.
Only in the event of a complete  liquidation would each eligible deposit account
holder be entitled to receive a  liquidating  distribution  in the amount of the
then current  adjusted  subaccount  balance for the deposit  accounts before any
liquidation distribution may be made with respect to the Common Stock. Dividends
paid by the Bank to the Parent cannot reduce the net worth of the Bank below the
amount required for this liquidation account.

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

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

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

         Other North Carolina Regulation. As a North Carolina-chartered  savings
bank,   the  Bank  derives  its  authority   from,  and  is  regulated  by,  the
Administrator.   The  Administrator  has  the  right  to  promulgate  rules  and
regulations  necessary for the  supervision  and  regulation  of North  Carolina
savings  banks  under his  jurisdiction  and for the  protection  of the  public
investing in such  institutions.  The regulatory  authority of the Administrator
includes, but is not limited to: the establishment of reserve requirements;  the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators,  stockholders,  directors,  officers and employees;
the  establishment  of  permitted  types of  withdrawable  accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct  and   management  of  savings   banks,   chartering  and  branching  of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires  that the Bank  maintain  federal  deposit  insurance as a condition of
doing business.
<PAGE>
         The    Administrator    conducts   regular    examinations   of   North
Carolina-chartered  savings banks. The purpose of such examinations is to assure
that  institutions  are being  operated  in  compliance  with  applicable  North
Carolina law and regulations and in a safe and sound manner.  These examinations
are  usually  conducted  on a joint  basis  with  the  FDIC.  In  addition,  the
Administrator  is required to conduct an examination of any institution  when he
has  good  reason  to  believe  that  the  standing  and  responsibility  of the
institution is of doubtful character or when he otherwise deems it prudent.  The
Administrator  is  empowered  to  order  the  revocation  of the  license  of an
institution  if he finds that it has  violated or is in  violation  of any North
Carolina law or regulation and that revocation is necessary in order to preserve
the assets of the institution  and protect the interests of its depositors.  The
Administrator  has the power to issue  cease and desist  orders if any person or
institution is engaging in, or has engaged in, any unsafe or unsound practice or
unfair  and  discriminatory  practice  in  the  conduct  of its  business  or in
violation of any other law, rule or regulation.

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

         Subject to limitation by the  Administrator,  North  Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted   to   federally    chartered    institutions.    However,   a   North
Carolina-chartered  savings bank cannot invest more than 15% of its total assets
in business,  commercial,  corporate  and  agricultural  loans without the prior
approval of the  Administrator.  In addition to such  lending  authority,  North
Carolina-chartered  savings banks are  authorized to invest funds,  in excess of
loan demand, in certain  statutorily  permitted  investments,  including but not
limited to (i) obligations of the United States, or those guaranteed by it; (ii)
obligations of the State of North Carolina;  (iii) bank demand or time deposits;
(iv) stock or obligations of the federal  deposit  insurance fund or a FHLB; (v)
savings  accounts  of any  savings  institution  as  approved  by the  board  of
directors;  and (vi)  stock or  obligations  of any agency of the State of North
Carolina or of the United States or of any  corporation  doing business in North
Carolina whose principal business is to make education loans.

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

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

         The  Bank is the  only  subsidiary  of the  Parent.  The  Bank  has one
subsidiary,  HSB Financial  Services,  Inc., that was  incorporated  under North
Carolina Law in January of 1998. HSB Financial  Services,  Inc. was  established
for the primary  purpose of selling  mutual  funds and other  retail  nondeposit
investments.  HSB Financial Services, Inc. currently has one employee. The total
assets of HSB Financial  Services,  Inc. at June 30, 1999 were $20,582,  the net
income for that subsidiary for the year ended June 30, 1999 was $6,132.

Employees

         As of  June  30,  1999,  the  Bank  had 47  full-time  employees  and 3
part-time  employees.  The Bank  provides  its  employees  with  basic and major
medical  insurance,  life  insurance,  sick  leave  and  vacation  benefits.  In
addition, the Bank maintains a 401(k) retirement plan pursuant to which the Bank
matches one-half of employees'  contributions,  with its contribution limited to
three percent of each employee's salary.

         The Bank also has an Employee Stock Ownership Plan (the "ESOP"),  which
provides  benefits to employees of the Bank.  Also, the directors,  officers and
employees of the Bank  participate  in the Management  Recognition  Plan and the
Stock Option Plan,  under which  105,800  shares of  restricted  stock have been
awarded  and  options  to  purchase  253,334  shares of Common  Stock  have been
granted, respectively.

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

Federal Income Taxation

         Savings  institutions  such  as the  Bank  are  subject  to the  taxing
provisions of the Internal  Revenue Code of 1986,  as amended (the "Code"),  for
corporations,  as modified by certain  provisions  specifically  applicable  for
financial or thrift institutions. Income is reported using the accrual method of
accounting. The maximum corporate federal income tax rate is 35%.

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

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

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

         As a result of changes in law,  thrift  institutions  were  required to
change to either the  reserve  method or the  specific  charge-off  method  that
applied to banks.  Large thrift  institutions,  those  generally  exceeding $500
million  in  assets,  had to  convert  to the  specific  charge-off  method.  In
computing  its bad debt  reserve for  federal  income  taxes,  the Bank used the
reserve method in fiscal years 1997, 1998 and 1999.

         Bad debt reserve  balances in excess of the balance  computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt  reserve")  require  inclusion in taxable  income upon
certain   distributions   to   shareholders.   Distributions  in  redemption  or
liquidation  of stock or  distributions  with  respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated  as a  distribution  from the  excess  bad  debt  reserve.  When  such a
distribution  takes place and it is treated as from the excess bad debt reserve,
the thrift is required  to reduce its reserve by such amount and  simultaneously
recognize  the amount as an item of taxable  income  increased  by the amount of
income tax imposed on the  inclusion.  Dividends  not in excess of earnings  and
profits  accumulated  since December 31, 1951 will not require inclusion of part
or all of the bad debt  reserve  in  taxable  income.  The Bank has  accumulated
earnings and profits  since  December 31, 1951 and has an excess in its bad debt
reserve. Distributions in excess of current and accumulated earnings and profits
will increase  taxable income.  Net retained  earnings at June 30, 1999 includes
approximately  $2,777,000 for which no provision for federal income tax has been
made.

         Legislation  passed by the U.S. Congress and signed by the President in
August 1996 contains a provision  that repeals the  percentage of taxable income
method of accounting for thrift bad debt reserves for tax years  beginning after
December 31, 1995. The legislation  will trigger bad debt reserve  recapture for
post-1987 excess reserves over a six-year  period.  At June 30, 1999, the Bank's
post-1987  excess  reserves  amounted  to  approximately   $534,000.  A  special
provision  suspends  recapture of post-1987  excess reserves for up to two years
if,  during  those  years,  the  institution   satisfies  a  "residential   loan
requirement."  This  requirement  will  be met if the  principal  amount  of the
institution's  residential loans exceeds a base year amount, which is determined
by reference to the average of the  institution's  residential  loans during the
six taxable years ending before January 1, 1996. However,  notwithstanding  this
special  provision,  recapture  must begin no later than the first  taxable year
beginning after December 31, 1997.
<PAGE>
         The Bank may also be subject to the corporate  alternative  minimum tax
("AMT").  This tax is  applicable  only to the  extent it  exceeds  the  regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative  minimum  taxable income  ("AMTI")  subject to applicable  statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain  adjustments to the  corporation's  regular taxable  income.  Preference
items and adjustments  generally applicable to financial  institutions  include,
but are not limited to, the following:  (i) the excess of the bad debt deduction
over  the  amount  that  would  have  been  allowable  on the  basis  of  actual
experience;  (ii)  interest on certain  tax-exempt  bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's  adjusted earnings
and profits over its AMTI (as otherwise  determined  with certain  adjustments).
Net operating loss carryovers,  subject to certain adjustments,  may be utilized
to offset up to 90% of the AMTI.  Credit for AMT paid may be available in future
years to reduce future regular  federal  income tax liability.  The Bank has not
been subject to the AMT in recent years.

         The Bank's federal income tax returns have not been audited in the last
ten tax years.  The  Parent's  1996  federal  income tax return was  examined in
fiscal 1999 and was  accepted by the Internal  Revenue  Service with no proposed
adjustments.  The Bank and Parent filed  separate  federal  returns until fiscal
1997 and began filing consolidated returns in fiscal 1998.

State Taxation

         Under North Carolina law, the corporate income tax in 1997 was 7.50% of
federal taxable income as computed under the Code, subject to certain prescribed
adjustments.  The North Carolina corporate tax rate dropped to 7.25% in 1998 and
will drop to 7.00% in 1999 and 6.90%  thereafter.  An annual state franchise tax
is imposed at a rate of 0.15% applied to the greatest of the  institution's  (i)
capital  stock,  surplus and  undivided  profits,  (ii)  investment  in tangible
property in North  Carolina or (iii)  appraised  valuation  of property in North
Carolina.


ITEM 2.           PROPERTIES

         At June 30, 1999, the Company conducted its business from three offices
in  Hillsborough,  Durham and Chapel Hill,  North Carolina.  The following table
sets  forth  certain  information  regarding  the  Company's  owned  and  leased
properties  as of June 30, 1999.  The  Hillsborough  and Chapel Hill Offices are
owned by the Company,  and the Durham Office is leased under an operating  lease
that expires in 2013.

                                             Owned                    Net Book
                                               Or                     Value of
         Address                             Leased                   Property
         -------                             ------                   --------

260 South Churton Street                     Owned                   $1,334,000
Hillsborough, North Carolina  27278

1406 E. Franklin Street                      Owned                    $940,000
Chapel Hill, North Carolina 27514

3400 Westgate Drive                          Leased                   $254,000
Durham, North Carolina 27707
<PAGE>
         In addition to the  properties  described  above,  the Company owns two
additional office buildings located in Hillsborough,  North Carolina, one at 112
North Churton Street (former branch location) and another  directly  adjacent to
the North Churton  Street  building.  These  properties  have net book values of
$39,000 and  $15,000,  respectively,  as of June 30, 1999 and were both used for
rental  office  space.  The total net book value of the  Company's  premises and
equipment on June 30, 1999 was $3,213,000.  The properties are considered by the
Company's management to be in good condition.

ITEM 3.           LEGAL PROCEEDINGS

         In the  opinion  of  management,  the  Company is not  involved  in any
pending legal proceedings other than routine, non-material proceedings occurring
in the ordinary course of business.

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

         No matter was submitted to a vote of the Company's  stockholders during
the quarter ended June 30, 1999.

                                     PART II


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

         The  information  required  by this Item is set forth under the section
captioned  "Capital  Stock"  in  the  Company's  1999  Annual  Report  which  is
incorporated  herein by reference.  See also "Item 1. BUSINESS  SUPERVISION  AND
REGULATION--Regulation of the Parent--Dividend and Repurchase Limitations" and "
--Regulation   of  the   Bank--Restrictions   on  Dividends  and  Other  Capital
Distributions" above for a detailed discussion of regulatory  restrictions which
limit the ability to pay dividends.

ITEM 6.           SELECTED FINANCIAL DATA

         The  information  required  by this  Item  is set  forth  in the  table
captioned  "Selected  Financial  Data" on page 2 of the  Company's  1999  Annual
Report which is incorporated herein by reference.

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

         See the  information  set forth under Item 1 above and the  information
set forth under the section captioned "Management's Discussion and Analysis " on
pages 7-22 of the Company's  1999 Annual  Report which  section is  incorporated
herein by reference.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The  information  required by this Item is set forth under the sections
captioned  "Liquidity  and Interest Rate Risk  Management"  and "Market Risk" on
pages 17 and 18 of the Company's  Annual Report which is incorporated  herein by
reference.
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated  financial statements of the Company and supplementary
data  set  forth  on  pages  24-47  in the  Company's  1999  Annual  Report  are
incorporated herein by reference.

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

         There  were  no  changes  in  or  disagreements   with  accountants  on
accounting and financial  disclosure  during the fiscal year ended June 30, 1999
and the interim subsequent period.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required  by this Item is set forth under the section
captioned  "Proposal 1 - Election of Directors"  in the Proxy  Statement for the
1999 Annual  Meeting of  Shareholders  of Piedmont  Bancorp,  Inc. to be held on
November 18, 1999 (the "Proxy  Statement")  and the section  captioned  "Section
16(a) Beneficial Ownership Reporting  Compliance" in the Proxy Statement,  which
sections are incorporated herein by reference.

ITEM 11.          EXECUTIVE COMPENSATION

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

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         There have been no reportable  transactions  since the beginning of the
Company's  last fiscal year nor are any reportable  transactions  proposed as of
the date of this Form 10-K. See also the section captioned  "Proposal 1 Election
of Directors - Certain Indebtedness and Transactions of Management" in the Proxy
Statement, which section is incorporated herein by reference.
<PAGE>
                                     PART IV

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

14(a)             Consolidated  Financial Statements (contained in the Company's
                  1999  Annual  Report  attached  hereto  as  Exhibit  (13)  and
                  incorporated herein by reference) including the following:

                  (1)      Independent Auditors' Report

                  (2)      Consolidated  Balance  Sheets as of June 30, 1999 and
                           1998

                  (3)      Consolidated Statements of Income for the Years Ended
                           June 30, 1999, 1998 and 1997

                  (4)      Consolidated  Statements of Stockholders'  Equity and
                           Comprehensive  Income  for the Years  Ended  June 30,
                           1999, 1998 and 1997

                  (5)      Consolidated  Statements  of Cash Flows for the Years
                           Ended June 30, 1999, 1998 and 1997

                  (6)      Notes to Consolidated Financial Statements


14(a)2.                    Financial Statement Schedules

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

14(a)3.                    Exhibits

                  Exhibit (3)(i)      Articles  of  Incorporation,  incorporated
                                      herein by  reference to Exhibit 3.1 of the
                                      Company's  Registration  Statement on Form
                                      S-1 (No.  33-94512) filed on July 12, 1995
                                      and  amended  on  September  27,  1995 and
                                      October 6, 1995

                  Exhibit (3)(ii)     Bylaws, as amended August 19, 1999

                  Exhibit (4)         Specimen Stock  Certificate,  incorporated
                                      herein by  reference to Exhibit 4.1 of the
                                      Company's  Registration  Statement on Form
                                      S-1 (No.  33-94512) filed on July 12, 1995
                                      and  amended  on  September  27,  1995 and
                                      October 6, 1995
<PAGE>
                  Exhibit (10)(a)     Piedmont Bancorp,  Inc. Stock Option Plan,
                                      incorporated   herein  by   reference   to
                                      Exhibit  (10)(ii)(a)  of the  Registrant's
                                      Form 10-K for the year ended June 30, 1996

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

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

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

                  Exhibit (10)(e)     Employment  Agreement between Hillsborough
                                      Savings Bank,  Inc.,  SSB and Ted R. Laws,
                                      incorporated   herein  by   reference   to
                                      Exhibit  (10)(ii)(e)  of the  Registrant's
                                      Form 10-K for the year ended June 30, 1997

                  Exhibit (10)(f)     Employment  Agreement between Hillsborough
                                      Savings  Bank,  Inc.,  SSB and  Thomas  W.
                                      Wayne, incorporated herein by reference to
                                      Exhibit  (10)(ii)(f)  of the  Registrant's
                                      Form 10-K for the year ended June 30, 1998

                  Exhibit (10)(g)     Employment  Agreement between Hillsborough
                                      Savings Bank, Inc., SSB and Danny C. Lloyd

                  Exhibit (10)(h)     Ground  Lease  dated   September  2,  1987
                                      between   ZT-Durham   Associates   #1  and
                                      Guaranty   State  Bank,  as   subsequently
                                      assigned  to  Hillsborough  Savings  Bank,
                                      Inc. SSB for space in the  Westgate  Plaza
                                      Shopping  Center  located on  property  in
                                      Durham, North Carolina.

<PAGE>
                  Exhibit (12)        Statement Regarding Computation of Ratios

                  Exhibit (13)        1999 Annual Report to Security Holders

                  Exhibit (21)        See Item 1. "Business--Subsidiaries" for a
                                      discussion of subsidiaries.

                  Exhibit (23)        Consent of Independent Auditors


                  Exhibit (27)        Financial Data Schedule

14(b) The  Company  filed one report on Form 8-K during the last  quarter of the
fiscal year ended June 30, 1999.
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                               PIEDMONT BANCORP, INC.


Date:     September 16, 1999                   By:  /s/D. Tyson Clayton
                                                    -----------------
                                                    D. Tyson Clayton
                                                    President and
                                                    Chief Executive Officer


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

Signature                         Title                            Date
---------                         -----                            ----
/s/D. Tyson Clayton         President, Chief Executive        September 16, 1999
-------------------         Officer and Director
D. Tyson Clayton


/s/Peggy S. Walker          Executive Vice President,         September 16, 1999
---------------             Secretary and Director
Peggy S. Walker


/s/Thomas W. Wayne          Vice President, Treasurer and     September 16, 1999
------------------          Principal Financial Officer
Thomas W. Wayne

M. Marion Clark             Director                          September 16, 1999
---------------
M. Marion Clark


/s/Robert B. Nichols, Jr.   Director                          September 16, 1999
-------------------------
Robert B. Nichols, Jr.


/s/Alfred L. Carr           Director                          September 16, 1999
-----------------
Alfred L. Carr


/s/Everett H. Kennedy       Director                          September 16, 1999
---------------------
Everett H. Kennedy


/s/Donald W. Pope           Director                          September 16, 1999
-----------------
Donald W. Pope
<PAGE>

/s/James P. Ray             Director                          September 16, 1999
---------------
James P. Ray


/s/William Larry Rogers
-----------------------     Director                          September 16, 1999
William Larry Rogers
<PAGE>

                                INDEX TO EXHIBITS



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


(3)(ii)         Bylaws, as amended August 19, 1999

(10)(g)         Employment Agreement between Hillsborough Savings
                Bank, Inc., SSB and Danny C. Lloyd

(10)(h)         Ground  Lease  dated   September   2,  1987  between   ZT-Durham
                Associates #1 and Guaranty State Bank, as subsequently  assigned
                to Hillsborough Savings Bank, Inc. SSB for space in the Westgate
                Plaza  Shopping  Center  located on  property  in Durham,  North
                Carolina.

(12)            Statement Regarding Computation of Ratios

(13)            1999 Annual Report to Security Holders

(23)            Consent of Independent Auditors

(27)            Financial Data Schedule



COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN  REQUEST TO THOMAS W. WAYNE,  VICE
PRESIDENT, TREASURER, AND PRINCIPAL FINANCIAL OFFICER OF PIEDMONT BANCORP, INC.