<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------
                                   
                                  FORM 10-K/A       


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


                   For the fiscal year ended  June 30, 1996
                                              -------------

                        Commission file number  1-14070
                                                -------


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

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

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

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


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

                          Common Stock, No Par Value
                          --------------------------         
                               (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.       Yes    X              No  
                                              -----                -----
    
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to 
this Form 10-K/A.            [ ]       

State the aggregate market value of the voting stock held by non-affiliates of
the registrant.  The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$ 41,605,850 common stock, no par value, based on the closing price of such
---------------------------------------------------------------------------
common stock on August 30, 1996.
-------------------------------- 

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
2,750,800 shares of common stock, no par value, outstanding at August 30, 1996.
-------------------------------------------------------------------------------
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of Piedmont Bancorp, Inc. for the year ended June
30, 1996, are incorporated by reference into Part I, Part II and Part IV.

Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders of
Piedmont Bancorp, Inc. to be held on November 26, 1996, are incorporated by
reference into Part III.
<PAGE>
 
                                     PART I

ITEM I.    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 on July 7, 1995 for the purpose of acquiring 100% of the
common stock of the Bank in its recent mutual to stock conversion which was
completed on December 7, 1995 (the "Conversion").  The Conversion occurred
through the sale of 2,645,000 shares of Piedmont Bancorp, Inc. common stock (no
par value). Total proceeds of $26,450,000 were reduced by Conversion expenses of
$1,052,395.  The Parent retained 50% of the net Conversion proceeds after
deducting the proceeds of a loan to the Bank's Employee Stock Ownership Plan and
paid the balance of $11,353,464 to the Bank in exchange for 100% of the common
stock of the Bank issued in the Conversion.

          Hillsborough Savings Bank is a state-chartered stock savings bank
originally organized under the laws of North Carolina in 1913.  The Bank is
headquartered in Hillsborough, North Carolina centrally located in its primary
market of central and northern Orange County, North Carolina.  The Bank is a
community-oriented financial institution which offers a variety of financial
services to meet the needs of the community it serves.  The Bank is principally
engaged in the business of attracting deposits from the general public and using
those deposits to make one-to-four family residential real estate loans, loans
secured by nonresidential real estate, home equity line of credit loans, and
other loans and investments.  At June 30, 1996, all of the loans in the Bank's
portfolio which were secured by real estate were secured by properties located
in North Carolina.  Revenues are derived primarily from interest on loans.  The
Bank also receives interest income from investment securities, mortgage-backed
securities, and interest-bearing deposit balances.  The major expenses of the
Bank are interest on deposits and borrowings and noninterest expenses such as
salaries, employee benefits, federal deposit insurance premiums, data processing
expenses, and occupancy expenses.  The Bank conducts its business through its
two offices in Hillsborough, North Carolina.

          Piedmont Bancorp, Inc. and its wholly-owned bank subsidiary,
Hillsborough Savings Bank, Inc., are collectively referred to as "the Company".
For additional information regarding the Company's business, see the 1996 Annual
Report to Security Holders and the accompanying financial statements.

Market Area and Competition

          The Company's primary market area consists of central and northern
Orange County, North Carolina.  Hillsborough is located approximately 10 miles
northwest of Durham, North Carolina and 10 miles north of Chapel Hill, North
Carolina.  North Carolina's Research Triangle Park is located about 20 miles
eastward between the cities of Chapel Hill, Durham and Raleigh.  Chapel Hill and
Durham are home to the University of North Carolina at Chapel Hill and Duke
University, respectively.  The economy of Orange County is significantly
impacted by these universities and the employment opportunities they generate.
However, the economy in Orange County is varied with employment spread among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities.

          The Company faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The
Company has also faced additional significant competition for investors' funds
from short-term money market securities and other corporate and government
securities. The ability of the Company to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. The Company
experiences strong competition for real estate loans from other savings
institutions, commercial banks, 

                                       3
<PAGE>
 
and mortgage banking companies. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.

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


                           SUPERVISION AND REGULATION

Regulation of the Parent Holding Company

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

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

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

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

                                       4
<PAGE>
 
          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 SAIF or
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.

          No stock repurchases may be made within one year after the conversion
without the approval of the Administrator.  Also, the Parent must notify the
Federal Reserve prior to repurchasing common stock for in excess of 10% of its
net worth during any rolling twelve-month period.

          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
Administrator.

          Capital Adequacy Guidelines for Holding Companies.  The Federal
Reserve has adopted capital adequacy guidelines for bank holding companies and
banks that are members of the Federal Reserve system and have consolidated
assets of $150 million or more.  For bank holding companies with less than $150
million in consolidated assets, the guidelines are applied on a bank-only basis
unless the parent bank holding company (i) is engaged in nonbank activity
involving significant leverage or (ii) has a significant amount of outstanding
debt that is held by the general public. Total consolidated assets of the
Company were less than $150 million during the fiscal year ended June 30, 1996,
and items (i) and (ii) did not apply during that same period. As of June 30, 
1996, the Bank exceeded the capital adequacy requirements for bank holding 
companies.

          Capital Maintenance Agreement.  In connection with the Administrator's
approval of the Parent's application to acquire control of the Bank, the Parent
was required to execute a Capital Maintenance Agreement whereby it has agreed to
maintain the Bank's capital in an amount sufficient to enable Hillsborough
Savings Bank to satisfy all regulatory capital requirements.

          Federal Securities Law.  The Parent has registered its common stock
with the SEC pursuant to Section 12 of the Exchange Act.  Accordingly, the proxy
and tender offer rules, insider trading reporting requirements and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Parent.

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
will continue to be subject to changes in applicable statutes and regulations
from time to time.

                                       5
<PAGE>
 
          The Bank is a member of the FHLB system, and its deposits are insured
by the FDIC through the SAIF. It is subject to examination and regulation by the
FDIC and the Administrator and to regulations governing such matters as capital
standards, mergers, establishment of branch offices, subsidiary investments and
activities, and general investment authority. Generally, North Carolina-
chartered savings banks whose deposits are insured by the SAIF are subject to
restrictions with respect to activities and investments, transactions with
affiliates and loans-to-one borrower similar to those applicable to SAIF-insured
savings associations. Such examination and regulation is intended primarily for
the protection of depositors and the federal deposit insurance funds.

          The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Stockholders), 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 may be subject to potential liability
under various statutes and regulations applicable to property owners generally,
including statutes and regulations relating to the environmental condition of
real property.

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

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

          Transactions with Affiliates.  Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the Bank. Since
consummation of the conversion, the Bank is an affiliate of the Parent.
Generally, Sections 23A and 23B (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 banks the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who own
more than 10% of a savings bank, and certain affiliated entities of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated entities, the savings bank's loans-to-one borrower limit
as established by federal law (as discussed below).  Section 22(h) also
prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers and stockholders who own more than 10%
of a savings bank, and their respective affiliates, unless such loan is approved
in advance by a majority of the board of directors of the savings bank.  Any
"interested" director may not participate in the voting. The Federal Reserve has
prescribed the loan amount (which 

                                       6
<PAGE>
 
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features.

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

          As a SAIF-insured institution, Hillsborough Savings Bank is subject to
insurance assessments imposed by the FDIC. Effective January 1, 1993, the FDIC
replaced its uniform assessment rate with a transitional risk-based assessment
schedule issued by the FDIC pursuant to the 1991 Banking Law, which imposes
assessments ranging from $0.23 to $0.31 per $100 of an institution's average
assessment base. The actual assessment to be paid by each SAIF member is based
on the institution's assessment risk classification, which is based on whether
the institution is considered "well capitalized," "adequately capitalized" or
"undercapitalized" (as such terms have been defined in federal regulations), and
whether such institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns. Under the 1991 Banking Law,
the FDIC also may impose special assessments on SAIF members to repay amounts
borrowed from the U.S. Treasury or for any other reason deemed necessary by the
FDIC.  As a result of the 1991 Banking Law, the assessment rate on deposits
could further increase over a 15-year period.

          Financial institutions which are members of the SAIF, are required to
pay higher deposit insurance premiums than financial institutions which are
members of the BIF, primarily commercial banks, because the BIF has higher
reserves than the SAIF and has been responsible for fewer troubled institutions.
The FDIC Board of Directors has approved a new risk-based premium schedule that
has reduced assessment rates for commercial banks, left assessment rates for
savings institutions such as the Bank at current levels, and will increase the
disparity between SAIF and BIF assessments.  Assessments for BIF members range
from $0.04 to $0.31 per $100 of domestic deposits.  In announcing this rule, the
FDIC noted that the premium differential may have adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets.  In addition, SAIF members, such as the Bank, could be
placed at a substantial competitive disadvantage to BIF members with respect to
pricing of loans and deposits and the ability to achieve lower operating costs.
Several alternatives to mitigate the effect of the BIF/SAIF premium disparity
have been suggested by the federal banking regulators, by members of the United
States Congress and by industry groups.

          The Balanced Budget Act of 1995, which was passed by the United States
Congress but vetoed by the President for reasons unrelated to the SAIF
recapitalization, provided for a one-time assessment currently estimated to be
0.85% of insured deposits.  It is unknown whether similar legislation that would
fully capitalize the SAIF will be enacted or whether premiums for either BIF or
SAIF members will be adjusted in the future by the FDIC or by legislative
action.  If a special assessment as described above were to be required, it
would result in a one-time charge to the Bank estimated at $711,000 pre-tax,
assuming the special assessment is based on deposits held at June 30, 1996.
Management cannot predict whether such legislation will be enacted, or, if
enacted, the amount of any one-time assessment or whether ongoing SAIF premiums
will be reduced to a level equal to that of BIF premiums.

          The Bank incurred deposit insurance premium expense of $176,000 in the
year ended June 30, 1996.  A significant increase in SAIF insurance premiums or
a significant one-time fee to recapitalize the SAIF would likely have an adverse
effect on the operating expenses and results of operations of the Bank.

                                       7
<PAGE>
 
          Community Reinvestment Act.  The Bank, like other financial
institutions, is subject to the Community Reinvestment Act ("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. During the Bank's last compliance examination, it received a
"satisfactory" rating with respect to CRA compliance.  The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by The Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and, if such rating was less than "satisfactory," could result in
the denial of such applications.

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

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

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

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

          At June 30, 1996, 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, 1996, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -
ANALYSIS OF FINANCIAL CONDITION - Capital Resources" in the 1996 Annual Report
to Security Holders.

          The 1991 Banking Law required each federal banking agency to revise 
its risk-based capital standards to ensure that those standards take adequate 
account of interest rate risk, concentration of credit risk, and the risk of 
nontraditional activities, as well as reflect the actual performance and 
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal 
banking agencies issued a joint notice of adoption of final risk-based capital 
rules to take account of interest rate risk. The final regulation required an 
assessment of the need for additional capital on a case-by-case basis, 
considering both the level of measured exposure and qualitative risk factors. 
The final rule also stated an intent to, in the future, establish an explicit 
minimum capital charge for interest rate risk based on the level of a bank's 
measured interest rate risk exposure. The final regulation has not had a
material impact on the Bank's capital requirements.

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


                                       8
<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. The Bank does not anticipate
that this rule will have 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 Bank.  Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of net worth.  These limits also authorize savings banks to
make loans to one borrower, for any purpose, in an amount not to exceed
$500,000.  The Bank also is authorized to make loans to one borrower to develop
domestic residential housing units, not to exceed the lesser of $30 million, or
30% of the 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
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
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, 1996, the largest aggregate amount of loans which the
Bank had to any one borrower was $1,722,000.  The Bank had no loans outstanding
which management believes violate the applicable loans-to-one borrower limits.

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

          Federal Home Loan Bank System.  The FHLB system provides a central
credit facility for member institutions.  As a member of the FHLB of Atlanta,
The Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1996, The Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $863,000.

                                       9
<PAGE>
 
          Federal Reserve System.  Federal Reserve regulations require banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve.  As of June 30, 1996, The Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.

          Restrictions on Acquisitions.  Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition.  Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired, among other  things, upon the acquisition of more than 25% of any
class of voting stock.  In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock.  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.

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

          Liquidity.  the Bank is subject to the Administrator's requirement
that the ratio of liquid assets to total assets equal at least 10%. The
computation of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable value, including investments with
maturities in excess of five years. At June 30, 1996, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 23%.

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

                                       10
<PAGE>
 
          State savings banks are also required to notify the FDIC at least 30
days prior to the establishment or acquisition of any subsidiary, or at least 30
days prior to conducting any such new activity. Any such activities must be
conducted in accordance with the regulations and orders of the FDIC and the
Administrator.  State 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").

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

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

          To facilitate the early identification of problems, the 1991 Banking
Law required the federal banking agencies to review and, under certain
circumstances, prescribe more stringent accounting and reporting requirements
than those required by generally accepted accounting principles. The FDIC issued
a final rule, effective July 2, 1993, implementing those provisions.

          The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities. The 1991 Banking Law also
requires annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators. Moreover, the 1991 Banking Law, as modified by the Federal Housing
Enterprises Financial Security and Soundness Act, requires the federal banking
agencies to set operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions and depository
institution holding companies, as well as compensation standards (but not dollar
levels of compensation) for insured depository institutions that prohibit
excessive compensation, fees or benefits to officers, directors, employees, and
principal stockholders. In July 1992, the federal banking agencies issued a
joint advance notice of proposed rulemaking soliciting comments on all aspects
of the implementation of these standards in accordance with the 1991 Banking
Law, including whether the compensation standards should apply to depository
institution holding companies.  An interagency notice of proposed rulemaking was
issued in November 1993.  However, sections of the Riegle Community Development
and Regulatory Improvement Act of 1994 will affect the nature and scope of the
proposed regulations, and eliminates the requirement that the regulations apply
to depository institution holding companies.

          The foregoing necessarily is a general description of certain
provisions of the 1991 Banking Law and does not purport to be complete.

                                       11
<PAGE>
 
          Interstate Banking.  A bank or savings bank holding company and its
subsidiaries are currently prohibited from acquiring any voting shares of, or
interest in, any banks or savings banks located outside of the state in which
the operations of the savings bank holding company's subsidiaries are located,
unless the acquisition is specifically authorized by the statutes of the state
in which the target bank is located.  However, in September 1994, Congress
passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act").  The Interstate Banking Act permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state beginning on September 29, 1995, one year after
the effectiveness of the Interstate Banking Act.  North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.

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

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

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

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

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

                                       12
<PAGE>
 
          Restrictions on Dividends and Other Capital Distributions.  A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. 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.

          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.  Under FDIC regulations, stock repurchases may be made
during the first year after the Conversion only after receipt of FDIC approval.

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

          Restrictions on Benefit Plans.  FDIC regulations provide that for a
period of one year from the date of the conversion, the Bank may not implement
or adopt a stock option plan or restricted stock plan, other than a tax-
qualified plan or ESOP, unless: (1) the plans are fully disclosed in the
conversion proxy soliciting and stock offering material, (2) all such plans are
approved by a majority of the Parent's stockholders prior to implementation and
no earlier than six months following the conversion, (3) for stock option plans,
the exercise price must be at least equal to the market price of the stock at
the time of grant, (4) for restricted stock plans, no stock issued in connection
with the Conversion may be used to fund the plan and (5) prior to implementing
the plans, all such plans are submitted for review and approval to the Regional
Director of the FDIC.

          The FDIC regulations provide that the FDIC will presume that excessive
compensation will result if stock based benefit plans fail to satisfy percentage
limitations on management stock-based benefit plans set forth in the regulations
of the OTS.  Those regulations provide that (1) for stock option plans, the
total number of shares  for  which  options may be granted may not exceed 10% of
the shares issued in the Conversion, (2) for restricted stock plans, the shares
issued may not exceed 3% of the shares issued in the Conversion (4% for
institutions with tangible capital of 10% or greater after the Conversion), (3)
the aggregate amount of stock purchased by the ESOP shall not exceed 10%  (8%
for well-capitalized institutions utilizing a 4% restricted stock plan), (4) no
individual employee may receive more than 25% of the available awards under any
plan, and (5) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan.  The awards
and grants made or to be made under the MRP and the Stock Option Plan conform to
these requirements.

          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.

                                       13
<PAGE>
 
          The Administrator conducts regular examinations of North Carolina-
chartered savings banks. The purpose of such examinations is to assure that
institutions are being operated in compliance with applicable North Carolina law
and regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC.  In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.

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

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

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

Subsidiaries

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

Employees

          As of June 30, 1996, the Bank had 29 full-time employees and two part-
time employees.  The Bank provides its employees with basic and major medical
insurance, life insurance, sick leave and vacation benefits.  In addition, the
Bank maintains a 401(k) retirement plan pursuant to which the Bank matches one-
half of employees' contributions, with its contribution limited to 3% of each
employee's salary.

          In connection with the Conversion, the Bank adopted an Employee Stock
Ownership Plan (the "ESOP"), which provides benefits to employees of the Bank.
Also, the Boards of Directors of the Bank and the Parent have approved, and the
stockholders of the Parent have approved, the Bank's Management Recognition Plan
and the Parent's Stock Option Plan.  Effective August 29, 1996, 105,800 shares 
were awarded to directors, officers and employees under the Management 
Recognition Plan. No stock options have been rewarded under the Stock Option 
Plan to date.

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

                                       14
<PAGE>
 
Federal Income Taxation

          The Parent and the Bank are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations.  However, savings banks which meet certain definitional
tests and other conditions prescribed by the Code may benefit from certain
favorable provisions regarding their deductions from taxable income for annual
additions to their bad debt reserve.  A savings bank qualifying under these
rules is permitted to deduct (i) an addition to a reserve for losses on
"qualifying real property loans," (in general, loans secured by interests in
real property improved or to be improved with the proceeds of the loan) (the
"qualifying real property reserve") and (ii) an addition to a reserve for losses
on nonqualifying loans.  A savings bank that satisfies certain requirements may
compute its addition to the qualifying real property reserve under (i) a method
based on the savings bank's actual loss experience (the "experience method") or
(ii) a method based on a percentage of the savings bank's taxable income, as
adjusted (the "percentage of taxable income method").  The addition to the
nonqualifying real property reserve must be computed under the experience
method.  Under the percentage of taxable income method, the bad debt deduction
for qualifying real property loans is limited to 8% of taxable income before the
bad debt deduction, subject to certain adjustments.

          A savings bank may not use the percentage of taxable income method in
any year in which less than 60% of its total assets are "qualifying assets,"
which include U.S. Government securities, loans secured by an interest in
residential real property, cash, and certain other assets.  The addition to the
reserve for losses on qualifying real property loans under the percentage of
taxable income method cannot exceed the amount necessary to increase the balance
of the qualifying real property reserve at the close of the taxable year to 6%
of the balance of the qualifying real property loans outstanding at the end of
the taxable year.  In addition, the annual addition to the qualifying real
property reserve under the percentage of taxable income method cannot, when
added to the addition to the reserve for losses on nonqualifying loans, exceed
the amount by which (i) 12% of the total deposits or withdrawable accounts of
depositors of the qualifying institution at the close of the taxable year
exceeds (ii) the sum of the institution's surplus, undivided profits, and
reserves at the beginning of such year.  In fiscal years 1996, 1995 and 1994,
the Bank elected to use the percentage of taxable income method in computing its
bad debt reserve for federal income tax purposes.

          If a savings bank has a reserve for losses on qualifying real property
loans that exceeds the reserve it would have under the experience method
("excess bad debt reserve"), or maintains a supplemental reserve that represents
certain reserves built up from 1952 through 1962, it may be subject to tax when
it makes distributions with respect to its stock, including distributions in
redemption of stock or in liquidation.  Under these circumstances, the
institution's taxable income would be increased by an amount not to exceed the
amount of its excess bad debt reserve and supplemental reserve, equal to the sum
of (i) any nonstock distributions paid in excess of earnings and profits
accumulated in taxable years beginning after December 31, 1951, (ii) any
distributions made in redemption of stock or made in partial or complete
liquidation, and (iii) the amount of federal income tax payable (determined on a
grossed-up basis) on the sum of (i) and (ii).  The Bank currently has earnings
and profits accumulated since December 31, 1951, and has an excess bad debt
reserve of approximately $2.8 million.  Thus, any distribution with respect to
its stock in excess of current and accumulated earnings and profits would
increase its taxable income as described above.

          Institutions which become ineligible to use the percentage of income
method must change to either the reserve method or the specific charge-off
method that applies to commercial banks.  Large institutions, those generally
exceeding $500 million in assets, must convert to the specific charge-off
method.  Legislation recently adopted by Congress requires ratable inclusion in
income of excess reserves over a six-year period in the event of ineligibility.

          The Parent and the Bank may also be subject to the corporate
alternative minimum tax ("AMT"). Generally, a corporation's AMT is the excess of
its "tentative minimum tax" (i.e., 20% of the amount by which the corporation's
alternative minimum taxable income ("AMTI") exceeds an applicable statutory
exemption amount) over its regular income tax.  The amount of the corporation's
AMT, if any, is added to the corporation's regular tax for a taxable year and
the total is the corporation's federal income tax for the year.  AMTI is
calculated by adding certain tax preference items and making certain adjustments
to the corporation's regular taxable income.  Such items and 

                                       15
<PAGE>
 
adjustments include, but are not limited to, the following: (i) 75% of the
excess, if any, of a corporation's adjusted current earnings and profits over
its AMTI (as otherwise determined with certain adjustments); (ii) interest on
certain tax-exempt bonds issued after August 7, 1986; and (iii) the amount by
which a financial institution's allowable deduction for the taxable year for
additions to its reserve for bad debts exceeds the deduction that would have
been allowable if the financial institution had made additions to its bad debt
reserve for all taxable years on the basis of actual experience. Net operating
loss carryovers may be utilized, subject to certain adjustments, to offset up to
90% of the AMTI, as otherwise determined. Thus, despite any available net
operating loss carryovers, a corporation generally will be subject to an
effective minimum tax liability of at least 2% of the excess of its AMTI over
the exemption amount. A portion of the AMT paid by a corporation may be credited
against future regular federal income tax liability, subject to certain
limitations. In recent years, the Bank has not been subject to the AMT.

          The Bank's federal income tax returns have not been audited since the
1989 fiscal year.

State Taxation

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

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



ITEM 2.   PROPERTIES

     At June 30, 1996, the Company conducted its business from its two offices
in Hillsborough, North Carolina.  The following table sets forth certain
information regarding the Company's properties as of June 30, 1996.  All
properties are owned by the Company.

<TABLE>
<CAPTION>
                                                      Net Book
                                                      Value of
Address                                               Property
-------                                               --------
<S>                                                 <C>       
112 North Churton Street                            $   44,000
Hillsborough, North Carolina  27278                           
                                                              
260 South Churton Street                            $1,048,000 
Hillsborough, North Carolina  27278
</TABLE>

          In addition to the properties described above, the Company owns an
office building adjacent to its North Churton Street branch.  This property had
a net book value of $16,000 as of June 30, 1996 and was used for rental office
space.  The total net book value of the Company's furniture, fixtures and
equipment on June 30, 1996 was $216,000.


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.

                                       16
<PAGE>
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     A special meeting of the stockholders of the Company was held on June 11,
1996 (the "Special Meeting") to approve the Piedmont Bancorp, Inc. Stock Option
Plan (the "Stock Option Plan") and the Hillsborough Savings Bank, Inc., SSB
Management Recognition Plan (the "MRP").  At the Special Meeting, 1,551,909
votes were cast for approval of the Stock Option Plan, 216,911 votes were cast
against or withheld and there were 11,895 abstentions or broker non-votes.  With
regard to the MRP, 1,546,661 votes were cast for approval of the Plan, 229,904
votes were cast against or withheld and there were 4,150 abstentions or broker
non-votes.


                                    PART II

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

     The high and low stock price for the Company's common stock was $15 1/8 and
$15 1/8, respectively, on August 30, 1996.  The information required by this
Item is set forth under the section captioned "Capital Stock" in the Company's
1996 Annual Report which is incorporated herein by reference.

ITEM 6.   SELECTED FINANCIAL DATA

     The information required by this Item is set forth in the table captioned
"Five Year Summary" on the inside cover of the Company's 1996 Annual Report
which is incorporated herein by reference.

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


The table below sets forth certain performance ratios for the
   Company for the periods indicated.

<TABLE> 
<CAPTION> 
                                               Year ended June 30,
                                           -------------------------
                                             1996      1995     1994
                                             ----      ----     ----
<S>                                       <C>       <C>       <C>
Return on Average Assets (Net income         1.42%     1.24%    1.06%
 divided by average total assets)

Return on Average Equity (Net income         6.15%     9.70%    8.64%
 divided by average
 shareholders' equity

Average Equity to Average Assets Ratio      23.11%    12.76%   12.22%
 (Average shareholders'
 equity divided by average total assets)

Interest Rate Spread for the Period          3.16%     3.72%    3.32%
 (Tax equivalent basis)

Average Interest-Earning Assets to         130.92%   114.90%  114.02%
 Average Interest-Bearing Liabilities

Net Interest Margin (Tax equivalent          4.33%     4.29%    3.80%
 basis)

Loan Loss Allowance to Nonperforming        80.21%  1716.67%  134.67%
 Assets at Period End
</TABLE>

          See also the information set forth under Item 1 above and the
information set forth under the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operation" in the Company's 1996
Annual Report which section is incorporated herein by reference.


                                       17
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements of the Company and supplementary data
set forth in the Company's 1996 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, 1996 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
1996 Annual Meeting of Shareholders of Piedmont Bancorp, Inc. to be held on
November 26, 1996 (the "Proxy Statement") and the section captioned "Compliance
with Section 16(a) of the Exchange Act of 1934" in the Proxy Statement, which
sections are incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION AND TRANSACTIONS

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
     There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-K/A.  See also the section captioned "Proposal 1 - Election of 
Directors - Certain Indebtedness and Transactions of Management" in the Proxy 
Statement, which section is incorporated herein by reference.       


                                    PART IV

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

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

          (a)  Independent Auditors' Report

          (b)  Consolidated Balance Sheets as of June 30, 1996 and 1995

          (c)  Consolidated Statements of Income for the Years Ended June 30,
               1996, 1995 and 1994

          (d)  Consolidated Statements of Shareholders' Equity for the Years
               Ended June 30, 1996, 1995 and 1994

                                       18
<PAGE>
 
          (e)  Consolidated Statements of Cash Flows for the Years Ended 
               June 30, 1996, 1995 and 1994

          (f)  Notes to Consolidated Financial Statements

14(a)2.   Financial Statement Schedules

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

14(a)3.   Exhibits
          
          Exhibit (3)(i)      Articles of Incorporation, incorporated herein by
                              reference to Exhibit 3.1 of the Company's 
                              Registration Statement on Form S-1 (No.33-94512) 
                              filed on July 12, 1995 and amended on
                              September 27, 1995 and October 6, 1995
 
         Exhibit (3)(ii)      Bylaws, incorporated herein by reference to 
                              Exhibit 3.2 of the Company's Registration 
                              Statement on Form S-1 (No.33-94512) filed on 
                              July 12, 1995 and amended on September 27, 1995 
                              and October 6, 1995
 
          Exhibit (4)         Specimen Stock Certificate, incorporated herein by
                              reference to Exhibit 4.1 of the Company's 
                              Registration Statement on Form S-1 (No.33-94512) 
                              filed on July 12, 1995 and amended on 
                              September 27, 1995 and October 6, 1995
 
          Exhibit (10)(ii)(a) Piedmont Bancorp, Inc. Stock Option Plan
 
          Exhibit (10)(ii)(b) Hillsborough Savings Bank, Inc., SSB Management
                              Recognition Plan
 
          Exhibit (10)(ii)(c) Employment Agreement between Hillsborough
                              Savings Bank, Inc., SSB and D. Tyson
                              Clayton, incorporated herein by reference to
                              Exhibit 10.2 of the Company's Registration
                              Statement on Form S-1 (No. 33-94512) filed
                              on July 12, 1995 and amended on September
                              27, 1995 and October 6, 1995
 
          Exhibit (10)(ii)(d) Employment Agreement between Hillsborough
                              Savings Bank, Inc., SSB and Peggy S. Walker,
                              incorporated herein by reference to Exhibit
                              10.2 of the Company's Registration Statement
                              on Form S-1 (No. 33-94512) filed on July 12,
                              1995 and amended on September 27, 1995 and
                              October 6, 1995
 
          Exhibit (10)(ii)(e) Employment Agreement between Hillsborough
                              Savings Bank, Inc., SSB and Gina B. Riggins,
                              incorporated herein by reference to Exhibit
                              10.2 of the Company's Registration Statement
                              on Form S-1 (No. 33-94512) filed on July 12,
                              1995 and amended on September 27, 1995 and
                              October 6, 1995
 
          Exhibit (10)(ii)(f) Employment Agreement between Hillsborough
                              Savings Bank, Inc., SSB and Robert L.
                              Pearson, 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

                                       19
<PAGE>
 
          Exhibit (11)        Statement Regarding Computation of Per Share 
                              Earnings

          Exhibit (12)        Statement Regarding Computation of Ratios

          Exhibit (13)        1996 Annual Report to Security Holders

          Exhibit (27)        Financial Data Schedule

14(b)     The Company filed no reports on Form 8-K during the last quarter of 
          the fiscal year ended June 30, 1996.

                                       20
<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: October 12, 1996           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           October 12, 1996  
---------------------------  Executive
D. Tyson Clayton             Officer and Director                             
     
/s/ Peggy S. Walker          Executive Vice             October 12, 1996  
---------------------------  President, Secretary,
Peggy S. Walker              and Director                                     
     
/s/ Gina B. Riggins          Vice President,            October 12, 1996  
---------------------------  Treasurer, Principal
Gina B. Riggins              Financial Officer                                
                                                            
/s/ M. Marion Clark          Director                   October 12, 1996  
---------------------------
M. Marion Clark                                                               
     
/s/ Robert B. Nichols, Jr.   Director                   October 12, 1996  
---------------------------
Robert B. Nichols, Jr.                                                        
     
/s/ Alfred L. Carr           Director                   October 12, 1996  
---------------------------
Alfred L. Carr                                                                
     
/s/ Everett H. Kennedy       Director                   October 12, 1996  
---------------------------
Everett H. Kennedy                                                            
     
/s/ Donald W. Pope           Director                   October 12, 1996  
---------------------------
Donald W. Pope                                                                
     
/s/ James P. Ray             Director                   October 12, 1996  
---------------------------
James P. Ray                                                                  
     
/s/ William Larry Rogers     Director                   October 12, 1996  
---------------------------
William Larry Rogers                                                          

                                      21

<PAGE>
 
                               INDEX TO EXHIBITS

                                                                      Sequential
Exhibit No.                     Description                            Page No.
                                                                   

(10)(ii)(a)  Piedmont Bancorp, Inc. Stock Option Plan
         
(10)(ii)(b)  Hillsborough Savings Bank, Inc., SSB Management 
             Recognition Plan
             
(11)         Statement Regarding Computation of Per Share Earnings
             
(12)         Statement Regarding Computation of Ratios
             
(13)         1996 Annual Report to Security Holders

(27)         Financial Data Schedule


                                      22