<PAGE>

--------------------------------------------------------------------------------
                                 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 [FEE REQUIRED]


              For the fiscal year ended         December 31, 1997
                                        -------------------------

          Commission file number        0-22734
                                 ------------------------


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

            North Carolina                               56-1842707
----------------------------------------    ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


        207 West Second Street                              27542
           P. O. Box 219                                 -----------
        Kenly, North Carolina                             (Zip Code)
----------------------------------------
(Address of principal executive office)

Registrant's telephone number, including area code    (919) 284-4157
                                                      --------------


Securities Registered Pursuant to Section 12(b) of the Act:     None
                                                             -----------

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

                       Common Stock, no par value
                   -----------------------------------
                             (Title of class)

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

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.          [  ]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant.  The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$18,592,476 common stock, no par value, based on the closing price of such
--------------------------------------------------------------------------
common stock on March 16, 1998.
--------------------------------

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.  885,356 shares of common
                                                  ------------------------
stock, no par value, outstanding at March 16, 1998.
---------------------------------------------------
<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of KS Bancorp, Inc. for the year ended December
31, 1997, are incorporated by reference into Part I, Part II and Part IV.

Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders of
KS Bancorp, Inc. to be held on May 5, 1998, are incorporated by reference into
Part III.

Portions of the Registration Statement of KS Bancorp, Inc. on Form S-1,
Registration No. 33-69522, dated September 25, 1993, as amended on November 3,
1993, are incorporated by reference into Part IV.

                                       2
<PAGE>

                                     PART I


ITEM 1.   BUSINESS

General

     Prior to December 29, 1993, Kenly Savings Bank, Inc., SSB (the "Bank")
operated as a mutual North Carolina-chartered savings bank.  On December 29,
1993, the Bank converted from a North Carolina-chartered mutual savings bank to
a North Carolina-chartered stock savings bank (the "Conversion").  In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by KS Bancorp, Inc., a North Carolina corporation (the "Company")
which was organized to become the holding company for the Bank.  At that time,
the Company had an initial public offering of its common stock, no par value
(the "Common Stock").

     The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina.  The Company's executive office is
located at 207 West Second Street, Kenly, North Carolina.  The Company's
activities consist of investing the proceeds of its initial public offering
which were retained at the holding company level, holding certain indebtedness
outstanding from the Kenly Savings Bank, Inc., SSB Employee Stock Ownership Plan
(the "ESOP") and owning the Bank.  The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP.  In
addition, the Company receives dividends which are declared and paid by the Bank
on its capital stock.

     The Bank was originally chartered in 1924.  It has been a member of the
Federal Home Loan Bank ("FHLB") system since 1936, and its deposits have been
federally insured since 1961.  The Bank's deposits are insured by the Savings
Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC") to the maximum extent permitted by law.  As a North
Carolina-chartered savings bank, the Bank is regulated and examined by the
Administrator, Savings Institutions Division, North Carolina Department of
Commerce (the "Administrator") and the FDIC.

     The Bank conducts business through six full service offices in Kenly (2),
Goldsboro, Wilson, Garner and Selma, North Carolina and loan production offices
in Clayton and Knightdale, North Carolina.  At December 31, 1997, the Bank had
total assets of $114.0 million, net loans of $95.0 million, deposits of $90.3
million and retained earnings of 14.6 million.

     The Bank is engaged primarily in the business of attracting retail deposits
from the general public and using such deposits to make mortgage loans secured
by real estate.  The Bank makes mortgage loans secured by owner-occupied and
non-owner occupied residential real estate, loans secured by non-residential,
construction loans and equity line of credit loans.  The Bank also makes loans
which are not secured by real property, such as loans secured by pledged deposit
accounts, and during 1997 the Bank began originating various types of secured
and unsecured consumer loans.  The Bank's primary source of revenue is interest
income from its lending activities.  The Bank's other major sources of revenue
are interest and dividend income from investments and mortgage-backed
securities, interest income from its interest-earning deposit balances in other
depository institutions, and transaction and fee income from its lending and
deposit activities.  The major expenses of the Bank are interest on deposits and
borrowings from the FHLB and noninterest expenses such as employee compensation
and benefits, federal deposit insurance premiums, data processing expenses and
occupancy expenses.

     The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the Administrator.  Deposit flows and cost of
funds are influenced by interest rates on competing investments and general
market rates of interest.  Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn are affected by
the interest rates at which such financing may be offered and other factors
affecting local demand and availability of funds.

                                       3
<PAGE>

     At December 31, 1997, the Company and the Bank had a total of 33 full-time
employees and no part-time employees.

     The Company has no operations and conducts no business of its own other
than owning the Bank, investing its portion of the net proceeds received in the
Conversion and lending funds to the ESOP.  Accordingly, the discussion of the
business which follows in the Form 10-K concerns the business conducted by the
Bank, unless otherwise indicated.

Lending Activities

     General.   The Bank is engaged primarily in the business of attracting
deposits from the general public and using such deposits to make mortgage loans
secured by real estate.  The Bank's primary source of revenue is interest and
fee income from its lending activities, consisting primarily of conventional
first mortgage loans secured by real property located in its primary market
area.  The Bank also makes loans secured by multi-family and nonresidential
properties, construction loans, equity line loans, savings account loans and
various types of secured and unsecured consumer loans. Approximately 99% of the
Bank's gross loan portfolio is secured by real estate.  On December 31, 1997,
the Bank's largest single outstanding loan had a balance of approximately
$880,000. This loan was performing in accordance with its original terms.  In
addition to interest earned on loans, the Bank receives fees in connection with
loan originations, loan servicing, loan modifications, late payments, loan
assumptions and other miscellaneous services.

     Loan Portfolio Composition.  The Bank's net loan portfolio totaled
approximately $95.0 million at December 31, 1997 representing 83.4% of the
Bank's total assets at such date.  At December 31, 1997, 79.5% of the Bank's
gross loan portfolio, before net items, was composed of conventional first
mortgage loans.  Construction loans and equity line lines represented 10.9% and
8.8%, respectively, of the Bank's gross loan portfolio, before net items, on
such date.  As of December 31, 1997, 77.8% of the loans in the Bank's gross
loan portfolio, before net items, had adjustable interest rates.  See Note 4 of
the "Notes to Consolidated Financial Statements" in the Company's 1997 Annual
Report to Stockholders.

     The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 1997.  Fixed rate and adjustable rate
loans are shown as due in the period of contractual maturity.  Demand loans,
loans having no stated maturity and overdrafts are reported as due in one year
or less.  The table does not include prepayments or scheduled principal
repayments.  Prepayments and scheduled repayments in the loan portfolio totaled
$23.8 million, $18.3 million and $15.0 million in the fiscal years ended
December 31, 1997, 1996 and 1995, respectively.  Amounts in the table are net of
loans in process and are net of unamortized loan fees.


                                                More Than
                                      One Yr.   1 Year to  More Than
                                      Or Less    5 Years    5 Years     Total
                                     ---------  ---------  ---------  ---------

Mortgage Loans:                                    (In Thousands)

  Fixed rate                          $   822     $ 7,281    $13,662   $21,765
  Adjustable rate                       2,415      21,413     40,176    64,004
 Equity Lines                           8,750          --         --     8,750
                                      -------     -------    -------   -------
                                      $11,987     $28,694    $53,838   $94,519
Other loans (includes consumer &          808          --         --       808
 share):                              -------     -------    -------   -------
Totals before allowance               $12,795     $28,694    $53,838   $95,327
Allowance                                (325)         --         --      (325)
                                      -------     -------    -------   -------
                                      $12,470     $28,694    $53,838   $95,002
                                      =======     =======    =======   =======

                                       4
<PAGE>

     The following table sets forth the dollar amount at December 31, 1997 of
all loans maturing or repricing on or after December 31, 1998 which have fixed
or adjustable interest rates.


                                 Fixed    Adjustable
                                 Rates       Rates
                               ---------  -----------

                               (Dollars in Thousands)

Mortgage loans                   $20,943      $61,589
Other loans                           --           --
                                 -------      -------
                                 $20,943      $61,589
                                 =======      =======


     Although adjustable rate loans generally present less interest rate risk to
the Bank, they are generally considered to involve a greater degree of credit
risk than fixed rate loans because borrowers may have difficulty meeting their
payment obligations if interest rates and required payment amounts increase
substantially.  Substantially all of the fixed-rate loans in the Bank's mortgage
loan portfolio have due on sale provisions allowing the Bank to declare the
unpaid balance due and payable in full upon the sale or transfer of an interest
in the property securing the loan.

     Conventional First Mortgages.  The Bank's primary lending activity, which
it intends to continue to emphasize, is the origination of conventional first
mortgage loans to enable borrowers to purchase or refinance one-to-four family
residential real property.  The Bank also makes conventional first mortgage
loans secured by multi-family residential property and by nonresidential real
property. Consistent with the Bank's emphasis on being a community-oriented
financial institution, it is and has been the Bank's strategy to focus its
lending efforts in its primary market area. On December 31, 1997, approximately
77.4% of the Bank's real estate loan portfolio, before net items, consisted of
one-to-four family residential real estate loans.  These include both loans
secured by detached single-family residences and condominiums and loans secured
by housing containing not more than four separate dwelling units.  On such date,
approximately 5.7% of the Bank's loan portfolio, before net items, consisted of
conventional first mortgage loans secured by multi-family residential and
nonresidential properties.  Loans secured by multi-family residential and
nonresidential properties generally are larger than one-to-four family
residential loans and involve a greater degree of risk.  Payments on these loans
depend to a large degree on results of operations and management of the
properties and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general.

     Construction Lending.  The Bank makes various types of construction loans
primarily for the construction of single-family dwellings.  On December 31,
1997, the aggregate gross outstanding balances of construction loans had
increased to approximately $10.9 million, representing 10.9% of the Company's
gross loan portfolio, before net items. Some of these loans were made to
investors who are constructing properties on a speculative basis; others were
made to persons who are constructing properties for the purpose of occupying
them.  Loans made to investors are generally "pure construction" loans which
require the payment of interest during the construction period and the payment
of the principal in full at the end of the construction period.  Loans made to
individual property owners are both pure construction loans and "construction-
permanent" loans which generally provide for the payment of interest only during
a construction period, after which the loans convert to a permanent loan at
fixed or adjustable interest rates having terms similar to other permanent
loans.

     Construction loans are generally considered to involve a higher degree of
risk than long-term financing secured by real estate which is already occupied.
A lender's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at the completion of
construction and the estimated cost (including interest) of construction.  If
the estimate of construction costs proves to be inaccurate, the lender may be
required to advance funds beyond the amount originally committed in order to
permit completion of construction.  If the estimate of anticipated value proves
to be inaccurate, the lender may have security which has value insufficient to
assure full repayment.  In addition, repayment of loans made to investors to
finance construction of properties is often dependent upon the builder's ability
to sell the property once construction is completed.

                                       5
<PAGE>

     Home Equity Lines of Credit.  At December 31, 1997, home equity loans
totaled $8.7 million and comprised approximately 8.8% of the Bank's gross loan
portfolio, before net items.  These loans are generally secured by subordinate
liens against residential dwellings.  In many of these cases, the Bank holds the
first lien on the security. Home equity lines of credit have terms of up to 15
years and interest rates which are adjustable based upon prime rates. Because
these loans involve revolving lines of credit which can be drawn over a period
of time, the Bank faces additional risks associated with changes in the
borrower's financial condition.  Because home equity loans have adjustable rates
with no rate caps (other than usury limitations), increased delinquencies could
occur if interest rate increases occur and borrowers are unable to satisfy
higher payment requirements.  Home equity loans are generally limited so that
amount of such loans, along with any senior indebtedness, does not exceed 80% of
the value of the real estate security.

     Consumer Loans.  During 1997, the Bank began originating consumer loans,
and at December 31, 1997, had $475,000 in such loans outstanding.  The Bank's
consumer loans are both secured and unsecured and have both adjustable and fixed
rates.  Secured consumer loans have personal property, such as automobiles, or
real property as collateral.  Fixed rate consumer loans generally have shorter
terms than adjustable rate loans.  The Bank intends to increase the amount of
consumer loans in its portfolio in future years.

     Origination and Sale of Loans.  In years prior to 1994, the Bank generally
did not originate its loans with the intention that they would be sold in the
secondary market.  Loans generally were not originated in conformity with the
purchase requirements of the Federal Home Loan Mortgage Corporation ("FHLMC") or
Federal National Mortgage Association ("FNMA").  However, in January 1994 and
October, 1994, the Bank opened a mortgage loan origination office in Clayton,
North Carolina and a mortgage loan origination office in Goldsboro, North
Carolina, respectively, and began originating loans in conformity with the
purchase requirements of the FHLMC and FNMA, so that they could be sold in the
secondary market if the Bank determined that such sales were prudent.
Nevertheless, the Bank continues to originate many loans which satisfy its
underwriting requirements which are tailored for its local community but do not
satisfy various requirements imposed by FHLMC and FNMA.  Such loans are not
readily saleable in the secondary market and could be sold only after the Bank
incurred certain costs, such as costs for surveys and title insurance an/or
discounted the purchase price.  The Bank has historically found that its
origination of nonconforming loans has not resulted in a high level of
nonperforming assets.  In addition, these loans generally produce a higher yield
than are produced by loans which conform to the purchase requirements of FHLMC
and FNMA.

     Nonperforming Assets.  When a borrower fails to make a required payment on
a loan and does not cure the delinquency promptly, the loan is classified as
delinquent.  In this event, the normal procedure followed by the Bank is to make
contact with the borrower at prescribed intervals in an effort to bring the loan
to a current status.  In most cases, delinquencies are cured promptly. If a
delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrower, commences foreclosure proceedings.  If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale.  In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable than those normally
offered.  Any property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold or
otherwise disposed of by the Bank to recover its investment.  As of December 31,
1997, the Bank had no real estate acquired in settlement of loans.

     The Bank's general policy is to place a loan on nonaccrual status when the
loan becomes 90 days delinquent as it establishes reserves for uncollected
interest.  Such interest when ultimately collected is credited to income in the
period received.  Interest on loans considered to be impaired is treated
similarly.  Loans delinquent more than 90 days amounted to $533,000 and $274,000
on December 31, 1997 and 1996, respectively.  See Note 4 to "Notes to
Consolidated Financial Statements" in the Company's 1997 Annual Report to
Stockholders.

     The following table sets forth information with respect to nonperforming
assets identified by the Bank, including nonaccrual loans, real estate owned and
nonperforming investments in real estate at the dates indicated.

                                       6
<PAGE>

                                                      At December 31,
                                            -----------------------------------
                                               1997        1996         1995
                                            ----------  -----------  ----------
                                                  (Dollars in Thousands)
Total nonaccrual loans delinquent 90 days    $    533     $    274     $   207
 or more
Real estate owned                                  --           66          --
                                             --------     --------     -------
  Total non-performing assets                $    533     $    340     $   207
                                             ========     ========     =======
Non-performing loans to total loans              0.56%        0.34%       0.30%
Non-performing assets to total assets            0.47%        0.34%       0.23%
Total assets                                 $113,978     $100,840     $88,274
Total loans                                  $ 95,002     $ 81,511     $70,099

     Allowance for Possible Loan Losses.  In originating loans, the Bank
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a secured loan,
the quality of the security for the loan as well as general economic conditions.
It is management's policy to maintain an adequate allowance for possible loan
losses based on, among other things,  the Bank's historical loan loss
experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality.  Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loans.
The Bank's level of allowances for loan losses at December 31, 1997, 1996 and
1995 was $325,000, $302,000 and $233,000, respectively.

     Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary.  Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.

     The following table describes the activity related to the Bank's allowance
for possible loan losses for the periods indicated.


                                     Year Ended December 31,
                                ---------------------------------
                                1997   1996   1995   1994   1993
                                -----  -----  -----  -----  -----
                                     (Dollars in Thousands)

Balance, beginning of period    $ 302  $ 233  $ 223  $ 201  $ 140
Provision for loan losses          23     69     10     22     61
Charge-offs                        --     --     --     --     --
Recoveries                         --     --     --     --     --
                                -----  -----  -----  -----  -----
Balance, end of period          $ 325  $ 302  $ 233  $ 223  $ 201
                                =====  =====  =====  =====  =====


     The following table sets forth the composition of the allowance for
possible loan losses by type of loan at the dates indicated.

                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                                        At December 31,
                                  -------------------------------------------------------------------------------------------
                                            1997                             1996                             1995
                                  ------------------------          -----------------------           -----------------------
                                                Amount of                         Amount of                         Amount of
                                  Amount of     Loans to            Amount of     Loans to            Amount of     Loans to
                                  Allowance    Gross Loans          Allowance    Gross Loans          Allowance    Gross Loans
                                  ---------    -----------          ---------    -----------          ---------    -----------
<S>                               <C>             <C>               <C>            <C>                <C>            <C>
(Dollars in Thousands)
Mortgage loans:
  Residential 1-4 family               $212        65.02%                $200       74.58%                 $159       76.44%
  Residential multi-family                8         2.53%                  13        4.33%                   11        5.47%
  Nonresidential real
   estate and other property              8         2.46%                   6        2.81%                    4        1.68%
  Home equity and property               49        15.20%                  39        8.65%                   33        9.07%
   improvement
  Construction                           43        13.17%                  44        9.40%                   26        7.14%
                                       ----       ------                 ----      ------                  ----      ------
Total real estate loans                $320        98.37%                $302       99.77%                 $233       99.80%
                                                                         ----      ------                  ----      ------
Other loans                               5         1.63%                  --        0.23%                   --        0.20%
                                       ----                              ----      ------                  ----      ------
Total allowance for loan               $325       100.00%                $302      100.00%                 $233      100.00%
 losses                                ====                              ====      ======                  ====      ======
</TABLE>

<TABLE>
<CAPTION>
                                                   At December 31,
                                  --------------------------------------------------------
                                              1994                       1993
                                  ------------------------          ----------------------
                                                Amount of                       Amount of
                                  Amount of     Loans to            Amount of   Loans to
                                  Allowance    Gross Loans          Allowance  Gross Loans
                                  ---------    -----------          ---------  -----------
<S>                               <C>           <C>                 <C>        <C>
Mortgage loans:
  Residential 1-4 family               $166        78.51%                $165       87.15%
  Residential multi-family               12         5.65%                   4        2.17%
  Nonresidential real
   estate and other property              3         1.45%                   2        1.11%
  Home equity and property improvement   29         8.19%                  27        7.73%
  Construction                           13         5.86%                   3        1.44%
                                       ----       ------                 ----      ------
Total real estate loans                $223        99.65%                $201       99.60%
                                       ----       ------                 ----      ------
Other loans                              --         0.35%                  --        0.40%
                                       ----       ------                 ----      ------
Total allowance for loan               $223       100.00%                $201      100.00%
 losses                                ====       ======                 ====      ======
</TABLE>

                                       8
<PAGE>

Investment Securities

     Interest and dividend income from investment securities including mortgage-
backed securities generally provides the second largest source of income to the
Bank after interest on loans.  At December 31, 1997, the Bank's investment
portfolio totaled approximately $10.3 million and consisted of U.S. government
and agency securities, corporate securities, mortgage-backed securities and
stock of the FHLB of Atlanta.

     As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta.  No ready market exists for such stock, which is carried at cost.  As
of December 31, 1997, the Bank's investment in stock of the FHLB of Atlanta was
$786,800.

     North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets.  The computation of liquidity allows for the inclusion of
mortgage-backed securities and other instruments which are readily marketable,
including investments with maturities in excess of five years.

     See Note 3 of "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Stockholders.

Deposits and Borrowings

     Deposits.  Deposits are the primary source of the Bank's funds for lending
and other investment purposes.  In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, advances
from the FHLB of Atlanta and otherwise from its operations.  Loan repayments are
a relatively stable source of funds while deposit inflows and outflows may be
significantly influenced by general interest rates and money market conditions.
On December 31, 1997, 1996 and 1995, the Bank's deposits totaled $90.3 million,
$82.3 million, and $70.7 million, respectively.

     The Bank attracts both short-term and long-term deposits from the general
public by offering a variety of accounts and rates.  The Bank offers passbook
savings accounts, negotiable order of withdrawal ("NOW") accounts, money market
demand accounts, non-interest-bearing accounts, and fixed interest rate
certificates with varying maturities.  At December 31, 1997, 81.3% of the Bank's
deposits, excluding accrued interest payable,  consisted of certificate
accounts, 3.8% consisted of passbook savings accounts, 5.4% consisted of NOW
accounts, 6.0% consisted of money market accounts and 3.5% consisted of
noninterest-bearing transaction accounts.  Of the certificates of deposit
described above, $17.6 million, or 24%, had denominations of $100,000 or
greater.  Deposit flows are greatly influenced by economic conditions, the
general level of interest rates, competition, and other factors, including the
restructuring of the thrift industry.  The Bank's savings deposits traditionally
have been obtained primarily from its primary market area.  The Bank utilizes
traditional marketing methods to attract new customers and savings deposits,
including print, television and radio media advertising and direct mailings.
The Bank does not advertise for deposits outside of its local market area or
utilize the services of deposit brokers.

     See Note 6 to the "Notes to Consolidated Financial Statements" in the
Company's 1997 Annual Report to Stockholders.

     Borrowings.    Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources.  They may also
be used on a longer term basis for general business purposes.  The Bank's
principal source of long-term borrowings are advances from the FHLB of Atlanta.
The FHLB system functions in a reserve credit capacity for savings institutions.
As a member, the Bank is required to own capital stock in the FHLB of Atlanta
and is authorized to apply for advances from the FHLB of Atlanta on the security
of that stock and a floating lien on certain of its real estate secured loans
and other assets.  Each credit program has its own interest rate and range of
maturities.  Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's net worth or on the FHLB
of Atlanta's assessment of the institution's creditworthiness.  The Bank had
$8.0 million outstanding borrowings from the FHLB of Atlanta at December 31,
1997.

                                       9
<PAGE>

Subsidiaries

     The Company has no subsidiaries other than the Bank.  The Bank has no
subsidiaries.

Results of Operations

     The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting primarily of deposits and FHLB advances.  The
Bank's operations are affected to a much lesser degree by non-interest income,
such as transaction and service fee income.  The Bank's net income is also
affected by, among other things, provisions for loan losses and operating
expenses.  The Bank's  principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, office occupancy costs,
data processing expenses and federal deposit insurance premiums.  The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and policies concerning monetary and fiscal affairs,
housing and financial institutions and the attendant actions of regulatory
authorities.

Market Area

     The Bank's primary market area consists of Johnston, Wilson, Wayne and Wake
counties in North Carolina. This area includes a portion of the Raleigh, North
Carolina metropolitan area and areas south and west of Raleigh.

     Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities.  The economy in the primary market area is affected by the
growth, processing and sale of tobacco products.  Legislative, regulatory and
other actions which negatively impact the demand for tobacco products could
negatively impact the Bank's performance.

Competition

     The Bank faces strong competition both in attracting deposits and making
real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The Bank
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 Bank to attract and retain savings deposits
depends on its ability to provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. Based upon
comparative data as of June 30, 1997, the Bank had approximately 8.95% of the
deposits in Johnston County, North Carolina, approximately 1.85% of the deposits
in Wilson County, North Carolina, and approximately 0.62% of the deposits in
Wayne County, North Carolina.

     The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies.  The
Bank competes for loans primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.

Asset/Liability Management

     The Company's asset/liability management, or interest rate risk management,
is focused primarily on evaluating and managing the Company's consolidated net
interest income given various risk criteria.  Factors beyond the Company's
control, such as market interest rates and competition, may also have an impact
on the Company's management of interest rate risk.

     In the absence of any other factors, the overall yield or return associated
with the Company's earning assets generally will increase from existing levels
when interest rates rise over an extended period of time, and conversely
interest income will decrease when interest rates decrease.  In general,
interest expense will increase when interest rates rise over an extended period
of time, and conversely interest expense will decrease when interest rates
decrease. Therefore, by controlling the increases and decreases in its interest
income and interest expense which are brought about

                                       10
<PAGE>

by changes in market interest rates, the Company can influence its net interest
income. As a part of the Company's interest rate risk management policy, the
Company calculates an interest rate "gap". Interest rate "gap" analysis is a
common, though imperfect, measure of interest rate risk, which measures the
relative dollar amounts of interest-earning assets and interest-bearing
liabilities which reprice within a specific time period, either through maturity
or rate adjustment. The "gap" is the difference between the amounts of such
assets and liabilities that are subject to such repricing. A "negative" gap for
a given period means that the amount of interest-bearing liabilities maturing or
otherwise repricing within that period exceeds the amount of interest-earning
assets maturing or otherwise repricing within the same period. Accordingly, in a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
lower decrease in the yield of its assets relative to the cost of its
liabilities and its income should be positively affected. Conversely, the cost
of funds for an institution with a negative gap would generally be expected to
increase more quickly than the yield on its assets in a rising interest rate
environment and such institution's net interest income should be adversely
affected by rising interest rates. Changes in interest rates generally have the
opposite effect on an institution with a "positive" gap.

     A static interest rate "gap" analysis may not be an accurate indicator of
how net interest income will react to changes in interest rates.  Income
associated with interest-earning assets and costs associated with interest-
bearing liabilities may not react uniformly to changes in interest rates.  In
addition, the magnitude and duration of changes in interest rates may have a
significant impact on net interest income.  For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates.  Interest rates
on certain types of assets and liabilities typically fluctuate in advance of
changes in general market interest rates, while interest rates on other types
may lag behind changes in general market rates.  As an example, the indices on
which interest rate changes on most of the Bank's adjustable rate mortgage loans
are based, the Treasury securities index adjusted to a constant one year
maturity and the Treasury securities index adjusted to a constant three year
maturity, tend to lag behind changes in general market rates of interest and,
thus, react more slowly to such changes than does the Bank's actual cost of
funds.  In addition, certain assets, such as adjustable rate mortgage loans,
have features (generally referred to as "interest rate caps") which limit
changes in interest rates on a short-term basis and over the life of the asset.
The ability of many borrowers to service their debt may also decrease in the
event of an interest rate increase.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
projected to reprice or mature in each of the future time periods shown.  The
computations were made without using certain common assumptions regarding loan
prepayments and deposit decay rates.  Except as stated below, the amounts of
assets and liabilities shown which reprice or mature within a particular period
were determined in accordance with the contractual terms of the assets or
liabilities.  In making the computations, all adjustable rate loans were
considered to be due at the end of the next upcoming adjustment period.  Fixed
rate loans were considered to reprice at their contractual maturities with no
consideration given to prepayments.  Liquid interest-earning investments with no
contractual maturities were assumed to be subject to immediate repricing, while
certain equity securities were assumed to reprice at the most distant repricing
date.  Savings accounts, money market deposit accounts, and negotiable order of
withdrawal and other transaction accounts were assumed to be subject to
immediate repricing.  Fixed maturity interest-bearing liabilities were assumed
to reprice at their contractual maturities without consideration for early
withdrawals.  In addition, the table does not reflect scheduled principal
payments which will be received throughout the lives of the loans.  The interest
rate sensitivity of the Company's consolidated assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used or if actual experience differs from that indicated by
such assumptions.

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                           Term to Repricing at December 31, 1997
                                                              ----------------------------------------------------------------------

                                                                                More than
                                                              1 Year            1 Year to           More than
                                                              Or Less            5 Years             5 Years              Total
                                                             --------           ---------           ---------             -----

                                                                                   (Dollars in Thousands)
<S>                                                          <C>                <C>                 <C>                   <C>
Interest-earning assets:
  Mortgage loans:
    Fixed rate                                               $        822       $      7,281        $       13,662        $   21,765
    Adjustable rate                                                 8,010             55,994                    --            64,004
    Adjustable home equity loans                                    8,750                 --                    --             8,750
  Other loans                                                         808                 --                    --               808

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

      Total loans                                                  18,390             63,275                13,662            95,327
                                                             ------------       ------------        --------------        ----------
  Interest-bearing deposits                                         4,782                 --                    --             4,782
  Investment securities                                             1,499              5,246                   500             7,245
  Mortgage-backed securities                                        1,105                 --                    --             1,105
                                                             ------------       ------------        --------------        ----------
      Total interest-earning assets                          $     25,776       $     68,521        $       14,162        $  108,459
                                                             ------------       ------------        --------------        ----------

Interest-bearing liabilities:
  Deposits:
    Fixed maturity deposits                                  $     62,121       $     11,296        $           --        $   73,417
    NOW accounts                                                    4,832                 --                    --             4,832
    Money market deposit accounts                                   5,441                 --                    --             5,441
    Passbook accounts                                               3,448                 --                    --             3,448
                                                             ------------       ------------        --------------        ----------
      Total deposits                                               75,842             11,296                    --            87,138
                                                             ------------       ------------        --------------        ----------
  FHLB advances                                                     4,000              4,000                    --             8,000
                                                             ------------       ------------        --------------        ----------
      Total interest-bearing liabilities                     $     79,842       $     15,296                    --        $   95,138
                                                             ------------       ------------        --------------        ----------

Interest sensitivity gap per period                          $    (54,066)      $     53,225        $       14,162
                                                             ============       ============        ==============
Cumulative interest sensitivity gap                          $    (54,066)      $       (841)       $       13,321
                                                             ============       ============        ==============
Cumulative gap as a percentage of total
 interest-earning assets/(1)/                                      -49.85%             -0.78%                12.28%
Cumulative interest-earning assets as a percentage of
 interest-bearing liabilities                                       32.28%             99.12%               114.00%
_________________________________
</TABLE>
(1)  Assets and liabilities are classified in accordance with their contractual
     maturities, except for deposit accounts with no stated maturities. Such
     deposit accounts are subject to immediate repricing and are placed in the
     shortest repricing period. No provision has been made above to reflect
     scheduled principal repayments on loans throughout their terms, or
     projected levels of prepayments of loans prior to their contractual
     maturities.

                                       12
<PAGE>

Supervision and Regulation

     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 Company 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 Company and the Bank.  Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.

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

     Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in 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.

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

     There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default.  For example, 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 capital standards as of the time the
institution fails to comply with such capital restoration plan. Under a policy
of the Federal Reserve with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy.  The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.

     In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("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.

                                       13
<PAGE>

     Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period.

     As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company 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.

     Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%.  At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items.  The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance.  In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion.  All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.

     Repurchase Limitations.   The Company must obtain Federal Reserve approval
prior to repurchasing Common Stock for in excess of 10% of its net worth during
any twelve-month period unless the Company (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.

     Although the payment of dividends and repurchase of stock by the Company
are subject to certain notice requirements with the Administrator in addition to
other requirements and limitations of North Carolina corporate law, except as
set forth in this paragraph, neither the Administrator nor the FDIC have
promulgated any regulations specifically limiting the right of the Company to
pay dividends and repurchase shares.  However, the ability of the Company to pay
dividends or repurchase shares may be dependent upon the Company's receipt of
dividends from the Bank.  The Bank's ability to pay dividends is limited.  See "
-- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."

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

     Federal Securities Law.  The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act.  As a result of such
registration, the proxy and tender offer rules, insider trading reporting
requirements, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Company.

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

                                       14
<PAGE>

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

     The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings).  As holders of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.

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

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

     Transactions with Affiliates.  Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  With certain exceptions, an affiliate of the Bank is any
company or entity that controls, is controlled by or is under common control
with the savings bank.  The Company is an affiliate of the Bank.  Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate.  The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
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 and its implementing
regulations 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, and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
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 bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting.  The
Federal Reserve has prescribed the loan amount (which

                                       15
<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. Section
22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.

     Deposit Insurance.  The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum extent permitted by law.  The Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions.  Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below.  The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.

     As a result of legislation enacted on September 30, 1996 (the "DIF Act"),
the FDIC imposed a special assessment on each depository institution with SAIF-
assessable deposits which resulted in the SAIF achieving its designated reserve
ratio.  In connection therewith, the FDIC reduced the assessment schedule for
SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most
institutions paying 0%.  This assessment schedule is the same as that for the
BIF, which reached its designated reserve ratio in 1995.  In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF-
assessable deposits for the purpose of paying interest on obligations issued in
the 1980s (the "FICO Bonds") to help fund the thrift industry cleanup.  BIF-
assessable deposits will be charged an assessment to help pay interest on the
FICO bonds at a rate of approximately 0.013% until the earlier of December 31,
1999 or the date upon which the last savings association ceases to exist, after
which time the assessment will be the same for all insured deposits.

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

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

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

                                       16
<PAGE>

     During the Bank's last compliance examination, which was performed by the
FDIC under the new CRA regulations in April, 1995, the Bank received a
satisfactory  rating with respect to CRA compliance.  The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.

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

     An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC.  If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At December 31, 1997,
the Bank had a leverage ratio of 9.18%, which substantially exceeded the other
FDIC capital requirements.

     The Administrator requires that net worth equal at least 5% of total
assets.  Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.  At December 31, 1997, the Bank
complied with the capital requirement of the Administrator with capital of 7.23%

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

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

     In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate  contracts.   Under the rule, savings banks are permitted to net
positive and  negative mark-to-market values of rate contracts with the same
counterpart, 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 savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth.  These limits also authorize

                                       17
<PAGE>

savings banks to make loans to one borrower, for any purpose, in an amount not
to exceed $500,000.  A savings bank also is authorized to make loans to one
borrower to develop domestic residential housing units, not to exceed the lesser
of $30 million or 30% of the savings bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth.  These limits also authorize a savings bank to make
loans to one borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.

     As of December 31, 1997, the largest aggregate amount of loans which the
Bank had to any one borrower was $1,159,841.  The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.

     Federal Home Loan Bank 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 December 31, 1997, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $786,800.

     Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.

     Federal Reserve System.  Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits.  The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1997, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.

     Restrictions on Acquisitions.  Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition.  Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired as a result of, among other things, 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
acquisitions 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 10%.  The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years.  On December 31, 1997, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 14%.

     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

                                       18
<PAGE>

activity to be engaged in and if the Bank is and continues to be in compliance
with capital standards. National banks are generally not permitted to hold
equity investments other than shares of service corporations and certain federal
agency securities. Moreover, service corporations of savings banks are permitted
to engage only in those activities which are permitted for service corporations
of national banks.

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

     Prompt Corrective Regulatory Action.  Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions.  The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized."  Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure.  An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth).  An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.  As of December 31, 1997, the most
recent notification received by the Bank from the FDIC categorized the Bank as
well-capitalized.

     Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), 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 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.

     The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time.  Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elected to do so by June 1, 1997.
States were allowed to choose to permit 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 such branching transactions.

     It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.

     Restrictions on 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

                                       19
<PAGE>

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.

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

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

     Other North Carolina Regulations.  As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator.  The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions.  The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases; the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest.  North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.

     The Administrator conducts regular 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.

                                       20
<PAGE>

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

ITEM 2.   PROPERTIES

     At December 31, 1997, the Company conducted its business from the Bank's
headquarters office and a branch office in Kenly, North Carolina, and its branch
offices in Selma, Goldsboro, Wilson and Garner, North Carolina.  In addition,
the Bank had loan origination offices in Clayton and Knightdale, North Carolina.
The following table sets forth certain information regarding the Company's
properties as of December 31, 1997.  See Note 5 to the Company's Consolidated
Financial Statements included in the Annual Report which is incorporated herein
by reference.

<TABLE>
<CAPTION>
                                                        Net Book Value
         Address                                          of Property
         -------                                        ---------------
<S>      <C>                                            <C>
Kenly
         Corporate offices:
         207 West Second Street
         Kenly, North Carolina 27542                        $  266,874

         Branch facility:
         200 North Church Street
         Kenly, North Carolina 27542                        $  569,053

Selma
         115 West Anderson Street
         Selma, North Carolina 27576                        $   93,463

Wilson
         206 N. Ward Boulevard
         Wilson, North Carolina 27893                       $  472,865

Clayton
         11440 Highway 70 West
         Clayton, North Carolina 27520                        (Leased)

Goldsboro
         1112 E. Ashe Street
         Goldsboro, North Carolina 27530                    $  232,040

Garner
         920 7th Avenue
         Garner, North Carolina 27529                         (Leased)

Knightdale
         106 N. First Street
         Suite D
         Knightdale, North Carolina 27545                     (Leased)

                                                            $1,634,295
                                                            ==========
</TABLE>

The total net book value of the Company's furniture and equipment on December
31, 1997 was $499,420.

ITEM 3.   LEGAL PROCEEDINGS

          In the opinion of management, neither the Company nor the Bank is
involved in any pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.

                                       21
<PAGE>


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

     No matter was submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1997.


                                    PART II


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

     See the information under the section captioned "Common Stock" on pages 36
and 37 in the Company's 1997 Annual Report, which section is incorporated herein
by reference. See "Item 1. BUSINESS--Regulation of the Bank--Restrictions on
Dividends and Other Capital Distributions" above for regulatory restrictions
which limit the ability of the Bank to pay dividends to the Company.

ITEM 6.   SELECTED FINANCIAL DATA

     The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page 1 of the Company's 1997 Annual Report which is
incorporated herein by reference.

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

     See the information set forth under Item 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 10 in the Company's 1997 Annual Report, which section is
incorporated herein by reference.

ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Pages 4 and 5 of the Company's 1997 Annual Report to Stockholders are
herein incorporated by reference.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company and supplementary data
set forth on pages 12 through 35 of the Company's 1997 Annual Report are
incorporated herein by reference.

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

          Not Applicable.

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on page 8 of the Proxy Statement of the 1998
Annual Meeting of Stockholders (the "Proxy Statement") and "Proposal 1 -
Election of Directors - Executive Officers" on pages 11 and 12 of the Proxy
Statement, which sections are incorporated herein by reference.

                                       22
<PAGE>

     The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is 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 - Directors' Compensation" on
pages 10 and 11 and " - "Management Compensation" on pages 12 through 20 of the
Proxy Statement, which sections are incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 3
through 6 of the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on page 21 of 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 Bank's 1997
          Annual Report attached hereto as Exhibit (13) and incorporated herein
          by reference)

          (a)  Independent Auditors' Report

          (b)  Consolidated Statements of Financial Condition -- December 31,
               1997 and 1996

          (c)  Consolidated Statements of Income -- Years Ended December 31,
               1997, 1996 and 1995

          (d)  Consolidated Statements of Stockholder's Equity -- Years Ended
               December 31, 1997, 1996 and 1995

          (e)  Consolidated Statements of Cash Flows -- Years Ended December 31,
               1997, 1996 and 1995

          (f)  Notes to Consolidated Financial Statements

14(a)2    Financial Statement Schedules

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

14(a)3    Exhibits

          A listing of the exhibits to this Report on Form 10-K is set forth on
          the Index to Exhibits which immediately precedes such exhibits and is
          incorporated herein by reference.

14(b)     The Company filed no reports on Form 8-K during the last quarter of
          the fiscal year ended December 31, 1997.

                                       23
<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.

                                    KS BANCORP, INC.



Date:  March 24, 1998         By:   /s/ Harold T. Keen
                                    ---------------------------------------
                                    Harold T. Keen
                                    President and Chief Executive Officer


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

<TABLE>
<CAPTION>
          Signature                        Title                    Date
          ---------                        -----                    ----
<S>                            <C>                             <C>

/s/ Harold T. Keen             President and Chief Executive   March 24, 1998
-----------------------------  Officer and Director
Harold T. Keen

/s/ Helen B. Pollock           Treasurer (Principal            March 24, 1998
-----------------------------  Financial
Helen B. Pollock               Officer)

/s/ Robert E. Fields           Director                        March 24, 1998
-----------------------------
Robert E. Fields

/s/ R. Harold Hinnant          Director                        March 24, 1998
-----------------------------
R. Harold Hinnant

/s/ James C. Parker            Director                        March 24, 1998
-----------------------------
James C. Parker

/s/ R. Elton Parrish           Director                        March 24, 1998
-----------------------------
R. Elton Parrish

/s/ Ralph Edward Scott, Jr.    Director                        March 24, 1998
-----------------------------
Ralph Edward Scott, Jr.

/s/ H. Elwin Watson            Director                        March 24, 1998
-----------------------------
H. Elwin Watson

/s/ J. Hayden Wiggs            Director                        March 24, 1998
-----------------------------
J. Hayden Wiggs

/s/ James C. Woodard           Director                        March 24, 1998
-----------------------------
James C. Woodard
</TABLE>

                                       24
<PAGE>

                               INDEX TO EXHIBITS



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

Exhibit (3)(i)      Certificate of Incorporation, incorporated herein by
                    reference to Exhibit 3.1 to the Registration Statement on
                    Form S-1, Registration No. 33-69522, dated September 25,
                    1993, and amended on November 3, 1993

Exhibit (3)(ii)     Bylaws, incorporated herein by reference to Exhibit 3.2 to
                    the Registration Statement on Form S-1, Registration No. 33-
                    69522, dated September 25, 1993, and amended on November 3,
                    1993

(4)                 Specimen Stock Certificate, incorporated by reference to
                    Exhibit 4.1 to the Registration Statement on Form S-1,
                    Registration No. 33-69522, dated September 25, 1993, and
                    amended on November 3, 1993

(13)                Portions of 1997 Annual Report to Stockholders

(21)                Subsidiaries of the Registrant

(23)                Consent of McGladrey & Pullen, LLP

(27)                Financial Data Schedule and Restated Financial Data
                    Schedules

                                       25