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

                                   Form 10-KSB

                   Annual Report Under Section 13 or 15 (d) of

                       The Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 1997

                        Commission File Number: 33-60742

                             Guaranty State Bancorp
                 ----------------------------------------------
                 (Name of small business issuer in its Charter)

             North Carolina  27701                                56-1816641
----------------------------------------------                ------------------
(State or other jurisdiction of incorporation)                (Corporation's ID)


                              302 West Main Street
                          Durham, North Carolina 27701
                    ----------------------------------------
                    (Address of principal executive offices)

                                 (919-688-9361)
                           ---------------------------
                           (Issuer's Telephone Number)




             SECURITIES REGISTERED UNDER SECTION 12 (b) OF THE ACT:
                                      NONE

             SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE ACT:

                           Common Stock, $1 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 Bank was
required  to file  such  reports,)  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.  Yes [  ]


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


        AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES OF
             GUARANTY STATE BANCORP AT FEBRUARY 9, 1998: $26,585,474


        NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 9, 1998:

                                     892,978

<PAGE>

                                Table of Contents


================================================================================
Part I Item 1          Business

Part I Item 2          Properties

Part I Item 3          Legal Proceedings

Part I Item 4          Submission of Matters to a Vote of Security Holders

Part II Item 5         Market and Related Shareholder Matters
                         Incorporated by reference - Annual Report

Part II Item 6         Selected Financial Data
                         Incorporated by reference - Annual Report

Part II Item 7         Management Discussion and Analysis
                         Incorporated by reference - Annual Report

Part II Item 8         Financial Statements and Supplementary Data
                         Incorporated by reference - Annual Report

Part II Item 9         Not Applicable

Part III Item 10       Directors and Executive Officers
                         Incorporated by reference - Proxy Statement

Part III Item 11       Executive Compensation
                         Incorporated by reference - Proxy Statement

Part III Item 12       Security Ownership
                         Incorporated by reference - Proxy Statement

Part III Item 13       Certain Transactions
                         Incorporated by reference - Proxy Statement

Part IV Item 14        Form S-8 Filing

                       Signatures

================================================================================

<PAGE>

                                     PART I


Item 1.  Business

Guaranty State Bancorp ("the  Corporation") is a registered bank holding company
headquartered  in Durham,  North Carolina and is the parent  holding  company of
Guaranty State Bank, ("the Bank"), a North Carolina  chartered  commercial bank.
The  Corporation  was organized on March 26, 1993 and received final  regulatory
approval on September 21, 1993, for the Bank to become a wholly owned subsidiary
of the  Corporation.  On September 21, 1993, the shareholders of the Bank became
shareholders of the  Corporation.  Guaranty State Bank is the only subsidiary of
the Corporation.

The Bank Holding  Company Act of 1956,  as amended (The  "BHCA"),  prohibits the
Corporation  from  acquiring  direct or indirect  control of more than 5% of the
outstanding  voting stock or  substantially  all of the assets of any  financial
institution,  or merging or  consolidating  with another  bank  holding  company
without  prior  approval of the Federal  Reserve.  Guaranty  State Bancorp filed
application  with The Federal  Reserve  Bank for approval to merge with and into
Triangle  Bancorp of Raleigh,  North  Carolina.  On February 23, 1998,  Triangle
Bancorp,  Inc.  received  approval from the Federal  Reserve Bank of Richmond to
acquire the shares of Guaranty State Bancorp.  If approved by the  Corporation's
shareholders  at a Special  Meeting of the  Shareholders to be held on March 30,
1998, the merger is expected to be effective on or about April 16, 1998.

Bank  holding  companies  are  required  to comply  with the  Federal  Reserve's
risk-based  capital guidelines which require a minimum ratio of total capital to
risk-weighted assets or 8%. At least half of the total capital is required to be
Tier 1 capital. A bank holding company is obligated by law to guarantee, subject
to  certain  limits,  the bank  subsidiary's  compliance  with the  terms of any
capital restoration plan filed with the subsidiary's  federal banking agency. As
a result of its ownership of a North  Carolina  chartered  commercial  bank, the
Corporation  is  registered  with and is  subject  to  regulation  by the  North
Carolina Commissioner of Banks under the state's bank holding company laws.

Guaranty State Bank
-------------------

Guaranty State Bank was organized and chartered under North Carolina law in 1917
as a Morris Plan Industrial  Bank. In 1957 the Bank became a commercial bank and
changed its name to Guaranty State Bank.

The Bank is an  independent  community  bank  engaged in the general  commercial
banking business at five locations in Durham County, North Carolina.

Competition
-----------

From its headquarters and four branch offices located in Durham, the Bank serves
substantially  all of Durham County,  which includes a large segment of Research
Triangle  Park.  There are 10 banks with offices and or  headquarters  in Durham
County.  Most of the Bank's  competitors  have  broader  geographic  markets and
higher  lending  limits  than  the  Bank  and are  able to make  greater  use of
large-scale  advertising and promotion.  After the merger with Triangle Bancorp,
Inc., the Bank will have greater advertising  resources that should increase its
marketing presence in Durham.

The Bank  competes  not only with the  largest  banking  organizations  in North
Carolina,  but also with a wide range of financial service institutions,  credit
unions,  investment  and  brokerage  firms and small  loan or  consumer  finance
companies.  Competition  among financial  institutions of all types is virtually
unlimited  with respect to legal ability and authority to provide most financial
services.


Diversity of Deposit and Loan Customers
---------------------------------------

The majority of the Bank's customers are individuals and  small-to-medium  sized
businesses  headquartered  within its service area.  Management does not believe
the Bank is dependent on a single customer or group of customers concentrated in
a particular  industry  whose loss would have a material  adverse  impact on the
Bank's results of operations.  There are no seasonal factors that would have any
material  adverse  effect on the Bank's  business  and the Bank does not rely on
foreign sources of funds.

Principal Services and Markets
------------------------------

The Bank offers a full range of retail and  commercial  banking  activities.  In
1997 management determined through a five-year plan that the need for investment
in new technology and services,  deemed  essential to remain  competitive in the
Durham  market,  was  a  necessity.   The  investment  required  would  cause  a
significant  downturn in profitability due to high anticipated  costs. The Board
of Directors and mangement of Guaranty  determined it to be in the best interest
of Guaranty and its shareholders to seek expert advice from qualified investment
bankers as to the status of merger activities of  community-oriented  banks that
are  similarly  situated  to  Guaranty.  Reference  is  made to  Form  S-4  (The
Registration  Statement  Under The  Securities  Act of 1933)  filed by  Triangle
Bancorp, Inc.

No material changes have occurred in the principal services rendered by the Bank
or in the principal markets over the past three fiscal years.

Patents, Trademarks and Research
--------------------------------

The  Bank  holds  no  material  patents,  trademark,   licenses,  franchises  or
concessions.

No material research activity occurred during the past two fiscal years relating
to the development of new services.  There has been no public  announcement  nor
does the Bank have  immediate  plans to develop a new  product or service  which
will require the investment of a material amount of total assets.

Environmental Impact
--------------------

The Bank is not aware of any material  effects  that  compliance  with  Federal,
State and local  provisions  which have been enacted or adopted  regulating  the
discharge  of  materials  into the  environment  or  otherwise  relating  to the
discharge  of  materials  into  the  environment,  may  have  upon  the  capital
expenditures,  earnings and  competitive  position of the Bank.  The Bank has in
place  lending  policies  and  procedures  designed  to  prevent  the Bank  from
accepting as collateral property which may be environmentally unsafe.

Employment
----------

At December  31, 1997,  the  Corporation  and its  subsidiary  Bank  employed 39
full-time equivalent  employees.  The Corporation is not party to any collective
bargaining agreements and believes its relations with its employees to be good.

Item 2.  Properties

The  Corporation's  principal  executive  office at 302 West Main  Street in the
downtown business  district of Durham is owned by the Corporation.  Improvements
consist of a three story attached building with approximately 15,300 square feet
of space.  This  includes  9,300 square feet used by the Bank for its teller and
lobby customer services,  data processing,  and the administrative  offices; and
6,000 square feet leased to outside tenants.

Guaranty  State Bank  operates  four  branch  offices  in  Durham.  Two of these
locations, which consist of real estate and constructed branch office buildings,
are owned by the Corporation. The other two locations are located on land- lease
properties.  The Corporation  owns the branch office  buildings on each of these
locations. In 1997 the newly constructed branch at 2313 Highway 54 was destroyed
by  what  authorities  assume  to be a  gas  explosion.  This  office  is  under
reconstruction  and should reopen in mid-April,  1998, as a Triangle Bank branch
office. The building was fully insured for replacement value.

Item 3.  Legal Proceedings

The Corporation and Bank have no legal  proceedings  pending other than ordinary
routine litigation incidental to the business.

Item 4.  Submission of Matters to a Vote of Security Holders

No matter was submitted  during the fourth quarter of the fiscal year covered by
this report to a vote of security holders.


                                     PART II

Item 5.  Market Price and Cash Dividends

At December 31, 1997,  Guaranty State Bancorp had 892,978 shares of common stock
outstanding which were held by 264 shareholders of record.

Morgan Keegan serves as the principal market maker for the Corporation's  common
stock in the over the counter market.  Monroe Securities,  Rochester,  New York,
also serves as a market  maker.  The following  table sets forth cash  dividends
declared  and the range of high and low  market  quotations  for each  quarterly
period as indicated.

                                    TABLE 10

<TABLE>
<CAPTION>
                         Market Price and Cash Dividends

                                   1997                                                     1996
              --------------------------------------------------     ---------------------------------------------------
                   Bid                   Ask                               Bid                    Ask
              --------------       ----------------                  ---------------        ---------------
              High       Low       High         Low     Dividend     High        Low        High        Low     Dividend
              ----       ---       -----        ---     --------     ----        ---        ----        ---     --------
Quarter
-------
<S>           <C>       <C>       <C>          <C>       <C>         <C>        <C>        <C>         <C>       <C>
1st           $22.75    $22.38    $23.38       $23.25    $ .09       $17.50     $17.00     $20.00      $19.75    $ .08
2nd            22.75     22.38     23.85        23.25      .09        18.00      17.25      19.75       19.50      .08
3rd            24.00     22.75     25.00        23.75      .10        21.00      18.00      25.00       19.50      .09
4th            37.00     24.00     37.00        34.00      .10        22.38      21.00      25.00       25.00      .09
</TABLE>

Cash  dividends per share were $ .38, $ .34 and $ .29 in 1997,  1996,  and 1995,
respectively. Dividends declared as a percentage of net income amounted to 27.4%
in 1997, 27.6% in 1996, and 25.7% in 1995.

<PAGE>

ITEM 6.  SELECTED FINANCIAL INFORMATION:

<TABLE>
<CAPTION>
                                                                                (Dollars in Thousands)
                                                                                Year Ended December 31
                                                              --------------------------------------------------------
                                                                1997        1996        1995        1994        1993
STATEMENT OF INCOME DATA:

<S>                                                           <C>         <C>         <C>         <C>         <C>
Total interest income                                         $  8,183    $  7,457    $  6,549    $  5,236    $  4,855
Total interest expense                                           3,854       3,597       2,909       2,000       1,892
                                                              --------    --------    --------    --------    --------
Net interest income                                              4,329       3,860       3,640       3,236       2,963
Provision for possible loan losses                                 211         143         183         144         229
                                                              --------    --------    --------    --------    --------

Net interest income after provision for possible                 4,118       3,717       3,457       3,092       2,734
loan losses
Other income                                                       522         444         413         451         586
Other expense                                                    2,944       2,564       2,453       2,345       2,185
                                                              --------    --------    --------    --------    --------
Income before taxes                                              1,696       1,597       1,417       1,198       1,135
Income taxes                                                       556         517         445         363         342
                                                              --------    --------    --------    --------    --------

Net income                                                    $  1,140    $  1,080    $    972    $    835    $    793
                                                              ========    ========    ========    ========    ========

Net income per share - basic                                  $   1.29    $   1.23    $   1.12    $    .97    $    .93

Net income per share assuming dilution (1)                    $   1.22    $   1.18    $   1.09    $    .95    $    .89

Cash dividends declared (1)                                   $    .38    $    .33    $    .29    $    .24    $    .22

Weighted average shares outstanding                            936,089     917,899     891,692     883,179     857,702

Book Value                                                    $  12.73    $  11.80    $  11.10    $   9.91    $   9.44

BALANCE SHEET DATA:

Assets                                                        $106,604    $ 96,560    $ 83,058    $ 75,563    $ 71,601
Net loans                                                       75,971      64,433      58,287      48,216      43,754
Deposits                                                        92,674      83,594      72,623      66,470      61,964
Shareholders' equity                                            11,399      10,450       9,675       8,597       8,135
</TABLE>

(1)  Per share data has been adjusted to reflect the 50% stock  dividend  issued
     October 18, 1995. Fractional amounts have been rounded to the nearest whole
     number.

<PAGE>

Dear Guaranty Shareholder:

Guaranty State Bancorp  achieved another year of record earnings with net income
reaching  $1,140,051  for 1997.  Total  assets  reached a record  high at $106.6
million on December 31, 1997, a 10.4% increase,  representing $10 million growth
over the previous year.

The net income  compared to  $1,080,447 in 1996,  represented  a 5.5%  increase.
Diluted  earnings  per share for 1997 were $1.22  compared to $1.18 the previous
year. Return on average assets was 1.13% and the return on average shareholders'
equity was 10.44%.  Without the one time expenses totaling  $109,623  associated
with Guaranty's  definitive  merger agreement with Triangle  Bancorp,  return on
average  assets would be 1.20% and return on average  equity would equal 11.04%.
These gains reflect  strong loan growth in 1997,  continued  control of expenses
and 17.4% increase in other operating revenues.

Loan growth  continued to be spurred by heavy demand for  construction  and home
mortgage loans. We closed the year with loans  outstanding at $77.1 million,  an
increase of 17.7% from last year.  The loan growth was funded  primarily  with a
10.9% increase in deposit growth.  At December 31, 1997,  deposits totaled $92.7
million.

The charge-off ratio to average loans outstanding decreased to .18% in 1997 from
 .27% in 1996.  Guaranty's  performance in this area ranked well among its peers.
The reserve for possible  loan losses at December  31, 1997,  was 1.50% of loans
outstanding.

Guaranty  shareholders  have  been  notified  of  the  Special  Meeting  of  the
Shareholders on March 30, 1998. At the special meeting shareholders will vote on
a  proposal  to  approve  an  Amended  and  Restated   Agreement   and  Plan  of
Reorganization  and Merger,  dated as of November 18, 1997, among Guaranty State
Bancorp, Guaranty State Bank, Triangle Bank and Triangle Bancorp, Inc. The Board
of Directors  of Guaranty has  unanimously  approved  the merger  agreement.  We
believe that  Guaranty  being merged with and into  Triangle Bank is in the best
interest of Guaranty and its shareholders,  employees,  customers and the Durham
community.

The banking  community  experiences  changes in how business is conducted almost
daily.  Technology,  competition  and a global economy are driving forces behind
these changes. We are indeed fortunate to have the opportunity to associate with
Triangle, a leading regional bank.  Triangle's commitment to provide outstanding
banking services and to remain a strong corporate citizen in all the communities
it serves is unparalleled.

We look forward to seeing you at the Special  Shareholders  Meeting on March 30,
1998.

Sincerely,


Charles J. Stewart
President & CEO

<PAGE>

Item 7. Management Discussion and Analysis

The following analysis  highlights the major components  affecting the growth of
Guaranty  State Bancorp and its  subsidiary,  Guaranty State Bank, for the three
year period ended December 31, 1997.  This  presentation  includes and should be
reviewed in conjunction with the consolidated  financial  statements and related
notes elsewhere in this Annual Report.

Earnings Analysis

Guaranty State Bancorp's consolidated net income in 1997 was $1,140,051,  a 5.5%
increase over 1996  earnings of  $1,080,447.  On a per share basis,  diluted net
income was $1.22 in 1997,  compared  to $1.18 for the prior year.  Earnings  for
1995 were $972,454 or $1. 09 per share.

The improved earnings in 1997 reflected strong loan growth, good expense control
and a 17.4% increase in noninterest  income. Net income  represented  returns of
10.44% on average shareholders' equity and 1.13% on average assets versus 10.72%
and 1.16%,  respectively  in 1996.  The equity  and assets  used in  calculating
returns  for both  years  include  unrealized  gains or losses,  net of tax,  on
securities available for sale.

Detailed  discussion  for each of the  factors  affecting  Guaranty's  operating
results and the Corporation's  overall financial  condition are included in this
analysis.

Net Interest Income

Net interest income, the largest component of Guaranty State Bank's earnings, is
the  difference  between  interest  and yield  related fee income  generated  by
earning assets and the interest  expense  associated  with funding these assets.
Net  interest  income is  affected  by the  interest  rate earned or paid and by
volume changes in loans, investment securities, deposits and borrowed funds.

For this  discussion,  net interest income is presented on a taxable  equivalent
basis in order to compare yields on assets having different tax attributes.

For 1997, net interest  income  represented  89.2% of net revenues (net interest
income  plus  noninterest  income),  comparable  to 89.7% in 1996.  The  taxable
equivalent net yield on average earning assets was 8.68% in 1997,  compared with
8.57% in 1996 and 8.85% in 1995.  The average  yield on loans was 9.35% in 1997,
up from 9.30% in 1996.

The increased tax equivalent net interest  income  realized  during 1997 was the
result of a 7.6% increase in average  earning assets and an increase of ll basis
points in the net yield of  earning  assets.  In 1997 the  average  rate paid on
interest-bearing liabilities decreased by 4 basis points.

Strong loan demand led the  interest-earning  asset  growth,  with average loans
increasing  by  10.8%  for  the  year.  Commercial  loans  and  residential  and
commercial  construction  loans paced  overall  loan growth.  On average,  loans
constituted 75.5% of earning assets in 1997,  compared to 73.3% in 1996. The net
interest  margin  averaged 4.65% in 1996, up from a net interest margin of 4.52%
during 1996.

The overall cost of interest-bearing  liabilities increased by $256,257 or 7.1%,
due primarily to growth in the time deposit category and the MAX savings account
that pays market  rates of  interest.  Time  deposits on average in 1997 rose by
9.2%.  Savings deposits  increased by 12.8% as a result of the popularity of the
MAX savings account.  The average yield paid for time deposits in 1997 was 5.78%
compared  to 5.77% in 1996,  reflecting  the  relatively  stable  interest  rate
environment in which the bank operated over the past year.

<PAGE>

The  following  Tables 1 and 2 reflect an  analysis  of net  income and  related
changes in 1997 compared to 1996.

                                     TABLE 1
                    Net Interest Income and Average Balances

<TABLE>
<CAPTION>
                                                              1997                                   1996
                                            -------------------------------------- --------------------------------------
                                                             Interest      Average                  Interest      Average
                                               Average        Income        Yield    Average         Income        Yield
                                               Balance       (Expense)     (Cost)    Balance        (Expense)     (Cost)
Interest-earning assets:
<S>                                         <C>             <C>             <C>    <C>             <C>             <C>
   Taxable investment securities (1)        $ 17,256,356    $1,084,804      6.29%  $17,099,145     $1,084,810      6.34%
   Nontaxable investment securities (1)        3,418,958       301,325      8.81%    3,197,583        288,570      9.02%
   Federal Home Loan Bank Stock                  300,795        21,729      7.22%      300,958         20,396      6.78%
   Federal funds sold                          2,426,238       133,311      5.49%    3,111,848        163,707      5.26%
   Loans (2)                                  72,232,926     6,755,582      9.35%   65,162,324      6,060,796      9.30%
                                             -----------    ----------             -----------     ----------
      Total interest-earning assets           95,635,273     8,296,751              88,871,858      7,618,279
                                             -----------    ----------             -----------     ----------
      Average yield on interest earning assets                              8.68%                                  8.57%

Noninterest-earning assets:
    Cash and due from banks                    2,542,333                             2,288,411
    Premises and equipment                     2,366,984                             1,797,420
    Allowance for loan losses                 (1,119,432)                           (1,140,384)
     Interest receivable and other             1,376,236                             1,369,407
                                             -----------                           -----------
      Total noninterest-earning assets         5,166,121                             4,314,854
                                             -----------                           -----------
      Total assets                          $100,801,394                           $93,186,712
                                            ============                           ===========

Interest-bearing liabilities:
    Demand deposits                         $  4,232,338        62,945      1.49%  $ 4,111,374         80,573      1.96%
    Savings deposits                          26,504,405     1,063,849      4.01%   23,496,740        936,942      3.99%
    Time deposits                             44,901,303     2,596,757      5.78%   41,095,883      2,372,665      5.77%
    FHLB borrowings                            2,161,052       130,070      6.02%    3,395,551        207,184      6.10%
                                            ------------    ----------             -----------     ----------
      Total interest-bearing liabilities      77,799,098     3,853,621              72,099,548      3,597,364
                                            ------------    ----------             -----------     ----------

      Average cost on interest-bearing liabilities                          4.95%                                  4.99%

Noninterest-bearing liabilities:
     Demand deposits                          11,234,710                            10,247,268
     Interest payable and other                  844,187                               757,469
                                            ------------                           -----------
       Total noninterest-bearing liabilities  12,078,897                            11,004,737
                                            ------------                           -----------

       Total liabilities                      89,877,995                            83,104,285
                                            ------------                           -----------
Stockholders' equity                          10,923,399                            10,082,427
                                            ------------                           -----------
       Total liabilities and
          stockholders' equity              $100,801,394                           $93,186,712
                                            ============                           ===========


      Net interest income                                   $4,443,130                             $4,020,915
                                                            ==========                             ==========

      Net yield on interest-earning assets                                  4.65%                                  4.52%
      Interest rate spread (earning asset yield
         minus interest-bearing liability)                                  3.73%
                                                                                                                   3.58%
</TABLE>

1    Nontaxable income on securities and the related yields are shown on a fully
     taxable  equivalent basis computed using the Federal  statutory tax rate of
     34% and the state tax rate of 7%.  Taxable  income on securities  are shown
     adjusted for the state tax rate of 7%.

2    For the  purpose  of  calculating  loan  yield,  average  balances  include
     nonaccrual and impaired loans.

<PAGE>


Table 2 shows the  variance in rate and volume.  Allocation  between  changes in
rate and changes in volume are on a proportional basis.

                                     TABLE 2

                          Rate/Volume Variance Analysis

<TABLE>
<CAPTION>
                                            1997 Compared to 1996                     1996 Compared to  1995
                                    ------------------------------------     ---------------------------------------
                                     Interest                                 Interest
                                     Income/                                  Income
                                     Expense                                  Expense
                                     Variance       Rate         Volume       Variance        Rate          Volume
                                    ---------     --------     ---------     ---------     ---------     -----------
Interest earning assets:
<S>                                 <C>           <C>          <C>           <C>           <C>           <C>
   Taxable investment securities    $      (6)    $ (9,889)    $   9,883     $ 180,659     $   2,181     $   178,478
   Nontaxable investment
      securities(1)                    12,755       (6,756)       19,511       (24,782)        6,416         (31,198)
   Federal Home Loan Bank stock         1,333        1,345           (12)       20,396            --          20,396
   Federal funds sold                 (30,396)       7,275       (37,671)      (64,807)      (22,073)        (42,734)
   Loans                              694,786       33,508       661,278       795,111      (234,613)      1,029,724
                                    ---------     --------     ---------     ---------     ---------     -----------
       Total                          678,472       25,483       652,989       906,577      (248,089)      1,154,666
                                    ---------     --------     ---------     ---------     ---------     -----------

Interest bearing liabilities:
   Demand deposits                    (17,628)     (19,427)        1,799        (7,692)       (2,013)         (5,679)
   Savings deposits                   126,907        6,184       120,723       282,645        77,487         205,158
   Time deposits                      224,092        4,015       220,077       206,326        24,426         181,900
   Short-term debt and Other          (77,114)      (2,812)      (74,302)      207,184            --         207,184
                                    ---------     --------     ---------     ---------     ---------     -----------
       Total                          256,257      (12,040)      268,297       688,463        99,900         588,563
                                    ---------     --------     ---------     ---------     ---------     -----------

       Net interest income          $ 422,215     $ 37,523     $ 384,692     $ 218,114     $(347,989)    $   566,103
                                    =========     ========     =========     =========     =========     ===========
</TABLE>

(1)  Tax exempt  income on  investments  and related  yields are  presented on a
     taxable  equivalent basis computed using the Federal  statutory tax rate of
     34% and the state tax rate of 7%.

Provision and Allowance for Loan Losses

Guaranty  State Bank  maintains an allowance for loan losses to absorb  possible
losses  in the loan  portfolio.  The level of the  allowance  is  determined  by
internally  generated credit quality ratings,  the general economic condition in
the Bank's market and historical loan loss experience.  Guaranty's commitment to
maintain a strong allowance and to have early  recognition of possible  problems
requires an ongoing review of loans to identify credit weaknesses.

The allowance for loan losses totaled $1,153,568 at December 31, 1997, which was
1.50% of loans  outstanding  on that  date.  The  allowance  equaled  440.2%  of
nonperforming  assets.  These  ratios at December 31, 1996 were 1.64% and 365.0%
respectively.

Table 3 presents the  relationship  of the allowance to the loan  portfolio.  In
1997 the loan committee  appropriated an amount to each loan category  according
to grading of loans within the category with the remaining  amount  allocated to
the  general  category.  The  entire  allowance  is  available  to be  used  for
charge-offs in any category.

<PAGE>

                                     TABLE 3

       Allocation of the Allowance for Loan Losses (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                   1997                  1996
                                           --------------------   -------------------
                                                     Percent in              Percent
                                                        each                 in each
                                                      category               category
                                                      to total               to total
                                           Amount      loans      Amount      loans
                                           ------    ----------   ------     --------
<S>                                        <C>          <C>       <C>          <C>
Commercial, financial and agricultural     $  250       3.90%     $  200       5.45%
Real estate-construction                      133      19.54%        100      16.94%
Real estate-mortgage                          263      67.57%        250      68.38%
Loans to individuals                           58       8.56%         50       9.06%
General                                       350        .43%        473        .17%
                                           ------     ------      ------     ------
         Total                             $1,054     100.00%     $1,073     100.00%
                                           ======     ======      ======     ======
</TABLE>


Table 4 summarizes transactions in the allowance for loan losses and details the
charge-offs,  recoveries and net loan losses by loan category for the last three
years.  Net  charge-offs as a percentage of average loans  decreased to .18% for
1997  compared to .27% for the year ended  December 31,  1996,  and .05% for the
year ended December 31, 1995, one of the lowest annual charge-off percentages in
the Bank's history


                                     TABLE 4

          Analysis of Allowance for Loan Losses (Dollars in Thousands)


<TABLE>
<CAPTION>
                                                                  1997          1996          1995
                                                                -------       -------       -------
<S>                                                             <C>           <C>           <C>
Balance, beginning                                              $ 1,073       $ 1,103       $   947
Charge-offs:
    Commercial, financial and agricultural                          (79)         (190)           --
    Real estate, mortgage                                           (24)           --           (25)
    Loans to individuals                                            (50)          (19)          (52)
    Other                                                            (0)           (3)           (1)
                                                                -------       -------       -------
          Total charge-offs                                        (153)         (212)          (78)
                                                                -------       -------       -------
Recoveries:
    Commercial, financial and agricultural                            1             2            26
    Real estate, mortgage                                             0            25            --
    Loans to individuals                                             21            13            25
                                                                -------       -------       -------
         Total recoveries                                            22            40            51
                                                                -------       -------       -------
Net charge-offs                                                    (131)         (172)          (27)
                                                                -------       -------       -------
Provision charged against income                                    211           142           183
                                                                -------       -------       -------
Balance, ending                                                 $ 1,153       $ 1,073       $ 1,103
                                                                =======       =======       =======
Ratio of net charge-offs during the period to average loans
outstanding during the period                                       .18%          .27%          .05%
</TABLE>

In 1996 a commercial customer declared  bankruptcy.  The significant increase in
commercial charge-offs was a result of this loan relationship.

<PAGE>

Nonperforming Assets

Nonperforming  assets consist of nonaccruing loans,  foreclosed assets and loans
which are 90 days or more past due but are still  accruing  interest.  Loans are
placed on nonaccrual  status when, in the judgment of Bank  management,  serious
doubt exists as to the collectibility of additional interest within a reasonable
period of time.

Management's  review  of the loan  portfolio  based on SFAS 114  resulted  in no
additional provision for credit losses in 1996. Statement of Financial Standards
No. 114 ("SFAS 114"),  "Accounting by Creditors for Impairment of a Loan" states
that a loan is impaired when current information and events make it probable the
Bank will be unable to collect the schedule  payments of principal  and interest
when due.

Table 5 provides a summary of nonperforming  assets and  contractually  past due
loans for the most recent  three  years.  Nonperforming  assets  equaled .35% of
total loans and foreclosed  properties at the end of 1997, down from .45% a year
earlier. Real estate secured loans comprise over 63% of the nonperforming loans.
Management  reviewed  the  properties  and believes  the  collateral  values are
sufficient  to  prevent  any  substantial   losses  should  the  loans  go  into
foreclosure.

                                     TABLE 5

             Analysis of Nonperforming Assets (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                          1997              1996               1995
                                                          ----              ----               ----
<S>                                                      <C>               <C>                <C>
Accruing loans past due 90 days or more                  $ 194             $ 147              $ 166
Nonaccruing loans                                           74               147                259
          Total                                          $ 268             $ 294              $ 425
                                                         =====             =====              =====
</TABLE>

There was no commitment to lend additional  funds to any customer whose loan was
classified as nonperforming at December 31, 1997.

Noninterest Income

Noninterest  income at Guaranty consists primarily of service charges on deposit
accounts,  origination fees for loans sold in the secondary market, and fees and
charges for various  other  financial  services  provided  to  customers.  Total
noninterest income increased by 17.4% in 1997, totaling $522,070.  This compares
to $444,528 in 1996,  which was a 7.5%  increase  from 1994's total of $413,545.
Fee income for mortgage  loans  originated  for sale to  correspondents  totaled
$100,534  in 1997  compared  with  $116,628  in  1996.  In 1995,  mortgage  loan
origination fees were $82,721.

Service charges on deposit  accounts have  historically  represented the largest
single item of noninterest income. Service charges on deposit accounts increased
by 20.7% in 1997,  totaling  $269,562.  These fees remained at the same level in
1996 and 1995, at $223,245 and $223,509,  respectively.  Service charge fees did
not increase in 1997. A new accounts receivable  financing product introduced in
1997  contributed  $22,056  in  noninterest  income.  Profit  from  the  sale of
securities and a fully depreciated bank automobile added $21,709.


Noninterest Expense

Noninterest  expenses  increased by 14.8% to $2,944,432 in 1997, from $2,563,992
in  1996.  Personnel  expense  increased  by 9.6% in 1997  over  1996.  Salaries
increased by 7.4%.  Employee benefits increased by 21.3%,  primarily as a result
of  adding  an  executive  supplemental  retirement  plan for  Guaranty's  chief
executive officer.  One-time expenses  associated with Guaranty's pending merger
into Triangle Bank were $109,623.

<PAGE>

Balance Sheet Analysis

Total assets were $106.6  million at the end of 1997, a 10.4%  increase from the
1996 amount of $96.6 million.  For the year 1997, assets averaged $100.8 million
compared to an average of $93.2 million for 1996. Average earning assets in 1997
were $95.6 million or 94.9% of total average assets, compared with $88.9 million
in 1996 and a ratio of 95.4%.  Premises  and  equipment  totaled 2.3% of average
assets in 1997 and 1.9% in 1996.  The newest  branch office in Durham at Highway
54 opened in April 1997 and was totally  destroyed by a gas  explosion in August
1997. This office is under reconstruction.  Insurance covered the full amount of
reconstruction.

During 1997, interest bearing  liabilities  averaged $77.8 million, up 7.9% from
the 1996 average of $72.1 million.  Time deposits on average  increased by 9.3%.
The  components  of the  Bank's  average  earning  assets and  interest  bearing
liabilities are presented in Table 1.

Loans

The loan portfolio  constitutes the Bank's largest earning asset.  Average loans
outstanding  grew by $7.0 million in 1997 to $72.2 million from $65.2 million in
1996,  representing  an  increase  of 10.9%.  A  detailed  analysis  of loans at
December  31,  1997  and  1996  is  presented  in the  Note 3 of  the  Notes  to
Consolidated  Financial  Statements.  This  analysis is based on the  collateral
securing the loan.

The  following  table  shows  the  Bank's  loan  maturities  by  types  of loans
indicated,  exclusive  of  residential  and  commercial  real  estate  loans and
consumer loans as of December 31, 1997.


                                     TABLE 6

                     Loan Maturities (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                           Maturing
                                       --------------------------------------------------
                                                     After One
                                       Within One    But Within   After Five
                                          Year       Five Years     Years          Total
                                          ----       ----------     -----          -----
<S>                                     <C>             <C>          <C>          <C>
Commercial, financial and               $ 3,392         $637         $170         $ 4,199
agricultural
Construction and development             14,816           --           --          14,816
                                        -------         ----         ----         -------
Total                                   $18,208         $637         $170         $19,015
                                        =======         ====         ====         =======
</TABLE>

The average rate earned on loans during 1997  increased to 9.35%, 5 basis points
above  the 1996  yield  of  9.30%.  Interest  income  and fees on loans  grew by
$769,193  in 1997,  up 12.7% from the  amount  earned in 1996.  Residential  and
commercial  construction loans have shown the strongest growth over the last two
years,  as  illustrated  in Note 3. Over 94% of the Bank's  loan  portfolio  was
secured by real estate at December 31, 1997.

Guaranty  strives to  maintain a diverse  loan  portfolio  in which there are no
industry  concentrations.  The majority of the Bank's  customers are individuals
and small-to-medium sized companies headquartered within Durham County.

Investments and Federal Funds Sold

Investments  and Federal funds sold at the end of 1997 totaled $20.5 million and
$2.7  million,  respectively,  and  $22.4  million  and  $3.7  million  in 1996,
respectively.  The  investment  portfolio  is  concentrated  primarily  in  U.S.
Treasury  securities and N.C.  Municipal  bonds with an average  maturity of 1.8
years and provides an appropriate liquidity level for the Bank. Table 7 provides
a detailed  analysis of  investment  securities.  In 1995,  Guaranty  joined the
Federal  Home Loan Bank,  which  requires  purchase of stock.  Book value of the
stock was $309,200 at December 31, 1997.


                                     TABLE 7

                              Investment Securities

<TABLE>
<CAPTION>
                                                                     Amortized Cost
                              ----------------------------------------------------------------------------------------
                                               After One      After Five
                              In One Year    Year Through   Years Through     After Ten                       Maturity
                                Or Less       Five Years      Ten Years         Years              Total      in Years
                                -------       ----------      ---------         -----              -----      --------
December 31, 1997
<S>                           <C>              <C>            <C>           <C>                <C>               <C>
  U.S. Treasury               $ 6,989,254      $8,018,964     $        -    $          -       $15,008,218       1.08
  U.S. Government agencies        500,288         499,700              -               -           999,928       1.50
  States and political subs.      175,114       1,998,162      1,997,511         151,767         4,322,554       4.50
                              -----------     -----------     ----------    ------------       -----------       ----
Total                         $ 7,664,596     $10,516,826     $1,997,511    $    151,767       $20,330,700       1.83
                              ===========     ===========     ==========    ============       ===========       ====
Estimated market value        $ 7,669,060     $10,627,497     $2,037,074    $    158,818       $20,492,449
 *Weighted average yields
  U.S. Treasury                      6.19%           6.49%             -               -
  U.S. Government agencies           4.86%           6.60%             -               -
  States and political subs.        10.43%           9.50%          7.39%           8.46%
  Consolidated                       6.20%           7.06%          7.39%           8.46%

December 31, 1996                                                             Book Value      Market Value
                                                                              ----------      ------------
  U.S. Treasury                                                              $15,961,563       $15,974,196
  U.S. Government agencies                                                     1,999,746         1,995,569
  States and political subs.                                                   4,317,129         4,434,749
                                                                             -----------       -----------
Total                                                                        $22,278,438       $22,404,514
                                                                             ===========       ===========
</TABLE>

*    Yields are  presented  at December 31, 1997 on a taxable  equivalent  basis
     using the Federal statutory tax rate of 34% and the state tax rate of 7%.

Deposits

The increase in the earning  assets over the last several  years has been funded
primarily with  increases in the deposit base. In 1997 average  deposits rose by
$6.9 million for a 10.1% growth over 1996.  Guaranty  borrowed  from the Federal
Home Loan Bank to provide  additional funding for the loan growth in 1997. Loans
from FHLB averaged $2.2 million during 1997.

Average   noninterest   demand  deposits   increased  by  9.6%  in  1997,  while
certificates of deposit rose by 9.3%.  Savings,  which includes the money market
accounts,  rose on  average  by  12.8%  in  1997.  The  Bank's  average  cost of
interest-bearing liabilities was .04% lower in 1997.

The Bank does not solicit  brokered  deposits and  virtually all of its deposits
are generated from its local market area. Table 8 provides maturity  information
relating to certificates of deposit of $100,000 or more.

                                     TABLE 8

              Large Time Deposit Maturities (Dollars in Thousands)


Analysis of time deposits of $100,000 or more at December 31, 1997:
    Remaining maturity of three months or less                         $ 7,472
    Remaining maturity of three through 12 months                        5,440
    Remaining maturity of 12 months or greater                           2,084
                                                                       -------
Total time deposit of $100,00 or more                                  $14,996
                                                                       =======


Short-Term Debt

During 1997, all of the Corporation's borrowings were with the Federal Home Loan
Bank and averaged  $2.2 million.  FHLB debt was used to maintain an  appropriate
liquidity  during  periods of the year with high loan  demand.  Table 9 provides
information relating to Guaranty's borrowing positions in 1997.

                                     TABLE 9

                                   Borrowings
                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                                                   1997        1996
                                                                  ------      ------
End of year:
<S>                                                               <C>         <C>
  Amount outstanding, end of year                                 $1,800      $1,800
                                                                  ------      ------
  Weighted average interest rate, end of year                       6.31%       5.71%
                                                                  ------      ------
Maximum amounts:
  Maximum amount outstanding at any month-end during the year     $2,800      $3,800
                                                                  ------      ------
Averages:
  Average outstanding balance during the year                     $2,161      $3,396
                                                                  ------      ------
  Weighted average interest rate during the year                    6.02%       6.10%
                                                                  ------      ------
</TABLE>

Capital

The Bank  endeavors to maintain  equity  capital at a level  adequate to support
future growth as well as payment of dividends to its  shareholders.  The primary
source  of  new  capital  funds  has  been  through  retained  earnings.   Total
shareholders'  equity  averaged $10.9 million in 1997, an 8.3% increase over the
prior year.  The 1996 average of $10.1  million  represented  a 9.8% growth over
1995. Average equity as a percentage of total assets was 10.8% in 1997 and 10.6%
in 1996.

The Federal  Deposit  Insurance  Corporation  Improvement  Act of 1991  (FDICIA)
required the  establishment  of a capital-  based  supervisory  system of prompt
corrective  action  for  all  depository  institutions.   FDICIA  defines  "well
capitalized" institutions as those whose capital to asset ratios equal or exceed
the minimum ratios:

Tier 1 Capital (primarily shareholder equity)                           4%
Total Risk Based Capital (calculated on the                             8%
 liquidity and credit risks of asset category)

Guaranty's core capital (Tier 1) was 10.8% on December 31, 1997,  which exceeded
all  regulatory  guidelines.  Reference  is made to Note 11 in the  accompanying
notes to the consolidated financial statements.

Market Price and Cash Dividends

At December 31, 1997,  Guaranty State Bancorp had 892,978 shares of common stock
outstanding which were held by 264 shareholders of record.

Morgan Keegan serves as the principal market maker for the Corporation's  common
stock in the over the counter market.  Monroe Securities,  Rochester,  New York,
also serves as a market  maker.  The following  table sets forth cash  dividends
declared  and the range of high and low  market  quotations  for each  quarterly
period as indicated.

                                    TABLE 10

                         Market Price and Cash Dividends

<TABLE>
<CAPTION>
                                    1997                                                     1996
              --------------------------------------------------     ---------------------------------------------------
                    Bid                   Ask                               Bid                   Ask
              --------------       ----------------                  ---------------        ---------------
              High       Low       High         Low     Dividend     High        Low        High        Low     Dividend
              ----       ---       ----         ---     --------     ----        ---        ----        ---     --------
Quarter
-------
<S>           <C>       <C>       <C>          <C>       <C>         <C>        <C>        <C>         <C>       <C>
1st           $22.75    $22.38    $23.38       $23.25    $ .09       $17.50     $17.00     $20.00      $19.75    $ .08
2nd            22.75     22.38     23.85        23.25      .09        18.00      17.25      19.75       19.50      .08
3rd            24.00     22.75     25.00        23.75      .10        21.00      18.00      25.00       19.50      .09
4th            37.00     24.00     37.00        34.00      .10        22.38      21.00      25.00       25.00      .09
</TABLE>

Cash  dividends per share were $ .38, $ .34 and $ .29 in 1997,  1996,  and 1995,
respectively. Dividends declared as a percentage of net income amounted to 27.4%
in 1997, 27.6% in 1996, and 25.7% in 1995.

Asset and Liability Management

The largest  component of the Bank's earnings is net interest income,  which can
fluctuate  widely when  significant  interest rate movements  occur.  The Bank's
management  team is responsible  for minimizing the Bank's  exposure to interest
rate risk and assuring an adequate level of liquidity.  This is  accomplished by
developing  objectives,  goals and strategies designed to enhance  profitability
and performance.

Ongoing  management of the Bank's interest rate sensitivity  limits the interest
rate  risk by  controlling  the mix and  maturity  of  assets  and  liabilities.
Management  regularly  reviews the Bank's  position  and  evaluates  alternative
sources  and uses of funds  as well as  changes  in  external  factors.  Various
methods are used to achieve and maintain the desired rate-sensitivity  position,
including the sale or purchase of assets and product pricing.

In order to ensure  that  sufficient  funds are  available  for loan  growth and
deposit  withdrawals,  as well as to provide  for general  needs,  the Bank must
maintain an adequate  level of liquidity.  Both assets and  liabilities  provide
sources of liquidity.  Asset  liquidity comes from the Bank's ability to convert
short-term  investments  into cash and from the maturity and  repayment of loans
and investment securities. Liability liquidity is provided by the Bank's ability
to attract  deposits.  The primary  source of liability  liquidity is the Bank's
customer  base which  provides core deposit  growth.  As a member of the Federal
Home Loan Bank, Guaranty State Bank has the ability to borrow as another funding
source.  The overall  liquidity  position of the Bank is closely  monitored  and
evaluated  regularly.  Management  believes  the  Bank's  liquidity  sources  at
December 31, 1997 are adequate to meet its operating needs.

Because actual and projected  repricing  volumes may differ,  it should be noted
that Table 11 reflects  the  sensitivity  of the balance  sheet as of a specific
date and is not necessarily indicative of the Bank's position on other dates. At
December 31, 1997,  Guaranty had a  cumulative  liability  sensitive  static gap
position (interest-bearing liabilities subject to interest rate changes exceeded
earning  assets  subject to changes in interest  rates) of $19.9 million for one
year.  This  is  due to the  inclusion  of  transaction  accounts  as  repricing
immediately.  Such  funds have been  invested  in longer  term  interest-earning
assets.  Experience  has shown that the Bank and other peer banks see relatively
modest  repricing  of their  transaction  accounts.  Management  takes this into
consideration in trying to determine  acceptable levels of interest  sensitivity
and accordingly,  developing appropriate strategies.  It is Guaranty's policy to
maintain  portfolios  of  earning  assets and  liabilities  with  maturities  or
repricing  opportunities that will afford  protection,  to the extent practical,
from unanticipated changes in interest rates.


                                    TABLE 11

                            Interest Rate Sensitivity
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                    1-3            4-12         13-60        Over 60
                                                   Months         Months        Months        Months       Total
                                                   ------         ------        ------        ------       -----
Earning assets (1)
<S>                                               <C>            <C>            <C>          <C>          <C>
  Loans - fixed and adjustable rate               $ 29,079       $ 11,538       $35,188      $ 1,077      $76,882

  Investments                                        2,674          5,495        10,628        1,695       20,492
  Federal Home Loan Bank Stock                         310             --            --           --          310
                                                  --------       --------       -------      -------      -------
Total                                               32,063         17,033        45,816        2,772       97,684
                                                  ========       ========       =======      =======      =======

Interest-bearing liabilities:
  NOW                                                7,671                                                  7,671
  Money market                                       9,096                                                  9,096
  Savings                                           17,701                                                 17,701
  Certificates of deposit                           14,474         20,270        12,134                    46,878
  Federal Home Loan Bank Borrowings                     --                        1,800           --        1,800
                                                  --------       --------       -------      -------      -------
Total                                             $ 48,942       $ 20,270       $13,934      $    --      $83,146
                                                  ========       ========       =======      =======      =======

Interest sensitivity gap                          $(16,879)      $ (3,237)      $31,882      $ 2,772
Cumulative gap                                    $(16,879)      $(20,116)      $11,766      $14,538
Ratio of interest sensitive assets to
  interest sensitive liabilities                      65.5%          84.0%        328.8%       100.0%
Cumulative ratio of interest sensitive assets
  to interest sensitive liabilities                   65.5%          70.9%        114.2%       117.5%
</TABLE>

(1)  Nonaccrual  loans  totaling  $74,535 are  omitted as they are not  interest
     bearing assets.

Effect of Changing Prices

The results of operations and financial  conditions presented in this report are
based on historical  cost  information,  and are  unadjusted  for the effects of
inflation.

Since the assets  and  liabilities  of banks are  primarily  monetary  in nature
(payable in fixed determinable  amounts) the performance of the Bank is affected
more by changes in interest rates than by inflation.  Interest  rates  generally
increase as the rate of inflation increases,  but the magnitude of the change in
rates may not be the same.

The effect of inflation on banks is normally not as significant as its influence
on those  businesses  which have large  investments  in plants and  inventories.
During periods of high inflation there are normally  corresponding  increases in
the money supply,  and banks will normally  experience  above-average  growth in
assets,  loans and deposits.  Also, increases in the price of goods and services
generally will result in increased operating expenses.


                       Comparison of Key Financial Ratios

                                          1997            1996            1995
                                        -------         -------         -------
Return on assets                          1.13%           1.16%           1.22%
Return on equity                         10.44%          10.72%          10.59%
Dividend payout ratio                    29.46%          27.57%          25.72%
Equity to assets ratio                   10.83%          10.82%          11.49%

*Ratios are computed on average balances


Item 8. Financial Statements and Supplementary Data.

                             GUARANTY STATE BANCORP

                       CONSOLIDATED FINANCIAL STATEMENTS

                        as of December 31, 1997 and 1996
                   and for each of the three years then ended

<PAGE>

                             GUARANTY STATE BANCORP


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                         Page(s)

Report of Independent Accountants                                              1

Financial Statements:

        Consolidated Balance Sheets                                            2

        Consolidated Statements of Income                                      3

        Consolidated Statements of Changes in Stockholders' Equity             4

        Consolidated Statements of Cash Flows                                  5

        Notes to Consolidated Financial Statements                        6 - 24

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS


The Board of Directors and Shareholders
Guaranty State Bancorp
Durham, North Carolina

We have audited the accompanying  consolidated  balance sheets of Guaranty State
Bancorp  and  subsidiary  as of  December  31,  1997 and 1996,  and the  related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for each of the three years in the period ended  December 31, 1997.  These
financial statements are the responsibility of the Corporation's management. Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of Guaranty State
Bancorp and  subsidiary as of December 31, 1997 and 1996,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.

/s/ Coopers & Lybrand L.L.P.

Raleigh, North Carolina
January 30, 1998

<PAGE>

                             GUARANTY STATE BANCORP
                          Consolidated Balance Sheets
                           December 31, 1997 and 1996


<TABLE>
<CAPTION>
               ASSETS                                             1997            1996
                                                              ------------     -----------
<S>                                                           <C>              <C>
Cash and due from banks                                       $  3,761,982     $ 2,445,899
Federal funds sold                                               2,670,000       3,744,000
Securities available for sale                                   20,492,449      22,404,514
Loans held for sale                                                163,000         354,600
Loans, less allowance for loan losses
   of $1,153,568 in 1997
   and $1,073,274 in 1996                                       75,808,149      64,078,398
Federal Home Loan Bank of Atlanta stock                            309,200         270,600
Premises and equipment, net                                      2,037,791       2,155,017
Interest receivable                                                789,911         700,199
Other assets                                                       571,714         406,769
                                                              ------------     -----------
               Total assets                                   $106,604,196     $96,559,996
                                                              ============     ===========


               LIABILITIES AND STOCKHOLDERS' EQUITY


Deposits:
   Noninterest-bearing demand                                 $ 11,327,748     $10,232,604
   Interest-bearing demand                                       7,671,175       5,221,254
   Savings                                                      26,796,627      25,662,273
   Large denomination certificates of deposit                   14,996,332      12,523,084
   Other time deposits                                          31,881,652      29,954,367
                                                              ------------     -----------
               Total deposits                                   92,673,534      83,593,582


Borrowings                                                       1,800,000       1,800,000
Interest payable                                                   578,915         542,766
Other liabilities                                                  152,866         174,092
                                                              ------------     -----------
               Total liabilities                                95,205,315      86,110,440
                                                              ------------     -----------

Commitments and contingencies (Notes 5 and 13)

Stockholders' equity:

   Common stock, $1 par value,  2,500,000 shares
      authorized;  892,978 shares and
      880,053 shares issued and outstanding
      in 1997 and 1996, respectively                               892,978         880,053
   Surplus                                                       4,835,242       4,722,289
   Undivided profits                                             5,575,231       4,772,831
   Net unrealized gains on securities available for sale            95,430          74,383
                                                              ------------     -----------
               Total stockholders' equity                       11,398,881      10,449,556
                                                              ------------     -----------

               Total liabilities and stockholders' equity     $106,604,196     $96,559,996
                                                              ============     ===========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       2
<PAGE>

                             GUARANTY STATE BANCORP
                       Consolidated Statements of Income
              for the years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                          1997           1996           1995
                                                          ----           ----           ----
Interest income:
<S>                                                    <C>            <C>            <C>
   Loans and fees on loans                             $6,829,988     $6,060,795     $5,265,685
   Federal funds sold                                     133,311        163,707        228,514
   Securities, taxable                                  1,034,687      1,055,090        862,627
   Securities, non-taxable                                184,953        177,125        192,336
                                                       ----------     ----------     ----------
               Total interest income                    8,182,939      7,456,717      6,549,162
                                                       ----------     ----------     ----------

Interest expense:
   Large denomination certificates of deposit             522,730        697,731        658,855
   Other deposits                                       3,200,822      2,692,449      2,250,046
   Other interest expense                                 130,070        207,184             --
                                                       ----------     ----------     ----------
               Total interest expense                   3,853,622      3,597,364      2,908,901
                                                       ----------     ----------     ----------
               Net interest income                      4,329,317      3,859,353      3,640,261
                                                       ----------     ----------     ----------

Provision for loan losses                                 211,000        142,836        183,268
                                                       ----------     ----------     ----------
               Net interest income after provision
                 for loan losses                        4,118,317      3,716,517      3,456,993
                                                       ----------     ----------     ----------

Other income:
   Service charges on deposit accounts                    269,562        223,245        223,509
   Other service charges, commissions and fees            172,504        177,868        158,484
   Other operating income                                  80,004         43,415         31,552
                                                       ----------     ----------     ----------
               Total other income                         522,070        444,528        413,545
                                                       ----------     ----------     ----------

Other expenses:
   Salaries                                             1,360,774      1,266,439      1,205,289
   Employee benefits                                      287,139        236,799        228,079
   Occupancy expense                                      311,570        270,775        248,417
   Equipment and fixtures expense                         118,421        100,687        121,889
   FDIC assessment                                         11,138          2,000         78,670
   Other operating expenses                               855,390        687,292        571,202
                                                       ----------     ----------     ----------
               Total other expense                      2,944,432      2,563,992      2,453,546
                                                       ----------     ----------     ----------

               Income before income taxes               1,695,955      1,597,053      1,416,992

Income taxes                                              555,904        516,606        444,538
                                                       ----------     ----------     ----------
               Net income                              $1,140,051     $1,080,447     $  972,454
                                                       ==========     ==========     ==========
Net income per:
   Common share                                        $     1.29     $     1.23     $     1.12
                                                       ==========     ==========     ==========
   Common share - assuming dilution                    $     1.22     $     1.18     $     1.09
                                                       ==========     ==========     ==========
Cash dividends declared per share                      $      .38     $      .34     $      .29
                                                       ==========     ==========     ==========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       3
<PAGE>

                             GUARANTY STATE BANCORP
           Consolidated Statements of Changes in Stockholders' Equity
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                Gains
                                                                                               (Losses)
                                          Common Stock                                       on Securities       Total
                                      --------------------                     Undivided       Available     Stockholders'
                                       Shares      Amount       Surplus         Profits      for Sale, Net       Equity
                                      -------     --------     ----------     -----------    -------------    ------------

<S>                                   <C>         <C>          <C>            <C>              <C>            <C>
Balance at January 1, 1995            578,338     $578,338     $4,644,812     $ 3,558,813      $(185,426)     $  8,596,537

Exercise of stock options               2,520        2,520         17,152              --             --            19,672
Cash dividends                             --           --             --        (250,092)            --          (250,092)
Three for two stock dividend          290,404      290,404             --        (290,404)            --                --
Net income                                 --           --             --         972,454             --           972,454
Change in net unrealized losses,
   net of income taxes                     --           --             --              --        336,180           336,180
                                      -------     --------     ----------     -----------    -------------    ------------

Balance at December 31, 1995          871,262      871,262      4,661,964       3,990,771        150,754         9,674,751

Exercise of stock options               8,791        8,791         60,325              --             --            69,116
Cash dividends                             --           --             --        (298,387)            --          (298,387)
Net income                                 --           --             --       1,080,447             --         1,080,447
Change in net unrealized gains,
   net of income taxes                     --           --             --              --        (76,371)          (76,371)
                                      -------     --------     ----------     -----------    -------------    ------------

Balance at December 31, 1996          880,053      880,053      4,722,289       4,772,831         74,383        10,449,556

Exercise of stock options              12,925       12,925        112,953              --             --           125,878
Cash dividends                             --           --             --        (337,651)            --          (337,651)
Net income                                 --           --             --       1,140,051             --         1,140,051
Change in net unrealized gains,
   net of income taxes                     --           --             --              --         21,047            21,047
                                      -------     --------     ----------     -----------    -------------    ------------

Balance at December 31, 1997         $892,978     $892,978     $4,835,242     $ 5,575,231      $  95,430      $ 11,398,881
                                     ========     ========     ==========     ===========      =========      ============

</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       4
<PAGE>

                             GUARANTY STATE BANCORP
                     Consolidated Statements of Cash Flows
              for the years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                                   1997              1996              1995
                                                               ------------      ------------      ------------
Cash flows from operating activities:
<S>                                                            <C>               <C>               <C>
   Net income                                                  $  1,140,051      $  1,080,447      $    972,454
   Adjustment to reconcile net income to net cash
      provided by operations:
         Depreciation and amortization                              173,770           154,761           147,038
         Amortization of organization costs                           9,443             9,443            10,515
         Amortization of premiums, (accretion) of
            discounts on securities, net                             (3,610)           18,523            73,544
         Provision for loan losses                                  211,000           142,836           183,268
         Realized loss (gain) on sale of securities                 (14,709)            3,390               780
         Deferred tax benefit                                       (39,592)          (37,635)          (73,369)
         Loans held for sale:
            Originations                                         (7,823,300)       (8,195,182)       (5,333,950)
            Proceeds                                              8,014,900         8,051,282         5,279,250
         Changes in assets and liabilities:
            Interest receivable                                     (89,712)          (56,142)          (45,538)
            Other assets                                           (149,423)           53,227           173,077
            Interest payable                                         36,149           (60,790)          217,082
            Other liabilities                                         8,423           (33,895)           29,160
                                                               ------------      ------------      ------------
               Net cash provided by operating activities          1,473,390         1,130,265         1,633,311
                                                               ------------      ------------      ------------

Cash flows from investing activities:
   Proceeds from sales of securities available for sale           1,013,750         1,001,172             4,156
   Proceeds from maturity of securities available for sale        4,550,000         7,440,000         6,160,000
   Purchase of securities available for sale                     (3,597,692)      (12,323,438)       (6,103,989)
   Purchase of FHLB of Atlanta stock                                (38,600)          (43,900)         (226,700)
   Net increase in loans                                        (11,940,751)       (6,233,383)      (10,199,406)
   Capital expenditures                                             (56,544)         (552,561)          (49,306)
                                                               ------------      ------------      ------------
               Net cash used by investing activities            (10,069,837)      (10,712,110)      (10,415,245)
                                                               ------------      ------------      ------------

Cash flows from financing activities:
   Net increase in deposits                                       9,079,952        10,970,199         6,152,889
   Proceeds from exercise of stock options                           96,229            69,116            19,672
   Dividends paid                                                  (337,651)         (298,387)         (232,441)
   Net proceeds from borrowed funds                                      --         1,800,000                --
                                                               ------------      ------------      ------------
               Net cash provided by financing activities          8,838,530        12,540,928         5,940,120
                                                               ------------      ------------      ------------
               Net increase (decrease) in cash and
                  cash equivalents                                  242,083         2,959,083        (2,841,814)


Cash and cash equivalents at beginning of year                    6,189,899         3,230,816         6,072,630
                                                               ------------      ------------      ------------

Cash and cash equivalents at end of year                       $  6,431,982      $  6,189,899      $  3,230,816
                                                               ============      ============      ============
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       5
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The  accounting  and  reporting  policies of Guaranty  State  Bancorp  (the
     "Corporation")  follow generally accepted accounting principles and general
     practices within the financial services industry.  The Corporation operates
     four branches in Durham, North Carolina.  The Corporation's  primary source
     of  revenue  is  derived   from  loans  to   customers.   These  loans  are
     predominately real estate loans secured by 1-4 family residences. Following
     is a summary of the more significant policies.

     Basis of Presentation

     The consolidated  financial  statements of the Corporation,  a bank holding
     company established under the laws of the State of North Carolina,  include
     the  accounts  of  Guaranty  State  Bank (the  "Bank"),  its  wholly  owned
     subsidiary. All significant intercompany transactions have been eliminated.

     Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  at the  date  of the  financial  statements  that  affect  the
     reported  amounts of assets and  liabilities  at the date of the  financial
     statements and disclosure of contingent  assets and liabilities at the date
     of the  financial  statements  and the  reported  amounts of  revenues  and
     expenses  during the reporting  periods.  Actual  results could differ from
     those estimates.

     Securities

     Securities  are  accounted for in  accordance  with  Statement of Financial
     Accounting  Standards ("SFAS") No. 115, "Accounting for Certain Investments
     in Debt and Equity  Securities." This statement requires certain securities
     to be classified into three categories:

     (a)  Securities  Held-to-Maturity - Debt securities that the entity has the
          positive  intent  and  ability to hold to  maturity  are  reported  at
          amortized cost.

     (b)  Trading  Securities - Debt and equity  securities  that are bought and
          held  principally  for the  purpose  of  selling  in the near term are
          reported at fair value,  with unrealized  gains and losses included in
          earnings.

     (c)  Securities   Available-for-Sale  -  Debt  and  equity  securities  not
          classified as either securities held to maturity or trading securities
          are reported at fair value,  with unrealized gains and losses excluded
          from  earnings and reported as a separate  component of  stockholders'
          equity.

     Premiums are  amortized and discounts  accreted  using the interest  method
     over the remaining terms of the related debt  securities.  Gains and losses
     on the sale of securities are determined using the  specific-identification
     method and are included in other income at the time of sale.

                                       6
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Loans Held for Sale

     Loans held for sale are  carried at the lower of cost or  estimated  market
     value,  determined  on  an  aggregate  basis.  Net  unrealized  losses  are
     recognized in a valuation allowance by charges to income.

     Loans and Allowance for Loan Losses

     Loans are stated at the amount of unpaid principal, reduced by an allowance
     for loan  losses.  Interest  on loans is  calculated  by using  the  simple
     interest  method on daily  balances of the  principal  amount  outstanding.
     Deferred loan  origination  fees and costs are amortized to interest income
     over the contractual life of the loan using a method that  approximates the
     level yield method.

     The allowance for loan losses is  established  through a provision for loan
     losses  charged to expense.  Loans are charged  against the  allowance  for
     possible loan losses when management  believes that the  collectibility  of
     the  principal is  unlikely.  The  allowance  is an amount that  management
     believes will be adequate to absorb  possible losses on existing loans that
     may become  uncollectible,  based on evaluations of the  collectibility  of
     loans  and  prior  loan  loss   experience.   The  evaluations   take  into
     consideration  such factors as changes in the nature and volume of the loan
     portfolio, overall portfolio quality, review of specific problem loans, and
     current  economic  conditions  and trends  that may  affect the  borrowers'
     ability to pay.

     The  Corporation  evaluates it's loan portfolio in accordance with SFAS No.
     114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS
     No.  118,  "Accounting  by  Creditors  for  Impairment  of a Loan -  Income
     Recognition and Disclosure".  Under these  standards,  a loan is considered
     impaired,  based on current  information and events, if it is probable that
     the  Corporation  will be unable  to  collect  the  scheduled  payments  of
     principal and interest when due according to the  contractual  terms of the
     loan agreement. Uncollateralized loans are measured for impairment based on
     the  present  value  of  expected  future  cash  flows  discounted  at  the
     historical  effective interest rate, while all  collateral-dependent  loans
     are measured for impairment based on the fair value of the collateral.

                                       7
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Loans and Allowance for Loan Losses (continued)

     At December 31, 1997 and 1996, and for the years then ended,  there were no
     loans material to the financial statements considered to be impaired.

     The  Corporation  uses several factors in determining if a loan is impaired
     under SFAS No. 114. The internal asset classification  procedures include a
     thorough  review of  significant  loans and lending  relationships  and the
     accumulation  of related  data.  This data  includes  loan payment  status,
     borrowers'  financial  data and borrowers'  operating  factors such as cash
     flows,  operating  income or loss,  etc. Loans with a principal  balance of
     less than  $150,000  are  considered  small  balance  loans  and  evaluated
     collectively for impairment.

     Income Recognition on Impaired and Nonaccrual Loans

     Loans,  including impaired loans, are generally classified as nonaccrual if
     they are past due as to maturity or payment of  principal or interest for a
     period of more than 90 days,  unless such loans are well-secured and in the
     process of  collection.  If a loan or a portion of a loan is  classified as
     doubtful or is partially  charged off, the loan is generally  classified as
     nonaccrual.  Loans  that are on a current  payment  status or past due less
     than 90 days may also be  classified  as nonaccrual if repayment in full of
     principal and/or interest is in doubt.

     Loans may be returned to accrual  status when all  principal  and  interest
     amounts contractually due (including  arrearages) are reasonably assured of
     repayment  within a  acceptable  period of time,  and there is a  sustained
     period of repayment performance by the borrower, generally a minimum of six
     months, in accordance with the contractual terms of interest and principal.

     While a loan is classified as nonaccrual and the future  collectibility  of
     the  recorded  loan  balance  is  doubtful,  collections  of  interest  and
     principal   are   generally   applied  as  a  reduction  to  the  principal
     outstanding, except in the case of loans with scheduled amortizations where
     the payment is generally applied to the oldest payment due. When the future
     collectibility  of the recorded loan balance is expected,  interest  income
     may be recognized on a cash basis.  In the case where a nonaccrual loan has
     been  partially  charged-off,  recognition  of  interest on a cash basis is
     limited  to that which  would have been  recognized  on the  recorded  loan
     balance at the contractual interest rate. Receipts in excess of that amount
     are recorded as  recoveries  to the  allowance  for loan losses until prior
     charge-off's have been fully recovered.

                                       8
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Foreclosed Assets

     Assets  acquired as a result of foreclosure  are valued at the lower of the
     recorded investment in the loan or fair value less estimated costs to sell.
     The  recorded  investment  is the  sum of the  outstanding  principal  loan
     balance and foreclosure  costs  associated with the loan. Any excess of the
     recorded  investment  over the fair value of the  property  received at the
     time of  foreclosure  is  charged to the  allowance  for loan  losses.  Any
     subsequent write-downs are charged against other expenses.

     Premises and Equipment

     Premises and equipment are stated at cost less accumulated depreciation and
     amortization.  Depreciation and amortization are computed  primarily by the
     straight-line  method based on estimated  service  lives of assets.  Useful
     lives  range  from 10 to 40 years for  premises  and from 5 to 25 years for
     equipment  and  fixtures.  Repairs  and  maintenance  costs are  charged to
     expense.

     Upon  retirement  or  other  disposition  of the  assets,  the cost and the
     related  accumulated  depreciation  and  amortization  are removed from the
     accounts and any gains or losses are included in other income.

     Income Taxes

     The Corporation  and its subsidiary file a consolidated  Federal income tax
     return.  Separate  state income tax returns are filed for each entity.  The
     Corporation's  consolidated  federal  income  tax  returns  are  subject to
     examination by taxing authorities for the years 1995 and thereafter.

     Deferred tax asset and liability  balances are determined by application to
     temporary  differences  of the tax rate expected to be in effect when taxes
     will become payable or receivable.  Temporary  differences  are differences
     between the tax basis of assets and liabilities and their reported  amounts
     in the  financial  statements  that will  result in taxable  or  deductible
     amounts in future years.

                                       9
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Accounting   for   Transfers   and   Servicing  of  Financial   Assets  and
     Extinguishments of Liabilities

     On January 1, 1997 the  Corporation  adopted SFAS No. 125,  "Accounting for
     Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
     Liabilities".  This  statement  establishes  new criteria  for  determining
     whether a transfer of financial assets should be accounted for as a sale or
     as a pledge of  collateral  in a secured  borrowing.  This  statement  also
     establishes  new  accounting  requirements  for  pledged  collateral.   The
     adoption  of this  statement  had no material  impact on the  Corporation's
     financial  statements.  SFAS No. 127 defers the  effective  date of certain
     provisions of SFAS No. 125 until January 1, 1998. The Corporation  does not
     anticipate a  significant  effect on net income or its  financial  position
     from the adoption of this statement.

     Net Income per share

     The  Corporation  adopted SFAS No. 128 "Earnings Per Share" on December 31,
     1997. As required,  all prior period  earnings per share have been restated
     to conform  with the  provisions  of the  statement.  There are no material
     differences  between earnings per  share-assuming  dilution  reported under
     SFAS No.  128 and the  previously  reported  amounts  for the  years  ended
     December 31, 1996 and 1995.

     The following table provides a reconciliation of income available to common
     stockholders  and the average  number of shares  outstanding  for the years
     ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                1997           1996         1995
                                            ----------     ----------     --------

<S>                                         <C>            <C>            <C>
     Net income (numerator)                 $1,140,051     $1,080,447     $972,454
                                            ==========     ==========     ========

     Shares for basic EPS (denominator)        886,558        876,254      870,526
     Dilutive effect of stock options           49,628         41,645       21,166
                                            ----------     ----------     --------
     Adjusted shares for diluted EPS           936,186        917,899      891,692
                                            ==========     ==========     ========
</TABLE>


     Cash Flows

     For purposes of reporting  cash flows,  cash and cash  equivalents  include
     cash on hand,  amounts  due from banks and federal  funds sold.  Generally,
     federal funds are purchased and sold for one-day periods.

                                       10
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Reclassifications

     Certain items included in the 1996 and 1995 financial  statements have been
     reclassified to conform to the 1997 presentation.  These  reclassifications
     had  no  effect  on the  net  income  or  stockholders'  equity  previously
     reported.

     New Accounting Pronouncements

     The Financial  Accounting  Standards Board has recently issued SFAS No. 130
     "Reporting  Comprehensive  Income"  and SFAS  No.  131  "Disclosures  about
     Segments of an Enterprise and Related  Information".  These statements will
     be adopted  effective  January 1, 1998,  with  appropriate  restatements or
     disclosures  for prior  periods.  The  adoption  is not  expected to have a
     significant effect on operations or financial position.

     2. SECURITIES

     The  amortized  cost and  estimated  market  values  of  available-for-sale
     securities as of December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                      Gross            Gross          Estimated
                                     Amortized     Unrealized       Unrealized          Market
                                        Cost          Gains            Losses           Value
                                    -----------     ---------      ------------      -----------
      1997:
<S>                                 <C>             <C>            <C>               <C>
        U. S. Treasury              $15,008,218     $  51,020      $     (7,296)     $15,051,942
        U. S. Government
           corporations and
           agencies obligations         999,928         3,190            (1,103)       1,002,015
        State and political
           subdivisions               4,322,554       115,938                --        4,438,492
                                    -----------     ---------      ------------      -----------
                                    $20,330,700     $ 170,148      $     (8,399)     $20,492,449
                                    ===========     =========      ============      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                      Gross            Gross          Estimated
                                     Amortized     Unrealized       Unrealized          Market
                                        Cost          Gains            Losses           Value
                                    -----------     ---------      ------------      -----------
     1996:
<S>                                 <C>             <C>            <C>               <C>
        U. S. Treasury              $15,961,563     $  60,549      $    (47,916)     $15,974,196
        U. S. Government
           corporations and
           agencies obligations       1,999,746         2,857            (7,034)       1,995,569
        State and political
           subdivisions               4,317,129       121,102            (3,482)       4,434,749
                                    -----------     ---------      ------------      -----------
                                    $22,278,438     $ 184,508      $    (58,432)     $22,404,514
                                    ===========     =========      ============      ===========
</TABLE>

                                       11
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


2.   SECURITIES (Continued)

     The  amortized  cost  and  estimated  market  value of debt  securities  at
     December 31, 1997, by contractual maturities, are shown below:

<TABLE>
<CAPTION>
                                                         After           After
                                        In One          One Year      Five Years
                                         Year           Through         Through     After Ten
                                        or Less        Five Years      Ten Years      Years          Total
                                       ----------     -----------     ----------     --------     -----------
<S>                                    <C>            <C>             <C>            <C>          <C>
     U.S. Treasury                     $6,989,254     $ 8,018,964     $       --     $     --     $15,008,218
     U. S. Government corporations
        and  agencies obligations         500,228         499,700             --           --         999,928

     States and political
        subdivisions                      175,114       1,998,162      1,997,511      151,767       4,322,554
                                       ----------     -----------     ----------     --------     -----------
     Amortized cost                    $7,664,596     $10,516,826     $1,997,511     $151,767     $20,330,700
                                       ==========     ===========     ==========     ========     ===========

     Estimated market value            $7,669,060     $10,627,497     $2,037,074     $158,818     $20,492,449
                                       ==========     ===========     ==========     ========     ===========
</TABLE>

     Expected   maturities  may  differ  from  contractual   maturities  because
     borrowers may have the right to call or prepay  obligations with or without
     call or prepayment penalties.

     Gross gains of $14,709 were  realized on sales of  securities  during 1997.
     Gross losses of $3,390 and $780 were realized on sales of securities during
     1996 and 1995, respectively.

     Securities  with a book value of $2,209,938  and  $2,414,681 as of December
     31, 1997 and 1996, respectively, were pledged to secure public deposits and
     for other banking purposes.

3.   LOANS

     Major  classifications  of loans as of  December  31,  1997 and  1996,  are
     summarized as follows (in thousands):

                                                     1997           1996
                                                   --------       --------
     Commercial                                    $  4,199       $  3,567
     Real estate:
        Construction and land development            14,816         11,096
        Residential, 1-4 families                    32,112         29,747
        Residential, 5 or more families               1,437            903
        Nonfarm, nonresidential                      17,710         13,884
     Consumer                                         6,487          5,927
     Other                                              328            119
                                                   --------       --------
     Total loans outstanding                         77,089         65,243
     Less deferred fees                                (127)           (92)
     Less allowance for loan losses                  (1,154)        (1,073)
                                                   --------       --------
                                                   $ 75,808       $ 64,078
                                                   ========       ========

                                       12
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


3.   LOANS (Continued)

     At December 31, 1997, the Corporation had entered into a security agreement
     with a blanket  floating  lien  pledging  all of its real  estate  loans to
     secure  actual or  potential  borrowings  for the Federal Home Loan Bank of
     Atlanta (see Note 6).

     A summary of changes in the  allowance  for loan losses for the years ended
     December 31, 1997, 1996 and 1995, is as follows:

<TABLE>
<CAPTION>
                                              1997             1996             1995
                                          -----------      -----------      -----------
<S>                                       <C>              <C>              <C>
     Balance, beginning                   $ 1,073,274      $ 1,102,709      $   947,022
     Provision charged against income         211,000          142,836          183,268
     Recoveries                                23,000           40,338           50,419
     Loans charged off                       (153,706)        (212,609)         (78,000)
                                          -----------      -----------      -----------
     Balance, ending                      $ 1,153,568      $ 1,073,274      $ 1,102,709
                                          ===========      ===========      ===========
</TABLE>

Nonperforming assets at December 31, 1997 and 1996, consist of the following:

<TABLE>
<CAPTION>
                                                                          1997         1996
                                                                        --------     --------
<S>                                                                     <C>          <C>
     Loans ninety days or more past due and still accruing interest     $193,883     $146,361
     Nonaccrual loans                                                     74,535      146,672
                                                                        --------     --------
                                                                        $268,418     $293,033
                                                                        ========     ========
</TABLE>

     Foregone interest on nonaccrual loans was $40,904,  $43,225 and $20,040 for
     the years ended December 31, 1997, 1996 and 1995, respectively.  There were
     no  commitments  to lend  additional  funds to  customers  whose loans were
     classified as nonperforming at December 31, 1997 and 1996.

4.   PREMISES AND EQUIPMENT

     Premises and  equipment at December 31, 1997 and 1996,  are stated at cost,
     less accumulated depreciation and amortization, as follows:

<TABLE>
<CAPTION>
                                                            1997             1996
                                                        -----------      -----------
<S>                                                     <C>              <C>
     Premises                                           $ 1,997,270      $ 1,724,681
     Equipment and fixtures                                 893,884          764,451
     Software                                               214,773          185,024
     Construction in progress                                    --          400,234
                                                        -----------      -----------
                                                          3,105,927        3,074,390
     Less accumulated depreciation and amortization      (1,590,071)      (1,441,308)
                                                        -----------      -----------
                                                          1,515,856        1,633,082
     Land                                                   521,935          521,935
                                                        -----------      -----------
                                                        $ 2,037,791      $ 2,155,017
                                                        ===========      ===========
</TABLE>

                                       13
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


5.   LEASES

     The  Corporation  leases premises under  operating  leases.  Rental expense
     related to operating leases was $62,917, $36,732 and $36,732 for 1997, 1996
     and 1995, respectively.

     The future minimum lease payments under  noncancelable  operating leases at
     December 31, 1997 are as follows:

        1998                                                       $    65,680
        1999                                                            65,680
        2000                                                            65,680
        2001                                                            65,680
        2002                                                            65,680
        Thereafter                                                     672,172
                                                                   -----------
           Total minimum lease payments                            $ 1,000,572
                                                                   ===========

6.   BORROWINGS

     Borrowings  represent  advances  from the Federal Home Loan Bank of Atlanta
     and totaled  $1,800,000 at both December 31, 1997 and 1996. At December 31,
     1997, the weighted average interest rate on these advances was 6.31%,  with
     a maturity date of July 1999.

     The  Corporation has pledged all of its stock in the Federal Home Loan Bank
     of Atlanta and entered into a security  agreement  with a blanket  floating
     lien  pledging  qualifying  real estate loans to secure actual or potential
     borrowings.  At December 31, 1997, the  Corporation  had an additional $8.2
     million of credit available with the Federal Home Loan Bank of Atlanta.

7.   INCOME TAXES

     The components of income taxes for the years ended December 31, 1997,  1996
     and 1995, are as follows:

<TABLE>
<CAPTION>
                                         1997           1996           1995
                                      ---------      ---------      ---------
<S>                                   <C>            <C>            <C>
     Current                          $ 595,496      $ 554,241      $ 517,907
     Deferred provision (benefit)       (39,592)       (37,635)       (73,369)
                                      ---------      ---------      ---------
                                      $ 555,904      $ 516,606      $ 444,538
                                      =========      =========      =========
</TABLE>

                                       14
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


7.   INCOME TAXES (Continued)

     Reconciliations  of expected income tax at the statutory Federal rate (34%)
     with income tax expense for the years ended  December  31,  1997,  1996 and
     1995, are as follows:

<TABLE>
<CAPTION>
                                                             1997           1996           1995
                                                          ---------      ---------      ---------
<S>                                                       <C>            <C>            <C>
     Expected income tax expense at
        statutory rate                                    $ 576,625      $ 542,998      $ 481,777
     Increase (decrease) in income tax expense
        resulting from:
           Tax exempt interest                              (75,901)       (55,355)       (68,215)
           State income taxes, net of federal benefit        36,938         22,973         20,366
           Other, net                                        18,242          5,990         10,610
                                                          ---------      ---------      ---------
     Income tax expense                                   $ 555,904      $ 516,606      $ 444,538
                                                          =========      =========      =========
</TABLE>

     The  components  of net  deferred  tax assets  included in other  assets at
     December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                   1997             1996
                                                ---------        ---------
<S>                                             <C>              <C>
     Allowance for loan losses                  $ 388,986        $ 359,084
     Unrealized securities gains                  (66,318)         (51,691)
     Accumulated depreciation                     (29,599)         (29,005)
     Deferred loan fees                            49,839           35,831
     Other, net                                   (33,812)         (30,088)
                                                ---------        ---------
                                                $ 309,096        $ 284,131
                                                =========        =========
</TABLE>

8.   EMPLOYEE BENEFIT PLAN

     The Corporation has a qualified profit sharing 401(K) plan for employees 21
     years  of age or over  with at  least  one year of  service,  which  covers
     substantially all employees.  Under the plan, employees may contribute from
     1% to 15% of compensation, subject to an annual maximum as determined under
     the  Internal   Revenue  Code.   The   Corporation   matches  50%  of  such
     contributions  not exceeding 2% and 100% of such  contributions  between 2%
     and 4% of the participants' compensation. Further, the Corporation may make
     additional  contributions on a discretionary  basis. The plan provides that
     employees' contributions are 100% vested at all times and the Corporation's
     contributions  vest at 20% each year after the first year of  service.  The
     expense  related to this plan for the years ended  December 31, 1997,  1996
     and 1995, was $97,142, $74,844 and $58,953, respectively.

                                       15
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


9.   STOCK DIVIDEND

     On August 20, 1995,  the  Corporation  declared a three for two stock split
     for all shares  outstanding  as of September  18,  1995,  which was paid on
     October 18,  1995,  and  effected as a stock  dividend.  The  dividend  was
     charged to undivided  profits in the aggregate amount of $290,404,  the par
     value of the shares  paid.  All  references  to the  outstanding  number of
     shares and  earnings per share  amounts  have been  restated to reflect the
     dividend.

10.  STOCK OPTIONS

     The  Corporation  has a qualified  incentive stock option plan (the "Plan")
     under which the  Corporation  may grant  options to its employees for up to
     82,500 shares of common stock.  Under the Plan,  the exercise price of each
     option  equals the market price of the  Corporation's  stock on the date of
     grant and an option's maximum term is ten years. Generally, the options are
     exercisable one year after the date of grant.

     On January 1, 1996 the  Corporation  adopted SFAS No. 123,  "Accounting for
     Stock Based  Compensation".  As permitted by SFAS No. 123, the  Corporation
     has chosen to continue to apply APB Opinion No. 25,  "Accounting  for Stock
     Issued to Employees" (APB No. 25) and related Interpretations in accounting
     for its Plans.  However,  the  Corporation  is required to disclose the pro
     forma  effects on net income based on the fair value at the grant dates for
     awards under the Plan  consistent with the method of SFAS No. 123. The fair
     value  of  each  award  is  estimated  on  the  date  of  grant  using  the
     Black-Scholes  option-pricing model with the following assumptions used for
     the 1995 grant:  dividend growth of 14%,  expected  volatility of 10%, risk
     free  interest rate of 6.25%,  and expected  life of 5 years.  The weighted
     average  fair  value  for the  options  granted  in  1995  was  $1.43.  Had
     compensation expense for the Plan been recognized  consistent with SFAS No.
     123,  net income and  earnings per share would have been reduced to the pro
     forma amounts indicated below:

     Net income - 1995                As reported                  $  972,454
                                      Pro forma                       949,705

     Net income per share - Basic     As reported                  $     1.12
                                      Pro forma                          1.09

     Net income per share - Diluted   As reported                  $     1.09
                                      Pro forma                          1.03


     As there were no grants during 1997 or 1996, nor any deferred  expense from
     the 1995 grants, pro forma disclosure  requirements of SFAS No. 123 are not
     applicable for these years.

                                       16
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


10.  STOCK OPTIONS (Continued)

     A summary of the changes  during the years ending  December 31, 1997,  1996
     and 1995, of the Corporation's Plan is presented below:

<TABLE>
<CAPTION>
                                                 1997                   1996                   1995
                                           ------------------     ------------------     ------------------
                                                     Weighted               Weighted               Weighted
                                                      Average                Average                Average
                                                     Exercise               Exercise               Exercise
                                           Shares      Price      Shares      Price      Shares      Price
                                           ------    --------     ------    --------     ------    --------
<S>                                        <C>       <C>          <C>       <C>          <C>       <C>
     Outstanding at beginning of year      64,455    $   7.54     73,246    $   7.58     59,838    $   6.65
     Granted                                   --       --            --       --        15,928       10.17
     Exercised                            (12,925)       7.44     (8,791)       7.83     (2,520)       5.20
                                           ------    --------     ------    --------     ------    --------
     Outstanding at end of year            51,530    $   7.37     64,455    $   7.54     73,246    $   7.58
                                           ======    ========     ======    ========     ======    ========

     Options exercisable at year-end       51,530    $   7.37     64,455    $   7.54     57,319    $   6.86
                                           ======    ========     ======    ========     ======    ========
</TABLE>

     At December 31, 1997 the option  exercise prices ranged from $5.17 - $10.17
     and have a weighted average remaining contractual life of 3.8 years.

     During  1997 there  were  disqualifying  dispositions  of  incentive  stock
     options which resulted in a tax benefit to the Corporation of approximately
     $30,000.

11.  REGULATORY MATTERS AND RESTRICTIONS

     The  Corporation is a member of the Federal Reserve System and, as such, is
     required to  maintain  certain of their cash and due from banks as reserves
     based on  regulatory  requirements.  The reserve  requirement  approximated
     $300,000 at both December 31, 1997 and 1996.

     The  Corporation  is  subject to various  regulatory  capital  requirements
     administered  by the federal and state  banking  agencies.  Failure to meet
     minimum capital  requirements can initiate certain mandatory,  and possibly
     additional discretionary,  actions by regulators that, if undertaken, could
     have a direct material effect on the  Corporation's  financial  statements.
     Management  believes,  as of December 31, 1997, that the Corporation  meets
     all capital adequacy requirements to which it is subject.

     As of  December  31,  1997,  the  most  recent  notification  from the FDIC
     categorized  the  Corporation  as well  capitalized  under  the  regulatory
     framework  for  prompt  corrective   action.  To  be  categorized  as  well
     capitalized the Corporation  must maintain  minimum amounts and ratios,  as
     set forth in the table below.  There are no conditions or events since that
     notification  that  management  believes  have  changed  the  Corporation's
     category.

                                       17
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


11.  REGULATORY MATTERS AND RESTRICTIONS (Continued)

     The  Corporation's  actual capital amounts and ratios are also presented in
     the table below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                            To Be Well Capitalized
                                                                            For Capital    Under Prompt Corrective
                                                        Actual           Adequacy Purposes     Action Provisions
                                                  ------------------     -----------------     -----------------
     As of December 31, 1997:                     Amount       Ratio      Amount     Ratio      Amount    Ratio
     ----------------------------------------     -------      -----      ------     -----      ------    -----
<S>                                               <C>          <C>        <C>         <C>       <C>       <C>
     Total Capital (to Risk Weighted Assets)      $12,242      16.3%      $6,005      8.0%      $7,507    10.0%
     Tier I Capital (to Risk Weighted Assets)      11,303      15.1        3,003      4.0        4,504     6.0
     Tier I Capital (to Average Assets)            11,303      10.8        4,180      4.0        5,225     5.0

     As of December 31, 1996:
     ----------------------------------------

     Total Capital (to Risk Weighted Assets)      $11,147      18.1%      $4,938      8.0%      $6,173    10.0%
     Tier I Capital (to Risk Weighted Assets)      10,375      16.8        2,469      4.0        3,704     6.0
     Tier I Capital (to Average Assets)            10,375      10.6        3,907      4.0        4,883     5.0
</TABLE>


12.  UNAUDITED INTERIM FINANCIAL INFORMATION

     The following unaudited interim financial information data includes, in the
     opinion of management, all adjustments (consisting only of normal recurring
     accruals)  necessary to present  fairly the results of operations  for such
     periods.  The aggregate of the interim  information may not agree to annual
     information due to rounding:


<TABLE>
<CAPTION>
                                                     Three Months Ended
                                    ----------------------------------------------------
                                    March 31      June 30     September 30   December 31
                                    --------      -------     ------------   -----------
                                      (In thousands of dollars except per share data)
     1997:
<S>                                  <C>           <C>           <C>           <C>
       Interest income               $1,859        $2,015        $2,083        $2,226
       Interest expense                 897           964           993         1,000
       Provision for loan losses         47            43            45            76
       Other income                     124           133           143           122
       Other expense                    678           704           702           860
                                     ------        ------        ------        ------
       Income before taxes              361           437           486           412
       Income taxes                     114           142           166           134
                                     ------        ------        ------        ------

       Net income                    $  247        $  295        $  320        $  278
                                     ======        ======        ======        ======
       Net income per:
          Common share               $  .28        $  .34        $  .36        $  .31
                                     ======        ======        ======        ======
          Common share -
             assuming dilution       $  .27        $  .31        $  .34        $  .30
                                     ======        ======        ======        ======
</TABLE>

                                       18
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


12.  UNAUDITED INTERIM FINANCIAL INFORMATION (Continued)

 <TABLE>
<CAPTION>
                                                     Three Months Ended
                                    ----------------------------------------------------
                                    March 31      June 30     September 30   December 31
                                    --------      -------     ------------   -----------
                                      (In thousands of dollars except per share data)
     1996:
<S>                                   <C>          <C>           <C>           <C>
     Interest income                  $1,751       $1,859        $1,918        $1,928
        Interest expense                 813          881           959           944
        Provision for loan losses         34           36            41            32
        Other income                     106          115           109           115
        Other expense                    606          650           642           666
                                     ------        ------        ------        ------
        Income before taxes              404          407           385           401
        Income taxes                     132          132           123           130
                                     ------        ------        ------        ------
        Net income                    $  272       $  275        $  262        $  271
                                      ======       ======        ======        ======
        Net income per:
           Common share               $  .31       $  .31        $  .30        $  .31
                                      ======       ======        ======        ======
           Common share -
              assuming dilution       $  .30       $  .30        $  .28        $  .30
                                      ======       ======        ======        ======
</TABLE>

13.  COMMITMENTS AND CONTINGENCIES

     The Corporation is a party to financial  instruments with off-balance sheet
     risk in the normal  course of business to meet the  financing  needs of its
     customers.  These  financial  instruments  include  commitments  to  extend
     credit,  lines of credit and standby letters of credit.  These  instruments
     involve  elements  of credit  risk in excess of amounts  recognized  in the
     accompanying financial statements.

     The Corporation's risk of loss with the commitments to extend credit, lines
     of credit and standby  letters of credit is represented by the  contractual
     amount of these instruments.  The Corporation uses the same credit policies
     in making  commitments to borrowers  under such  instruments as it does for
     on-balance sheet instruments. The amount of collateral obtained, if any, is
     based on management's  credit  evaluation of the borrower.  Collateral held
     varies,  but may include accounts  receivable,  inventory,  real estate and
     time deposits with financial  institutions.  Since many of the  commitments
     are  expected to expire  without  being drawn  upon,  the total  commitment
     amounts do not necessarily represent future cash requirements.

     As of December 31, 1997 and 1996,  outstanding  financial instruments whose
     contract amounts represent credit risk were approximately as follows:

                                               1997           1996
                                               ----           ----

     Unfunded loans and lines of credit     $9,940,520     $8,604,802
                                            ==========     ==========

     Standby letters of credit              $  180,600     $  232,634
                                            ==========     ==========

                                       19
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


13.  COMMITMENTS AND CONTINGENCIES (Continued)

     The  Corporation's  lending is  concentrated  primarily  in  Durham,  North
     Carolina and the surrounding  communities in which it operates.  Credit has
     been extended to certain of the  Corporation's  customers  through multiple
     lending transactions.

14.  RELATED PARTY TRANSACTIONS

     In the normal course of business,  certain directors and executive officers
     of the  Corporation,  including their  immediate  families and companies in
     which they have a 10% or more  beneficial  interest,  were loan  customers.
     Activity  during the years ended  December 31, 1997 and 1996, is summarized
     as follows:

                                1997             1996
                                ----             ----

     Balance, beginning     $ 1,282,048      $ 1,111,391
     Loans made                 271,000          794,533
     Payments received         (369,392)        (623,876)
                            -----------      -----------
     Balance, ending        $ 1,183,656      $ 1,282,048
                            ===========      ===========


15.  PARENT CORPORATION FINANCIAL STATEMENTS

     The  Corporation's  principal  asset is its  investment  in the  Bank.  The
     balance  sheets as of December 31, 1997 and 1996 and  statements  of income
     and cash flows for the three years ended  December 31, 1997, for the parent
     corporation only, are presented below.

        Guaranty State Bancorp (Parent Corporation Only)
                         Balance Sheets

<TABLE>
<CAPTION>
                                                              1997           1996
                                                              ----           ----
     Assets:
<S>                                                       <C>             <C>
     Cash and due from depository institutions
        with subsidiary                                   $    32,399     $    24,454
     Investment in subsidiary                              11,364,030      10,414,703
     Other assets                                               5,634          15,077
     Dividends receivable from subsidiary                      89,298          79,205
                                                          -----------     -----------
           Total assets                                   $11,491,361     $10,533,439
                                                          ===========     ===========

     Liabilities and stockholders' equity:
     Other liabilities                                    $     3,182     $     4,678
     Dividends payable to stockholders                         89,298          79,205
                                                          -----------     -----------

     Common stock and surplus                               5,728,220       5,602,342
     Undivided profits                                      5,575,231       4,772,831
     Net unrealized gains on securities                        95,430          74,383
                                                          -----------     -----------
     Stockholders' equity                                  11,398,881      10,449,556
                                                          -----------     -----------

           Total liabilities and stockholders' equity     $11,491,361     $10,533,439
                                                          ===========     ===========
</TABLE>

                                       20
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


15.  PARENT CORPORATION FINANCIAL STATEMENTS (Continued)

               Statements of Income

<TABLE>
<CAPTION>
                                                            1997             1996            1995
                                                        -----------      -----------      ---------
<S>                                                     <C>              <C>              <C>
     Dividends from  wholly-owned subsidiary            $   375,760      $   330,754      $ 277,893
     Amortization expense                                    (9,443)          (9,443)       (10,515)
     Franchise tax                                           (8,588)         (22,922)        (7,603)
     Other expense                                          (20,080)            (750)       (10,192)
                                                        -----------      -----------      ---------
     Income before equity in undistributed income
        of wholly-owned subsidiary                          337,649          297,639        249,583
     Equity in undistributed income of subsidiary           802,402          782,808        722,871
                                                        -----------      -----------      ---------
                 Net income                             $ 1,140,051      $ 1,080,447      $ 972,454
                                                        ===========      ===========      =========

               Statements of Cash Flows

     Cash flows from operating activities:
        Net income                                      $ 1,140,051      $ 1,080,447      $ 972,454
        Equity in undistributed income of
           subsidiary                                      (802,402)        (782,808)      (722,871)
        Amortization expense                                  9,443            9,443         10,515
        Increase in receivables and
           other assets                                          --           (8,754)        (7,136)
        Increase (decrease) in other liabilities             (1,496)           2,689         18,538
                                                        -----------      -----------      ---------
              Net cash provided by operating
                 activities                                 345,596          301,017        271,500
                                                        -----------      -----------      ---------

     Cash flows from financing activities:
        Proceeds from exercise of stock options              96,229           69,116         19,672
        Increase in investment in subsidiary                (96,229)         (69,116)       (47,512)
        Dividends paid                                     (337,651)        (288,884)      (232,441)
                                                        -----------      -----------      ---------
              Net cash used in financing activities        (337,651)        (288,884)      (260,281)
                                                        -----------      -----------      ---------

              Net increase in cash                            7,945           12,133         11,219

     Cash at beginning of year                               24,454           12,321          1,102
                                                        -----------      -----------      ---------

     Cash at end of year                                $    32,399      $    24,454      $  12,321
                                                        ===========      ===========      =========

     Non-cash financing activities:
        Tax benefits from disqualified dispositions
           of incentive stock options                   $    29,649               --             --
                                                        ===========      ===========      =========

        Dividends declared but not paid                 $    89,928      $    79,205      $  69,701
                                                        ===========      ===========      =========
</TABLE>

                                       21
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


16.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  following  disclosure  of  the  estimated  fair  values  of  financial
     instruments is made in accordance  with the  requirements  of SFAS No. 107,
     "Disclosure About Fair Value of Financial  Instruments." The estimated fair
     values  have been  determined  by the  Corporation  using the  methods  and
     assumptions described below. However,  considerable judgment is required to
     interpret market data to develop the estimates of fair value.  Accordingly,
     the  estimates  presented  herein  are not  necessarily  indicative  of the
     amounts the Corporation could realize in a current market exchange. The use
     of different market assumptions and/or estimation  methodologies may have a
     material effect on the estimated fair values.

     The following  methods and assumptions were used to estimate the fair value
     of each  class of  financial  instruments  for which it is  practicable  to
     estimate that value:

     Cash and Cash Equivalents
     -------------------------

     The carrying amount is a reasonable estimate of fair value.

     Securities Available-for-Sale
     -----------------------------

     For securities  available-for-sale,  fair values are based on quoted market
     prices or dealer quotes.  If a quoted market price is not  available,  fair
     value is estimated using quoted market prices for similar securities.

     Loans Receivable
     ----------------

     The fair value of loans  receivable is estimated by discounting  the future
     cash flows using the current  rates at which similar loans would be made to
     borrowers   with  similar   credit  ratings  and  for  the  same  remaining
     maturities.

     Interest Receivable and Payable and Federal Home Loan Bank of Atlanta stock
     ---------------------------------------------------------------------------

     The carrying amount approximates fair value.

     Deposits
     --------

     The fair value of noninterest-bearing  demand,  interest-bearing demand and
     savings accounts is the amount payable on demand at the reporting date. The
     fair value of fixed maturity certificates of deposit is estimated using the
     rates currently offered for deposits of similar remaining maturities.

     Borrowings
     ----------

     The  rate  on  borrowings   approximates  the  rate  offered  currently  on
     borrowings  with similar  characteristics.  Therefore,  the carrying amount
     approximates the fair value.

                                       22
<PAGE>


                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


16.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

     Off-Balance Sheet Financial Instruments
     ---------------------------------------

     The fair value of  off-balance  sheet  financial  instruments  has not been
     considered in determining on balance sheet fair value. As discussed in Note
     13, these off-balance sheet financial instruments are commitments to extend
     credit  and are  either  short  term in  nature  or  subject  to  immediate
     repricing.

     The carrying amount and estimated fair value of the Corporation's financial
     instruments at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                      1997                             1996
                                          -----------------------------     ---------------------------
                                                            Estimated                       Estimated
                                            Carrying           Fair           Carrying         Fair
                                             Amount            Value           Amount          Value
                                          ------------     ------------     -----------     -----------
     Financial assets:
<S>                                       <C>              <C>              <C>             <C>
        Cash and cash equivalents         $  6,431,982     $  6,431,982     $ 6,189,899     $ 6,189,899
        Securities available for sale       20,492,449       20,492,449      22,404,514      22,404,514
        Loans held for sale                    163,000          163,000         354,600         354,600
        Loans less allowance for loan
           losses                           75,808,149       75,761,744      64,078,398      63,850,105
        Federal Home Loan Bank of
           Atlanta stock                       309,200          309,200         270,600         270,600
        Interest receivable                    789,911          789,911         700,199         700,199
                                          ------------     ------------     -----------     -----------
              Total                       $103,994,691     $103,948,286     $93,998,210     $93,769,917
                                          ============     ============     ===========     ===========

     Financial liabilities:
        Deposits                          $ 92,673,534     $ 92,878,830     $83,593,582     $83,739,436
        Borrowings                           1,800,000        1,800,000       1,800,000       1,800,000
        Interest payable                       578,915          578,915         542,766         542,766
                                          ------------     ------------     -----------     -----------
              Total                       $ 95,052,449     $ 95,257,745     $85,936,348     $86,082,202
                                          ============     ============     ===========     ===========
</TABLE>

     The  Corporation's  remaining  assets and  liabilities  are not  considered
     financial instruments.

                                       23
<PAGE>

                             GUARANTY STATE BANCORP
                   Notes to Consolidated Financial Statements


17.  CONSOLIDATED STATEMENTS OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES

     The following is supplemental  information  regarding the consolidated cash
     flows for the years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                         1997           1996           1995
                                                      ----------     ----------     ----------
     Supplemental disclosure of cash flow
        information:
        Cash paid for:
<S>                                                   <C>            <C>            <C>
           Interest                                   $3,817,473     $3,658,154     $2,691,819
                                                      ==========     ==========     ==========
           Income taxes                               $  647,000     $  503,806     $  512,817
                                                      ==========     ==========     ==========

     Schedule of non-cash investing and
        financing activities:

     Tax benefits from nonqualified stock options     $   26,649     $       --     $       --
                                                      ==========     ==========     ==========

     Dividends declared but not paid                  $   89,928     $   79,205     $   69,701
                                                      ==========     ==========     ==========
</TABLE>

18.  YEAR 2000 ISSUE

     The Year 2000 Issue is the result of computer  programs being written using
     two digits  rather  than four to define  the  applicable  year.  Any of the
     Corporation's  computer  programs  that have  date-sensitive  software  may
     recognize  a date  using "00" as the year 1900  rather  than the year 2000.
     This  could  result  in  a  system  failure  or   miscalculations   causing
     disruptions  of  operations,  including,  among other  things,  a temporary
     inability  to process  transactions,  send  invoices,  or engage in similar
     normal business activities.

     Based on a recent  assessment,  the  Corporation  has  developed  a plan to
     address the year 2000 issue.  The Corporation  presently  believes that the
     majority of the  existing  software in use is in  compliance  with the year
     2000 issue and plans are in  progress  to bring the  remaining  software in
     compliance.  Although  the  cost to bring  the  Corporation's  software  in
     compliance  can not be  determined  at this time,  it is not expected to be
     material.  However,  there can be no  guarantee  that the  systems of other
     companies on which the Corporation's systems rely will be timely converted,
     or that a failure to convert by another  company,  or a conversion  that is
     incompatible with the Corporation's  systems or inadequate  conversion by a
     significant loan customer,  would not have a material adverse effect on the
     Corporation.

19.  PENDING MERGER

     On  November  18,  1997  the  Corporation  entered  into  an  agreement  of
     reorganization  and merger  with  Triangle  Bancorp,  Inc.  All  regulatory
     approvals have been obtained and the  Corporation's  shareholders will meet
     on March  30,  1998 to vote on the  proposed  merger.  The  transaction  is
     expected to be consummated in April 1998.

                                       24
<PAGE>

Item 9. Changes In & Disagreements with Accountants.

        Not applicable

Item 10. Directors and Executive Officers

         Set forth  below is a table  showing  the name,  age,  initial  year of
election to the Board and principal  occupation and employment for the past five
years of each member of the Board of Directors:

<TABLE>
<CAPTION>
                                          Director       Principal Occupations
Name                            Age       Since          During the Past Five Years
----                            ---       -----          --------------------------

Nominees

<S>                             <C>       <C>            <C>
Susan Cranford Ross             42        1994           Associate Dean and Director of Arts and
                                                         Sciences Development, Duke University

David W. Wiggins                52        1994           Staff Systems and Procedures Analyst, International
                                                         Business Machines Corporation

Charles J. Stewart              48        1993           President and Chief Executive Officer,
                                         *1979           Guaranty State Bancorp and Guaranty
                                                         State Bank

E. Spurgeon Booth, Jr.          65        1993           Secretary-Treasurer, Booth Real Estate
                                         *1977           and Insurance, Inc.

N. Wayne Campbell               55        1993           President, Credit Financial Information
                                         *1980           Service Inc. (credit reporting agency)

W.L. Douglas Townsend, Jr.      39        1993           Managing Director and CEO,
                                         *1988           Townsend Frew & Co., L.L.C.
                                                         (January, 1996-present investment
                                                         banking); Senior Vice President,
                                                         Corporate Development, Coastal
                                                         Physician Group, Inc. (1991-1995)

Stancil B. Roberts              56        1995           Independent Engineer (1997-present)
                                                         Previous - Principal, Knott & Roberts
                                                         Engineering Associates, P.A.

Robert F. Baker                 62        1993           Partner, Spears, Barnes, Baker,
                                         *1972           Wainio, Brown and Whaley (law firm)

B. W. Harris, III               59        1993           Principal, Harris, Harris & Company,
                                         *1968           CPA's, PLLC(November,1995 -
                                                         present); Principal, Bailey,
                                                          Self, Harris and Company (certified
                                                         public accountants, 1960-1995)

Philip H. Pearce, M.D.          62        1993           Partner, The Durham Women's
                                                         Clinic,P.A. (OB/GYN clinic
</TABLE>
----------------------

* Director of Bank since year stated.

The following table sets forth certain information with respect to the executive
officers of the  Corporation,  each of which serves in the same capacity for the
Bank:

Name                             Age               Position
----                             ---               --------

Charles J. Stewart               48       President and Chief Executive Officer

Jean R. Turner                   52       Senior Vice President

Joseph M. Johnson                42       Senior Vice President

J. Edwin Causey, Jr.             54       Senior Vice President and Secretary


     Charles J. Stewart has been  employed by the Bank since 1972.  Mr.  Stewart
has served as President and Chief  Executive  Officer of the Bank since 1979 and
of the Corporation since 1993.

     Jean R. Turner  joined the Bank in 1986 and serves as Chief  Administrative
Officer.  Ms. Turner was  appointed a Senior Vice  President of the Bank in 1987
and of the Corporation in 1993.

     Joseph M.  Johnson  joined the Bank in 1987 and serves as the Bank's  Chief
Lending  Officer.  Mr. Johnson was appointed a Senior Vice President of the Bank
in 1991 and of the Corporation in 1993.

     J.  Edwin  Causey,  Jr.  has been  employed  by the Bank since 1967 and has
served as a Senior  Vice  President  of the Bank  since  1986.  Mr.  Causey  was
appointed a Senior Vice  President of the  Corporation in 1993. He serves as the
Bank's security officer.

Item 11. Executive Compensation.

     The following table sets forth certain information relating to compensation
received by the  Corporation's  Chief  Executive  Officer for fiscal years 1995,
1996 and 1997. No other  executive  officer of the  Corporation  received  total
annual salary and bonus in excess of $100,000.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                    Annual Compensation                  Long-Term Compensation
                                    -------------------                  ----------------------
    Name and                                                    Securities Underlying         All Other
Principal Position         Year     Salary ($)   Bonus ($)              Options           Compensation ($)1
------------------         ----     ----------   ---------      ---------------------     -----------------

<S>                        <C>        <C>          <C>                 <C>                       <C>
Charles J. Stewart         1997       125,034      50,000                  -                     24,211
  President and Chief      1996       117,480      44,000                  -                      8,173
  Executive Officer        1995       111,881      40,000              6,000                      9,056
</TABLE>

-------------------
(1)  1997 consists of the Corporation's matching and discretionary contributions
     to  the  Corporation's  401(k)  profit-sharing  plan  and  a  non-qualified
     Executive  Retirement Plan for Mr. Stewart..  1995 and 1996 consist only of
     the 401(k) profit-sharing plan.

The following table  summarizes  options  exercised by Charles J. Stewart during
the fiscal year ended  December 31, 1997 and  presents the value of  unexercised
options held by Mr. Stewart at the end of fiscal year 1997.

                 Aggregated Option Exercises in Fiscal Year 1997
                        and Fiscal Year-End Option Values
                 -----------------------------------------------

<TABLE>
<CAPTION>
                                                                      Number of Securities
                                                                     Underlying Unexercised       Value of Unexercised
                                                                           Options at             In-the-Money Options
                           Shares Acquired            Value            Fiscal Year-End (#)        at Fiscal Year-End ($)
         Name              on Exercise (#)         Realized ($)    (Exercisable/Unexercisable) (Exercisable/Unexercisable)
         ----              ---------------         ------------    --------------------------- ---------------------------
<S>                             <C>                   <C>                   <C>                        <C>
   Charles J. Stewart           5,500                 86,208                36,380/0                   1,346,060/0
         President and
         Chief
         Executive
         Officer
</TABLE>

Item 12.      Security ownership of certain beneficial owners and management

     The following table sets forth certain  information  concerning  beneficial
ownership of the Common Stock by (i) each person known by the  Corporation to be
a  beneficial  owner of more than five percent  (5%) of the  outstanding  Common
Stock,  (ii) each  director  of the  Corporation,  (iii)  each of the  executive
officers  named in the Summary  Compensation  Table,  and (iv) all directors and
executive  officers of the  Corporation as a group,  as of February 9, 1998. The
percentages  are  based  on  total  shares  outstanding  as well as  immediately
exercisable stock options.  Except as otherwise noted, the person named had sole
voting and  investment  power with respect to the shares  reflected in the table
below:


                                           Amount
                                             and
                                           Nature                       Percent
                                             of                           of
                                         Beneficial                     Common
         Name                             Ownership                      Stock
         ----                             ---------                      -----

Dwight G. Howard                         119,775   (1)                  12.71%

Frank Ward                                59,499   (2)                   6.31%

Charles J. Stewart                        67,984   (3)                   7.21%

B. W. Harris, III                         29,265   (4)                   3.10%

David W. Wiggins                          20,136   (5)                   2.14%

N. Wayne Campbell                         15,955   (6)                   1.69%

Robert F. Baker                            5,049   (7)                       *

Stancil B. Roberts                         3,747   (8)                       *

W. L. Douglas Townsend, Jr.                2,550   (9)                       *

Susan Cranford Ross                          800  (10)                       *

E. Spurgeon Booth, Jr.                       500  (11)                       *

Phillip H. Pearce, M.D.                      500  (12)                       *

All Directors and Executive
    Officers as a Group                  165,371  (13)                  17.54%
    (13 persons)

-----------------------------------
     * Less than one percent.

(1)  Mr. Howard's address is P.O. Box 1962, Durham, North Carolina 27702.

(2)  Mr. Ward's address is 518 South Duke Street, Durham, North Carolina 27701.

(3)  Includes 36,380 shares subject to a presently  exercisable stock option and
     900 shares held by Mr. Stewart's spouse.

(4)  Includes 4,500 shares subject to a presently  exercisable stock option. Mr.
     Harris' address is 3942 Nottaway Road, Durham, North Carolina 27707.

(5)  Includes 300 shares held by Mr. Wiggins'  children under the North Carolina
     Uniform  Transfers  to Minors  Act,  and 750  shares  held by Mr.  Wiggins'
     spouse.  Mr.  Wiggins'  address is P.O. Box 71244,  Durham,  North Carolina
     27722.

(6)  Includes 825 shares held by Mr. Campbell's  spouse.  Mr. Campbell's address
     is 1920 Redding Lane, Durham, North Carolina 27712.

(7)  Mr. Baker's address is P.O. Box 891, Durham, North Carolina 27702.

(8)  Mr. Roberts' address is 2202 Thunder Road, Durham, North Carolina 27712.

(9)  Includes 360 shares held by Mr. Townsend's  spouse.  Mr. Townsend's address
     is 2204 Whitley Drive, Durham, North Carolina 27707.

(10) Mr. Booth's address is P.O. Box 2916, Durham, North Carolina 27715.

(11) Ms. Ross' address is 4102 Westfield Drive, Durham, North Carolina 27705.

(12) Dr. Pearce's address is 30 Brookside Place, Durham, North Carolina 27705.

(13) Includes 49,580 shares subject to presently exercisable stock options.


Item 13. Certain transactions

     The Bank has engaged  in, and  expects to  continue  to engage in,  lending
transactions with the Corporation's directors and officers and with corporations
and other entities with which such  individuals are  shareholders or principals.
During the last two years, all of such loans were made in the ordinary course of
business,  were made on substantially the same terms,  including  interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons,  and did not involve more than the normal risk of  collectibility
or present other unfavorable features.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Forms 8-K

              Reference is made to Form 8-K filed October 16, 1997

<PAGE>

                                   SIGNATURES


Under the  requirements of the Securities  Exchange Act of 1934, the Corporation
has duly  caused  this  report  to be signed  on its  behalf by the  undersigned
thereunto duly authorized.


                                        Guaranty State Bancorp



March 27, 1998                          By:
                                           ----------------------------------
                                           Charles J. Stewart
                                           President and Chief Executive Officer


March 27, 1998                          By:
                                           ----------------------------------
                                           Jean R. Turner
                                           Senior Vice President

<PAGE>

                                     PART IV


Item 14. Exhibits, Financial Statement Schedules, and Reports on Forms 8-K.

         None