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

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         For the quarterly period ended
                               December 31, 1999

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

                        Commission File Number 001-14070

                             PIEDMONT BANCORP, INC.
                             ----------------------
             (Exact Name of Registrant as Specified in its Charter)

       North Carolina                                           56-1936232
       --------------                                           ----------
(State or Other Jurisdiction of                              (I.R.S. Employer
Incorporation or Organization)                            Identification Number)

260 South Churton Street, Hillsborough, NC                         27278
------------------------------------------                         -----
(Address of Principal Executive Offices)                         (Zip Code)

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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                [ X ] Yes [ ] No

As of February 4, 2000 2,502,700 shares of the registrant's common stock, no par
value,  were  outstanding.  The  registrant  has no other  classes of securities
outstanding.

This Form 10-Q report has 27 pages.
<PAGE>
<TABLE>
<CAPTION>
                                             CONSOLIDATED BALANCE SHEETS

                                                                                       December 31,       June 30,
                                                                                         1999              1999
                                                                                      (unaudited)           *
                               Assets                                                 (in thousands, except shares)
<S>                                                                                  <C>             <C>
Cash                                                                                 $     2,917     $     1,706
Interest-bearing deposits in other financial institutions                                  1,895           1,866
Investment securities:
   Available-for-sale                                                                     24,400          25,810
   Held-to-maturity                                                                        3,333           3,362
Loans receivable (net of allowance for loan losses of $1,124 and
   $1,054 at December 31, 1999 and June 30, 1999, respectively)                          108,552         100,717
Federal Home Loan Bank stock, at cost                                                      1,036           1,036
Premises and equipment                                                                     3,225           3,213
Prepaid expenses and other assets                                                          2,756           2,379
                                                                                     -----------     -----------
          Total assets                                                               $   148,114     $   140,089
                                                                                     ===========     ===========
Liabilities and Stockholders' Equity

                                   Liabilities
Deposits:
   Demand, non-interest bearing                                                            4,180           3,390
   Certificates of Deposit                                                                54,393          56,034
                                                                                     -----------     -----------
                                                                                         109,480          99,339
Advances from the Federal Home Loan Bank                                                  18,551          20,162
Accrued expenses and other liabilities                                                     1,086           1,027
                                                                                     -----------     -----------
     Total liabilities                                                                   129,117         120,528
                                                                                     -----------     -----------
Stockholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized;
   none issued                                                                              --              --
Common stock, no par value, 20,000,000 shares authorized; 2,502,700 and                2,687,633
   shares issued and outstanding at September 30 and June 30, 1999 , respectively          6,745           7,035
Unearned ESOP shares                                                                        (340)           (450)
Unamortized deferred compensation                                                           (510)           (655)
Unallocated restricted stock                                                                 (95)            (87)
Retained earnings, substantially restricted                                               13,909          14,081
Accumulated other comprehensive income (loss)                                               (712)           (363)
                                                                                     -----------     -----------
      Total stockholders' equity                                                          18,997          19,561
                                                                                     -----------     -----------
Commitments and contingencies
          Total liabilities and stockholders' equity                                 $   148,114     $   140,089
                                                                                     ===========     ===========
</TABLE>

* Derived from audited financial statements
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                 CONSOLIDATED STATEMENTS OF INCOME (unaudited)


                                                                   Three Months Ended        Six months ended
                                                                       December 31,            December 31,
                                                                     1999        1998        1999       1998
                                                                     ----        ----        ----       ----
                                                                      (in thousands, except per share data)
<S>                                                                <C>         <C>        <C>         <C>
Interest income:
   Interest on loans                                               $ 2,230     $ 2,188    $ 4,384     $ 4,487
   Interest on deposits in other financial institutions                 28          21         42          43
   Interest and dividends on investment securities:
      Taxable                                                          403         224        802         457
       Non-taxable                                                      56          48        112          96
                                                                   -------     -------    -------     -------
            Total interest income                                    2,717       2,481      5,340       5,083
                                                                   -------     -------    -------     -------
Interest expense:
   Interest on deposits                                              1,181       1,029      2,272       2,071
   Interest on borrowings                                              253         230        514         501
                                                                   -------     -------    -------     -------
            Total interest expense                                   1,434       1,259      2,786       2,572
                                                                   -------     -------    -------     -------
Net interest income                                                  1,283       1,222      2,554       2,511
Provision for loan losses                                                6           3          9          27
                                                                   -------     -------    -------     -------
            Net interest income after provision for loan losses      1,277       1,219      2,545       2,484
                                                                   -------     -------    -------     -------
Other income:
   Customer service and other fees                                      59          53        127         104
   Mortgage loan servicing fees                                         35           1         67           7
   Gain on sale of investment securities                              --             5          8           5
   Lower-of-cost or market adjustment on loans held-for-sale           (47)       --           24        --
   Gain (loss) on sale of loans                                         13          23       (140)         63
   Stock and mutual fund commissions                                    14          20         28          44
   Other                                                                34          26         67          56
                                                                   -------     -------    -------     -------
            Total other income                                         108         128        181         279
                                                                   -------     -------    -------     -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                <C>         <C>        <C>         <C>
Other expenses:
   Compensation and fringe benefits (note 4)                           584         473      1,149         930
   Data and items processing                                           126          69        240         156
   Deposit insurance premiums                                           14          13         27          26
   Occupancy expense                                                    58          29        114          55
   Furniture and equipment expense                                      70          46        136          89
   Professional fees                                                    90          24        113          67
   Other                                                               206         175        364         289
                                                                   -------     -------    -------     -------
            Total other expenses                                     1,148         829      2,143       1,612
                                                                   -------     -------    -------     -------

             Income before income tax expense                          237         518        583       1,151
Income tax expense                                                      73         181        166         400
                                                                   -------     -------    -------     -------
                   Net income                                      $   164     $   337    $   417     $   751
                                                                   =======     =======    =======     =======
Net income per share - basic (note 6)                              $  0.07     $  0.13    $  0.17     $  0.29
                                                                   =======     =======    =======     =======
Net income per share - diluted (note 6)                            $  0.07     $  0.13    $  0.17     $  0.28
                                                                   =======     =======    =======     =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                               PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                          STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

                                                                                     Unearned     Unamortized       Unallocated
                                                        Shares         Common          ESOP          Deferred      Restricted
                                                     Outstanding       Stock          Shares       Compensation       Stock
                                                     -----------       -----          ------       ------------       -----
                                                                         (dollars in thousands)
<S>                                                    <C>           <C>            <C>            <C>            <C>
Balance at June 30, 1998                               2,750,800     $    9,121     $     (679)    $     (953)    $      (61)
      Net income                                            --             --             --             --             --
      Other comprehensive income - change in
         unrealized holding gains (losses),net of
         income taxes

         Total comprehensive income
      Purchase and retirement of common stock           (134,867)        (1,291)          --             --             --
      Release of ESOP shares                                --              (30)           120           --             --
      Amortization of unearned compensation                 --             --             --              134           --
      Forfeiture of restricted stock                        --             --             --               26            (26)
      Tax benefit of dividends on restricted stock          --                1           --             --             --
      Cash dividends declared, net of
         forfeited dividends on restricted stock            --               12           --             --             --
                                                      ----------     ----------     ----------     ----------     ----------
Balance at December 31, 1998                           2,615,933     $    7,813     $     (559)    $     (793)    $      (87)
                                                      ==========     ==========     ==========     ==========     ==========

Balance at June 30, 1999                               2,532,000     $    7,035     $     (450)    $     (655)    $      (87)
      Net income                                            --             --             --             --             --
      Other comprehensive income - change in
         unrealized holding gains (losses),net of
         income taxes

         Total comprehensive income
      Purchase and retirement of common stock            (29,300)          (259)          --             --             --
      Release of ESOP shares                                --              (39)           110           --             --
      Amortization of unearned compensation                 --             --             --              137           --
      Forfeiture of restricted stock                        --             --             --                8             (8)
      Tax benefit of dividends on restricted stock          --                6           --             --             --
      Cash dividends declared, net of
         forfeited dividends on restricted stock            --                2           --             --             --
                                                      ----------     ----------     ----------     ----------     ----------
Balance at December 31, 1999                           2,502,700     $    6,745     $     (340)    $     (510)    $      (95)
                                                      ==========     ==========     ==========     ==========     ==========


</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                     Accumulated
                                                                       other            Total
                                                      Retained      comprehensive    Stockholders'
                                                      Earnings      income (loss)      Equity
                                                      --------      -------------      ------
<S>                                                   <C>            <C>            <C>
Balance at June 30, 1998                              $   14,101     $       77     $   21,606
      Net income                                             751           --              751
      Other comprehensive income - change in
         unrealized holding gains (losses),net of
         income taxes                                                        13             13
                                                                                     ----------
         Total comprehensive income                                                        764
      Purchase and retirement of common stock               --             --           (1,291)
      Release of ESOP shares                                --             --               90
      Amortization of unearned compensation                 --             --              134
      Forfeiture of restricted stock                        --             --             --
      Tax benefit of dividends on restricted stock          --             --                1
      Cash dividends declared, net of
         forfeited dividends on restricted stock            (622)          --             (610)
                                                      ----------     ----------     ----------
Balance at December 31, 1998                          $   14,230     $       90     $   20,694
                                                      ==========     ==========     ==========

Balance at June 30, 1999                              $   14,081     $     (363)    $   19,561
      Net income                                             417           --              417
      Other comprehensive income - change in
         unrealized holding gains (losses), net of
         income taxes                                                      (349)          (349)
                                                                                    ----------
                                                                                            68
         Total comprehensive income
      Purchase and retirement of common stock               --             --             (259)
      Release of ESOP shares                                --             --               71
      Amortization of unearned compensation                 --             --              137
      Forfeiture of restricted stock                        --             --             --
      Tax benefit of dividends on restricted stock          --             --                6
      Cash dividends declared, net of
         forfeited dividends on restricted stock            (589)          --             (587)
                                                      ----------     ----------     ----------
Balance at December 31, 1999                          $   13,909     $     (712)    $   18,997
                                                      ==========     ==========     ==========

</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                                Six months ended
                                                                                                                  December 31,
                                                                                                             1999             1998
                                                                                                             ----             ----
<S>                                                                                                       <C>            <C>
Operating activities:
   Net income                                                                                             $    417       $    751
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation                                                                                          117             78
         Net amortization                                                                                       57            109
         Provision for loan losses                                                                               9             27
         Gain on sale of investments and mortgage-backed securities                                             (8)            (5)
         Net (gain) loss on sale of loans                                                                      140            (63)
         Release of ESOP shares                                                                                 71             90
         Compensation earned under MRP                                                                         137            134
         Net decrease (increase) in mortgage loans held for sale                                               273         (5,368)
          Increase in other assets                                                                            (143)           (23)
         Increase (decrease) in other liabilities                                                               56           (144)
                                                                                                          --------       --------
               Net cash provided by (used in) operating activities                                           1,126         (4,414)
                                                                                                          --------       --------
Investing activities:
   Net (increase) decrease in loans held for investment                                                     (8,289)         8,158
   Principal collected on mortgage-backed securities                                                           714            759
   Principal collected on collateralized mortgage-backed securities                                             54           --
   Purchases of investment securities classified as available-for-sale                                      (1,926)        (1,997)
   Purchases of mortgage-backed securities classified as available-for-sale                                   --           (1,453)
   Purchases of collateralized mortgage-backed securities classified as available-for-sale                    --           (2,037)
   Proceeds of sales of mortgage-backed-securities classified as available-for-sale                           --              501
   Proceeds from investment securities called by issuer                                                      2,007          3,280
   Purchases of premises and equipment                                                                        (129)          (362)
                                                                                                          --------       --------
                Net cash provided by (used in) investing activities                                         (7,569)         6,849
                                                                                                          --------       --------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                       <C>            <C>
Financing activities:
   Net decrease in time deposits                                                                            (1,641)          (997)
   Net increase in other deposits                                                                           11,782          3,057
   Proceeds from borrowings                                                                                  2,000          1,780
   Repayments of borrowings                                                                                 (3,611)        (4,071)
    Repurchase of no par common stock                                                                         (259)        (1,291)
   Cash dividends paid to shareholders                                                                        (588)          (632)
                                                                                                          --------       --------
                Net cash provided by (used in)financing activities                                           7,683         (2,154)
                                                                                                          --------       --------
               Decrease in cash and cash equivalents                                                         1,240            281
 Cash and cash equivalents at beginning of period                                                            3,572          2,644
                                                                                                          --------       --------
Cash and cash equivalents at end of period                                                                $  4,812       $  2,925
                                                                                                          ========       ========
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest                                                                                            $  2,699       $  2,569
                                                                                                          ========       ========
      Income taxes                                                                                        $    167       $    428
                                                                                                          ========       ========
 Supplemental disclosure of noncash transactions:
    Unrealized gains (losses) on available-for-sale securities,
       net of deferred taxes of  $457 and $33                                                             $  (347)      $     13
    Dividends declared but unpaid                                                                        $    295       $    314
                                                                                                          ========       ========
</TABLE>

See accompanying notes to financial statements
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


1) Organization and Operations

       Piedmont Bancorp, Inc., ("the Parent") is a bank holding company,  formed
       in  December  1995,  which owns all of the  outstanding  common  stock of
       Hillsborough  Savings Bank,  Inc. SSB ("the Bank").  The Bank amended and
       restated  its  charter to effect  its  conversion  from a North  Carolina
       chartered mutual savings bank to a North Carolina chartered stock savings
       bank in December 1995.  The Bank is primarily  engaged in the business of
       obtaining  deposits  and  providing  loans  to the  general  public.  The
       principal activity of the Parent is ownership of the Bank.

2) Basis of Presentation

       The consolidated  financial statements include the accounts of the Parent
       and the Bank,  together  referred to as "the  Company".  All  significant
       intercompany  transactions and balances are eliminated in  consolidation.
       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and disclosure of contingent assets and liabilities as of the date of the
       balance  sheets and the  reported  amounts of income and expenses for the
       periods presented.  Actual results could differ  significantly from those
       estimates.  In management's opinion, the financial information,  which is
       unaudited,   reflects  all  adjustments   (consisting  solely  of  normal
       recurring adjustments) necessary for a fair presentation of the financial
       information  as of  December  31,  1999 and for the  three  and six month
       periods ended December 31, 1999 and December 31, 1998 in conformity  with
       generally accepted accounting principles. Operating results for the three
       and six  month  periods  ended  December  31,  1999  are not  necessarily
       indicative of the results that may be expected for the fiscal year ending
       June 30, 2000.


3) Cash and Cash Equivalents

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

4) Comprehensive Income

       On July 1, 1998, the Company  adopted  Statement of Financial  Accounting
       Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive  Income". SFAS
       130  establishes  standards for reporting  and  displaying  comprehensive
       income and its components  (revenues,  expenses,  gains, and losses) in a
       full set of general-purpose financial statements. This Statement requires
       that an enterprise  (a) classify items of other  comprehensive  income by
       their nature in the financial  statement and (b) display the  accumulated
       balance of other comprehensive
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements

4) Comprehensive Income (continued)

       income separately from retained  earnings and additional  paid-in-capital
       in the equity section of a statement of financial position. In accordance
       with the  provisions of SFAS No. 130,  comparative  financial  statements
       presented  for  earlier  periods  have been  reclassified  to reflect the
       provisions of the statement.

       Comprehensive  income is the change in equity of an enterprise during the
       period from transactions and other events and circumstances from nonowner
       sources and,  accordingly,  includes both net income and amounts referred
       to  as  other   comprehensive   income   (loss).   The  Company's   other
       comprehensive  income for the nine  months  ended March 31, 1999 and 1998
       consisted of unrealized  gains and losses on certain  investments in debt
       securities.

5) Employee and Director Benefit Plans

       The Company has an employee  stock  ownership  plan  ("ESOP")  whereby an
       aggregate number of shares amounting to 211,600 were purchased for future
       allocation to employees.  Contributions  to the ESOP are made by the Bank
       on a discretionary  basis,  and are allocated among ESOP  participants on
       the basis of relative  compensation  in the year of allocation.  Benefits
       will vest in full upon five years of service  with credit given for years
       of service prior to the conversion.  A $40,000 cash contribution from the
       Bank in  December  1995  and a loan  from the  Parent  in the  amount  of
       $2,690,677  funded  the  ESOP.  The loan is  secured  by  shares of stock
       purchased by the ESOP and is not  guaranteed by the Bank.  The Bank funds
       principal and interest payments on this loan primarily from discretionary
       contributions.  Dividends,  if any,  paid on shares  held by the ESOP may
       also be used to reduce the loan. Dividends on unallocated shares that are
       used to repay debt are not  reported  as  dividends  in the  consolidated
       financial   statements   but  rather  are   recorded  as  an  element  of
       compensation  expense.  Dividends on allocated shares are credited to the
       accounts  of  the   participants   and   reported  as  dividends  in  the
       consolidated  financial  statements.  For  the  six-month  periods  ended
       December 31, 1999 and 1998,  ESOP-related  compensation  expense  totaled
       $71,000  and  $90,000,  respectively.  For the  six-month  periods  ended
       December 31, 1999 and 1998,  ESOP-related  compensation  expense  totaled
       $34,000 and $45,000, respectively.  Additionally, in December of 1999 and
       1998, 16,840 and 18,448 shares, respectively, were released to individual
       participant  accounts.  At December 31,  1999, a total of 184,125  shares
       have been  released  and  allocated  to  participants  under the Plan and
       27,475 shares remain unallocated.

       The Bank has a  management  recognition  plan  ("MRP")  which serves as a
       means of providing  existing  directors and employees of the Bank with an
       ownership interest in the Company.  On August 29, 1996,  restricted stock
       awards of 105,800 shares were made to 38 directors,
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements

   5) Employee and Director Benefit Plans (continued)

       officers,  and  employees of the Bank.  The shares  awarded under the MRP
       were issued from  authorized  but  unissued  shares of common stock at no
       cost to recipients. The shares granted vest at a rate of 20% each year on
       the anniversary of the initial award of shares so that the shares will be
       completely  vested at the end of five years.  During the first six months
       of fiscal 1999, two MRP participants forfeited 902 restricted, non-vested
       shares of the Company's stock and $7,010 of dividends  previously paid to
       the participants on those restricted  shares.  The dividends  refunded to
       the Bank have been  reflected as an addition to common stock.  The shares
       forfeited  during the six months ended  December 31, 1999,  combined with
       shares previously  forfeited,  leaves 5,778 restricted shares unallocated
       under the MRP. Compensation expense of $137,000 and $134,000 was recorded
       during  the  six-month   periods  ended   December  31,  1999  and  1998,
       respectively.  Compensation  expense was recorded of $71,000  during each
       three-month period ending December 31, 1999 and 1998.

6)  Regulatory Restrictions

       At the time of conversion,  the Bank established a liquidation account in
       an  amount  equal  to its net  worth at June 30,  1995.  The  liquidation
       account will be maintained  for the benefit of eligible  deposit  account
       holders who continue to maintain their deposit accounts in the Bank after
       conversion.  Only  in the  event  of a  complete  liquidation  will  each
       eligible  deposit  account  holder be entitled  to receive a  liquidation
       distribution  from the  liquidation  account in the amount of the current
       adjusted  subaccount  balance for deposit  accounts  then held before any
       liquidation  distribution  may be made  with  respect  to  common  stock.
       Dividends  paid  subsequent  to the  conversion  cannot be paid from this
       liquidation account.

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

       Management is not aware of any other trends,  events,  uncertainties,  or
       current  recommendations by regulatory authorities that will have or that
       are  reasonably  likely  to  have a  material  effect  on  the  Company's
       liquidity, capital resources, or other operations.
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


7) Earnings per Share

       Basic net income per share,  or basic EPS, is  computed  by dividing  net
       income by the weighted  average number of common shares  outstanding  for
       the period.  ESOP shares that are unallocated and are not committed to be
       released are not included in weighted average shares outstanding. Diluted
       EPS reflects the  potential  dilution  that could occur if the  Company's
       dilutive  stock  options were  exercised  and unvested  stock grants were
       vested.  The  numerator of the basic EPS  computation  is the same as the
       numerator of the diluted EPS  computation  for all periods  presented.  A
       reconciliation   of  the  denominators  of  the  basic  and  diluted  EPS
       computations is as follows:
<TABLE>
<CAPTION>

                                               Three Months Ended       Six months ended
                                                   December 31,            December 31,
                                           -----------------------   ----------------------
                                              1999         1998         1999         1998
                                           ---------    ---------    ---------    ---------
<S>                                        <C>          <C>          <C>          <C>
Basic EPS denominator: weighted average
   number of common shares outstanding     2,430,269    2,552,856    2,506,025    2,586,695
Dilutive effect of stock options and
   unvested stock grants                      43,085       76,297       48,637       74,924
                                           ---------    ---------    ---------    ---------
Diluted EPS denominator                    2,473,354    2,629,153    2,554,662    2,661,619
                                           =========    =========    =========    =========
</TABLE>


8)  Pending Acquisition

         On December 27, 1999, National Commerce  Bancorporation  (Nasdaq: NCBC)
         and Piedmont Bancorp,  Inc. entered into an agreement whereby NCBC will
         acquire  Piedmont  Bancorp,  Inc., the holding  company of Hillsborough
         Savings Bank, Inc., SSB, through an exchange of stock. The transaction,
         expected  to close  late in the first  quarter  or early in the  second
         quarter of 2000, is subject to  shareholder  and  regulatory  approval.
         Once the transaction is completed,  NCBC will operate the  Hillsborough
         Savings Bank locations as branches of NBC Bank, FSB, its North Carolina
         banking subsidiary.
<PAGE>
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

Comparison of Results of Operations  for the Six Months Ended  December 31, 1999
and 1998

Summary
For the six months ended December 31, 1999,  the Company  recorded net income of
$417,000,  or $0.17 basic and diluted earnings per share, compared to net income
of  $751,000,  or $0.29 basic and $0.28  diluted  earnings per share for the six
months ended December 31, 1998.

Net Interest Income
As shown in the  table  below,  tax-equivalent  net  interest  income  increased
$53,000 to $2,624,000 for the six months ended December 31, 1999 from $2,571,000
for the same period in 1998. Net interest income is analyzed on a tax-equivalent
basis  to  adjust  for  the  nontaxable  status  of  income  earned  on  certain
investments such as municipal bonds.
<PAGE>
<TABLE>
<CAPTION>
                                                                                       Six months ended December 31,
                                                                    ---------------------------------------------------------------
                                                                                  1999                           1998
                                                                    -----------------------------   -------------------------------
                                                                                          Average                          Average
                                                                    Average               Yield/     Average               Yield/
                                                                    Balance   Interest    Rate(1)    Balance   Interest    Rate(1)
                                                                    -------   --------    -------    -------   --------    -------
Assets:                                                                                   (dollars in thousands)
<S>                                                                 <C>         <C>        <C>     <C>         <C>         <C>
Interest-earning assets:
  Interest-bearing deposits                                         $  1,884    $     42   4.46 %  $  1,407    $     43    6.11 %
  FHLB common stock                                                    1,036          40   7.72       1,151          44    7.65
  Taxable investment securities                                       24,521         762   6.22      12,893         413    6.41
  Tax-exempt investment securities (2)                                 4,638         182   7.85       3,862         156    8.08
  Loans receivable                                                   104,152       4,384   8.42     106,359       4,487    8.44
                                                                    --------    --------   ----    --------    --------    ----
Total interest-earning assets                                        136,231       5,410   7.94     125,672       5,143    8.18
                                                                                           ----    --------    --------    ----
Non-interest-earning assets                                            6,564                          2,256
                                                                    --------                       --------
     Total                                                          $142,795                       $127,928
                                                                    ========                       ========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                                   101,266       2,272   4.45      86,942       2,071    4.73
  Borrowings                                                          17,787         514   5.78      17,240         501    5.81
                                                                    --------    --------   ----    --------    --------   ----
Total interest-bearing liabilities                                   119,053       2,786   4.70     104,182       2,572    4.94
                                                                                           ----    --------    --------    ----
Non-interest-bearing liabilities                                       4,418                          2,423
Stockholders' equity                                                  19,324                         21,323
                                                                    --------                       --------
     Total                                                          $142,795                       $127,928
                                                                    ========                       ========
Net interest income and interest rate spread                        $  2,624               3.24 %              $  2,571    3.24 %
                                                                    ========                                   ========
Net interest-earning assets and net interest margin                 $ 17,178               3.88 %              $ 22,201    4.12 %
                                                                    ========                                   ========
Ratio of interest-earning assets to interest-bearing liabilities                          114.43 %                       120.63 %
</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt  investment  securities has been adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.25%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.
<PAGE>
The  increase  in net  interest  income is due to a higher  level of average net
interest-earning  assets  offset by a lower  average yield during the six months
ended  December 31, 1999 compared to the same period last year.  The increase in
average  interest-earning  assets from December 31, 1998 to December 31, 1999 is
due primarily to an increase of  $11,628,000  in taxable  investment  securities
mitigated  by a decline in loans  receivable  of  $2,207,000.  The  increase  in
interest-bearing  liabilities  is  primarily  due to a  $14,324,000  increase in
interest-bearing  deposits from December 31, 1998 to December 31, 1999. Interest
rate  spread (on a  tax-equivalent  basis)  was 3.24% for the six  months  ended
December  31, 1999 and 1998.  A 24 basis point  decline in the average  yield on
total  interest-earning  assets  was offset by a 24 basis  point  decline in the
average  rate  on  total  interest-bearing   liabilities.  Net  interest  margin
decreased to 3.88% for the six months ended December 31, 1999 from 4.12% for the
three months ended December 31, 1998.

Provision for Loan Losses
The provision for loan losses for the six months ended December 31, 1999 totaled
$9,000  compared to $27,000 for the same period in 1998.  The provision for loan
losses is based on  management's  evaluation of the loan  portfolio as discussed
under "Financial Condition".

Other Income Other income totaled $181,000 for the six months ended December 31,
1999 compared to $279,000 for the same period in 1998.  The decline is primarily
attributable  to a $140,000  loss on sale of loans  during the six months  ended
December  31, 1999  compared to a $63,000  gain on sale of loans during the same
period in 1998.  Offsetting  this decline was an increase of $60,000 in mortgage
loan  servicing  fees due to the general  increase in  mortgage  interest  rates
during the six months ended  December 31, 1999 as compared to the same period in
1998. An increase of $24,000 in lower-of-cost or market adjustment on loans held
for sale was due to a  decrease  in the  average  balance of loans held for sale
from June 30, 1999 to December 31, 1999 that caused a decline in the  associated
valuation allowance.  Stock and mutual fund commissions declined from $44,000 in
the six months  ended  December  31,  1998 to $28,000  during the same period in
1999. Customer service and other fees and "other" other income increased $23,000
and  $11,000  due to an  increase  in the  number  of  customers  as well as fee
generating products during the six months ended December 31, 1999 as compared to
the same period of time in 1998.

Other Expenses
Other  expenses  totaled  $2,143,000  for the six months ended December 31, 1999
compared  to  $1,612,000  for the  same  period  in 1998.  Compensation  expense
increased  $219,000  from the six months  ended  December  31,  1998 to the same
period  in  1999.  Most  of the  increase  due to  additional  staffing  for the
Company's two Durham and Chapel Hill bank branches that were opened in March and
May of 1999,  respectively.  Data and items processing expense increased $84,000
for the six months ended  December 31, 1999  compared to the same period in 1998
due to additional expenses associated with the Bank's two new branches. Occupany
expense  increased  $59,000 from the six months  ended  December 31, 1998 to the
same period in 1999 due to higher occupancy expense  associated with the two new
branches noted above. Furniture and equipment expense increased $47,000 from the
six months  ended  December  31,  1998 to the same  period in 1999 due to higher
depreciation   expense  associated  with  the  two  new  branches  noted  above.
<PAGE>
Professional  fees increased $46,000 from the six months ended December 31, 1998
to the same  period in 1999 due to  assistance  from  professional  advisors  in
fiscal  1999  for  the  Company's  pending   acquisition  by  National  Commerce
Bancorporation  that was announced on December 28, 1999.  Other "other"  expense
increased $75,000 from the six months ended December 31, 1998 to the same period
in 1999 due primarily to increased  expenses  associated  with the Company's new
Durham and Chapel Hill branches.

Income Tax Expense
Income tax expense  was  $166,000  for the six months  ended  December  31, 1999
resulting  in an effective  rate of 28.5%  compared to $400,000 or 34.8% for the
same period in 1998. The decline in the effective tax rate from 1998 to 1999 was
due to a higher  level of  interest  income from  Federal  Home Loan Bank agency
investment  securities for the six months ended December 31, 1999 as compared to
the same  period in 1998.  Interest  income from  Federal  Home Loan Bank agency
investment securities is exempt from North Carolina income tax.
<PAGE>
Comparison of Results of Operations for the Three Months Ended December 31, 1999
and 1998

Summary
For the quarter  ended  December  31, 1999,  the Company  recorded net income of
$164,000,  or $0.07 basic and diluted earnings per share,  compared to $417,000,
or $0.13 basic and diluted earnings per share for the same quarter last year.

Net Interest Income
As shown in the table below,  there was a $66,000 increase in tax-equivalent net
interest  income from the quarter ended  December 31, 1998 to the same period in
1999. Net interest  income is analyzed on a  tax-equivalent  basis to adjust for
the nontaxable status of income earned on certain  investments such as municipal
bonds.
<PAGE>
<TABLE>
<CAPTION>
                                                                                       Three Months Ended December 31,
                                                                    ----------------------------------------------------------------
                                                                                 1999                              1998
                                                                    ----------------------------    -------------------------------
                                                                                         Average                            Average
                                                                    Average              Yield/      Average                Yield/
                                                                    Balance   Interest   Rate(1)     Balance    Interest    Rate(1)
                                                                    -------   --------   -------     -------    --------    -------
<S>                                                                 <C>         <C>       <C>      <C>         <C>          <C>
Assets:                                                                                (dollars in thousands)
Interest-earning assets:
  Interest-bearing deposits                                         $  2,268    $     28   4.94 %  $  1,376    $     21     6.10 %
  FHLB common stock                                                    1,036          20   7.72       1,152          21     7.29
  Taxable investment securities                                       24,552         383   6.24      13,121         203     6.19
  Tax-exempt investment securities (2)                                 4,634          91   7.86       3,860          78     8.08
  Loans receivable                                                   106,040       2,230   8.41     104,521       2,188     8.37
                                                                    --------    --------   ----    --------    --------     ----
Total interest-earning assets                                        138,530       2,752   7.95     124,030       2,511     8.10
                                                                    --------    --------   ----    --------    --------     ----
Non-interest-earning assets                                            6,805                          3,898
                                                                    --------                       --------
     Total                                                          $145,335                       $127,928
                                                                    ========                       ========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                                   103,989       1,181   4.51     87,829       1,029     4.65
  Borrowings                                                          17,392         253   5.82     15,459         230     5.95
                                                                    --------    --------   ----    --------    --------    ----
Total interest-bearing liabilities                                   121,381       1,434   4.74    103,288       1,259     4.89
                                                                                           ----    --------    --------    ----
Non-interest-bearing liabilities                                       4,694                         3,639
Stockholders' equity                                                  19,260                        21,001
                                                                    --------                       -------
     Total                                                          $145,335                      $127,928
                                                                    ========                      ========
Net interest income and interest rate spread                        $  1,318               3.21 %              $  1,252    3.21 %
                                                                    ========                                   ========
Net interest-earning assets and net interest margin                 $ 17,149               3.83 %              $ 20,742    4.06 %
                                                                    ========                                   ========
Ratio of interest-earning assets to interest-bearing liabilities                         114.13 %                        120.08 %
</TABLE>

(1) All information presented in this column is annualized with the exception of
the  ratio of  interest-earning  assets to  interest  bearing  liabilities.
(2) Interest earned on tax-exempt  investment  securities has been adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.25%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.

<PAGE>
The average yield on total interest earning assets declined 15 basis points from
the three months ended December 31, 1998 to the same period in 1999. Most of the
decline was caused by a greater  increase to taxable  investment  securities  as
compared  to the  increase  in  loans  receivable.  Average  taxable  investment
securities  increased $11.4 million and average loans receivable  increased $1.5
million  from the three  months  ended  December  31, 1998 to the same period in
1999. Most of the decline in the total average yield on interest  earning assets
was caused by interest income on taxable  investment  securities  representing a
greater  proportion of total  interest  income in the quarter ended December 31,
1999 as compared to the same period in 1998.  The average rate on total interest
bearing  liabilities  declined  15 basis  points  from the  three  months  ended
December  31,  1998 to the  same  three-month  period  in  1999.  A  shift  from
borrowings to deposits from the three months ended December 31, 1998 to the same
three-month  period in 1999,  as well as a decline in the average  yield/rate on
deposits  and  borrowings,  caused the  decline  during the same period of time.
Interest  rate  spread  (on a  tax-equivalent  basis)  was  3.21% in each of the
three-month  periods ending  December 31 in both 1999 and 1998. The net interest
margin decreased to 3.83% from 4.06% during the same period of time.

Provision for Loan Losses
The  provision  for loan losses for the three  months  ended  December  31, 1999
totaled $6,000 compared to $3,000 for the same period in 1998. The provision for
loan  losses  is based on  management's  evaluation  of the  loan  portfolio  as
discussed under "Financial Condition".

Other Income
Other income  totaled  $108,000 for the quarter ended December 31, 1999 compared
to $128,000  for the same period in 1998.  Increases  and  decreases  in various
income accounts caused the overall  decrease in other income.  Customer  service
and other fees increased $6,000 from the three months ended December 31, 1998 to
the same period in 1999 due to increases  in the number of deposit  accounts and
related for fee products  between the two periods.  Mortgage loan servicing fees
increased  $34,000  from the three  months  ended  December 31, 1998 to the same
period in 1999 due to slower prepayments on the underlying  mortgages in 1999 as
compared  to 1998.  The Company  recorded a negative  $47,000  lower-of-cost  or
market adjustment on loans  held-for-sale  during the three-month  period ending
December 31, 1999 compared to no adjustment during the same period in 1998. This
was due to a general increase in mortgage interest rates during the three-months
ended  December 31, 1999.  The Company  recorded a $13,000 gain on sale of loans
during the three-month period ended December 31, 1999 compared to $23,000 during
the same period in 1998. The Company collected stock and mutual fund commissions
of $14,000  during the three months ended  December 31, 1999 compared to $20,000
during the same period in 1998.  Other income  increased  to $34,000  during the
three months ended  December 31, 1999 compared to $26,000 during the same period
in 1998.  This was caused by an increase in Bank's  number of customers  and fee
related services.

Other Expenses
Other expenses  totaled  $1,148,000 for the three months ended December 31, 1999
compared to $829,000 for the same period in 1998. Compensation expense increased
$111,000  from the quarter  ended  December 31, 1998 to the same period in 1999.
Most of the increase is due to additional  staffing for the Company's new Durham
and Chapel Hill bank branches during the second quarter of fiscal 1999. Data and
items processing  expense  increased $59,000 for the three months ended December
31,  1999  compared  to the  same  period  in 1998  due to  additional  expenses
<PAGE>
associated with the Bank's two new branches.  Occupany expense increased $29,000
from the three months ended  December 31, 1998 to the same period in 1999 due to
higher  occupancy  expense  associated  with the two new  branches  noted above.
Furniture and equipment  expense  increased  $24,000 from the three months ended
December 31, 1998 to the same period in 1999 due to higher depreciation  expense
associated  with the two new branches noted above.  Professional  fees increased
$31,000 from the three months ended December 31, 1998 to the same period in 1999
due to assistance  from  professional  advisors in fiscal 1999 for the Company's
pending  acquisition by National Commerce  Bancorporation  that was announced on
December 28, 1999. Other "other" expense  increased  $31,000 from the six months
ended  December  31, 1998 to the same period in 1999 due  primarily to increased
expenses associated with the Company's new Durham and Chapel Hill branches.

Income Tax Expense
Income tax expense was $73,000 for the quarter ended December 31, 1999 resulting
in an effective  rate of 30.8% compared to $181,000 or 34.9% for the same period
in 1998.

Financial Condition

CHANGES IN FINANCIAL CONDITION

Total assets  increased  $8.0 million or 5.7% to $148.1  million at December 31,
1999 from $140.1  million at June 30,  1999.  Increases in net loans and cash of
$7.9  million  and $1.2  million,  respectively,  were  offset by a decrease  in
available-for-sale  investment  securities of $1.4 million from June 30, 1999 to
December 31, 1999. Total liabilities increased $8.6 million to $129.1 million at
December  31, 1999 from $120.5  million at June 30,  1999.  An increase of $10.2
million in deposits and a decrease of $1.6 million in Advances  from the Federal
Home Loan Bank made up the  majority  of the  change in  liabilities  during the
first six months of fiscal 2000.

Total  stockholders'  equity decreased $600,000 to $19.0 million at December 31,
1999 from $19.6  million at June 30, 1999.  Under a previously  announced  stock
repurchase plan, the Company repurchased and retired 29,300 shares of its common
stock  during the quarter  ended  September  30,  1999.  The average cost of the
shares repurchased was $8.84 per share for a total cost of $259,000. The Company
has  now  completed  its  repurchase  plan.  The  implementation  of  the  share
repurchase  plan,  cash dividends  declared of $589,000 and change in unrealized
holding losses of $349,000 were the primary factors  contributing to the decline
in  stockholders'  equity  during  the  six  months  ended  December  31,  1999.
Mitigating  these  decreases  were net income of  $417,000,  and release of ESOP
shares and  amortization  of unearned  compensation  of $110,000  and  $145,000,
respectively.

ASSET QUALITY

Nonperforming Assets and Risk Assets

Nonperforming  assets  include  nonaccrual  loans,  restructured  loans and real
estate  owned.  The  table  on  the  following  page  presents   information  on
nonperforming  assets and loans  contractually  past due but still  accruing  at
December 31, 1999 and June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
                                                      December 31,      June 30
                                                          1999          1999
                                                          ----          ----
                                                            (in thousands)
<S>                                                     <C>            <C>
Total nonaccrual loans                                  $  1,298       $    973
Total restructured loans                                    --             --
                                                        --------       --------
     Total nonperforming loans                             1,298            973
Real estate owned                                           --             --
                                                        --------       --------
Total nonperforming assets                                 1,298            973

Accruing loans, delinquent 90 days or more                  --             --
                                                        --------       --------

Total risk assets                                       $  1,298       $    973
                                                        ========       ========

Nonperforming loans to total loans                          1.20%          0.97%
Nonperforming assets to total assets                        0.88%          0.69%
Risk assets to total assets                                 0.88%          0.69%
Allowance for loan losses to:
   Total nonperforming assets                              0.87x          1.08x
   Total risk assets                                       0.87x          1.08x
Total assets                                            $148,114       $140,089
Total loans, net                                         108,552        100,717
Allowance for loan losses                                  1,124          1,054

</TABLE>


There was a $325,000 increase in nonperforming  assets outstanding from June 30,
1999 to December 31, 1999.  The majority of the  nonperforming  assets are loans
secured by single family residences.  Management has reviewed the collateral for
nonperforming  assets and believes that  collateral  values related to the loans
exceeds such balances.  The recorded  investment in loans that are considered to
be impaired under SFAS No. 114 (Statement of Financial  Accounting Standards No.
114,  "Accounting  by Creditors for  Impairment of a Loan") was $117,000 at both
December 31, 1999 and June 30, 1999.  There was no related  allowance for credit
losses  associated  with these loans as determined  in accordance  with SFAS No.
114.  Management  has included  this review among the factors  considered in the
evaluation of the allowance for possible loan losses.
<PAGE>
Provision and Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for
the three and six months ended December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>


                                          Three Months Ended       Six months ended
                                               December 31,          December 31,
                                           1999        1998        1999         1998
                                          -------     -------     -------     -------
<S>                                       <C>         <C>         <C>         <C>
Balance at the beginning of the period    $ 1,127     $ 1,005     $ 1,054     $   951
Provision for loan loss                         6           3           9          27
Recoveries                                     17          29          92          59
Loans charged off                             (26)         (8)        (31)         (8)
                                          -------     -------     -------     -------
Balance at end of period                  $ 1,124     $ 1,029     $ 1,124     $ 1,029
                                          =======     =======     =======     =======
</TABLE>

At December 31, 1999,  the  allowance  for loan losses was 1.03% of total loans,
compared  to 1.04% of total  loans at June 30,  1999 and 0.98% of total loans at
December 31, 1998.

The  levels  of the  provision  and  allowance  for  loan  losses  are  based on
management's  ongoing  evaluation  of  the  risk  characteristics  of  the  loan
portfolio  considering  current  economic  conditions,  financial  condition  of
borrowers, growth and composition of the loan portfolio,  collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming  loans that have been identified as potential  problems,  past and
expected loss experience,  results of the most recent  regulatory  examinations,
and other factors deemed relevant by management. Management actively maintains a
current  loan watch list and knows of no other loans which are (1)  material and
represent or result from trends or  uncertainties  which  management  reasonably
expects will materially impact future operating results,  liquidity,  or capital
resources,  or (2) represent material credits about which management has serious
doubts as to the ability of such  borrowers  to comply  with the loan  repayment
terms.  Based on  management's  evaluation of the loan  portfolio,  as described
above,  the Company  recorded a $6,000  provision  for loan losses for the three
months  ended  December  31, 1999  compared to a $3,000  provision  for the same
period in 1998.

YEAR 2000 ISSUE

The Company recognizes and has addressed the potentially severe  implications of
the "Year 2000  Issue." The "Year 2000 Issue" is a general term used to describe
the various  problems that may result from the improper  processing of dates and
date-sensitive calculations as the Year 2000 approaches. This issue is caused by
the fact that many of the world's existing computer programs use only two digits
to  identify  the  year in the date  field of a  program.  These  programs  were
designed and developed without  considering the impact of the upcoming change in
the century and could experience  serious  malfunctions when the last two digits
of the year change to "00" as a result of identifying a year  designated "00" as
the year 1900 rather than the Year 2000.  This  misidentification  could prevent
the Company from being able to engage in normal business operations,  including,
among other  things,  miscalculating  interest  accruals  and the  inability  to
process customer transactions.  Because of the potentially serious ramifications
of the Year  2000  Issue,  the  Company  is  taking  the Year  2000  Issue  very
<PAGE>

seriously.  The Company formed a Year 2000 Committee,  which is comprised of the
Company's  management  team, in November of 1997.  Other  employees are actively
involved in the Company's Year 2000 efforts on an as needed basis. The Committee
is  leading  the  Company's  Year 2000  efforts  to ensure  that the  Company is
properly  prepared  for the Year 2000.  The  Company's  Board of  Directors  has
approved a plan  submitted  by the Year 2000  Committee  that was  developed  in
accordance  with  guidelines  set forth by the  Federal  Financial  Institutions
Examination Council.  This plan, which is described in further detail below, has
five primary phases related to internal Year 2000 compliance:

1.       Awareness  - this  phase is  ongoing  and is  designed  to  inform  the
         Company's  Board of Directors  (the "Board") and  Executive  management
         ("Management"),  employees,  customers and vendors of the impact of the
         Year 2000 Issue. The awareness phase is an ongoing one that is designed
         to provide ongoing  information  about the Year 2000 issue to the Board
         of Directors,  Management,  employees and customers.  Since December of
         1997 the Board has been  apprised  of the  Company's  efforts  at their
         regular  meetings.  Employees are informed of the  Company's  Year 2000
         efforts through monthly scheduled employee meetings.  In addition,  all
         customers  were updated with respect to the Company's Year 2000 efforts
         through  mailings  sent in June of 1998 and April of 1999.  The Company
         has also  placed  Year 2000  information  on the Bank's  World Wide Web
         site.

2.       Assessment - during this phase an inventory  was conducted of all known
         Company  processes that could  reasonably be expected to be impacted by
         the Year 2000 Issue and their  related  vendors,  if  applicable.  This
         inventory of processes and vendors  included not only typical  computer
         processes such as the Company's  transaction  applications systems, but
         all known processes that could be impacted by micro-chip  malfunctions.
         These include but are not limited to the Company's alarm system,  phone
         system,   check  ordering  process,   and  ATM  network.   The  Company
         inventoried  all the  systems  listed  above  in  December  of 1997 and
         performed an initial assessment of potential risks from either under or
         nonperformance  arising from  incorrect  processing  and usage of dates
         after  December 31, 1999. At this time the Company had already made the
         decision  to  convert in  February  of 1998 to a new  computer  service
         provider  for   processing   all  loan,   deposit  and  general  ledger
         transactions. In conjunction with the conversion, the Company purchased
         and installed new computers,  printers and related  software in January
         of 1998.  New  hardware  and software for a local area network was also
         purchased  and  installed  in  January  of 1998.  The total cost of the
         hardware and  software  purchased by the Company in fiscal 1998 totaled
         $296,000  and  was  capitalized.  Most  of the  hardware  and  software
         purchased by the Company  either is Year 2000 compliant or will be with
         minor  modifications  or upgrades.  The  assessment  phase is complete,
         although it is updated periodically as necessary.
<PAGE>
3.       Renovation  and/or  replacement - this phase includes  programming code
         enhancements,  hardware and  software  upgrades,  system  replacements,
         vendor  certification  and any  other  changes  necessary  to make  any
         hardware, software and other equipment Year 2000 compliant. The Company
         does  not  perform  in-house  programming,  and  thus is  dependent  on
         external  vendors  to ensure  and  modify,  if  needed,  the  hardware,
         software  or other  services  it  provides to the Company for Year 2000
         compliance.  As a result of the assessment performed above, the Company
         contacted all third party vendors,  requested  documentation  regarding
         their Year 2000 compliance efforts,  and analyzed their responses.  The
         responses  from third party  vendors  generally  include an overview of
         renovation  efforts to their  systems  that the  Company  utilizes.  In
         addition,  some third party software  vendors have notified the Company
         that upgrades of their  software was  necessary to ensure  reliable and
         accurate Year 2000  processing.  One third party  computer  vendor (the
         "primary service provider")  processes,  either directly, or indirectly
         through other computer  vendors,  all loan,  deposit and general ledger
         transactions.  The primary  service  provider  has notified the Company
         that the  renovation  and  replacement of their systems is complete and
         has been tested for Year 2000 compliance.

4.       Testing - The next phase for the Company  under the plan is to complete
         a  comprehensive  testing  of all  known  processes.  As  noted  in the
         renovation  and/or  replacement  phase  above,  the  Company's  primary
         service  provider  has  already  tested  their  system  for  Year  2000
         compliance.  The next step was to test the  Company's  network and core
         service provider  software  applications and hardware.  A first test of
         the company's core service provider software  applications and hardware
         was  performed on September  20, 1998 using a future date of January 3,
         2000.  The Company  reviewed  the results of this test,  and the review
         indicated that the system performed  reliably and accurately when using
         the future  date of January 3, 2000.  The Company  performed  follow up
         tests with its core service provider during the third quarter of fiscal
         1999 using  future  dates of February  29, 2000 and March 1, 2000.  The
         Company  has  reviewed  the  results  of these  tests,  and the  review
         indicated that the system performed  reliably and accurately when using
         the future dates of February 29, 2000 and March 1, 2000. The testing of
         the remainder of the Company's processes was substantially  complete as
         of March  31,  1999  with  follow  up  testing  performed  as needed in
         calendar year 1999.

5.       Implementation  - this phase occurs as the  Company's  vendors  certify
         their present systems as Year 2000 compliant.  This has occurred on all
         of  the  Company's  systems,   including  the  Company's  core  service
         provider.  The Company has entered dates greater than December 31, 1999
         into their systems with no adverse events.  The Company has developed a
         Business Resumption  Contingency plan for processes that do not process
         information  reliably and accurately after December 31, 1999. This plan
         was approved by the Bank's Board of Directors in late May of 1999.  The
         contingency plans for all systems was complete by the end of the fourth
         quarter of fiscal 1999 in accordance with regulatory guidelines.

The Company has also assessed the year 2000 readiness of  significant  borrowers
and  depositors.  In the second  quarter of 1999 the Company  prepared a list of
significant  borrowers and depositors.  After verbal and/or written inquiries of
these  customers,  any that  the  Company  had Year  2000  concerns  about  were
counseled on the Year 2000 issue and urged to take corrective action. Since most
of the  Company's  loans are to  individuals  and  secured by one to four family
residences this step did not require a significant amount of time or resources.

Excluding the hardware and software  purchases noted above, the Company expensed
$6,000 on Year 2000 costs for the quarters ended December 31, 1999 and 1998, and
$12,000 for the six months ended  December  31, 1999 and 1998.  The Company does
not anticipate any further Year 2000 costs. The Company estimates that its total
Year 2000  expenditures  were  approximately  $36,000.  Funding of the Year 2000
project  costs came from  normal  operating  cash  flow,  however  the  expenses
associated with the Year 2000 Issue will directly reduce otherwise  reported net
income for the Company.

Management of the Company  believes that the potential  effects on the Company's
internal operations of the Year 2000 Issue was addressed prior to the Year 2000.
However,  if  required  modifications  or  conversions  are not made or were not
completed  on a timely  basis prior to the Year 2000,  the Year 2000 Issue could
have disrupted normal business operations. The most reasonably likely worst case
Year 2000 scenarios  foreseeable  at this time included the Company  temporarily
not being  able to  process,  in some  combination,  various  types of  customer
transactions.  This could have  affected  the ability of the  Company to,  among
other things, originate new loans, post loan payments,  accept deposits or allow
immediate  withdrawals,  and,  depending  on the  amount of time such a scenario
lasted,  could have a material  adverse  effect on the  Company.  Because of the
serious  implications of these scenarios,  the primary emphasis of the Company's
Year 2000 efforts was to correct,  with complete  replacement if necessary,  any
systems or processes whose Year 2000 test results were not satisfactory prior to
the Year 2000. Nevertheless, should one of the most reasonably likely worst case
scenarios  have occurred in the Year 2000,  the Company,  as noted above,  had a
contingency plan that allowed for limited transactions, including the ability to
make certain deposit  withdrawals,  until the Year 2000 problems were fixed. The
costs of the Year 2000 project on which the Company  plans to complete Year 2000
compliance were based on management's  best estimates,  which were derived using
numerous  assumptions  of future  events  such as the  availability  of  certain
resources (including internal and external resources),  third party vendor plans
and other factors. Factors that might affect the timely and efficient completion
of the Company's  Year 2000 project  include,  but are not limited to,  vendors'
abilities  to  adequately  correct  or  convert  software  and the effect on the
Company's  ability to test its systems,  the  availability and cost of personnel
trained in the Year 2000 area,  the ability to identify and correct all relevant
computer programs and similar uncertainties.

The Company  noted no adverse Year 2000 related  effects on customer  service or
data  processing  in the weeks  prior to  December  31,  1999,  and has noted no
adverse  effects  since  December  31,  1999 to the date of the  filing  of this
report.
<PAGE>
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

Liquidity  is the ability to raise  funds or convert  assets to cash in order to
meet customer and operating  needs.  The Company's  primary sources of liquidity
are its portfolio of  investment  securities  available-for-sale,  principal and
interest payments on loans and mortgage-backed securities,  interest income from
investment  securities,  maturities of investment  securities  held-to-maturity,
increases in deposits,  and advances  from the FHLB of Atlanta.  At December 31,
1999, the Bank had $11.4 million of credit available from the FHLB that would be
collateralized  by a blanket lien on qualifying loans secured by first mortgages
on 1-4 family  residences.  Additional  amounts may be made available under this
blanket  floating  lien  or  by  using  investment   securities  as  collateral.
Management  believes that it will have  sufficient  funds  available to meet its
anticipated future loan commitments as well as other liquidity needs.

Interest rate risk is the sensitivity of interest income and interest expense to
changes in  interest  rates.  Management  structures  the  Company's  assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated with changes in interest rates. At December 31, 1999, the Company had
a  cumulative  one-year  liability-sensitive  gap  position of $15.1  million or
10.85% of interest-earning  assets. A liability-sensitive gap position generally
indicates  that  net  interest   income  would  increase  in  a  declining  rate
environment  and  decrease  in a rising  rate  environment.  The  Company  had a
cumulative one year liability-sensitive gap position of $5.9 million or 4.44% of
interest-earning assets at June 30, 1999. The Company will continue to actively
manage its balance  sheet in order  protect net interest  income from changes in
interest rates.

It should be noted that these measures reflect the  interest-sensitivity  of the
balance sheet as of a specific date and are not necessarily indicative of future
results.  Because  of this  and  other  limitations,  management  also  monitors
interest rate sensitivity  through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest  sensitivity  measures as of
December  31, 1999,  management  believes  that its interest  rate risk is at an
acceptable level.
<PAGE>
CAPITAL RESOURCES

The Parent is regulated by the Board of Governors of the Federal  Reserve System
("FRB")  and  is  subject  to  securities   registration  and  public  reporting
regulations of the Securities and Exchange Commission.  The Bank is regulated by
the  Federal  Deposit  Insurance  Corporation  ("FDIC")  and the  Administrator,
Savings  Institutions  Division,  North  Carolina  Department of Commerce,  (the
"Administrator").  The Bank is subject to the capital  requirements  of the FDIC
and the Administrator.  The FDIC requires the Bank to maintain minimum ratios of
Tier I capital to total risk-weighted  assets and total capital to risk-weighted
assets  of  4%  and  8%,   respectively.   Tier  I  capital  consists  of  total
stockholders' equity calculated in accordance with generally accepted accounting
principles  less  intangible  assets,  and total  capital is comprised of Tier I
capital plus certain  adjustments,  the only one  applicable  to the Bank is the
allowance  for possible loan losses.  Risk-weighted  assets refer to the on- and
off-balance  sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement,  which calls for a minimum ratio of Tier I capital
(as defined above) to quarterly  average total assets of 3% and a ratio of 5% to
be "well-capitalized".  The Administrator requires a net worth equal to at least
5% of total assets.  At September 30, 1999, the Bank was in compliance  with all
of the aforementioned capital requirements.

As of December 31, 1999,  the FDIC  categorized  the Bank as  "well-capitalized"
under the regulatory  framework for prompt corrective  action. To be categorized
as well capitalized,  the Bank must meet minimum ratios for total risk-based and
Tier I leverage  (the ratio of Tier I capital to average  assets).  There are no
events or  conditions  since  December 31, 1999 that  management  believes  have
changed the Bank's category.

FORWARD LOOKING STATEMENTS

The  foregoing   discussion  may  contain   statements   that  could  be  deemed
forward-looking  statements  within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private  Securities  Litigation  Reform Act,  which
statements are inherently  subject to risks and  uncertainties.  Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs  about  future  events or results or  otherwise  are not  statements  of
historical  fact.  Such  statements  are  often  characterized  by  the  use  of
qualifying  words  (and  their   derivatives)   such  as  "expect,"   "believe,"
"estimate,"  "plan,"  "project,"  or other  statements  concerning  opinions  or
judgment of the Company and its  management  about future  events.  Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the  financial  success or changing  strategies of the Company's
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.

CURRENT ACCOUNTING ISSUES

                  The Company prepares its consolidated financial statements and
related  disclosures in conformity with standards  established by, among others,
the Financial Accounting  Standards Board (the "FASB").  Because the information
needed by users of financial  reports is dynamic,  the FASB  frequently  has new
rules  and  proposed  new  rules  for  companies  to  apply in  reporting  their
activities.  The following  discussion addresses such changes as of December 31,
1999 that will affect the Company's future reporting.

                  In  June  1998,   the  FASB  issued   Statement  of  Financial
Accounting  Standards  No. 133  ("SFAS No.  133"),  "Accounting  for  Derivative
Instruments and Hedging  Activities".  SFAS No. 133  establishes  accounting and
reporting  standards  for  derivative  instruments  and for hedging  activities.
Statement of Financial  Accounting Standards No. 137, "Accounting for Derivative
Instruments  and Hedging  Activities  - Deferral of the  Effective  Date of FASB
Statement No. 133 - and amendment of FASB No. 133" delayed the effective date of
this statement for one year. This Statement is effective for all fiscal quarters
of fiscal years  beginning  after June 15, 2000. The Company plans to adopt SFAS
133 in fiscal  year  2001  without  any  impact  on its  consolidated  financial
statements as the Company does not have any derivative financial instruments and
is not involved in any hedging activities.

                  In  October  1998,  the FASB  issued  Statement  of  Financial
Accounting  Standards  No.  134,  "Accounting  for  Mortgage-Backed   Securities
Retained after the  Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise,"  establishes accounting and reporting standards for certain
mortgage  banking  activities.  It also conforms the  subsequent  accounting for
securities  retained  after the  securitization  of other types of assets.  This
statement is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company  adopted SFAS 134 in fiscal year 1999 without any
impact on its consolidated financial statements.
<PAGE>
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk reflects the risk of economic loss resulting from adverse changes in
market  price  and  interest  rates.  This  risk of  loss  can be  reflected  in
diminished current market values and/or reduced potential net interest income in
future periods.

The Company's  market risk arises  primarily from interest rate risk inherent in
its lending and deposit taking  activities.  The structure of the Company's loan
and deposit portfolios is such that a significant  decline in interest rates may
adversely impact net market values and net interest income. The Company does not
maintain a trading account nor is the Company subject to currency  exchange risk
or  commodity  price  risk.  Interest  rate  risk  is  monitored  as part of the
Company's asset/liability  management function, which is discussed above in Item
2  "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" under the heading "Liquidity and Interest Rate Risk Management".

Management does not believe there has been any significant change in the overall
analysis of financial instruments considered market risk sensitive,  as measured
by the factors of contractual  maturities,  average interest rates and estimated
fair values,  since the analysis  prepared and presented in conjunction with the
Form 10-K Annual report for the fiscal year ended June 30, 1999.

<PAGE>



PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
None

ITEM 2.  CHANGES IN SECURITIES
Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
Not applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None

ITEM 5.  OTHER INFORMATION
Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None

(b) Reports on Form 8-K
None



<PAGE>



                                   SIGNATURES

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



Date:    February 14, 2000         By:  /s/ D. Tyson Clayton
                                         -------------------
                                         President and Chief Executive Officer


Date:    February 14, 2000         By:  /s/ Thomas W. Wayne
                                         ------------------
                                         Vice President and principal
                                         financial officer