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
                               September 30, 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 November 4, 1999,  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 23 pages.
<PAGE>
<TABLE>
<CAPTION>
                                 CONSOLIDATED BALANCE SHEETS
                                                                                      September 30,      June 30,
                                                                                          1999             1999
                                                                                       (unaudited)           *
                                                                                      -----------      -----------
                           Assets                                                    (in thousands, except shares)
<S>                                                                                   <C>              <C>
Cash                                                                                  $     1,539      $     1,706
Interest-bearing deposits in other financial institutions                                   1,445            1,866
Investment securities
   Available-for-sale                                                                      25,197           25,810
   Held-to-maturity                                                                         3,337            3,362
Loans receivable (net of allowance for loan losses of $1,127 and
   $1,054 at September 30, 1999 and June 30, 1999, respectively)                          101,748          100,717
Federal Home Loan Bank stock, at cost                                                       1,036            1,036
Premises and equipment                                                                      3,241            3,213
Prepaid expenses and other assets                                                           2,635            2,379
                                                                                      -----------      -----------
          Total assets                                                                $   140,178      $   140,089
                                                                                      ===========      ===========
Liabilities and Stockholders' Equity

                         Liabilities

Deposits
   Demand, non-interest bearing                                                             3,234            3,390
   Savings, NOW and MMDA                                                                   40,832           39,915
   Certificates of Deposit                                                                 58,830           56,034
                                                                                      -----------      -----------
                                                                                          102,896           99,339
Advances from the Federal Home Loan Bank                                                   16,791           20,162
Accrued expenses and other liabilities                                                      1,190            1,027
                                                                                      -----------      -----------
     Total liabilities                                                                    120,877          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           6,764            7,035
Unearned ESOP shares                                                                         (395)            (450)
Unamortized deferred compensation                                                            (581)            (655)
Unallocated restricted stock                                                                  (95)             (87)
Retained earnings, substantially restricted                                                14,040           14,081
Accumulated other comprehensive income                                                       (432)            (363)
                                                                                      -----------      -----------
      Total stockholders' equity                                                           19,301           19,561
                                                                                      -----------      -----------

Commitments and contingencies
          Total liabilities and stockholders' equity                                  $   140,178      $   140,089
                                                                                      ===========      ===========
</TABLE>
* Derived from audited financial statements

See accompanying notes to consolidated financial statements.

                                       2
<PAGE>
<TABLE>
<CAPTION>
                       CONSOLIDATED STATEMENTS OF INCOME (unaudited)

                                                                      Three months ended
                                                                        September 30,
                                                                   -----------------------
                                                                     1999          1998
                                                                     ----          ----
<S>                                                                 <C>          <C>
Interest income:
   Interest on loans                                                $ 2,154      $ 2,299
   Interest on deposits in other financial institutions                  14           22
   Interest and dividends on investment securities:
      Taxable                                                           399          233
      Non-taxable                                                        56           48
                                                                    -------      -------
            Total interest income                                     2,623        2,602
                                                                    -------      -------
Interest expense:
   Interest on deposits                                               1,091        1,042
   Interest on borrowings                                               261          271
                                                                    -------      -------
            Total interest expense                                    1,352        1,313
                                                                    -------      -------
Net interest income                                                   1,271        1,289
Provision for loan losses                                                 3           24
                                                                    -------      -------
            Net interest income after provision for loan losses       1,268        1,265
                                                                    -------      -------
Other income:
   Customer service and other fees                                       68           51
   Mortgage loan servicing fees                                          32            6
   Gain on sale of investment securities                                  8         --
   Lower-of-cost or market adjustment on loans held-for-sale             71         --
   Gain (loss) on sale of loans                                        (153)          40
   Stock and mutual fund commissions                                     14           24
   Other                                                                 33           30
                                                                    -------      -------
            Total other income                                           73          151
                                                                    -------      -------

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                 <C>          <C>
Other expenses:
   Compensation and fringe benefits                                     565          457
   Data and items processing                                            114           87
   Deposit insurance premiums                                            13           13
   Occupancy expense                                                     56           26
   Furniture and equipment expense                                       66           43
   Professional fees                                                     23           43
   Other                                                                158          114
                                                                    -------      -------
            Total other expenses                                        995          783
                                                                    -------      -------
            Income before income tax expense                            346          633
Income tax expense                                                       93          219
                                                                    -------      -------
                  Net income                                        $   253      $   414
                                                                    =======      =======

Net income per share - basic                                        $  0.10      $  0.15
                                                                    =======      =======

Net income per share - diluted                                      $  0.10      $  0.15
                                                                    =======      =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
<TABLE>
<CAPTION>
                                                                             Unearned   Unamortized  Unallocated
                                                        Shares      Common     ESOP       Deferred   Restricted    Retained
                                                     Outstanding    Stock     Shares    Compensation    Stock      Earnings
                                                     -----------    -----     ------    ------------    -----      --------
                                                                            (dollars in thousands)
<S>                                                   <C>          <C>        <C>          <C>          <C>         <C>
Balance at June 30, 1998                              2,750,800    $ 9,121    $ (679)      $ (953)      $ (61)      $ 14,101
      Net income                                              -          -         -            -           -            414
      Other comprehensive income - change in
         unrealized holding gains (losses),net of
         income taxes

         Total comprehensive income
      Purchase and retirement of common stock           (63,167)      (623)        -            -           -              -
      Release of ESOP shares                                  -        (14)       59            -           -              -
      Amortization of unearned compensation                   -          -         -           63           -              -
      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         -            -           -            (314)
                                                             --        ---        --           --          --           -----
Balance at September 30, 1998                         2,687,633    $ 8,495     $ (620)      $ (864)      $ (87)       $ 14,201
                                                     ==========    =======     =======      ======       =====        ========

Balance at June 30, 1999                              2,532,000    $ 7,035     $ (450)      $ (655)      $ (87)      $ 14,081
      Net income                                              -          -         -            -           -            253
      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                                  -        (18)       55            -           -              -
      Amortization of unearned compensation                   -          -         -           66           -              -
      Forfeiture of restricted stock                          -          -         -            8          (8)             -
      Tax benefit of dividends on restricted stock            -          3         -            -           -              -
      Cash dividends declared, net of
         forfeited dividends on restricted stock              -          2         -            -           -            (293)
                                                     ----------    -------     ------       ------       -----        --------
Balance at September 30, 1999                         2,502,700    $ 6,763     $ (395)      $ (581)      $ (95)       $ 14,041
                                                     ==========    =======     ======       ======       =====        ========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                Accumulated
                                                                   other           Total
                                                              comprehensive    Stockholders'
                                                                   income          Equity
                                                                   ------          ------
<S>                                                                 <C>          <C>
Balance at June 30, 1998                                            $ 77         $ 21,606
      Net income                                                       -              414
      Other comprehensive income - change in
         unrealized holding gains (losses),net of
         income taxes                                                 45              45
                                                                                      --
         Total comprehensive income                                                   459
      Purchase and retirement of common stock                          -             (623)
      Release of ESOP shares                                           -               45
      Amortization of unearned compensation                            -               63
      Forfeiture of restricted stock                                   -                -
      Tax benefit of dividends on restricted stock                     -               (1)
      Cash dividends declared, net of
         forfeited dividends on restricted stock                       -              (302)
                                                                      --             -----
Balance at September 30, 1998                                       $ 122         $ 21,247
                                                                    =====         ========

Balance at June 30, 1999                                            $(363)        $ 19,561
      Net income                                                       -               253
      Other comprehensive income - change in
         unrealized holding gains (losses),net of
         income taxes                                                 (69)            (69)
                                                                                  --------
         Total comprehensive income                                                   184
      Purchase and retirement of common stock                          -             (259)
      Release of ESOP shares                                           -               37
      Amortization of unearned compensation                            -               66
      Forfeiture of restricted stock                                   -                -
      Tax benefit of dividends on restricted stock                     -                3
      Cash dividends declared, net of
         forfeited dividends on restricted stock                      -              (291)
                                                                    ------        --------
Balance at September 30, 1999                                       $ (432)       $ 19,301
                                                                    =======       ========

</TABLE>
See accompanying notes to consolidated financial statements.

                                        4

<PAGE>
<TABLE>
<CAPTION>
                                             PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                       Three months ended
                                                                                          September 30,
                                                                                       1999         1998
                                                                                     -------      -------
<S>                                                                                  <C>          <C>
Operating activities:
   Net income                                                                        $   253      $   414
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation                                                                     60           39
         Net amortization                                                                  6           13
         Provision for loan losses                                                         3           24
         Gain on sale of investments and mortgage-backed securities                       (8)        --
         Net (gain) loss on sale of loans                                                153          (40)
         Release of ESOP shares                                                           37           45
         Compensation earned under MRP                                                    66           63
         Net decrease (increase) in mortgage loans held for sale                       1,537         (880)
         Increase in other assets                                                       (204)        (251)
         Increase in other liabilities                                                   161          235
                                                                                     -------      -------
               Net cash provided (used in) operating activities                        2,064         (338)
                                                                                     -------      -------
Investing activities:
   Net (increase) decrease in loans held for investment                               (2,724)       4,607
   Principal collected on mortgage-backed securities                                     432          290
   Principal collected on collateralized mortgage-backed securities                       22         --
   Purchases of investment securities classified as available-for-sale                (1,926)        (500)
   Purchases of mortgage-backed securities classified as available-for-sale             --           (782)
   Proceeds from investment securities called by issuer                                1,997          280
   Purchases of premises and equipment                                                   (88)         (65)
                                                                                     -------      -------
               Net cash provided (used in) investing activities                       (2,287)       3,830
                                                                                     -------      -------
Financing activities:
   Net increase in time deposits                                                       2,796          571
   Net increase (decrease) in other deposits                                             761       (1,300)
   Repayments of borrowings                                                           (3,371)      (2,071)
   Repurchase of no par common stock                                                    (259)        (623)
   Cash dividends paid to shareholders                                                  (292)        (324)
                                                                                     -------      -------
               Net cash used in financing activities                                    (365)      (3,747)
                                                                                     -------      -------
               Decrease in cash and cash equivalents                                    (588)        (255)
Cash and cash equivalents at beginning of period                                       3,572        2,644
                                                                                     -------      -------
Cash and cash equivalents at end of period                                           $ 2,984      $ 2,389
                                                                                     =======      =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                  <C>          <C>
Supplemental  disclosure of cash flow  information:
  Cash paid during the period for:
      Interest                                                                       $ 1,028      $ 1,287
                                                                                     =======      =======
      Income taxes                                                                   $   108      $    59
                                                                                     =======      =======
Supplemental disclosure of noncash transactions:
   Unrealized gains on available-for-sale securities,
      net of deferred taxes of  $278 and $53                                         $    69      $   122
                                                                                     =======      =======
   Dividends declared but unpaid                                                     $   294      $   314
                                                                                     =======      =======


</TABLE>

See accompanying notes to financial statements.

                                       5

<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, that 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  Conversion").  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.  Material
    estimates that are  particularly  susceptible to significant  changes in the
    near-term relate to the  determination of the allowance for loan losses.  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
    September 30, 1999 and for the three month periods ending September 30, 1999
    and September  30, 1998 in conformity  with  generally  accepted  accounting
    principles.  Operating  results for the three month period ending  September
    30, 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.


                                       6
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


4) 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.  The ESOP was funded by a $40,000 cash  contribution from
    the Bank in  December  1995 and a loan  from the  Parent  in the  amount  of
    $2,690,677. The loan is secured by shares of stock purchased by the ESOP and
    is not guaranteed by the Bank.  Principal and interest payments on this loan
    are  funded  primarily  from   discretionary   contributions  by  the  Bank.
    Dividends,  if any,  paid on  shares  held by the  ESOP  may also be used to
    reduce the loan.  Dividends  on  unallocated  shares which 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
    three  month  period  ending  September  30,  1999  and  1998,  ESOP-related
    compensation expense totaled $37,000 and $45,000,  respectively. On December
    31, 1998, the Bank made a $207,000  contribution  to the ESOP,  representing
    the  normal  principal  payment  due for the  year  and the  application  of
    dividends on unallocated  shares to the principal  balance of the loan. This
    contribution  resulted  in  the  release  of  18,448  shares  to  individual
    participant  accounts. At June 30, 1999, a total of 167,285 shares have been
    released and allocated to participants and 44,315 shares remain unallocated,
    of which 16,840 shares are committed to be released on December 31, 1999.

    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,  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 three  months of fiscal 2000,  one MRP  participant
    forfeited  580  restricted,  non-vested  shares of the  Company's  stock and
    $4,500 of dividends  previously  paid to the  participant  on the restricted
    shares.  The  dividends  refunded  to the Bank  have  been  reflected  as an
    addition to common stock. The shares forfeited during the three months ended
    September 30, 1999, combined with shares previously forfeited,  leaves 6,358
    restricted shares unallocated under the MRP. Compensation expense of $66,000
    and $63,000 was recorded  during the three months ended  September  30, 1999
    and 1998, respectively.

                                       7
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements

5) 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.

6) 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.  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:

                                                           Three Months Ended
                                                              September 30,
                                                        ------------------------
                                                          1999            1998
                                                        ---------      ---------
Basic EPS denominator: weighted average
   number of common shares outstanding                  2,422,136      2,684,045
Dilutive effect of stock options and
   unvested stock grants                                   54,125          9,738
                                                        ---------      ---------
Diluted EPS denominator                                 2,476,261      2,693,783
                                                        =========      =========

                                       8
<PAGE>
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

Comparison  of Results of  Operations  for the Three Months Ended  September 30,
1999 and 1998

Summary
-------
For the quarter  ended  September 30, 1999,  the Company  recorded net income of
$253,000,  or $0.10 per share,  compared to $414,000, or $0.15 per share for the
same quarter last year.

Net Interest Income
-------------------
As shown in the  table  below,  tax-equivalent  net  interest  income  decreased
$13,000 to $1,306,000 for the quarter ended  September 30, 1999 from  $1,319,000
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>
                                                                           Three Months Ended September 30,
                                                                   ---------------------------------------------
                                                                                       1999
                                                                   ---------------------------------------------
                                                                                                        Average
                                                                     Average                            Yield/
                                                                     Balance         Interest           Rate(1)
                                                                     -------         --------           -------
Assets:                                                                       (dollars in thousands)
<S>                                                                <C>                 <C>                <C>
Interest-earning assets:
  Interest-bearing deposits                                        $    1,499          $   14             3.74%
  FHLB common stock                                                     1,036              20             7.72
  Taxable investment securities                                        24,490             379             6.19
  Tax-exempt investment securities (2)                                  4,642              91             7.84
  Loans receivable                                                    102,264           2,154             8.43
                                                                     --------          ------             ----
Total interest-earning assets                                         133,931           2,658             7.94
                                                                                       ------             ----
Non-interest-earning assets                                             6,324
                                                                   ----------
     Total                                                         $  140,255
                                                                   ==========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                                     98,478           1,091             4.40
  Borrowings                                                           18,181             261             5.74
                                                                      -------          ------             ----
Total interest-bearing liabilities                                    116,659           1,352             4.64
                                                                                       ------             ----
Non-interest-bearing liabilities                                        4,208
Stockholders' equity                                                   19,388
                                                                   ----------
     Total                                                         $  140,255
                                                                   ==========
Net interest income and interest rate spread                                           $1,306             3.30%
                                                                                       ======
Net interest-earning assets and net interest margin                $   17,272                             3.93%
                                                                   ==========
Ratio of interest-earning assets to interest-bearing liabilities                                        114.81%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                        Three Months Ended September 30,
                                                                   -----------------------------------------
                                                                                     1998
                                                                   -----------------------------------------
                                                                                                    Average
                                                                   Average                          Yield/
                                                                   Balance          Interest        Rate(1)
                                                                   -------          --------        -------
Assets:                                                                       (dollars in thousands)
<S>                                                                <C>                 <C>             <C>
Interest-earning assets:                                           $     1,438         $   22          6.12%
  Interest-bearing deposits                                              1,150             22          7.65
  FHLB common stock                                                     12,665            211          6.66
  Taxable investment securities                                          3,863             78          8.08
  Tax-exempt investment securities (2)                                 108,196          2,299          8.50
  Loans receivable                                                  ----------         ------          ----
                                                                       127,312          2,632          8.27
Total interest-earning assets                                                          ------          ----
                                                                         3,631
Non-interest-earning assets                                         ----------
                                                                    $  130,943
     Total                                                          ==========


Liabilities and Stockholders' Equity:
Interest-bearing liabilities:                                           86,089          1,042          4.80
  Deposit accounts                                                      19,022            271          5.70
  Borrowings                                                        ----------         ------          ----
                                                                       105,111          1,313          5.00
Total interest-bearing liabilities                                                     ------          ----
                                                                         4,187
Non-interest-bearing liabilities                                        21,645
Stockholders' equity                                                ----------
                                                                    $  130,943
     Total                                                          ==========
                                                                                      $ 1,319          3.27%
Net interest income and interest rate spread                                          =======
                                                                    $   22,201                         4.17%
Net interest-earning assets and net interest margin                 ==========
                                                                                                     121.12%
Ratio of interest-earning assets to interest-bearing liabilities

</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.

                                       9
<PAGE>
The  decrease  in net  interest  income is due to a lower  level of average  net
interest-earning  assets as well as a lower  average  yield  during the  quarter
ended September 30, 1999 compared to the same quarter last year. The increase in
average interest-earning assets from September 30, 1998 to September 30, 1999 is
due primarily to an increase of  $11,825,000  in taxable  investment  securities
mitigated  by a decline in loans  receivable  of  $5,932,000.  The  increase  in
interest-bearing  liabilities  is  primarily  due to a  $12,389,000  increase in
interest-bearing  deposits  from  September  30,  1998 to  September  30,  1999.
Interest  rate spread (on a  tax-equivalent  basis)  increased  to 3.30% for the
quarter ended  September 30, 1999 from 3.27% for the same quarter in 1998 due to
36 basis point decline in the average rate on total interest-bearing liabilities
mitigated  by  a  33  basis  point   decline  in  the  average  yield  on  total
interest-earning  assets.  Net interest margin  decreased to 3.93% for the three
months ended  September 30, 1999 from 4.17% for the three months ended September
30, 1998.

Provision for Loan Losses
-------------------------
The  provision  for loan losses for the three  months ended  September  30, 1999
totaled  $3,000  compared to $24,000 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  $73,000 for the quarter ended  September 30, 1999 compared
to $151,000  for the same  period in 1998.  The  general  increase in  long-term
interest  rates during the quarter  caused  losses of $153,000 on sales of loans
during the quarter  ended  September  30, 1999,  compared with gains on sales of
loans of $40,000  during the quarter ended  September 30, 1998. The loss on sale
of loans was offset by a $71,000 positive  lower-of-cost or market adjustment on
loans  held-for-sale  during the same  quarter.  A $26,000  increase in mortgage
servicing  fees from the first quarter ended  September 30, 1998 compared to the
first  quarter ended  September  30, 1999 also  mitigated the losses on sales of
mortgage loans.

Other Expenses
--------------
Other expenses  totaled  $995,000 for the three months ended  September 30, 1999
compared to $783,000 for the same period in 1998.  Most of the  remainder of the
decline in net income was caused by a $212,000 increase in total other expenses.
Approximately  $182,000 of the total increase in total other expenses was caused
by the opening of two new  branches  in Chapel Hill and Durham that  occurred in
April and June of 1999. Of the total $108,000 increase in compensation  expense,
$97,000 was attributable to the new branch openings.  The remaining increase was
due to normal compensation  increases and additional  administrative  support at
the Bank's  headquarters  and main branch in  Hillsborough.  $7,000 of the total
$27,000  increase in data and items  processing  expenses was due to the two new
branches,  with the  remainder  due to greater use of  technology  at the Bank's
headquarters  and main  branch in  Hillsborough.  $25,000  of the total  $30,000
increase in occupancy expense, and $15,000 of the total $23,000 in furniture and
equipment  expense was due to the two new branches.  Professional  fees declined
$20,000 due to a branch  consulting  study that was  performed  during the first
quarter of fiscal 1999. Of the total increase of $44,000 in other other expenses
$38,000 was due to the two new branches.


                                       10
<PAGE>
Income Tax Expense
------------------
Income tax  expense  was  $93,000  for the  quarter  ended  September  30,  1999
resulting  in an effective  rate of 26.9%  compared to $219,000 or 34.6% 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 quarter ended  September 30, 1999 as compared to
the same  quarter in 1998.  Interest  income from  Federal Home Loan Bank agency
investment securities is exempt from North Carolina income tax.


                                       11
<PAGE>
Financial Condition

CHANGES IN FINANCIAL CONDITION
------------------------------

Total assets  increased .06% to $140.2 million at September 30, 1999 compared to
$140.1 million at June 30, 1999.  Total  liabilities  increased  .29%,  with the
primary  contributors  being a 3.58% or $3.6 million  increase in total deposits
offset by a 16.72% or $3.4  million  decline in advances  from the Federal  Home
Loan Bank.

Total stockholders'  equity decreased $300,000 to $19.3 million at September 30,
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 $291,000 and change in unrealized
holding losses of $69,000 were the primary  factors  contributing to the decline
in stockholders' equity during the quarter ended September 30, 1998.  Mitigating
these  decreases  were  quarterly  net income of  $253,000,  and release of ESOP
shares  and  amortization  of  unearned  compensation  of $55,000  and  $74,000,
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
September 30, 1999 and June 30, 1999.



                                       12
<PAGE>
<TABLE>
<CAPTION>
                                                     September 30,      June 30
                                                         1999              1999
                                                             (in thousands)
<S>                                                    <C>             <C>
Total nonaccrual loans                                 $  1,050        $    973
Total restructured loans                                   --              --
                                                       --------        --------
     Total nonperforming loans                            1,050             973
Real estate owned                                          --              --
                                                       --------        --------
Total nonperforming assets                                1,050             973

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

Total risk assets                                      $  1,050        $    973
                                                       ========        ========

Nonperforming loans to total loans                         1.03%           0.97%
Nonperforming assets to total assets                       0.75%           0.69%
Risk assets to total assets                                0.75%           0.69%
Allowance for loan losses to:
   Total nonperforming assets                             1.07x           1.08x
   Total risk assets                                      1.07x           1.08x
Total assets                                           $140,178        $140,089
Total loans, net                                        101,748         100,717
Allowance for loan losses                                 1,127           1,054


</TABLE>
There were no significant changes in nonperforming  assets outstanding from June
30, 1999 to September  30, 1999.  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") were $117,000 at both
September 30, 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.


                                       13
<PAGE>
Provision and Allowance for Loan Losses
---------------------------------------

The following table summarizes the activity in the allowance for loan losses for
the three months ended September 30, 1999 and 1998, respectively.

<TABLE>
<CAPTION>
                                                          Three months ended
                                                              September 30,
                                                         1999              1998
                                                        -------          -------
<S>                                                     <C>              <C>
Balance at the beginning of period                      $ 1,054          $   951
Provision for loan losses                                     3               24
Recoveries                                                   75               30
Loans charged off                                            (5)            --
                                                        -------          -------
Balance at the end of period                            $ 1,127          $ 1,005
                                                        =======          =======
</TABLE>

At September  30, 1999,  the allowance for loan losses was 1.11% of total loans,
compared  to 1.05% of total  loans at June 30,  1999 and 0.97% of total loans at
September 30, 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 $3,000  provision  for loan losses for the three
months ended  September  30, 1999  compared to a $24,000  provision for the same
period in 1998.


                                       14
<PAGE>
YEAR 2000 ISSUE
---------------

The Company recognizes and is addressing 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
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.
     Since December of 1997 the Board has been apprised of the Company's efforts
     at their regular monthly meetings.  Employees are informed of the Company's
     Year 2000 efforts through 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.  A
     final Year 2000  mailing  will be sent to all  customers  of the Bank as of
     September 30, 1999.



                                       15
<PAGE>
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  also  all  known
     processes that could be impacted by microchip  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.

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  will be  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.

                                       16
<PAGE>
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, which
     is currently in process,  is 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 has
     reviewed  the  results of this test,  and this  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 this test, and this 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 June 30, 1999, with follow up testing to
     be performed as needed in the remainder of calendar year 1999.

5.   Implementation - this phase occurred when the Company's  vendors  certified
     their  present  systems  as Year 2000  compliant.  All of the  systems  the
     Company is presently  using have been  certified as Year 2000  compliant by
     the  respective  vendors.  On some  applications  the  Company  is  already
     entering dates greater than December 31, 1999 into their systems.  In these
     situations no adverse  events have been noted.  The Company has developed a
     Business  Resumption  Contingency plan for critical  processes in the event
     they 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 and tested by the Company in July of 1999.

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 quarter ended  September 30, 1998.  There were
no Year 2000 costs for the quarter ended September 30, 1999. The Year 2000 costs
do not include the time of Bank personnel related to the Year 2000 issue.  Based
on an analysis of projected  expenses  performed in the second quarter of fiscal
1999, the total cost of the Year 2000 project is currently estimated at $28,000.
Funding of the Year 2000 project costs has come from normal operating cash flow,
and the  expenses  associated  with the Year 2000  Issue  has and will  directly
reduce otherwise reported net income for the Company.


                                       17
<PAGE>
Management of the Company  believes that the potential  effects on the Company's
internal  operations of the Year 2000 Issue has been addressed prior to the Year
2000.  However,  notwithstanding  the time and  effort  expended  to date by the
Company and its vendors,  if required  modifications or conversions are not made
or are not  completed  on a timely  basis prior to the Year 2000,  the Year 2000
Issue could disrupt normal business operations. The most reasonably likely worst
case Year 2000  scenarios  foreseeable  at this time would  include  the Company
temporarily  not being able to process,  in some  combination,  various types of
customer  transactions.  This could  affect 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 has been to correct any systems or  processes  whose Year 2000
test results are not satisfactory prior to the Year 2000.  Nevertheless,  should
one of the most  reasonably  likely worst case scenarios occur in the Year 2000,
the Company,  as noted above, has formalized a contingency plan that would allow
for  limited  transactions,  including  the  ability  to  make  certain  deposit
withdrawals,  until the Year 2000 problems are fixed. The costs of the Year 2000
project and the date on which the Company plans to complete Year 2000 compliance
are 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.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved at the cost  disclosed or within the  timeframe  indicated,  and actual
results could differ materially from these plans.  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.


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 September 30,
1999, the Bank had $13.2 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.


                                       18
<PAGE>
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 September 30, 1999, the Company
had a cumulative one-year  liability-sensitive  gap position of $14.4 million or
10.75% 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
September  30, 1999,  management  believes  that its interest rate risk is at an
acceptable level.


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 September 30, 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  September 30, 1999 that  management  believes have
changed the Bank's category.


                                       19
<PAGE>
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 June 30, 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.



                                       20
<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.


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<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




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<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:    November 12, 1999              By:  /s/ D. Tyson Clayton
                                             --------------------
                                                 D. Tyson Clayton
                                                 President


Date:    November 12, 1999              By:  /s/ Thomas W. Wayne
                                             -------------------
                                                 Thomas W. Wayne
                                                 Vice President and principal
                                                 financial officer



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