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, 1997
                              ---------------------

                        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 3, 1997,  2,750,800 shares of the  registrant's  common stock, no
par value, were  outstanding.  The registrant has no other classes of securities
outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
                             PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                  CONSOLIDATED BALANCE SHEETS
                                                                  September 30,    June 30,
                                                                     1997            1997
                                                                  (unaudited)          *
                                                                   ---------      ---------                
                                                                 (in thousands, except shares)
<S>                                                                <C>            <C>
                      Assets
Cash .........................................................     $     893      $     879
Interest-bearing deposits in other financial institutions ....         1,828          3,766
Investment securities:
   Available-for-sale ........................................        12,186         10,866
   Held-to-maturity ..........................................         3,327          3,341
Loans receivable (net of allowance for loan losses of $854 and
   $796 at September 30, 1997 and June 30, 1997, respectively)       104,260        100,173
Federal Home Loan Bank stock, at cost ........................           978            920
Premises and equipment .......................................         1,182          1,205
Prepaid expenses and other assets ............................         1,890          1,611
                                                                   ---------      ---------
          Total assets .......................................     $ 126,544      $ 122,761
                                                                   =========      =========
          Liabilities and Stockholders' Equity
                      Liabilities
Deposits:
   Demand, non-interest bearing ..............................         2,301          2,074
   Savings, NOW and MMDA .....................................        29,084         28,594
   Certificates of Deposit ...................................        53,507         54,192
                                                                   ---------      ---------
                                                                      84,892         84,860
Advances from the Federal Home Loan Bank .....................        19,550         16,500
Accrued expenses and other liabilities .......................         1,311            985
                                                                   ---------      ---------
     Total liabilities .......................................       105,753        102,345
                                                                   ---------      ---------
                              Stockholders' Equity

Preferred stock, no par value, 5,000,000 shares authorized;
   none issued ...............................................          --             --
Common stock, no par value, 20,000,000 shares authorized;
   2,750,800 shares issued and outstanding ...................         9,145          9,143
Unearned ESOP shares .........................................          (859)          (933)
Unamortized deferred compensation ............................        (1,167)        (1,269)
Unallocated restricted stock .................................           (58)           (21)
Retained earnings, substantially restricted (note 6) .........        13,731         13,580
Unrealized holding losses on available-for-sale securities ...            (1)           (84)
                                                                   ---------      ---------
      Total stockholders' equity .............................        20,791         20,416
                                                                   ---------      ---------

          Total liabilities and stockholders' equity .........     $ 126,544      $ 122,761
                                                                   =========      =========
</TABLE>
* Derived from audited financial statements
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                 PIEDMONT BANCORP, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF INCOME (unaudited) 

                                                                           Three Months Ended
                                                                              September 30,
                                                                          -------------------- 
                                                                           1997         1996
                                                                         -------      -------                                       
                                                                 (in thousands, except per share data)
<S>                                                                       <C>          <C>
Interest income:
   Interest on loans ...............................................      $ 2,187      $ 1,970           
   Interest on deposits in other financial institutions ............           16           16
   Interest and dividends on investment securities:
      Taxable ......................................................          203          323
      Non-taxable ..................................................           48          154
                                                                          -------      -------
            Total interest income ..................................        2,454        2,463
                                                                          -------      -------
Interest expense:
   Interest on deposits ............................................          993          859
   Interest on borrowings ..........................................          266          252
                                                                          -------      -------
            Total interest expense .................................        1,259        1,111
                                                                          -------      -------
Net interest income ................................................        1,195        1,352
Provision for loan losses ..........................................           24           21
                                                                          -------      -------
            Net interest income after provision for loan losses ....        1,171        1,331
                                                                          -------      -------
Other income:
   Customer service and other fees .................................           52           51
   Mortgage loan servicing fees ....................................           21           22
   Gain (loss) on sale of investment securities ....................            6          (26)
   Lower-of-cost or market adjustment on loans held-for-sale .......           33           37
   Other ...........................................................           25           18
                                                                          -------      -------
            Total other income .....................................          137          102
                                                                          -------      -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 PIEDMONT BANCORP, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF INCOME (unaudited) 

                                                                           Three Months Ended
                                                                              September 30,
                                                                          -------------------- 
                                                                           1997         1996
                                                                         -------      -------                 
                                                                 (in thousands, except per share data)
<S>                                                                       <C>          <C>
Other expenses:
   SAIF recapitalization assessment ................................         --            487
   Compensation and fringe benefits (note 5) .......................          423          416
   Data and items processing .......................................           55           62
   Deposit insurance premiums ......................................           13           45
   Occupancy expense ...............................................           25           30
   Furniture and equipment expense .................................           25           30
   Professional fees ...............................................           37           31
   Other ...........................................................           93          113
                                                                          -------      -------
            Total other expenses ...................................          671        1,214
                                                                          -------      -------
            Income before income tax expense .......................          637          219
Income tax expense .................................................          223           36
                                                                          -------      -------
                  Net income .......................................      $   414      $   183
                                                                          =======      =======

Net income per share (notes 2 and 7) ...............................      $  0.15      $  0.07
                                                                          =======      =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                     STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)

                                                                                         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, 1996 .........................      2,645,000      $  25,398       $  (2,552)      $    --         $    --   
      Net income .................................           --             --              --              --              --   
      Issuance of restricted stock ...............        105,800          1,587            --            (1,587)           --   
      Release of ESOP shares .....................           --             --               107            --              --   
      Amortization of unearned compensation ......           --             --              --                26            --      
      Cash dividends declared ....................           --             --              --              --              --   
      Change in unrealized holding gains (losses),
         net of income taxes......................           --             --              --              --              --   
                                                        ---------      ---------       ---------       ---------       ---------
Balance at September 30, 1996 ....................      2,750,800      $  26,985       $  (2,445)      $  (1,561)      $    --   
                                                        =========      =========       =========       =========       =========    


Balance at June 30, 1997 .........................      2,750,800      $   9,143       $    (933)      $  (1,269)      $     (21)
      Net income .................................           --             --              --              --              --   
      Release of ESOP shares .....................           --              (12)             74            --              --   
      Amortization of unearned compensation ......           --             --              --                65            --   
      Forfeiture of restricted stock .............           --                             --                37             (37) 
      Tax benefit of dividends on restricted stock           --               (3)           --              --              --   
      Cash dividends declared, net of
         forfeited dividends on restricted stock..           --               17            --              --              --   
      Change in unrealized holding gains (losses),
         net of income taxes......................           --             --              --              --              --   
                                                        ---------      ---------       ---------       ---------       ---------
Balance at September 30, 1997 ....................      2,750,800      $   9,145       $    (859)      $  (1,167)      $     (58)
                                                        =========      =========       =========       =========       ========= 

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                     STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
                                           (continued)


                                                                         Unrealized       Total              
                                                         Retained      holding gains   Stockholders' 
                                                         Earnings         (losses)        Equity       
                                                         --------         --------        ------       
<S>                                                     <C>             <C>             <C>
Balance at June 30, 1996 .........................      $  14,783       $    (579)      $  37,050
      Net income .................................            183            --               183
      Issuance of restricted stock ...............           --              --              --
      Release of ESOP shares .....................           --              --               107
      Amortization of unearned compensation ......           --              --                26
      Cash dividends declared ....................           (305)           --              (305)
      Change in unrealized holding gains (losses),
         net of income taxes......................           --              (175)           (175)
                                                        ---------       ---------       ---------
Balance at September 30, 1996 ....................      $  14,661       $    (404)      $  37,236
                                                        =========       =========       =========


Balance at June 30, 1997 .........................      $  13,580       $     (84)      $  20,416
      Net income .................................            414            --               414
      Release of ESOP shares .....................           --              --                62
      Amortization of unearned compensation ......           --              --                65
      Forfeiture of restricted stock .............           --              --               --
      Tax benefit of dividends on restricted stock           --              --                (3)
      Cash dividends declared, net of
         forfeited dividends on restricted stock .           (263)           --              (246)
      Change in unrealized holding gains (losses),
         net of income taxes......................           --                83              83
                                                        ---------       ---------       ---------                                   
Balance at September 30, 1997 ....................      $  13,731       $      (1)      $  20,791
                                                        =========       =========       =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                   PIEDMONT BANCORP, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
                                                                                       Three Months Ended
                                                                                          September 30,
                                                                                     --------------------  
                                                                                       1997         1996
                                                                                     -------      -------
<S>                                                                                  <C>          <C>
Operating activities:
   Net income ..................................................................     $   414      $   183
   Adjustments to reconcile net income to net cash provided
   (used) by operating activities
         Depreciation ..........................................................          25           24
         Net amortization (accretion) ..........................................          26           39
         Provision for loan losses .............................................          24           21
         Net (gain) loss on sale of investments and mortgage-backed securities .          (6)          26
         Release of ESOP shares ................................................          62          107
         Compensation earned under MRP .........................................          65           26
         Net decrease (increase) in mortgage loans held for sale ...............        (609)           3
         Increase in other assets ..............................................        (326)        (370)
         Increase in other liabilities .........................................         330          637
                                                                                     -------      -------
               Net cash provided by operating activities .......................           5          696
                                                                                     -------      -------
Investing activities:
   Net increase in loans held for investment ...................................      (3,519)      (3,354)
   Principal collected on mortgage-backed securities ...........................          95          164
   Purchases of investment securities classified as available-for-sale .........      (2,782)        --
   Proceeds from sales of investment securities classified as available-for-sale       1,508        1,115
   Proceeds from call of investment securities classified as held-to-maturity ..          10         --
   Purchases of FHLB Stock .....................................................         (58)        --
   Purchases of premises and equipment .........................................          (2)          (3)
                                                                                     -------      -------
               Net cash used by investing activities ...........................      (4,748)      (2,078)
                                                                                     -------      -------
Financing activities:
   Net increase (decrease) in time deposits ....................................        (685)         556
   Net increase in other deposits ..............................................         717        1,964
   Proceeds from borrowings ....................................................       6,050        5,000
   Repayments of borrowings ....................................................      (3,000)      (5,000)
   Cash dividends paid to shareholders .........................................        (263)        (292)
                                                                                     -------      -------
               Net cash provided by financing activities .......................       2,819        2,228
                                                                                     -------      -------
               Increase (decrease) in cash and cash equivalents ................      (1,924)         846
Cash and cash equivalents at beginning of period ...............................       4,645        2,670
                                                                                     -------      -------
Cash and cash equivalents at end of period .....................................     $ 2,721      $ 3,516
                                                                                    =======      =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   PIEDMONT BANCORP, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
                                               (continued)
                                                                                       Three Months Ended
                                                                                          September 30,
                                                                                     --------------------  
                                                                                       1997         1996
                                                                                     -------      -------
<S>                                                                                  <C>          <C>
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest .................................................................     $ 1,235      $ 1,113
                                                                                     =======      =======
      Income taxes .............................................................     $    45      $    79
                                                                                     =======      =======
Supplemental disclosure of noncash transactions:
   Unrealized gains on available-for-sale securities, net of deferred taxes
      of $53 and $113 ..........................................................     $    83      $   175
                                                                                     =======      =======
   Dividends declared but unpaid ...............................................     $   263      $   305
                                                                                     =======      =======

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


1) Organization and Operations

    In December,  1995, pursuant to a Plan of Conversion approved by its members
    and regulators,  Hillsborough  Savings Bank,  Inc., SSB (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 (the  "Conversion")  and became a  wholly-owned  subsidiary of Piedmont
    Bancorp,  Inc., (the "Parent"),  a holding company formed in connection with
    the Conversion.  The Bank is primarily  engaged in the business of obtaining
    savings  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
    September  30, 1997 and for the three month period ended  September 30, 1997
    and September  30, 1996 in conformity  with  generally  accepted  accounting
    principles. Operating results for the three month period ended September 30,
    1997 are not necessarily  indicative of the results that may be expected for
    the fiscal year ending June 30, 1998.

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) Adoption of Statements of Financial Accounting Standards ("SFAS")

    In February 1997, the Financial  Accounting Standards Board issued Statement
    of  Financial  Accounting  Standards  No. 128 ("SFAS  128"),  "Earnings  per
    Share". SFAS 128 establishes  standards of computing and presenting earnings
    per share (EPS) and applies to entities  with  publicly held common stock or
    potential  common  stock.  This  statement   simplifies  the  standards  for
    computing  earnings  per  share  previously  found in APB  Opinion  No.  15,
    "Earnings  per  Share",  and makes  them  comparable  to  international  EPS
    standards.  It replaces the  presentation of primary EPS with a presentation
    of basic EPS. It also requires dual presentation of basic and diluted EPS on
    the face of the income  statement  for all  entities  with  complex  capital
    structures and requires a reconciliation of the numerator and denominator of
    the basic EPS  computation  to the numerator and  denominator of the diluted
    EPS computation.  SFAS 128 is effective for financial  statements issued for
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY 
                   Notes to Consolidated Financial Statements


4) Adoption of Statements of Financial Accounting Standards ("SFAS"), continued

    periods ending after December 15, 1997 and requires restatement of all prior
    period EPS data  presented.  The  Company  plans to adopt SFAS 128 in fiscal
    year 1998  without  any  significant  impact on its  consolidated  financial
    statements.

    In  February  1997,  the  FASB  issued  Statement  of  Financial  Accounting
    Standards No. 129 ("SFAS 129"),  "Disclosure  of  Information  about Capital
    Structure".  SFAS 129 establishes standards for disclosing information about
    an entity's capital structure and is applicable to all entities. It contains
    no change in  disclosure  requirements  for  entities  that were  previously
    subject to the requirements of APB Opinion No. 10, "Omnibus Opinion - 1966",
    APB Opinion  No. 15,  "Earnings  Per  Share",  and  Statement  of  Financial
    Accounting Standards No. 47, "Disclosure of Long-Term Obligations". SFAS 129
    is effective for financial  statements for periods ending after December 15,
    1997. The Company plans to adopt SFAS 129 in fiscal year 1998 with no impact
    on its consolidated financial statements.

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.  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  periods  ended  September  30,  1997  and  1996,  ESOP-related
    compensation  expense  totaled  $61,900  and  $107,000,   respectively.   At
    September  30,  1997,  a total of  128,919  shares  have been  released  and
    allocated  to   participants   under  the  Plan  and  82,681  shares  remain
    unallocated,  of which  19,918 are  committed to be released on December 31,
    1997.

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

5) Employee and Director Benefit Plans, continued

    years.  During  the first  quarter  of  fiscal  1998,  two MRP  participants
    forfeited a total of 2,424  restricted,  non-vested  shares of the Company's
    stock and $18,000 of dividends  previously paid to the participants on those
    restricted  shares.  The forfeited shares remain unallocated as of September
    30,  1997.  The  dividends  refunded to the Bank have been  reflected  as an
    addition to equity in the same ratio the dividends were  originally  paid to
    the former  participants.  Compensation  expense of $65,000  and $26,000 was
    recorded  during the three month periods ended  September 30, 1997 and 1996,
    respectively.

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.

7) Earnings per Share

    Earnings  per  common  share of  $0.15  and  $0.07  for the  quarters  ended
    September 30, 1997 and 1996,  respectively,  were calculated by dividing net
    income  of  $414,000  and  $183,000  for  the  respective  quarters  by  the
    weighted-average  number of common and common equivalent shares  outstanding
    of   2,713,220   and   2,557,739,   respectively.   For   purposes   of  the
    weighted-average number of common and common-equivalent  shares outstanding,
    common  stock  equivalents  consist of stock  options.  The number of shares
    purchased by the employee stock ownership plan which have not been allocated
    or  committed to be released to  participant  accounts are not assumed to be
    outstanding.
<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, 1997 and 1996

Summary
For the quarter  ended  September 30, 1997,  the Company  recorded net income of
$414,000,  or $0.15 per share,  compared to $183,000, or $0.07 per share for the
same quarter last year.  Earnings for the quarter ended  September 30, 1996 were
adversely impacted by a special $487,000  assessment paid to the Federal Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund  ("SAIF").  Without the effect of the  SAIF-assessment,  net income for the
quarter ended September 30, 1996 would have been $496,000, or $0.19 per share.

Net Interest Income
As shown in the  table  below,  tax-equivalent  net  interest  income  decreased
$210,000 to $1,225,000 for the quarter ended  September 30, 1997 from $1,435,000
for the same period in 1996. 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.
<TABLE>
<CAPTION>
                                                                                  Three Months Ended September 30,
                                                         --------------------------------------------------------------------------
                                                                         1997                                     1996
                                                         -------------------------------------   ----------------------------------
                                                                                      Average                               Average
                                                          Average                     Yield/     Average                    Yield/ 
                                                          Balance       Interest      Rate (1)   Balance       Interest     Rate (1)
                                                          -------       --------      --------   -------       --------     --------

<S>                                                      <C>           <C>            <C>       <C>           <C>          <C>
Assets:
Interest-earning assets:
  Interest-bearing deposits ........................     $  1,589      $     16        3.99%    $  1,642      $     16      3.87%

  FHLB common stock ................................          939            17        7.18          897            16      7.08

  Taxable investment securities ....................       11,408           186        6.52       17,715           298      6.73
  Tax-exempt investment securities (2) .............        3,900            78        8.01       13,182           246      7.46

  Loans receivable .................................      103,065         2,187        8.48       93,110         1,970      8.45
                                                         --------      --------        ----     --------      --------      ----
Total interest-earning assets ......................      120,901         2,484        8.21      126,546         2,546      8.04

Non-interest-earning assets ........................        3,046                                  3,277
                                                         --------                               --------
     Total .........................................     $123,947                               $129,823
                                                         ========                               ========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                  Three Months Ended September 30,
                                                         --------------------------------------------------------------------------
                                                                         1997                                     1996
                                                         -------------------------------------   ----------------------------------
                                                                                      Average                               Average
                                                          Average                     Yield/     Average                    Yield/ 
                                                          Balance       Interest      Rate (1)   Balance       Interest     Rate (1)
                                                          -------       --------      --------   -------       --------     --------

<S>                                                      <C>           <C>            <C>       <C>           <C>          <C>
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts .................................     $ 82,229           993        4.81     $ 72,321           859      4.72

  Borrowings .......................................       17,574           266        6.05       16,889           252      5.97
                                                         --------      --------        ----     --------      --------      ----
Total interest-bearing liabilities .................       99,803         1,259        5.03       89,120         1,111      4.96

Non-interest-bearing liabilities ...................        3,367                                  3,241
Stockholders' equity ...............................       20,777                                 37,462
                                                         --------                               --------
     Total .........................................     $123,947                               $129,823
                                                         --------                               --------
Net interest income and interest rate spread .......                   $  1,225        3.18%                  $  1,435      3.08%
                                                                       ========                               ========
Net interest-earning assets and net interest margin      $ 21,098                      4.05%    $ 37,426                    4.53%
                                                         ========                               ========
Ratio of interest-earning assets to interest-bearing
  liabilities ......................................                                 121.14%                              142.00%
-------------
</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
    7.50%,  respectively,  and reduced by the nondeductible  portion of interest
    expense.


The decrease in net interest income is primarily due to a lower level of average
net interest-earning assets during the quarter ended September 30, 1997 compared
to the same quarter last year. The decline in interest-earning  assets is due to
the  sale of  investment  securities  in order to pay the  special  dividend  in
December 1996.  Average investment  securities  decreased by $15.6 million while
average  loans  increased  by $10.0  million  over the same  quarter  last year.
Interest  rate spread (on a  tax-equivalent  basis)  increased  to 3.18% for the
quarter ended  September 30, 1997 from 3.08% for the same quarter in 1996 due to
an increase in the weighted  average yield on  interest-earning  assets due to a
shift in the mix toward higher earning assets,  principally  loans.  Despite the
increase in interest  rate  spread,  net  interest  margin (on a  tax-equivalent
basis)  decreased to 4.05% for the quarter  ended  September 30, 1997 from 4.53%
for the quarter ended  September 30, 1996.  Net interest  margin for the quarter
ended  September 30, 1996  reflects  return on  conversion  proceeds  which were
invested in loans and investment securities. Net interest margin for the quarter
ending  September 30, 1997 reflects the  liquidation  of those  interest-earning
assets to fund the special dividend paid on December 6, 1996 requiring increased
liability funding of asset growth.
<PAGE>
Provision for Loan Losses
The  provision  for loan losses for the three  months ended  September  30, 1997
totaled  $24,000  compared to $21,000 for the same period in 1996. 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  $137,000 for the quarter ended September 30, 1997 compared
to $102,000  for the same  period in 1996.  A large  portion of the  increase in
other  income is due to a $6,000 net gain on the sale of  investment  securities
during the quarter  ended  September  30, 1997 compared to a $26,000 net loss on
the sale of investment securities for the same period in 1996. Also contributing
to the increase in other income in the current year is approximately  $12,000 of
rental income received from rental of the former branch facility that was closed
in December, 1996.

Other Expenses
Other expenses  totaled  $671,000 for the three months ended  September 30, 1997
compared to  $1,214,000  for the same period in 1996.  Expenses  for the quarter
ended  September  30, 1996 included the $487,000  SAIF-assessment.  Without this
assessment,  expenses  would have  totaled  $727,000 for the 1996  quarter.  The
decrease  in other  expenses  is  attributable  to a  $32,000  decrease  in FDIC
insurance  premiums  from $45,000 for the quarter  ended  September  30, 1996 to
$13,000   for  the  quarter   ended   September   30,   1997,   resulting   from
recapitalization of the SAIF in the prior year. In addition,  due to a decreased
equity  level after  payment of the $7.00  special  dividend  in December  1996,
franchise tax expense  decreased $11,000 from $24,000 for the three months ended
September 30, 1996 to $13,000 for the current  quarter.

Income Tax Expense
The  Company  recorded  income tax expense of  $223,000  for the  quarter  ended
September  30,  1997.  The Company  recorded  income tax expense for the quarter
ended  September 30, 1996 of $36,000 which reflects the decline in income before
income tax expense.

Financial Condition

CHANGES IN FINANCIAL CONDITION

Total  assets  increased  to $126.5  million at  September  30, 1997 from $122.8
million at June 30, 1997.  During the quarter ended  September  30, 1997,  loans
grew by $4.1 million to $104.3  million at September  30, 1997.  Loan growth was
funded largely with advances from the Federal Home Loan Bank which  increased by
$3.1 million to $19.6  million at September  30, 1997 from $16.5 million at June
30, 1997.

Stockholders'  equity  increased  from $20.4  million at June 30,  1997 to $20.8
million at September 30, 1997. As discussed in note 5 of this report, during the
quarter  ended  September  30,  1997,  two  MRP  participants   forfeited  2,424
restricted,  non-vested  shares of the Company's  stock and $18,000 of dividends
previously paid to the  participants on those restricted  shares.  The forfeited
shares remain  unallocated as of September 30, 1997.  The dividends  refunded to
the Bank have been  reflected  as an  addition  to equity in the same  ratio the
dividends were originally paid to the former participants.
<PAGE>
ASSET QUALITY

Nonperforming Assets and Risk Assets
Nonperforming  assets  include  nonaccrual  loans,  restructured  loans and real
estate owned. The following table presents  information on nonperforming  assets
and loans  contractually  past due but still  accruing at September 30, 1997 and
June 30, 1997
<TABLE>
<CAPTION>
                                              September 30,   June 30,
                                                 1997          1997
                                               --------      --------
                                                    (in thousands)
<S>                                            <C>           <C>
Total nonaccrual loans ...................     $    803      $    803
Total restructured loans .................           --            --
                                               --------      --------
     Total nonperforming loans ...........          803           803
Real estate owned ........................           --            --
                                               --------      --------
     Total nonperforming assets ..........     $    803      $    803
Accruing loans, delinquent 90 days or more          321           244
                                               --------      --------
     Total risk assets ...................     $  1,124      $  1,047
                                               ========      ========

Nonperforming loans to total loans .......         0.77%         0.80%
Nonperforming assets to total assets .....         0.63          0.65
Risk assets to total assets ..............         0.89          0.85
Allowance for loan losses to:
    Total nonperforming assets ...........         1.06x         0.99x
    Total risk assets ....................         0.76x         0.76x

Total assets .............................     $126,544      $122,761
Total loans, net .........................      104,260       100,173
Allowance for loan losses ................          854           796
</TABLE>

There were no significant changes in nonperforming  assets outstanding from June
30, 1997 to September  30, 1997.  Management  has  reviewed the  collateral  for
nonperforming  loans and believes that  collateral  values related to such loans
exceed the loan balances.  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 months ended September 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
                                                 Three months ended
                                                    September 30,
                                              -----------------------
                                               1997              1996
                                               ----              ----
<S>                                           <C>               <C>
Balance at the beginning of period            $ 796             $ 608
Provision for loan losses                        24                21
Recoveries                                       34                 -
Loans charged off                                -                  -
                                              -----             -----
Balance at the end of period                  $ 854             $ 629
                                              -----             ----- 
</TABLE>

At September  30, 1997,  the allowance for loan losses was 0.81% of total loans,
compared  to 0.79% of total  loans at June 30,  1997 and 0.66% of total loans at
September 30, 1996.

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  material and (1)
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 $24,000  provision for loan losses for the three
months ended  September  30, 1997  compared to a $21,000  provision for the same
period in 1996.


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,
1997, the Bank had $5.5 million of credit available from the FHLB which 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.
<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, 1997, the Company
had a cumulative  one year  liability-sensitive  gap position of $1.0 million or
0.82% of interest-earning  assets. A liability-sensitive  gap position generally
indicates  that  net  interest   income  would  increase  in  a  declining  rate
environment and would experience downward pressure in a rising rate environment.
The Company had a cumulative one year  liability-sensitive  gap position of $5.6
million   or  2.24%  of   interest-earning   assets  at  June  30,   1997.   The
liability-sensitive  gap  position is  primarily  attributable  to the growth of
customer  deposits  with  maturities  of less than one year.  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, 1997,  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, 1997, the Bank was in compliance with all of the aforementioned
capital requirements.

As of September 30, 1997, 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) of 10% and
5%,  respectively.  There have been no events or conditions  since  notification
that management believes have changed the Bank's category.
<PAGE>
Current Accounting Issues

In June 1997, the FASB issued  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 income separately
from retained earnings and additional paid-in-capital in the equity section of a
statement  of  financial  position.  SFAS  130 is  effective  for  fiscal  years
beginning after December 15, 1997.  Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company plans
to adopt  SFAS 130 in fiscal  year 1999 and will make the  required  disclosures
upon adoption.

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
131 ("SFAS  131"),  "Disclosures  about  Segments of an  Enterprise  and Related
Information".  SFAS 131 establishes standards for the way that public businesses
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments  in  interim  financial   reports  issued  to  shareholders.   It  also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997 and in the initial year
of application, comparative information for earlier years is to be restated. The
Company  plans to adopt SFAS 131 in fiscal  year 1999  without  any  significant
impact on its consolidated financial statements.
<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:    November 3, 1997                   By:  /s/ D. Tyson Clayton
                                                 --------------------
                                                 D. Tyson Clayton
                                                 President


Date:    November 3, 1997                   By:  /s/ Eric J. Schuppenhauer
                                                 -------------------------
                                                 Eric J. Schuppenhauer
                                                 Vice President and principal
                                                 financial officer