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

                                    FORM 10-Q

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

                         For the quarterly period ended
                                December 31, 1998

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

                        Commission File Number 001-14070

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

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

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

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

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

                                [ X ] Yes [  ] No
 
         As of February 1, 1998,  2,605,533  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
                                         December 31, June 30,
                                               1998 1998
                                             (unaudited) *
                                     (in thousands, except shares)

<S>                                                                           <C>            <C>      
                                     Assets
Cash                                                                          $     609      $     823
Interest-bearing deposits in other financial institutions                         2,316          1,821
Investment securities:
   Available-for-sale                                                            14,768         13,775
   Held-to-maturity                                                               3,212          3,250
Loans receivable (net of allowance for loan losses of $1,029 and
   $951 at December 31, 1998 and June 30, 1998, respectively)                   103,700        106,500
Federal Home Loan Bank stock, at cost                                             1,152          1,152
Premises and equipment                                                            1,698          1,414
Prepaid expenses and other assets                                                 1,789          1,806
                                                                              ---------      ---------
          Total assets                                                        $ 129,244      $ 130,541
                                                                              =========      =========
                      Liabilities and Stockholders' Equity
                                   Liabilities

Deposits:
   Demand, non-interest bearing                                                   3,155          2,844
   Savings, NOW and MMDA                                                         35,546         32,800
   Certificates of Deposit                                                       53,199         54,196
                                                                              ---------      ---------
                                                                                 91,900         89,840
Advances from the Federal Home Loan Bank                                         15,709         18,000
Accrued expenses and other liabilities                                              941          1,095
                                                                              ---------      ---------
     Total liabilities                                                          108,550        108,935
                                                                              ---------      ---------
                              Stockholders' Equity

Preferred stock, no par value, 5,000,000 shares authorized;
   none issued                                                                     --             --
Common stock, no par value, 20,000,000 shares authorized; 2,615,933 and
   2,750,800 shares issued and outstanding at September 30, 1998 and June
   30, 1998, respectively                                                         7,813          9,121
Unearned ESOP shares                                                               (559)          (679)
Unamortized deferred compensation                                                  (793)          (953)
Unallocated restricted stock                                                        (87)           (61)
Retained earnings, substantially restricted (note 6)                             14,230         14,101
Accumulated other comprehensive income                                               90             77
                                                                              ---------      ---------
      Total stockholders' equity                                                 20,694         21,606
                                                                              ---------      ---------
          Total liabilities and stockholders' equity                          $ 129,244      $ 130,541
                                                                              =========      =========
</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     Six Months Ended
                                                                       December 31,          December 31,
                                                                    -----------------     ----------------- 
                                                                     1998       1997       1998       1997
                                                                    ------     ------     ------     ------
                                                                     (in thousands, except per share data)
<S>                                                                 <C>        <C>        <C>        <C>   
Interest income:
   Interest on loans                                                $2,188     $2,245     $4,487     $4,432
   Interest on deposits in other financial institutions                 21         14         43         30
   Interest and dividends on investment securities:
      Taxable                                                          224        208        457        411
      Non-taxable                                                       48         49         96         97
                                                                    ------     ------     ------     ------
            Total interest income                                    2,481      2,516      5,083      4,970
                                                                    ------     ------     ------     ------
Interest expense:
   Interest on deposits                                              1,029        992      2,071      1,985
   Interest on borrowings                                              230        301        501        567
                                                                    ------     ------     ------     ------
            Total interest expense                                   1,259      1,293      2,572      2,552
                                                                    ------     ------     ------     ------
Net interest income                                                  1,222      1,223      2,511      2,418
Provision for loan losses                                                3         24         27         48
                                                                    ------     ------     ------     ------
            Net interest income after provision for loan losses      1,219      1,199      2,484      2,370
                                                                    ------     ------     ------     ------
Other income:
   Customer service and other fees                                      53         52        104        104
   Mortgage loan servicing fees                                          1         18          7         39
   Gain on sale of investment securities                                 5         --          5          6
   Lower-of-cost or market adjustment on loans held-for-sale            --          3         --         36
   Gain on sale of loans                                                23         --         63         --
   Stock and mutual fund commissions                                    20         --         44         --
   Other                                                                26         23         56         48
                                                                    ------     ------     ------     ------
            Total other income                                         128         96        279        233
                                                                    ------     ------     ------     ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                CONSOLIDATED STATEMENTS OF INCOME (unaudited)
                                                (continued)


                                                                   Three Months Ended     Six Months Ended
                                                                       December 31,          December 31,
                                                                    -----------------     ----------------- 
                                                                     1998       1997       1998       1997
                                                                    ------     ------     ------     ------
                                                                     (in thousands, except per share data)
<S>                                                                 <C>        <C>        <C>        <C>   
Other expenses:
   Compensation and fringe benefits (note 5)                           473        402        930        825
   Data and items processing                                            69         61        156        116
   Deposit insurance premiums                                           13         13         26         26
   Occupancy expense                                                    29         27         55         52
   Furniture and equipment expense                                      46         26         89         51
   Professional fees                                                    24         56         67         93
   Other                                                               175        145        289        238
                                                                    ------     ------     ------     ------
            Total other expenses                                       829        730      1,612      1,401
                                                                    ------     ------     ------     ------
            Income before income tax expense                           518        565      1,151      1,202
Income tax expense                                                     181        202        400        425
                                                                    ------     ------     ------     ------
                  Net income                                        $  337     $  363     $  751     $  777
                                                                    ======     ======     ======     ======

Net income per share - basic (note 7)                               $ 0.13     $ 0.13     $ 0.28     $ 0.29
                                                                    ======     ======     ======     ======
Net income per share - diluted (note 7)                             $ 0.13     $ 0.13     $ 0.28     $ 0.29
                                                                    ======     ======     ======     ======
</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, 1997                                2,750,800      $    9,143      $     (933)     $   (1,269)     $      (21)
      Net income                                             --              --              --              --              --   
      Release of ESOP shares                                 --               (24)            135            --              --   
      Amortization of unearned compensation                  --              --              --               123            --   
      Forfeiture of restricted stock                         --              --              --               136            (136)
      Allocation of restricted stock                         --               (11)           --               (95)            106
      Tax benefit of dividends on restricted stock           --                (7)           --              --              --   
      Cash dividends declared, net of
         forfeited dividends on restricted stock             --                32            --              --              --   
      Change in unrealized holding gains (losses),
         net of income taxes                                 --              --              --              --              --   
                                                       ----------      ----------      ----------      ----------      ----------
Balance at December 31, 1997                            2,750,800      $    9,133      $     (798)     $   (1,105)     $      (51)
                                                       ==========      ==========      ==========      ==========      ==========

Balance at June 30, 1998                                2,750,800      $    9,121      $     (679)     $     (953)     $      (61)
      Net income                                             --              --              --              --              --   
      Purchase and retirement of common stock            (134,867)         (1,291)           --              --              --   
      Release of ESOP shares                                 --               (30)            120            --              --   
      Amortization of unearned compensation                  --              --              --               134            --   
      Forfeiture of restricted stock                         --              --              --                26             (26)
      Tax benefit of dividends on restricted stock           --                 1            --              --              --   
      Cash dividends declared, net of
         forfeited dividends on restricted stock             --                12            --              --              --   
      Change in unrealized holding gains (losses),
         net of income taxes                                 --              --              --              --              --   
                                                       ----------      ----------      ----------      ----------      ----------
Balance at December 31, 1998                            2,615,933      $    7,813      $     (559)     $     (793)     $      (87)
                                                       ==========      ==========      ==========      ==========      ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                     STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
                                            (continued)



                                                       Accumulated                                                         
                                                          other                            Total                                 
                                                        Retained      comprehensive   Stockholders'   
                                                        Earnings          income          Equity  
                                                       ----------      ----------      ----------
<S>                                                    <C>             <C>             <C>       
Balance at June 30, 1997                               $   13,580      $      (84)     $   20,416
      Net income                                              777            --               777
      Release of ESOP shares                                 --              --               111
      Amortization of unearned compensation                  --              --               123
      Forfeiture of restricted stock                         --              --              --
      Allocation of restricted stock                         --              --              --
      Tax benefit of dividends on restricted stock           --              --                (7)
      Cash dividends declared, net of
         forfeited dividends on restricted stock             (529)           --              (497)
      Change in unrealized holding gains (losses),
         net of income taxes                                 --               136             136
                                                       ----------      ----------      ----------
Balance at December 31, 1997                           $   13,828      $       52      $   21,059
                                                       ==========      ==========      ==========

Balance at June 30, 1998                               $   14,101      $       77      $   21,606
      Net income                                              751            --               751
      Purchase and retirement of common stock                --              --            (1,291)
      Release of ESOP shares                                 --              --                90
      Amortization of unearned compensation                  --              --               134
      Forfeiture of restricted stock                         --              --              --
      Tax benefit of dividends on restricted stock           --              --                 1
      Cash dividends declared, net of
         forfeited dividends on restricted stock             (622)           --              (610)
      Change in unrealized holding gains (losses),
         net of income taxes                                 --                13              13
                                                       ----------      ----------      ----------
Balance at December 31, 1998                           $   14,230      $       90      $   20,694
                                                       ==========      ==========      ==========

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

                                                                                                 Six months ended
                                                                                                    December 31,
                                                                                                 1998          1997
                                                                                               --------      --------
<S>                                                                                            <C>           <C> 
   Net income                                                                                  $    751      $    777
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation                                                                                78            49
         Net amortization (accretion)                                                               109            63
         Provision for loan losses                                                                   27            48
         Net gain on sale of investments and mortgage-backed securities                              (5)           (6)
         Gain on sale of loans                                                                      (63)         --
         Loss on sale of fixed assets                                                              --               4
         Release of ESOP shares                                                                      90           111
         Compensation earned under MRP                                                              134           123
         Net decrease (increase) in mortgage loans held for sale                                 (5,368)         --
         Increase in other assets                                                                   (23)         (238)
         Increase (decrease) in other liabilities                                                  (144)          119
                                                                                               --------      --------
               Net cash provided (used in) operating activities                                  (4,414)        1,050
                                                                                               --------      --------
Investing activities:
   Net (increase) decrease in loans held for investment                                           8,158        (7,663)
   Principal collected on mortgage-backed securities                                                759           229
   Purchases of investment securities classified as available-for-sale                           (1,997)       (1,250)
   Purchases of mortgage-backed securities classified as available-for-sale                      (1,453)       (1,532)
   Purchases of collateralized mortgage-backed securities classified as available-for-sale       (2,037)         --
   Proceeds of sales of mortgage-backed-securities classified as available-for-sale                 501         1,508
   Proceeds from investment securities called by issuer                                           3,280            10
   Purchases of Federal Home Loan Bank stock                                                       --            (160)
   Purchases of premises and equipment                                                             (362)          (78)
                                                                                               --------      --------
               Net cash provided (used in)  investing activities                                  6,849        (8,936)
                                                                                               --------      --------
Financing activities:
   Net increase (decrease) in time deposits                                                        (997)         (260)
   Net increase (decrease) in other deposits                                                      3,057         1,771
   Proceeds from borrowings                                                                       1,780        11,100
   Repayments of borrowings                                                                      (4,071)       (6,000)
   Purchase and retirement of common stock                                                       (1,291)         --
   Cash dividends paid to shareholders                                                             (632)         (515)
                                                                                               --------      --------
               Net cash provided (used in) financing activities                                  (2,154)        6,096
                                                                                               --------      --------
               Increase (decrease) in cash and cash equivalents                                     281        (1,790)
Cash and cash equivalents at beginning of period                                                  2,644         4,645
                                                                                               --------      --------
Cash and cash equivalents at end of period                                                     $  2,925      $  2,855
                                                                                               ========      ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                         PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (continued)

                                                                                                  Six months ended
                                                                                                    December 31,
                                                                                                1998           1997
                                                                                              --------      --------
<S>                                                                                            <C>           <C>                    
Supplemental disclosure of cash flow information:                                     act         2,925
   Cash paid during the period for:                                                  diff             2
      Interest                                                                                 $  2,569      $  2,550
                                                                                               ========      ========
      Income taxes                                                                             $    428      $    430
                                                                                               ========      ========
Supplemental disclosure of noncash transactions:
   Unrealized gains on available-for-sale securities,
      net of deferred taxes of  $58 and $33                                                    $     90      $    136
                                                                                               ========      ========
   Dividends declared but unpaid                                                                    314           267
                                                                                               ========      ========
   Transfer from loans receivable to real estate owned                                             --             522
</TABLE>
                                                                  
See accompanying notes to financial statements.
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


1) Organization and Operations

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

2) Basis of Presentation

       The consolidated  financial statements include the accounts of the Parent
       and the Bank,  together  referred to as "the  Company".  All  significant
       intercompany  transactions and balances are eliminated in  consolidation.
       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and disclosure of contingent assets and liabilities as of the date of the
       balance  sheets and the  reported  amounts of income and expenses for the
       periods presented.  Actual results could differ  significantly from those
       estimates.  In management's opinion, the financial information,  which is
       unaudited,   reflects  all  adjustments   (consisting  solely  of  normal
       recurring adjustments) necessary for a fair presentation of the financial
       information  as of  December  31,  1998 and for the  three  and six month
       periods ended December 31, 1998 and December 31, 1997 in conformity  with
       generally accepted accounting principles. Operating results for the three
       and six  month  periods  ended  December  31,  1998  are not  necessarily
       indicative of the results that may be expected for the fiscal year ending
       June 30, 1999.

3) Cash and Cash Equivalents

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

4) Comprehensive Income

       On July 1, 1998, the Company  adopted  Statement of Financial  Accounting
       Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive  Income". SFAS
       130  establishes  standards for reporting  and  displaying  comprehensive
       income and its components  (revenues,  expenses,  gains, and losses) in a
       full set of general-purpose financial statements. This Statement requires
       that an enterprise  (a) classify items of other  comprehensive  income by
       their nature in the financial  statement and (b) display the  accumulated
       balance of other  comprehensive  income separately from retained earnings
       and  additional  paid-in-capital  in the equity section of a statement of
       financial  position.  In accordance  with the provisions of SFAS No. 130,
       comparative  financial statements presented for earlier periods have been
       reclassified to reflect the provisions of the statement.
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


4) Comprehensive Income (continued)


       Comprehensive  income is the change in equity of an enterprise during the
       period from transactions and other events and circumstances from nonowner
       sources and,  accordingly,  includes both net income and amounts referred
       to as other  comprehensive  income.  The  Company's  other  comprehensive
       income for the six months ended December 31, 1998 consisted of unrealized
       gains and losses on certain investments in debt securities. Comprehensive
       income for the six months ended  December  31, 1998 and 1997  amounted to
       $764,000 and $913,000, respectively.

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  six  month  periods  ended
       December 31, 1998 and 1997,  ESOP-related  compensation  expense  totaled
       $90,000 and  $111,000,  respectively.  For the three month  periods ended
       December 31, 1998 and 1997,  ESOP-related  compensation  expense  totaled
       $43,000 and $50,000, respectively.  Additionally, in December of 1998 and
       1997, 18,448 and 19,918 shares, respectively, were released to individual
       participant  accounts.  At December 31,  1998, a total of 167,285  shares
       have been  released  and  allocated  to  participants  under the Plan and
       44,315 shares remain unallocated.

       The Bank has a  management  recognition  plan  ("MRP")  which serves as a
       means of providing  existing  directors and employees of the Bank with an
       ownership interest in the Company.  On August 29, 1996,  restricted stock
       awards  of  105,800  shares  were  made to 38  directors,  officers,  and
       employees of the Bank.  The shares awarded under the MRP were issued from
       authorized but unissued  shares of common stock at no cost to recipients.
       The shares granted vest at a rate of 20% each year on the  anniversary of
       the initial award of shares so that the shares will be completely  vested
       at the end of five years. During the first six months of fiscal 1998, one
       MRP participant  forfeited  1,719  restricted,  non-vested  shares of the
       Company's  stock  and  $12,000  of  dividends   previously  paid  to  the
       participants on those restricted  shares.  The dividends  refunded to the
       Bank have been  reflected  as an  addition  to common  stock.  The shares
       forfeited  during the six months ended  December 31, 1998,  combined with
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


5) Employee and Director Benefit Plans (continued)


       shares previously  forfeited,  leaves 5,778 restricted shares unallocated
       under the MRP. Compensation expense of $134,000 and $123,000 was recorded
       during  the  six  month  periods  ended   December  31,  1998  and  1997,
       respectively.  During the three months ended  December 31, 1998 and 1997,
       compensation expense was recorded of $71,000 and $56,000, 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

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



                                              Three Months Ended           Six Months Ended
                                                  December 31,                December 31,
                                            ---------------------------------------------------   
                                               1998          1997          1998          1997
                                            ---------     ---------     ---------     ---------
<S>                                         <C>           <C>           <C>           <C>      
Basic EPS denominator: weighted average
   number of common shares outstanding      2,629,153     2,688,037     2,656,599     2,684,302
Dilutive effect of stock options                  103        25,627         5,020        25,867
                                            ---------     ---------     ---------     ---------
Diluted EPS denominator                     2,629,256     2,713,664     2,661,619     2,710,169
                                            =========     =========     =========     =========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Comparison of Results of Operations  for the Six Months Ended  December 31, 1998
and 1997

Summary
For the six months ended December 31, 1998,  the Company  recorded net income of
$751,000,  or $0.28 basic and diluted earnings per share, compared to net income
of  $777,000,  or $0.29 basic and diluted  earnings per share for the six months
ended December 31, 1997.

Net Interest Income
As shown in the  table  below,  tax-equivalent  net  interest  income  increased
$94,000 to $2,571,000 for the six months ended December 31, 1998 from $2,477,000
for the same period in 1997. Net interest income is analyzed on a tax-equivalent
basis  to  adjust  for  the  nontaxable  status  of  income  earned  on  certain
investments such as municipal bonds.
<PAGE>
<TABLE>
<CAPTION>
                                                                                       Six Months Ended December 31,
                                                                                  -------------------------------------- 
                                                                                                 1998     
                                                                                   --------------------------------------
                                                                                                                Average
                                                                                  Average                        Yield/         
                                                                                  Balance      Interest          Rate(1)
                                                                                  -------      --------          -------
                                                                                         (dollars in thousands)
<S>                                                                              <C>           <C>                <C> 
Interest-earning assets:              
  Interest-bearing deposits                                                      $  1,407      $     43           6.11% 
  FHLB common stock                                                                 1,151            44           7.65  
  Taxable investment securities                                                    12,893           413           6.41  
  Tax-exempt investment securities (2)                                              3,862           156           8.08  
  Loans receivable                                                                106,359         4,487           8.44  
                                                                                 --------      --------        -------  
Total interest-earning assets                                                     125,672         5,143           8.18  
Non-interest-earning assets                                                         3,764                        
                                                                                 --------                               
     Total                                                                       $129,436                        
                                                                                 ========                        
                                                                                                                        
                                                                                                                        
Liabilities and Stockholders' Equity:                                                                                   
Interest-bearing liabilities:                                                                                           
  Deposit accounts                                                                 86,942         2,071           4.73  
  Borrowings                                                                       17,240           501           5.81  
                                                                                 --------      --------        -------
Total interest-bearing liabilities                                                104,182         2,572           4.94  
                                                                                               --------        -------  
Non-interest-bearing liabilities                                                    3,931                               
Stockholders' equity                                                               21,323                               
                                                                                 --------                               
     Total                                                                       $129,436                               
                                                                                 ========                               
Net interest income and interest rate spread                                                   $  2,571           3.24% 
                                                                                               ========                 
Net interest-earning assets and net interest margin                              $ 21,490                         4.12% 
                                                                                 ========                        
Ratio of interest-earning assets to interest-bearing liabilities                                                120.63% 
                                                                                             
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                          Six Months Ended December 31,
                                                                     -------------------------------------- 
                                                                                    1997     
                                                                      --------------------------------------
                                                                                                   Average
                                                                     Average                        Yield/         
                                                                     Balance      Interest          Rate(1)
                                                                     -------      --------          -------
                                                                            (dollars in thousands)
<S>                                                                  <C>           <C>              <C>                 
Assets:
                                                                                     
Interest-earning assets:
  Interest-bearing deposits                                          $  1,634      $     30          3.67%
  FHLB common stock                                                       991            36          7.27
  Taxable investment securities                                        11,483           375          6.53
  Tax-exempt investment securities (2)                                  3,914           156          7.97
  Loans receivable                                                    104,831         4,432          8.46
                                                                     --------      --------        ------
Total interest-earning assets                                         122,853         5,029          8.19
Non-interest-earning assets                                             3,182  
                                                                     --------    
     Total                                                           $126,035  
                                                                     ========  
                                                               
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                                     83,119         1,985          4.74
  Borrowings                                                           18,950           567          5.98
                                                                     --------    
Total interest-bearing liabilities                                    102,069         2,552          5.00
                                                                                   ========        ======  
Non-interest-bearing liabilities                                        3,055 
Stockholders' equity                                                   20,911 
                                                                     -------- 
     Total                                                           $126,035 
                                                                     ======== 
Net interest income and interest rate spread                                       $ 2,477           3.19% 
                                                                                   =======
Net interest-earning assets and net interest margin                  $ 20,784                        4.06%
                                                                     ========
Ratio of interest-earning assets to interest-bearing liabilities                                   120.36%              

</TABLE>

(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt  investment  securities has been adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.25%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.
<PAGE>
The  increase  in net  interest  income is  primarily  due to a higher  level of
interest-earning  assets  during  the six  months  ended  December  31,  1998 as
compared to the same period in 1997. Average taxable  investment  securities and
average loans receivable increased $1.4 million and $1.5 million,  respectively,
over  the same  six  month  period  last  year.  The  average  yield on  taxable
investment  securities  declined 2 basis points while the average yield on loans
receivable declined 12 basis points from the six month period ended December 31,
1997 to the same  period in 1998.  Interest  rate  spread  (on a  tax-equivalent
basis)  increased to 3.24% for the six months ended December 31, 1998 from 3.19%
for the same six month period in 1997  primarily due to a decline in the average
yield on total interest  bearing  liabilities.  Net interest margin increased to
4.12% for the six months  ended  December 31, 1998 from 4.06% for the six months
ended December 31, 1997.

Provision for Loan Losses
The provision for loan losses for the six months ended December 31, 1998 totaled
$27,000 compared to $48,000 for the same period in 1997. The decline between the
two six month periods was based on the Company's favorable charge off experience
over the past eight quarters and the decline in net loans receivable from fiscal
1998 to 1999. 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  $279,000  for the six months  ended  December  31,  1998
compared to $233,000 for the same period in 1997.  Mortgage loan  servicing fees
declined  $32,000  from the first three months of fiscal 1998 to the same period
in  1999  due to  faster  prepayments  on the  underlying  mortgages  in 1998 as
compared  to 1997.  During  the first six  months  of  fiscal  1998  there was a
positive  lower-of-cost  or market  adjustment  of $36,000  that was not present
during the first six months of fiscal 1999. The Company  recorded a $63,000 gain
on sale of loans during the first six months of fiscal 1999.  There were no such
loan sales  during the first six months of fiscal  1998.  The Company  collected
stock and mutual  fund  commissions  of  $44,000  during the first six months of
fiscal 1999.  There were no  commissions  in the first six months of fiscal 1998
since the full service and  discount  brokerage  subsidiary  of the Bank did not
begin operations until the quarter ended March 31, 1998.

Other Expenses
Other  expenses  totaled  $1,612,000  for the six months ended December 31, 1998
compared  to  $1,401,000  for the  same  period  in 1997.  Compensation  expense
increased  $105,000 from the quarter ended  December 31, 1997 to the same period
in 1998 due to the hiring of several  employees  during the middle of the second
quarter as well as others added in the third and fourth  quarters of fiscal year
1998.  Some of the  increase  in  compensation  expense is due to normal cost of
living and merit  increases for  employees.  Data and items  processing  expense
increased  $40,000 for the six months ended December 31, 1998 to the same period
in 1997 due to the  Bank's  conversion  to a new  data  processor  in the  third
quarter of fiscal  1998.  The Bank's new  processor  provides a higher  level of
service and technology compared to the Bank's previous processor.  Furniture and
equipment  expense increased $38,000 from the quarter ended December 31, 1997 to
the same period in 1998 due to higher  depreciation  expense associated with the
purchase  of  computer  equipment  in the third  quarter of fiscal  1998.  Other
"other" expense increased $51,000 from the six months ended December 31, 1997 to
the same period in 1998 due  primarily to increases in savings  forms,  postage,
and checking account expenses in the six months ended December 31, 1998.
 
Income Tax Expense
Income tax expense  was  $400,000  for the six months  ended  December  31, 1998
resulting in an effective rate of 34.75%  compared to $425,000 or 35.36% for the
same period in 1997.
<PAGE>
Comparison of Results of Operations for the Three Months Ended December 31, 1998
and 1997

Summary
For the quarter  ended  December  31, 1998,  the Company  recorded net income of
$337,000,  or $0.13 per share,  compared to $363,000, or $0.13 per share for the
same quarter last year.

Net Interest Income
As shown in the table below,  there was no change in tax-equivalent net interest
income  between the quarter ended December 31, 1998 and the same period in 1997.
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 December 31,
                                                                    ----------------------------------- 
                                                                                   1998     
                                                                    ----------------------------------- 
                                                                                               Average
                                                                     Average                    Yield/         
                                                                     Balance      Interest      Rate(1)
                                                                     --------     --------      ------
                                                                         (dollars in thousands)
<S>                                                                  <C>          <C>             <C>  
Assets:                                                           
Interest-earning assets:
  Interest-bearing deposits                                          $  1,376     $     21        6.10%
  FHLB common stock                                                     1,152           21        7.29
  Taxable investment securities                                        13,121          203        6.19
  Tax-exempt investment securities (2)                                  3,860           78        8.08
  Loans receivable                                                    104,521        2,188        8.37
                                                                     --------     --------      ------
Total interest-earning assets                                         124,030        2,511        8.10
                                                                                  --------      ------
Non-interest-earning assets                                             3,898
                                                                     --------
     Total                                                           $127,928
                                                                     ========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                                     87,829        1,029        4.65
  Borrowings                                                           15,459          230        5.95
                                                                     --------     --------      ------
Total interest-bearing liabilities                                    103,288        1,259        4.88
                                                                                  --------      ------
Non-interest-bearing liabilities                                        3,639
Stockholders' equity                                                   21,001
                                                                     --------
     Total                                                           $127,928
                                                                     ----====
Net interest income and interest rate spread                                      $  1,252        3.22%
                                                                                  ========
Net interest-earning assets and net interest margin                  $ 20,742                     4.06%
                                                                     ========
Ratio of interest-earning assets to interest-bearing liabilities                                120.08%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                       Three Months Ended December 31,
                                                                    ----------------------------------- 
                                                                                   1998     
                                                                    ----------------------------------- 
                                                                                               Average
                                                                     Average                    Yield/         
                                                                     Balance      Interest      Rate(1)
                                                                     --------     --------      ------
                                                                         (dollars in thousands)
<S>                                                                  <C>          <C>             <C>  
Assets:
Interest-earning assets:
  Interest-bearing deposits                                          $  1,678     $     14        3.34%
  FHLB common stock                                                     1,044           19        7.28
  Taxable investment securities                                        11,557          189        6.54
  Tax-exempt investment securities (2)                                  3,929           78        7.94
  Loans receivable                                                    106,595        2,245        8.42
                                                                     --------     --------      ------
Total interest-earning assets                                         124,803        2,545        8.16
                                                                                  --------      ------
Non-interest-earning assets                                             3,319
                                                                     --------
     Total                                                           $128,122
                                                                     ========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                                     83,562          992        4.71
  Borrowings                                                           20,326          301        5.92
                                                                     --------     --------      ------
Total interest-bearing liabilities                                    103,888        1,293        4.98
                                                                                  --------      ------
Non-interest-bearing liabilities                                        3,189
Stockholders' equity                                                   21,045
                                                                     --------
     Total                                                           $128,122
                                                                     ========
Net interest income and interest rate spread                                      $  1,252       3.18%
                                                                                  ========
Net interest-earning assets and net interest margin                  $ 20,915                    4.04%
                                                                     ========
Ratio of interest-earning assets to interest-bearing liabilities                               120.13%

</TABLE>
(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.
(2) Interest earned on tax-exempt  investment  securities has been adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.25%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.
<PAGE>
The average yield on total interest  earning assets declined 6 basis points from
the three  months  ended  December  31,  1997 to the same  period in 1998.  This
decline  was caused by a shift in average  interest  earning  assets  from loans
receivable to taxable investment securities.  Average loans receivable decreased
$2.1 million and average taxable  investment  securities  increased $1.6 million
from the three months ended  December 31, 1997 to the same period in 1998.  Some
of the decline in the average yield on total interest  earning assets was caused
by 5 and 35 basis point  declines in the average yield on loans  receivable  and
taxable  investment  securities,  respectively,  from  the  three  months  ended
December  31, 1997 to the same three month  period in 1998.  The average rate on
total  interest  bearing  liabilities  declined  10 basis  points from the three
months ended  December 31, 1997 to the same three month period in 1998.  Most of
this decline was caused by a shift from  borrowings  to deposits  from the three
months ended December 31, 1997 to the same three month period in 1998.  Interest
rate  spread (on a  tax-equivalent  basis)  increased  to 3.22% for the  quarter
December  31,  1998  from  3.18%  for the same  quarter  in 1997,  while the net
interest margin increased to 4.06% from 4.04% during the same period of time.

Provision for Loan Losses
The  provision  for loan losses for the three  months  ended  December  31, 1998
totaled  $3,000  compared to $24,000  for the same  period in 1997.  The decline
between the two three month periods was based on the Company's  favorable charge
off  experience  over the past  eight  quarters  and the  decline  in net  loans
receivable  from fiscal 1998 to 1999.  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  $128,000 for the quarter ended December 31, 1998 compared
to $96,000 for the same period in 1996. The overall increase in other income was
caused by increases  and  decreases in various  income  accounts.  Mortgage loan
servicing fees declined $17,000 from the three months ended December 31, 1997 to
the same period in 1998 due to faster prepayments on the underlying mortgages in
1998 as compared to 1997. Gain on sale of investments  increased $5,000 from the
three  months ended  December 31, 1997 to the same period in 1998 because  there
were no sales of investment  securities  in the three months ended  December 31,
1997.  The  Company  recorded a $23,000  gain on sale of loans  during the three
months ended  December 31, 1998.  There were no such loan sales during the three
months  ended  December 31, 1997.  The Company  collected  stock and mutual fund
commissions of $20,000 during the first three months of fiscal 1999.  There were
no  commissions  in the three  months  ended  December  31,  1997 since the full
service and discount  brokerage  subsidiary of the Bank did not begin operations
until the quarter ended March 31, 1998.

Other Expenses
Other  expenses  totaled  $829,000 for the three months ended  December 31, 1998
compared to $730,000 for the same period in 1997. Compensation expense increased
$71,000 from the quarter ended  December 31, 1997 to the same period in 1998 due
to the hiring of several  employees  during the middle of the second  quarter as
well as others added in the third and fourth  quarters of fiscal year 1998. Some
of the  increase  in  compensation  expense is due to normal  cost of living and
merit  increases for  employees.  Data and items  processing  expense  increased
$8,000 from the quarter  ended  December 31, 1997 to the same period in 1998 due
to the Bank's  conversion to a new data processor in the third quarter of fiscal
1998. The Bank's new processor provides a higher level of service and technology
compared to the Bank's  previous  processor.  Furniture  and  equipment  expense
<PAGE>
increased $20,000 from the quarter ended December 31, 1997 to the same period in
1998  due to  higher  depreciation  expense  associated  with the  purchase  and
depreciation  of computer  equipment in the third quarter of fiscal 1998.  Other
"other"  expense  increased  $30,000 from the quarter ended December 31, 1997 to
the same period in 1998 due  primarily to increases  in postage,  Directors  and
Officers insurance, employee training and checking account expenses in the three
months ended December 31, 1998.

Income Tax Expense
Income tax  expense  was  $181,000  for the  quarter  ended  December  31,  1998
resulting  in an effective  rate of 34.9%  compared to $202,000 or 35.8% for the
same period in 1997.

Financial Condition

CHANGES IN FINANCIAL CONDITION

Total assets  decreased  $1.3 million or .99% to $129.2  million at December 31,
1998 from  $130.5  million at June 30,  1998.  A  decrease  in net loans of $2.8
million,  offset in part by increases in  investment  securities of $955,000 and
interest-bearing   deposits  in  other   financial   institutions  of  $495,000,
contributed  to the  majority  of the  decrease  in assets from June 30, 1998 to
December 31, 1998.  Total  liabilities  decreased  $385,000 to $108.6 million at
December  31, 1998 from  $108.9  million at June 30,  1998.  An increase of $2.1
million in deposits  and a decrease of 2.3 million in Advances  from the Federal
Home Loan Bank made up the  majority  of the  change in  liabilities  during the
first six months of fiscal 1999.

Total  stockholders'  equity decreased $912,000 to $20.7 million at December 31,
1998 from $21.6  million at June 30, 1998.  Under a previously  announced  stock
repurchase  plan,  the Company  repurchased  and retired  134,867  shares of its
common stock during the six months ended  December 31, 1998. The average cost of
the shares  repurchased was $9.57 per share for a total cost of $1,291,000.  The
implementation of the share repurchase plan and cash dividends declared were the
primary factors  contributing to the decline in stockholders'  equity during the
six months ended December 31, 1998. Mitigating these decreases was net income of
$751,000, and release of ESOP shares, amortization of unearned compensation, and
a change in  unrealized  holding  gains on  investment  securities  of  $90,000,
$134,000 and $13,000, respectively.


ASSET QUALITY

Nonperforming Assets and Risk Assets

Nonperforming  assets  include  nonaccrual  loans,  restructured  loans and real
estate  owned.  The  table  on  the  following  page  presents   information  on
nonperforming  assets and loans  contractually  past due but still  accruing  at
December 31, 1998 and June 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
                                                    December 31,       June 30
                                                        1998             1998
                                                      --------        ---------
                                                             (in thousands)
<S>                                                    <C>             <C>     
Total nonaccrual loans                                 $    740        $    928
Total restructured loans                                   --              --
                                                       --------        ---------
     Total nonperforming loans                              740             928
Real estate owned                                          --              --
                                                      --------        ---------
Total nonperforming assets                                  740             928

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

Total risk assets                                      $    740        $    928
                                                       ========        ========

Nonperforming loans to total loans                         0.71%           0.87%
Nonperforming assets to total assets                       0.57%           0.71%
Risk assets to total assets                                0.57%           0.71%
Allowance for loan losses to:
   Total nonperforming assets                             1.39x           1.02x
   Total risk assets                                      1.39x           1.02x
Total assets                                           $129,244        $130,541
Total loans, net                                        103,700         106,500
Allowance for loan losses                                 1,029             951

</TABLE>

There were no significant changes in nonperforming  assets outstanding from June
30, 1998 to December  31, 1998.  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 $118,000 at both
December 31, 1998 and June 30, 1998.  There was no related  allowance for credit
losses  associated  with these loans as determined  in accordance  with SFAS No.
114.  Management  has included  this review among the factors  considered in the
evaluation of the allowance for possible loan losses.
<PAGE>
Provision and Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for
the three and six months ended December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>

                                        Three months ended          Six months ended
                                           December 31,               December 31,
                                       --------------------      --------------------
                                         1998         1997         1998         1997
                                       -------      -------      -------      -------
<S>                                    <C>          <C>          <C>          <C>    
Balance at the beginning of period     $ 1,005      $   854      $   951      $   796
Provision for loan losses                    3           24           27           48
Recoveries                                  29            5           59           39
Loans charged off                           (8)          (4)          (8)          (4)
                                       -------      -------      -------      -------
Balance at end of period               $ 1,029      $   879      $ 1,029      $   879
                                       =======      =======      =======      =======
</TABLE>


At December 31, 1998,  the  allowance  for loan losses was 0.98% of total loans,
compared  to 0.89% of total  loans at June 30,  1998 and 0.81% of total loans at
December 31, 1997.

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  December  31, 1998  compared to a $24,000  provision  for the same
period in 1997. The decline between the two three month periods was based on the
Company's  favorable  charge off experience over the past eight quarters and the
decline in net loans receivable from fiscal 1998 to 1999.

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
<PAGE>
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 a
cross-section  of the Company's  management  team and employees,  in November of
1997.  This  Committee is leading the Company's Year 2000 efforts to ensure that
the Company is  properly  prepared  for the Year 2000.  The  Company's  Board of
Directors  has  approved a plan  submitted by the Year 2000  Committee  that was
developed  in  accordance  with  guidelines  set forth by the Federal  Financial
Institutions  Examination  Council.  This plan,  which is  described  in further
detail below, has five primary phases related to internal Year 2000 compliance:

1.       Awareness  - this  phase is  ongoing  and is  designed  to  inform  the
         Company's  Board of Directors  (the "Board") and  Executive  management
         ("Management"),  employees,  customers and vendors of the impact of the
         Year 2000 Issue. The awareness phase is an ongoing one that is designed
         to provide ongoing  information  about the Year 2000 issue to the Board
         of Directors,  Management,  employees and customers.  Since December of
         1997 the Board has been  apprised  of the  Company's  efforts  at their
         regular meetings. In addition,  all customers were updated with respect
         to the  Company's  Year 2000 efforts  through a mailing sent in June of
         1998.

2.       Assessment - during this phase an inventory  was conducted of all known
         Company  processes that could  reasonably be expected to be impacted by
         the Year 2000 Issue and their  related  vendors,  if  applicable.  This
         inventory of processes and vendors  included not only typical  computer
         processes such as the Company's  transaction  applications systems, but
         all known processes that could be impacted by micro-chip  malfunctions.
         These include but are not limited to the Company's alarm system,  phone
         system,   check  ordering  process,   and  ATM  network.   The  Company
         inventoried  all the  systems  listed  above  in  December  of 1997 and
         performed an initial assessment of potential risks from either under or
         nonperformance  arising from  incorrect  processing  and usage of dates
         after  December 31, 1999. At this time the Company had already made the
         decision  to  convert in  February  of 1998 to a new  computer  service
         provider  for   processing   all  loan,   deposit  and  general  ledger
         transactions. In conjunction with the conversion, the Company purchased
         and installed new computers,  printers and related  software in January
         of 1998.  New  hardware  and software for a local area network was also
         purchased  and  installed  in  January  of 1998.  The total cost of the
         hardware and  software  purchased by the Company in fiscal 1998 totaled
         $296,000  and  was  capitalized.  Most  of the  hardware  and  software
         purchased by the Company  either is Year 2000 compliant or will be with
         minor  modifications  or upgrades.  The  assessment  phase is complete,
         although it is updated periodically as necessary.

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
<PAGE>
         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.

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  plans to perform  follow up tests with its core
         service  provider in the third and fourth quarters of fiscal 1999 using
         future  dates of February  29,  2000 and March 1, 2000.  Based upon the
         results  of this test the  Company  may or may not  perform  additional
         testing with its core service provider. The testing of the remainder of
         the Company's  processes was substantially  complete as of December 31,
         1998 with follow up testing to be performed as needed in calendar  year
         1999.

5.       Implementation  - this  phase  will  occur  when Year  2000  processing
         commences.  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  significant  part  of the
         implementation phase will occur after December 31, 1999. The Company is
         in the process of developing  contingency  plans for processes  that do
         not process  information  reliably and  accurately  after  December 31,
         1999. The  contingency  plans for all systems  should be  substantially
         complete by the end of the fourth  quarter of fiscal 1999 in accordance
         with regulatory guidelines.

The  Company is also in the  process of  assessing  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  has Year  2000
concerns  about  will be  counseled  on the Year  2000  issue  and urged to take
corrective action.  Since the majority of the Company's loans are to individuals
and  secured  by one to four  family  residences  this step is not  expected  to
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  December 31, 1998,  and $12,000
for the six months ended  December  31, 1998.  There were no Year 2000 costs for
the quarter and six months  ended  December  31,  1997.  Based on an analysis of
<PAGE>
projected  expenses  performed in the second  quarter of fiscal 1999,  the total
cost of the Year 2000 project is currently estimated at $50,000.  Funding of the
Year 2000 project costs will come from normal  operating cash flow,  however the
expenses  associated  with the Year 2000 Issue will  directly  reduce  otherwise
reported net income for the Company.

Management of the Company  believes that the potential  effects on the Company's
internal  operations  of the Year 2000 Issue can and will be addressed  prior to
the Year 2000. However, 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 is to correct,  with complete  replacement  if necessary,  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, is in the process
of  formalizing  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 December 31,
1998,  the Bank had $14.3 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 December 31, 1998, the Company had
a  cumulative  one year  liability-sensitive  gap  position of $18.7  million or
14.95% of  interest-earning  assets. An  asset-sensitive  gap position generally
indicates  that  net  interest   income  would  decrease  in  a  declining  rate
environment  and  increase  in a rising  rate  environment.  The  Company  had a
cumulative one year  liability-sensitive  gap position of $11.8 million or 7.09%
of  interest-earning  assets at June 30,  1998.  The  Company  will  continue to
actively  manage its balance  sheet in order  protect net  interest  income from
changes in interest rates.

It should be noted that these measures reflect the  interest-sensitivity  of the
balance sheet as of a specific date and are not necessarily indicative of future
results.  Because  of this  and  other  limitations,  management  also  monitors
interest rate sensitivity  through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest  sensitivity  measures as of
December  31, 1998,  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 December 31, 1998, the Bank was in compliance with all of
the aforementioned capital requirements.

As of December 31, 1998,  the Bank was considered  "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 that management  believes
have changed the Bank's category.
<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 December 31,
1998 that will affect the Company's future reporting.

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 fiscal years 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 because the Company
operates as one segment.

In February 1998, the FASB issued  Statement of Financial  Accounting  Standards
No.  132  ("SFAS  132"),   "Employers   Disclosures  about  Pensions  and  Other
Postretirement   Benefits".   This   statement   standardizes   the   disclosure
requirements of pensions and other postretirement  benefits. This statement does
not  change  any  measurement  or  recognition  provisions,  and  thus  will not
materially  impact the Company.  This  statement  is effective  for fiscal years
beginning after December 15, 1997. The Company plans to adopt SFAS 132 in fiscal
year  1999  without  any  significant  impact  on  its  consolidated   financial
statements.

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. SFAS No. 133 is effective for
all fiscal  quarters of fiscal years  beginning after June 15, 1999. The Company
plans  to  adopt  SFAS  133 in  fiscal  year  2000  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.
<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, 1998.

<PAGE>


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
None

ITEM 2.  CHANGES IN SECURITIES
Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
Not applicable

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

ITEM 5.  OTHER INFORMATION
Not applicable

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

(b) Reports on Form 8-K
None


<PAGE>


                                   SIGNATURES

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



Date:     February 9, 1998                     By:  /s/ D. Tyson Clayton
                                                    --------------------
                                                    President


Date:     February 9, 1998                     By:  /s/ Thomas W. Wayne
                                                    -------------------
                                                    Vice President and principal
                                                    financial officer