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
                                 March 31, 1999

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

                        Commission File Number 001-14070

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

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

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

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

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

As of May 10, 1999,  2,555,800 shares of the  registrant's  common stock, no par
value,  were  outstanding.  The  registrant  has no other  classes of securities
outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                     CONSOLIDATED BALANCE SHEETS




                                                                            March 31,      June 30,
                                                                              1999           1998
                                                                            ---------      ---------
                                                                            (unaudited)       *
                                                                         (in thousands, except shares)
                            Assets
<S>                                                                         <C>            <C>      
Cash                                                                        $     960      $     823
Interest-bearing deposits in other financial institutions                       1,577          1,821
Investment securities:
   Available-for-sale                                                          22,875         13,775
   Held-to-maturity                                                             3,461          3,250
Loans receivable (net of allowance for loan losses of $1,048 and
   $951 at March 31, 1999 and June 30, 1998, respectively)                     99,708        106,500
Federal Home Loan Bank stock, at cost                                           1,366          1,152
Premises and equipment                                                          2,646          1,414
Prepaid expenses and other assets                                               1,979          1,806
                                                                            ---------      ---------
          Total assets                                                      $ 134,572      $ 130,541
                                                                            =========      =========
                         Liabilities and Stockholders' Equity
                                      Liabilities
Deposits :
   Demand, non-interest bearing                                                 3,481          2,844
   Savings, NOW and MMDA                                                       37,206         32,800
   Certificates of Deposit                                                     51,292         54,196
                                                                            ---------      ---------
                                                                               91,979         89,840
Advances from the Federal Home Loan Bank                                       21,307         18,000
Accrued expenses and other liabilities                                          1,040          1,095
                                                                            ---------      ---------
     Total liabilities                                                        114,326        108,935
                                                                            ---------      ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                     CONSOLIDATED BALANCE SHEETS
                                            (continued)


                                                                            March 31,      June 30,
                                                                              1999           1998
                                                                            ---------      ---------
                                                                            (unaudited)       *
                                                                         (in thousands, except shares)
                      Stockholders' Equity       
<S>                                                                         <C>            <C>      
Preferred stock, no par value, 5,000,000 shares authorized;
   none issued                                                                   --             --
Common stock, no par value, 20,000,000 shares authorized; 2,555,800 and
    2,750,800 shares issued and outstanding at March 31, 1999 and June
    30, 1998, respectively                                                      7,257          9,121
Unearned ESOP shares                                                             (505)          (679)
Unamortized deferred compensation                                                (726)          (953)
Unallocated restricted stock                                                      (87)           (61)
Retained earnings, substantially restricted (note 6)                           14,267         14,101
Accumulated other comprehensive income                                             40             77
                                                                            ---------      ---------
      Total stockholders' equity                                               20,246         21,606
                                                                            ---------      ---------
          Total liabilities and stockholders' equity                        $ 134,572      $ 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        Nine Months Ended
                                                                         March 31,                  March 31,
                                                                    --------------------      --------------------
                                                                     1999          1998         1999         1998
                                                                    -------      -------      -------      -------
                                                                         (in thousands, except per share data)
<S>                                                                 <C>          <C>          <C>          <C>    
Interest income:
   Interest on loans                                                $ 2,207      $ 2,333      $ 6,694      $ 6,765
   Interest on deposits in other financial institutions                  21           12           64           42
   Interest and dividends on investment securities:
      Taxable                                                           263          205          720          616
      Non-taxable                                                        50           49          146          146
                                                                    -------      -------      -------      -------
            Total interest income                                     2,541        2,599        7,624        7,569
                                                                    -------      -------      -------      -------
Interest expense:
   Interest on deposits                                                 973          987        3,044        2,972
   Interest on borrowings                                               282          315          783          882
                                                                    -------      -------      -------      -------
            Total interest expense                                    1,255        1,302        3,827        3,854
                                                                    -------      -------      -------      -------
Net interest income                                                   1,286        1,297        3,797        3,715
Provision for loan losses                                                 3           24           30           72
                                                                    -------      -------      -------      -------
            Net interest income after provision for loan losses       1,283        1,273        3,767        3,643
                                                                    -------      -------      -------      -------
Other income:
   Customer service and other fees                                       64           53          168          157
   Mortgage loan servicing fees                                          (2)          15            5           54
   Gain on sale of investment securities                               --           --              5            6
   Lower-of-cost or market adjustment on loans held-for-sale            (26)         (24)         (26)          12
   Gain on sale of loans                                                 17           23           80           23
   Stock and mutual fund commissions                                     13         --             57         --
   Gain on sale of real estate owned                                   --            114         --            114
   Other                                                                 24           26           80           74
                                                                    -------      -------      -------      -------
            Total other income                                           90          207          369          440
                                                                    -------      -------      -------      -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                      PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                   CONSOLIDATED STATEMENTS OF INCOME (unaudited)
                                                    (continued)


                                                                     Three Months Ended        Nine Months Ended
                                                                         March 31,                  March 31,
                                                                    --------------------      --------------------
                                                                     1999          1998         1999         1998
                                                                    -------      -------      -------      -------
                                                                         (in thousands, except per share data)
<S>                                                                 <C>          <C>          <C>          <C>    
Other expenses:
   Compensation and fringe benefits (note 5)                            492          430        1,422        1,255
   Data and items processing                                            104           69          260          185
   Deposit insurance premiums                                            14           13           40           39
   Occupancy expense                                                     39           32           94           84
   Furniture and equipment expense                                       50           32          139           83
   Professional fees                                                     25           52           92          145
   Other                                                                135          158          424          396
                                                                    -------      -------      -------      -------
            Total other expenses                                        859          786        2,471        2,187
                                                                    -------      -------      -------      -------
            Income before income tax expense                            514          694        1,665        1,896
Income tax expense                                                      178          247          578          672
                                                                    -------      -------      -------      -------
                  Net income                                        $   336      $   447      $ 1,087      $ 1,224
                                                                    =======      =======      =======      =======
Net income per share - basic (note 7)                               $  0.13      $  0.17      $  0.42      $  0.46
                                                                    =======      =======      =======      =======
Net income per share - diluted (note 7)                             $  0.13      $  0.16      $  0.42      $  0.45
                                                                    =======      =======      =======      =======
</TABLE>

See accompanying notes to consolidated financial statements 
<PAGE>
<TABLE>
<CAPTION>
                                                PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                     STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)

                                                                                                                     Accumulated
                                                                               Unearned  Unamortized   Unallocated     other   
                                                       Shares        Common     ESOP      Deferred      Restricted    Retained 
                                                     Outstanding     Stock      Shares   Compensation     Stock       Earnings 
                                                      ----------   --------   -------    ---------      ------       --------  
                                                                              (dollars in thousands)
<S>                                                    <C>          <C>        <C>        <C>            <C>         <C>      
Balance at June 30, 1997                               2,750,800    $ 9,143    $ (933)    $ (1,269)      $ (21)      $ 13,580 
      Net income                                               -          -         -            -           -          1,224 
      Release of ESOP shares                                   -        (33)      194            -           -              - 
      Amortization of unearned compensation                    -          -         -          193           -              - 
      Forfeiture of restricted stock                           -          -         -          146        (146)             - 
      Allocation of restricted stock                           -        (11)        -          (95)        106              - 
      Tax benefit of dividends on restricted stock             -         (5)        -            -           -              - 
      Cash dividends declared, net of                                                                                         
         forfeited dividends on restricted stock               -         36         -            -           -           (797)
      Change in unrealized holding gains (losses),                                                                            
         net of income taxes                                   -          -         -            -           -              - 
                                                      ----------   --------   -------    ---------      ------       -------- 
Balance at March 31, 1998                              2,750,800    $ 9,130    $ (739)    $ (1,025)      $ (61)      $ 14,007 
                                                      ==========   ========   =======    =========      ======       ======== 
     
Balance at June 30, 1998                               2,750,800    $ 9,121    $ (679)      $ (953)      $ (61)      $ 14,101 
      Net income                                               -          -         -            -           -          1,087 
      Purchase and retirement of common stock           (195,000)    (1,833)        -            -           -              - 
      Release of ESOP shares                                   -        (44)      174            -           -              - 
      Amortization of unearned compensation                    -          -         -          201           -              - 
      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         -            -           -           (921)
      Change in unrealized holding gains (losses),                                                                            
         net of income taxes                                   -          -         -            -           -              - 
                                                       ---------    --------   -------    ---------      ------       -------- 
Balance at March 31, 1999                              2,555,800    $  7,257   $  (505)      $ (726)      $ (87)      $ 14,267
                                                       =========    ========   =======      =======      ======      =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                          Total                   
                                                      comprehensive    Stockholders' 
                                                          income          Equity     
                                                          ------          ------     
<S>                                                        <C>           <C>                                 
Balance at June 30, 1997                                   $ (84)        $ 20,416                            
      Net income                                               -            1,224   
      Release of ESOP shares                                   -              161   
      Amortization of unearned compensation                    -              193   
      Forfeiture of restricted stock                           -                -   
      Allocation of restricted stock                           -                -   
      Tax benefit of dividends on restricted stock             -               (5)  
      Cash dividends declared, net of                                               
         forfeited dividends on restricted stock               -             (761)  
      Change in unrealized holding gains (losses),                                  
         net of income taxes                                 156              156  
                                                           -----         --------                         
Balance at March 31, 1998                                  $  72         $ 21,384   
                                                           =====         ========    
                                                                                    
Balance at June 30, 1998                                    $ 77         $ 21,606   
      Net income                                               -            1,087   
      Purchase and retirement of common stock                  -           (1,833)  
      Release of ESOP shares                                   -              130   
      Amortization of unearned compensation                    -              201   
      Forfeiture of restricted stock                           -                -   
      Tax benefit of dividends on restricted stock             -                1   
      Cash dividends declared, net of                                               
         forfeited dividends on restricted stock               -             (909)  
      Change in unrealized holding gains (losses),                                  
         net of income taxes                                 (37)             (37) 
                                                            -----         --------                                 
Balance at March 31, 1999                                   $ 40         $ 20,246   
                                                            =====        ========   
                                                                        
</TABLE>
          See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>

                                         PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                         CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                                Nine months ended
                                                                                                      March 31,
                                                                                                 1999          1998
                                                                                               --------      --------
<S>                                                                                            <C>           <C>     
Operating activities:
   Net income                                                                                  $  1,087      $  1,224
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation                                                                               119            75
         Net amortization (accretion)                                                                73            84
         Provision for loan losses                                                                   30            72
         Net gain on sale of investments and mortgage-backed securities                              (5)           (6)
         Gain on sale of loans                                                                      (80)         --
         Loss on sale of fixed assets                                                              --               4
         Gain on sale of real estate owned                                                         --            (114)
         Release of ESOP shares                                                                     130           161
         Compensation earned under MRP                                                              201           193
         Net increase in mortgage loans held for sale                                            (1,843)       (1,563)
         Increase in other assets                                                                  (208)         (476)
         Increase (decrease) in other liabilities                                                   (37)          388
                                                                                               --------      --------
               Net cash provided (used in) operating activities                                    (533)           42
                                                                                               --------      --------
Investing activities:
   Net (increase) decrease in loans held for investment                                           8,712        (9,599)
   Principal collected on mortgage-backed securities                                              1,030           375
   Purchases of investment securities classified as
   Purchases of mortgage-backed securities classified as available-for-sale                      (6,670)       (1,532)
   Purchases of collateralized mortgage-backed securities classified as available-for-sale       (2,037)         --
   Purchases of investment securities classified as held-to-maturity                               (300)         (307)
   Proceeds of sales of mortgage-backed-securities classified as available-for-sale                 501         1,508
   Proceeds from investment securities called by issuer                                           3,825            55
   Purchases of Federal Home Loan Bank stock                                                       (214)         (189)
   Purchases of premises and equipment                                                           (1,351)         (182)
   Proceeds from sale of real estate owned                                                         --             636
                                                                                               --------      --------
               Net cash used in investing activities                                             (2,248)      (10,485)
                                                                                               --------      --------
Financing activities:
   Net increase (decrease) in time deposits                                                      (2,904)          154
   Net increase in other deposits                                                                 5,043         3,309
   Proceeds from borrowings                                                                       8,450        14,200
   Repayments of borrowings                                                                      (5,143)       (9,000)
   Purchase and retirement of common stock                                                       (1,833)         --
   Cash dividends paid to shareholders                                                             (939)         (764)
                                                                                               --------      --------
               Net cash provided by financing activities                                          2,674         7,899
                                                                                               --------      --------
               Decrease  in cash and cash equivalents                                              (107)       (2,544)
Cash and cash equivalents at beginning of period                                                  2,644         4,645
                                                                                               --------      --------
Cash and cash equivalents at end of period                                                     $  2,537      $  2,101
                                                                                               ========      ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                         PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (continued)


                                                                                                Nine months ended
                                                                                                      March 31,
                                                                                                 1999          1998
                                                                                               --------      --------
<S>                                                                                            <C>           <C>     
Supplemental disclosure of cash flow information:                                                 
   Cash paid during the period for:                                                                    
      Interest                                                                                 $  3,814      $  3,837
                                                                                               ========      ========
      Income taxes                                                                             $    599      $    251
                                                                                               ========      ========
Supplemental disclosure of noncash transactions:
   Unrealized gains on available-for-sale securities,
      net of deferred taxes of  $26 and $100                                                    $    39      $    156
                                                                                               ========      ========
   Dividends declared but unpaid                                                                    306           269
                                                                                               ========      ========
   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 March
    31, 1999 and for the three and nine month  periods  ended March 31, 1999 and
    March 31, 1998 in conformity with generally accepted accounting  principles.
    Operating  results for the three and nine month periods ended March 31, 1999
    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
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements

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

    Comprehensive  income is the  change in equity of an  enterprise  during the
    period from  transactions and other events and  circumstances  from nonowner
    sources and,  accordingly,  includes both net income and amounts referred to
    as other comprehensive  income. The Company's other comprehensive income for
    the nine months ended March 31, 1999 and 1998 consisted of unrealized  gains
    and losses on certain investments in debt securities.  Comprehensive  income
    for the nine months ended March 31, 1999 and 1998 amounted to $1,050,000 and
    $1,380,000, 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.  A $40,000 cash  contribution  from the Bank in December
    1995 and a loan from the Parent in the amount of $2,690,677 funded the ESOP.
    The loan is  secured  by  shares of stock  purchased  by the ESOP and is not
    guaranteed by the Bank.  The Bank funds  principal and interest  payments on
    this loan primarily from  discretionary  contributions.  Dividends,  if any,
    paid on  shares  held by the  ESOP  may  also be used to  reduce  the  loan.
    Dividends on unallocated shares that are used to repay debt are not reported
    as  dividends  in the  consolidated  financial  statements  but  rather  are
    recorded  as an element of  compensation  expense.  Dividends  on  allocated
    shares are  credited to the  accounts of the  participants  and  reported as
    dividends  in the  consolidated  financial  statements.  For the  nine-month
    periods  ended March 31, 1999 and 1998,  ESOP-related  compensation  expense
    totaled  $130,000 and $161,000,  respectively.  For the three-month  periods
    ended March 31, 1999 and 1998,  ESOP-related  compensation  expense  totaled
    $40,000 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 March 31, 1999, 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,
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements

  5) Employee and Director Benefit Plans (continued)
    officers,  and employees of the Bank.  The shares awarded under the MRP were
    issued from  authorized  but  unissued  shares of common stock at no cost to
    recipients.  The  shares  granted  vest  at a rate of 20%  each  year on the
    anniversary  of the  initial  award of  shares  so that the  shares  will be
    completely vested at the end of five years.  During the first nine months of
    fiscal 1999, 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 nine months ended March 31, 1999,  combined with shares
    previously  forfeited,  leaves 5,778 restricted shares unallocated under the
    MRP.  Compensation  expense of $201,000 and $193,000 was recorded during the
    nine-month periods ended March 31, 1999 and 1998,  respectively.  During the
    three  months  ended  March 31,  1999 and  1998,  compensation  expense  was
    recorded of $67,000 and $55,000, 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.
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


7) Earnings per Share

    Basic net income per share, or basic EPS, is computed by dividing net income
    by the weighted average number of common shares  outstanding for the period.
    ESOP shares that are  unallocated  and are not  committed to be released are
    not included in weighted  average shares  outstanding.  Diluted EPS reflects
    the  potential  dilution that could occur if the  Company's  dilutive  stock
    options were  exercised.  The numerator of the basic EPS  computation is the
    same as the  numerator  of the  diluted  EPS  computation  for  all  periods
    presented. A reconciliation of the denominators of the basic and diluted EPS
    computations is as follows:
<TABLE>
<CAPTION>
                                               Three Months Ended           Nine Months Ended
                                                   March 31,                    March 31,
                                            -----------------------     -----------------------
                                              1999           1998          1999          1998
                                            ---------     ---------     ---------     ---------
<S>                                         <C>           <C>           <C>           <C>      
Basic EPS denominator: weighted average
   number of common shares outstanding      2,545,568     2,690,574     2,619,589     2,683,500
Dilutive effect of stock options
                                                 --          26,735           950        26,208
                                            ---------     ---------     ---------     ---------
Diluted EPS denominator                     2,545,568     2,717,309     2,620,539     2,709,708
                                            =========     =========     =========     =========

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

Comparison of Results of Operations for the Nine Months Ended March 31, 1999 and
1997

Summary
For the nine months  ended March 31,  1999,  the Company  recorded net income of
$1,087,000,  or $0.42  basic and  diluted  earnings  per share,  compared to net
income of  $1,224,000,  or $0.46 basic and $0.45 diluted  earnings per share for
the nine months ended March 31, 1998.

Net Interest Income
As shown in the  table  below,  tax-equivalent  net  interest  income  increased
$83,000 to $3,888,000  for the nine months ended March 31, 1999 from  $3,805,000
for the same period in 1998. Net interest income is analyzed on a tax-equivalent
basis  to  adjust  for  the  nontaxable  status  of  income  earned  on  certain
investments such as municipal bonds.
<PAGE>
<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                        --------------------------------------------------------------------------
                                                                        1999                                 1998
                                                        -----------------------------------     ----------------------------------
                                                                                    Average                               Average
                                                         Average       Interest     Yield/      Average     Interest      Yield/
                                                         Balance                    Rate(1)     Balance                   Rate(1)
                                                         -------       --------     -------     -------     --------      -------- 
Assets:                                                                           (dollars in thousands)
<S>                                                      <C>           <C>           <C>       <C>          <C>            <C>   
  Interest-bearing deposits                              $  1,236      $    64       6.90 %    $  1,631     $     42       3.43 %
  FHLB common stock                                         1,167           70       8.00         1,029           56       7.26
  Taxable investment securities                            13,674          650       6.34        11,460          560       6.52
  Tax-exempt investment securities (2)                      3,932          237       8.05         3,941          236       7.98
  Loans receivable                                        106,180        6,694       8.41         6,765      106,273       8.49
                                                         --------      -------       ----      --------     --------       ---- 
Total interest-earning assets                             126,189        7,715       8.15       124,334        7,659       8.21
                                                                       -------       ----                   --------       ---- 
                                                                                                               
Non-interest-earning assets                                 4,138                                 3,288
                                                         --------                              -------- 
     Total                                               $130,327                              $127,622
                                                         ========                              ========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                         87,522        3,044       4.63        83,864        2,972       4.72
  Borrowings                                               18,016          783       5.79        19,675          882       5.98
                                                         --------      -------       ----      --------     --------       ---- 
Total interest-bearing liabilities                        105,538        3,827       4.83       103,539        3,854       4.96
                                                                       -------       ----                   --------       ---- 
                                                                                                              
Non-interest-bearing liabilities                            3,722                                 3,019
Stockholders' equity                                       21,067                                21,064
                                                         --------                              --------
                                                                                                       
     Total                                               $130,327                              $127,622
                                                                                                         
Net interest income and interest rate spread margin                    $ 3,888       3.32 %                 $  3,805      3.25 %
                                                                       =======                              ========          
Net interest-earning assets and net interest             $ 20,651                    4.11 %    $ 20,795                   4.08 %
                                                         ========                              ========                  
Ratio of interest-earning assets to interest-bearing       
liabilities                                                                        119.57 %                             120.08 %
</TABLE>

(1) All information presented in this column is annualized with the exception of
the ratio of interest-earning assets to interest bearing liabilities.

(2) Interest earned on tax-exempt  investment  securities has been adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.25%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.
<PAGE>
The  increase  in net  interest  income is  primarily  due to a higher  level of
interest-earning  assets during the nine months ended March 31, 1999 as compared
to the same period in 1998. Average taxable investment securities increased $2.2
million over the same nine-month  period last year. The average yield on taxable
investment  securities declined 18 basis points while the average yield on loans
receivable  declined 7 basis  points from the nine month  period ended March 31,
1998 to the same  period in 1999.  Interest  rate  spread  (on a  tax-equivalent
basis)  increased  to 3.32% for the nine months  ended March 31, 1999 from 3.25%
for the same nine month period in 1998 primarily due to a decline in the average
yield on total interest  bearing  liabilities.  Net interest margin increased to
4.11% for the nine  months  ended  March 31, 1999 from 4.08% for the nine months
ended March 31, 1998.

Provision for Loan Losses
The  provision  for loan losses for the nine months ended March 31, 1999 totaled
$30,000 compared to $72,000 for the same period in 1998. The decline between the
two  nine  month  periods  was  based  on the  Company's  favorable  charge  off
experience  over the past nine 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  $369,000 for the nine months ended March 31, 1999 compared
to $440,000 for the same period in 1998.  Mortgage loan  servicing fees declined
$49,000 from the first nine months of fiscal 1998 to the same period in 1999 due
to faster  prepayments on the underlying  mortgages in 1999 as compared to 1998.
During the first nine months of fiscal  1998 there was a positive  lower-of-cost
or market  adjustment of $12,000 compared to a negative  lower-of-cost or market
adjustment of $26,000  during the nine months ended March 31, 1999.  The Company
recorded a $80,000  gain on sale of loans during the first nine months of fiscal
1999. There was only one gain on sale of loans totaling $23,000 during the first
nine  months of fiscal  1998.  The  Company  collected  stock  and  mutual  fund
commissions of $57,000  during the first nine months of fiscal 1999.  There were
no  commissions  in the first nine months of fiscal 1998 since the full  service
and discount brokerage subsidiary of the Bank did not begin operations until the
quarter  ended  June 30,  1998.  Lastly,  the  Company  sold real  estate  owned
consisting of one tract of land and recorded a gain of $114,000  during the nine
months  ended  March 31,  1998.  There were no such sales of real  estate  owned
during the nine months ended March 31, 1999.

Other Expenses
Other  expenses  totaled  $2,471,000  for the nine  months  ended March 31, 1999
compared  to  $2,187,000  for the  same  period  in 1998.  Compensation  expense
increased  $167,000  from the quarter ended March 31, 1998 to the same period in
1999.  Some of the  increase  in  compensation  expense is due to normal cost of
living and merit  increases for employees with the remainder of the increase due
to  additional  staffing  for the  Company's  new Durham  and  Chapel  Hill bank
branches.  Data and items  processing  expense  increased  $75,000  for the nine
months  ended  March 31,  1999  compared  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
increased  $56,000  from the nine months ended March 31, 1998 to the same period
in 1999 due to higher  depreciation  expense  associated  with the  purchase  of
computer  equipment  in the third  quarter  of fiscal  1998.  Professional  fees
<PAGE>
declined $53,000 from the nine months ended March 31, 1998 to the same period in
1999  due to  assistance  from  professional  advisors  in  fiscal  1998 for the
Company's  strategic plan and prospective  bank branches.  Other "other" expense
increased  $28,000  from the nine months ended March 31, 1998 to the same period
in 1999 due primarily to increased  expenses  associated  with the Company's new
Durham and Chapel Hill branches.

Income Tax Expense
Income tax  expense  was  $578,000  for the nine  months  ended  March 31,  1999
resulting  in an effective  rate of 34.7%  compared to $672,000 or 35.4% for the
same period in 1998.

Comparison  of Results of  Operations  for the Three Months Ended March 31, 1999
and 1997

Summary
For the  quarter  ended  March 31,  1999,  the  Company  recorded  net income of
$336,000,  or $0.13 basic and diluted earnings per share,  compared to $447,000,
or $0.17 basic and $0.16  diluted  earnings  per share for the same quarter last
year.

Net Interest Income
As shown in the table below,  there was a $11,000 decline in tax-equivalent  net
interest  income  from the  quarter  ended  March 31, 1998 to the same period in
1999. Net interest  income is analyzed on a  tax-equivalent  basis to adjust for
the nontaxable status of income earned on certain  investments such as municipal
bonds.
<PAGE>
<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                        --------------------------------------------------------------------------
                                                                        1999                                 1998
                                                        -----------------------------------     ----------------------------------
                                                                                    Average                               Average
                                                         Average       Interest     Yield/      Average     Interest      Yield/
                                                         Balance                    Rate(1)     Balance                   Rate(1)
                                                         -------       --------     -------     -------     --------      -------
Assets:                                                                               (dollars in  thousands)
<S>                                                 <C>             <C>               <C>         <C>            <C>          <C>   
                                                     
Interest-earning assets:
  Interest-bearing deposits                         $       894     $     21          9.40 %      $     1,626    $    12      2.95 %
                                                                                                          
  FHLB common stock                                       1,201           27          8.99              1,106         20      7.23
  Taxable investment securities                          15,238          236          6.20             11,414        185      6.48
  Tax-exempt investment securities (2)                    4,073           81          7.95              3,995         80      8.01
  Loans receivable                                      105,822        2,207          8.34            109,161      2,333      8.55
                                                    -----------     --------          ----        -----------    -------      ---- 
Total interest-earning assets                           127,228        2,572          8.09            127,302      2,630      8.26
                                                                    --------          ----                       -------      ----  
Non-interest-earning assets                               4,883                                         3,494
                                                    -----------                                    ---------- 
     Total                                          $   132,111                                    $  130,796
                                                    ===========                                    ==========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                       88,695          973          4.45             85,330        987      4.69
  Borrowings                                             19,571          282          5.76             21,126        315      5.96
                                                    -----------     --------          ----        -----------    -------      ---- 
Total interest-bearing liabilities                      108,266        1,255          4.69            106,456      1,302      4.89
                                                                    --------          ----                       -------      ----  
Non-interest-bearing liabilities                          3,289                                         2,970
Stockholders' equity                                     20,556                                        21,370
                                                    -----------                                     --------- 
     Total                                          $   132,111                                     $ 130,796
                                                    ===========                                     =========
Net interest income and interest rate spread                        $  1,317          3.40 %                     $ 1,328      3.37 %
                                                                    ========                                     =======
Net interest-earning assets and net interest margin $    18,962                       4.10 %        $  20,846                 4.13 %
                                                    ===========                                     =========

Ratio of interest-earning assets to interest-bearing                   
liabilities                                                                         117.51 %                                119.58 %
</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 17 basis points from
the three  months  ended March 31, 1998 to the same period in 1999.  Most of the
decline  was caused by a shift in average  interest  earning  assets  from loans
receivable to taxable investment securities.  Average loans receivable decreased
$3.3 million and average taxable  investment  securities  increased $3.8 million
from the three months  ended March 31, 1998 to the same period in 1999.  Some of
the decline in the average yield on total interest  earning assets was caused by
21 and 28 basis  point  declines in the average  yield on loans  receivable  and
taxable investment securities,  respectively,  from the three months ended March
31,  1998 to the same three  month  period in 1999.  The  average  rate on total
interest  bearing  liabilities  declined 20 basis  points from the three  months
ended  March  31,  1998 to the same  three-month  period in 1999.  A shift  from
borrowings  to deposits  from the three  months ended March 31, 1998 to the same
three-month  period in 1999,  as well as a decline in the average  yield/rate on
deposits  and  borrowings  caused the  decline  during the same  period of time.
Interest  rate spread (on a  tax-equivalent  basis)  increased  to 3.40% for the
quarter  March 31, 1999 from 3.37% for the same  quarter in 1998,  while the net
interest margin decreased to 4.10% from 4.13% during the same period of time.

Provision for Loan Losses
The  provision for loan losses for the three months ended March 31, 1999 totaled
$3,000  compared to $24,000 for the same period in 1998. The decline between the
two  three  month  periods  was  based on the  Company's  favorable  charge  off
experience  over the past nine 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  $90,000 for the quarter  ended March 31, 1999 compared to
$207,000 for the same period in 1998.  Increases and decreases in various income
accounts caused the overall decrease in other income. Customer service and other
fees  increased  $11,000  from the three months ended March 31, 1998 to the same
period  in 1999 due to  increases  in ATM  fees and  safety  deposit  box  fees.
Mortgage loan servicing fees declined  $17,000 from the three months ended March
31, 1998 to the same period in 1999 due to faster  prepayments on the underlying
mortgages in 1999 as compared to 1998.  The Company  collected  stock and mutual
fund  commissions of $13,000 during the three months ended March 31, 1999. There
were no  commissions  in the three  months  ended  March 31, 1998 since the full
service and discount  brokerage  subsidiary of the Bank did not begin operations
until the quarter  ended June 30,  1998.  Lastly,  the Company  sold real estate
owned consisting of one tract of land and recorded a gain of $114,000 during the
three months ended March 31, 1998. There were no such sales of real estate owned
during the three months ended March 31, 1999.

Other Expenses
Other  expenses  totaled  $859,000  for the three  months  ended  March 31, 1999
compared to $786,000 for the same period in 1998. Compensation expense increased
$62,000 from the quarter  ended March 31, 1998 to the same period in 1999.  Some
of the  increase  in  compensation  expense is due to normal  cost of living and
merit  increases  for  employees  with  the  remainder  of the  increase  due to
additional  staffing for the  Company's new Durham and Chapel Hill bank branches
during  the third  quarter of fiscal  1999.  Data and items  processing  expense
increased  $35,000  from the quarter  ended March 31, 1998 to the same period in
1999 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
<PAGE>
expense  increased  $18,000  from the  quarter  ended March 31, 1998 to the same
period in 1999 due to higher  depreciation  expense associated with the purchase
and depreciation of computer equipment at the end of the third quarter of fiscal
1998.  Professional  fees declined $27,000 from the three months ended March 31,
1998 to the  same  period  in 1998 due to a branch  feasibility  study  that was
conducted  on behalf  of the bank in the third  quarter  of fiscal  1998.  Other
"other" expense  decreased  $23,000 from the quarter ended March 31, 1998 to the
same period in 1999 due primarily to decreases in training  expense and checking
and savings forms in the three months ended March 31, 1999.

Income Tax Expense
Income tax expense was $178,000 for the quarter  ended March 31, 1999  resulting
in an effective  rate of 34.6% compared to $247,000 or 35.6% for the same period
in 1998.

Financial Condition

CHANGES IN FINANCIAL CONDITION

Total assets  increased $4.0 million or 3.1% to $134.6 million at March 31, 1999
from $130.5  million at June 30, 1998. A decrease in net loans of $6.8  million,
offset  in part by  increases  in  investment  securities  of $9.3  million  and
premises  and  equipment  of $1.2  million,  contributed  to the majority of the
increase  in assets  from June 30,  1998 to March 31,  1999.  Total  liabilities
increased  $5.4 million to $114.3  million at March 31, 1999 from $108.9 million
at June 30,  1998.  Increases  of $2.1  million and $3.3 million in deposits and
Advances  from the Federal  Home Loan Bank made up the majority of the change in
liabilities during the first nine months of fiscal 1999.

Total stockholders'  equity decreased $1.4 million to $20.2 million at March 31,
1999 from $21.6  million at June 30, 1998.  Under a previously  announced  stock
repurchase  plan,  the Company  repurchased  and retired  195,000  shares of its
common stock  during the nine months  ended March 31, 1999.  The average cost of
the shares  repurchased was $9.31 per share for a total cost of $1,833,000.  The
implementation of the share repurchase plan and cash dividends declared were the
primary factors  contributing to the decline in stockholders'  equity during the
nine months ended March 31, 1999.  Mitigating  these decreases was net income of
$1,087,000,  and release of ESOP shares,  amortization of unearned compensation,
and a change in unrealized holding losses on investment  securities of $130,000,
$201,000 and $37,000, 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
March 31, 1999 and June 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
                                                      March 31,      June 30
                                                       1999            1998
                                                     --------       -----------
                                                             (in thousands)
<S>                                                  <C>            <C>     
Total nonaccrual loans                               $    894       $    928
Total restructured loans                                   --             --
                                                     --------       --------
     Total nonperforming loans                            894            928
                                                         
Real estate owned                                          --             --
                                                     --------       --------
Total nonperforming assets                                894            928
                                                          
Accruing loans, delinquent 90 days or more                 --             --
                                                     --------       --------

Total risk assets                                    $    894       $    928
                                                     ========       ========

Nonperforming loans to total loans                       0.90%          0.87%
Nonperforming assets to total assets                     0.66%          0.71%
Risk assets to total assets                              0.66%          0.71%
Allowance for loan losses to:
   Total nonperforming assets                            1.17x          1.02x
   Total risk assets                                     1.17x          1.02x
Total assets                                         $134,572       $ 130,541
Total loans, net                                       99,708         106,500
                                                                     
Allowance for loan losses
                                                        1,048            951

</TABLE>
There were no significant changes in nonperforming  assets outstanding from June
30,  1998 to  March  31,  1999.  Management  has  reviewed  the  collateral  for
nonperforming  assets and believes that  collateral  values related to the loans
exceeds such balances.  The recorded  investment in loans that are considered to
be impaired under SFAS No. 114 (Statement of Financial  Accounting Standards No.
114,  "Accounting  by Creditors for Impairment of a Loan") were $118,000 at both
March 31,  1999 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 nine months ended March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>

                                                     Three months ended                   Nine months ended
                                                             March 31,                         March  31,
                                                    -------------------------          ---------------------
                                                     1999              1998               1999          1998
                                                    -------            ------         ---------      ------
<S>                                                 <C>                <C>            <C>            <C>   
Balance at the beginning of period                  $ 1,029            $  879         $     951      $  796
Provision for loan losses                                 3                24                30          72
Recoveries                                               16                11                75          50
Loans charged off                                         -                 -                (8)         (4)
                                                    -------            ------         ---------      ------

Balance at end of period                            $ 1,048            $  914         $ 1,048         $  914
                                                    =======            ======         =======         ======
</TABLE>

At March 31,  1999,  the  allowance  for loan  losses was 1.04% of total  loans,
compared  to 0.89% of total  loans at June 30,  1998 and 0.82% of total loans at
March 31, 1998.

The  levels  of the  provision  and  allowance  for  loan  losses  are  based on
management's  ongoing  evaluation  of  the  risk  characteristics  of  the  loan
portfolio  considering  current  economic  conditions,  financial  condition  of
borrowers, growth and composition of the loan portfolio,  collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming  loans that have been identified as potential  problems,  past and
expected loss experience,  results of the most recent  regulatory  examinations,
and other factors deemed relevant by management. Management actively maintains a
current  loan watch list and knows of no other loans which are (1)  material and
represent or result from trends or  uncertainties  which  management  reasonably
expects will materially impact future operating results,  liquidity,  or capital
resources,  or (2) represent material credits about which management has serious
doubts as to the ability of such  borrowers  to comply  with the loan  repayment
terms.  Based on  management's  evaluation of the loan  portfolio,  as described
above,  the Company  recorded a $3,000  provision  for loan losses for the three
months ended March 31, 1999 compared to a $24,000  provision for the same period
in 1998.  The  decline  between  the two three  month  periods  was based on the
Company's  favorable  charge off experience  over the past nine 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
<PAGE>
the century and could experience  serious  malfunctions when the last two digits
of the year change to "00" as a result of identifying a year  designated "00" as
the year 1900 rather than the Year 2000.  This  misidentification  could prevent
the Company from being able to engage in normal business operations,  including,
among other  things,  miscalculating  interest  accruals  and the  inability  to
process customer transactions.  Because of the potentially serious ramifications
of the Year  2000  Issue,  the  Company  is  taking  the Year  2000  Issue  very
seriously.  The Company formed a Year 2000 Committee,  which is comprised of the
Company's  management  team, in November of 1997.  Other  employees are actively
involved in the Company's Year 2000 efforts on an as needed basis. The Committee
is  leading  the  Company's  Year 2000  efforts  to ensure  that the  Company is
properly  prepared  for the Year 2000.  The  Company's  Board of  Directors  has
approved a plan  submitted  by the Year 2000  Committee  that was  developed  in
accordance  with  guidelines  set forth by the  Federal  Financial  Institutions
Examination Council.  This plan, which is described in further detail below, has
five primary phases related to internal Year 2000 compliance:

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

2.   Assessment  - during this phase an  inventory  was  conducted  of all known
     Company  processes that could  reasonably be expected to be impacted by the
     Year 2000 Issue and their related vendors, if applicable. This inventory of
     processes and vendors included not only typical computer  processes such as
     the Company's  transaction  applications  systems,  but all known processes
     that could be impacted by  micro-chip  malfunctions.  These include but are
     not limited to the Company's  alarm system,  phone system,  check  ordering
     process,  and ATM network.  The Company  inventoried all the systems listed
     above in December of 1997 and performed an initial  assessment of potential
     risks from either under or nonperformance arising from incorrect processing
     and usage of dates after  December 31,  1999.  At this time the Company had
     already  made the decision to convert in February of 1998 to a new computer
     service  provider  for  processing  all loan,  deposit and  general  ledger
     transactions. In conjunction with the conversion, the Company purchased and
     installed new computers,  printers and related software in January of 1998.
     New hardware and software for a local area network was also  purchased  and
     installed  in January of 1998.  The total cost of the hardware and software
     purchased  by  the  Company  in  fiscal  1998  totaled   $296,000  and  was
     capitalized.  Most of the hardware  and  software  purchased by the Company
     either  is Year  2000  compliant  or will be with  minor  modifications  or
     upgrades.  The  assessment  phase  is  complete,  although  it  is  updated
     periodically as necessary.
<PAGE>
3.   Renovation  and/or  replacement  - this  phase  includes  programming  code
     enhancements,  hardware and software upgrades, system replacements,  vendor
     certification  and  any  other  changes  necessary  to make  any  hardware,
     software  and other  equipment  Year 2000  compliant.  The Company does not
     perform in-house programming,  and thus is dependent on external vendors to
     ensure and modify, if needed,  the hardware,  software or other services it
     provides  to the  Company  for Year  2000  compliance.  As a result  of the
     assessment  performed above, the Company contacted all third party vendors,
     requested  documentation  regarding their Year 2000 compliance efforts, and
     analyzed their responses.  The responses from third party vendors generally
     include an overview of renovation efforts to their systems that the Company
     utilizes. In addition,  some third party software vendors have notified the
     Company  that  upgrades  of their  software  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  performed  follow up tests  with its core
     service provider during the third quarter of fiscal 1999 using future dates
     of February  29,  2000 and March 1, 2000.  The  Company  has  reviewed  the
     results of this test, and this review  indicated that the system  performed
     reliably  and  accurately  when using the future dates of February 29, 2000
     and March 1, 2000. The testing of the remainder of the Company's  processes
     was  substantially  complete as of March 31, 1999 with follow up testing to
     be performed as needed in calendar year 1999.

5.   Implementation  - this phase will occur when the Company's  vendors certify
     their  present  systems as Year 2000  compliant.  This has  occurred on the
     majority of the Company's  systems,  including  the Company's  core service
     provider.  On some  applications  the  Company  is already  entering  dates
     greater than December 31, 1999 into their systems.  In these  situations no
     adverse  events  have been  noted.  The  Company  has  developed a Business
     Resumption  Contingency plan for processes that do not process  information
     reliably and accurately  after December 31, 1999.  This plan is expected to
     be  approved  by the Bank's  Board of  Directors  in late May of 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.
<PAGE>
The Company has also assessed the year 2000 readiness of  significant  borrowers
and  depositors.  In the second  quarter of 1999 the Company  prepared a list of
significant  borrowers and depositors.  After verbal and/or written inquiries of
these  customers,  any that  the  Company  had Year  2000  concerns  about  were
counseled on the Year 2000 issue and urged to take corrective action. Since most
of the  Company's  loans are to  individuals  and  secured by one to four family
residences this step did not require a significant amount of time or resources.

Excluding the hardware and software  purchases noted above, the Company expensed
$6,000 on Year 2000 costs for the quarter ended March 31, 1999,  and $18,000 for
the nine  months  ended  March 31,  1999.  There were no Year 2000 costs for the
quarter and nine months ended March 31, 1998.  Based on an analysis of projected
expenses  performed in the second  quarter of fiscal 1999, the total cost of the
Year 2000  project is currently  estimated at $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
<PAGE>
investment  securities,  maturities of investment  securities  held-to-maturity,
increases in deposits, and advances from the FHLB of Atlanta. At March 31, 1999,
the Bank had $14.3  million  of  credit  available  from the FHLB that  would be
collateralized  by a blanket lien on qualifying loans secured by first mortgages
on 1-4 family  residences.  Additional  amounts may be made available under this
blanket  floating  lien  or  by  using  investment   securities  as  collateral.
Management  believes that it will have  sufficient  funds  available to meet its
anticipated future loan commitments as well as other liquidity needs.

Interest rate risk is the sensitivity of interest income and interest expense to
changes in  interest  rates.  Management  structures  the  Company's  assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated  with changes in interest rates. At March 31, 1999, the Company had a
cumulative one-year  liability-sensitive gap position of $15.4 million or 11.94%
of  interest-earning   assets.  A  liability-sensitive  gap  position  generally
indicates  that  net  interest   income  would  increase  in  a  declining  rate
environment  and  decrease  in a rising  rate  environment.  The  Company  had a
cumulative one year  liability-sensitive  gap position of $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
March  31,  1999,  management  believes  that its  interest  rate  risk is at an
acceptable level.


CAPITAL RESOURCES

The Parent is regulated by the Board of Governors of the Federal  Reserve System
("FRB")  and  is  subject  to  securities   registration  and  public  reporting
regulations of the Securities and Exchange Commission.  The Bank is regulated by
the  Federal  Deposit  Insurance  Corporation  ("FDIC")  and the  Administrator,
Savings  Institutions  Division,  North  Carolina  Department of Commerce,  (the
"Administrator").  The Bank is subject to the capital  requirements  of the FDIC
and the Administrator.  The FDIC requires the Bank to maintain minimum ratios of
Tier I capital to total risk-weighted  assets and total capital to risk-weighted
assets  of  4%  and  8%,   respectively.   Tier  I  capital  consists  of  total
stockholders' equity calculated in accordance with generally accepted accounting
principles  less  intangible  assets,  and total  capital is comprised of Tier I
capital plus certain  adjustments,  the only one  applicable  to the Bank is the
allowance  for possible loan losses.  Risk-weighted  assets refer to the on- and
off-balance  sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement,  which calls for a minimum ratio of Tier I capital
(as defined above) to quarterly  average total assets of 3% and a ratio of 5% to
be "well-capitalized".  The Administrator requires a net worth equal to at least
5% of total assets.  At March 31, 1999,  the Bank was in compliance  with all of
the aforementioned capital requirements.
<PAGE>
As of March  31,  1999,  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.


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 March 31, 1999
that may 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:    May ___, 1999                By:  /s/ D. Tyson Clayton
                                           --------------------
                                           D. Tyson Clayton                   
                                           President and Chief Executive Officer


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