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

                                    FORM 10-Q

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

                         For the quarterly period ended
                               September 30, 1998

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

                        Commission File Number 001-14070

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

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

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

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

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

                                [ X ] Yes [  ] No

As of November 3, 1998,  2,661,133 shares of the  registrant's  common stock, no
par value, were  outstanding.  The registrant has no other classes of securities
outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                         PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                              CONSOLIDATED BALANCE SHEETS

                                                                            September 30,    June 30,
                                                                                1998           1998
                                                                             (unaudited)        *
                                                                              ---------      ---------
                                                                           (in thousands, except shares)
<S>                                                                           <C>            <C>      
                                     Assets
                                     ------
Cash                                                                          $     828      $     823
Interest-bearing deposits in other financial institutions                         1,561          1,821
Investment securities:
   Available-for-sale                                                            14,590         13,775
   Held-to-maturity                                                               3,215          3,250
Loans receivable (net of allowance for loan losses of $1,005 and
   $951 at September 30, 1998 and June 30, 1998, respectively)                  102,801        106,500
Federal Home Loan Bank stock, at cost                                             1,152          1,152
Premises and equipment                                                            1,440          1,414
Prepaid expenses and other assets                                                 2,020          1,806
                                                                              ---------      ---------
          Total assets                                                        $ 127,607      $ 130,541
                                                                              =========      =========
                      Liabilities and Stockholders' Equity
                      ------------------------------------

                                  Liabilities
                                  -----------
Deposits:
   Demand, non-interest bearing                                                   2,449          2,844
   Savings, NOW and MMDA                                                         31,895         32,800
   Certificates of Deposit                                                       54,767         54,196
                                                                              ---------      ---------
                                                                                 89,111         89,840
Advances from the Federal Home Loan Bank                                         15,929         18,000
Accrued expenses and other liabilities                                            1,320          1,095
                                                                              ---------      ---------
     Total liabilities                                                          106,360        108,935
                                                                              ---------      ---------

<PAGE>
<CAPTION>
                                         PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                              CONSOLIDATED BALANCE SHEETS

                                                                            September 30,    June 30,
                                                                                1998           1998
                                                                             (unaudited)        *
                                                                              ---------      ---------
                                                                           (in thousands, except shares)
<S>                                                                           <C>            <C>      
                              Stockholders' Equity
                              --------------------

Preferred stock, no par value, 5,000,000 shares authorized;
   none issued                                                                     --             --
Common stock, no par value, 20,000,000 shares authorized; 2,687,633 and
   2,750,800 shares issued and outstanding at September 30, 1998 and June
   30, 1998, respectively                                                         8,495          9,121
Unearned ESOP shares                                                               (620)          (679)
Unamortized deferred compensation                                                  (864)          (953)
Unallocated restricted stock                                                        (87)           (61)
Retained earnings, substantially restricted (note 6)                             14,201         14,101
Accumulated other comprehensive income                                              122             77
                                                                              ---------      ---------
      Total stockholders' equity                                                 21,247         21,606
                                                                              ---------      ---------

          Total liabilities and stockholders' equity                          $ 127,607      $ 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
                                                                       September 30,
                                                                    -----------------
                                                                     1998       1997
                                                                    ------     ------
                                                          (in thousands, except per share data)
<S>                                                                 <C>        <C>   
Interest income:
   Interest on loans                                                $2,299     $2,187
   Interest on deposits in other financial institutions                 22         16
   Interest and dividends on investment securities:
      Taxable                                                          233        203
      Non-taxable                                                       48         48
                                                                    ------     ------
            Total interest income                                    2,602      2,454
                                                                    ------     ------

Interest expense:
   Interest on deposits                                              1,042        993
   Interest on borrowings                                              271        266
                                                                    ------     ------
            Total interest expense                                   1,313      1,259
                                                                    ------     ------
Net interest income                                                  1,289      1,195
Provision for loan losses                                               24         24
                                                                    ------     ------
            Net interest income after provision for loan losses      1,265      1,171
                                                                    ------     ------
Other income:
   Customer service and other fees                                      51         52
   Mortgage loan servicing fees                                          6         21
   Gain on sale of investment securities                              --            6
   Lower-of-cost or market adjustment on loans held-for-sale          --           33
   Gain on sale of loans                                                40       --
   Stock and mutual fund commissions                                    24       --
   Other                                                                30         25
                                                                    ------     ------
            Total other income                                         151        137
                                                                    ------     ------

<PAGE>
<CAPTION>
               PIEDMONT BANCORP, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF INCOME (unaudited)

                                                                     Three Months Ended
                                                                       September 30,
                                                                    -----------------
                                                                     1998       1997
                                                                    ------     ------
                                                          (in thousands, except per share data)
<S>                                                                 <C>        <C>   
Other expenses:
   Compensation and fringe benefits (note 5)                           457        423
   Data and items processing                                            87         55
   Deposit insurance premiums                                           13         13
   Occupancy expense                                                    26         25
   Furniture and equipment expense                                      43         25
   Professional fees                                                    43         37
   Other                                                               114         93
                                                                    ------     ------
            Total other expenses                                       783        671
                                                                    ------     ------

            Income before income tax expense                           633        637
Income tax expense                                                     219        223
                                                                    ------     ------
                  Net income                                        $  414     $  414
                                                                    ======     ======

Net income per share - basic (notes 2 and 7)                        $ 0.15     $ 0.15
                                                                    ======     ======

Net income per share - diluted (notes 2 and 7)                      $ 0.15     $ 0.15
                                                                    ======     ======
</TABLE>


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

                                                                                         Three months ended
                                                                                            September 30,
                                                                                         1998          1997
                                                                                        -------      -------
<S>                                                                                     <C>          <C>    
Operating activities:
   Net income                                                                           $   414      $   414
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation                                                                        39           25
         Net amortization (accretion)                                                        13           26
         Provision for loan losses                                                           24           24
         Net gain on sale of investments and mortgage-backed securities                    --             (6)
         Gain on sale of loans                                                              (40)        --
         Release of ESOP shares                                                              45           62
         Compensation earned under MRP                                                       63           65
         Net decrease (increase) in mortgage loans held for sale                           (880)        (609)
         Increase in other assets                                                          (251)        (326)
         Increase in other liabilities                                                      235          330
                                                                                        -------      -------
               Net cash provided by operating activities                                   (338)           5
                                                                                        -------      -------
Investing activities:
   Net (increase) decrease in loans held for investment                                   4,607       (3,519)
   Principal collected on mortgage-backed securities                                        290           95
   Purchases of investment securities classified as available-for-sale                     (500)      (2,782)
   Purchases of mortgage-backed securities classified as available-for-sale                (782)        --
   Proceeds from investment securities called by issuer                                     280           10
   Proceeds of sales of mortgage-backed-securities classified as available-for-sale        --          1,508
   Purchases of Federal Home Loan Bank stock                                               --            (58)
   Purchases of premises and equipment                                                      (65)          (2)
                                                                                        -------      -------
               Net cash used by investing activities                                      3,830       (4,748)
                                                                                        -------      -------
Financing activities:
   Net increase (decrease) in time deposits                                                 571         (685)
   Net increase (decrease) in other deposits                                             (1,300)         717
   Proceeds from borrowings                                                                --          6,050
   Repayments of borrowings                                                              (2,071)      (3,000)
   Purchase and retirement of common stock                                                 (623)        --
   Cash dividends paid to shareholders                                                     (324)        (263)
                                                                                        -------      -------
               Net cash provided by financing activities                                 (3,747)       2,819
                                                                                        -------      -------
               Increase (decrease) in cash and cash equivalents                            (255)      (1,924)
Cash and cash equivalents at beginning of period                                          2,644        4,645
                                                                                        -------      -------
Cash and cash equivalents at end of period                                              $ 2,389      $ 2,721
                                                                                        =======      =======

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

                                                                                         Three months ended
                                                                                            September 30,
                                                                                         1998          1998
                                                                                        -------      -------
<S>                                                                                     <C>          <C>    
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest                                                                          $ 1,287      $ 1,235
                                                                                        =======      =======
      Income taxes                                                                      $    59      $    45
                                                                                        =======      =======
Supplemental disclosure of noncash transactions:
   Unrealized gains (losses) on available-for-sale securities,
      net of deferred taxes of  $79 and $53                                             $   122       $   83
                                                                                        =======      =======
   Dividends declared but unpaid                                                            314          263
                                                                                        =======      =======
</TABLE>

See accompanying notes to financial statements.

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

                                                                                                                               
                                                                                  Unearned  Unamortized  Unallocated           
                                                         Shares        Common      ESOP      Deferred    Restricted   Retained 
                                                       Outstanding      Stock      Shares  Compensation    Stock      Earnings 
                                                        ---------      ------      -----      -------      -----      -------  
                                                                                        (dollars in thousands)
<S>                                                     <C>            <C>         <C>        <C>          <C>        <C>      
Balance at June 30, 1997                                2,750,800      $9,143      $(933)     $(1,269)     $ (21)     $13,580  
      Net income                                             --          --         --           --         --            414  
      Release of ESOP shares                                 --           (12)        74         --         --           --    
      Amortization of unearned compensation                  --          --         --             65       --           --    
      Forfeiture of restricted stock                         --          --         --             37        (37)        --    
      Tax benefit of dividends on restricted stock           --            (3)      --           --         --           --    
      Cash dividends declared, net of                                                                                          
         forfeited dividends on restricted stock             --            17       --           --         --           (263) 
      Change in unrealized holding gains (losses),                                                                             
         net of income taxes                                 --          --         --           --         --           --    
                                                        ---------      ------      -----      -------      -----      -------  
Balance at September 30, 1997                           2,750,800      $9,145      $(859)     $(1,167)     $ (58)     $13,731  
                                                        =========      ======      =====      =======      =====      =======  
                                                                                                                               
Balance at June 30, 1998                                2,750,800      $9,121      $(679)     $  (953)     $ (61)     $14,101  
      Net income                                             --          --         --           --         --            414  
      Purchase and retirement of common stock             (63,167)       (623)      --           --         --           --    
      Release of ESOP shares                                 --           (14)        59         --         --           --    
      Amortization of unearned compensation                  --          --         --             63       --           --    
      Forfeiture of restricted stock                         --          --         --             26        (26)        --    
      Tax benefit of dividends on restricted stock           --            (1)      --           --         --           --    
      Cash dividends declared, net of                                                                                          
         forfeited dividends on restricted stock             --            12       --           --         --           (314) 
      Change in unrealized holding gains (losses),                                                                             
         net of income taxes                                 --          --         --           --         --           --    
                                                        ---------      ------      -----      -------      -----      -------  
Balance at September 30, 1998                           2,687,633      $8,495      $(620)     $  (864)     $ (87)     $14,201  
                                                        =========      ======      =====      =======      =====      =======  

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

                                                        Accumulated
                                                          other          Total
                                                       comprehensive  Stockholders'
                                                          income         Equity
                                                          -----         -------
                                                       
<S>                                                       <C>           <C>    
Balance at June 30, 1997                                  $ (84)        $20,416
      Net income                                           --               414
      Release of ESOP shares                               --                62
      Amortization of unearned compensation                --                65
      Forfeiture of restricted stock                       --              --
      Tax benefit of dividends on restricted stock         --                (3)
      Cash dividends declared, net of                                
         forfeited dividends on restricted stock           --              (246)
      Change in unrealized holding gains (losses),                   
         net of income taxes                                 83              83
                                                          -----         -------
Balance at September 30, 1997                             $  (1)        $20,791
                                                          =====         =======
                                                                     
Balance at June 30, 1998                                  $  77         $21,606
      Net income                                           --               414
      Purchase and retirement of common stock              --              (623)
      Release of ESOP shares                               --                45
      Amortization of unearned compensation                --                63
      Forfeiture of restricted stock                       --              --
      Tax benefit of dividends on restricted stock         --                (1)
      Cash dividends declared, net of                                
         forfeited dividends on restricted stock           --              (302)
      Change in unrealized holding gains (losses),                   
         net of income taxes                                 45              45
                                                          -----         -------
Balance at September 30, 1998                             $ 122         $21,247
                                                          =====         =======

</TABLE>
                                                                  

See accompanying notes to consolidated 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
    September 30, 1998 and for the three month periods ending September 30, 1998
    and September  30, 1997 in conformity  with  generally  accepted  accounting
    principles.  Operating  results for the three month period ending  September
    30, 1998 are not necessarily  indicative of the results that may be expected
    for the fiscal year ending June 30, 1999.

3) Cash and Cash Equivalents

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

4) Comprehensive Income

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

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

    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 three months ended September 30, 1998 consisted of unrealized  gains and
    losses on certain investments in debt securities.  Comprehensive  income for
    the three months ended  September 30, 1998 and 1997 amounted to $459,000 and
    $497,000, respectively.

5) Employee and Director Benefit Plans

    The  Company  has an  employee  stock  ownership  plan  ("ESOP")  whereby an
    aggregate  number of shares  amounting to 211,600 were  purchased for future
    allocation to employees. Contributions to the ESOP are made by the Bank on a
    discretionary  basis, and are allocated among ESOP participants on the basis
    of relative  compensation  in the year of allocation.  Benefits will vest in
    full upon five years of service with credit given for years of service prior
    to the conversion.  The ESOP was funded by a $40,000 cash  contribution from
    the Bank in  December  1995 and a loan  from the  Parent  in the  amount  of
    $2,690,677. The loan is secured by shares of stock purchased by the ESOP and
    is not guaranteed by the Bank.  Principal and interest payments on this loan
    are  funded  primarily  from   discretionary   contributions  by  the  Bank.
    Dividends,  if any,  paid on  shares  held by the  ESOP  may also be used to
    reduce the loan.  Dividends  on  unallocated  shares which are used to repay
    debt are not reported as dividends in the consolidated  financial statements
    but rather are recorded as an element of compensation expense.  Dividends on
    allocated  shares are  credited  to the  accounts  of the  participants  and
    reported as  dividends in the  consolidated  financial  statements.  For the
    three  month  period  ending  September  30,  1998  and  1997,  ESOP-related
    compensation   expense   totaled   $45,000   and   $62,000,    respectively.
    Additionally, in December of 1997, 19,918 shares were released to individual
    participant  accounts. At September 30, 1998, a total of 148,837 shares have
    been released and allocated to participants under the Plan and 62,763 shares
    remain unallocated.

    The Bank has a management  recognition  plan ("MRP") which serves as a means
    of providing  existing directors and employees of the Bank with an ownership
    interest in the  Company.  On August 29,  1996,  restricted  stock awards of
    105,800  shares were made to 38  directors,  officers,  and employees of the
    Bank.  The shares  awarded  under the MRP were  issued from  authorized  but
    unissued shares of common stock at no cost to recipients. The shares granted
    vest at a rate of 20% each year on the  anniversary  of the initial award of
    shares  so that the  shares  will be  completely  vested  at the end of five
    years. During the first three months of
<PAGE>
                      PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements

    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 participant on the restricted shares. The dividends refunded to the Bank
    have been  reflected as an addition to common  stock.  The shares  forfeited
    during the three  months ended  September  30,  1998,  combined  with shares
    previously  forfeited,  leaves 5,778 restricted shares unallocated under the
    MRP.  Compensation  expense of $63,000 and $65,000 was  recorded  during the
    three months ended September 30, 1998 and 1997, 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
                                                            September 30,
                                                       ------------------------
                                                          1998           1997
                                                          ----           ----
<S>                                                    <C>            <C>      
Basic EPS denominator: weighted average
   number of common shares outstanding                 2,684,045      2,713,220
Dilutive effect of stock options                           9,738             -
                                                       ---------      ---------
Diluted EPS denominator                                2,693,783      2,713,220
                                                       =========      =========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Comparison of Results of Operations for the Three Months Ended
September 30, 1998 and 1997

Summary
-------

For the quarter  ended  September 30, 1998,  the Company  recorded net income of
$414,000,  or $0.15 per share,  compared to $414,000, or $0.15 per share for the
same quarter last year.


Net Interest Income
-------------------

As shown in the  table  below,  tax-equivalent  net  interest  income  increased
$94,000 to $1,319,000 for the quarter ended  September 30, 1998 from  $1,225,000
for the same period in 1997. Net interest income is analyzed on a tax-equivalent
basis  to  adjust  for  the  nontaxable  status  of  income  earned  on  certain
investments such as municipal bonds.

<PAGE>
<TABLE>
<CAPTION>
                                                                                  Three Months Ended September 30,
                                                               -------------------------------------------------------------------
                                                                             1998                                1997
                                                               -------------------------------     -------------------------------
                                                                                      Average                              Average
                                                                 Average               Yield/       Average                 Yield/
                                                                 Balance   Interest   Rate(1)       Balance    Interest    Rate(1)
                                                               -------------------------------     -------------------------------
                                                                                       (dollars in thousands)  
<S>                                                            <C>          <C>       <C>          <C>          <C>        <C>  
Assets:
Interest-earning assets:
  Interest-bearing deposits                                    $  1,438     $   22      6.12%      $  1,589     $   16       4.03%
  FHLB common stock                                               1,150         22      7.65            939         17       7.24
  Taxable investment securities                                  12,665        211      6.66         11,408        186       6.52
  Tax-exempt investment securities (2)                            3,863         78      8.08          3,900         78       8.00
  Loans receivable                                              108,196      2,299      8.50        103,065      2,187       8.49
                                                               --------     ------      ----       --------     ------       ----
Total interest-earning assets                                   127,312      2,632      8.27        120,901      2,484       8.22
                                                                            ------      ----                    ------       ----
Non-interest-earning assets                                       3,631                               3,046
                                                               --------                            --------
     Total                                                     $130,943                            $123,947
                                                               ========                            ========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                               86,089      1,042      4.80         82,229        993       4.79
  Borrowings                                                     19,022        271      5.70         17,574        266       6.05
                                                               --------     ------      ----        -------     ------       ----
Total interest-bearing liabilities                              105,111      1,313      5.00         99,803      1,259       5.05
                                                                            ------      ----                    ------       ----
Non-interest-bearing liabilities                                  4,187                               3,367
Stockholders' equity                                             21,645                              20,777
                                                               --------                            --------
     Total                                                     $130,943                            $123,947
                                                               ========                            ========
Net interest income and interest rate spread                                $1,319      3.27%                   $1,225       3.17%
                                                                            ======                              ======
Net interest-earning assets and
 net interest margin                                           $ 22,201                 4.17%      $ 21,098                  4.08%
                                                               ========                            ========
Ratio of interest-earning assets to
 interest-bearing liabilities                                                         121.12%                              121.14%
</TABLE>

(1)      All  information  presented  in this  column  is  annualized  with  the
         exception of the ratio of  interest-earning  assets to interest bearing
         liabilities.  (2) Interest earned on tax-exempt  investment  securities
         has been  adjusted  to a  tax-equivalent  basis  using  the  applicable
         federal and state rates of 34% and 7.25%, respectively,  and reduced by
         the nondeductible portion of interest expense.
<PAGE>
The  increase  in net  interest  income is due to a higher  level of average net
interest-earning  assets as well as a higher  average  yield  during the quarter
ended September 30, 1998 compared to the same quarter last year. The majority of
the increase in  interest-earning  assets is due to an increase in average loans
receivable to  $108,196,000  for the three months ended  September 30, 1998 from
$103,065,000 for the three months ended September 30, 1997. Interest rate spread
(on a  tax-equivalent  basis) increased to 3.27% for the quarter ended September
30,  1998 from  3.17% for the same  quarter  in 1997 due to an  increase  in the
weighted average yield on interest-earning assets and a decrease in the weighted
average  yield on  interest-bearing  liabilities.  The  increase in the weighted
average yield on assets was caused by a shift in the mix toward  higher  earning
assets,  principally  loans. Some of the increase was also caused by an increase
in the weighted  average yield on taxable  investment  securities.  Net interest
margin  increased to 4.17% for the three months  ended  September  30, 1998 from
4.08% for the three months ended September 30, 1997.

Provision for Loan Losses

The  provision  for loan losses for the three  months ended  September  30, 1998
totaled  $24,000  compared to $24,000 for the same period in 1997. 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  $151,000 for the quarter ended September 30, 1998 compared
to $137,000  for the same period in 1996.  The overall  increase in other income
was caused by increases  and decreases in other income  accounts.  Mortgage loan
servicing  fees  declined  $15,000 from the first three months of fiscal 1998 to
the same period in 1999 due to faster prepayments on the underlying mortgages in
fiscal 1999 as compared to fiscal  1998.  Gain on sale of  investments  declined
$6,000 from the first three months of fiscal 1998 compared to the same period in
1999 because  there were no sales of  investment  securities  in the first three
months of fiscal year 1999.  During the first three  months of fiscal 1998 there
was a  positive  lower-of-cost  or market  adjustment  of  $33,000  that was not
present  during the first three  months of fiscal 1999.  The Company  recorded a
$40,000  gain on sale of loans  during the first  three  months of fiscal  1999.
There were no such loan sales during the first three months of fiscal 1998.  The
Company  collected stock and mutual fund commissions of $24,000 during the first
three months of fiscal 1999. There were no commissions in the first three months
of fiscal 1998 since the full service and discount  brokerage  subsidiary of the
Bank did not begin  operations  until the  quarter  ended  March 31,  1998.  The
increase of $5,000 in other "other" income from the first quarter of fiscal 1998
to the same period in 1999 was caused by increases in life insurance commissions
and VISA and Mastercard interchange income.
<PAGE>
Other Expenses

Other expenses  totaled  $783,000 for the three months ended  September 30, 1998
compared to $671,000 for the same period in 1997. Compensation expense increased
$34,000 from the quarter ended September 30, 1997 to the same period in 1998 due
to the hiring of several employees during the second,  third and fourth quarters
of fiscal year 1998. Data and items processing  expense  increased  $32,000 from
the  quarter  ended  September  30,  1997 to the same  period in 1998 due to the
Bank's  conversion to a new data  processor in the third quarter of fiscal 1998.
The  Bank's new  processor  provides a higher  level of service  and  technology
compared to the Bank's  previous  processor.  Furniture  and  equipment  expense
increased  $18,000 from the quarter ended  September 30, 1997 to the same period
in 1998 due to higher  depreciation  expense  associated  with the  purchase  of
computer  equipment in the third quarter of fiscal 1998.  Other "other"  expense
increased  $21,000 from the quarter ended  September 30, 1997 to the same period
in 1998  due  primarily  to  increases  in  savings  forms,  postage,  dues  and
subscriptions  and VISA and  Mastercard  merchant  expenses in the three  months
ended September 30, 1998.

Income Tax Expense

Income tax  expense  was  $219,000  for the  quarter  ended  September  30, 1998
resulting  in an effective  rate of 34.6%  compared to $223,000 or 35.0% for the
same period in 1997.

Financial Condition

CHANGES IN FINANCIAL CONDITION

Total assets  decreased  $2.9 million or 2.2% to $127.6 million at September 30,
1998 from  $130.5  million at June 30,  1998.  A  decrease  in net loans of $3.7
million and an increase in investment  securities of $780,000 from June 30, 1998
to  September  30, 1998  contributed  to the  majority of the decrease in assets
during the same period of time. Total liabilities decreased $2.5 million or 2.3%
to $106.4  million at September  30, 1998 from $108.9  million at June 30, 1998.
Decreases of $729,000 and $2.1 million in total deposits and borrowings from the
Federal  Home Loan Bank of Atlanta,  respectively,  from  September  30, 1997 to
September 30, 1998 accounted for the decline.

Total stockholders'  equity decreased $400,000 to $21.2 million at September 30,
1998 from $21.6  million at June 30, 1998.  Under a previously  announced  stock
repurchase plan, the Company repurchased and retired 63,167 shares of its common
stock  during the quarter  ended  September  30,  1998.  The average cost of the
shares  repurchased  was  $9.86  per share  for a total  cost of  $623,000.  The
implementation of the share repurchase plan and cash dividends declared were the
primary factors  contributing to the decline in stockholders'  equity during the
quarter ended September 30, 1998.  Mitigating these decreases were quarterly net
income of  $414,000,  and  release  of ESOP  shares,  amortization  of  unearned
compensation,  and a change in unrealized holding gains on investment securities
of $45,000, $63,000 and $45,000, respectively.
<PAGE>
ASSET QUALITY

Nonperforming Assets and Risk Assets

Nonperforming  assets  include  nonaccrual  loans,  restructured  loans and real
estate  owned.  The  table  on  the  following  page  presents   information  on
nonperforming  assets and loans  contractually  past due but still  accruing  at
September 30, 1998 and June 30, 1998.
<TABLE>
<CAPTION>
                                                September 30,     June 30,
                                                   1998             1998
                                                 --------         --------
                                                      (in thousands)
<S>                                              <C>              <C>     
Total nonaccrual loans                           $    863         $    928
Total restructured loans                               -                -
                                                 --------         --------
     Total nonperforming loans                        863              928
Real estate owned                                      -                -
                                                 --------         --------
Total nonperforming assets                            863              928

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

Total risk assets                                $    863         $    928
                                                 ========         ========

Nonperforming loans to total loans                   0.84%            0.87%
Nonperforming assets to total assets                 0.68%            0.71%
Risk assets to total assets                          0.68%            0.71%
Allowance for loan losses to:
   Total nonperforming assets                        1.16x            1.02x
   Total risk assets                                 1.16x            1.02x
Total assets                                     $127,607         $130,541
Total loans, net                                  102,801          106,500
Allowance for loan losses                           1,005              951
</TABLE>

There were no significant changes in nonperforming  assets outstanding from June
30, 1998 to September  30, 1998.  Management  has  reviewed the  collateral  for
nonperforming  assets and believes that  collateral  values related to the loans
exceeds such balances.  The recorded  investment in loans that are considered to
be impaired under SFAS No. 114 (Statement of Financial  Accounting Standards No.
114,  "Accounting  by Creditors for Impairment of a Loan") were $118,000 at both
September 30, 1998 and June 30, 1998. There was no related  allowance for credit
losses  associated  with these loans as determined  in accordance  with SFAS No.
114.  Management  has included  this review among the factors  considered in the
evaluation of the allowance for possible loan losses.
<PAGE>
Provision and Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for
the three months ended September 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
                                                            Three months ended
                                                               September 30,
                                                          ----------------------
                                                           1998            1997
                                                          ------          ------
<S>                                                       <C>             <C>   
Balance at the beginning of period                        $  951          $  796
Provision for loan losses                                     24              24
Recoveries                                                    30              34
Loans charged off                                           --              --
                                                          ------          ------
Balance at the end of period                              $1,005          $  854
                                                          ======          ======
</TABLE>

At September  30, 1998,  the allowance for loan losses was 0.97% of total loans,
compared  to 0.89% of total  loans at June 30,  1998 and 0.81% of total loans at
September 30, 1997.

The  levels  of the  provision  and  allowance  for  loan  losses  are  based on
management's  ongoing  evaluation  of  the  risk  characteristics  of  the  loan
portfolio  considering  current  economic  conditions,  financial  condition  of
borrowers, growth and composition of the loan portfolio,  collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming  loans that have been identified as potential  problems,  past and
expected loss experience,  results of the most recent  regulatory  examinations,
and other factors deemed relevant by management. Management actively maintains a
current  loan watch list and knows of no other loans which are (1)  material and
represent or result from trends or  uncertainties  which  management  reasonably
expects will materially impact future operating results,  liquidity,  or capital
resources,  or (2) represent material credits about which management has serious
doubts as to the ability of such  borrowers  to comply  with the loan  repayment
terms.  Based on  management's  evaluation of the loan  portfolio,  as described
above,  the Company  recorded a $24,000  provision for loan losses for the three
months ended  September  30, 1998  compared to a $24,000  provision for the same
period in 1997.
<PAGE>
YEAR 2000 ISSUE

The Company recognizes and is addressing the potentially severe  implications of
the "Year 2000  Issue." The "Year 2000 Issue" is a general term used to describe
the various  problems that may result from the improper  processing of dates and
date-sensitive calculations as the Year 2000 approaches. This issue is caused by
the fact that many of the world's existing computer programs use only two digits
to  identify  the  year in the date  field of a  program.  These  programs  were
designed and developed without  considering the impact of the upcoming change in
the century and could experience  serious  malfunctions when the last two digits
of the year change to "00" as a result of identifying a year  designated "00" as
the year 1900 rather than the Year 2000.  This  misidentification  could prevent
the Company from being able to engage in normal business operations,  including,
among other  things,  miscalculating  interest  accruals  and the  inability  to
process customer transactions.  Because of the potentially serious ramifications
of the Year  2000  Issue,  the  Company  is  taking  the Year  2000  Issue  very
seriously.  The Company  formed a Year 2000  Committee,  which is comprised of a
cross-section of the Company's employees, in November of 1997. This Committee is
leading the  Company's  Year 2000 efforts to ensure that the Company is properly
prepared for the Year 2000. The Company's Board of Directors has approved a plan
submitted  by the Year 2000  Committee  that was  developed in  accordance  with
guidelines set forth by the Federal Financial Institutions  Examination Council.
This plan,  which is described in further detail below,  has five primary phases
related to internal Year 2000 compliance:

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

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

5.       Implementation  - this  phase  will  occur  when Year  2000  processing
         commences.  On some  applications the Company is already entering dates
         greater than December 31, 1999 into their systems.  In these situations
         no  adverse  events  have  been  noted.  The  significant  part  of the
         implementation phase will occur after December 31, 1999. The Company is
         in the process of developing  contingency  plans for processes  that do
         not process  information  reliably and  accurately  after  December 31,
         1999. The  contingency  plans for all systems  should be  substantially
         complete by the end of the second quarter of fiscal 1999.

The  Company is also in the  process of  assessing  the year 2000  readiness  of
significant borrowers and depositors.  In the second quarter of 1999 the Company
plans on making a list of significant  borrowers and  depositors.  Customers who
the  Company has Year 2000  concerns  about will be  counseled  on the Year 2000
issue and urged to take corrective  action.  Since the majority of the Company's
loans are to individuals and secured by one to four family  residences this step
is not expected to require a significant amount of time or resources.
<PAGE>
Excluding the hardware and software  purchases noted above, the Company expensed
$6,000 on Year 2000 costs for the quarter ended  September 30, 1998.  There were
no Year  2000  costs for the  quarter  ended  September  30,  1997.  Based on an
analysis of projected expenses performed in the last quarter of fiscal 1998, 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.
<PAGE>
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

Liquidity  is the ability to raise  funds or convert  assets to cash in order to
meet customer and operating  needs.  The Company's  primary sources of liquidity
are its portfolio of  investment  securities  available-for-sale,  principal and
interest payments on loans and mortgage-backed securities,  interest income from
investment  securities,  maturities of investment  securities  held-to-maturity,
increases in deposits,  and advances from the FHLB of Atlanta.  At September 30,
1998,  the Bank had $14.0 million of credit  available from the FHLB which would
be  collateralized  by a  blanket  lien on  qualifying  loans  secured  by first
mortgages on 1-4 family  residences.  Additional  amounts may be made  available
under  this  blanket  floating  lien  or  by  using  investment   securities  as
collateral.  Management believes that it will have sufficient funds available to
meet its anticipated future loan commitments as well as other liquidity needs.

Interest rate risk is the sensitivity of interest income and interest expense to
changes in  interest  rates.  Management  structures  the  Company's  assets and
liabilities in an attempt to protect net interest income from large fluctuations
associated  with changes in interest  rates.  At September 30, 1998, the Company
had a cumulative one year  asset-sensitive gap position of $3.7 million or 3.00%
of  interest-earning  assets. A asset-sensitive gap position generally indicates
that net interest  income would  decrease in a declining  rate  environment  and
increase in a rising rate  environment.  The Company had a  cumulative  one year
liability-sensitive  gap position of $11.8 million or 7.09% of  interest-earning
assets at June 30,  1998.  The Company  will  continue  to  actively  manage its
balance  sheet in order  protect net  interest  income from  changes in interest
rates.

It should be noted that these measures reflect the  interest-sensitivity  of the
balance sheet as of a specific date and are not necessarily indicative of future
results.  Because  of this  and  other  limitations,  management  also  monitors
interest rate sensitivity  through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest  sensitivity  measures as of
September  30, 1998,  management  believes  that its interest rate risk is at an
acceptable level.
<PAGE>
CAPITAL RESOURCES

The Parent is regulated by the Board of Governors of the Federal  Reserve System
("FRB")  and  is  subject  to  securities   registration  and  public  reporting
regulations of the Securities and Exchange Commission.  The Bank is regulated by
the  Federal  Deposit  Insurance  Corporation  ("FDIC")  and the  Administrator,
Savings  Institutions  Division,  North  Carolina  Department of Commerce,  (the
"Administrator").  The Bank is subject to the capital  requirements  of the FDIC
and the Administrator.  The FDIC requires the Bank to maintain minimum ratios of
Tier I capital to total risk-weighted  assets and total capital to risk-weighted
assets  of  4%  and  8%,   respectively.   Tier  I  capital  consists  of  total
stockholders' equity calculated in accordance with generally accepted accounting
principles  less  intangible  assets,  and total  capital is comprised of Tier I
capital plus certain  adjustments,  the only one  applicable  to the Bank is the
allowance  for possible loan losses.  Risk-weighted  assets refer to the on- and
off-balance  sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement,  which calls for a minimum ratio of Tier I capital
(as defined above) to quarterly  average total assets of 3% and a ratio of 5% to
be "well-capitalized".  The Administrator requires a net worth equal to at least
5% of total assets.  At September 30, 1998, the Bank was in compliance  with all
of the aforementioned capital requirements.

As of September 30, 1998, the FDIC  categorized  the Bank as  "well-capitalized"
under the regulatory  framework for prompt corrective  action. To be categorized
as  "well-capitalized",  the Bank must meet minimum ratios for total risk-based,
and Tier I leverage  (the ratio of Tier I capital to average  assets) of 10% and
5%,  respectively.  There have been no events or conditions  since  notification
that management believes have changed the Bank's category.
<PAGE>
CURRENT ACCOUNTING ISSUES

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 September 30,
1998 that will affect the Company's future reporting.

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
131 ("SFAS  131"),  "Disclosures  about  Segments of an  Enterprise  and Related
Information".  SFAS 131 establishes standards for the way that public businesses
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments  in  interim  financial   reports  issued  to  shareholders.   It  also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997 and in the initial year
of application, comparative information for earlier years is to be restated. The
Company  plans to adopt SFAS 131 in fiscal  year 1999  without  any  significant
impact on its consolidated  financial statements 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 2.    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:   November 16, 1998                 By:  /s/ D. Tyson Clayton
                                              -----------------
                                               President


Date:   November 16, 1998                 By:  /s/ Thomas W. Wayne
                                               ---------------
                                               Vice President and principal
                                               financial officer