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, 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 May 13, 1998,  2,750,800 shares of the  registrant's  common stock, no par
value,  were  outstanding.  The  registrant  has no other  classes of securities
outstanding.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
                      PIEDMONT BANCORP, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                                                   March 31,        June 30,
                                                                     1998             1997
                                                                  (unaudited)          *
                                                                   ---------      ---------
                                                                 (in thousands, except shares)
                         Assets
<S>                                                                <C>            <C>
Cash .........................................................     $     830      $     879
Interest-bearing deposits in other financial institutions ....         1,271          3,766
Investment securities:
   Available-for-sale ........................................        12,024         10,866
   Held-to-maturity ..........................................         3,579          3,341
Loans receivable (net of allowance for loan losses of $914 and
   $796 at March 31, 1998 and June 30, 1997, respectively) ...       110,694        100,173
Federal Home Loan Bank stock, at cost ........................         1,109            920
Premises and equipment .......................................         1,308          1,205
Real estate owned ............................................          --             --
Prepaid expenses and other assets ............................         2,013          1,611
                                                                   ---------      ---------
          Total assets .......................................     $ 132,828      $ 122,761
                                                                   =========      =========
             Liabilities and Stockholders' Equity
                      Liabilities
Deposits :
   Demand, non-interest bearing ..............................         2,175          2,074
   Savings, NOW and MMDA .....................................        31,802         28,594
   Certificates of Deposit ...................................        54,346         54,192
                                                                   ---------      ---------
                                                                      88,323         84,860
Advances from the Federal Home Loan Bank .....................        21,700         16,500
Accrued expenses and other liabilities .......................         1,421            985
                                                                   ---------      ---------
     Total liabilities .......................................       111,444        102,345
                                                                   ---------      ---------
                     Stockholders' Equity

Preferred stock, no par value, 5,000,000 shares authorized;
   none issued ...............................................          --             --
Common stock, no par value, 20,000,000 shares authorized;
   2,750,800 shares issued and outstanding ...................         9,130          9,143
Unearned ESOP shares .........................................          (739)          (933)
Unamortized deferred compensation ............................        (1,025)        (1,269)
Unallocated restricted stock .................................           (61)           (21)
Retained earnings, substantially restricted (note 6) .........        14,007         13,580
Unrealized holding losses on available-for-sale securities ...            72            (84)
                                                                   ---------      ---------
      Total stockholders' equity .............................        21,384         20,416
                                                                   ---------      ---------

          Total liabilities and stockholders' equity .........     $ 132,828      $ 122,761
                                                                   =========      =========
</TABLE>
* Derived from audited financial statements
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                       PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                   CONSOLIDATED STATEMENTS OF INCOME (unaudited)

                                                                     Three Months Ended        Nine Months Ended
                                                                          March 31,                 March 31,
(In thousands, except per share data)                                1998          1997        1998          1997
                                                                    -------      -------      -------     -------
<S>                                                                 <C>          <C>          <C>         <C>      
Interest income:
   Interest on loans ..........................................     $ 2,333      $ 2,013      $ 6,765     $ 5,987
   Interest on deposits in other financial institutions .......          12           17           42          84
   Interest and dividends on investment securities ............         254          268          762       1,120
                                                                    -------      -------      -------     -------
            Total interest income .............................       2,599        2,298        7,569       7,191
                                                                    -------      -------      -------     -------
Interest expense:
   Interest on deposits .......................................         987          914        2,972       2,665
   Interest on borrowings .....................................         315          244          882         752
                                                                    -------      -------      -------     -------
            Total interest expense ............................       1,302        1,158        3,854       3,417
                                                                    -------      -------      -------     -------
Net interest income ...........................................       1,297        1,140        3,715       3,774
Provision for loan losses .....................................          24           20           72         638
                                                                    -------      -------      -------     -------
            Net interest income after provision for loan losses       1,273        1,120        3,643       3,136
                                                                    -------      -------      -------     -------
Other income:
   Customer service and other fees ............................          53           50          157         149
   Mortgage loan servicing fees ...............................          15           21           54          65
   Gain (loss) on sale of investment securities ...............        --           --              6        (132)
   Lower-of-cost or market adjustment on loans held-for-sale ..         (24)         (18)          12          22
   Gain on sale of real estate owned ..........................         114         --            114        --
   Other ......................................................          49           17           97          49
                                                                    -------      -------      -------     -------
            Total other income ................................         207           70          440         153
                                                                    -------      -------      -------     -------
Other expenses:
   Compensation and fringe benefits ...........................         430          374        1,255       2,762
   SAIF recapitalization assessment ...........................        --           --           --           487
   Data and items processing ..................................          69           63          185         186
   Deposit insurance premiums .................................          13           13           39          58
   Occupancy expense ..........................................          32           25           84          86
   Furniture and equipment expense ............................          32           30           83          92
   Professional fees ..........................................          52           28          145          98
   Other ......................................................         158           84          396         323
                                                                    -------      -------      -------     -------
            Total other expenses ..............................         786          617        2,187       4,092
                                                                    -------      -------      -------     -------
            Income (loss) before income tax expense ...........         694          573        1,896        (803)
Income tax expense (benefit) ..................................         247          201          672          73
                                                                    -------      -------      -------     -------
                  Net income (loss) ...........................     $   447      $   372      $ 1,224     $  (876)
                                                                    =======      =======      =======     =======
Net income (loss) per share - basic ...........................     $  0.17      $  0.14      $  0.46     $ (0.33)
Net income (loss) per share - diluted .........................     $  0.16      $  0.14      $  0.45     $ (0.33)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                     PIEDMONT BANCORP, INC. AND SUBSIDIARY
                          STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
 
                                                                                     Unearned     Unamortized 
                                                       Shares           Common         ESOP        Deferred   
                                                     Outstanding        Stock        Shares      Compensation 
                                                     -----------        -----        ------      ------------ 
                                                                         (dollars in thousands)
<S>                                                   <C>              <C>           <C>            <C>    
Balance at June 30, 1996 .........................     2,645,000      $ 25,398       $ (2,552)      $   --   
      Net income .................................          --            --             --             --   
      Issuance of restricted stock ...............       105,800         1,587           --           (1,587)
      Release of ESOP shares .....................          --             105          1,545           --   
      Amortization of unearned compensation ......          --            --             --              161
      Forfeiture of restricted stock and
         related dividends- ......................          --             105           --              224     
      Allocation of restricted stock .............          --             (60)          --             (143)
      Tax benefit of dividends on restricted stock          --             279           --             --   
      Cash dividends .............................          --         (19,763)          --             --   
      Change in unrealized holding gains (losses),
         net of income taxes .....................          --            --             --             --   
                                                       ---------     ---------      ---------      ---------
Balance at March 31, 1997 ........................     2,750,800     $   7,651      $  (1,007)     $  (1,345)
                                                       =========     =========      =========      =========


Balance at June 30, 1997 .........................     2,750,800     $   9,143      $    (933)     $  (1,269)
      Net income .................................          --            --             --             --   
      Release of ESOP shares .....................          --             (33)           194           --   
      Amortization of unearned compensation ......          --            --             --              193
      Forfeiture of restricted stock .............          --            --             --              146
      Allocation of restricted stock .............          --             (11)          --              (95)
      Tax benefit of dividends on restricted stock          --              (5)          --             --   
      Cash dividends declared, net of
         forfeited dividends on restricted stock .          --              36           --             --   
      Change in unrealized holding gains (losses),
         net of income taxes .....................          --            --             --             --   
                                                       ---------     ---------      ---------      ---------
Balance at March 31, 1998 ........................     2,750,800     $   9,130      $    (739)     $  (1,025)
                                                       =========     =========      =========      =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                     PIEDMONT BANCORP, INC. AND SUBSIDIARY
                          STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)
                                                  (continued)


                                                     Unallocated                      Unrealized       Total      
                                                      Restricted      Retained     holding gain     Stockholders' 
                                                         Stock         Earnings       (losses)        Equity       
                                                         -----         --------       --------        ------       
<S>                                                    <C>            <C>            <C>            <C>   
Balance at June 30, 1996 .........................     $    --        $  14,783      $    (579)     $  37,050
      Net income .................................          --             (876)          --             (876)
      Issuance of restricted stock ...............          --             --             --             --
      Release of ESOP shares .....................          --             --             --            1,650
      Amortization of unearned compensation ......          --             --             --              161
      Forfeiture of restricted stock and
         related dividends- ......................          (224)           2             --              107
      Allocation of restricted stock .............           203           --             --             --
      Tax benefit of dividends on restricted stock          --             --             --              279
      Cash dividends .............................          --            1,128           --          (18,635)
      Change in unrealized holding gains (losses),
         net of income taxes .....................          --             --              364            364
                                                       ---------      ---------      ---------      ---------
Balance at March 31, 1997 ........................     $     (21)     $  15,037      $    (215)     $  20,100
                                                       =========      =========      =========      =========


Balance at June 30, 1997 .........................     $     (21)     $  13,580      $     (84)     $  20,416
      Net income .................................          --            1,224           --            1,224
      Release of ESOP shares .....................          --             --             --              161
      Amortization of unearned compensation ......          --             --             --              193
      Forfeiture of restricted stock .............          (146)          --             --             --
      Allocation of restricted stock .............           106           --             --             --
      Tax benefit of dividends on restricted stock          --             --             --               (5)
      Cash dividends declared, net of
         forfeited dividends on restricted stock .          --             (797)          --             (761)
      Change in unrealized holding gains (losses),
         net of income taxes .....................          --             --              156            156
                                                       ---------      ---------      ---------      ---------
Balance at March 31, 1998 ........................     $     (61)     $  14,007      $      72      $  21,384
                                                       =========      =========      =========      =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                      PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 

                                                                                             Nine Months Ended
                                                                                                 March 31,
                                                                                            1998           1997
                                                                                          --------      --------
 <S>                                                                                       <C>           <C>
Operating activities:
   Net income ........................................................................     $  1,224      $   (876)
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation ................................................................           75            68
         Net amortization (accretion) ................................................           84            67
         Provision for loan losses ...................................................           72           638
         Net (gain) loss on sale of investments and mortgage-backed securities .......           (6)          132
         Loss on sale of fixed assets ................................................            4          --
         Gain on sale of real estate owned ...........................................         (114)         --
         Release of ESOP shares ......................................................          161         1,650
         Compensation earned under MRP ...............................................          193           161
         Net decrease (increase) in mortgage loans held for sale .....................       (1,563)          287
         Increase in other assets ....................................................         (476)          (68)
         Increase (decrease) in other liabilities ....................................          388           (26)
                                                                                           --------      --------
               Net cash provided by operating activities .............................           42         2,033
                                                                                           --------      --------
Investing activities:
   Net increase in loans held for investment .........................................       (9,599)       (5,846)
   Principal collected on mortgage-backed securities .................................          375           458
   Purchases of investment securities classified as available-for-sale ...............       (1,250)         --
   Purchases of mortgage-backed securities classified as available-for-sale ..........       (1,532)       (1,576)
   Purchases of investment securities classified as held-to-maturity .................         (307)         --
   Proceeds from sales or calls of mortgage-backed securities classified
      as available-for-sale...........................................................        1,508        12,645
   Proceeds from investment securities classified as held-to-maturity called by issuer           55         3,847
   Purchases of Federal Home Loan Bank stock .........................................         (189)         --
   Purchases of premises and equipment ...............................................         (182)          (17)
   Proceeds from sale of real estate owned ...........................................          636          --
                                                                                           --------      --------
               Net cash provided by (used in) investing activities ...................      (10,485)        9,511
                                                                                           --------      --------
Financing activities:
   Net increase (decrease) in time deposits ..........................................          154         3,544
   Net increase in other deposits ....................................................        3,309         5,015
   Proceeds from borrowings ..........................................................       14,200        11,000
   Repayments of borrowings ..........................................................       (9,000)      (12,750)
   Cash dividends paid to shareholders ...............................................         (764)      (18,599)
                                                                                           --------      --------
               Net cash provided by (used in) financing activities ...................        7,899       (11,790)
                                                                                           --------      --------
               Increase (decrease) in cash and cash equivalents ......................       (2,544)         (246)
Cash and cash equivalents at beginning of period .....................................        4,645         2,670
                                                                                           --------      --------
Cash and cash equivalents at end of period ...........................................     $  2,101      $  2,424
                                                                                           ========      ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                      PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
                                                   (continued)
 

                                                                                             Nine Months Ended
                                                                                                 March 31,
                                                                                            1998           1997
                                                                                          --------      --------
 <S>                                                                                       <C>           <C>
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest .......................................................................     $  3,837      $  3,386
                                                                                           ========      ========
      Income taxes ...................................................................     $    251      $    339
                                                                                           ========      ========
Supplemental disclosure of noncash transactions:
   Unrealized gains (losses) on available-for-sale securities,
      net of deferred taxes of  $100 and $234 ........................................     $    156      $    364
                                                                                           ========      ========
   Dividends declared but unpaid .....................................................          269           267
                                                                                           ========      ========
   Transfer from loans receivable to real estate owned ...............................          522          --
                                                                                           ========      ========
</TABLE>

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


1) Organization and Operations

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

2) Basis of Presentation

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

3) Cash and Cash Equivalents

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

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

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

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

presentation  of basic and diluted EPS on the face of the income  statement  for
all entities with complex capital  structures and requires a  reconciliation  of
the numerator and  denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.  SFAS 128 is effective for financial
statements  issued for periods  ending  after  December  15,  1997 and  requires
restatement of all prior period EPS data presented. The Company adopted SFAS 128
at December 31, 1997 and made all the required disclosures.

In February 1997, the FASB issued  Statement of Financial  Accounting  Standards
No. 129 ("SFAS 129"), "Disclosure of Information about Capital Structure".  SFAS
129 establishes  standards for disclosing  information about an entity's capital
structure and is applicable to all entities. It contains no change in disclosure
requirements  for entities that were previously  subject to the  requirements of
APB Opinion No. 10, "Omnibus  Opinion - 1966", APB Opinion No. 15, "Earnings Per
Share", and Statement of Financial  Accounting  Standards No. 47, "Disclosure of
Long-Term  Obligations".  SFAS 129 is effective  for  financial  statements  for
periods ending after December 15, 1997. The Company adopted SFAS 129 at December
31, 1997 with no impact on its consolidated financial statements.

5)  Employee and Director Benefit Plans

The Company has an employee stock  ownership plan ("ESOP")  whereby an aggregate
number of shares  amounting to 211,600 were  purchased for future  allocation to
employees.  Contributions  to the ESOP  are made by the Bank on a  discretionary
basis,  and are  allocated  among  ESOP  participants  on the basis of  relative
compensation  in the year of  allocation.  Benefits  will vest in full upon five
years of service with credit given for years of service prior to the conversion.
The ESOP was funded by a $40,000  cash  contribution  from the Bank in  December
1995 and a loan from the Parent in the amount of $2,690,677. The loan is secured
by  shares of stock  purchased  by the ESOP and is not  guaranteed  by the Bank.
Principal  and  interest  payments  on  this  loan  are  funded  primarily  from
discretionary  contributions by the Bank. Dividends, if any, paid on shares held
by the ESOP may also be used to reduce the loan. Dividends on unallocated shares
which are used to repay debt are not reported as  dividends in the  consolidated
financial  statements  but rather  are  recorded  as an element of  compensation
expense.  Dividends  on  allocated  shares are  credited to the  accounts of the
participants and reported as dividends in the consolidated financial statements.
For the  nine  month  periods  ended  March  31,  1998  and  1997,  ESOP-related
compensation  expense  totaled  $161,000 and $1,650,000,  respectively.  For the
three month  periods  ended March 31, 1998 and 1997,  ESOP-related  compensation
expense totaled $50,000 and $47,000, respectively.  Additionally, in December of
1997 and 1996,  19,918  and  125,819  shares,  respectively,  were  released  to
individual  participant  accounts.  The  significant  expense  and  release  and
allocation of shares under the ESOP in the three and nine month  periods  ending
March 31, 1997, as compared to the same period in 1998, was  attributable to the
$7.00  special  dividend paid on the  Company's  stock on December 6, 1996,  and
management's  decision to use the dividends on unallocated  shares to repay debt
to the parent.  At March 31, 1998, a total of 148,837  shares have been released
and  allocated  to  participants   under  the  Plan  and  62,763  shares  remain
unallocated.
<PAGE>
                     PIEDMONT BANCORP, INC. and SUBSIDIARY
                   Notes to Consolidated Financial Statements


5)        Employee and Director Benefit Plans, continued

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 nine months
of fiscal 1998, seven MRP participants  forfeited a total of 11,645  restricted,
non-vested  shares of the  Company's  stock and $40,000 of dividends  previously
paid to the participants on those restricted  shares.  The dividends refunded to
the Bank have been  reflected  as an  addition  to equity in the same  ratio the
dividends were  originally paid to the former  participants.  The Bank allocated
9,000 of the forfeited restricted shares to new MRP participants during the nine
months ending March 31, 1998,  leaving 4,059 restricted shares unallocated under
the MRP.  Compensation  expense of $193,000 and $161,000 was recorded during the
nine month periods ended March 31, 1998 and 1997, respectively. During the three
months  ended March 31,  1998 and 1997,  compensation  expense  was  recorded of
$70,000 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 EPS is computed by dividing net income by the weighted  average  number of
shares of common  stock  outstanding  for the period.  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  computaions   for  all  periods   presented  A
reconciliation of the denominator of the basic EPS computation is as follows:
<TABLE>
<CAPTION>
                                               Three months ended          Nine months ended
                                                    March 31,                  March 31,   
                                            -----------------------     ----------------------- 
                                               1998          1997          1998           1997
                                            ---------     ---------     ---------     ---------
<S>                                         <C>           <C>           <C>           <C> 
Basic EPS denominator: weighted average
   number of common shares outstanding      2,690,574     2,670,386     2,683,500     2,627,126
Dilutive effect of stock options ......        26,735        19,156        26,208        16,524
                                            ---------     ---------     ---------     ---------
Diluted EPS denominator ...............     2,717,309     2,689,542     2,709,708     2,643,650
                                            =========     =========     =========     =========

</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, 1998 and
1997

Summary
For the nine months  ended March 31,  1998,  the Company  recorded net income of
$1,224,000,  or $0.46 basic and $0.45 diluted earnings per share,  compared to a
net loss of  $876,000,  or $0.33 basic and  diluted  loss per share for the nine
months ended March 31,  1997.  Earnings for the nine months ended March 31, 1997
were adversely affected by a number of non-recurring  items. For the nine months
ended March 31, 1997, the Company  recorded  $1,650,000 of compensation  expense
associated  with the release and allocation of  approximately  126,000 shares of
common  stock of the  Parent to  participants  of the  ESOP.  This  release  and
allocation of shares under the ESOP was mainly attributable to the $7.00 special
dividend  paid on the  Parent's  stock on  December  6,  1996  and  management's
decision  to use the special  dividends  paid on the  unallocated  shares of the
Parent's  common stock held by the ESOP to pre-pay the ESOP loan from the Parent
to the ESOP.  In addition,  the Company  recorded a provision for loan losses of
$638,000, which resulted primarily from the charge off of approximately $510,000
in loans to a single borrower. Losses of $132,000 were recognized on the sale of
investment  securities,  which were sold to fund the special dividend.  Finally,
earnings for the nine month period reflect the $487,000 FDIC special  assessment
to  recapitalize  the Savings  Association  Insurance  Fund  ("SAIF")  which the
Company recorded during the first quarter.  Without these  non-recurring  items,
net income for the nine month period would have been approximately $1,187,000 or
$0.46 basic and diluted earnings per share.

Net Interest Income
As shown in the table on the following page,  tax-equivalent net interest income
decreased  $162,000 to $3,806,000  for the nine months ended March 31, 1998 from
$3,968,000  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>
Net Interest Income (continued)
<TABLE>
<CAPTION>
                                                                                Nine Months Ended March 31,
                                                       -----------------------------------------------------------------------------
                                                                        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 .......................... $  1,631      $     42        3.43%      $  2,601      $     84         4.30%
  FHLB common stock ..................................    1,029            56        7.26            886            48         7.22 
  Taxable investment securities ......................   11,460           560        6.52         15,235           769         6.73 
  Tax-exempt investment securities (2) ...............    3,941           236        7.98          8,271           497         8.02 
  Loans receivable ...................................  106,273         6,765        8.49         95,167         5,987         8.39 
                                                       --------      --------        ----       --------      --------         ----
Total interest-earning assets ........................  124,334         7,659        8.21        122,160         7,385         8.06 
                                                                     --------        ----                     --------              
Non-interest-earning assets ..........................    3,288                                    3,217                            
                                                       --------                                 --------                            
     Total ........................................... $127,622                                 $125,377                            
                                                       ========                                 ========                            
                                                                                                                                    
Liabilities and Stockholders' Equity:                                                                                               
Interest-bearing liabilities:                                                                                                       
  Deposit accounts ...................................   83,864         2,972        4.72         75,700         2,665         4.69 
  Borrowings .........................................   19,675           882        5.98         16,725           752         6.00 
                                                       --------      --------        ----       --------      --------         ----
Total interest-bearing liabilities ...................  103,539         3,854        4.96         92,425         3,417         4.93 
                                                                     --------        ----                     --------    
Non-interest-bearing liabilities .....................    3,019                                    5,214                            
Stockholders' equity .................................   21,064                                   27,738                            
                                                       --------                                 --------                            
     Total ........................................... $127,622                                 $125,377                            
                                                       ========                                 ========                            
                                                                                                                                    
Net interest income and interest rate spread .........               $  3,805        3.25%                    $  3,968         3.13%
                                                                                                                                    
Net interest-earning assets and net interest marg$n ..   20,795                      4.08%      $ 29,735                       4.33%
                                                       ========                                 ========                            
Ratio of interest-earning assets to interest-bearing                                                                                
liabilities ..........................................                             120.08%                                   132.17%
</TABLE>            

(1) All information presented in this column is annualized with the exception of
the  ratio of  interest-earning  assets to  interest  bearing  liabilities.  (2)
Interest  earned on  tax-exempt  investment  securities  has been  adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.50%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.
<PAGE>
The  decrease  in net  interest  income is  primarily  due to a higher  level of
average interest-bearing liabilities during the nine months ended March 31, 1998
compared  to the  same  period  in 1997.  Average  total  investment  securities
declined $8.9 million while average  loans  receivable  increased  $11.1 million
over  the  same  nine  month  period  last  year.  Interest  rate  spread  (on a
tax-equivalent  basis)  increased  to 3.25% for the nine months  ended March 31,
1998 from 3.13% for the same period in 1997 due  primarily to a shift in the mix
toward higher earning assets, principally loans receivable. Despite the increase
in  interest  rate  spread,  net  interest  margin (on a  tax-equivalent  basis)
decreased  to 4.08% for the nine months  ended March 31, 1998 from 4.33% for the
nine months ended March 31,1997.  Net interest  margin for the nine months ended
March 31, 1997  reflects  return on  conversion  proceeds  that were invested in
loans and investment securities.  Net interest margin for the nine months ending
March 31, 1998 reflects the  liquidation  of  investment  securities to fund the
special  dividend  paid on December 6, 1996 that  required  increased  liability
funding of asset growth.

Provision for Loan Losses
The  provision  for loan losses for the nine months ended March 31, 1998 totaled
$72,000  compared to $638,000 for the same period in 1997.  The  unusually  high
provision  in 1997  resulted  primarily  from the  charge  off of  approximately
$510,000 of loans to a single  borrower.  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  $440,000 for the nine months ended March 31, 1998 compared
to  $153,000  for the same  period in 1997.  The  increase  is  attributable  to
$132,000  of net losses  recorded  in the nine  months  ended  March 31, 1997 on
investment  securities  sold to fund the  special  dividend  paid on December 6,
1996. In addition,  a gain on sale of real estate owned of $114,000 was recorded
in the nine months  ended March 31, 1998.  Another  factor  contributing  to the
increase is an increase of $48,000 in other  income.  This increase is primarily
attributable to a $38,000  increase in rental income  associated with the rental
of the Company's former branch facility that commenced in December of 1996 and a
gain on sale of loans of $23,000  that was  recorded  in the nine  months  ended
March 31,  1998.  Offsetting  this  increase  is a $10,000  decline in  merchant
income.

Other Expenses
Other  expenses  totaled  $2,187,000  for the nine  months  ended March 31, 1998
compared to $4,092,000 for the same period in 1997. The significant  decline was
primarily  attributable to two large non-recurring expenses that occurred in the
nine months ended March 31, 1997. The Company  recorded a total of $1,650,000 of
compensation  expense  associated  with the  release and  allocation  of 125,819
shares of common stock to ESOP  participants  as of December  31,  1996.  Such a
large  release and  allocation  of shares was made possible by the $7.00 special
dividend  and  management's  decision  to use  the  special  dividends  paid  on
unallocated  ESOP shares to prepay the ESOP loan.  Approximately  $1,428,000  of
compensation expense associated with the release and allocation of approximately
103,000 shares was attributable to the special dividend and was considered to be
non-recurring.
<PAGE>
The second  non-recurring  other  expense that occurred in the nine months ended
March  31,  1997 was the  $487,000  one-time  FDIC  special  assessment  for the
recapitalization  of the SAIF.  The  assessment  was  levied  on all  depository
institutions with SAIF-insured  deposits and was calculated as 65.7 basis points
on assessable  deposits as of March 31, 1995. The Bank received a $45,000 refund
of premiums paid for the quarter ended  December 31, 1996 and has seen a benefit
in the form of lower  deposit  insurance  premiums  during the nine months ended
March 31, 1998 as compared to the same period in 1997.

Without the effect of the  non-recurring  SAIF assessment and the  non-recurring
portion of ESOP-related  compensation expense, other expenses would have totaled
$2,177,000 for the nine months ended March 31, 1997.

Income Tax Expense
The Company  recorded  income tax expense of $672,000  for the nine months ended
March 31, 1998 compared to income tax expense of $73,000  during the same period
in 1997. The increase is  attributable  to the increase in taxable income in the
nine months ended March 31, 1998 compared to the same period in 1997.

Comparison  of Results of  Operations  for the Three Months Ended March 31, 1998
and 1997

Summary
For the  quarter  ended  March 31,  1998,  the  Company  recorded  net income of
$447,000,  or $0.17 basic and $0.16 diluted earnings per share,  compared to net
income of $372,000,  or $0.14 basic and diluted earnings per share, for the same
quarter last year.

Net Interest Income
As shown in the table on the following page,  tax-equivalent net interest income
increased  $157,000 to $1,328,000 for the three months ended March 31, 1998 from
$1,171,000  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 March 31,
                                                       -----------------------------------------------------------------------------
                                                                        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:                                                                           (dollars in thousands)
Interest-earning assets:
  Interest-bearing deposits .......................     $  1,626     $     12        2.95%      $  1,666      $     17        4.14% 
  FHLB common stock ...............................        1,106           20        7.23            897            16        7.23  
  Taxable investment securities ...................       11,414          185        6.48         12,133           203        6.69  
  Tax-exempt investment securities (2) ............        3,995           80        8.01          3,983            80        8.08  
  Loans receivable ................................      109,161        2,333        8.55         96,657         2,013        8.35  
                                                        --------     --------        ----       --------      --------        ----  
Total interest-earning assets .....................      127,302        2,630        8.26        115,336         2,329        8.10  
                                                                     --------        ----                     --------              
Non-interest-earning assets .......................        3,494                                   3,638                            
                                                        --------                                --------                            
     Total ........................................     $130,796                                $118,974                            
                                                        ========                                ========                            
                                                                                                                                    
Liabilities and Stockholders' Equity:                                                                                               
Interest-bearing liabilities:                                                                                                       
  Deposit accounts ................................       85,330          987        4.69         79,217           914        4.68  
  Borrowings ......................................       21,126          315        5.96         16,713           244        5.84  
                                                        --------     --------        ----       --------      --------        ----  
Total interest-bearing liabilities ................      106,456        1,302        4.89         95,930         1,158        4.88  
                                                                                                                                    
Non-interest-bearing liabilities ..................        2,970                                   3,116                            
Stockholders' equity ..............................       21,370                                  19,928                            
                                                        --------                                --------  
     Total ........................................     $130,796                                $118,974                            
                                                        ========                                ========                            
                                                                                                                                    
Net interest income and interest rate spread ......                  $  1,328        3.37%                     $  1,171        3.22%
                                                                     ========                                  ========             
                                                                                                                                    
Net interest-earning assets and net interest margin     $ 20,846                     4.13%      $ 19,406                       4.02%
                                                                                                                                    
Ratio of interest-earning assets to                                                                                                 
interest-bearing liabilities ......................                                119.58%                                   120.23%
</TABLE>    


(1) All information presented in this column is annualized with the exception of
the  ratio of  interest-earning  assets to  interest  bearing  liabilities.  (2)
Interest  earned on  tax-exempt  investment  securities  has been  adjusted to a
tax-equivalent  basis  using the  applicable  federal and state rates of 34% and
7.50%,  respectively,  and  reduced by the  nondeductible  portion  of  interest
expense.
<PAGE>
The  increase in net interest  income is primarily  due to a increase in average
earning  assets and a higher  average  yield on earning  assets during the three
months  ended  March 31, 1998  compared to the same three month  period in 1997.
Average loans  receivable  increased  $12.5 million from March 31, 1997 to March
31, 1998.  Interest rate spread (on a  tax-equivalent  basis) increased to 3.37%
for the three  months  ended  March 31, 1998 from 3.22% for the same three month
period in 1997 due primarily to a shift in the mix toward higher earning assets,
principally loans receivable

Provision for Loan Losses
The  provision for loan losses for the three months ended March 31, 1998 totaled
$24,000  compared to $20,000 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 $207,000 for the three months ended March 31, 1998 compared
to $70,000 for the same period in 1997.  Included in other  income for the three
months ended March 31, 1998 is a $114,000  gain on sale of real estate owned and
a $21,000  gain on sale of loans that was not present  during the same period in
1997.

Other Expenses
Other  expenses  totaled  $786,000  for the three  months  ended  March 31, 1998
compared to $617,000 for the same period in 1997. The increase was primarily due
to increases in three other expense categories. Compensation and fringe benefits
increased to $430,000  for the three  months ended March 31, 1998 from  $374,000
for the same three month  period in 1997.  This  increase is  attributable  to a
higher  number of  employees  during the three  months  ended  March 31, 1998 as
compared to the same period in 1997.  Professional fees increased to $52,000 for
the three  months  ended  March 31,  1998 from  $28,000 for the same three month
period in 1997 due to fees  associated with the development of a strategic plan,
a branch analysis study and a state bank examination. Other expense increased to
$158,000  for the three  months  ended March 31, 1998 from  $84,000 for the same
three month  period in 1997.  The  increase was caused by increases in marketing
expenses and office  supplies as well as employee  training  associated with the
conversion to a new data center during the quarter ended March 31, 1998.

Income Tax Expense
The Company  recorded  income tax expense of $247,000 for the three months ended
March 31, 1998  compared  to an income tax  expense of $201,000  during the same
period in 1997. The increase is  attributable  to the increase in taxable income
in the three months ended March 31, 1998 compared to the same period in 1997.

Financial Condition

CHANGES IN FINANCIAL CONDITION

Total assets  increased to $132.8  million at March 31, 1998 from $122.8 million
at June 30, 1997.  During the nine months  ended March 31,  1998,  loans grew by
$10.5  million  to $110.7  million  at March 31,  1998.  Loan  growth was funded
largely  with (1) advances  from the Federal  Home Loan Bank which  increased by
$5.2 million to $21.7  million at March 31, 1998 from $16.5  million at June 30,
1997, and (2) deposits which increased by $3.4 million to $88.3 million at March
31, 1998 from $84.9 million at June 30, 1997.

Stockholders'  equity  increased  from $20.4  million at June 30,  1997 to $21.4
million at March 31, 1998. As discussed in note 5 to the financial statements of
this  report,  during  the nine  months  ended  December  31,  1997,  seven  MRP
participants  forfeited 11,645  restricted,  non-vested  shares of the Company's
stock and $40,000 of  dividends  previously  paid to the  participants  on those
restricted  shares. The dividends refunded to the Bank have been reflected as an
addition to equity in the same ratio the dividends were  originally  paid to the
former participants. The Bank allocated 9,000 of the forfeited restricted shares
to new MRP  participants  during the nine months ending March 31, 1998,  leaving
4,059 restricted shares unallocated under the MRP.
<PAGE>
ASSET QUALITY

Nonperforming Assets and Risk Assets

Nonperforming  assets  include  nonaccrual  loans,  restructured  loans and real
estate owned. The table below presents  information on nonperforming  assets and
loans  contractually  past due but still accruing at March 31, 1998 and June 30,
1997.
<TABLE>
<CAPTION>
                                                        March 31,       June 30
                                                          1998            1997
                                                       --------        --------
                                                              (in thousands)
<S>                                                    <C>             <C>
Total nonaccrual loans .........................       $    642        $    803
Total restructured loans .......................           --              --
                                                       --------        --------
     Total nonperforming loans .................            642             803
Real estate owned ..............................           --              --
                                                       --------        --------
Total nonperforming assets .....................            642             803

Accruing loans, delinquent 90 days or more .....           --               244
                                                       --------        --------

Total risk assets ..............................       $    642        $  1,047
                                                       ========        ========

Nonperforming loans to total loans .............           0.58%           0.80%
Nonperforming assets to total assets ...........           0.48%           0.65%
Risk assets to total assets ....................           0.48%           0.85%
Allowance for loan losses to:
   Total nonperforming assets ..................          1.42x           0.99x
   Total risk assets ...........................          1.42x           0.76x
Total assets ...................................       $132,828        $122,761
Total loans, net ...............................       $110,694        $100,173
Allowance for loan losses ......................            914             796

</TABLE>
<PAGE>
The primary change in nonperforming  assets from June 30, 1997 to March 31, 1998
was the  foreclosure  and  transfer of property  from loans  receivable  to real
estate owned.  This occurred during the three months ended December 31, 1997 and
was followed by the sale of the property during the three months ended March 31,
1997.  Management  has  reviewed the  collateral  for  nonperforming  assets and
believes that collateral  values related to the loans exceeds such balances.  At
March 31, 1998 and June 30,  1997,  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") was
$119,000 and $580,000,  respectively.  Impaired loans totaling $114,000 at March
31, 1998 and $458,000 at June 30, 1996 were in non-accrual status.  There was no
related allowance for credit losses associated with these loans as determined in
accordance with SFAS No. 114, however,  approximately $18,000 and $87,000 of the
general  allowance  for loan losses is allocated to impaired  loans at March 31,
1998 and June 30, 1997, respectively.  Management has included this review among
the factors  considered  in the  evaluation  of the  allowance for possible loan
losses.

Provision and Allowance for Loan Losses
<TABLE>
<CAPTION>
                                        Three months ended    Nine months ended
                                             March 31,             March 31,
                                        ------------------    ------------------     
                                           1998     1997       1998        1997
                                           ----     ----       ----        ----
<S>                                       <C>       <C>        <C>        <C>
Balance at the beginning of period ..     $ 879     $ 715      $ 796      $ 608
Provision for loan losses ...........        24        20         72        638
Recoveries ..........................        11        41         50         42
Loans charged off ...................      --          (4)        (4)      (516)
                                          -----     -----      -----      -----
Balance at the end of period ........     $ 914     $ 772      $ 914      $ 772
                                          =====     =====      =====      =====
</TABLE>
The following table summarizes the activity in the allowance for loan losses for
the three and nine months ended March 31, 1998 and 1997, respectively.
 
At March 31,  1998,  the  allowance  for loan  losses was 0.82% of total  loans,
compared  to 0.79% of total  loans at June 30,  1997 and 0.80% of total loans at
March 31, 1997.
<PAGE>
The  levels  of the  provision  and  allowance  for  loan  losses  are  based on
management's  ongoing  evaluation  of  the  risk  characteristics  of  the  loan
portfolio  considering  current  economic  conditions,  financial  condition  of
borrowers, growth and composition of the loan portfolio,  collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming  loans that have been identified as potential  problems,  past and
expected loss experience,  results of the most recent  regulatory  examinations,
and other factors deemed relevant by management. Management actively maintains a
current  loan watch list and knows of no other loans which are  material and (1)
represent or result from trends or  uncertainties  which  management  reasonably
expects will materially impact future operating results,  liquidity,  or capital
resources,  or (2) represent material credits about which management has serious
doubts as to the ability of such  borrowers  to comply  with the loan  repayment
terms.  Based on  management's  evaluation of the loan  portfolio,  as described
above,  the Company  recorded a $72,000  provision  for loan losses for the nine
months ended March 31, 1998 compared to a $638,000 provision for the same period
in 1997.  The primary  reason for the large  decrease in the  provision for loan
losses in 1998  compared to 1997 was a $597,000  provision  for loan losses that
was  recorded  in the three  months  ended  December  31,  1996  which  resulted
primarily  from the charge off of  approximately  $510,000  in loans to a single
borrower.

YEAR 2000 PLANNING

The  Company has been  assessing  possible  effects of the Year 2000  problem in
connection with its technology  investments and operations.  Management believes
that the Company has limited  exposure  and expects the cost of  addressing  the
Year 2000 issues to be  approximately  $30,000.  As part of its assessment,  the
Company has contacted its primary vendors to evaluate Year 2000 compliance.  The
Year 2000 problem creates risk for the Company from  unforeseen  problems in its
own computer systems and from third parties. Such failures of the Company and/or
third parties'  computer  systems could have a material  impact on the Company's
ability to conduct business.

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 March 31, 1998,
the Bank had $8.3  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, 1998, the Company had a
cumulative  one year  asset-sensitive  gap  position of $5.4 million or 4.07% 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 $2.7  million or 2.24% of  interest-earning
assets at June 30,  1997.  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,  1998,  management  believes  that its  interest  rate  risk is at an
acceptable level.

CAPITAL RESOURCES

The Parent is regulated by the Board of Governors of the Federal  Reserve System
("FRB")  and  is  subject  to  securities   registration  and  public  reporting
regulations of the Securities and Exchange Commission.  The Bank is regulated by
the  Federal  Deposit  Insurance  Corporation  ("FDIC")  and the  Administrator,
Savings  Institutions  Division,  North  Carolina  Department of Commerce,  (the
"Administrator").  The Bank is subject to the capital  requirements  of the FDIC
and the Administrator.  The FDIC requires the Bank to maintain minimum ratios of
Tier I capital to total risk-weighted  assets and total capital to risk-weighted
assets  of  4%  and  8%,   respectively.   Tier  I  capital  consists  of  total
stockholders' equity calculated in accordance with generally accepted accounting
principles  less  intangible  assets,  and total  capital is comprised of Tier I
capital plus certain  adjustments,  the only one  applicable  to the Bank is the
allowance  for possible loan losses.  Risk-weighted  assets refer to the on- and
off-balance  sheet exposures of the Bank adjusted for their relative risk levels
using formulas set forth in FDIC regulations. The Bank is also subject to a FDIC
leverage capital requirement,  which calls for a minimum ratio of Tier I capital
(as defined above) to quarterly  average total assets of 3% and a ratio of 5% to
be "well-capitalized".  The Administrator requires a net worth equal to at least
5% of total assets.  At March 31, 1998,  the Bank was in compliance  with all of
the aforementioned capital requirements.

As of March 31, 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.

Current Accounting Issues

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
130  ("SFAS  130"),  "Reporting  Comprehensive  Income".  SFAS  130  establishes
standards for reporting and displaying  comprehensive  income and its components
(revenues,  expenses,  gains,  and  losses)  in a full  set  of  general-purpose
financial  statements.  This Statement  requires that an enterprise (a) classify
items of other  comprehensive  income by their nature in the financial statement
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the equity section of a
statement  of  financial  position.  SFAS  130 is  effective  for  fiscal  years
beginning after December 15, 1997.  Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company plans
to adopt  SFAS 130 in fiscal  year 1999 and will make the  required  disclosures
upon adoption.

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

In February 1998, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting  Standards No. 132,  "Employer's  Disclosure about Pensions
and Other  Postretirement  Benefits" ("SFAS No. 132"). SFAS No. 132 standardizes
the disclosure  requirements of pensions and other postretirement  benefits.  It
does not change any  measurement  or recognition  provisions,  and thus will not
materially  impact the  Corporation.  SFAS No. 132 is effective for fiscal years
beginning  after  December 15, 1997. The  Corporation  will present the required
disclosures in its financial statements for the year ended June 30, 1999.
<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
Not applicable

ITEM 5.  OTHER INFORMATION
Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
 
         Exhibit Number                 Description
             27.1             Financial Data Schedule (Edgar only)
             27.2             Restated Financial Data Schedule

(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 13, 1998                    By:     /s/ D. Tyson Clayton
                                                 --------------------
                                                 D. Tyson Clayton

                                                 President


Date:    May 13, 1998                    By:     /s/ Thomas W. Wayne
                                                 -------------------
                                                 Vice President and principal
                                                 financial officer