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

                                    FORM 10-Q

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

                         For the quarterly period ended
                               December 31, 1997
                              ---------------------

                        Commission File Number 001-14070

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

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

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

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

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

                                [ X ] Yes [  ] No

<PAGE>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
                            PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                 CONSOLIDATED BALANCE SHEETS


                                                                   December 31,    June 30,
                                                                      1997            1997
                                                                   (unaudited)         *
                                                                   ---------      ---------
                                                                (in thousands, except shares)
<S>                                                                <C>            <C>
Assets

Cash .........................................................     $     770      $     879
Interest-bearing deposits in other financial institutions ....         2,085          3,766
Investment securities:
   Available-for-sale ........................................        12,138         10,866
   Held-to-maturity ..........................................         3,322          3,341
Loans receivable (net of allowance for loan losses of $879 and
   $796 at December 31, 1997 and June 30, 1997, respectively)        107,225        100,173
Federal Home Loan Bank stock, at cost ........................         1,080            920
Premises and equipment .......................................         1,230          1,205
Real estate owned ............................................           522           --
Prepaid expenses and other assets ............................         1,795          1,611
                                                                   ---------      ---------
          Total assets .......................................     $ 130,167      $ 122,761
                                                                   =========      =========

Liabilities and Stockholders' Equity

Liabilities

Deposits :
   Demand, non-interest bearing ..............................         2,149          2,074
   Savings, NOW and MMDA .....................................        30,290         28,594
   Certificates of Deposit ...................................        53,932         54,192
                                                                   ---------      ---------
                                                                      86,371         84,860
Advances from the Federal Home Loan Bank .....................        21,600         16,500
Accrued expenses and other liabilities .......................         1,137            985
                                                                   ---------      ---------
     Total liabilities .......................................       109,108        102,345
                                                                   ---------      ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                            PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                 CONSOLIDATED BALANCE SHEETS
                                       (consolidated)


                                                                   December 31,    June 30,
                                                                      1997            1997
                                                                   (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;
   2,750,800 shares issued and outstanding ...................         9,133          9,143
Unearned ESOP shares .........................................          (798)          (933)
Unamortized deferred compensation ............................        (1,105)        (1,269)
Unallocated restricted stock .................................           (51)           (21)
Retained earnings, substantially restricted (note 6) .........        13,828         13,580
Unrealized holding losses on available-for-sale securities ...            52            (84)
                                                                   ---------      ---------
      Total stockholders' equity .............................        21,059         20,416
                                                                   ---------      ---------

          Total liabilities and stockholders' equity .........     $ 130,167      $ 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        Six Months Ended
                                                                        December 31,              December 31,
                                                                    -------------------      -------------------
                                                                      1997        1996         1997         1996
                                                                    -------     -------      -------     -------
                                                                        (in thousands, except per share data)
<S>                                                                 <C>         <C>          <C>         <C>
Interest income:
   Interest on loans ..........................................     $ 2,245     $ 2,004      $ 4,432     $ 3,974
   Interest on deposits in other financial institutions .......          14          51           30          67
   Interest and dividends on investment securities:
      Taxable .................................................         208         275          411         598
      Non-taxable .............................................          49         100           97         254
                                                                    -------     -------      -------     -------
            Total interest income .............................       2,516       2,430        4,970       4,893
                                                                    -------     -------      -------     -------
Interest expense:
   Interest on deposits .......................................         992         892        1,985       1,751
   Interest on borrowings .....................................         301         256          567         508
                                                                    -------     -------      -------     -------
            Total interest expense ............................       1,293       1,148        2,552       2,259
                                                                    -------     -------      -------     -------
Net interest income ...........................................       1,223       1,282        2,418       2,634
Provision for loan losses .....................................          24         597           48         618
                                                                    -------     -------      -------     -------

            Net interest income after provision for loan losses       1,199         685        2,370       2,016
                                                                    -------     -------      -------     -------
Other income:
   Customer service and other fees ............................          52          48          104          99
   Mortgage loan servicing fees ...............................          18          22           39          44
   Gain (loss) on sale of investment securities ...............          --        (106)           6        (132)
   Lower-of-cost or market adjustment on loans held-for-sale ..           3           3           36          40
   Other ......................................................          23          14           48          32
                                                                    -------     -------      -------     -------
            Total other income (expense) ......................          96         (19)         233          83
                                                                    -------     -------      -------     -------
Other expenses:
   Compensation and fringe benefits (note 5) ..................         402       1,972          825       2,388
   SAIF recapitalization assessment ...........................          --          --           --         487
   Data and items processing ..................................          61          61          116         123
   Deposit insurance premiums .................................          13          --           26          45
   Occupancy expense ..........................................          27          31           52          61
   Furniture and equipment expense ............................          26          32           51          62
   Professional fees ..........................................          56          39           93          70
   Other ......................................................         145         126          238         239
                                                                    -------     -------      -------     -------
            Total other expenses ..............................         730       2,261        1,401       3,475
                                                                    -------     -------      -------     -------

            Income (loss) before income tax expense ...........         565      (1,595)       1,202      (1,376)
                                                                    -------     -------      -------     -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                      PIEDMONT BANCORP, INC. AND SUBSIDIARY
                                  CONSOLIDATED STATEMENTS OF INCOME (unaudited)
                                                   (continued)


                                                                     Three Months Ended        Six Months Ended
                                                                        December 31,              December 31,
                                                                    -------------------      -------------------
                                                                      1997        1996         1997         1996
                                                                    -------     -------      -------     -------
                                                                        (in thousands, except per share data)
<S>                                                                 <C>         <C>          <C>         <C>

Income tax expense (benefit) ..................................         202        (164)         425        (128)
                                                                    -------     -------      -------     -------

                  Net income (loss) ...........................     $   363     $(1,431)     $   777     $(1,248)
                                                                    =======     =======      =======     ======= 

Net income (loss) per share - basic (notes 2 and 7) ...........     $  0.13     $ (0.54)     $  0.29     $ (0.48)
                                                                    =======     =======      =======     ======= 

Net income (loss) per share - diluted (notes 2 and 7) .........     $  0.13     $ (0.54)     $  0.29     $ (0.48)
                                                                    =======     =======      =======     ======= 

</TABLE>

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


                                                                                     Unearned      Unamortized   Unallocated   
                                                        Shares         Common          ESOP         Deferred     Restricted    
                                                      Outstanding      Stock          Shares       Compensation     Stock      
                                                      -----------      -----          ------       ------------     -----      
                                                                             (dollars in thousands)
<S>                                                    <C>           <C>             <C>           <C>            <C>
Balance at June 30, 1996 .........................     2,645,000     $  25,398       $ (2,552)          --        $    --      
      Net income .................................          --            --             --             --             --      
      Issuance of restricted stock ...............       105,800         1,587           --           (1,587)          --      
      Release of ESOP shares .....................          --             105          1,498           --             --      
      Amortization of unearned compensation ......          --            --             --              106           --      
      Cash dividends .............................          --         (18,233)          --             --             --      
      Change in unrealized holding gains (losses),
         net of income taxes .....................          --            --             --             --             -- 
                                                       ---------     ---------      ---------      ---------      -------     
Balance at December 31, 1996 .....................     2,750,800     $   8,857      $  (1,054)     $  (1,481)     $    --   
                                                       =========     =========      =========      =========      =======     

   
Balance at June 30, 1997 .........................     2,750,800     $   9,143      $    (933)     $  (1,269)     $     (21)   
      Net income .................................          --            --             --             --             --      
      Release of ESOP shares .....................          --             (24)           135           --             --      
      Amortization of unearned compensation ......          --            --             --              123           --      
      Forfeiture of restricted stock .............          --            --             --              136           (136)   
      Allocation of restricted stock .............          --             (11)          --              (95)           106    
      Tax benefit of dividends on restricted stock          --              (7)          --             --             --      
      Cash dividends declared, net of
         forfeited dividends on restricted stock .          --              32           --             --             --      
      Change in unrealized holding gains (losses),
         net of income taxes .....................          --            --             --             --             --  
                                                       ---------     ---------      ---------      ---------      ---------    
Balance at December 31, 1997 .....................     2,750,800     $   9,133      $    (798)     $  (1,105)     $     (51)   
                                                       =========     =========      =========      =========      =========    
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              PIEDMONT BANCORP, INC. AND SUBSIDIARY
                   STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (unaudited)

                                           (continued)


                                                                      Unrealized       Total           
                                                       Retained     holding gain   Stockholders'  
                                                       Earnings        (losses)        Equity       
                                                       --------        --------        ------       
<S>                                                   <C>             <C>            <C>
Balance at June 30, 1996 .........................    $  14,783       $    (579)     $  37,050
      Net income .................................       (1,248)           --           (1,248)
      Issuance of restricted stock ...............         --              --             --
      Release of ESOP shares .....................         --              --            1,603
      Amortization of unearned compensation ......         --              --              106
      Cash dividends .............................         (135)           --          (18,368)
      Change in unrealized holding gains (losses),                 
         net of income taxes .....................         --               488            488
                                                      ---------       ---------      ---------
Balance at December 31, 1996 .....................    $  13,400       $     (91)     $  19,631
                                                      =========       =========      =========


Balance at June 30, 1997 .........................    $  13,580       $     (84)     $  20,416
      Net income .................................          777            --              777
      Release of ESOP shares .....................         --              --              111
      Amortization of unearned compensation ......         --              --              123
      Forfeiture of restricted stock .............         --              --             --
      Allocation of restricted stock .............         --              --             --
      Tax benefit of dividends on restricted stock         --              --               (7)
      Cash dividends declared, net of                              
         forfeited dividends on restricted stock .         (529)           --             (497)
      Change in unrealized holding gains (losses),                 
         net of income taxes .....................         --               136            136
                                                      ---------       ---------      ---------
Balance at December 31, 1997 .....................    $  13,828       $      52      $  21,059
                                                      =========       =========      =========
                                                                   
                                                    
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              PIEDMONT BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

                                                                              Six Months Ended
                                                                                 December 31,
                                                                          ----------------------
                                                                             1997          1996
                                                                           -------      --------
<S>                                                                       <C>           <C>
Operating activities:
   Net income .......................................................     $    777      $ (1,248)
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation ...............................................           49            47
         Net amortization (accretion) ...............................           63            50
         Provision for loan losses ..................................           48           618
         Net (gain) loss on sale of investments
             and mortgage-backed securities .........................           (6)          132
         Loss on sale of fixed assets ...............................            4          --
         Release of ESOP shares .....................................          111         1,603
         Compensation earned under MRP ..............................          123           106
         Net decrease (increase) in mortgage loans held for sale ....         --              44
         Increase in other assets ...................................         (238)          (13)
         Increase (decrease) in other liabilities ...................          119           (22)
                                                                           -------      --------
               Net cash provided by operating activities ............        1,050         1,317
                                                                          -------       --------
Investing activities:
   Net increase in loans held for investment ........................       (7,663)       (5,385)
   Principal collected on mortgage-backed securities ................          229           348
   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)
   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 ......................           10         3,847
   Purchases of Federal Home Loan Bank stock ........................         (160)         --
   Purchases of premises and equipment ..............................          (78)          (13)
                                                                          -------       --------
               Net cash provided by (used in) investing activities ..       (8,936)        9,866
                                                                          -------       --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              PIEDMONT BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
                                           (continued)

                                                                              Six Months Ended
                                                                                 December 31,
                                                                          ----------------------
                                                                             1997          1996
                                                                           -------      --------
<S>                                                                       <C>           <C>
Financing activities:
   Net increase (decrease) in time deposits .........................         (260)        3,024
   Net increase in other deposits ...................................        1,771         4,567
   Proceeds from borrowings .........................................       11,100        16,000
   Repayments of borrowings .........................................       (6,000)       (9,750)
   Cash dividends paid to shareholders ..............................         (515)      (18,394)
                                                                          -------       --------
               Net cash provided by (used in) financing activities ..        6,096        (4,553)
                                                                          -------       --------
               Increase (decrease) in cash and cash equivalents .....       (1,790)        6,630
Cash and cash equivalents at beginning of period ....................        4,645         2,670
                                                                          -------       --------
Cash and cash equivalents at end of period ..........................     $  2,855      $  9,300
                                                                          ========      ========
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest ......................................................     $  2,550      $  2,225
                                                                          ========      ========
      Income taxes ..................................................     $    430      $    330
                                                                          ========      ========
Supplemental disclosure of noncash transactions:
   Unrealized gains (losses) on available-for-sale securities,
      net of deferred taxes (benefit) of  $33 and $313 ..............     $    136      $    488
                                                                          ========      ========
   Dividends declared but unpaid ....................................          267           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

In December,  1995, pursuant to a Plan of Conversion approved by its members and
regulators,  Hillsborough  Savings  Bank,  Inc.,  SSB (the  "Bank")  amended and
restated its charter to effect its conversion  from a North  Carolina  chartered
mutual  savings  bank to a North  Carolina  chartered  stock  savings  bank (the
"Conversion") and became a wholly-owned  subsidiary of Piedmont  Bancorp,  Inc.,
(the "Parent"), a holding company formed in connection with the Conversion.  The
Bank is  primarily  engaged in the business of  obtaining  savings  deposits and
providing loans to the general public.  The principal  activity of the Parent is
ownership of the Bank.

2) Basis of Presentation

The consolidated financial statements include the accounts of the Parent and the
Bank,  together  referred  to as "the  Company".  All  significant  intercompany
transactions  and balances are eliminated in  consolidation.  The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities  as of the date of the balance  sheets and the  reported  amounts of
income and  expenses  for the periods  presented.  Actual  results  could differ
significantly  from those  estimates.  In  management's  opinion,  the financial
information,  which is unaudited, reflects all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the financial
information  as of  December  31,  1997 and for the three and six month  periods
ended  December  31, 1997 and  December 31, 1996 in  conformity  with  generally
accepted  accounting  principles.  Operating results for the three and six month
periods ended  December 31, 1997 are not  necessarily  indicative of the results
that may be expected for the fiscal year ending June 30, 1998.

3) Cash and Cash Equivalents

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

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

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"),  "Earnings per Share". SFAS
128 establishes  standards of computing and presenting  earnings per share (EPS)
and applies to entities  with  publicly  held common stock or  potential  common
stock. This statement  simplifies the standards for computing earnings per share
previously  found in APB Opinion No. 15,  "Earnings  per Share",  and makes them
comparable to  international  EPS  standards.  It replaces the  presentation  of
primary EPS with a presentation of basic EPS. It also requires dual
<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 plans to adopt SFAS 129 in
fiscal year 1998 with no impact on its consolidated financial statements.

5)  Employee and Director Benefit Plans

The Company has an employee stock  ownership plan ("ESOP")  whereby an aggregate
number of shares  amounting to 211,600 were  purchased for future  allocation to
employees.  Contributions  to the ESOP  are made by the Bank on a  discretionary
basis,  and are  allocated  among  ESOP  participants  on the basis of  relative
compensation  in the year of  allocation.  Benefits  will vest in full upon five
years of service with credit given for years of service prior to the conversion.
The ESOP was funded by a $40,000  cash  contribution  from the Bank in  December
1995 and a loan from the Parent in the amount of $2,690,677. The loan is secured
by  shares of stock  purchased  by the ESOP and is not  guaranteed  by the Bank.
Principal  and  interest  payments  on  this  loan  are  funded  primarily  from
discretionary  contributions by the Bank. Dividends, if any, paid on shares held
by the ESOP may also be used to reduce the loan. Dividends on unallocated shares
which are used to repay debt are not reported as  dividends in the  consolidated
financial  statements  but rather  are  recorded  as an element of  compensation
expense.  Dividends  on  allocated  shares are  credited to the  accounts of the
participants and reported as dividends in the consolidated financial statements.
For the six  month  periods  ended  December  31,  1997 and  1996,  ESOP-related
compensation  expense  totaled  $111,000 and $1,603,000,  respectively.  For the
three month periods ended December 31, 1997 and 1996, ESOP-related  compensation
expense totaled $50,000 and $1,496,000, 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 six month  periods  ending
December 31, 1996, as compared to the same period in 1997, 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  December  31,  1997,  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 six months
of fiscal 1998,  six MRP  participants  forfeited a total of 11,011  restricted,
non-vested  shares of the  Company's  stock and $36,000 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
quarter ending December 31, 1997,  leaving 3,425 restricted  shares  unallocated
under the MRP. Compensation expense of $123,000 and $106,000 was recorded during
the six month periods ended December 31, 1997 and 1996, respectively. During the
three months ended December 31, 1997 and 1996, compensation expense was recorded
of $56,000 and $79,000, respectively.

6)  Regulatory Restrictions

At the time of  conversion,  the Bank  established a  liquidation  account in an
amount equal to its net worth at June 30, 1995. The liquidation  account will be
maintained for the benefit of eligible  deposit  account holders who continue to
maintain their deposit accounts in the Bank after conversion.  Only in the event
of a complete  liquidation will each eligible deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the current adjusted subaccount balance for deposit accounts then held before
any liquidation distribution may be made with respect to common stock. Dividends
paid subsequent to the conversion cannot be paid from this liquidation account.

The Bank may not  declare or pay a cash  dividend  on or  repurchase  any of its
common  stock if its net  worth  would  thereby  be  reduced  below  either  the
aggregate  amount  then  required  for the  liquidation  account or the  minimum
regulatory capital  requirements  imposed by federal and state  regulations.  In
addition,  for a period of five  years  after the  conversion,  the Bank will be
required,  under existing North  Carolina  regulations,  to obtain prior written
approval of the  Administrator  before it can declare and pay a cash dividend on
its  capital  stock in an amount in excess of one-half of the greater of (i) its
net income  for the most  recent  fiscal  year,  or (ii) the  average of its net
income after  dividends for the most recent fiscal year and not more than two of
the  immediately  preceding  fiscal years,  if  applicable.  As a result of this
limitation,  the  Bank  cannot  pay a  dividend  without  the  approval  of  the
Administrator.

Management is not aware of any other trends, events,  uncertainties,  or current
recommendations by regulatory  authorities that will have or that are reasonably
likely to have a material effect on the Company's liquidity,  capital resources,
or other operations.
<PAGE>
                      PIEDMONT BANCORP, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

7)  Earnings per Share

Basic net income per share is computed by  dividing  net income by the  weighted
average number of shares of common stock outstanding for the period. Diluted net
income  per share  reflects  the  potential  dilution  that  could  occur if the
Company's dilutive stock options were exercised.  The numerator of the basic net
income per share  computation  is the same as the  numerator  of the diluted net
income per share  computaions for all periods  presented A reconciliation of the
denominator of the basic net income EPS computation is as follows:
<TABLE>
<CAPTION>
                                             Three months ended               Six months ended
                                                 December 31,                   December 31,
                                           -----------------------        ------------------------ 
                                             1997          1996             1997          1996
<S>                                        <C>           <C>              <C>           <C>
Basic EPS denominator: weighted average
   number of common shares outstanding     2,688,037     2,653,254        2,684,302     2,605,496
Dilutive effect of stock options              25,627            -            25,867            -
                                           ---------     ---------        ---------     ---------
Diluted EPS denominator                    2,713,664     2,653,254        2,710,169     2,605,496
</TABLE>
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

Comparison of Results of Operations  for the Six Months Ended  December 31, 1997
and 1996

Summary

For the six months ended December 31, 1997,  the Company  recorded net income of
$777,000,  or $0.29 basic and diluted earnings per share, compared to a net loss
of  $1,248,000,  or $0.48  basic and  diluted  loss per share for the six months
ended  December  31, 1996.  Earnings for the six months ended  December 31, 1996
were adversely  affected by a number of non-recurring  items. For the six months
ended December 31, 1996, the Company recorded $1,603,000 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
$618,000, 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  year  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 six month period would have been  approximately  $815,000 or $0.32 basic
and diluted per share.

Net Interest Income

As shown in the table on the following page,  tax-equivalent net interest income
decreased $321,000 to $2,477,000 for the six months ended December 31, 1997 from
$2,798,000  for the same period in 1996.  Net  interest  income is analyzed on a
tax-equivalent  basis to adjust for the  nontaxable  status of income  earned on
certain investments such as municipal bonds.
<PAGE>
Net Interest Income (continued)
<TABLE>
<CAPTION>
 
                                                                                      Six Months Ended December 31,
                                                           -----------------------------------------------------------------------
                                                                          1997                                 1996
                                                            Average                   Yield/     Average                   Yield/ 
                                                            Balance     Interest      Rate(1)    Balance     Interest      Rate(1)
                                                           ----------------------------------   ----------------------------------
<S>                                                        <C>          <C>          <C>        <C>          <C>           <C> 
Assets:                                                                             (dollars in thousands)
Interest-earning assets:
  Interest-bearing deposits ..........................     $  1,634     $     30        3.79    $  3,069     $     67        4.3%
  FHLB common stock ..................................          991           36        7.27         880           32        7.21
  Taxable investment securities ......................       11,483          375        6.51      16,286          566        6.95
  Tax-exempt investment securities (2) ...............        3,914          156        7.97      10,916          418        7.65
  Loans receivable ...................................      104,831        4,432        8.46      94,422        3,974        8.40
                                                           --------     --------      ------    --------     --------      ------
Total interest-earning assets ........................      122,853        5,029        8.19     125,573        5,057        8.01
                                                                        --------      ------                 --------               
Non-interest-earning assets ..........................        3,182                                3,006
                                                                                                                        
     Total ...........................................     $126,035                             $128,579
                                                           ========                             ========
                                                                                                           
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts ...................................       83,119        1,985        4.78      73,953        1,751        4.70
  Borrowings .........................................       18,950          567        5.98      16,731          508        6.07
                                                           --------     --------      ------    --------     --------      ------ 
Total interest-bearing liabilities ...................      102,069        2,552        5.00      90,684        2,259        4.95
                                                                                     
Non-interest-bearing liabilities .....................        3,055                                6,251
Stockholders' equity .................................       20,911                               31,644
                                                                                                         
     Total ...........................................     $126,035                             $128,579
                                                           ========                             ========
                                                                                                            
Net interest income and interest rate spread .........                  $  2,477        3.19                 $  2,798        3.06
                                                                        ========                             ========  
Net interest-earning assets and net interest .........       20,784                     4.03    $ 34,889                     4.46
                                                           ========                             ========  
Ratio of interest-earning assets to 
     interest-bearing liabilities                                                     120.36                               138.47
</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  protion of
     interest expense.
<PAGE>
The  decrease  in net  interest  income is  primarily  due to a higher  level of
average  interest-bearing  liabilities  during the six months ended December 31,
1997 compared to the same period in 1996.  Average total  investment  securities
declined $11.8 million while average loans  receivable  increased  $10.4 million
over  the  same  six  month  period  last  year.  Interest  rate  spread  (on  a
tax-equivalent  basis)  increased to 3.19% for the six months ended December 31,
1997 from 3.06% for the same period in 1996 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 4.03% for the six months ended December 31, 1997 from 4.46% for the
six months ended December 31, 1996. Net interest margin for the six months ended
December 31, 1996 reflects  return on conversion  proceeds that were invested in
loans and investment  securities.  Net interest margin for the six months ending
December 31, 1997 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 six months ended December 31, 1997 totaled
$48,000  compared to $618,000 for the same period last year.  The unusually high
provision  last year  resulted  primarily  from the charge off of  approximately
$510,000 of loans to a single borrower. There are no remaining outstanding loans
to this  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  $233,000  for the six months  ended  December  31,  1997
compared  to $83,000  for the same period in 1996.  The  increase  is  primarily
attributable to $132,000 of net losses recorded in the six months ended December
31, 1996 on  investment  securities  sold to fund the special  dividend  paid on
December 6, 1996. Another factor  contributing to the increase is an increase of
$16,000 in other income.  This increase is primarily  attributable  to a $25,000
increase in rental income  associated  with the rental of the  Company's  former
branch facility that commenced in December of 1996.  Offsetting this increase is
a $10,000 decline in merchant income.

Other Expenses

Other  expenses  totaled  $1,401,000  for the six months ended December 31, 1997
compared to $3,475,000 for the same period in 1996. The significant  decline was
primarily  attributable to two large non-recurring expenses that occurred in the
six months ended December 31, 1996.  The Company  recorded a total of $1,603,000
of  compensation   expense   associated  with  the  release  and  allocation  of
approximately 126,000 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.

The second  non-recurring  other  expense that  occurred in the six months ended
December 31, 1996 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
<PAGE>
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 six months  ended
December 31, 1997 as compared to the same period in 1996.

Without the effect of the  non-recurring  SAIF assessment and the  non-recurring
portion of ESOP-related  compensation expense, other expenses would have totaled
$1,560,000 for the six months ended December 31, 1996.

Income Tax Expense

The Company  recorded  income tax expense of $425,000  for the six months  ended
December 31, 1997 compared to an income tax benefit of $128,000  during the same
period in 1996. The increase is  attributable  to the increase in taxable income
in the six months ended December 31, 1997 compared to the same period in 1996.

Comparison of Results of Operations for the Three Months Ended December 31, 1997
and 1996

Summary

For the quarter  ended  December  31, 1997,  the Company  recorded net income of
$363,000,  or $0.13 basic and diluted earnings per share, compared to a net loss
of $1,431,000, or $(0.54) basic and diluted loss per share, for the same quarter
last  year.  The  net  loss in the  prior  period  is  largely  attributable  to
non-recurring  items.   Compensation  expense  of  $1,496,000  was  recorded  in
association with the release and allocation of  approximately  126,000 shares of
common stock to ESOP participants discussed previously.  In addition, a $597,000
provision  for loan  losses was  recorded  during  the  quarter  which  resulted
primarily  from the charge off of  approximately  $510,000  in loans to a single
borrower.  Finally,  net losses of $106,000 were recognized on investments which
were sold to assist in funding  the special  dividend  paid on December 6, 1996.
Without  the effect of these  non-recurring  items,  net income for the  quarter
would have totaled $319,000 or $0.12 basic and diluted earnings per share.

Net Interest Income

As shown in the table on the following page,  tax-equivalent net interest income
decreased  $95,000 to  $1,252,000  for the three months ended  December 31, 1997
from  $1,347,000 for the same period in 1996. Net interest income is analyzed on
a tax-equivalent  basis to adjust for the nontaxable  status of income earned on
certain investments such as municipal bonds.
<PAGE>
<TABLE>
<CAPTION>
 
                                                                                     Three Months Ended December 31,
                                                           -----------------------------------------------------------------------
                                                                          1997                                 1996
                                                            Average                   Yield/     Average                   Yield/ 
                                                            Balance     Interest      Rate(1)    Balance     Interest      Rate(1)
                                                           ----------------------------------   ----------------------------------
<S>                                                        <C>          <C>          <C>        <C>          <C>           <C> 
Assets:                                                                             (dollars in thousands)
Interest-earning assets:
  Interest-bearing deposits                                $  1,678     $   14        3.58%     $   4,495    $    51        4.50%
  FHLB common stock                                           1,044         19        7.28            862         15        6.90
  Taxable investment securities                              11,557        189        6.51         14,857        260        7.00
  Tax-exempt investment securities (2)                        3,929         78        7.94          8,649        165        7.63
  Loans receivable                                          106,595      2,245        8.42         95,735      2,004        8.36
                                                           --------     ------        ----      ---------     ------        ----
Total interest-earning assets                               124,803      2,545        8.16        124,598      2,495        8.00
                                                                        ------        ----                    ------
Non-interest-earning assets                                   3,319                                 2,737
                                                           --------                             ---------
     Total                                                 $128,122                             $ 127,335
                                                           ========                             =========

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
  Deposit accounts                                           83,562        992        4.75         75,675        892        4.68
  Borrowings                                                 20,326        301        5.92         16,572        256        6.18
                                                           --------     ------        ----      ---------     ------        ----
Total interest-bearing liabilities                          103,888      1,293        4.98         92,247      1,148        4.95
                                                           --------     ------        ----      ---------     ------        ----
Non-interest-bearing liabilities                              3,189                                 9,262
Stockholders' equity                                         21,045                                25,826
                                                           --------                             ---------
     Total                                                 $128,122                             $ 127,335
                                                           ========                             =========
Net interest income and interest rate spread                            $1,252        3.18%                  $ 1,347        3.05%
                                                                        ======                               =======
Net interest-earning assets and net interest margin        $ 20,915                   4.01%     $ 32,351                    4.32%
                                                           ========                             ========
Ratio of interest-earning assets to 
    interest-bearing liabilities                                                    120.13                                135.07
</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  protion of
     interest expense.


The  decrease  in net  interest  income is  primarily  due to a higher  level of
average interest-bearing  liabilities during the three months ended December 31,
1997 compared to the same three month period in 1996.  Average total  investment
securities declined $8.0 million while average loans receivable  increased $10.8
million  over the same three month  period in 1996.  Interest  rate spread (on a
tax-equivalent basis) increased to 3.18% for the three months ended December 31,
<PAGE>
1997 from 3.05% for the same three month period in 1996 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 4.01% for the three  months  ended  December 31, 1997 from
4.32% for the three months ended December 31, 1996. Net interest  margin for the
three months ended December 31, 1996 reflects return on conversion proceeds that
were invested in loans and investments. Net interest margin for the three months
ending  December 31, 1997 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 three  months  ended  December  31, 1997
totaled $24,000  compared to $597,000 for the same period in 1996. The provision
for the three months ended December 31, 1996 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  $96,000 for the three  months  ended  December  31, 1997
compared to $(19,000) for the same period in 1996.  Included in other income for
the three months ended  December 31, 1996 is a $106,000 net loss on  investments
sold to assist in  funding  the  special  dividend.  Without  the effect of this
non-recurring loss other income would have totaled $87,000.

Other Expenses

Other  expenses  totaled  $730,000 for the three months ended  December 31, 1997
compared to $2,261,000 for the same period in 1996. The significant decrease was
largely attributable to the Company recording $1,496,000 of compensation expense
associated  with the release and allocation of  approximately  126,000 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   therefore   considered  to  be
non-recurring.

Without the effect of the  non-recurring  portion of  ESOP-related  compensation
expense,  other expenses would have totaled  $833,000 for the three months ended
December 31, 1997, or $103,000  greater than total other  expenses for the three
months  ended   December  31,  1997.   Compensation   expense,   excluding   the
non-recurring portion,  totaled $544,000 for the three months ended December 31,
1996,  or $142,000 more than the same period 1997.  The primary  reasons for the
decrease in compensation  expense are lower  management and employee  bonuses as
well as fewer  employees in the three months ended December 31, 1997 as compared
to the same period in 1996.  The decline in  compensation  expense was offset by
increases in deposit insurance premiums, professional fees and other expenses.

Income Tax Expense

The Company  recorded  income tax expense of $202,000 for the three months ended
December 31, 1997 compared to an income tax benefit of $164,000  during the same
period in 1996. The increase is  attributable  to the increase in taxable income
in the three months ended December 31, 1997 compared to the same period in 1996.
<PAGE>
Financial Condition

CHANGES IN FINANCIAL CONDITION

Total  assets  increased  to $130.2  million at  December  31,  1997 from $122.8
million at June 30, 1997.  During the six months ended December 31, 1997,  loans
grew by $7.0 million to $107.2  million at December  31,  1997.  Loan growth was
funded largely with (1) advances from the Federal Home Loan Bank which increased
by $5.1 million to $21.6 million at December 31, 1997 from $16.5 million at June
30, 1997, and (2) deposits  which  increased by $1.5 million to $86.4 million at
December 31, 1997 from $84.9 million at June 30, 1997.

Stockholders'  equity  increased  from $20.4  million at June 30,  1997 to $21.1
million at December 31, 1997. As discussed in note 5 to the financial statements
of  this  report,  during  the six  months  ended  December  31,  1997,  two MRP
participants  forfeited 11,011  restricted,  non-vested  shares of the Company's
stock and $36,000 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 quarter ending  December 31, 1997,  leaving
3,425 restricted shares unallocated under the MRP.

ASSET QUALITY

Nonperforming Assets and Risk Assets

Nonperforming  assets  include  nonaccrual  loans,  restructured  loans and real
estate  owned.  The  table  on  the  following  page  presents   information  on
nonperforming  assets and loans  contractually  past due but still  accruing  at
December 31, 1997 and June 30, 1997.
<PAGE>
<TABLE>
<CAPTION>
                                                     December 31,       June 30
                                                         1997             1997
                                                       --------        --------
<S>                                                    <C>             <C>
                                                              (in thousands)
Total nonaccrual loans .........................       $    422        $    803
Total restructured loans .......................           --              --
                                                       --------        --------
     Total nonperforming loans .................            422             803
Real estate owned ..............................            522            --
Total nonperforming assets .....................            944             803

Accruing loans, delinquent 90 days or more .....            218             244
                                                       --------        --------

Total risk assets ..............................       $  1,162        $  1,047
                                                       ========        ========

Nonperforming loans to total loans .............           0.39%           0.80%
Nonperforming assets to total assets ...........           0.73%           0.65%
Risk assets to total assets ....................           0.89%           0.85%
Allowance for loan losses to:
   Total nonperforming assets ..................          0.93x           0.99x
   Total risk assets ...........................          0.76x           0.76x
Total assets ...................................       $130,167        $122,761
Total loans, net ...............................       $107,225        $100,173
Allowance for loan losses ......................            879             796
</TABLE>

The primary  change in  nonperforming  assets from June 30, 1997 to December 31,
1997 was the foreclosure and transfer of property from loans  receivable to real
estate owned.  Management has reviewed the collateral for  nonperforming  assets
and believes that  collateral  values related to the loans and real estate owned
exceeds such balances.  The real estate owned consists of one undeveloped  tract
of land  that was  foreclosed  by the  Company  during  the three  months  ended
December  31,  1997.  At  December  31,  1997 and June 30,  1996,  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 $113,000 and $580,000,  respectively.  Impaired
loans totaling  $113,000 at December 31, 1997 and $458,000 at June 30, 1997 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  $17,000 and $87,000 of the general  allowance  for loan
losses is  allocated  to impaired  loans at December 31, 1997 and June 30, 1997,
respectively.  Management has included this review among the factors  considered
in the evaluation of the allowance for possible loan losses.
<PAGE>
Provision and Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for
the three and six months ended December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
                                        Three months ended      Six months ended
                                          December 31,             December 31,
                                        ------------------     -----------------
                                          1997       1996        1997      1996
                                         -----      -----      -----      -----
<S>                                      <C>        <C>        <C>        <C>
Balance at the beginning of period .     $ 854      $ 629      $ 796      $ 608
Provision for loan losses ..........        24        597         48        618
Recoveries .........................         5          1         39          1
Loans charged off ..................        (4)      (512)        (4)      (512)
                                         -----      -----      -----      -----
Balance at the end of period .......     $ 879      $ 715      $ 879      $ 715
</TABLE>



At December 31, 1997,  the  allowance  for loan losses was 0.82% of total loans,
compared  to 0.79% of total  loans at June 30,  1997 and 0.74% of total loans at
December 31, 1996.

The  levels  of the  provision  and  allowance  for  loan  losses  are  based on
management's  ongoing  evaluation  of  the  risk  characteristics  of  the  loan
portfolio  considering  current  economic  conditions,  financial  condition  of
borrowers, growth and composition of the loan portfolio,  collateral values, the
relationship of the allowance for loan losses to outstanding loans, the level of
nonperforming  loans that have been identified as potential  problems,  past and
expected loss experience,  results of the most recent  regulatory  examinations,
and other factors deemed relevant by management. Management actively maintains a
current  loan watch list and knows of no other loans which are  material and (1)
represent or result from trends or  uncertainties  which  management  reasonably
expects will materially impact future operating results,  liquidity,  or capital
resources,  or (2) represent material credits about which management has serious
doubts as to the ability of such  borrowers  to comply  with the loan  repayment
terms.  Based on  management's  evaluation of the loan  portfolio,  as described
above,  the  Company  recorded a $48,000  provision  for loan losses for the six
months ended  December 31, 1997  compared to a $618,000  provision  for the same
period in 1996.  The primary  reason for the large decrease in the provision for
loan losses in 1997  compared to 1996 was a $597,000  provision  for loan losses
that was  recorded  in 1996  which  resulted  primarily  from the  charge off of
approximately $510,000 in loans to a single borrower.


LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

Liquidity  is the ability to raise  funds or convert  assets to cash in order to
meet customer and operating  needs.  The Company's  primary sources of liquidity
are its portfolio of  investment  securities  available-for-sale,  principal and
interest payments on loans and mortgage-backed securities,  interest income from
investment  securities,  maturities of investment  securities  held-to-maturity,
increases in deposits,  and advances  from the FHLB of Atlanta.  At December 31,
1997, the Bank had $8.4 million of credit available from the FHLB which would be
collateralized  by a blanket lien on qualifying loans secured by first mortgages
<PAGE>
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT (continued)

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 December 31, 1997, the Company had
a one  year  liability-sensitive  gap  position  of $4.4  million  or  3.49%  of
interest-earning  assets. A liability-sensitive gap position generally indicates
that net interest  income would  increase in a declining  rate  environment  and
would experience downward pressure in a rising rate environment. The Company had
a cumulative one year  asset-sensitive  gap position of $5.6 million or 2.24% of
interest-earning  assets at June 30, 1997. The  liability-sensitive gap position
is primarily  attributable to the growth of customer deposits with maturities of
less than one year.  The Company  will  continue to actively  manage its balance
sheet in order protect net interest income from changes in interest rates.

It should be noted that these measures reflect the  interest-sensitivity  of the
balance sheet as of a specific date and are not necessarily indicative of future
results.  Because  of this  and  other  limitations,  management  also  monitors
interest rate sensitivity  through the use of a model which estimates the change
in net portfolio value and net interest income in response to a range of assumed
changes in market interest rates. Based on interest  sensitivity  measures as of
December  31, 1997,  management  believes  that its interest  rate risk is at an
acceptable level.

CAPITAL RESOURCES

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

At December 31, 1997, the Bank was in compliance with all of the  aforementioned
capital requirements.
<PAGE>
As of December 31, 1997,  the FDIC  categorized  the Bank as  "well-capitalized"
under the regulatory  framework for prompt corrective  action. To be categorized
as  "well-capitalized",  the Bank must meet minimum ratios for total risk-based,
and Tier I leverage  (the ratio of Tier I capital to average  assets) of 10% and
5%,  respectively.  There have been no events or conditions  since  notification
that management believes have changed the Bank's category.

Current Accounting Issues

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

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



PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS
          None

ITEM 2.   CHANGES IN SECURITIES
          Not applicable

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
          Not applicable

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)       The Registrant's Annual Meeting of Shareholders was held on
          November 12, 1997

(b)       Not applicable

(c)       1.   All the nominees for Director listed under the caption  "Election
               of Directors" in the  Registrant's  Proxy Statement dated October
               3, 1997, were duly elected  Directors of the  Registrant.  27% of
               the  outstanding  shares were voted. Of the 751,759 shares voted,
               each  director  received at least  745,499 or 99% in favor,  with
               5,300 votes abstained.                                           
                                                                                
                                                                                
          2.   The  ratification  of the  selection  of KPMG Peat Marwick LLP as
               independent  auditors for the  Registrant as described  under the
               caption "Ratification or Selection of Independent Auditor" in the
               Registrant's  Proxy Statement dated October 3, 1997, was approved
               by an  affirmative  vote of 746,459 shares or 99.3% of the shares
               that voted, with 5,300 votes abstained.                          
          
         

ITEM 5.   OTHER INFORMATION
          Not applicable

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

          (b) Reports on Form 8-K
          None


<PAGE>



                                   SIGNATURES

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



Date: February 17, 1998                        By:  /s/ D. Tyson Clayton
                                                    --------------------
                                                    D. Tyson Clayton
                                                    President


Date: February 17, 1998                        By:  /s/ Thomas W. Wayne
                                                    ------------------
                                                    Thomas W. Wayne
                                                    Vice President and principal
                                                    financial officer