<PAGE>
 
                                UNITED  STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington  D.C. 25049

                                  FORM 10-QSB

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
      For the quarterly period ended December 31, 1996
                                     ------------------------------------------
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
    EXCHANGE ACT OF 1934
 
      For the transition period from ___________________ to ___________________

                        Commission File Number 1-14266
                                               -------

                            SCOTLAND BANCORP, INC.
                            ----------------------
       (Exact name of small business issuer as specified in its charter)

            North Carolina                                     56-1955133
            --------------                                     ----------
    (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                       Identification No.)
                                                          
                             505 South Main Street
                       Laurinburg, North Carolina 28352
                       --------------------------------
              (Address of principal executive office) (Zip code)

                                (910)-276-2703
                                --------------
                         (Issuer's telephone  number)

                                      N/A
                                      ---
           (Former name, former address and former fiscal year, if 
                          changed since last report)

Indicate by check X whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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. 
Yes X  No     
   ---    ---  

As of February 1, 1997 there were issued and outstanding 1,840,000 shares of the
Registrant's common stock, no par value

Transitional Small Business Disclosure Format:  Yes    No  X
                                                   ---    ---      


                                        1



<PAGE>
                     SCOTLAND BANCORP, INC. AND SUBSIDIARY

                                   CONTENTS

PART I - FINANCIAL INFORMATION                                    Pages
                                                                  -----
   Item 1.  Financial Statements

     Consolidated statements of financial
      condition at September 30, 1996 and                             1
      December 31, 1996
 
    Consolidated statements of income for
     the three months ended December  31,                             2
     1995 and 1996
 
    Consolidated statements of cash flows
     for the three months ended December       
     31, 1995 and 1996                                              3-4
 
    Notes to consolidated financial                                 5-6     
     statements
        
   Item 2. Management's Discussion and Analysis of 
           Financial Condition and Results of                       
           Operations                                               7-10    
 
PART II - OTHER INFORMATION
 
   Item 1.  Legal Proceedings                                         11
   Item 2.  Changes in Securities                                     11
   Item 3.  Defaults upon Senior Securities                           11
   Item 4.  Submission of Matters to a Vote of Security 
            Holders                                                   11
   Item 5.  Other Information                                         11
   Item 6.  Exhibits and Reports on Form 8-K                          11
  
   Signatures                                                         12

                                       2
<PAGE>
 SCOTLAND BANCORP, INC. AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
                                                    September 30,            December 31,
ASSETS                                                   1996                    1996
------                                              -------------            ------------
                                                                              (Unaudited)
<S>                                                 <C>                      <C>
Cash and cash equivalents                           $ 5,005,923                $ 2,543,293
Federal funds sold                                      100,000                $ 1,050,000
Investment securities:                       
 Held to maturity, at amortized cost                  2,502,326                  2,001,164
 Available for sale, at estimated                    
  market value                                       13,465,261                 13,952,280   
 Nonmarketable equity securities                        599,400                    599,400
Loans receivable, net                                45,078,860                 46,073,734
Mortgage-backed securities, held to                     
 maturity, at amortized cost                            545,290                    476,632
Accrued interest receivable                             352,284                    380,768
Property and equipment, net                             819,474                    818,295
Prepaid expenses and other assets                       152,747                    171,590
                                                    -----------                ----------- 
       TOTAL ASSETS                                 $68,621,565                $68,067,156
                                                    ===========                =========== 
</TABLE>
                                       3
<PAGE>
<TABLE> 
<S>                                                   <C>                     <C>  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
 Deposits                                             $ 42,409,568            $  41,788,559
 Advance payments by borrowers for                         
  taxes and insurance                                      156,525                  102,917
 Accrued expenses and other liabilities                    404,558                  419,652
 Special SAIF assessment                                   320,750                        -
 Deferred income taxes                                     402,802                  468,780
 Income taxes payable                                      136,090                  190,811
                                                      ------------            -------------
       TOTAL LIABILITIES                                43,830,293               42,970,719
                                                      ------------            -------------
Stockholders' Equity
 Preferred stock, no par value, authorized
  5,000,000 shares, none issued
 Common stock, no par value, authorized
  20,000,000 shares, 1,840,000 shares issued
 Additional paid-in capital                             17,420,468               17,422,654
 Note receivable from ESOP for purchase                 
  of common stock                                       (1,772,292)              (1,772,292)
 Unrealized gain on securities                             
  available for sale, net of tax                           411,135                  539,212
 Retained earnings, substantially                        
  restricted                                             8,731,961                8,906,863
                                                      ------------            -------------
       TOTAL STOCKHOLDERS' EQUITY                       24,791,272               25,096,437
                                                      ------------            -------------
       TOTAL LIABILITIES AND                         
        STOCKHOLDERS' EQUITY                          $  68,621,565            $ 68,067,156
                                                      ------------            -------------

</TABLE> 

See Notes to Consolidated Financial Statements.


                                       4
<PAGE>
 
SCOTLAND BANCORP, INC.  AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996

<TABLE> 
<CAPTION> 

 
                                                1995              1996
                                          -------------       ------------ 
<S>                                       <C>                 <C> 
Interest and dividend income:
 Loans                                    $     901,896       $    962,484
 Investment securities                          162,860            238,913
 Mortgage-backed securities                      18,405             14,454
 Short-term cash investments                     40,689             69,517
                                          -------------       ------------ 
       TOTAL INTEREST INCOME                  1,123,850          1,285,368
Interest expense:                                                         
 Deposits                                       593,664            489,108
 FHLB advances                                                         897
                                          -------------       ------------ 
       TOTAL INTEREST EXPENSE                   593,664            490,005
                                          -------------       ------------ 
       NET INTEREST INCOME                      530,186            795,363
Provision for loan losses                         6,000              6,000
                                          -------------       ------------ 
        NET INTEREST INCOME AFTER               
         PROVISION FOR LOAN LOSSES              524,186            789,363 
                                          -------------       ------------  
Noninterest income:                                                       
 Service charges and fees                        14,297             13,291
 Other                                           15,290              9,036
                                          -------------       ------------  
                                                 29,587             22,327
                                          -------------       ------------  
Noninterest expense:                                                      
 Compensation and employee benefits             156,606            182,181
 Occupancy                                       22,331             21,607
 Insurance                                       31,315             26,778
 Data processing                                 23,848             23,239
 Furniture and fixture expense                   10,058              6,285
 Other                                           46,919             72,882
                                          -------------       ------------  
                                                291,077            332,972
                                          -------------       ------------  
       INCOME BEFORE INCOME TAXES               262,696            478,718
Income taxes                                     95,631            176,499
                                          -------------       ------------  
       NET INCOME                         $     167,065       $    302,219
                                          -------------       ------------  
Primary earnings per share                $        n/a        $       0.18 
                                          -------------       ------------ 
</TABLE> 


See Notes to Consolidated Financial Statements.

                                       5
<PAGE>
 
SCOTLAND BANCORP, INC.  AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 1995
 AND 1996

<TABLE>
<CAPTION> 
                                             1995            1996
                                          ---------       ----------
<S>                                      <C>             <C>    
Cash Flows From Operating Activities
 Net income                              $   167,065    $   302,219
 Adjustments to reconcile net income to                  
  net                                                    
   cash provided by operating                            
    activities:                                          
   Depreciation                               13,863         10,522
   ESOP compensation expense charged to                       2,186
    paid-in capital                                      
   Changes in assets and liabilities:                    
    (Increase) decrease in:                              
      Prepaid expenses and other assets      (53,454)       (18,941)
      Accrued interest receivable             54,990        (28,484)
    Increase (decrease) in:                              
      Accrued expenses and other             (74,960)        15,094
       liabilities                                       
      Special SAIF assessment                              (320,750)
      Income taxes payable                    86,479         54,721
                                           ---------      ---------     
                                          
       NET CASH PROVIDED BY OPERATING        193,983         16,567
        ACTIVITIES                       
                                           ---------      ---------
Cash Flows From Investing Activities     
 Net increase in loans receivable           (585,447)      (994,874)
 Principal payments on mortgage-backed        25,800         68,658
  securities                             
 Net decrease in investment securities       500,949        208,198
 Purchase of property and equipment           (7,586)        (9,343)
                                        
       NET CASH USED IN INVESTING            (66,284)      (727,361)
        ACTIVITIES                       
                                           ---------      ---------

Cash Flows From Financing Activities     
 Net decrease in deposits                   (287,798)      (621,009)
 Cash dividends paid                               -       (127,219)
 Decrease in advance payments by
  borrowers
    for taxes and insurance                  (76,214)       (53,608)
                                           ---------      --------- 
       NET CASH USED IN FINANCING           (364,012)      (801,836)
        ACTIVITIES
                                           ---------      --------- 
       NET DECREASE IN CASH AND CASH        (236,313)    (1,512,630)
        EQUIVALENTS
Cash and cash equivalents, including
 federal funds sold:
 Beginning                                 3,088,695      5,105,923
                                           ---------      ---------  
 Ending                                  $ 2,852,382    $ 3,593,293
                                           ---------      ---------
                                
</TABLE>



                                       6
<PAGE>
 
SCOTLAND BANCORP, INC.  AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION> 
                                           1995            1996
                                        ----------      ----------
<S>                                     <C>             <C>    
Supplemental Disclosure of Cash Flow
 Information:
 Cash payments for interest             $  593,664      $  461,424
                                        ----------      ----------            
 Cash payments for income taxes         $   11,349      $  136,090
                                        ----------      ----------
Supplemental Disclosure of Noncash                          
 Financing Transactions                                     
 Dividends declared, accrued and        
  deducted from retained earnings       $               $  127,317   
                                        ----------      ----------
 
</TABLE> 

See Notes to Consolidated Financial Statements



                                       7
<PAGE>
 
      NATURE OF BUSINESS

      Scotland Bancorp, Inc. (the "Company") was incorporated under the laws of
      the State of North Carolina for the purpose of becoming the bank holding
      company of Scotland Savings Bank, Inc., SSB (THE "Bank" or "Scotland
      Savings Bank") in connection with the Bank's conversion from a state
      chartered mutual savings bank to a state chartered stock savings bank,
      pursuant to its amended and restated Plan of Conversion.  The Company was
      organized in 1995 to acquire all of the common stock of Scotland Savings
      Bank upon its conversion to stock form, which occurred on March 29, 1996.
      A subscription offering of the Company's shares closed on March 29, 1996,
      at which time the Company acquired all of the shares of the Bank and
      commenced operations.


      The Company has no operations and conducts no business of its own other
      than owning Scotland Savings Bank, investing its portion of the net
      proceeds received in the Conversion, and lending funds to the Employee
      Stock Ownership Plan (the "ESOP") which was formed in connection with the
      Conversion. The principal business of the Bank is accepting deposits from
      the general public and using those deposits and other sources of funds to
      make loans secured by real estate and other forms of collateral located in
      the Bank's primary market area of Scotland and Moore counties in North
      Carolina.

      Scotland Savings Bank's results of operations depend primarily on its net
      interest income, which is the difference between interest income from
      interest-earning assets and interest expense on interest-bearing
      liabilities. The Bank's operations are also affected by noninterest
      income, such as miscellaneous income from loans, customer deposit account
      service charges, and other sources of revenue. The Bank's principal
      operating expenses, aside from interest expense, consist of compensation
      and associated benefits, federal deposit insurance premiums, occupancy
      costs, furniture and fixture expense, data processing charges, and other
      general and administrative expenses.

      BASIS OF PRESENTATION

      The accompanying unaudited consolidated financial statements (except for
      the statement of financial condition at September 30, 1996, which is
      audited) have been prepared in accordance with generally accepted
      accounting principles for interim financial information and with the
      instructions to Form 10-QSB of Regulation S-X. Accordingly, they do not
      include all of the information and footnotes

                                       8
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (none of which were
other than normal recurring accruals) necessary for a fair presentation of the
financial position and results of operations for the periods presented have been
included. The financial statements of the Company are presented on a
consolidated basis with those of Scotland Savings Bank, although the Company did
not own any shares of the Bank and had no assets, liabilities, equity or
operations at any date prior to March 29, 1996. The Company did not conduct any
operations for any period prior to March 29, 1996. Therefore, the information in
financial statements presented for all periods prior to March 31, 1996 include
only the accounts and operations of Scotland Savings Bank. The results of
operations for the three month period ended December 31, 1996 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1997. The accounting policies followed are as set forth
in Note 1 of the Notes to Consolidated Financial Statements in the 1996 annual
report of the Company.

                                       9
<PAGE>

SCOTLAND BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
EARNINGS PER SHARE

The Company's earnings per share for the three month period ended December 31,
1996 is based on 1,696,772 shares assumed to be outstanding for the period.
Earnings per share has been calculated in accordance with Statement of Position
93-6 "Employers' Accounting for Employee Stock Ownership Plans."   Earnings per
share for the three month period ended December 31, 1995 has not been presented
in the consolidated statements of income because the Bank had not converted to
stock form and the Company had not completed its stock offering at any time
during that period.

DIVIDENDS DECLARED

On December 17, 1996, the Board of Directors of Scotland Bancorp, Inc. declared
a dividend of $ .075 a share for stockholders of record as of January 10, 1997
and payable on January 24, 1997.  The dividends declared were accrued and
reported as other liabilities in the December 31, 1996 consolidated balance
sheet.

                                      10
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND SEPTEMBER 30, 1996:

Total assets decreased by $554,000 to $68.1 million at December 31, 1996 from
$68.6 million at September 30, 1996.  Net loans receivable increased by $995,000
to $46.1 million at December 31, 1996 from $45.1 million at September 30, 1996,
which on an annualized basis when compared with the increase in loans for the
past two years, represented a fairly typical quarter for loan growth.   Cash and
cash equivalents, including federal funds sold, decreased by $1.5 million to
$3.6 million at December 31, 1996 from $5.1 million at September 30, 1996.
Investment securities remained constant at 16.6 million at December 31, 1996 and
September 30, 1996, although investment securities actually declined by $208,000
and were offset by unrealized gains in the fair value of the available for sale
securities portfolio.  Cash and cash equivalents decreased primarily to fund the
increase in loans, to fund the payment of $321,000 during the quarter for the
special SAIF assessment to recapitalize the insurance fund, and to fund an
outflow of $621,000 in savings deposits.   During the three months ended June
30, 1996, the Company loaned $1.8 million to the Bank's ESOP plan to purchase
shares of the Company's common stock in the open market.  The loan is scheduled
to be repaid over a 15 year term although no principal payments have yet to
occur.  The Bank has accrued and expensed approximately $38,000 at December 31,
1996 towards the first payment due in March, 1997.  The note to the ESOP is
reported as a reduction in stockholders' equity.   The Bank borrowed and repaid
$1,000,000 from the FHLB of Atlanta during the three months ended December 31,
1996.  Retained earnings increased by $175,000 during the current quarter to
$8.9 million at December 31, 1996, which is attributable to the Company's
earnings of $302,000 for the three months ended December 31, 1996 less cash
dividends declared of $127,000.

At December 31, 1996, the Company's capital amounted to $25.1 million, which as
a percentage of total consolidated assets was 36.9%, and was considerably in
excess of the regulatory capital requirements at such date.

The Bank considers all loans past due 90 days or more to be nonperforming, even
though a loan may have sufficient collateral and/or the Bank ultimately expects
to receive all delinquent payments.  The Bank had one loan of $31,297 which was
nonperforming at December 31, 1996.  Management does not expect to incur a
loss on this loan.  The Bank's nonperforming loans as a percentage of total
loans outstanding was .07% at both December 31, 1996 and September 30, 1996.
During the three month period ended December 31, 1996, the Bank's level of
nonperforming loans has remained consistently low 

                                      11
<PAGE>

SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
in relation to prior periods and total loans outstanding, and the Bank only
incurred $492 in loan charge-offs during the period ended December 31, 1996. As
a result, and based on management's analysis of the adequacy of its allowances,
only $6,000 during the three month period ended December 31, 1996 was provided
 to the loan loss allowance. Such amounts were added as a general valuation
allowance primarily due to the increase in the Bank's loan portfolio during the
period.

                                      12
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND
1995:

GENERAL.  Net income for the three months ended December 31, 1996 was $302,000
or $135,000 more than the $167,000 earned during the same quarter in 1995.   As
discussed below, the increase in net income was primarily attributable to an
increase in net interest income for the three month period ended December 31,
1996 as compared to the same period in 1995 due to the investment of the
Company's stock proceeds.  Due to the added capital, net interest income was
also positively effected during the quarter in comparison to the same quarter a
year earlier due to a lower level of savings deposits required to finance the
Company's operations.

INTEREST INCOME.  Interest income increased by $162,000 from $1.1 million for
the three months ended December 31, 1995 to $1.3 million for the three months
ended December 31, 1996.   The increase was attributable to higher level of
interest-earning assets outstanding during the first quarter of this year in
comparison to the same quarter a year earlier.  Due primarily to an infusion of
cash received in the stock offering, interest-earning assets amounted to $66.7
million at December 31, 1996 as compared to $55.7 million at December 31, 1995.
approximately 98% of the Company's assets were interest earning at December 31,
1996, and approximately 69% of such interest earning assets were held in the
form of loans receivable.

INTEREST EXPENSE.   Interest expense decreased by $104,000 from $594,000 for the
three months ended December 31, 1995 to $490,000 for the three months ended
December 31, 1996.  In total, the average balance of interest bearing
liabilities was approximately $6.0 million lower during quarter ending December
31, 1996 compared to the same period in 1995.  In addition, the Association's
average cost of funds, which approximated 4.65% for the quarter ended December
31, 1996, was approximately 29 basis points lower in the quarter ended December
31, 1996 than in the same quarter a year earlier.

NET INTEREST INCOME.  Net interest income increased by $265,000 from $530,000
for the three months ended December 31, 1995 to $795,000 for the three months
ended December 31, 1996.  This increase resulted from the combination of an
increase in the volume of interest-earning assets and a decrease in the volume
of interest-bearing liabilities between the quarters and a lower cost of funds
in the December 1996 quarter as compared to the same quarter in 1995.

                                      13
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
PROVISION FOR LOAN LOSSES.  The bank added $6,000 in loan loss provisions during
the quarters ended December 31, 1996 and 1995.  provisions, which are charged to
operations, and the resulting loan loss allowances are amounts the Bank's
management believes will be adequate to absorb losses on existing loans that may
become uncollectible. Loans are charged off against the allowance when
management believes that collectibility is unlikely. The evaluation to increase
or decrease the provision and resulting allowances is based both on prior loan
loss experience and other factors, such as changes in the nature and volume of
the loan portfolio, overall portfolio quality, and current economic conditions.
The provisions which were added in the quarters ended December 31, 1996 and 1995
were provided primarily due to the increase in the volume of the Bank's loan
portfolio during those quarters.

                                      14
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
PROVISION FOR LOAN LOSSES (CONTINUED)

The Bank's loan loss provisions were relatively minor during the three month
periods ended December 31, 1996 and 1995 because the Bank's level of
nonperforming loans has remained consistently low (or the Bank had no
nonperforming loans) in relation to prior periods and total loans outstanding.
At December 31, 1996, the Bank's level of general valuation allowances for loan
losses amounted to $231,000, which management believes is adequate to absorb
potential losses in its loan portfolio.

NONINTEREST EXPENSE.  Noninterest expense increased by $42,000 to $333,000 for
the three month period ended December 31, 1996 from $291,000 for the comparable
quarter in 1995 principally as a result of an increase in compensation expense
resulting from the establishment of the Company's ESOP as discussed below.
Other categories of noninterest expense fluctuated by insignificant amounts
between the periods, except for other noninterest expense which increased by
$26,000 during the current quarter as compared to the same quarter a year
earlier due primarily to certain  expenses associated with operating as a public
company.

As a part of the Conversion, the Company established an ESOP that acquired 8% of
the shares offered in the Conversion in the after market with funds provided in
the form of a loan from the Company.  The loan is expected to be repaid over a
fifteen year period with funds provided by the Bank in the form of retirement
plan contributions sufficient to amortize the debt.  The expense associated with
the ESOP is reported in accordance with SOP 93-6 "Employers' Accounting for
Employee Stock Ownership Plans."  In addition, certain other benefit plans are
anticipated to be placed before the Company's stockholders for approval at a
future special  stockholders' meeting expected to be held during 1997.

CAPITAL RESOURCES AND LIQUIDITY:

The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash.  More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or

                                      15
<PAGE>
SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-bearing deposits.

One form of liquidity,  which is made up of cash and cash equivalents and
federal funds sold, decreased by $1.5 million during the three month period
ended December 31, 1996.  As reported in the consolidated statement of cash
flows, such decrease ocurred in order to fund the Bank's new loan originations,
to fund the payment of the special SAIF assessment, to provide for a decrease in
the Bank's savings deposits, and to provide funds for dividends to the Company's
stockholders.

                                      16
<PAGE>

SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED):

As a state chartered stock savings bank, Scotland Savings Bank must maintain
liquidity in the form of cash and cash equivalents and investment securities,
including mortgage-backed securities, equal to at least 10% of total assets.
The Bank's liquidity ratio at December 31, 1996 was considerable in excess of
such requirements.  Given its excess liquidity and its ability to borrow from
the Federal Home Loan Bank, the Bank believes that it will have sufficient funds
available to meet anticipated future loan commitments, unexpected deposit
withdrawals, and other cash requirements.

                                      17
<PAGE>

SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
Part II.  OTHER INFORMATION

    Item 1.  Legal Proceedings

             The Company is not engaged in any legal proceedings at the present
             time.  From time to time, the Bank is a party to legal proceedings
             within the normal course of business wherein it enforces its
             security interest in loans made by it, and other matters of a like
             kind.

    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)  Not applicable
             (b)  Not applicable

                                      18
<PAGE>

SCOTLAND BANCORP, INC. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 
SIGNATURES

    Pursuant to 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.

                                           SCOTLAND BANCORP, INC.

     Dated      February 1, 1997           By:  /s/ William C. Fitzgerald, III
           -------------------------            ------------------------------
                                                William C. Fitzgerald, III
                                                President and CEO


     Dated      February 1, 1997           By:   /s/ Debora B. Steagall
           --------------------------            ------------------------------
                                                 Debora B. Steagall
                                                 Assistant Treasurer

                                      19
<PAGE>
 
SIGNATURES

    Pursuant to 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.

     SCOTLAND BANCORP, INC.

     Dated      February 1, 1997               By:
           ------------------------------      ---
________________________________________________
------------------------------------------------
     William C. Fitzgerald, III
     President and CEO

     Dated      February 1, 1997               By:
           ------------------------------      ---
________________________________________________
------------------------------------------------
     Debora B. Steagall
     Assistant Treasurer

                                       20