<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          June 30, 1998
                                        -------------------------------------

     [_] 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 Identification No.)
     incorporation or organization)

                              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 August 1, 1998 there were issued and outstanding 1,913,600 shares of the
Registrant's common stock, no par value

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

<PAGE>
 
                      SCOTLAND BANCORP, INC. AND SUBSIDIARY

                                    CONTENTS

<TABLE> 
<CAPTION> 

PART I - FINANCIAL INFORMATION                                                                    Pages
                                                                                                  -----
    <S>                                                                                           <C> 
      Item 1.  Financial Statements

    Condensed consolidated statements of financial condition at September 30,
    1997 and June 30, 1998 (unaudited)                                                               1

    Condensed consolidated statements of income for the three months ended
    June 30, 1997 and 1998 (unaudited)                                                               2

    Condensed consolidated statements of income for the nine months ended 
    June 30, 1997 and 1998 (unaudited)                                                               3

    Condensed consolidated statements of cash flows for the nine months ended
    June 30, 1997 and 1998 (unaudited)                                                              4-5

    Notes to condensed consolidated financial statements (unaudited)                                6-8

      Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                                           9-12
  
PART II - OTHER INFORMATION

      Item 1.  Legal Proceedings                                                                    13      
      Item 2.  Changes in Securities and Use of Proceeds                                            13      
      Item 3.  Defaults upon Senior Securities                                                      13      
      Item 4.  Submission of Matters to a Vote of Security Holders                                  13 
      Item 5.  Other Information                                                                    13
      Item 6.  Exhibits and Reports on Form 8-K                                                     13

      Signatures                                                                                    14
</TABLE> 

This Form 10-QSB contains forward-looking statements consisting of estimates
with respect to the financial condition, results of operations and other
business of Scotland Bancorp., Inc. and Subsidiary that are subject to various
factors which could cause actual results to differ materially from those
estimates. Factors which could influence the estimates include changes in the
national, regional and local market conditions, legislative and regulatory
conditions, and an adverse interest rate environment.
<PAGE>
 
 SCOTLAND BANCORP, INC. AND SUBSIDIARY


 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 September 30, 1997 and June 30, 1998

<TABLE> 
<CAPTION> 
                                                                               September 30,          June 30,
 ASSETS                                                                             1997                1998
 ------------------------------------------------------------------------------------------------------------------
 <S>                                                                          <C>                 <C> 
                                                                                    (Note 2)          (Unaudited)
 Cash and cash equivalents, including federal funds sold                      $     6,758,248     $      6,239,130
 Securities held to maturity, at amortized cost                                       500,000              500,000
 Securities available for sale, at fair value                                       8,460,850            8,015,727
 Nonmarketable equity securities                                                      599,400              599,400
 Loans receivable, net                                                             46,463,348           44,126,120
 Mortgage-backed securities, held to maturity, at amortized cost                      418,657              337,690
 Accrued interest receivable                                                          210,759              208,962
 Property and equipment, net                                                          792,359              767,577
 Prepaid expenses and other assets                                                    195,666              287,270
                                                                            ---------------------------------------
               Total assets                                                   $    64,399,287     $     61,081,876
                                                                            =======================================
 LIABILITIES AND STOCKHOLDERS' EQUITY
 ------------------------------------------------------------------------------------------------------------------
 Liabilities:
    Deposits                                                                  $    43,139,725     $     44,786,223
    Note payable                                                                    5,500,000                   -
    Accounts payable and accrued expenses                                             447,422              202,885
    Advance payments by borrowers for taxes and insurance                             160,229              195,652
    Deferred income taxes                                                             553,766              670,803
    Income taxes payable                                                               37,383                   -
                                                                            ---------------------------------------
               Total liabilities                                                   49,838,525           45,855,563
                                                                            ---------------------------------------
 Stockholders' Equity
    Preferred stock, no par value, authorized 5,000,000 shares,
       none issued                                                                         -                    -
    Common stock, no par value, authorized 20,000,000 shares,
       1,913,600 shares issued                                                             -                    -
    Additional paid-in capital                                                      7,939,945            7,927,648
    Note receivable from ESOP                                                      (1,708,545)          (1,606,395)
    Unrealized gain on securities available for sale, net of tax                      518,552              720,518
    Deferred management recognition plan                                             (824,167)            (651,667)
    Unearned compensation                                                            (834,558)            (818,508)
    Retained earnings, substantially restricted                                     9,469,535            9,654,717
                                                                            ---------------------------------------
               Total stockholders' equity                                          14,560,762           15,226,313
                                                                            ---------------------------------------
               Total liabilities and stockholders' equity                     $    64,399,287     $     61,081,876
                                                                            =======================================
</TABLE> 

See Notes to Condensed Consolidated Financial Statements.
 

                                       1
<PAGE>
 
 SCOTLAND BANCORP, INC. AND SUBSIDIARY


 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 Three Months Ended June 30, 1997 and 1998

<TABLE> 
<CAPTION> 
                                                                                    1997                1998      
 ------------------------------------------------------------------------------------------------------------------
 <S>                                                                              <C>                 <C> 
 Interest and dividend income:
    Loans                                                                     $     1,000,223     $        914,864
    Investment securities                                                             227,996              102,218
    Mortgage-backed securities                                                         12,634                9,357
    Short-term cash investments                                                        55,935              112,582
                                                                           ----------------------------------------
               Total interest income                                                1,296,788            1,139,021
                                                                           ----------------------------------------
 Interest expense on deposits:                                                        501,376              529,322
                                                                           ----------------------------------------
               Net interest income                                                    795,412              609,699
 Provision for loan losses                                                              6,000                  -
                                                                           ----------------------------------------
                Net interest income after provision for loan losses                   789,412              609,699
                                                                           ----------------------------------------
 Noninterest income:
    Service charges and fees                                                           14,291               12,866
    Other                                                                             239,932                3,751
                                                                           ----------------------------------------
                                                                                      254,223               16,617
                                                                           ----------------------------------------
 Noninterest expense:
    Compensation and employee benefits                                                466,155              263,027
    Occupancy                                                                          20,475               20,012
    Insurance                                                                           3,544                9,699
    Data processing                                                                    23,261               26,365
    Furniture and fixture expense                                                       5,994                8,874
    Other                                                                             105,557               75,716
                                                                           ----------------------------------------
                                                                                      624,986              403,693
                                                                           ----------------------------------------
               Income before income taxes                                             418,649              222,623
 Income taxes                                                                         158,269               83,981
                                                                           ----------------------------------------
               Net income                                                     $       260,380     $        138,642
                                                                           ========================================

 Basic earnings per share                                                     $          0.15     $           0.08
                                                                           ========================================
 Diluted earnings per share                                                   $          0.15     $           0.08
                                                                           =======================================
 Dividends per share                                                          $         0.075     $           0.05
                                                                           =======================================
</TABLE> 

See Notes to Condensed Consolidated Financial Statements.

                                       2
<PAGE>
 
 SCOTLAND BANCORP, INC. AND SUBSIDIARY


 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 Nine Months Ended June 30, 1997 and 1998

<TABLE> 
<CAPTION> 

                                                                                    1997                1998    
 ------------------------------------------------------------------------------------------------------------------
 <S>                                                                          <C>                 <C> 
 Interest and dividend income:
    Loans                                                                     $     2,932,001     $      2,813,414
    Investment securities                                                             705,847              289,078
    Mortgage-backed securities                                                         39,846               31,905
    Short-term cash investments                                                       168,340              337,679
                                                                           ----------------------------------------
               Total interest income                                                3,846,034            3,472,076
                                                                           ----------------------------------------
 Interest expense:
    Deposits                                                                        1,465,630            1,613,525
    FHLB advances and note payable                                                        897                1,986
                                                                           ----------------------------------------
               Total interest expense                                               1,466,527            1,615,511
                                                                           ----------------------------------------
               Net interest income                                                  2,379,507            1,856,565
 Provision for loan losses                                                             18,000                6,000
                                                                           ----------------------------------------
                Net interest income after provision for loan losses                 2,361,507            1,850,565
                                                                           ----------------------------------------
 Noninterest income:
    Service charges and fees                                                           40,229               36,978
    Other                                                                             252,363               17,272
                                                                           ----------------------------------------
                                                                                      292,592               54,250
                                                                           ----------------------------------------
 Noninterest expense:
    Compensation and employee benefits                                                824,798              760,823
    Occupancy                                                                          64,150               64,260
    Insurance                                                                          21,524               28,529
    Data processing                                                                    71,077               75,471
    Furniture and fixture expense                                                      19,365               22,153
    Other                                                                             284,263              245,250
                                                                           ----------------------------------------
                                                                                    1,285,177            1,196,486
                                                                           ----------------------------------------
               Income before income taxes                                           1,368,922              708,329
 Income taxes                                                                         510,091              265,802
                                                                           ----------------------------------------
               Net income                                                     $       858,831     $        442,527
                                                                           ========================================

 Basic earnings per share                                                     $          0.50     $           0.26
                                                                           ========================================
 Diluted earnings per share                                                   $          0.50     $           0.26
                                                                           ========================================
 Dividends per share                                                          $         0.225     $           0.15
                                                                           ========================================
</TABLE> 

See Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>
 
 SCOTLAND BANCORP, INC. AND SUBSIDIARY


 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months Ended June 30, 1997 and 1998

<TABLE> 
<CAPTION> 
                                                                                    1997                1998
 ------------------------------------------------------------------------------------------------------------------
 <S>                                                                          <C>                 <C> 
 Cash Flows From Operating Activities
    Net income                                                                $       858,831     $        442,527
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Depreciation                                                                    32,366               24,782
       Deferred income taxes                                                          121,885               (6,747)
       ESOP compensation expense (income)                                              11,331              (12,297)
       Amortization of deferred management recognition plan                           268,333              172,500
       Amortization of unearned compensation                                               -                16,050
       Changes in assets and liabilities:
         (Increase) decrease in:
            Prepaid expenses and other assets                                        (284,708)             (91,604)
            Accrued interest receivable                                                14,877                1,797
         Decrease in:
            Accrued expenses and other liabilities                                     (5,992)            (196,223)
            Special SAIF assessment                                                  (320,750)                  -
            Income taxes payable                                                      (52,773)             (37,383)
                                                                             --------------------------------------
               Net cash provided by operating activities                              643,400              313,402
                                                                             --------------------------------------
 Cash Flows From Investing Activities
    Net (increase) decrease in loans receivable                                    (2,844,048)           2,337,228
    Principal payments received on mortgage-backed securities                         103,337               80,967
    Net decrease in investment securities                                           1,217,631              770,873
    Purchase of property and equipment                                                (15,002)                  -
                                                                             --------------------------------------
               Net cash provided by (used in) investing activities                 (1,538,082)           3,189,068
                                                                             --------------------------------------
 Cash Flows From Financing Activities
    Net increase in deposits                                                           41,527            1,646,498
    Repayment of note payable                                                              -            (5,500,000)
    Cash dividends paid                                                              (381,835)            (305,659)
     Repayment of ESOP debt                                                            63,747              102,150
    Decrease in advance payments by borrowers
        for taxes and insurance                                                        65,500               35,423
                                                                             --------------------------------------
               Net cash used in financing activities                                 (211,061)          (4,021,588)
                                                                             --------------------------------------
               Net decrease in cash and cash equivalents                           (1,105,743)            (519,118)
 Cash and cash equivalents, including federal funds sold:
    Beginning                                                                       5,105,923            6,758,248
                                                                             --------------------------------------
    Ending                                                                    $     4,000,180     $      6,239,130
                                                                             ======================================
</TABLE> 

                                       4
<PAGE>
 
 SCOTLAND BANCORP, INC. AND SUBSIDIARY


 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months Ended June 30, 1997 and 1998

<TABLE> 
<CAPTION> 
                                                                                    1997                1998
 ------------------------------------------------------------------------------------------------------------------
 <S>                                                                          <C>                 <C> 
 Supplemental Disclosure of Cash Flow Information:
    Cash payments for interest                                                $     1,446,567     $      1,629,886
                                                                             ======================================
    Cash payments for income taxes                                            $       455,290     $        360,727
                                                                             ======================================
 Supplemental Disclosure of Noncash Financing Transactions
    Dividends declared, accrued and deducted from retained earnings           $       133,088     $         84,774
                                                                             ======================================
    Issuance of common stock for the Management Recognition Plan              $     1,150,000     $             -
                                                                             ======================================
</TABLE> 

See Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
SCOTLAND BANCORP, INC. AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1.    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. (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.


Note 2.     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (except
for the condensed consolidated statement of financial condition at September 30,
1997, which has been taken from the audited financial statements at that date)
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 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. The
results of operations for the three and nine month periods ended June 30, 1998
are not necessarily indicative of the results of operations that may be expected
for the year ended September 30, 1998. The accounting policies followed are as
set forth in Note 1 of the Notes to Consolidated Financial Statements in the
1997 annual report of the Company.

                                       6
<PAGE>
 
SCOTLAND BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 3. Earnings Per Share

Earnings per share has been calculated in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," and Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans." For
purposes of this computation, the number of shares of common stock purchased by
the Bank's employee stock ownership plan which have not been allocated to
participant accounts are not assumed to be outstanding. MRP restricted stock
awards for the three and nine month periods ended June 30, 1998 have not been
included since they are anti-dilutive. The following are reconciliations of the
amounts used in the per share calculations:

<TABLE> 
<CAPTION> 
                                                              For the Three Months Ended June 30, 1998
                                                   ---------------------------------------------------------------
                                                           Income               Shares            Per Share
                                                        (Numerator)         (Denominator)           Amount
                                                   ---------------------------------------------------------------
<S>                                               <C>                             <C>       <C>  
Basic and Diluted EPS
Income available to stockholders                  $              138,642          1,656,239 $               0.08
                                                                                             =====================
<CAPTION> 
                                                              For the Nine Months Ended June 30, 1998
                                                   ---------------------------------------------------------------
                                                           Income               Shares            Per Share
                                                        (Numerator)         (Denominator)           Amount
                                                   ---------------------------------------------------------------
<S>                                               <C>                             <C>       <C> 
Basic and Diluted EPS
Income available to stockholders                  $              442,527          1,684,654 $               0.26
                                                                                             =====================
<CAPTION> 
                                                              For the Three Months Ended June 30, 1997
                                                   ---------------------------------------------------------------
                                                          Income               Shares             Per Share
                                                        (Numerator)         (Denominator)           Amount
                                                   ---------------------------------------------------------------
                                                  <C>                       <C>              <C> 
Basic EPS
Income available to stockholders                  $              260,380           1,716,676 $              0.15
                                                                                             =====================

Effect of dilutive securities
MRP restricted stock awards                       $               -                    1,322
Stock options                                                     -                    4,148
                                                   ------------------------------------------

Diluted EPS
Income available to stockholders                  $              260,380           1,722,146 $              0.15
                                                                                             =====================
</TABLE> 

                                       7
<PAGE>
 
SCOTLAND BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-------------------------------------------------------------------------------

Note 3.     Earnings Per Share (Continued)
<TABLE> 
<CAPTION> 
                                                              For the Nine Months Ended June 30, 1997
                                                   ---------------------------------------------------------------
                                                          Income               Shares             Per Share
                                                        (Numerator)         (Denominator)           Amount
                                                   ---------------------------------------------------------------
<S>                                                <C>                      <C>              <C>        
Basic EPS
Income available to stockholders                   $         858,831          1,715,292      $               0.50
                                                                                             =====================

Effect of dilutive securities
MRP restricted stock awards                        $           -                  1,322
Stock options                                                  -                  4,148
                                                   -------------------------------------

Diluted EPS
Income available to stockholders                   $         858,831          1,720,762      $               0.50
                                                                                             =====================
</TABLE> 


Note 4.     Dividends Declared

On June 17, 1998, the Board of Directors of Scotland Bancorp, Inc. declared a
dividend of $.05 per share for stockholders of record as of July 10, 1998 and
payable on July 24, 1998. The dividends declared were accrued and reported as
other liabilities in the June 30, 1998 consolidated statement of financial
condition.

                                       8
<PAGE>
 
SCOTLAND BANCORP, INC. AND SUBSIDIARY

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

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

Comparison of Financial Condition at June 30, 1998 and September 30, 1997:

Total assets decreased by $3.3 million to $61.1 million at June 30, 1998 from
$64.4 million at September 30, 1997. Net loans receivable decreased by $2.4
million to $44.1 million at June 30, 1998 from $46.5 million at September 30,
1997. Cash and cash equivalents, including federal funds sold, decreased by
$519,000 to $6.2 million at June 30, 1998 from $6.8 million at September 30,
1997. Investment securities decreased by $526,000 to $9.5 million at June 30,
1998 from $10.0 million at September 30, 1997. During the nine months ended June
30, 1998, investment securities totaling $5.1 million were sold in order to pay
off the Company's note payable described below, $1.5 million of securities were
called, $5.8 million of securities were purchased, and the fair value of the
securities available for sale portfolio increased by $326,000. Deposits
increased by $1.7 million to $44.8 million at June 30, 1998 from $43.1 million
at September 30, 1997. The Company repaid the $5.5 million note payable which
was incurred in September of 1997, thus eliminating the Company's external debt.
Retained earnings increased by $185,000 during the current period to $9.7
million at June 30, 1998, which is attributable to the Company's earnings of
$443,000 for the nine months ended June 30, 1998, less cash dividends declared
of $257,000.

At June 30, 1998, the Company's capital amounted to $15.2 million, which as a
percentage of total consolidated assets was 24.9%, 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 no loans which were
nonperforming at June 30, 1998. The Bank's nonperforming loans as a percentage
of total loans outstanding was .00% and .06% at June 30, 1998 and September 30,
1997, respectively. During the nine month period ended June 30, 1998, the Bank's
level of nonperforming loans has remained consistently low in relation to prior
periods and total loans outstanding, and the Bank has not incurred any loan
charge-offs during the nine months ended June 30, 1998. As a result, and based
on management's analysis of the adequacy of its allowances, only $6,000 was
provided to the loan loss allowance during the nine month period ended June 30,
1998.

                                       9
<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 and Nine Months Ended June 30,
1998 and 1997:

General. Net income for the three months ended June 30, 1998 was $139,000
compared to $260,000 earned during the same quarter in 1997. Net income for the
nine months ended June 30, 1998 was $443,000 compared to $859,000 earned during
the same period in 1997. As discussed below, the decrease in net income was
primarily attributable to a decrease in net interest income for the three and
nine month periods ended June 30, 1998, as compared to the same period in 1997,
due to a lower level of loans and investment securities and moderate deposit
growth. In October 1997, the Company liquidated certain investment securities
and utilized the cash to repay a $5.5 million note payable incurred in September
1997 due to a $6.00 per share return of capital dividend.

Interest income. Interest income decreased by $158,000 from $1.3 million for the
three months ended June 30, 1997 to $1.1 million for the three months ended June
30, 1998. Interest income decreased by $374,000 from $3.8 million for the nine
months ended June 30, 1997 to $3.5 million for the nine months ended June 30,
1998. The decrease was attributable to a lower level of interest-earning assets,
primarily loans receivable and investment securities, which were outstanding
during the first three quarters of this year in comparison to the same three
quarters a year earlier. Interest-earning assets amounted to $59.3 million at
June 30, 1998 as compared to $67.6 million at June 30, 1997. The Company
utilized investment securities as the funding source to pay a $11.5 million
return of capital dividend. Approximately 97% of the Company's assets were
interest-earning at June 30, 1998, and approximately 74% of such
interest-earning assets were held in the form of loans receivable.

Interest Expense. Interest expense increased by $28,000 from $501,000 for the
three months ended June 30, 1997 to $529,000 for the three months ended June 30,
1998. Interest expense increased by $149,000 from $1.5 million for the nine
months ended June 30, 1997 to $1.6 million for the nine months ended June 30,
1998. The increase was attributable to a higher level of interest-bearing
liabilities outstanding during the first three quarters of this year in
comparison to the same three quarters a year earlier, while the cost of funds
remained fairly stable.

Net interest income. Net interest income decreased by $185,000 from $795,000 for
the three months ended June 30, 1997 to $610,000 for the three months ended June
30, 1998. Net interest income decreased by $523,000 from $2.4 million for the
nine months ended June 30, 1997 to $1.9 million for the nine months ended June
30, 1998. This decrease resulted from the combination of an decrease in the
volume of interest-earning assets and a increase in the volume of
interest-bearing liabilities between the periods.

                                      10
<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 first and second quarters of fiscal year 1997 and during the first quarter
of fiscal year 1998. 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 Bank's loan loss provisions were relatively minor during the three and nine
month periods ended June 31, 1997 and 1998 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 June 30, 1998, the Bank's level of general valuation allowances for loan
losses amounted to $255,000, which management believes is adequate to absorb
potential losses in its loan portfolio.

Noninterest expense. Noninterest expense decreased by $221,000 to $404,000 for
the three month period ended June 30, 1998 from $625,000 for the comparable
quarter in 1997, and by $89,000 to $1.2 million for the nine month period ended
June 30, 1998 from $1.3 million for the comparable period in 1997. The decrease
is principally as a result of an increase in compensation expense resulting from
the establishment of the Bank's Management Recognition Plan ("MRP") during the
three months ended June 30, 1997, as discussed below. Other categories of
noninterest expense fluctuated by insignificant amounts between the periods.

On April 17, 1997, the Company's stockholders approved the Bank's "MRP" which
reserved for issuance 73,600 shares of common stock to all officers, directors,
and employees at the time of adoption. The restricted common stock under the MRP
vests at the rate of 20% on the date of grant and 20% annually thereafter. The
expense associated with the MRP amounted to $268,000 for the three and nine
months ended June 30, 1997, and to $58,000 and $173,000 for the three and nine
months ended June 30, 1998, respectively, and is included in compensation
expense on the consolidated statement of income.

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

                                      11
<PAGE>
 
SCOTLAND BANCORP, INC. AND SUBSIDIARY

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

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

One form of liquidity, which is made up of cash and cash equivalents and federal
funds sold, decreased by $519,000 during the nine months ended June 30, 1998. As
reported in the consolidated statement of cash flows, such decrease occurred as
a result of the repayment of debt, offset by deposit growth, a decrease in loans
receivable and sales of investment securities.

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 June 30, 1998 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.

Year 2000:

At the turn of the century, computer-based information systems will be faced
with the problems potentially affecting hardware, software, networks, processing
platforms, as well as customer and vendor interdependencies. The Company has
established a committee and is in the process of assessing the effect of Year
2000 on the Bank's operating plans and systems. The Company is developing a plan
for identifying, renovating, testing and implementing its systems for Year 2000
processing and internal control requirements. Management's estimate of the cost
for becoming Year 2000 compliant to be approximately $160,000.

                                      12
<PAGE>
 
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 and Use of Proceeds

                 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)      Exhibit
                           (27)                      Financial Data Schedule.

                 (b)      Not applicable


                                      13
<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      August 1, 1998           By:   /s/ William C. Fitzgerald, III
             ----------------------               ------------------------------
                                                  William C. Fitzgerald, III
                                                  President and CEO

        Dated      August 1, 1998           By:    /s/ Debora B. Steagall
             ----------------------               ------------------------------
                                                  Debora B. Steagall
                                                  Assistant Treasurer

                                      14