<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)
(X)             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED                     JUNE 30, 1998
                               -------------------------------------------------
                                      OR

(_)            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                            1-14230
                      ----------------------------------------------------------



                          STONE STREET BANCORP, INC.
            (Exact name of registrant as specified in its charter)


                NORTH CAROLINA                                    56-1949352
--------------------------------------------                  ------------------
(State or other jurisdiction of incorporation                 (I.R.S. Employer
               or organization)                              Identification No.)

               232 SOUTH MAIN STREET, MOCKSVILLE, NORTH CAROLINA
               -------------------------------------------------
                   (Address of principal executive offices)
                                  (Zip Code)
                                     27028
               --------------------------------------------------
              (Registrant's telephone number, including area code)

                                (336) 751-5936
               --------------------------------------------------
  (Former name, former address and former fiscal year, if changed since last 
                                    report)

     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.

Yes   X    No _____
    -----          

               APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

                 PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes _____  No _____

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 1,803,352 OF COMMON STOCK AS
                                                  -----------------------------
OF AUGUST 10, 1998.
-------------------
<PAGE>
 
                          STONE STREET BANCORP, INC.

                                     INDEX


<TABLE> 
<CAPTION> 
                                                                 PAGE
                                                                 ----
<S>                                                              <C> 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
 
Financial Statements:
 
         Consolidated Statements of Financial Condition -
         June 30, 1998 (Unaudited) and December 31, 1997          1-2
 
         Consolidated Statements of Operations -
         Three Months and Six Months Ended June 30, 1998
         and 1997 (Unaudited)                                       3
 
         Consolidated Statement of Stockholders' Equity
         for the Six Months Ended June 30, 1998 (Unaudited)         4
 
         Consolidated Statements of Cash Flows - Six Months
         Ended June 30, 1998 and 1997 (Unaudited)                 5-6
 
Notes to Consolidated Financial Statements                          7


ITEM 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations            8-9


PART II. OTHER INFORMATION


ITEM 6.  Exhibits and Reports on Form 8-K                          10


Signatures                                                         11
</TABLE> 
<PAGE>

                          STONE STREET BANCORP, INC.
                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                      JUNE 30, 1998 AND DECEMBER 31, 1997
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                             JUNE 30,     DECEMBER 31,
                                                               1998           1997
                                                          --------------  ------------
                                                           (Unaudited)
<S>                                                       <C>             <C>
ASSETS
------
 
CASH AND DUE FROM BANKS                                    $  2,184,165   $    968,571
INTEREST-BEARING DEPOSITS                                     4,762,653      2,701,326
FEDERAL FUNDS SOLD                                              732,877      1,034,174
INVESTMENT SECURITIES
 Securities held-to-maturity
  (market value-June 30, 1998 $2,766,567,
  December 31, 1997 $5,939,928)                               2,737,599      5,889,605
 Securities available for sale,
  at market value                                               777,809      1,858,886
                                                           ------------   ------------
   Total                                                      3,515,408      7,748,491
 
LOANS RECEIVABLE-Net                                         98,141,140     92,966,627
FEDERAL HOME LOAN BANK STOCK                                    830,200        741,000
OFFICE PROPERTIES AND EQUIPMENT-Net                             789,390        823,565
ACCRUED INTEREST RECEIVABLE                                     326,125        284,291
DEFERRED INCOME TAXES                                           408,727        412,360
REFUNDABLE INCOME TAXES                                         274,169        125,460
PREPAID EXPENSES AND OTHER ASSETS                               142,925        140,444
CASH SURRENDER VALUE OF LIFE INSURANCE                          145,516        145,516
                                                           ------------   ------------
 
TOTAL                                                      $112,253,295   $108,091,825
                                                           ============   ============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
 
DEPOSITS:
 Savings Accounts                                          $  9,360,537   $  9,189,559
 Money Market and NOW Accounts                                4,858,250      4,704,414
 Time, $100,000 and over                                      6,323,991      4,530,714
 Other Time                                                  48,282,299     48,548,135
                                                           ------------   ------------
  Total deposits                                             68,825,077     66,972,822
 
ADVANCES FROM FHLB                                           11,200,000      7,800,000
AMOUNTS PAYABLE UNDER REMITTANCE
 SERVICE AGREEMENT                                              405,749      1,174,961
ADVANCE PAYMENTS BY BORROWERS FOR
 TAXES AND INSURANCE                                            102,487         25,369
ACCRUED INTEREST PAYABLE                                        208,182        144,485
ACCOUNTS PAYABLE AND ACCRUED
 LIABILITIES                                                    836,813        898,618
                                                           ------------   ------------
  TOTAL  LIABILITIES                                       $ 81,578,308   $ 77,016,255
                                                           ============   ============
</TABLE>

                See notes to consolidated financial statements

                                       1
<PAGE>
 
                          STONE STREET BANCORP, INC.
            CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONT'D)
                     JUNE 30,  1998 AND DECEMBER 31, 1997
--------------------------------------------------------------------------------

                                                 JUNE 30,       DECEMBER  31,
                                                    1998           1997
                                              ----------------  -------------
                                                 (Unaudited)
<TABLE>
<CAPTION>
<S>                                            <C>              <C>
STOCKHOLDERS' EQUITY:
 Preferred stock, no par value
  5,000,000 shares authorized, no shares
  issued and outstanding
 Common Stock, no par value,
  20,000,000 authorized;  June 30, 1998 -
  1,898,052 issued and 1,843,452 outstanding;
  December 31, 1997 - 1,898,052
  issued and outstanding                       $  20,610,883    $ 20,610,883
 Unearned ESOP shares                             (1,859,376)     (1,947,573)
 Unamortized deferred compensation                (1,244,734)     (1,517,896)
 Retained Earnings                                14,262,002      13,927,634
 
 Unrealized gain on securities
  available-for-sale net of
  applicable deferred taxes of $5,789                  7,993           2,522
                                               -------------    ------------
   Total                                          31,776,768      31,075,570
 Less cost of treasury stock (54,600 shares)      (1,101,781)              -
                                               -------------    ------------
  Total stockholders' equity                      30,674,987      31,075,570
                                               -------------    ------------
TOTAL                                          $ 112,253,295    $108,091,825
                                               =============    ============
</TABLE> 

                See notes to consolidated financial statements

                                       2
<PAGE>
                          STONE STREET BANCORP, INC. 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
         FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE, 1998 AND 1997


<TABLE> 
<CAPTION> 
                                    THREE MONTHS  THREE MONTHS   SIX MONTHS    SIX MONTHS               
                                       ENDED         ENDED          ENDED        ENDED     
                                      JUNE 30,      JUNE 30,       JUNE 30,     JUNE 30,      
                                       1998          1997            1998         1997       
                                    ------------  ------------   ------------  -----------    
                                    (Unaudited)    (Unaudited)   (Unaudited)   (Unaudited) 
<S>                                 <C>           <C>            <C>           <C>            
INTEREST INCOME:                                                                               
Interest and fees on loans          $2,049,649    $1,803,585     $4,034,242     $3,558,467     
Interest on investments:                                                                       
 U. S. Treasury and                                                                            
   Government Agency                    23,342        76,292         72,572        146,523     
  Mortgage backed securities            38,527        47,593         80,475         99,057     
  Municipal Securities                  14,512        12,113         33,673         24,753     
  Other interest                       126,600       110,610        221,401        331,757     
                                    ----------    ----------     ----------     ----------     
     Total interest  income          2,252,630     2,050,193      4,442,363      4,160,557     
                                    ----------    ----------     ----------     ----------     
COST OF FUNDS:                                                                                 
Interest on time deposits              750,530       756,351      1,490,773      1,499,547     
Interest on interest bearing                                                                              
  demand deposits                       19,344        19,306         37,829         37,067     
Interest on savings deposits            76,011        64,819        146,288        130,166     
Interest on FHLB advances              128,783             -        251,194              -     
                                    ----------    ----------     ----------     ----------     
     Total interest expense            974,668       840,476      1,926,084      1,666,780     
                                    ----------    ----------     ----------     ----------     
                                                                                               
NET INTEREST INCOME                  1,277,962     1,209,717      2,516,279      2,493,777     
                                                                                               
PROVISION FOR LOAN LOSSES               30,000        15,000         60,000         30,000     
                                    ----------    ----------     ----------     ----------     
NET INTEREST INCOME AFTER                                                                      
  PROVISION FOR LOAN LOSSES          1,247,962     1,194,717      2,456,279      2,463,777     
                                    ----------    ----------     ----------     ----------     
OTHER OPERATING INCOME:                                                                        
Loan fees and charges                   14,212        11,337         26,601         23,446     
Other fees and commissions              19,136        21,252         36,307         40,141     
Other - net                              2,298        19,427          6,597         22,614     
                                    ----------    ----------     ----------     ----------     
     Total other income                 35,646        52,016         69,505         86,201     
                                    ----------    ----------     ----------     ----------                                   
OTHER OPERATING EXPENSES:                                                                      
Compensation and related benefits      627,979       662,671        967,258        948,831     
Insurance                               13,917        15,181         26,860         35,269     
Occupancy and equipment                 69,123        50,174        138,732        131,760     
Other                                   86,483       116,493        157,392        179,147     
                                    ----------    ----------     ----------     ----------     
     Total                             797,502       844,519      1,290,242      1,295,007     
                                    ----------    ----------     ----------     ----------     
                                                                                               
INCOME BEFORE INCOME TAXES             486,106       402,214      1,235,542      1,254,971     
                                                                                               
INCOME TAXES                           185,409       144,144        471,567        470,910     
                                    ----------    ----------     ----------     ----------     
NET INCOME                          $  300,697    $  258,070     $  763,975     $  784,061     
                                    ==========    ==========     ==========     ==========     
NET INCOME PER SHARE - BASIC        $      .16    $      .14     $      .41     $      .43     
                                    ==========    ==========     ==========     ==========     
NET INCOME PER SHARE - DILUTED      $      .16    $      .14     $      .41     $      .43     
                                    ==========    ==========     ==========     ==========      
</TABLE>

                See notes to consolidated financial statements

                                       3
<PAGE>
 
                          STONE STREET BANCORP, INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                    FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                      Unearned       Unamortized                
                                       Shares             Common       Treasury         ESOP          Deferred         Retained  
                                       Outstanding        Shares         Stock         Shares       Compensation       Earnings  
                                      -------------     ------------- ------------    ------------  -------------     ------------
<S>                                   <C>               <C>           <C>             <C>           <C>               <C>    
Balance at December 31, 1997            1,898,052       $ 20,610,883                  $ (1,947,573) $ (1,517,896)     $ 13,927,634  
                             
Net income                                                                                                                 763,975
                             
Cash dividends                                                                                                            (429,607)
                             
Amortization of unearned     
 compensation                                                                                            273,162      
                             
Release on ESOP shares                                                                      88,197  
                             
Treasury Stock purchased                  (54,600)                      (1,101,781)  
                             
Unrealized gain on securities
 available-for-sale net of   
 applicable deferred taxes   
 of $3,373                                                                                                      
                                      -------------     ------------- -------------   ------------- -------------     ------------
Balance at  June 30, 1998               1,843,452       $ 20,610,883  $ (1,101,781)    $(1,859,376) $ (1,244,734)     $ 14,262,002
                                      =============     ============= =============   ============= =============     ============
                 
<CAPTION>                                        

                                             Unrealized             Total
                                              Holding            Stockholders'
                                            Gain/Losses             Equity 
                                           ---------------       --------------
<S>                                        <C>                   <C> 
Balance at December 31, 1997               $     2,522           $  31,075,570     
                              
Net income                                                             763,975
                             
Cash dividends                                                        (429,607)
                                                   
Amortization of unearned     
 compensation                                                          273,162
                             
Release on ESOP shares                                                  88,197
                             
Treasury Stock purchased                                            (1,101,781)
                             
Unrealized gain on securities
 available-for-sale net of   
 applicable deferred taxes   
 of $3,373                                       5,471                   5,471
                                           ---------------       --------------

Balance at June 30, 1998                   $     7,993           $  30,674,987    
                                           ===============       ==============
</TABLE> 


                       See notes to financial statements.

                                       4
<PAGE>
 
                          STONE STREET BANCORP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         SIX MONTHS      SIX MONTHS
                                                           ENDED           ENDED
                                                       JUNE 30, 1998   JUNE 30, 1997
                                                       --------------  --------------
                                                        (Unaudited)     (Unaudited)
<S>                                                    <C>             <C>            
CASH FLOWS FROM
OPERATING ACTIVITIES:
 
Net income                                               $   763,975     $   784,061   
Adjustments to reconcile net
income to net cash provided
  by operating activities:
Depreciation                                                  43,344          42,919
Provision for loan loss                                       60,000          30,000
Deferred income tax                                            3,633           1,938
Contributions allowing the release of ESOP shares             88,197               -
Compensation earned under the Management
  Recognition Plan                                           273,162               -
Decrease (increase) in accrued interest receivable           (41,834)         (6,962)
Decrease (increase) in other assets                           (2,481)       (116,008)
Decrease (increase) in refundable income taxes              (148,709)       (116,600)
Increase (decrease) in notes receivable-ESOP                       -         120,103
Increase (decrease) in cash dividends payable                      -        (401,511)
Increase (decrease) in accounts payable under
  remittance service agreement                              (769,212)       (322,648)
Increase in return of capital dividends                                    7,592,208
Increase (decrease) in accrued interest payable               63,697         (14,096)
Increase (decrease) in accounts payable and
  accrued liabilities                                        (61,805)        (72,165)
                                                         ------------    ------------
   Net cash provided by operating
      activities                                             271,967       7,521,239
                                                         ------------    ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans                                     (5,234,513)     (3,040,359)
Purchase of held-to-maturity securities                                     (735,000)
Proceeds from maturities of held-to-maturity               3,152,006         780,504
Proceeds from sale of available-for-sale maturities        1,086,548         879,259
Purchase of FHLB stock                                       (89,200)              -
Purchase of premises and equipment                            (9,169)              -
                                                         ------------    ------------
   Net cash provided by (used in) investing
      activities                                         $(1,094,328)    $(2,115,596)
                                                         ------------    ------------
</TABLE>



                 See notes to consolidated financial statements

                                       5
<PAGE>
 
                          STONE STREET BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            SIX MONTHS      SIX MONTHS
                                                              ENDED           ENDED
                                                          JUNE 30, 1998   JUNE 30, 1997           
                                                          --------------  --------------
                                                            (Unaudited)      (Unaudited)
<S>                                                       <C>             <C>           
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits                              $1,852,255     $   210,076
Increase (decrease) in advance payments
  by borrowers for taxes and insurance                           77,118          65,576
Increase (decrease) in Federal Home Loan Bank Advances        3,400,000               -
Issuance of common stock                                              -         352,780   
Purchase of treasury stock                                   (1,101,781)              -
Return of capital dividends                                           -      (7,592,208)
Cash dividends paid                                            (429,607)       (418,851)
                                                             -----------    ------------
   Net cash provided by financing activities                  3,797,985      (7,382,627)
                                                             -----------    ------------
 
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                 2,975,624      (1,976,984)
 
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD                                                   4,704,071       9,804,531
                                                             -----------    ------------
 
CASH AND CASH EQUIVALENTS AT END
  OF PERIOD                                                  $7,679,695     $ 7,827,547
                                                             ===========    ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
Cash paid during the periods for:
 
  Interest                                                   $1,862,387     $ 1,680,876
                                                             ===========    ============
 
  Income taxes                                               $  620,276     $   587,510
                                                             ===========    ============
</TABLE>


                 See notes to consolidated financial statements
                                        

                                       6
<PAGE>
 
                          STONE STREET BANCORP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------ 




1. In the opinion of management, the accompanying financial statements contain
   all adjustments necessary to present fairly the consolidated financial
   position of Stone Street Bancorp, Inc. as of June 30, 1998 and December 31,
   1997, the results of operations for the three months and six months ended
   June 30, 1998 and 1997 and the consolidated cash flows for the six months
   ended June 30, 1998 and 1997.

   The accounting policies followed by the Holding Company are set forth in Note
   1 to the Company's financial statements included in Form 10-K on file with
   the Securities and Exchange Commission.

2. The consolidated financial statements include the financial results of Stone
   Street Bancorp, Inc., its wholly-owned subsidiary, Mocksville Savings Bank,
   Inc., SSB and Stone Street Financial Services, Inc., a subsidiary of the
   Bank.

3. The results of operations for the three and six month periods ended June 30,
   1998, are not necessarily indicative of the results expected for the full
   year.

4. Results of operations for the three and six month periods ended June 30, 1998
   and 1997 includes operations for both Mocksville Savings Bank, Inc., SSB and
   the Holding Company,  Stone Street Bancorp, Inc.  The weighted average shares
   outstanding for the quarter ended June 30, 1998 and 1997 were 1,865,778 and
   1,825,050, respectively and for the six months ended June 30, 1998 and 1997
   were 1,877,513 and 1,825,050, respectively and was used in calculating
   earnings per share for the presented.

                                       7
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS
         ----------------------------------------------------------------------


         FINANCIAL CONDITION

         For the six months ended June 30, 1998, total assets increased
         $4,161,470 or 3.85%. Cash balances and interest bearing deposits
         increased $3,276,921 or 89.29% while federal funds decreased by
         $301,297 compared to December, 1997. Investment securities decreased
         $4,233,083 or 54.63%. Net loans increased to $98,141,140, an increase
         of $5,174,513 or 5.57% over the December 1997 balance of $92,966,627.
         Deposits increased $1,852,255 during the six month period in 1998.
         Advances from the Federal Home Loan Bank of Atlanta totaled $11,200,000
         at June 30, 1998, an increase of $3,400,000 or 43.59% over the
         December, 1997 level. These increased borrowings were used to fund the
         $5,234,513 of loan originations during the six month period of 1998.
         Stockholders' equity decreased $400,583 from December, 1997 which is
         comprised of an increase due to net income of $763,975 during the six
         months and reduced by cash dividends declared and paid of $429,607
         during the period, and an increase of $88,197 due to the release of
         ESOP shares and $273,162 due to the amortization of unearned
         compensation under the Bank's Management Recognition Plan net of a
         decrease in equity due to the Bank acquiring treasury stock of
         $1,101,781 during the six months in 1998.

         RESULTS OF OPERATIONS

         Three Months Ended June 30, 1998 and 1997

         Net income for the six months ended June 30, 1998 was $300,697 compared
         to $258,070 for the comparable period in 1997. Total interest income
         increased $202,437 or 9.87% while total interest expense increased
         $134,192 or 15.97% due to the increased FHLB borrowings during the six
         month period in 1998. Net interest income increased $68,245 or 5.64%
         and was further reduced by an increase of $15,000 in the loan loss
         provision. Other operating expenses decreased from $844,519 in 1997 to
         $797,502 in 1998, a decrease of $47,017 or 5.57%. Other operating
         expenses for the three month period is comprised primarily of
         compensation and related benefits of $627,979 in 1998 compared to
         $662,671 in 1997. Income tax expense increased $41,265 due to the
         increase in net income during the three month period in 1998 compared
         to 1997.


         Six Months Ended June 30, 1998 and 1997

         Net income for the six months ended June 30, 1998 was $763,975 compared
         to $784,061 in 1997. Interest income increased $281,806 or 6.77%
         primarily due to the $12,138,430 increase in loan balances since June,
         1997. Interest expense increased from $1,666,780 in 1997 to $1,926,084
         in 1998, a $259,304 or 15.56%. This increase is a result of increased
         deposits of $2,050,735 and the new borrowings from the FHLB of
         $11,200,000 since June, 1997. Net interest income during the comparable
         six month periods increased $22,502 but was decreased by the additional
         provision for loan losses of $30,000 during the six month period in
         1998.

                                       8
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS (CONT'D)
         -----------------------------------------------------------------------

         Other operating expenses in 1998 remained relatively constant compared
         to 1997 with only a $4,765 net reduction in these expenses in 1998. The
         primary component of other operating expenses is compensation and
         related benefits which totaled $967,258 for the six month period in
         1998 compared to $948,831 for the comparable period in 1997. The Bank
         recognized additional compensation expense during the second quarter of
         1998 and 1997 of $273,162 and $352,780, respectively, related to its
         employee benefit program under the Bank's Management Recognition Plan.
         Income tax expense remained relatively constant due to the immaterial
         change in net income for the six month comparable periods.

                                       9
<PAGE>
 
PART II -  OTHER INFORMATION

Item 6b.  Reports on Form 8-K

There were no Form 8-K's filed during the Second Quarter of 1998

                                       10
<PAGE>
 
                                  Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the Holding
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                          STONE STREET BANCORP, INC.



Date:    8/13/98                   By: /s/ J. Charles Dunn
      --------------------            --------------------------
                                   J. Charles Dunn
                                       President and Chief Executive Officer



Date:    8/13/98                   By: /s/ Marjorie D. Foster
      --------------------            --------------------------
                                   Marjorie D. Foster
                                       Controller

                                       11