UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20552

                                    FORM 10-K

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
       ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       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 000-29460
                                               ---------

                       COMMUNITY SAVINGS BANKSHARES, INC.
    ------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           UNITED STATES                                 65-0780334
-------------------------------------       ------------------------------------
(State or Other Jurisdiction of             (IRS Employer Identification Number)
  Incorporation or Organization)

660 US HIGHWAY ONE, NORTH PALM BEACH, FL                   33408
-----------------------------------------   ------------------------------------
(Address of Principal Executive Offices)                 (Zip Code)

                                 (561) 881-2212
    ------------------------------------------------------------------------
               (Registrant's Telephone Number including area code)

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      NONE
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $1.00 PER SHARE
                     ---------------------------------------
                                (Title of Class)

         Indicate by check mark whether the Registrant (1) his filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant  was  required  to file  reports)  and (2) has been  subject  to such
requirements for the past 90 days. YES [ X ] NO [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendments to this Form 10-K. [ X ]

         As of March 17,  1998,  there  were  issued and  outstanding  5,100,120
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by  non-affiliates  (persons  other than the Mutual  Holding  Company,  the
employee  stock  ownership  plan,  directors  and  officers) of the  Registrant,
computed by reference  to the closing  price of the Common Stock as of March 17,
1998 ($38.50) was $ 82,493,488.

                       DOCUMENTS INCORPORATED BY REFERENCE

1. Portions  of the Annual  Report to  Shareholders  for the  fiscal  year ended
   December 31, 1997 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders  (Portions of Parts II
   and III).

                                       1
<PAGE>
PART I

ITEM 1.  BUSINESS

GENERAL

         In the  following  discussion,  references  to  "Bankshares"  relate to
Community Savings  Bankshares,  Inc. together with its wholly-owned  subsidiary,
Community Savings, F. A. (the "Association").

COMMUNITY SAVINGS BANKSHARES, INC.

         Bankshares is a federally  chartered  mid-tier  stock  holding  company
organized  in August  1997.  The only  significant  asset of  Bankshares  is its
investment in the  Association.  Bankshares is majority owned by ComFed,  M.H.C.
("ComFed") a federally chartered mutual holding company. Effective September 30,
1997,  Bankshares acquired all of the issued and outstanding common stock of the
Association  in  connection  with  the  Association's  reorganization  into  the
two-tier form of mutual holding company  ownership.  At that time, each share of
the  Association's  common  stock was  converted  into one share of  Bankshares'
common stock. At December 31, 1997, ComFed owned 2,620,144 shares of Bankshares'
common  stock with the  remaining  2,474,776  shares being owned by the minority
shareholders. The holding company reorganization was accounted for at historical
cost in a manner  similar to a pooling of  interests.  Therefore,  all financial
information  has been  presented as if Bankshares  had been in existence for all
periods  included in this report.  At December 31,  1997,  Bankshares  had total
assets of $720.1  million,  total  loans of $451.7  million,  total  deposits of
$550.7 million, and total shareholders' equity of $81.3 million.

         Bankshares'  executive office is located at 660 U.S. Highway One, North
Palm Beach, Florida and its telephone number at that address is (561) 881-2212.

COMMUNITY SAVINGS, F. A.

         The Association,  founded in 1955, is a federally chartered savings and
loan association  headquartered in North Palm Beach,  Florida. The Association's
deposits are  federally  insured by the Federal  Deposit  Insurance  Corporation
("FDIC")  through  the  Savings   Association   Insurance  Fund  ("SAIF").   The
Association has been a member of the Federal Home Loan Bank of Atlanta  ("FHLB")
since 1955.  The  Association  is regulated by the Office of Thrift  Supervision
("OTS"). On October 24, 1994, the Association  completed a reorganization into a
federally   chartered   mutual  holding   company,   ComFed.   As  part  of  the
reorganization,  the  Association  organized  a new  federally  chartered  stock
savings  association  and  transferred  substantially  all  of  its  assets  and
liabilities  to the stock savings  association in exchange for a majority of the
common stock of the stock savings association.

         The Association is a community-oriented  financial  institution engaged
primarily in the business of attracting  deposits from the general public in the
Association's  market area (as described  below) and using such funds,  together
with other borrowings,  to invest in various  consumer-based  real estate loans,
commercial  business  loans and  mortgage-backed  securities  ("MBS") as well as
United States  government and agency  securities,  mutual funds,  corporate debt
securities,  interest-earning  deposits in the FHLB and FHLB stock. See "Lending
Activities",   "Mortgage-Backed   and  Related   Securities",   and  "Investment
Activities". The Association's principal source of funds are deposits, principal
and interest payments on loans and securities,  and FHLB advances. The principal
source of income is interest received from loans and securities, while principal
expenses are interest paid on deposits and borrowings and employee  compensation
and benefits.  See "Sources of Funds." The Association's plan is to operate as a
well-capitalized,  profitable and  independent  institution.  The  Association's
profitability  is highly  dependent on its net interest  income.  The components
that determine net interest income are the amount of interest-earning assets and
interest-bearing  liabilities,  together  with the rates  earned or paid on such
interest  rate-sensitive  instruments.  The Association is sensitive to managing
interest rate risk exposure by better  matching  asset and liability  maturities
and rates.  This is  accomplished  while  considering the credit risk of certain
assets. The Association maintains asset quality by utilizing  comprehensive loan
underwriting   standards  and  collection   efforts  as  well  as  by  primarily
originating or purchasing secured or guaranteed assets.

         The Association's  executive office is located at 660 U.S. Highway One,
North Palm Beach,  Florida,  and its  telephone  number at that address is (561)
881-4800

                                       2
<PAGE>

FORMATION OF THE MID-TIER HOLDING COMPANY

         In January 1997,  the Board of Directors of the  Association  adopted a
resolution to proceed with filing an application  with the OTS to reorganize the
Association  into a  two-tier  holding  company  structure.  As a result  of the
reorganization, the Association became the wholly-owned subsidiary of Bankshares
and shareholders of the Association became the shareholders of Bankshares.

         ComFed, the Association's  mutual holding company,  holds a majority of
the common stock of the new mid-tier stock holding  company,  Bankshares,  which
owns 100% of the common stock of the Association. Under the reorganization, each
share  of  Association  common  stock  held  by  existing  shareholders  of  the
Association  was  converted  into one share of common stock of  Bankshares.  The
reorganization  of the Association  was structured as a tax-free  reorganization
and was accounted for in a manner similar to a pooling of interests.  Completion
of the  reorganization  was  subject to  regulatory  approval  by the OTS and to
shareholder  approval. On August 4, 1997, the OTS issued its order approving the
application of Bankshares to become the holding company of the Association.  The
reorganization  was  approved  by the  shareholders  at a special  meeting  held
September 24, 1997. The  reorganization was effective on September 30, 1997. The
common stock of Bankshares was  substituted  for that of the  Association on the
Nasdaq National Market under the symbol "CMSV".

CHANGE OF FISCAL YEAR.

         In January 1997, the Board of Directors of the  Association  approved a
change of the  Association's  fiscal  year from  September  30 to  December  31,
effective December 31, 1996. Bankshares' fiscal year end is December 31 as well.

FORWARD-LOOKING STATEMENTS

         Certain  information in this Form 10-K may  constitute  forward-looking
information  that  involves  risks and  uncertainties  that could  cause  actual
results to differ  materially from those  estimated.  Persons are cautioned that
such forward-looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from those estimated.  These factors include, but are not limited to, changes in
general  economic and market  conditions,  legislative  and regulatory  changes,
monetary  and fiscal  policies  of the federal  government,  demand for loan and
deposit  products  and the  development  of an interest  rate  environment  that
adversely  affects the  interest  rate spread or other  income from  Bankshares'
investments and operations.

MARKET AREA AND COMPETITION

         Bankshares and the Association are  headquartered  in North Palm Beach,
Florida.  Because Bankshares' only significant asset is its ownership of all the
issued and  outstanding  capital stock of the  Association,  the market area and
competition are identical for both entities. The Association operates 21 offices
in its market area in southeastern  Florida, five of which are located in Martin
County,  twelve of which are  located in Palm Beach  County,  three of which are
located in St. Lucie County and one of which is located in Indian River  County.
The Association  operated a loan production office in Indian River County, which
was closed and moved to the new Vero Beach office  during July 1997.  During the
first quarter of 1998,  another loan production  office was opened in Vero Beach
to handle the  increased  loan  activity.  In  addition,  the  Association  also
operated a loan production office in southern Palm Beach County which was closed
during 1997.

         According  to  county  projections  from  the  University  of  Florida,
population  in Palm Beach,  Martin,  St.  Lucie,  and Indian River  counties was
estimated at l.4 million for 1997. This study projects a 6.6% growth rate to 1.5
million by the year 2000 and a 38.6%  growth rate from the year 2001 to the year
2020 to 2.l million.  This population growth combined with a lower interest rate
environment during early 1998 suggests an increased demand for mortgage loans in
the four county market, as well as the State of Florida. However, such estimates
may not prove representative of trends for the remainder of 1998.

         The  counties  in  the  Association's  market  area,  have  experienced
significant  growth  since the 1960s.  Several  of the  counties  are  currently
experiencing  major  redevelopment  projects.  In Palm Beach County, the City of
West Palm  Beach is  implementing  a $375  million  project  called  City  Place
designed to continue the revitalization of the downtown area. Also in Palm Beach
County,  construction has begun on Abacoa, a new subdivision  development  which
will feature a new baseball  stadium,  commercial office space and retail space,
as well as single-family and multi-family residential properties which will

                                       3
<PAGE>

accommodate  10,000  residents.  The commuter train service for southern Florida
will be extended northward to service this community.

         In Martin County,  redevelopment of the City of Stuart's  downtown area
has been supplemented by the completion of the new Roosevelt bridge facilitating
access to the city from the north.

         In St. Lucie County, the Professional  Golfers  Association ("PGA") has
planned  three new  championship  golf  courses,  a golf  learning  center and a
housing development.

         The   economy  in  this  market   area  is   service-oriented   and  is
significantly  dependent  upon  government,  foreign  trade,  tourism,  and  its
continued  attraction as a retirement  area. In Palm Beach and Martin  counties,
cooperative efforts between the counties and local  municipalities are producing
business  growth and  expansion  in the  county.  A variety of county  supported
programs have been instituted to create new jobs and to encourage  relocation or
expansion of companies with an emphasis  placed on  high-technology  and service
industries.  Consequently,  commercial  building  vacancies  are at a low level.
Major  employers  in  Palm  Beach  County  include  Pratt  and  Whitney  (United
Technologies),  Motorola, Inc., St. Mary's and Good Samaritan Hospitals, Florida
Power and Light Co. and Flo Sun,  Inc.  Martin  County major  employers  include
Martin Memorial Health System, Staff Leasing, and Publix. St. Lucie County major
employers  include Indian River Community  College,  Columbia  Lawnwood Regional
Medical,  Publix, and Staff Leasing. Indian River County major employers include
Indian River Memorial Hospital, Publix and New Piper Aircraft Corp.

         Bankshares' market area in Southeast Florida has a large  concentration
of  financial  institutions,  many of which are  significantly  larger  and have
greater  financial  resources  than  the  Association,  and  all  of  which  are
competitors of the Association to varying degrees.  As a result, the Association
encounters  strong  competition  both in attracting  deposits and in originating
real estate and other loans.  Its most direct  competition for deposits has come
historically from commercial  banks,  securities  broker-dealers,  other savings
associations, and credit unions in its market area. Continued strong competition
from such financial  institutions  is expected in the  foreseeable  future.  The
market area includes branches of several commercial banks that are substantially
larger than the  Association in terms of state-wide  deposits.  The  Association
competes for savings by offering depositors a high level of personal service and
expertise  together  with  a  wide  range  of  financial  services  as  well  as
competitive  pricing.  In recent  years many  financial  institutions  have been
aggressively  expanding  through the  acquisition of branch  locations or entire
financial institutions, thereby increasing competition.

         Based on total assets as of December 31, 1997, the  Association was the
third  largest  savings  institution  headquartered  in Palm Beach  County.  The
Association  held  2.35%,  5.49%  2.73%  and  0.06%  of  all  bank  and  savings
association  deposits  in Palm  Beach,  Martin,  St.  Lucie,  and  Indian  River
counties, respectively, at September 30, 1997.

         The competition for real estate and other loans comes  principally from
commercial banks,  mortgage-banking  companies,  and other savings associations.
The  competition  for loans has  increased  substantially  in recent  years as a
result of the large number of institutions  competing in the market area as well
as  the  increased   efforts  by  commercial   banks  to  expand  mortgage  loan
originations.   The  Association   competes  for  loans  primarily  through  the
competitive  interest  rates and loan fees it  charges  and the  efficiency  and
quality of services it provides  borrowers,  real estate brokers,  and builders.
Factors that affect competition  include general and local economic  conditions,
current interest rate levels, and the volatility of the mortgage markets.

LENDING ACTIVITIES

         GENERAL.   Historically,   the  principal   lending   activity  of  the
Association has been the origination of fixed-and adjustable-rate mortgage loans
collateralized  by one- to  four-family  residential  properties  located in its
primary market area. It is the Association's  intention to offer varied products
in the residential mortgage loan area. The Association  currently emphasizes the
origination of adjustable-rate residential mortgage ("ARM") loans and fixed-rate
residential  mortgage  loans  with  terms  of 15  years  or  less,  as well as a
residential mortgage loan which provides for a fixed-rate of interest during the
first five or seven  years and which  thereafter  converts  to an ARM loan,  the
interest rate of which adjusts annually. At times, it has been the Association's
policy to sell in the secondary market all fixed-rate mortgage loan originations
with terms greater than 15 years on a servicing retained basis.  However,  based
on  management's  assessment  of the  market at a  particular  time and Board of
Director limits, the Association may periodically decide to retain such loans in
the  portfolio.  There were no loans held for sale at December 31,  1997.  Loans
serviced  for  other  institutions   totaled  $22.5  million.   The  Association
participates  with  other  financial  institutions  in  programs  which  provide
residential  mortgage  loans to low  income  and  middle  income  borrowers.  At
December 31, 1997, the net loan portfolio totaled $451.7 million, of which

                                      4
<PAGE>

$339.1 million, or 75.1%,  consisted of one-to four-family  residential mortgage
loans; $34.9 million,  or 7.7%,  consisted of construction loans; $17.1 million,
or  3.8%,  consisted  of  land  loans;  $8.8  million,  or  2.0%,  consisted  of
multi-family  residential real estate loans; $59.2 million, or 13.1%,  consisted
of commercial real estate loans; $15.7 million,  or 3.5%,  consisted of consumer
loans  (primarily  home  equity  lines of credit,  automobile  loans,  and loans
secured by savings deposits); and $3.5 million, or 0.8%, consisted of commercial
business  loans.  At December 31, 1997, the weighted  average  remaining term to
maturity of the loan  portfolio was  approximately  15.6 years.  At December 31,
1997,  $251.5  million,  or 55.7% of the total net loan  portfolio  consisted of
loans with adjustable interest rates. To supplement local loan originations, the
Association also invests in mortgage-backed and related securities that directly
or  indirectly  provide funds  principally  for  residential  home buyers in the
United States.  The Association has also purchased either  participations  in or
whole  residential  or commercial  real estate loans which are serviced by other
institutions. Such loans totaled $19.4 million, net of premiums, at December 31,
1997.

                                       5

<PAGE>

ANALYSIS OF LOAN  PORTFOLIO.  Set forth below is selected  data  relating to the
composition of the loan portfolio by type of loan as of the dates indicated.

                                                     At
                                                 December 31,
                                 --------------------------------------------
                                         1997                    1996
                                         ----                    ----
                                            (Dollars in Thousands)
Real estate loans:
Residential 1-4 family (1)       $ 339,117     75.07%    $ 293,366     75.41%
Construction loans                  34,850      7.72        35,358      9.09
Land loans                          17,117      3.79        19,426      4.99
Multi-family (2)                     8,800      1.95         8,096      2.08
Commercial (3)                      59,220     13.11        37,815      9.72
                                 ---------    ------     ---------    ------
 Total real estate loans           459,104    101.64       394,061    101.29
                                 ---------    ------     ---------    ------

Non-real estate loans:
  Consumer loans (4)                15,694      3.47        16,028      4.12
  Commercial business                3,530      0.78         2,458      0.63
                                 ---------    ------     ---------    ------
  Total non-real estate loans       19,224      4.25        18,486      4.75

                                 ---------    ------     ---------    ------
  Total loans receivable           478,328    105.89       412,547    106.04

Less:
  Undisbursed loan proceeds         24,163      5.35        20,765      5.34
  Unearned discount and net
   deferred fees                      (206)    (0.05)          200      0.05
  Allowance for loan losses          2,662      0.59         2,542      0.65
                                 ---------    ------     ---------    ------
    Total loans receivable,
     net                         $ 451,709    100.00%    $ 389,040    100.00%
                                 =========    ======     =========    ======

<TABLE>
<CAPTION>
                                                                               At
                                                                          September 30,
                                 ---------------------------------------------------------------------------------------------
                                          1996                     1995                    1994                    1993
                                          ----                     ----                    ----                    ----
<S>                              <C>           <C>       <C>            <C>       <C>           <C>       <C>           <C>
Real estate loans:
Residential 1-4 family (1)       $ 284,474     75.61%    $ 248,769      75.51%    $ 247,867     78.16%    $ 262,480     79.84%
Construction loans                  35,720      9.49        27,314       8.29        12,265      3.87         7,965      2.42
Land loans                          16,846      4.48        15,601       4.74        20,476      6.46        17,072      5.19
Multi-family (2)                     8,153      2.17         7,351       2.23         6,772      2.14         5,952      1.81
Commercial (3)                      38,433     10.22        35,402      10.75        32,612     10.28        34,953     10.64
                                 ---------    ------     ---------     ------     ---------    ------     ---------    ------
 Total real estate loans           383,626    101.97       334,437     101.52       319,992    100.91       328,422     99.90
                                 ---------    ------     ---------     ------     ---------    ------     ---------    ------

Non-real estate loans:
  Consumer loans (4)                15,606      4.15        12,638       3.84        10,237      3.23        10,844      3.30
  Commercial business                1,874      0.50         1,958       0.59         1,058      0.33           929      0.28
                                 ---------    ------     ---------     ------     ---------    ------     ---------    ------
  Total non-real estate loans       17,480      4.65        14,596       4.43        11,295      3.56        11,773      3.58

                                 ---------    ------     ---------     ------     ---------    ------     ---------    ------
  Total loans receivable           401,106    106.62       349,033     105.95       331,287    104.47       340,195    103.48

Less:
  Undisbursed loan proceeds         22,318      5.94        15,253       4.63         9,872      3.11         6,466      1.96
  Unearned discount and net
   deferred fees                       257      0.07           846       0.26           908      0.29         1,234      0.38
  Allowance for loan losses          2,312      0.61         3,492       1.06         3,390      1.07         3,748      1.14
                                 ---------    ------     ---------     ------     ---------    ------     ---------    ------
   Total loans receivable,
    net                          $ 376,219    100.00%    $ 329,442     100.00%    $ 317,117    100.00%    $ 328,747    100.00%
                                 =========    ======     =========     ======     =========    ======     =========    ======

</TABLE>
--------------------------------
(1) Includes  participations or whole loans of $19.5 million, $1.7 million, $1.8
    million,  $2.2 million, $2.6 million, and $3.6 million at December 31, 1997,
    1996, September 30, 1996, 1995, 1994, and 1993, respectively.

(2) Includes  participations  of $0,  $505,000,  $360,000,  $0,  $0,  and $0, at
    December  31,  1997,  1996,  September  30,  1996,  1995,  1994,  and  1993,
    respectively.

(3) Includes participations of $162,000,  $190,000, $198,000, $4.9 million, $5.0
    million,  and $5.5 million at December 31, 1997,  1996,  September 30, 1996,
    1995, 1994, and 1993, respectively.

(4) Includes primarily home equity lines of credit,  automobile loans, and loans
    secured by savings  deposits.  At December 31, 1997 the disbursed portion of
    home equity lines of credit totaled $8.8 million.

                                        6
<PAGE>

         LOAN AND  MORTGAGE-BACKED AND RELATED SECURITIES MATURITY AND REPRICING
SCHEDULE.  The following table sets forth certain information as of December 31,
1997,  regarding  the dollar  amount of loans and  mortgage-backed  and  related
securities  maturing in the  Association's  portfolio based on their contractual
terms to maturity.  Demand loans,  loans having no stated schedule of repayments
and no stated maturity,  and overdrafts are reported as due in one year or less.
Adjustable and floating-rate  loans are included in the period in which interest
rates are next  scheduled  to adjust  rather  than in which  they  contractually
mature,  and  fixed-rate  loans are  included  in the  period in which the final
contractual repayment is due. Fixed-rate  mortgage-backed securities are assumed
to mature in the  period in which the final  contractual  payment  is due on the
underlying mortgage.

<TABLE>
<CAPTION>
                                             WITHIN 1      1-3         3-5      5-10     MORE THAN
                                               YEAR       YEARS       YEARS    YEARS      10 YEARS    TOTAL
                                             --------     -----       -----    -----     ----------   -----
                                                                      (IN THOUSANDS)
<S>                                          <C>        <C>        <C>        <C>        <C>        <C>
Real estate loans:
 One- to four-family residential             $196,202   $ 55,097   $ 42,572   $ 39,610   $ 25,727   $359,208
 Commercial, multi-family and land             84,256      6,753      3,522      2,678      2,687     99,896
Consumer loans (excluding lines of credit)      3,491      2,922        500         59         --      6,972
Equity line of credit loans (1)                 8,722         --         --         --         --      8,722
Commercial business loans                       3,530         --         --         --         --      3,530
                                             --------   --------   --------   --------   --------   --------
  Total loans receivable (gross)             $296,201   $ 64,772   $ 46,594   $ 42,347   $ 28,414   $478,328
                                             ========   ========   ========   ========   ========   ========

Mortgage-backed and related securities       $ 26,861   $ 29,465   $ 18,287   $ 13,844   $  4,308   $ 92,765
                                             ========   ========   ========   ========   ========   ========
</TABLE>
------------------------
(1) Variable-rate equity lines of credit reprice on a monthly basis.

         The following  table sets forth at December 31, 1997, the dollar amount
of all fixed-rate and adjustable-rate loans due after December 31, 1998 based on
either the repricing date or the contractual maturity as described above.

<TABLE>
<CAPTION>
                                                    FIXED        ADJUSTABLE         TOTAL
                                                    -----        ----------         -----
                                                               (IN THOUSANDS)
<S>                                               <C>            <C>               <C>
Real estate loans:
  One- to four-family residential                 $131,300       $ 31,706          $163,006
  Commercial, multi-family and land                 12,051          3,589            15,640
Consumer and commercial business loans               3,481             --             3,481
                                                  --------       --------          --------
  Total                                           $146,832       $ 35,295          $182,127
                                                  ========       ========          ========

Mortgage-backed and related securities            $ 65,904       $     --          $ 65,904
                                                  ========       ========          ========
</TABLE>

         ONE- TO FOUR-FAMILY  RESIDENTIAL REAL ESTATE LOANS.  The  Association's
primary  lending  activity  consists of the  origination of one- to four-family,
owner-occupied,  residential mortgage loans secured by properties located in its
market area. One- to four-family  residential  owner-occupied mortgage loans are
generally underwritten in conformity with the criteria established by Fannie Mae
("FNMA"),  with the exception of loans exceeding applicable agency dollar limits
and loans purchased through the  Association's  affiliation with a consortium of
financial institutions which provides loans to low and moderate income borrowers
(discussed  below).  The  Association  generally  does  not  originate  one-  to
four-family  residential loans secured by properties outside of its market area.
At December 31, 1997,  $339.1  million,  or 75.1%,  of the total loan  portfolio
consisted  of one- to  four-family  residential  mortgage  loans.  The  weighted
average contractual maturity of one-to four-family residential mortgage loans at
the  time  they  are  originated  is  24.0  years.  However,  it  has  been  the
Association's experience that the average length of time which such loans remain
outstanding is 9.5 years.

         The  Association  currently  offers  one-  to  four-family  residential
mortgage  loans  with  terms  typically  ranging  from 15 to 30 years,  and with
adjustable or fixed interest rates.  Originations  of fixed-rate  mortgage loans
and ARM loans are monitored on an ongoing  basis and are affected  significantly
by the level of market interest rates,  customer  preference,  the Association's
interest  rate  sensitivity  gap  position,  and loan  products  offered  by its
competitors.  In a  relatively  low interest  rate  environment,  which  existed
throughout  fiscal 1997,  borrowers  typically  prefer  fixed-rate  loans to ARM
loans. The

                                       7
<PAGE>

Association  has  continued  to  emphasize  its  ARM  loan  products.  ARM  loan
originations  totaled $54.6 million,  or 73.6%, of all one- to four-family  loan
originations  during the year ended  December 31, 1997. In  connection  with the
Association's  effort to  increase  mortgage  lending,  the  Association  offers
residential mortgage loans which provide for a fixed-rate of interest during the
first five or seven years of the term of the loans and which thereafter  convert
to ARM loans on which the interest  rate adjusts on an annual  basis.  This loan
product allows the  Association  to offer a loan with a relatively  short period
during which the interest rate remains fixed but which typically provides for an
initial  interest  rate which is greater than could be obtained  from ARM loans.
This loan is generally offered for terms between l5 and 30 years.

         The  Association  currently  offers ARM loans with an adjustment of one
year based on changes in a designated market index plus a margin.  Each ARM loan
currently adjusts annually with an annual interest rate adjustment limitation of
200 basis points and a maximum lifetime adjustment of 600 basis points above the
initial rate.  Interest  rates on the ARM loans  currently  adjust to either the
changes  in the  weekly  average  yield on  United  States  Treasury  securities
adjusted to a constant  maturity of one year plus a margin,  or to the  National
Monthly  Median  Cost of Funds  plus a margin.  ARM loans  are  originated  with
initial  rates  which  are  below the fully  indexed  rate,  the  amount of such
discount  varying  depending  upon market  conditions,  and which provide for an
annual adjustment. Management determines whether a borrower qualifies for an ARM
loan  based on the  fully  indexed  rate of the ARM loan at the time the loan is
originated.  Negative  amortization  of the ARM  loans is not  allowed.  One- to
four-family residential ARM loans totaled $192.5 million at December 31, 1997.

         The primary purpose of offering ARM loans is to make the loan portfolio
more  interest rate  sensitive.  However,  as the interest  income earned on ARM
loans  varies  with  prevailing  interest  rates,  such  loans  do not  offer as
consistently  predictable  interest income as long-term,  fixed-rate  loans. ARM
loans carry increased  credit risk associated  with  potentially  higher monthly
payments by borrowers as general market interest rates increase. It is possible,
therefore,  that during periods of rising interest rates, the risk of default on
ARM loans may increase  due to the upward  adjustment  of interest  costs to the
borrower.

         Fixed-rate loans generally are originated and underwritten according to
standards that permit sale in the secondary mortgage market.  Whether management
can or will sell fixed-rate loans into the secondary market, however, depends on
a number  of  factors  including  the  yield  and the term of the  loan,  market
conditions, the Association's current interest rate sensitivity gap position and
Board of Director  established limits.  During the first three quarters of 1997,
the  Association's  policy was to retain in its  portfolio  fixed-rate  mortgage
loans originated with terms of 15 years or less, and to sell fixed-rate mortgage
loans  originated  (servicing  retained) with terms of more than 15 years except
for loans  originated for special  financing on low and moderate income housing.
Periodically,   management  and  the  Board  may  decide  to  retain  all  loans
originated, including loans with terms greater that 15 years based on conditions
in effect at that time.  This policy was in effect for the last quarter of 1997.
The  Association's  fixed-rate  mortgage  loans are amortized on a monthly basis
with principal and interest due each month. One- to four-family residential real
estate loans often remain  outstanding  for  significantly  shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option without prepayment penalities.

         The Association participates with other financial institutions in local
consortiums  which are  committed to provide  financing  of one- to  four-family
mortgage loans for low and moderate income borrowers. The consortiums underwrite
and  package  the loans  which are  generally  sold to  participating  financial
institutions  on a whole loan basis.  These loans are  originated  to  borrowers
within  the  Association's   market  area  and  provide  for  either  fixed-  or
adjustable-rates  of interest.  The Association  determines  which loans it will
purchase  after  conducting  its own due  diligence  review of the loan  package
offered.  Although for the fiscal year ended  December 31, 1997 the  Association
did  not  purchase  any  loans  originated  by  the   consortiums,   it  is  the
Association's intent,  subject to market conditions,  to continue to participate
in consortiums of this nature.

         The Association  also purchases  single-family  residential  loans from
other sources,  such as mortgage origination  companies,  or brokers,  under the
same guidelines as described above. In addition,  such loan purchases  include a
contract between the mortgage  origination  company and the  Association,  which
contains  an  indemnification   clause  protecting  the  Association  from  loss
resulting from  misrepresentations in the loan applications or other information
provided to the  Association.  $24.5 million of such loans were purchased during
fiscal year 1997. It is management's  intent,  subject to market conditions,  to
continue purchasing such loans.

         The Association's one- to four-family  residential first mortgage loans
customarily  include  due-on-sale  clauses,  which  are  provisions  giving  the
Association  the right to  declare a loan  immediately  due and  payable  in the
event, among

                                       8
<PAGE>

other things,  that the borrower  sells or otherwise  disposes of the underlying
real  property  serving as  security  for the loan.  Due-on-sale  clauses are an
important means of adjusting the rates on the fixed-rate mortgage loan portfolio
(and to a lesser extent ARM loans), and the Association has generally  exercised
its rights under these clauses.

         Regulations  limit  the  amount  that a  savings  association  may lend
relative  to the  appraised  value of the real  estate  securing  the  loan,  as
determined  by an  appraisal  at the time of loan  origination.  Appraisals  are
generally performed by an independent outside appraiser. Such regulations permit
a maximum  loan-to-value  ratio of 95% for residential  property and 80% for all
other real estate loans. The Association's  lending policies generally limit the
maximum  loan-to-value  ratio on both  fixed-rate and ARM loans without  private
mortgage  insurance to 80% of the lesser of the appraised  value or the purchase
price  of the  property  to  serve  as  collateral  for the  loan.  For  one- to
four-family real estate loans with loan-to-value  ratios of between 80% and 95%,
the borrower is generally  required to obtain  private  mortgage  insurance.  An
origination  fee of between 1 % and 2% of the total  loan  amount on all one- to
four-family  loans may be charged depending on the market  conditions.  Fire and
casualty  insurance (and flood  insurance if the property is within a designated
flood plain), as well as a title guaranty  regarding good title, are required on
all properties securing real estate loans made by the Association.

         The Association may purchase participation or whole loans loans secured
by one- to four-family  residences when there are funds available for lending in
excess of the demand for loans in the local market or to  facilitate  funding of
large projects.  At December 31, 1997, the loan portfolio included $19.5 million
of  loan   participations  and  whole  loans  secured  by  one-  to  four-family
residences. The Association purchased $18.l million of such loans during 1997.

         CONSTRUCTION  AND LAND LOANS. At December 31, 1997,  $34.9 million,  or
7.7%, and $17.1 million,  or 3.8%, of the total net loan portfolio  consisted of
construction loans and land loans, respectively.  Fixed-rate and adjustable-rate
residential   construction   loans  are  currently  offered  primarily  for  the
construction of  owner-occupied  single-family  residences in the  Association's
market  area to  builders  who have a contract  for sale of the  property  or to
owners who have a contract for  construction.  Advances are made as construction
is  completed.  In  addition,  construction  loans are also made to builders for
single-family  homes held for sale.  Such loans totaled $4.2 million at December
31, 1997.  Construction  loans for owner-occupied  single-family  residences are
generally  structured to become permanent loans upon completion of construction,
and are  originated  with terms of up to 30 years with an allowance of up to six
months for  construction  during  which  period the  borrower is obliged to make
interest-only  payments.  Construction loans to builders for homes held for sale
are  generally  originated  for a  term  of up  to  one  year  and  provide  for
interest-only  payments.  Disbursements  are made as  affidavits of progress are
presented to the Association.

         At December 31, 1997, the largest real estate  construction loan had an
aggregate principal outstanding balance of $2.5 million, with disbursed funds of
$13,000,  which is within the  Association's  loans-to-one-borrower  limit. This
loan is secured by a construction  loan to build a  single-family  home which is
located in the  Association's  market area.  Construction  was completed and the
loan was satisfied in full during the March 1998 quarter.

         Construction loans are also offered on multi-family and commercial real
estate loans.  At December 31, 1997,  multi-family  and commercial  construction
loans totaled $0 and $2.0 million, respectively.

         In  addition,  loans are  originated  within the market  area which are
secured by  individual  unimproved  or improved  lots zoned  primarily to become
single-family  residences,  as well as commercial and  agricultural  properties.
Land loans are currently  offered as either  one-year  ARMs or fixed-rate  loans
with  terms of up to 15 years.  The  maximum  loan-to-value  ratio for such land
loans is 75%.

         Adjustable-rate single-family construction and land loans are currently
offered  at the  weekly  average  yield on  United  States  Treasury  Securities
adjusted  to a  constant  maturity  of one year plus a  margin.  Adjustable-rate
construction  loans and land loans have an annual interest rate cap of 200 basis
points and a lifetime  interest  rate cap of 600 basis  points  over the initial
interest  rate.  Initial  interest rates may be below the fully indexed rate but
the loan is underwritten at the fully indexed rate.

         Construction lending generally involves a greater degree of credit risk
than  one-  to  four-family  residential  mortgage  lending.  Risk  of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's  value at completion of  construction  or development  and the
estimated cost (including  interest) of  construction.  During the  construction
phase,  a number of factors  could  result in delays and cost  overruns.  If the
estimate of value proves to be inaccurate, the Association may be confronted, at
or prior to the maturity of the loan, with a project, when completed,

                                       9
<PAGE>

having a value which is insufficient to assure full repayment. Loans on lots may
run the risk of adverse zoning changes,  environmental, or other restrictions on
future use.

         MULTI-FAMILY   RESIDENTIAL   REAL  ESTATE   LOANS.   Loans  secured  by
multi-family real estate constituted approximately $8.8 million, or 2.0%, of the
total net loan  portfolio at December 31, 1997. At December 31, 1997, a total of
40 loans were secured by multi-family properties. Multi-family real estate loans
are primarily secured by multi-family residences, such as rental properties with
between five and  thirty-six  units.  At December 31,  1997,  substantially  all
multi-family loans were secured by properties located within the market area. At
December  31,  1997,  multi-family  real estate  loans had an average  principal
balance of approximately  $220,000 and the largest multi-family real estate loan
had a principal  balance of $1.4 million,  and was performing in accordance with
its terms.  Multi-family real estate loans are currently offered with adjustable
interest rates,  although in the past fixed-rate  multi-family real estate loans
were  originated.  Multi-family  loans typically have adjustable  interest rates
tied to a market index with a 600 basis point  lifetime  interest rate cap and a
200 basis point cap on annual adjustments,  and amortize over 20 to 25 years. An
origination  fee of  between  1.5% to 2.0% is usually  charged  on  multi-family
loans. Multi-family mortgage loans are generally made up to 75% of the appraised
value  of  the  property  securing  the  loan.  The  initial  interest  rate  on
multi-family  real estate loans is currently  priced at the weekly average yield
on United States Treasury securities adjusted to a constant maturity of one year
plus a margin, depending on the nature and size of the project.  Originations of
multi-family  loans have been limited in recent years due to the limited  demand
for such projects in the Association's market area.

         In underwriting multi-family real estate loans, the Association reviews
the expected net  operating  income  generated by the real estate to support the
debt service,  the age and condition of the collateral,  the financial resources
and  income  level of the  borrower,  the  borrower's  experience  in  owning or
managing similar properties, and any financial reserves the borrower may have. A
debt  service  coverage  ratio of at least 125% of the monthly  loan  payment is
generally  required.   Personal  guarantees  from  all  the  principals  of  the
multi-family real estate borrowers are generally obtained.

         Loans secured by multi-family  real estate generally  involve a greater
degree of credit risk than one- to  four-family  residential  mortgage loans and
carry larger loan balances.  This  increased  credit risk is a result of several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects of general  economic  conditions on income producing
properties,  and the increased  difficulty of evaluating  and  monitoring  these
types of loans.  Furthermore,  the  repayment of loans  secured by  multi-family
property is typically  dependent  upon the  successful  operation of the related
real  estate  property.  If the cash  flow  from the  project  is  reduced,  the
borrower's ability to repay the loan may be impaired.

         COMMERCIAL  REAL ESTATE LOANS.  Loans secured by commercial real estate
constituted  approximately  $59.2  million,  or  13.1%,  of the  total  net loan
portfolio  at December  31,  1997.  Commercial  real estate loans are secured by
improved  property such as offices,  hotels,  small business  facilities,  strip
shopping  centers,   warehouses,   commercial  land  and  other  non-residential
buildings.  At December 31, 1997,  substantially  all of commercial  real estate
loans were secured by properties located within the market area. At December 31,
1997,  a total of 182 loans  were  secured by  commercial  real  estate  with an
average  principal  balance of  approximately  $325,000.  Commercial real estate
loans are currently only offered with adjustable-rates, although in the past the
Association has originated fixed-rate commercial real estate loans. The terms of
each  commercial  real  estate  loan are  negotiated  on a  case-by-case  basis,
although such loans  typically have  adjustable  interest rates tied to a market
index.  An origination  fee of up to 2% of the principal  balance of the loan is
typically charged on commercial real estate loans.  Commercial real estate loans
originated by the Association  generally amortize over 15 to 20 years and have a
maximum loan-to-value ratio of 75%.

         During fiscal year 1996, the Association decided that a need existed in
the local  market for  commercial  real estate and business  loans.  In order to
better  serve its  customers  and to increase its share of the  commercial  loan
market,  the  Association  began an expansion of both its commercial real estate
and  business  lending  activities  in late fiscal 1996 with the  addition of an
experienced commercial loan officer and a credit analyst to the Lending Division
staff.  Such loans were pursued  aggressively  with $28.7  million of such loans
originated  during  fiscal  year 1997.  The  Association  intends to continue to
pursue such loans aggressively in the future.

         At December 31, 1997, the largest  commercial  real estate borrower had
an aggregate  principal  outstanding  balance of $9.3 million,  with undisbursed
funds of $3.8 million,  which is within the Association's  loans-to-one-borrower
limit. The $9.3 million  principal  balance  represent's the  Association's  50%
share of the funding.  The remaining 50% was funded by another local lender. The
loan is for the construction of a 24 unit luxury condominium  project located in
the  Association's  market area, and is currently  performing in accordance with
its terms.

                                       10
<PAGE>

       In  underwriting  commercial  real estate  loans,  the same  underwriting
standards  and  procedures   are  employed  as  are  employed  in   underwriting
multi-family  real  estate  loans.  Loans  secured  by  commercial  real  estate
generally  involve a higher degree of risk than one- to four-family  residential
mortgage loans and carry larger loan balances.  This increased  credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and  borrowers,  the effects of general  economic  conditions on
income  producing  properties,  and the increased  difficulty of evaluating  and
monitoring these types of loans. Furthermore,  the repayment of loans secured by
commercial real estate is typically  dependent upon the successful  operation of
the related real estate  project.  If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired.

         CONSUMER LOANS.  As of December 31, 1997,  consumer loans totaled $15.7
million,  or 3.5%,  of the  total net loan  portfolio.  The  principal  types of
consumer  loans  offered  are home  equity  lines of credit,  fixed-rate  second
mortgage loans,  automobile loans,  mobile home loans, boat loans,  recreational
vehicle loans,  unsecured personal loans, and loans secured by deposit accounts.
Consumer  loans are offered  primarily  on a  fixed-rate  basis with  maturities
generally of five years or less.  The home equity lines of credit are secured by
the borrower's principal residence with a maximum loan-to-value ratio, including
the  principal  balances of both the first and second  mortgage  loans,  of 100%
based on certain credit and occupancy  requirements or 80% if such  requirements
are not met.  Such  loans are  offered on a monthly  adjustable-rate  basis with
terms of up to ten years.  At December 31, 1997,  the disbursed  portion of home
equity lines of credit totaled $8.8 million,  or 56.1%, of consumer  loans.  The
undisbursed  portion of such loans was $5.6 million at December  31,  1997.  The
Association  anticipates it will modestly expand its home equity product line in
fiscal 1998.

         The  underwriting  standards  employed by the  Association for consumer
loans  include  a  determination  of  the  applicant's  credit  history  and  an
assessment of ability to meet existing  obligations and payments on the proposed
loan.  Creditworthiness of the applicant is of primary  consideration;  however,
the  underwriting  process  also  includes  a  comparison  of the  value  of the
collateral  in relation to the  proposed  loan  amount,  and in the case of home
equity  lines of credit,  an  independent  company is engaged to conduct a title
search.

         Consumer loans  generally have shorter terms and higher  interest rates
than  traditional  mortgage loans, but generally entail greater credit risk than
do residential  mortgage loans,  particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly, such as automobiles,
mobile homes,  boats,  and  recreational  vehicles.  In such cases,  repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment for the outstanding  loan and the remaining  deficiency often does not
warrant  further  substantial   collection  efforts  against  the  borrower.  In
particular,  amounts  realizable on the sale of repossessed  automobiles  may be
significantly  reduced  based  upon the  condition  of the  automobiles  and the
fluctuating demand for used automobiles.

         COMMERCIAL BUSINESS LOANS. The Association  currently offers commercial
business  loans to  finance  small  businesses  in its market  area.  Commercial
business loans are offered as a customer  service to business  account  holders.
Such  loans  may  include  commercial  lines  of  credit,  loans  on  inventory,
equipment, receivables, or other collateral and unsecured loans. During the last
quarter of the fiscal year ended  September  30,  1996,  the  Association  began
expanding  its  activities  in  the  commercial  business  lending  market.  The
Association  aggressively pursued such loans during fiscal year 1997 and intends
to continue  pursuing  such loans  aggressively  in the future.  At December 31,
1997, 53 commercial business loans were outstanding with an aggregate balance of
$3.5 million and an average loan balance of  approximately  $66,000.  Commercial
business loans  originated  during the year ended December 31, 1997 totaled $2.7
million.   Commercial   business   loans  are  offered   with  both  fixed-  and
adjustable-interest  rates.  Adjustable-rates  on commercial  business loans are
priced  against the Citibank or WALL STREET  JOURNAL prime rate,  plus a margin.
The loans are offered with terms of up to five years.

         Underwriting  standards  employed  by the  Association  for  commercial
business  loans  include a  determination  of the  applicant's  ability  to meet
existing  obligations  and payments on the proposed  loan from normal cash flows
generated by the applicant's business.  The financial strength of each applicant
also is  assessed  through  a review of  financial  statements  provided  by the
applicant as well as conducting a credit review.

         Commercial  business loans  generally  bear higher  interest rates than
residential  loans,  but they also may  involve a higher  risk of default  since
their  repayment  is  generally  dependent  on the  successful  operation of the
borrower's business.  Personal guarantees from the borrower or a third party are
generally obtained as a condition to originating its commercial business loans.

                                       11

<PAGE>

       LOAN   ORIGINATIONS,   SOLICITATION,   PROCESSING,   COMMITMENTS,   AND
PURCHASES.  Loan  originations are derived from a number of sources such as real
estate broker referrals,  existing customers,  developers and walk-in customers.
Upon receiving a loan application,  the Association  obtains a credit report and
income verification to verify specific  information  relating to the applicant's
employment,  income, and credit standing.  In the case of a real estate loan, an
independent  appraiser  approved by the  Association  appraises  the real estate
intended to secure the proposed  loan. A loan  processor in the loan  department
checks the loan application file for accuracy and completeness, and verifies the
information  provided.  Outside members of the Board of Directors  ("Director"),
the Chairman of the Board of Directors ("Chairman"),  the President,  the Senior
Vice President of the Lending  Division (the "SVP") and certain  designated Vice
Presidents  of the Lending  Division  ("VP") have been granted the  authority to
approve loans. The President,  the SVP and certain VPs have individual authority
to approve  mortgage loans between  $100,000 and $400,000,  secured consumer and
commercial  loans  between  $25,000 and $200,000,  and  unsecured  loans between
$10,000 and $100,000.  Additionally,  these officers may individually approve an
additional  10% of a customer's  currently  outstanding  debt,  even though that
exceeds their individual authority limit. Any two of the President,  the SVP and
a designated  VP may jointly  approve all loan types up to $750,000.  Any two of
the Chairman,  the President,  and the SVP may jointly approve all loan types up
to $l.5 million.  The Loan Committee  consists of any three of any one Director,
the President,  the SVP, and one  designated VP. The designated  Director or his
representative must be present at Loan Committee. Such committee can approve all
loan types up to $2.0  million.  The Loan  Committee  can  approve  any loans in
excess of $2.0  million  by  notifying  the  entire  Board of  Directors  of its
intention to approve a loan in excess of $2.0 million.  The Directors who attend
the meeting have a vote along with the other members of the Committee.  The Loan
Committee meets as needed to review and verify that  management's loan approvals
are made within the scope of management's authority. After the loan is approved,
a loan  commitment  letter is promptly  issued to the borrower.  At December 31,
1997, commitments to originate loans, excluding the undisbursed portion of loans
in process, totaled $7.2 million.

         If the loan is approved,  the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral,  and required
insurance coverage. Fire and casualty insurance is required at the time the loan
is  made  and  throughout  the  term  of  the  loan,  and  upon  request  of the
Association, flood insurance may be required. Title insurance is required on all
loans secured by real property.

         In addition to  originations,  the  Association  also  purchases  loans
secured by one- to four-family residences from consortiums, mortgage origination
companies,   or  brokers,  as  previously  discussed  in  "One-  to  Four-Family
Residential  Real Estate  Loans." In  addition,  the  Association  may  purchase
participation loans when there are more funds available for lending in excess of
the  demand  for loans in the local  market or to  facilitate  funding  of large
projects.  Such participation loans, which totaled $19.9 million at December 31,
1997,  are secured by one- to  four-family,  multi-family  and  commercial  real
estate loans.

                                       12
<PAGE>

ORIGINATION,  PURCHASE  AND  SALE OF  LOANS.  The  table  below  shows  the loan
origination, purchase and sales activity for the periods indicated.

<TABLE>
<CAPTION>
                                                               For Year      For Three
                                                                Ended       Months Ended              For Year Ending
                                                              December 31,  December 31,               September 30,
                                                             ------------------------------------------------------------------
                                                                  1997         1996            1996         1995         1994
                                                                  ----         ----            ----         ----         ----
                                                                                         (In Thousands)
<S>                                                            <C>          <C>             <C>          <C>          <C>
 Loans receivable, beginning of period                         $ 389,040    $ 376,219       $ 329,442    $ 317,117    $ 328,747
 Originations:
  Real estate:
   One- to four-family residential (1)                            67,923       20,226          82,596       35,909       49,718
   Land loans                                                     14,360        5,498           6,848       18,163        6,418
   Multi-family                                                    1,427           --           1,263           --          696
   Commercial                                                     28,667        1,806          16,102        8,197        2,813
                                                               ---------    ---------       ---------    ---------    ---------
    Total real estate loans                                      112,377       27,530         106,809       62,269       59,645
  Non-real estate loans:
   Consumer                                                        4,116        1,525           5,698        4,154        2,425
   Commercial business                                             2,699          515             796          646          718
                                                               ---------    ---------       ---------    ---------    ---------
    Total originations                                           119,192       29,570         113,303       67,069       62,788

 Transfer of mortgage loans to
  foreclosed real estate                                            (558)         (78)           (400)      (1,394)      (5,528)
 Loan and participations purchased                                24,455        1,998          16,775        2,728        2,395
 Repayments                                                      (76,816)     (20,042)        (72,114)     (50,452)     (63,471)
 Loan sales                                                         (631)        (283)         (5,429)        (105)      (5,115)
 Decrease (increase) in allowance for loan losses                   (120)        (230)          1,180         (102)         358
 Decrease in amortization of unearned discount and premiums
  and net deferred fees and cost                                    406           63             589           62          326
 Increase (decrease)  in loans in process                         (3,398)       1,553          (7,065)      (5,381)      (3,406)
 Change in other                                                     139          270             (62)        (100)          23
                                                               ---------    ---------       ---------    ---------    ---------
 Net loan activity                                                62,669       12,821          46,777       12,325      (11,630)
                                                               ---------    ---------       ---------    ---------    ---------
 Total loans receivable at end of period                       $ 451,709    $ 389,040       $ 376,219    $ 329,442    $ 317,117
                                                               =========    =========       =========    =========    =========
</TABLE>

(l) Includes  loans  to  finance  the   construction   of  one-  to  four-family
    residential  properties,  and  loans  originated  for sale in the  secondary
    market.

                                                           13

<PAGE>

         LOAN ORIGINATION FEES AND OTHER INCOME.  In addition to interest earned
on loans, the Association may receive loan origination  fees. To the extent that
loans are  originated  or acquired  for the  portfolio,  Statement  of Financial
Accounting  Standards  No.  91,  "Accounting  for  Nonrefundable  Fees and Costs
Associated  with  Originating  or  Acquiring  Loans and Initial  Direct Costs of
Leases"  ("SFAS  No.  91")  requires  that  loan  origination  fees and costs be
deferred and  amortized as an  adjustment  of yield over the life of the loan by
use of the level yield  method.  ARM loans  originated  below the  fully-indexed
interest rate will have a substantial  portion of the deferred amount recognized
as income in the initial adjustment  period.  Fees and costs deferred under SFAS
No. 91 are recognized into income immediately upon prepayment or the sale of the
related loan. At December 31, 1997, unearned discounts and premiums and deferred
loan  origination  fees and costs totaled  $206,000.  Loan origination fees vary
with the volume and type of loans and commitments made and purchased,  principal
repayments,  and competitive  conditions in the mortgage markets which, in turn,
respond to the demand and availability of funds.

         In addition to loan  origination  fees, the  Association  also receives
servicing  income and other fees that consist  primarily of servicing fees, late
charges, and other miscellaneous fees which totaled $269,000, $33,000, $148,000,
$184,000  and $163,000  for the year ended  December 31, 1997,  the three months
ended December 31, 1996 and the years ended September 30, 1996,  1995, and 1994,
respectively.

         LOAN SERVICING.  While the Association  primarily  originates loans for
its own portfolio,  it also has sold  fixed-rate  loans to Freddie Mac ("FHLMC")
and to the FNMA. At December 31, 1997, the unpaid balances of loans sold totaled
approximately  $19.0  million.  Servicing of such loans is retained and a fee is
received  of between  one-fourth  to  three-eights  of a percent  per loan.  The
Association does not purchase loan servicing from other sources.

         LOANS-TO-ONE BORROWER. Savings and loan associations are subject to the
same  loans-to-one  borrower limits as those applicable to national banks which,
under current regulations,  restrict loans to one borrower to an amount equal to
15% of unimpaired  capital and unimpaired  surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired  capital and unimpaired  surplus if
the loan is secured  by  readily  marketable  collateral  (generally,  financial
instruments and bullion,  but not real estate). The 15% limitation resulted in a
dollar  limitation of  approximately  $12.2 million at December 31, 1997. All of
the Association's loans are in compliance with the loans-to-one  borrower limits
at December 31, 1997.

The following table presents the five largest lending  relationships at December
31, 1997:

<TABLE>
<CAPTION>
                                                                              At December 31, 1997
                                                     -------------------------------------------------------------
                                                               Total of Loans                     Amount disbursed
                                                     -------------------------------------------------------------
Description of collateral:                                                       (In Thousands)

<S>                                                               <C>                                 <C>
Construction loans to build single-family
 homes and line of credit                                         $10,082                              $5,204
Construction loans to build a condominium                           9,284                               5,497
Construction loans to build single-family homes                     5,365                               3,592
Loans secured by convenience stores and
 gas stations                                                       4,785                               4,785
Construction loans to build single-family homes                     3,897                                 487

At  December  31,  1997  all of the  aforementioned  loans  were  performing  in
accordance with their terms.
</TABLE>

ASSET QUALITY

         DELINQUENCIES.  The Association's  collection  procedures  provide that
when a loan is 15 days past due, a computer-generated late charge notice is sent
to the borrower requesting  payment. If the delinquency  continues at 30 days, a
delinquent notice is sent and personal contact efforts are attempted,  either in
person or by telephone,  to strengthen the collection process and obtain reasons
for the delinquency. Also, plans to arrange a repayment plan are made. If a loan
becomes  60 days  past  due and no  progress  has  been  made in  resolving  the
delinquency,  a 10-day demand letter is sent and personal  contact is attempted.
The loan also becomes subject to possible legal action if suitable  arrangements
to repay have not been made. In addition,  the borrower is advised that they may
obtain  access to  consumer  counseling  services,  to the  extent  required  by
regulations of the Department of Housing and Urban Development  ("HUD").  When a
loan  continues  in a  delinquent  status for 90 days or more,  and a  repayment
schedule has not been made or kept by the borrower, generally a

                                                            14

<PAGE>
notice of intent to  foreclose is sent to the  borrower,  giving the borrower 10
days to repay all outstanding interest and principal.  If the delinquency is not
cured, foreclosure proceedings are initiated.

         DELINQUENT LOANS.  Loans are reviewed on a regular basis and are placed
on a non-accrual  status when, in the opinion of  management,  the collection of
additional  interest is doubtful.  In addition,  loans are placed on non-accrual
status  when either  principal  or interest is 90 days or more past due, or less
than 90 days, in the event the loan has been referred to the Association's legal
counsel  for  foreclosure.  Interest  accrued  and  unpaid at the time a loan is
placed on a non-accrual status is charged against interest income.

         The following table sets forth  information  with respect to loans past
due 60 to 89 days in the loan portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                      AT DECEMBER 31,                            AT SEPTEMBER 30,
                                              -----------------------------    ---------------------------------------------
                                                    1997          1996               1996              1995             1994
                                                    ----          ----               ----              ----             ----
                                                                (IN THOUSANDS)
<S>                                                 <C>           <C>                <C>               <C>              <C>
Loans past due 60-89 days:
 One- to four-family residential                    $469          $446               $209              $493             $193
 Commercial and multi-family real estate              --            --                 --                --               --
 Consumer and commercial business loans               54            72                  3                24               --
 Land loans                                           --            --                 --                --               95
                                                    ----          ----               ----              ----             ----
   Total past due 60-89 days                        $523          $518               $212              $517             $288
                                                    ====          ====               ====              ====             ====
</TABLE>

         NON-PERFORMING  ASSETS.  At  December  31,1997,  non-performing  assets
(non-performing  loans and real estate owned (" REO")) totaled $2.0 million, and
the ratio of  non-performing  assets to total  assets  was  0.47%.  Real  estate
acquired by the  Association  as a result of  foreclosure  or by deed in lieu of
foreclosure  is classified as until such time as it is sold.  REO is recorded at
cost which is the  estimated  fair value of the property at the time the loan is
foreclosed.  Subsequent to foreclosure, these properties are carried at lower of
cost or fair value less  estimated  costs to sell.  REO totaled  $592,000,  $1.5
million,  $1.4 million,  $1.9 million, $3.7 million and $l.3 million at December
31,  1997,  and  1996,  and  at  September  30,  1996,   1995,  1994  and  1993,
respectively.

         The following table sets forth information  regarding non-accrual loans
delinquent  90 days or more,  and real  estate  acquired  or deemed  acquired by
foreclosure at the dates  indicated.  When a loan is delinquent 90 days or more,
all accrued  interest  thereon is fully  reserved  and the loan ceases to accrue
interest  thereafter.  For all  the  dates  indicated,  there  were no  material
restructured loans within the meaning of SFAS 15.

<TABLE>
<CAPTION>
                                                      AT DECEMBER 31,                           AT SEPTEMBER 30,
                                                   ---------------------------------------------------------------------------
                                                    1997          1996               1996              1995             1994
                                                    ----          ----               ----              ----             ----
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                 <C>           <C>                <C>               <C>              <C>

Non-performing loans:
 One- to four-family residential                   $1,289         $1,524             $  832            $  605           $1,571
 Commercial and multi-family real estate               --             --                                                 1,282
 Consumer and commercial business loans                55            107                 10                39               20
 Land                                                  35             --                 --                18               82
                                                   ------          ------            ------            ------           ------
Total non-performing  loans                         1,379          1,631                842               662            2,955
REO                                                   592          1,455              1,384             1,910            3,686
Other non-performing assets                            --             --                400  (2)           --               --
                                                   ------          ------            ------            ------           ------
Total non-performing assets (1)                    $1,971          $3,086            $2,626            $2,572           $6,641
                                                   ======          ======            ======            ======           ======

Total non-performing  loans to net loans
 receivable                                          0.31%           0.42%             0.22%             0.20%            0.93%
Total non-performing loans to total assets           0.19            0.25              0.13              0.12             0.53
Total non-performing loans and REO to total          0.27            0.47              0.40              0.45             1.25
 assets
</TABLE>
------------------------
(1) Net of specific valuation allowances.
(2) The other  non-performing  asset at September 30, 1996 represented a deposit
    account due to the Association  whose recovery was in doubt.  All funds were
    recovered in the subsequent periods.

                                                                    15
<PAGE>

         The largest  non-performing asset had a balance of $256,000 at December
31,  1997,  with a current  appraisal of $340,000.  The loan was  originated  in
fiscal  1989 and was  collateralized  by a citrus  grove  located  in St.  Lucie
County. The borrower, which was an insurance company, went into receivership and
was  liquidated  in  October  1991.  The  Association  subsequently  obtained  a
Receiver's Deed and the property was classified as REO in February 1993. In June
1995, the  Association  applied for approval of a site plan to allow for 32 lots
for residential  use. The Association  applied for extension of the site plan in
February 1997 and 1998. The  Association has held the REO for five years and has
applied for an extension  with the OTS to hold it for one  additional  year. The
property has been marketed aggressively, but it is located in an area of limited
growth.

         During the year ended  December  31,  1997,  gross  interest  income of
$86,000  would have been  recorded on  non-performing  loans  accounted for on a
non-accrual  basis if the loans  had been  current  throughout  the  period.  No
interest income on non-accrual loans was included in income during such period.

         The following table sets forth information  regarding delinquent loans,
REO and loans to facilitate the sale of REO at December 31, 1997.

<TABLE>
<CAPTION>
                                                                                      AT DECEMBER 31, 1997
                                                                                 --------------------------
                                                                                     BALANCE         NUMBER
                                                                                 --------------------------
                                                                                     (DOLLARS IN THOUSANDS)
<S>                                                                                 <C>                 <C>
Residential real estate:
 Loans 60 to 89 days delinquent                                                      $  469              9
 Loans more than 89 days delinquent                                                   1,289             20
Commercial and multi-family real estate:
 Loans 60 to 89 days delinquent                                                          --             --
 Loans more than 89 days delinquent                                                      --             --
Consumer and commercial business loans:
 Loans 60 to 89 days delinquent                                                          54              4
 Loans more than 89 days delinquent                                                      55              3
Land                                                                                     35              2
REO                                                                                     592              8
Restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15 (not included in other non-performing categories above)                 --             --
Loans to facilitate sale of REO                                                         217              4
                                                                                     ------            ---
      Total                                                                          $2,711             50
                                                                                     ======            ===
</TABLE>

         CLASSIFICATION  OF  ASSETS.   Federal   regulations   provide  for  the
classification  of loans and other  assets  such as debt and  equity  securities
considered  by OTS to be of lesser  quality  as  "substandard,"  "doubtful,"  or
"loss"  assets.  An  asset is  considered  "substandard"  if it is  inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected.  Assets classified as "doubtful" have all
of the weaknesses  inherent in those  classified  "substandard,"  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full,  " on the basis of  currently  existing  facts,  conditions,  and  values,
"highly  questionable  and  improbable."  Assets  classified as "loss" are those
considered  "uncollectible"  and of such little value that their  continuance as
assets  without the  establishment  of a specific loss reserve is not warranted.
Assets that do not expose the savings  institution to risk sufficient to warrant
classification in one of the aforementioned  categories,  but which possess some
weaknesses, are required to be designated "special mention" by management.

         When  a  savings  institution   classifies  problem  assets  as  either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management.  General allowances  represent
loss  allowances  that have been  established  to recognize  the  inherent  risk
associated with lending activities, but which, unlike specific allowances,  have
not been  allocated to particular  problem  assets.  When a savings  institution
classifies  problem  assets as  "loss," it is  required  either to  establish  a
specific  allowance  for  losses  equal to 100% of the  amount of the  assets so
classified, or to charge off such amount. A savings institution's  determination
as to  the  classification  of its  assets  and  the  amount  of  its  valuation
allowances is subject to review by the OTS, which can order the establishment of
additional  general or specific loss allowances.  Problem loans in the portfolio
are regularly reviewed to determine whether any loans require  classification in
accordance with applicable regulations.

                                                16

<PAGE>

         The   following   table  sets  forth  the   aggregate   amount  of  the
Association's classified assets at the dates indicated.

<TABLE>
<CAPTION>
                                   At December 31               At September,
                                 -----------------   -------------------------------------
                                  1997       1996      1996      1995     1994        1993
                                  ----       ----      ----      ----     ----        ----
                                                       (In Thousands)
<S>                              <C>       <C>       <C>       <C>       <C>       <C>
Substandard assets               $ 3,056   $ 4,205   $ 3,745   $ 8,652   $10,166   $12,447
Doubtful assets                       --        --        --        --        --        --
Loss assets                           --       344       544     1,565     1,520     1,848
------------------------         -------   -------   -------   -------   -------   -------
  Total classified assets        $ 3,056   $ 4,549   $ 4,289   $10,217   $11,686   $14,295
                                 =======   =======   =======   =======   =======   =======
</TABLE>

         ALLOWANCE  FOR LOAN  LOSSES.  Management's  policy  is to  provide  for
estimated  losses on the loan portfolio based on management's  evaluation of the
potential losses that may be incurred. Provisions for losses, which increase the
allowances  for  loan  losses,  are  established  by  charges  to  income.  Such
allowances represent the amounts which, in management's  judgment,  are adequate
to absorb  charge-offs  of existing  loans which may become  uncollectible.  The
adequacy of the allowance is determined by  management's  monthly  evaluation of
the loan  portfolio and related  collateral,  in light of past loss  experience,
present economic conditions and other factors considered relevant by management.
Anticipated  changes in economic  factors  which may  influence the level of the
allowances are considered in the evaluation by management when the likelihood of
the changes can be reasonably determined.

         Management  continues to review the entire loan  portfolio to determine
the extent,  if any, to which further  additional  loan loss  provisions  may be
deemed necessary. Management believes that the current allowance for loan losses
is adequate,  however,  there can be no assurance  that the  allowance  for loan
losses  will be  adequate  to cover  losses  that may in fact be realized in the
future or that additional provisions for loan losses will not be required.

                                       17

<PAGE>

         ANALYSIS OF THE  ALLOWANCE FOR LOAN LOSSES.  The  following  table sets
forth the analysis of the allowance for loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                        AT DECEMBER 31,                          AT SEPTEMBER 30,
                                                 ---------------------------------------------------------------------------------
                                                    1997          1996          1996           1995          1994          1993
                                                    ----          ----          ----           ----          ----          ----
                                                                                            (DOLLARS IN THOUSANDS)
<S>                                              <C>           <C>           <C>             <C>           <C>           <C>
Total loans outstanding                          $ 451,709     $ 389,040     $ 376,219       $ 329,442     $ 317,117     $ 328,747
                                                 =========     =========     =========       =========     =========     =========
Average loans outstanding for the period         $ 411,098     $ 383,258     $ 346,880       $ 321,849     $ 321,721     $ 352,173
                                                 =========     =========     =========       =========     =========     =========
Allowance balance (at beginning of period)       $   2,542     $   2,312     $   3,492       $   3,390     $   3,748     $   2,281
Provision for losses:
 Real estate loans                                     264           243            84             234           967         2,395
 Consumer and commercial business loans                 14             6            22               3
Recoveries                                              --            --            --              --            --            --
Charge-offs:
 Real estate loans                                    (143)          (13)       (1,264)(1)        (132)       (1,325)         (885)
 Consumer and commercial business loans                 (1)           --           (14)             (6)          (22)          (46)
                                                 ---------     ---------     ---------       ---------     ---------     ---------
Allowance balance (at end of period)             $   2,662     $   2,542     $   2,312       $   3,492     $   3,390     $   3,748
                                                 =========     =========     =========       =========     =========     =========
Allowance for loan losses as a percent
 of net loans receivable at end of period             0.59%         0.65%         0.61%           1.06%         1.07%         1.14%
Net loans charged off as a percent of
 average  loans outstanding                           0.04%           --%         0.37%           0.04%         0.41%         0.26%
Ratio of allowance for loan losses to total
 non-performing loans at end of period (2)          193.04%        155.8%       274.58%         527.49%       114.72%        55.65%
Ratio of allowance for loan losses to total
 non-performing loans and REO
 at end of period (2)                               135.06%         82.3%       103.86%         135.77%        51.05%        46.51%
</TABLE>
------------------------
(1) Charge offs at  September  30, 1996  primarily  reflected  the reversal of a
    specific  reserve  of $1.2  million  which was  related  to a  participation
    interest in a note which was sold during the year.
(2) Net of specific reserves.

                                                                18
<PAGE>
         ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the  allocation  of allowance  for loan losses by loan  category for the periods
indicated.  Management  believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily  indicative  of future  losses and does not  restrict the use of the
allowance to absorb losses in any category.

                                                AT DECEMBER 31,
                                --------------------------------------------
                                      1997                        1996
                                --------------------     -------------------
                                         % OF LOANS              % OF LOANS
                                          IN EACH                 IN EACH
                                         CATEGORY TO             CATEGORY TO
                                AMOUNT   TOTAL LOANS (1) AMOUNT  TOTAL LOANS (1)
                                ------   -----------     ------  -----------
 Balance at end of period
 applicable to:
 One- to four-family
  residential  mortgage         $1,042      78.18%       $1,037      79.68%
 Land                              650       3.58           630       4.71
 Multi-family residential
  mortgage                         300       1.84           300       1.96
 Commercial real estate            550      12.38           500       9.17
 Consumer and commercial
  business                         120       4.02            75       4.48
                                ------     ------        ------     ------
 Total allowance for loan
   losses                       $2,662     100.00%       $2,542     100.00%
                                ======     ======        ======     ======

                                                AT SEPTEMBER 30,
                                -------------------------------------------
                                      1996                        1995
                                --------------------     ------------------
                                         % OF LOANS              % OF LOANS
                                          IN EACH                 IN EACH
                                         CATEGORY TO             CATEGORY TO
                                AMOUNT   TOTAL LOANS (1) AMOUNT  TOTAL LOANS (1)
                                ------   -----------     ------  -----------
                                       (DOLLARS IN THOUSANDS)
 Balance at end of period
 applicable to:
 One- to four-family
  residential  mortgage         $  870      79.83%       $  790      79.10%
 Land                              630       4.20           630       4.47
 Multi-family residential
  mortgage                         300       2.03           300       2.11
 Commercial real estate            452       9.58         1,712      10.14
 Consumer and commercial
  business                          60       4.36            60       4.18
                                ------    -------        ------     ------
 Total allowance for loan
   losses                       $2,312     100.00%       $3,492     100.00%
                                ======     ======        ======     ======

                              ----------------------------------------------
                                      1994                        1993
                              ----------------------     -------------------
                                         % OF LOANS              % OF LOANS
                                          IN EACH                 IN EACH
                                         CATEGORY TO             CATEGORY TO
                                AMOUNT   TOTAL LOANS (1) AMOUNT  TOTAL LOANS (1)
                                ------   -----------     ------  -----------
 Balance at end of period
 applicable to:
 One- to four-family
  residential  mortgage         $  700      78.52%       $  700      79.50%
 Land                              630       6.18           600       5.02
 Multi-family residential
  mortgage                         300       2.05           453       1.75
 Commercial real estate          1,700       9.84         1,935      10.27
 Consumer and commercial
  business                          60       3.41            60       3.46
                                ------     ------        ------     ------
 Total allowance for loan
  losses                        $3,390     100.00%       $3,748     100.00%
                                ======     ======        ======     ======
----------------------------
(1) Percentages  do not  reflect  adjustments  for  undisbursed  loan  proceeds,
    unearned discount and net deferred fees, and allowance for loan losses.

                                       19
<PAGE>
SECURITIES PORTFOLIO.

         The Association's  primary focus is the origination of loans.  However,
during past periods when mortgage  loan demand was moderate and the  Association
had  de-emphasized  the  origination of fixed-rate  loans,  management  invested
excess  liquidity in  investment  securities,  including  mutual  funds,  and in
mortgage-backed  and related  securities  rather than purchasing  whole loans or
loan participations.  Such securities are subject to classification based on the
intentions of management.  Securities purchased for the portfolio are classified
as either held to maturity or as  available  for sale.  The  Association  has no
securities  classified as trading.  During December 1995, the provisions of SFAS
No. 115  "Questions  and Answers Guide ("SFAS No. 115 Q & A") were adopted which
allowed   between   November   15,  1995  and   December  31,  1995  a  one-time
reclassification  of securities from held to maturity to available for sale. The
Association  reclassified $49.5 million of securities from  investments-held  to
maturity  and  mortgage-backed  and  related   securities-held  to  maturity  to
securities  available for sale.  Such  reclassification  resulted in a credit of
$247,000 to shareholders' equity. Subsequently,  $749,000 of the securities were
sold at no gain or loss.

         The  Association  maintains an  Investment  Committee  which meets on a
monthly basis to review the securities  portfolio and make recommendations to be
carried  out by  management.  All  investments  must be rated BBB or higher by a
recognized   rating   service.   The  Investment   Committee   consists  of  the
Association's  President and Chief  Executive  Officer,  James B. Pittard,  Jr.,
Senior Vice President,  Chief Financial  Officer and Treasurer,  Larry J. Baker,
and Senior Vice  Presidents,  Cecil F. Howard,  Jr.,  Feriel G. Hughes,  Mary L.
Kaminske, and Michael E. Reinhardt.

         MORTGAGE-BACKED  AND RELATED  SECURITIES.  At December  31,  1997,  net
mortgage-backed and related securities totaled $92.8 million, or 12.9%, of total
assets.  Of this amount,  $46.4  million was  classified as held to maturity and
$46.4 million was available for sale. At December 31, 1997,  the market value of
the net mortgage-backed and related securities  portfolio totaled  approximately
$93.3 million.  Management  primarily invests in fixed-rate  mortgage-backed and
related  securities  with  weighted  average  lives  of  five  to  seven  years.
Management  believes that  investing in short-term  mortgage-backed  and related
securities  limits the exposure to higher  interest  rates.  During fiscal years
1997, $679,000 of mortgage-backed  and related securities were purchased.  These
purchases  were funded with public  funds  deposits,  odd-term  certificates  of
deposit and FHLB  advances,  instead of excess  liquidity as in previous  years.
Also included in the mortgage-backed  securities portfolio at December 31, 1997,
was $80.0 million of collateralized  mortgage obligations ("CMOs"), $7.5 million
of  pass-through  securities  issued by the FHLMC,  $3.3 million of pass-through
securities issued by the FNMA and $1.8 million of pass-through securities issued
by the Government  National Mortgage  Association  ("GNMA").  The FHLMC and FNMA
pass-through  securities  are primarily  comprised of five-year  and  seven-year
balloon mortgage loans. The GNMA  pass-through  securities were purchased in the
early  1980s and the loans  underlying  the GNMAs are well  seasoned.  A limited
amount of  mortgage-backed  securities  issued by the Agency  for  International
Development ("AID") are also included in the portfolio.  The AID mortgage-backed
securities are fixed-rate  instruments and are securitized  with loans to Korea,
Venezuela,  and Israel.  At December 31, 1997,  AID  mortgage-backed  securities
totaled $236,000. Such mortgage-backed securities are guaranteed by governmental
agencies or  quasi-governmental  agencies of the United  States  Government.  By
investing in mortgage-backed and related securities,  the Association lowers the
credit risk of its asset base in exchange for lower yields than would  typically
be available on internally generated loans.

         CMOs  are  typically  issued  by  a  special-purpose   entity  (in  the
Association's  case,  private  issuers),  which may be organized in a variety of
legal  forms,  such as a trust,  a  corporation,  or a  partnership.  The entity
aggregates pools of pass-through securities, which are used to collateralize the
CMO. Once combined,  the cash flows are divided into  "tranches" or "classes" of
individual bonds,  thereby creating more predictable  average durations for each
bond  than  the  underlying  pass-through  pools.  Accordingly,  under  the  CMO
structure all principal  paydowns from the various  mortgage pools are allocated
to a CMO's first class until it has been paid off,  then to a second class until
such class has been paid off, and then to the next classes in order of priority.
Substantially all of the CMOs held in the mortgage-backed and related securities
portfolio consist of senior sequential tranches, primarily investments in one of
the first three tranches of the CMO. By purchasing senior  sequential  tranches,
management  is  attempting  to  ensure  the cash  flow  associated  with such an
investment.  Generally,  such tranches have stated  maturities  ranging from 6.5
years to 30 years;  however,  because  of  prepayments,  the  expected  weighted
average life of these securities is less than the stated maturities. At December
31, 1997, the fixed-rate  CMOs had coupon rates ranging from 6.0 % to12.0 % with
a weighted average yield of 7.38%. The  adjustable-rate  CMOs are indexed to the
London  InterBank  Offered  Rate  ("LIBOR") or to the Ten Year  Treasury  Index.
Management's  policy is to  purchase  tranches  in CMOs  which are  deemed to be
investment  grade by the  Federal  Financial  Institutions  Examination  Council
("FFIEC").  In the past,  CMO residuals were purchased in which the repayment of
principal  is only made after the senior  tranches of the CMO are repaid in full
as to  principal.  Consequently,  investments  in CMO residuals are riskier than
investments in senior  sequential  tranches because of their  relatively  junior
position to moresenior  tranches and the interest rate risk associated with such
securities,  in that they could result in a loss of a substantial portion of the
original investment.

                                       20

<PAGE>

Cash flows from  residual  interests  are very  sensitive  to  prepayments  and,
therefore,  contain a high  degree of  interest  rate risk.  Residual  interests
represent an ownership  interest in the  underlying  collateral,  subject to the
first lien of the CMO investors. At December 31, 1997, the carrying value of the
CMO residuals was $7,000. The Association no longer invests in CMO residuals.

         OTS regulations require the classification of CMOs as high-risk if they
fail the FFIEC test. No CMOs are purchased which fail the FFIEC test at the time
of  purchase.  The FFIEC  test is  reperformed  annually  during the life of the
securities.  During fiscal year 1997, one CMO issue totaling $9.3 million failed
the FFIEC test and is classified as high-risk for OTS reporting purposes.

         The following  tables set forth the carrying value of, and activity in,
the mortgage-backed and related securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,        AT SEPTEMBER 30,
                                                       --------------------------------------------
                                                           1997       1996          1996       1995
                                                           ----       ----          ----       ----
                                                                       (IN THOUSANDS)
<S>                                                    <C>        <C>           <C>        <C>
Mortgage-backed and related securities:
 Held to maturity:
 CMOs                                                  $ 33,638   $ 37,359      $ 38,308   $ 57,586
 CMO residuals                                                7         15            20        118
 FHLMCs                                                   7,465      9,673         9,973     11,943
 GNMAs                                                    1,751      2,108         2,233      2,774
 FNMAs                                                    3,316      3,933         4,076      4,691
 AID loans                                                  236        317           335        387
 Total mortgage-backed and related securities held     --------   --------      --------   --------
  to maturity                                            46,413     53,405        54,945     77,499
                                                       --------   --------      --------   --------
 Available for sale: (shown at market value)
  CMOs                                                   46,350     51,974        53,318         --
                                                       --------   --------      --------   --------
 Total mortgage-backed and related securities
  available for sale                                     46,350     51,974        53,318         --
                                                       --------   --------      --------   --------
Total mortgage-backed and related securities           $ 92,763   $105,379      $108,263   $ 77,499
                                                       ========   ========      ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                    THREE MONTHS
                                                     YEAR ENDED         ENDED         YEAR ENDED
                                                     DECEMBER 31,   DECEMBER 31,     SEPTEMBER 30,
                                                     ---------------------------------------------
                                                         1997        1996         1996        1995
                                                         ----        ----         ----        ----
                                                                       (IN THOUSANDS)

<S>                                                    <C>        <C>           <C>        <C>
Mortgage-backed and related securities at:
 Beginning of period                                  $105,379    $108,263      $ 77,499   $ 41,281
 Purchases                                                 679          --        43,703     41,549
 Calls                                                      --          --          (311)        --
 Sales                                                      --          --          (749)        --
 Repayments                                            (14,421)     (2,840)      (11,454)    (5,286)
 Discount (premium) amortization                           216          60           189        (45)
 Gain on call                                               --          --           254         --
 (Increase) decrease in market value available
   for sale (net)                                          910        (104)         (868)        --
                                                      --------     -------      --------   --------
 Mortgage-backed and related securities at
 end of period                                        $ 92,763    $105,379      $108,263   $ 77,499
                                                      ========    ========      ========   ========
</TABLE>

                                                    21
<PAGE>

         The   following   table  sets  forth  the   allocation  of  fixed-  and
adjustable-rate   mortgage-backed   and  related   securities  for  the  periods
indicated.

<TABLE>
<CAPTION>
                                                          AT DECEMBER 31,                       AT SEPTEMBER 30,
                                               ----------------------------------------------------------------------------------
                                                     1997                   1996              1996                   1995
                                               -----------------      -----------------   -----------------     -----------------
                                                  $        %            $        %          $         %            $        %
                                               -----------------      -----------------   -----------------     -----------------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                            <C>          <C>      <C>          <C>     <C>          <C>       <C>         <C>
Mortgage-backed and related securities, net:
   Held to maturity:
   Adjustable-rate CMOs                        $  3,028     3.26%    $  3,027     2.87%   $  3,030     2.80%     $ 3,980     5.14%
                                               --------   ------     --------   ------    --------   ------      -------   ------
   Fixed-rate:
      FHLMCs                                      7,465     8.05        9,673     9.18       9,973     9.21       11,943    15.41
      FNMAs                                       1,751     1.89        2,108     2.00       4,076     3.76        4,691     6.05
      GNMAs                                       3,316     3.57        3,933     3.73       2,233     2.06        2,774     3.58
      CMOs                                       30,617    33.01       34,347    32.59      35,298    32.60       53,724    69.32
      AID loans                                     236     0.25          317     0.30         335     0.32          387     0.50
                                               --------   ------     --------   ------    --------   ------      -------   ------

       Total fixed-rate                          43,385    46.77       50,378    47.81      51,915    47.95       73,519    94.86
                                               --------   ------     --------   ------    --------   ------      -------   ------
        Total mortgage-backed and
           related securities-held to
           maturity, net                         46,413    50.03       53,405    50.68      54,945    50.75      77,499    100.00
                                               --------   ------     --------   ------    --------   ------      -------   ------
   Available for sale: (at market value)
       Adjustable-rate CMOs                       3,331     3.59        3,594     3.41       3,670     3.39           --       --
       Fixed-rate CMOs                           43,019    46.38       48,380    45.91      49,648    45.86           --       --
                                               --------   ------     --------   ------    --------   ------      -------   ------
         Total mortgage-backed and related
             securities available for
                  sale, net                      46,350    49.97       51,974    49.32      53,318    49.25           --       --
                                               --------   ------     --------   ------    --------   ------      -------   ------
Total mortgage-backed and related              $ 92,763   100.00%    $105,379   100.00%   $108,263   100.00%     $77,499   100.00%
securities, net                                ========   ======     ========   ======    ========   ======      =======   ======
</TABLE>

                                                                      22
<PAGE>

         INVESTMENTS.  Investments  purchased are comprised  primarily of United
States  Government  and  agency   obligations,   mutual  funds  that  invest  in
mortgage-backed securities and government and agency obligations, corporate debt
securities and FHLB stock, as well as interest-earning deposits at the FHLB. The
carrying  value of the  interest-earning  deposits,  investments  and securities
available for sale totaled $134.2 million or18.6% of total assets.

         The  Association  is required  under federal  regulations to maintain a
minimum  amount of liquid  assets that may be invested in  specified  short-term
securities  and  certain  other  investments.   The  Association  generally  has
maintained a portfolio of liquid  assets that exceeds  regulatory  requirements.
Liquidity  levels may be  increased or  decreased  depending  upon the yields on
investment  alternatives and upon management's judgment as to the attractiveness
of the  yields  then  available  in  relation  to  other  opportunities  and its
expectation of the level of yield that will be available in the future,  as well
as management's  projections as to the short term demand for funds to be used in
loan origination and other  activities.  For further  information  regarding the
investments  see  Notes  1,  2 and 3 to  the  Notes  to  Consolidated  Financial
Statements  contained in Bankshares'  Annual Report to Shareholders for the Year
Ended December 31, 1997 (the "Annual Report") attached hereto as Exhibit 13.

         INTEREST-EARNING  DEPOSITS.  Excess funds are  primarily  invested on a
daily basis in an interest-earning overnight account at the FHLB of Atlanta. The
balance of this account was $13.6  million at December 31, 1997.  Such funds are
available  to  provide   liquidity  to  meet  lending   requirements  and  daily
operations.

         INVESTMENT  SECURITIES.  At December  31, 1997,  investment  securities
included United States Government and agency obligations totaling $13.0 million,
corporate  debt issues  totaling  $8.3  million,  and FHLB stock  totaling  $3.3
million.

         Included in corporate  debt issues are  asset-backed  securities  which
include two debt securities secured by automobile loan receivables totaling $1.5
million at December 31, 1997 purchased during fiscal year 1994, the repayment of
which is secured by automobile  receivables.  These  securities are rated BBB or
above by Standard & Poors and provide an effective  yield of 6.29%.  While these
securities  have a stated  maturity  of six  years,  it is  expected  because of
prepayments  that the  receivables  underlying  the  securities  have a weighted
average life of less than the stated  maturities.  Debt instruments which depend
on the repayment of automobile  loans involve a certain  degree of risk since in
the event that  borrowers  of the  automobile  loan  default,  the issuer of the
security may have  insufficient  funds to repay the principal or interest of the
security in accordance with its terms.

         The FHLB  requires its members to own a required  amount of FHLB stock.
During 1996,  the FHLB decided to begin  redeeming  all stock held by members in
excess of the required  amount.  During October 1996, the  Association  received
$2.5 million leaving a FHLB stock balance of $2.9 million.  Since that time, due
to the growth of the  Association's  balance  sheet,  purchases of $400,000 have
occurred. At December 31, 1997, FHLB stock totaled $3.3 million.

         SECURITIES  AVAILABLE  FOR  SALE.  Securities  available  for  sale are
carried on the books at fair value as required by FASB No. 115 and totaled $95.9
million at December  31, 1997.  Included in  securities  available  for sale are
equity  securities  totaling $23,000,  mutual funds totaling $40.7 million,  and
United States Government and agency obligations totaling $55.2 million.

         Mutual fund  investments  include mutual funds that invest primarily in
mortgage-backed  securities  and  government  and  agency  securities,  and  are
classified as available for sale for accounting purposes. The mutual funds which
invest  in  mortgage-backed  securities  have  characteristics  similar  to  the
mortgage-backed securities in which they invest. Mutual fund investments include
approximately   $35.7   million  in  funds  which   invest  in   adjustable-rate
mortgage-backed  securities  issued by FNMA, FHLMC and GNMA, as well as CMOs and
real estate mortgage investment conduits and other securities  collateralized by
or  representing  interests in real estate  mortgages,  and  approximately  $5.0
million in funds which invest in asset backed, corporate and CMO obligations.

                                       23
<PAGE>

         INVESTMENT PORTFOLIO. The following tables set forth the carrying value
of the  investment  portfolio  and  securities  available  for sale at the dates
indicated.  At  December  31,  1997,  the market  value of the  investments  was
approximately  $138.4  million.  The market value of investments  and securities
available  for sale  includes  interest-earning  deposits and FHLB stock at book
value, which approximates market value.

<TABLE>
<CAPTION>
                                                                  AT DECEMBER 31,                  AT SEPTEMBER 30,
                                                        ------------------------------------- -----------------------------
                                                              1997               1996             1996           1995
                                                              ----               ----             ----           ----
                                                                                     (IN THOUSANDS)
<S>                                                          <C>                <C>               <C>            <C>
Interest-earning deposits:
  FHLB-Atlanta                                               $ 13,621           $ 28,695          $ 28,580       $ 28,171
  Other deposits                                                   --                200               600          1,200
                                                             --------           --------          --------       --------
    Total interest-earning deposits                            13,621             28,895            29,180         29,371
                                                             --------           --------          --------       --------
Investment securities:
  United States Government and agency obligations              13,039             11,701            11,691         38,987
  Corporate debt issues                                         8,349             10,138            10,602         13,692
  Certificates of deposit                                          --                 --                --          7,000
  FHLB stock                                                    3,264              2,864             5,384          7,384
                                                             --------           --------          --------       --------
    Total investment securities                                24,652             24,703            27,677         67,063
                                                             --------           --------          --------       --------
Securities available for sale:
 (shown at fair value)
  Equity securities (1)                                            23                 14               115             96
  Mutual funds                                                 40,721             43,067            42,912         26,932
  United States Government and agency obligations              55,175             28,097            27,942             --
                                                             --------           --------          --------       --------
    Total securities available for sale                        95,919             71,178            70,969         27,028
                                                             --------           --------          --------       --------
    Total investment portfolio                               $134,192           $124,776          $127,826       $123,462
                                                             ========           ========          ========       ========

</TABLE>

(1) Consists of $23,000,  $14,000,  $14,000, and $10,000 in FNMA stock which was
    purchased in order for the  Association to qualify as a FNMA sevicer for the
    years ended  December 31, 1997 and 1996,  and  September  30, 1996 and 1995,
    respectively,  and $0, $0, $101,000, and $86,000 in securities issued by the
    Financial  Institutions Insurance Group Limited for the years ended December
    31, 1997 and 1996 and September 30, 1996 and 1995, respectively.

                                                         24
<PAGE>

         SECURITIES  PORTFOLIO  MATURITIES.  The following  table sets forth the
scheduled maturities,  carrying values, market values and average yields for the
investment securities and securities available for sale at December 31, 1997.

<TABLE>
<CAPTION>
                                                       At December 31, 1997
                                            ------------------------------------------
                                             One Year Or Less      One To Five Years
                                             ----------------      -----------------
                                                       Annualized           Annualized
                                                        Weighted             Weighted
                                            Carrying    Average   Carrying   Average
                                              Value      Yield      Value     Yield
                                            --------    -------   --------   -------
                                                      (Dollars in Thousands)

<S>                                         <C>            <C>     <C>        <C>
Interest-earning deposits:
  FHLB of Atlanta                           $13,621        5.20%   $    --       --%
                                            -------       -----    -------    -----
  Total interest-earning deposits            13,621        5.20         --       --
                                            -------       -----    -------    -----

Investment securities:
  United States Government
    and agency obligations                    1,250       10.99         --       --
  Corporate debt issues                          --          --      1,493     6.32
  FHLB stock                                     --          --         --       --
                                            -------       -----    -------    -----
    Total investment securities               1,250       10.99      1,493     6.32
                                            -------       -----    -------    -----

Securities available for sale:
  United States Government
   and agency obligations                     5,000        5.89     44,835     6.40
  Equity securities                              23        1.33         --       --
  Mutual funds:                              40,721        5.93         --       --
                                            -------       -----    -------    -----
   Total securities available
      for sale                               45,744        5.92     44,835     6.40
                                            -------       -----    -------    -----
  Total investment securities and
   securities available for sale             46,994        6.06     46,328     6.40
                                            -------       -----    -------    -----
    Total securities portfolio              $60,615        5.86%   $46,328     6.40%
                                            =======       =====    =======    =====
</TABLE>

<TABLE>
<CAPTION>
                                                       At December 31, 1997
                                            ------------------------------------------
                                             Five To Ten Years     More Than Ten Years
                                             -----------------     -------------------
                                                       Annualized             Annualized           Total                  Annualized
                                                        Weighted               Weighted     ------------------   Average    Weighted
                                            Carrying    Average    Carrying    Average      Carrying    Market   Life in     Average
                                              Value      Yield       Value      Yield        Value      Value    Years (1)    Yield
                                            ---------   -------    ---------   -------      --------    ------   -----      -------
                                                                        (Dollars in Thousands)
<S>                                         <C>                    <C>                      <C>        <C>                    <C>
Interest-earning deposits:
  FHLB of Atlanta                           $     --        --%    $     --       --%       $ 13,621   $ 13,621      --       5.20%
                                            --------     -----     --------    -----        --------   --------              -----
  Total interest-earning deposits                 --        --           --       --          13,621     13,621      --       5.20
                                            --------     -----     --------    -----        --------   --------              -----

Investment securities:
  United States Government
   and agency obligations                     11,284     11.33          505     9.36          13,039     17,204    5.44      11.22
  Corporate debt issues                           --        --        6,856     6.27           8,349      8,655   10.10       6.28
  FHLB stock                                      --        --        3,264     7.25           3,264      3.264      --       7.25
                                            --------     -----     --------    -----        --------   --------   -----      -----
    Total investment securities               11,284     11.33       10,625     6.71          24,652     29,123    7.26       8.16
                                            --------     -----     --------    -----        --------   --------   -----      -----

Securities available for sale:
  United States Government
   and agency obligations                      5,340      6.99           --       --          55,175     55,175    4.18       6.39
  Equity securities                               --        --           --       --              23         23      --       1.33
  Mutual funds:                                   --        --           --       --          40,721     40,721      --       5.93
                                            --------     -----     --------    -----        --------   --------   -----      -----
    Total securities available
       for sale                                5,340      6.99           --       --          95,919     95,919    4.18       6.20
                                            --------     -----     --------    -----        --------   --------   -----      -----
  Total investment securities and
   securities available for sale              16,624      9.94       10,625     6.71         120,571    125,042    5.04       6.61
                                            --------     -----     --------    -----        --------   --------   -----      -----
    Total securities portfolio              $ 16,624      9,94%    $ 10,625     6.71%       $134,192   $138,663    5.04       6.48%
                                            ========     =====     ========    =====        ========   ========   =====      =====
</TABLE>
------------------------
(1) Total  weighted  average  life in years  calculated  only on  United  States
    Government and agency obligations.

                                       25
<PAGE>

SOURCES OF FUNDS

         GENERAL.  Deposits  are the major source of funds for lending and other
investment  purposes.  In  addition  to  deposits,  funds are  derived  from the
amortization and prepayment of loans and mortgage-backed and related securities,
the maturity of investment securities,  operations and, if needed, advances from
the FHLB.  Scheduled loan principal repayments are a relatively stable source of
funds,  while deposit  inflows and outflows and loan  prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term  basis to compensate for reductions in the  availability of
funds  from  other  sources  or on a longer  term  basis  for  general  business
purposes.

         DEPOSITS.  Consumer and commercial  deposits are attracted  principally
from within the market area through the offering of a broad selection of deposit
instruments  including   non-interest-bearing  demand  accounts,  NOW  accounts,
passbook savings,  money market deposit accounts,  term certificate accounts and
individual retirement accounts. While deposits of $100,000 or more are accepted,
premium rates for such deposits are not currently offered. Deposit account terms
vary according to the minimum balance required,  the period of time during which
the funds must remain on deposit,  and the interest rate, among other factors. A
management committee meets weekly to evaluate the internal cost of funds, survey
rates  offered by competing  institutions,  review the  Association's  cash flow
requirements for lending and liquidity and the amount of certificates of deposit
maturing in the upcoming weeks. This committee executes rate changes when deemed
appropriate.  Funds are not obtained  through  brokers,  nor are funds solicited
outside the Association's market area.

         The following table sets forth  information  regarding  interest rates,
terms, minimum amounts and balances of deposits as of December 31, 1997.

<TABLE>
<CAPTION>
    WEIGHTED                                                                                               PERCENTAGE
     AVERAGE            MINIMUM                                              MINIMUM                        OF TOTAL
  INTEREST RATE          TERM          CHECKING AND SAVINGS DEPOSITS (1)     AMOUNT          BALANCES       DEPOSITS
  -------------          ----          ------------------------------        ------          --------      ----------
                                                                                         (IN THOUSANDS)
      <S>                <C>          <C>                                  <C>               <C>               <C>
      0.00%              None         Non-interest-bearing account             None          $ 24,715          4.49%
      1.00               None         NOW accounts                         $    100            69,862         12.69
      1.73               None         Passbook accounts                         100            30,221          5.49
      3.40               None         Money market deposit accounts           1,000            78,832         14.31
                                                                                             --------        ------
                                      Total checking and savings deposits                     203,630         36.98
                                                                                             --------        ------

                                          CERTIFICATES OF DEPOSIT (1)
                                          -----------------------

      4.71        1 - 5 months        Fixed term, fixed-rate                  1,000            12,531          2.28
      5.04        6-11 months         Fixed term, fixed-rate                  1,000            54,099          9.82
      5.60        12-17 months        Fixed term, fixed-rate                  1,000           165,026         29.97
      5.68        24-30 months        Fixed term, fixed-rate                  1,000            36,654          6.65
      5.96        36-47 months        Fixed term, fixed-rate                  1,000            15,358          2.79
      5.93        48-59 months        Fixed term, fixed-rate                  1,000             2,335          0.42
      6.11        Over 60 months      Fixed term, fixed-rate                  1,000            58,342         10.59
      1.73        Various             Fixed term, fixed-rate                  1,000             1,436          0.26
      5.03        Various             Negotiated Jumbo                      100,000             1,297          0.24
                                                                                             --------        ------
                                      Total certificates of deposit                           347,078         63.02
                                                                                             --------        ------
                                      Total deposits                                         $550,708        100.00%
                                                                                             ========        ======
</TABLE>
---------------------------------------------------------------------
(1) IRA and KEOGH  accounts are generally  offered  throughout  all terms stated
    above with balances of $45.0 million and $1.4 million, respectively.

                                       26
<PAGE>

         The  following  tables  sets forth the  change in dollar  amount in the
various types of savings accounts offered between the dates indicated:

<TABLE>
<CAPTION>
                                 Balance    Percent                     Balance     Percent
                                   at          of            Incr.         at          of        Incr.
                                12/31/97    Deposits        (Decr.)     12/31/96     Deposits    (Decr.)
                               -------------------------------------------------------------------------

<S>                            <C>            <C>            <C>        <C>           <C>      <C>
Non-interest-bearing demand
  accounts                     $ 24,715       4.49%          6,088      $ 18,627      3.63%    $   (905)
NOW accounts                     69,862      12.69           2,786        67,076     13.06        3,978
Passbooks                        30,221       5.49            (600)       30,821      6.00          (54)
Money market deposit
  accounts                       78,832      14.31           9,318        69,514     13.53           93
Time deposits which mature:
  Within 12 months              260,772      47.35           6,975       253,797     49.40       13,557
  Within 12-36 months            58,794      10.67          17,590        41,204      8.02       (1,510)
  Beyond 36 months               27,512       5.00          (5,158)       32,670      6.36         (379)
                               --------     ------        --------      --------    ------     --------
    Total                      $550,708     100.00%       $ 36,999      $513,709    100.00%    $ 14,780
                               ========     ======        ========      ========    ======     ========
</TABLE>

<TABLE>
<CAPTION>
                                 Balance    Percent                 Balance    Percent
                                   at         of         Incr.        at           of
                                 9/30/96    Deposits     (Decr.)    9/30/95    Deposits
                               --------------------------------------------------------
                                              (Dollars in Thousands)
<S>                              <C>           <C>      <C>         <C>           <C>
Non-interest-bearing demand
   accounts                      $  19,532     3.91%    $  4,688    $ 14,844      3.39%
NOW accounts                        63,098    12.65         (763)     63,861     14.60
Passbooks                           30,875     6.19        1,174      29,701      6.79
Money market deposit
   accounts                         69,421    13.91       (6,299)     75,720     17.32
Time deposits which mature:
  Within 12 months                 240,240    48.15       46,740     193,500     44.24
  Within 12-36 months               42,714     8.56       10,290      32,424      7.41
  Beyond 36 months                  33,049     6.63        5,723      27,326      6.25
                                  --------   ------     --------    --------    ------
    Total                         $498,929   100.00%    $ 61,553    $437,376    100.00%
                                  ========   ======     ========    ========    ======
</TABLE>

                                                       27
<PAGE>

         The following table sets forth the  certificates of deposit  classified
by rates as of the dates indicated.

                           AT DECEMBER 31,        AT SEPTEMBER 30,
                         -----------------------------------------
                             1997       1996       1996       1995
                             ----       ----       ----       ----
Rate                                  (IN THOUSANDS)

3.00% or less            $  1,436   $  1,035   $  1,600   $    930
3.01 - 3.99%                   11        598        903      5,257
4.00 - 4.99%               35,699     51,484     80,831     55,583
5.00 - 5.99%              262,029    232,313    193,281    108,608
6.00 - 6.99%               39,186     33,568     29,571     70,456
7.00 - 7.99%                8,717      8,673      9,817     12,416
                         --------   --------   --------   --------
                         $347,078   $327,671   $316,003   $253,250
                         ========   ========   ========   ========


         The   following   table  sets  forth  the  amount  and   maturities  of
certificates of deposit at December 31, 1997.

<TABLE>
<CAPTION>
                                                                    AMOUNT DUE
                                   ----------------------------------------------------------------------------
                                     LESS THAN      1-2        2-3        3-4      4-5       AFTER 5
                                     ONE YEAR      YEARS      YEARS      YEARS    YEARS       YEARS      TOTAL
                                     -------       -----      -----      -----    -----       -----      -----

RATE                                                            (IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>
3.00% or less                        $     25   $     38   $      2   $     30   $    114   $  1,227   $  1,436
3.01 - 3.99%                               --         --         11         --         --         --         11
4.00 - 4.99%                           34,693      1,006         --         --         --         --     35,699
5.00 - 5.99%                          219,566     21,680     10,841      3,096      6,846         --    262,029
6.00 - 6.99%                            6,488      7,860      8,639      8,094      8,105         --     39,186
7.00 - 7.99%                               --        378      8,339         --         --         --      8,717
                                     --------   --------   --------   --------   --------   --------   --------
                                     $260,772   $ 30,962   $ 27,832   $ 11,220   $ 15,065   $  1,227   $347,078
                                     ========   ========   ========   ========   ========   ========   ========
</TABLE>

         The following table indicates the amount of negotiable  certificates of
deposit of $100,000 or more by time remaining  until maturity as of December 31,
1997.

                                                              CERTIFICATES
                                                               OF DEPOSIT
                                                               OF $100,000
                  REMAINING MATURITY                            OR MORE
                  ------------------                       ------------------
                                                             (IN THOUSANDS)

                  Three months or less                           $16,919
                  Three through six months                        13,460
                  Six through twelve months                       10,491
                  Over twelve months                              14,188
                                                                 -------
                   Total                                         $55,058
                                                                 =======

         Deposits are used to fund loan originations, the purchase of securities
and for general  business  purposes.  The deposit  growth in fiscal year 1997 of
$37.0  million  reflected  the use of odd-term and  promotional  certificate  of
deposit products,  the opening of three new branch offices, as well as increased
retail deposits generated by aggressive, competitive pricing of such products in
the market area.

                                       28
<PAGE>

         The  following  table  sets  forth  the  net  changes  in  the  deposit
activities for the periods indicated:

<TABLE>
<CAPTION>
                                                    THREE MONTHS
                                       YEAR ENDED       ENDED             YEARS ENDED
                                       DECEMBER 31,   DECEMBER 31,       SEPTEMBER 30,
                                      -----------------------------------------------------
                                          1997           1996        1996            1995
                                          ----           ----        ----            ----
                                                          (IN THOUSANDS)
<S>                                   <C>           <C>           <C>           <C>
Deposits                              $ 2,433,375   $   554,294   $ 2,158,898   $ 1,952,009
Withdrawals                             2,416,860       549,264     2,114,903     1,988,577
                                      -----------   -----------   -----------   -----------
Net increase (decrease) before
 interest credited                         16,515         5,030        43,995       (36,568)
Interest credited                          20,484         9,750        17,558        13,965
                                      -----------   -----------   -----------   -----------
Net increase (decrease) in deposits   $    36,999   $    14,780   $    61,553   $   (22,603)
                                      ===========   ===========   ===========   ===========
</TABLE>

         BORROWINGS.  Savings  deposits  are the  primary  source  of funds  for
lending and investment activities and for general business purposes. If the need
arises,  advances from the FHLB may be used to supplement the supply of lendable
funds  and to meet  deposit  withdrawal  requirements.  Advances  from  the FHLB
typically  are  collateralized  by the  Association's  stock  in the  FHLB and a
blanket floating lien on the  Association's  one- to four-family  first mortgage
loans.  At December 31, 1997,  $57.3 million of FHLB  advances were  outstanding
with a weighted average interest rate of 6.25%.

         The FHLB functions as a central  reserve bank providing  credit for the
Association and other member savings institutions and financial institutions. As
a member,  the  Association  is required to own capital stock in the FHLB and is
authorized  to apply for  advances on the  security of such stock and certain of
its  home  mortgages  and  other  assets   (principally,   securities  that  are
obligations of, or guaranteed by, the United States) provided certain  standards
related to creditworthiness have been met. Advances are made pursuant to several
different  programs.  Each credit program has its own interest rate and range of
maturities.  Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the institution's  creditworthiness.  Although advances may
be used on a short-term basis for cash management  needs, FHLB advances have not
been,  nor are they expected to be, a significant  long-term  funding source for
the Association,  although the Association  periodically utilizes its ability to
access advances in order to take advantage of investment opportunities which may
arise.

         On September  30,  1983,  the  Association  sold two of its branches to
another financial institution. Under terms of the sale, the Association issued a
10.94%,  30-year term  mortgage-backed bond (the "Bond") for approximately $41.6
million.  The Bond  issue  has a stated  interest  rate  which was less than the
market rate  (assumed to have been 17.53 %) for  similar  debt at the  effective
date of the sale.  Accordingly,  a discount  was  recorded  on the Bond which is
being accreted on the interest  method of accounting  over the life of the Bond.
The Bond bears an interest rate that is adjustable semi-annually on each April 1
and October 1 to reflect changes in the average of the United States 10-year and
30-year  long-term bond rates. At December 31, 1997, the outstanding  balance of
the Bond was $16.3 million with a rate of 10.49%. For further information on the
Bond, see Note 15 to the Notes to the Consolidated  Financial  Statements in the
Annual Report attached hereto as Exhibit 13.

         On October 24,  1994,  in  connection  with the  Association's  Plan of
Reorganization  into a mutual holding  company,  the Association  established an
Employee  Stock  Ownership  Plan ("ESOP") for all eligible  employees.  The ESOP
purchase of 190,388  shares of common stock in the common  market is funded by a
loan currently held by an unaffliated financial  institution.  The loan is being
repaid from the  Association's  contributions to the ESOP over a period of up to
seven years and had an outstanding balance of $1.4 million at December 31, 1997.
The loan bears  interest at a monthly  average of the Federal Funds high and low
rate plus 2.35%,  which was 9.60% at December 31, 1997.  Subsequent  to December
31, 1997,  Bankshares  loaned sufficient funds to the ESOP to permit the ESOP to
repay  the loan to the  unaffiliated  lender.  The terms of the loan to the ESOP
from  Bankshares  are  substantially  identical  to those  of the loan  from the
unaffiliated lender,  however, the interest rate used will be the New York prime
rate.  The  Association  may, in any plan year,  make  additional  discretionary
contributions  for the benefit of plan  participants in either cash or shares of
Common Stock,  which may be acquired through the purchase of outstanding  shares
in the market or from  individual  shareholders,  upon the original  issuance of
additional  shares by the Association or upon the sale of treasury shares by the
Association.  Such  purchases,  if made,  would  be  funded  through  additional
borrowings by the ESOP or additional  contributions  from the  Association.  The
timing,  amount and manner of future  contributions to the ESOP will be affected
by various factors,  including prevailing

                                       29
<PAGE>

regulatory  policies,  the  requirements  of applicable laws and regulations and
market  conditions.  For  further  information,  see Note 14 to the Notes to the
Consolidated  Financial  Statements  in the Annual  Report,  attached  hereto as
Exhibit 13.

         The  following  table  sets  forth  the  source,  balance,  and rate of
borrowings  for the year ended  December  31,  1997,  for the three months ended
December 31, 1996, and for the years September 30, 1996, and 1995.


                                 DURING THE    DURING THE
                                   YEAR        THREE MONTHS    DURING THE
                                  ENDED          ENDED         YEAR ENDED
                                 DECEMBER 31,  DECEMBER 31,    SEPTEMBER 30,
                                 ----------------------------------------------
                                     1997        1996       1996         1995
                                     ----        ----       ----         ----
                                              (DOLLARS IN THOUSANDS)

FHLB advances:
 Maximum month-end balance        $57,341    $36,350       $36,350    $18,679
 Balance at end of period          57,341     34,763        36,350     18,200
 Average balance (1)               42,952     35,657        22,110      3,846
Weighted average interest rate
during the period                    6.38%      6.72%         6.36%     10.80%
Weighted average interest rate
at end of period                     6.25%      6.69%         6.70%      6.86%

Mortgage-backed bond:
 Maximum month-end balance        $17,312    $18,204       $18,660    $19,618
 Balance at end of period          16,333     17,230        17,454     18,344
 Average balance (1)               16,888     17,428        18,033     19,030
Weighted average interest rate
during the period                   10.94%     11.17%        10.41%     11.72%
Weighted average interest
rate at end of period               10.49%     11.19%        10.52%     11.65%

ESOP loan:
 Maximum month-end balance        $ 1,817    $ 1,966       $ 2,409    $ 2,776
 Balance at end of period           1,424      1,915         2,114      2,557
 Average balance (1)                1,681      1,978         2,273      2,257
Weighted average interest during
the period                           7.85%      8.72%         7.98%      8.83%
Weighted average interest rate
at end of period                     9.60%      7.76%         7.77%      8.20%
-------------------------------------------------------------
            (1) Computed on the basis of  month-end balances.

SUBSIDIARY ACTIVITIES

         The Association  currently has one active subsidiary.  ComFed, Inc. was
formed in February  1971 for the purpose of owning and  operating  an  insurance
agency, Community Insurance Agency, which sells property and casualty insurance.
ComFed,  Inc. also receives income and incurs related  expenses from the sale of
third  party  mutual  funds and  annuities.  Such third party  mutual  funds and
annuities  include  products  widely  marketed to the investing  public and have
investment advisors that are not affiliated with ComFed, Inc. For the year ended
December 31, 1997, ComFed,  Inc. reported net income of $35,000. At December 31,
1997, the Association had an equity investment in ComFed, Inc. of $73,000.

         Under the Financial Institutions Reform,  Recovery, and Enforcement Act
of 1989  ("FIRREA"),  SAIF-insured  institutions are required to provide 30 days
advance notice to the OTS and FDIC before establishing or acquiring a subsidiary
or conducting a new activity in a subsidiary.  The insured institution must also
provide the FDIC and the OTS such  information  as may be required by applicable
regulations  and must  conduct  the  activity in  accordance  with the rules and
orders of the OTS.

                                       30
<PAGE>
         In addition to other  enforcement and supervision  powers,  the OTS may
determine after notice and opportunity for a hearing that the continuation of an
institution's ownership of or relation to a subsidiary (i) constitutes a serious
risk to the  safety,  soundness  or  stability  of the  institution;  or (ii) is
inconsistent   with  the  purposes  of  FIRREA.   Upon  the  making  of  such  a
determination,  the OTS may order the  institution  to divest the  subsidiary or
take other actions.

CONTINGENCIES

         The  Association has completed its  investigation  of a possible former
employee  defalcation which may have occurred for several years. The Association
maintains insurance to cover possible defalcation losses with a claim deductible
of $200,000. A liability for the amount of the deductible was established during
the year ended  September  30, 1996.  The  Association  notified  its  insurance
company of the potential claim and the insurance company acknowledged  coverage.
The insurance  company has completed its due diligence related to the claim. The
Association   and  insurance   company  are  currently   negotiating  the  final
settlement.  Management  does not believe  that the claim will have any material
effect on its financial position or results of its operations.

REGULATION

         As a federally chartered SAIF-insured savings and loan association, the
Association is subject to examination,  supervision and extensive  regulation by
the OTS and the FDIC. The  Association is a member of and owns stock in the FHLB
of Atlanta,  which is one of the twelve  regional banks in the Federal Home Loan
Bank  System.  This  regulation  and  supervision  establishes  a  comprehensive
framework  of  activities  in which an  institution  can engage and is  intended
primarily for the protection of the insurance fund and depositors.

         The Association also is subject to regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board")  governing  reserves
to be maintained  against  deposits and certain other  matters.  Bankshares  and
ComFed are also subject to supervision and regulation by the OTS.

         The OTS regularly examines the Association and prepares reports for the
consideration of the  Association's  Board of Directors on any deficiencies that
they may  find in the  Association's  operations.  The FDIC  also  examines  the
Association  in its role as the  administrator  of the SAIF.  The  Association's
relationship  with its  depositors  and  borrowers  also is regulated to a great
extent  by both  federal  and  state  laws  especially  in such  matters  as the
ownership  of savings  accounts  and the form and  content of the  Association's
mortgage documents. Any change in such regulation,  whether by the FDIC, OTS, or
Congress, could have a material adverse impact on Bankshares and the Association
and their operations.

INDUSTRY RECAPITALIZATION OF SAIF

         The  deposits  of  savings  and  loans,  such as the  Association,  are
presently  insured by the SAIF. SAIF and the Bank Insurance Fund ("BIF") are the
two insurance funds  administered by the FDIC. On August 8, 1995, in recognition
of BIF  achieving  its  mandated  reserve  ratio,  the FDIC  revised the premium
schedule  for BIF members to provide a new range of .04% to .31% of deposits (as
compared to the then existing range of .23% to .31% of deposits for BIF and SAIF
insured  institutions).  Subsequent  revisions in such schedule resulted in most
BIF-insured  institutions paying the statutory annual minimum premium of $2,000.
As a result,  well capitalized and healthy BIF members paid significantly  lower
premiums  than  SAIF-insured  institutions.  Without a  substantial  increase in
premium  rates,  or the imposition of special  assessments or other  significant
developments, such as a merger of SAIF and BIF, it was not anticipated that SAIF
would be  adequately  recapitalized  until 2002. As a result of the disparity in
BIF  and  SAIF  premium  rates,  SAIF  members  were  placed  at  a  significant
competitive  disadvantage  in relation to BIF members with respect to pricing of
loans and deposits and the ability to lower their operating costs.

         On September 30, 1996 Congress passed,  and the President  signed,  the
Deposit  Insurance  Funds  Act of 1996  (the  "DIF")  which  mandated  that  all
institutions  which have  deposits  are  insured by SAIF were  required to pay a
one-time  special  assessment  of 65.7  basis  points on  SAIF-insured  deposits
(subject to adjustment  for certain types of banks with SAIF deposits) that were
held at March 31,1995 payable by November 27, 1996 to recapitalize the SAIF. The
assessment  increased the SAIF's reserve ratio to a comparable  level to that of
the BIF at 1.25% of total  insured  deposits.  The  Association's  share of this
special  assessment  totaled $2.8 million and is reflected in the 1996 operating
results.  The FDIC, in connection with the  recapitalization,  also lowered SAIF
premiums from $0.23 per $100 to $0.065 per $100 of insured deposits beginning in
January 1997.

                                       31
<PAGE>
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991

         On  December  19,  1991,  the  Federal  Deposit  Insurance  Corporation
Improvement Act of 1991 ("FDICIA")  became law. FDICIA  primarily  addresses the
recapitalization of the FDIC, which insures the deposits of commercial banks and
savings and loan associations.  In addition,  FDICIA established a number of new
mandatory supervisory measures for savings associations and banks.

         STANDARDS FOR SAFETY AND  SOUNDNESS.  FDICIA  requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions  and  depository  institution  holding  companies  relating to: (i)
internal   controls,   information   systems  and  audit   systems;   (ii)  loan
documentation;  (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset  growth;  and (vi)  compensation,  fees  and  benefits.  The  compensation
standards  would  prohibit   employment   contracts,   compensation  or  benefit
arrangements,  stock  option  plans,  fee  arrangements  or  other  compensatory
arrangements that provide excessive  compensation,  fees or benefits which could
lead to material  financial loss. In addition,  the federal  banking  regulatory
agencies  are  required to prescribe by  regulation  standards  specifying:  (i)
maximum classified assets to capital ratios; (ii) minimum earnings sufficient to
absorb losses without  impairing  capital;  and (iii) to the extent feasible,  a
minimum  ratio of market  value to book  value  for  publicly  traded  shares of
depository  institutions and depository  institution holding companies.  In July
1995,  the federal  banking  agencies,  including the OTS and the FDIC,  adopted
final rules regarding implementation of these standards.

         FINANCIAL MANAGEMENT REQUIREMENTS. Pursuant to FDICIA, in May 1993, the
FDIC  adopted  rules  establishing   annual  independent  audits  and  financial
reporting requirements for all depository  institutions with assets of more than
$500 million.  The rules also establish new  requirements  for the  composition,
duties,  and  authority of such  institutions'  audit  committees  and boards of
directors,  effective in fiscal years beginning after September 30, 1993.  Among
other things, all depository  institutions with assets in excess of $500 million
are required to prepare and make available to the public annual reports on their
financial  condition  and  management,   including  statements  of  management's
responsibility  under  regulations  relating  to safety  and  soundness,  and an
assessment of the  institution's  compliance  with internal  controls,  laws and
regulations.  The institution's  independent  auditors are required to attest to
these management assessments.  Each such institution also is required to have an
audit committee  composed of independent  directors.  Audit  committees of large
institutions (institutions with assets exceeding $3.0 billion) must: (i) include
members with banking or related financial management  experience;  (ii) have the
ability  to engage  their own  independent  legal  counsel;  and (iii)  must not
include as members any large customers (as defined) of the institution.

         PROMPT CORRECTIVE  ACTION  REGULATION.  FDICIA  establishes a system of
prompt   corrective   action  to  resolve  the   problems  of   undercapitalized
institutions.  Under this system,  which became  effective on December 19, 1992,
the OTS and the other banking  regulators  established  five capital  categories
("well-capitalized,"      "adequately     capitalized,"      "undercapitalized,"
"significantly  undercapitalized" and "critically undercapitalized") and to take
certain  mandatory  supervisory  actions  (and  are  authorized  to  take  other
discretionary   actions)   with   respect   to   institutions   in   the   three
undercapitalized  categories, the severity of which will depend upon the capital
category in which the  institution  is placed.  Generally,  FDICIA  requires the
requisite  banking  regulator  to  appoint  a  receiver  or  conservator  for an
institution that is critically undercapitalized.

         Under  the  OTS  rule   implementing  the  prompt   corrective   action
provisions, a savings institution that: (i) has a total risk-based capital ratio
of 10.0% or greater, a Tier I (core) risk-based capital ratio of 6.0% or greater
and a leverage ratio of 5.0% or greater;  and (ii) is not subject to any written
agreement, order, capital directive or prompt corrective action directive issued
by the OTS,  is  deemed  to be  well-capitalized.  An  institution  with a total
risk-based  capital ratio of 8.0% or greater,  a Tier I risk-based capital ratio
of 4.0% or greater and a leverage ratio of 4.0% or greater,  is considered to be
adequately  capitalized.  A  savings  institution  that  has a total  risk-based
capital ratio of less than 8.0%, a Tier I risk-based  capital ratio of less than
4.0%,  or a  leverage  ratio  that  is  less  than  4.0  % is  considered  to be
undercapitalized.  A savings  institution  that has a total  risk-based  capital
ratio of less than 6.0%, a Tier I risk-based  capital ratio of less than 3.0% or
a leverage  ratio  that is less than 3.0%,  is  considered  to be  significantly
undercapitalized.  A savings  institution  that has a tangible equity capital to
assets   ratio  equal  to  or  less  than  2.0%  is  deemed  to  be   critically
undercapitalized.  For purposes of the  regulation,  the term "tangible  equity"
includes  core  capital  elements  counted as Tier I capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus),  minus all intangible assets except
certain purchased mortgage servicing rights and qualifying supervisory goodwill.
At December 31, 1997, the Association was in the "well capitalized" category.

                                       32
<PAGE>

         FDICIA authorizes the appropriate federal banking agency,  after notice
and an  opportunity  for a  hearing,  to  treat a  well-capitalized,  adequately
capitalized or  undercapitalized  insured depository  institution as if it had a
lower capital  classification  if it is in an unsafe or unsound  condition or is
engaging  in an unsafe or unsound  practice.  Thus,  an  adequately  capitalized
institution   can  be  subjected  to  the   restrictions   on   undercapitalized
institutions (provided that a capital restoration plan cannot be required of the
institution)  described  below  and  an  undercapitalized   institution  can  be
subjected  to the  restrictions  applicable  to  significantly  undercapitalized
institutions.

         OTHER DEPOSIT INSURANCE REFORMS. FDICIA amended the FDI Act to prohibit
insured  depository  institutions that are not  well-capitalized  from accepting
brokered  deposits  unless a waiver  has been  obtained  from the FDIC.  Deposit
brokers are required to register with the FDIC.

         The FDIC is required to  establish a risk-based  assessment  system for
deposit  insurance to become  effective no later than January 1, 1993.  The FDIC
established a  transactional  risk-based  insurance  assessment  system which is
effective  for the  semi-annual  assessment  period  beginning  January 1, 1993.
Furthermore,   the  FDIC  has  proposed  a  risk-based  system  to  replace  the
transitional  system and is in the process of adopting  final  regulations  with
respect to this matter. FDICIA also authorizes the FDIC to privately reinsure up
to 10% of its risk loss with respect to an  institution  and base its assessment
on the cost of such reinsurance.

FEDERAL REGULATIONS

         REGULATORY CAPITAL. The OTS capital requirements consist of a "tangible
capital requirement," a "leverage capital requirement" and a "risk-based capital
requirement."

         Under the tangible  capital  requirement,  a savings  association  must
maintain  tangible capital in an amount equal to at least 1.5% of adjusted total
assets.  Tangible capital is defined as core capital less all intangible  assets
(including supervisory goodwill),  plus a specified amount of purchased mortgage
servicing rights.

         Under the leverage capital requirement adopted by the OTS, associations
maintain  "capital" in an amount equal to at least 3% of adjusted  total assets.
Core  capital is  defined as common  stockholders'  equity  (including  retained
earnings),  non-cumulative  perpetual preferred stock, and minority interests in
the equity  accounts  of  consolidated  subsidiaries,  plus  purchased  mortgage
servicing  rights  valued  at the  lower  of 90% of fair  market  value,  90% of
original cost or the current  amortized book value as determined under generally
accepted accounting principles ("GAAP"), and "qualifying  supervisory goodwill,"
less  non-qualifying  intangible assets. At December 31, 1997, the Association's
ratio of core capital to total adjusted assets was 9.8%.

         Under the risk-based capital  requirement,  a savings  association must
maintain  total  capital  (which is defined as core capital  plus  supplementary
capital) equal to at least 8.0% of risk-weighted  assets. A savings  association
must  calculate  its   risk-weighted   assets  by  multiplying  each  asset  and
off-balance sheet item by various risk factors, which range from 0% for cash and
securities  issued by the United  States  Government or its agencies to 100% for
repossessed  assets or loans  more than 90 days  past  due.  Qualifying  one- to
four-family   residential   real  estate  loans  and   qualifying   multi-family
residential  real estate loans (not more than 90 days  delinquent  and having an
80% or lower loan-to-value ratio), which at December 31, 1997, represented 72.2%
of the total loans receivable, are weighted at a 50% risk factor.  Supplementary
capital may include,  among other items,  cumulative  perpetual preferred stock,
perpetual   subordinated   debt,   mandatory   convertible   subordinated  debt,
intermediate-term  preferred stock, and general  allowances for loan losses. The
allowance  for loan losses  includable  in  supplementary  capital is limited to
1.25% of risk-weighted assets.  Supplementary capital is limited to 100% of core
capital.

         Certain  exclusions from capital and assets are required to be made for
the  purpose of  calculating  total  capital,  in  addition  to the  adjustments
required  for  calculating  core  capital.  Such  exclusions  consist  of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
non-residential  construction loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital  instruments.  However, in calculating
regulatory  capital,  institutions  can add back  unrealized  losses  and deduct
unrealized  gains  net of  taxes,  on debt  securities  reported  as a  separate
component of GAAP capital.

         The OTS regulations establish special  capitalization  requirements for
savings  associations  that own  service  corporations  and other  subsidiaries,
including  subsidiary  savings  associations.  According  to these  regulations,
certain  subsidiaries  are  consolidated  for  capital  purposes  and others are
excluded from assets and capital. In determining

                                       33
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compliance with the capital  requirements,  all  subsidiaries  engaged solely in
activities  permissible for national banks,  engaged solely in  mortgage-banking
activities,  or  engaged  in certain  other  activities  solely as agent for its
customers  are  "includable"  subsidiaries  that are  consolidated  for  capital
purposes in proportion to the  association's  level of ownership,  including the
assets of  includable  subsidiaries  in which  the  association  has a  minority
interest  that  is  not   consolidated   for  GAAP   purposes.   For  excludable
subsidiaries,  the debt and equity investments in such subsidiaries are deducted
from assets and capital. At December 31, 1997 the Association had no investments
subject to a deduction from tangible capital.

         The OTS amended its risk-based capital  requirements that would require
institutions  with an "above  normal"  level of  interest  rate risk to maintain
additional  capital.  A savings  association  is considered to have a " normal "
level of interest  rate risk if the decline in the market value of its portfolio
equity  after an  immediate  200 basis  point  increase  or  decrease  in market
interest rates (whichever leads to the greater decline) is less than two percent
of the  current  estimated  market  value of its  assets.  The  market  value of
portfolio  equity is defined as the net present  value of expected  cash inflows
and outflows from an  association's  assets,  liabilities and off-balance  sheet
items. The amount of additional capital that an institution with an above normal
interest rate risk is required to maintain (the "interest rate risk  component")
equals  one-half of the dollar  amount by which its measured  interest rate risk
exceeds the normal level of interest rate risk. The interest rate risk component
is in  addition  to the capital  otherwise  required  to satisfy the  risk-based
capital requirement.  Implementation of this component has been postponed by the
OTS. The final rule was to be effective as of January 1, 1994,  subject  however
to a three  quarter lag time in  implementation.  However,  the OTS has recently
indicated  that no savings  association  will be required to deduct  capital for
interest rate risk until further notice.

         The OTS and the  FDIC  generally  are  authorized  to take  enforcement
action   against  a  savings   association   that  fails  to  meet  its  capital
requirements,  which action may include  restrictions  on operations and banking
activities,  the imposition of a capital directive,  a  cease-and-desist  order,
civil money penalties or harsher  measures such as the appointment of a receiver
or conservator or a forced merger into another institution.  In addition,  under
current  regulatory  policy,  an  association  that  fails to meet  its  capital
requirements is prohibited from paying any dividends.

         FEDERAL HOME LOAN BANK SYSTEM.  The Association is a member of the FHLB
of Atlanta,  which is one of the 12 regional FHLBs. As a member of the FHLB, the
Association is required to purchase and maintain stock in the FHLB of Atlanta in
an  amount  equal  to the  greater  of 1% of its  aggregate  unpaid  residential
mortgage loans, home purchase contracts or similar  obligations at the beginning
of each year, or 1/20 (or such greater  fraction as  established by the FHLB) of
outstanding FHLB advances.  During 1996, the FHLB required all stockholders with
stock in excess of the  required  amount to redeem the excess  stock at par. The
Association's  excess was $4.5 million of which $2.0 million was redeemed during
fiscal year 1996,  with the remaining  $2.5 million  being  redeemed by the FHLB
during fiscal year 1997. During 1997, due to increases in the loan portfolio and
FHLB advances,  the Association was required to purchase an additional  $400,000
in FHLB stock,  resulting  in FHLB stock  totaling  $3.3 million at December 31,
1997. In past years,  the Association has received  dividends on its FHLB stock.
Such dividends were 7.25% for the fiscal years ended December 31, 1997 and 1996.
Certain  provisions  of  FIRREA  require  all  12  FHLBs  to  provide  financial
assistance for the resolution of troubled savings associations and to contribute
to affordable  housing  programs  through direct loans or interest  subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects. These contributions could cause rates on the FHLB advances to increase
and could affect  adversely  the level of FHLB  dividends  paid and the value of
FHLB stock in the future.

         Each FHLB serves as a reserve or central  bank for its  members  within
its assigned region.  It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors  of the  FHLB.  These  policies  and  procedures  are  subject  to the
regulation and oversight of the Federal Housing Finance Board (the "FHFB").

         QUALIFIED THRIFT LENDER TEST. The Qualified Thrift Lender ("QTL") test,
requires that a savings  association  maintain either at least 65 % of its total
tangible  assets in "qualified  thrift  investments" on an average basis in nine
out of  every  twelve  months  in  accordance  with the  Home  Owners'  Loan Act
("HOLA"),  or meet the  requirements to qualify as a domestic  building and loan
association  as  defined  in the  Internal  Revenue  Code of  1986,  as  amended
("Code"). The Association is a domestic building and loan association as defined
in the Code.

         For  purposes of the test under HOLA,  portfolio  assets are defined as
the total assets of the savings  association minus goodwill and other intangible
assets,  the value of property  used by the savings  association  to conduct its
business, and liquid assets not to exceed 20% of the savings association's total
assets.

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<PAGE>

         Under the QTL statutory and  regulatory  provisions,  all forms of home
mortgages,  home improvement loans, home equity loans, and loans on the security
of other  residential real estate and mobile homes as well as consumer loans and
small business loans are "qualified thrift  investments," as are shares of stock
of an FHLB,  investments or deposits in other insured  institutions,  securities
issued by the FNMA,  FHLMC,  GNMA,  or the RTC Financing  Corporation  and other
mortgage-related  securities.   Investments  in  nonsubsidiary  corporations  or
partnerships  whose  activities  include  servicing  mortgages  or  real  estate
development are also considered  qualified  thrift  investments in proportion to
the  amount  of  primary  revenue  such  entities  derive  from  housing-related
activities. Also included in qualified thrift investments are mortgage servicing
rights,  whether such rights are purchased by the insured institution or created
when the institution sells loans and retains the right to service such loans.

         A savings  institution that fails to become or maintain its status as a
qualified thrift lender must either become a bank (other than a savings and loan
association) or be subject to certain  restrictions.  A savings institution that
fails  to meet  the QTL  test and  does  not  convert  to a bank  will  be:  (1)
prohibited  from making any investment or engaging in activities  that would not
be permissible for national  banks;  (2) prohibited  from  establishing  any new
branch  office where a national bank located in the savings  institution's  home
state would not be able to establish a branch  office;  (3) ineligible to obtain
new advances  from any FHLB;  and (4) subject to  limitations  on the payment of
dividends  comparable  to the  statutory and  regulatory  dividend  restrictions
applicable  to national  banks.  Also,  beginning  three years after the date on
which the  savings  institution  ceases to be a  qualified  thrift  lender,  the
savings  institution  would be  prohibited  from  retaining  any  investment  or
engaging  in any  activity  not  permissible  for a  national  bank and would be
required to repay any  outstanding  advances to any FHLB. A savings  institution
may requalify as a qualified  thrift  lender if it thereafter  complies with the
QTL test.

         As of December 31, 1997, the Association was in compliance with the QTL
requirement  with  approximately   80.0%  of  the  Association's   assets  being
"qualified thrift investments."

         LIQUIDITY  REQUIREMENTS.  Federally  insured savings  associations  are
required  to  maintain  an average  daily  balance of liquid  assets  equal to a
certain  percentage  of the sum of average  daily  balances of net  withdrawable
deposit  accounts  and  borrowings  payable in one year or less.  The  liquidity
requirement  may vary from time to time (between 4.0% and 10.0%)  depending upon
economic  conditions  and  savings  flows of all  savings  associations.  At the
present time, the required liquid asset ratio is 5.0%.

         For purposes of this ratio, liquid assets include specified  short-term
assets (such as cash,  certain time deposits,  certain bankers'  acceptances and
short-term  United States Treasury  obligations),  and long-term  assets such as
United States Treasury obligations of more than one and less than five years and
federal agency  obligations with a minimum term of 18 months.  Short-term liquid
assets currently must constitute at least 1% of an  association's  average daily
balance of net withdrawable  deposit accounts and current borrowings.  Penalties
may be imposed upon  associations for violations of the liquidity  requirements.
The monthly  average  liquidity  ratio of the  Association for December 1997 was
14.2% and exceeded the then applicable requirement of 5.0%.

         INSURANCE OF ACCOUNTS AND  REGULATION  BY THE FDIC.  The  Association's
deposits  are insured up to $100,000  per insured  member (as defined by law and
regulation)  by the FDIC.  This insurance is backed by the full faith and credit
of the United States Government.  As insurer,  the FDIC is authorized to conduct
examinations of and to require  reporting by insured  associations.  It also may
prohibit  any  insured  association  from  engaging  in any  activity  the  FDIC
determines  by  regulation  or order to pose a serious  threat to the  insurance
fund. The FDIC also has the authority to initiate  enforcement  actions  against
savings  associations,  after first giving the OTS an  opportunity  to take such
action.

         Pursuant  to the  FDICIA,  the FDIC has  issued a new  regulation  that
imposes,  on a transitional  basis, a risk-based deposit insurance premium based
on the  condition of the insured  institution,  and that  increases  the average
assessment  rate paid by insured  institutions.  The  risk-based  system,  which
applies to insured members, establishes nine assessment risk classifications; an
institution  assigned  to the  highest  risk  classification  will  pay  deposit
insurance  premiums  at a rate of 0.27%  while an  institution  assigned  to the
lowest risk classification will pay a premium of 0.00%.

         The FDIC may terminate the deposit insurance of any insured  depository
institution if it determines,  after a hearing, that the institution has engaged
or is  engaging  in  unsafe or  unsound  practices,  is in an unsafe or  unsound
condition to continue operations or has violated any applicable law, regulation,
order, or any condition imposed by an agreement with the FDIC. The FDIC also may
suspend deposit  insurance  temporarily for any savings  association  during the
hearing process for the permanent  termination of insurance,  if the association
has no tangible capital. If insurance of accounts is terminated,

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<PAGE>

the insured  accounts at the  institution at the time of the  termination,  less
subsequent withdrawals,  shall continue to be insured for a period of six months
to two years, as determined by the FDIC.

         OTS  REGULATORY  ASSESSMENTS.  As a result of FIRREA,  the OTS will not
receive funds from  contributions  of the FHLBs and the insurance funds in order
to fund its operations.  The OTS has adopted a regulation to assess fees to fund
its operations and expenses.  These fees include:  (i)  semi-annual  assessments
based on the consolidated assets of a savings association; (ii) fees of $485 per
day, per examiner,  to cover the costs of examinations of savings  associations,
holding companies,  subsidiaries,  and their affiliates;  (iii) application fees
which apply to nearly all regulatory and  securities  applications  and filings;
and (iv) fees to recover the costs of OTS  seminars and  publications.  Based on
its  assets  at  December  31,  1997,  the  Association  is  required  to  pay a
semi-annual assessment of approximately $76,000.

         LIMITATIONS   ON  CAPITAL   DISTRIBUTIONS.   OTS   regulations   impose
limitations  on all  capital  distributions  by  savings  institutions.  Capital
distributions  include  cash  dividends,  payments to  repurchase  or  otherwise
acquire the savings  association's  shares,  payments to stockholders of another
institution  in a  cash-out  merger,  and other  distributions  charged  against
capital.  The rule establishes three tiers of institutions.  An institution that
exceeds all fully  phased-in  capital  requirements  before and after a proposed
capital  distribution ("Tier 1 Association") may, after prior notice but without
the approval of the OTS, make capital distributions during a calendar year up to
the greater of (i) 100% of its net income to date during the calendar  year plus
the amount that would reduce by one-half its surplus capital at the beginning of
the  calendar  year  or  (ii)  75%  of its  net  income  over  the  most  recent
four-quarter  period. Any additional capital  distributions  would require prior
regulatory  approval.  An institution that meets its minimum  regulatory capital
requirement  before and after its capital  distribution  ("Tier 2  Association")
may,  after  prior  notice but without the  approval  of the OTS,  make  capital
distributions  of up to 75% of its net income over the most recent four  quarter
period. A savings  institution that does not meet its current regulatory capital
requirement  before or after payment of a proposed  capital  distribution or has
been notified that it needs more than normal  supervision ("Tier 3 Association")
may not make any capital distributions without the prior approval of the OTS. As
of December 31, 1997, the Association was a Tier 1 Association.

         LOAN-TO-VALUE LIMITATIONS. As required by FDICIA, the banking agencies,
including the OTS, recently adopted  regulations that require insured depository
institutions to adopt and maintain a written policy that establishes appropriate
limits and  standards  for  extensions of credit that are secured by liens on or
interests in real estate, or are made for the purpose of constructing  buildings
or  other  improvements.   In  addition,   the  regulations   establish  maximum
loan-to-value  limits for certain categories of loans. A loan-to-value limit has
not  been   established   for  permanent   mortgage  or  home  equity  loans  on
owner-occupied,  one- to four-family residential property. The regulations state
that for my such loan with a  loan-to-value  ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit enhancement in the
form  of  either  mortgage  insurance  or  readily  marketable  collateral.  The
Association's  current internal  loan-to-value  limits are less than the maximum
established by the regulation.

HOLDING COMPANY REGULATION

         Upon completion of the Reorganization,  Bankshares became a savings and
loan holding company within the meaning of Section 10(o) of the HOLA.  Under the
terms of the OTS approval of the  Reorganization,  Bankshares was limited to the
powers permitted to mutual holding companies.  As such, Bankshares is registered
with and is  subject  to OTS  examination  and  supervision  as well as  certain
reporting requirements. In addition, the operations of Bankshares are subject to
the  regulations  promulgated  by the OTS  from  time  to  time.  As an  insured
subsidiary of a savings and loan holding company,  the Association is subject to
certain   restrictions  in  dealing  with  Bankshares  and  with  other  persons
affiliated  with  Bankshares,  and  continues to be subject to  examination  and
supervision by the OTS and the FDIC.

         The HOLA  prohibits a savings  and loan  holding  company,  directly or
indirectly,  from:  (i)  acquiring  control  (as  defined)  of  another  insured
institution  (or holding  company  thereof)  without  prior OTS  approval;  (ii)
acquiring more than 5% of the voting shares of another  insured  institution (or
holding  company  thereof  which  is  not  a  subsidiary),  subject  to  certain
exceptions; (iii) acquiring through merger, consolidation or purchase of assets,
another  savings  association or holding  company  thereof,  or acquiring all or
substantially all of the assets of such institution (or holding company thereof)
without prior OTS approval;  or (iv) acquiring control of a savings  association
not  insured  by the SAIF  (except  through a merger  with and into the  holding
company's savings association subsidiary that is approved by the OTS). A savings
and loan  holding  company  may  acquire  up to 15% of the  voting  shares of an
undercapitalized savings association. A savings and loan holding company may not
acquire  as a separate  subsidiary  an insured  institution  that has  principal
offices  outside of the state  where the  principal  offices  of its  subsidiary
institution  is  located,   except:   (i)  in  the  case  of  certain  emergency
acquisitions  approved by the FDIC; (ii) if the holding  company  controlled (as
defined) such insured institution as of March

                                       36
<PAGE>

5, 1987; or (iii) if the laws of the state in which the insured  institution  to
be acquired is located specifically authorize a savings association chartered by
that state to be acquired by a savings association  chartered by the state where
the  acquiring  savings  association  or  savings  and loan  holding  company is
located,  or  by  a  holding  company  that  controls  such  a  state  chartered
association.  No director or officer of a savings  and loan  holding  company or
person  owning or  controlling  more than 25% of such holding  company's  voting
shares may,  except with the prior approval of the OTS,  acquire  control of any
SAIF-insured  institution that is not a subsidiary of such holding  company.  If
the OTS approves such an  acquisition,  any holding  company  controlled by such
officer,  director or person shall be subject to the activities limitations that
apply to multiple savings and loan holding companies, unless certain supervisory
exceptions apply.

         RESTRICTIONS  APPLICABLE  TO  MUTUAL  HOLDING  COMPANIES.  Pursuant  to
Section  10(o) of the HOLA and the  Regulations,  a mutual  holding  company may
engage in the following activities:

             (i)        Investing in the stock of a savings association.

            (ii)        Acquiring  a mutual  association  through  the merger of
                        such association into a savings  association  subsidiary
                        of  such   holding   company  or  an   interim   savings
                        association subsidiary of such holding company.

           (iii)        Merging with or acquiring  another holding company,  one
                        of whose subsidiaries is a savings association.

            (iv)        Investing in a corporation the capital stock of which is
                        available  for purchase by a savings  association  under
                        federal  law or under  the law of any  state  where  the
                        subsidiary  savings  association or  associations  share
                        their home offices.

             (v)        Furnishing  or  performing  management  services  for  a
                        savings association subsidiary of such company.

            (vi)        Holding,   managing,  or  liquidating  assets  owned  or
                        acquired from a savings  association  subsidiary of such
                        company.

           (vii)        Holding or  managing  properties  used or  occupied by a
                        savings association subsidiary of such company.

          (viii)        Acting as trustee under deed of trust.

            (ix)        Any other  activity (A) that the Federal  Reserve Board,
                        by regulation, has determined to be permissible for bank
                        holding companies under section 4(c) of the Bank Holding
                        Company Act of 1956, unless the Director, by regulation,
                        prohibits  or limits any such  activity  for savings and
                        loan holding companies; or (B) in which multiple savings
                        and  loan  holding   companies   were   authorized   (by
                        regulation) to directly engage on March 5, 1987.

             (x)        Purchasing,  holding,  or disposing of stock acquired in
                        connection  with  a  qualified  stock  issuance  if  the
                        purchase of such stock by such  savings and loan holding
                        company is approved by the Director of the OTS.

         If a mutual  holding  company  acquires or merges with another  holding
company, the holding company acquired or the holding company resulting from such
merger or acquisition may only invest in assets and engage in activities  listed
in  (i)  through  (x)  above,  and  has a  period  of two  years  to  cease  any
non-conforming activities and divest of any nonconforming investments.

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<PAGE>

TRANSACTIONS WITH AFFILIATES

         Section  11 of HOLA  provides  that  transactions  between  an  insured
subsidiary of a holding company and an affiliate  thereof will be subject to the
restrictions  that apply to  transactions  between banks that are members of the
Federal Reserve System and their affiliates  pursuant to Sections 23A and 23B of
the Federal Reserve Act ("FRA"). Generally,  Sections 23A and 23B: (i) limit the
extent  to which a  financial  institution  or its  subsidiaries  may  engage in
"covered  transactions"  with an  "affiliate,"  to an amount equal to 10% of the
institution's  capital and surplus, and limit all "covered  transactions" in the
aggregate  with all  affiliates  to an amount  equal to 20% of such  capital and
surplus;  and (ii) require that all transactions  with an affiliate,  whether or
not "covered transactions," be on terms substantially,  the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions.  Management  believes
that the Association is in compliance with the  requirements of Sections 23A and
23B.  In  addition  to the  restrictions  that apply to  financial  institutions
generally under Sections 23A and 23B,  Section 11 of the HOLA places three other
restrictions on savings associations, including those that are part of a holding
company  organization.  First,  savings  associations  may not  make any loan or
extension  of credit to an  affiliate  unless that  affiliate is engaged only in
activities permissible for bank holding companies.  Second, savings associations
may not  purchase  or  invest  in  affiliate  securities  except  for those of a
subsidiary.  Finally, the Director is granted authority to impose more stringent
restrictions when justifiable for reasons of safety and soundness.

         Extensions  of  credit  by  the  Association  to  executive   officers,
directors,  and principal  shareholders  of Bankshares and related  interests of
such  persons  are subject to Sections 22 (g) and 22(h) of the FRA and Subpart A
of the Federal Reserve  Board's  Regulation 0. These rules prohibit loans to any
such individual  where the aggregate amount exceeds an amount equal to 15% of an
institution's   unimpaired  capital  and  surplus  plus  an  additional  10%  of
unimpaired  capital and  surplus in the case of loans that are fully  secured by
readily marketable  collateral,  and/or when the aggregate amount outstanding to
all such individuals exceeds the institution's unimpaired capital and unimpaired
surplus.  The rules identify  limited  circumstances  in which an institution is
permitted to extend credit to executive  officers.  Management believes that the
Association  is in  compliance  with  Sections  22(g)  and  22(h) of the FRA and
Subpart A of the Federal Reserve Board's Regulation 0.

THE FEDERAL RESERVE SYSTEM

         Federal Reserve Board regulations  require all depository  institutions
to maintain  non-interest  earning reserves against their  transaction  accounts
(primarily NOW and Super NOW checking  accounts) and non-personal time deposits.
At December 31, 1997,  the  Association  was in  compliance  with these  reserve
requirements.  The balances maintained to meet the reserve  requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity  requirements that
may be imposed by the OTS.

         Savings  associations  are authorized to borrow from a Federal  Reserve
Bank "discount  window," but Federal Reserve Board  regulations  require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from a Federal Reserve Bank.

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<PAGE>

                           FEDERAL AND STATE TAXATION
FEDERAL TAXATION

         For  federal  income  tax  purposes,  Bankshares  files a  consolidated
federal  income tax return with the  Association  on a fiscal year basis.  Since
ComFed owns less than 80% of the outstanding Common Stock of Bankshares,  ComFed
is  not  permitted  to  file a  consolidated  federal  income  tax  return  with
Bankshares.   Because  ComFed  has  nominal  assets  other  than  the  stock  of
Bankshares, it has no material federal income tax liability.

         On May 13,  1997,  permission  was received  from the Internal  Revenue
Service  ("IRS")  to change  the  accounting  period,  for  federal  income  tax
purposes, from September 30th to December 31st, effective December 31, 1996.

         Bankshares,  ComFed  and the  Association  are  subject to the rules of
federal income taxation  generally  applicable to  corporations  under the Code.
Most  corporations  are not permitted to make  deductible  additions to bad debt
reserves  under the Code.  However,  savings and loan  associations  and savings
associations such as the Association, which meet certain tests prescribed by the
Code may benefit from favorable  provisions  regarding  deductions  from taxable
income for annual  additions to their bad debt reserve.  For purposes of the bad
debt reserve  deduction,  loans are  separated  into  "qualifying  real property
loans," which  generally are loans  secured by interests in real  property,  and
non-qualifying  loans, which are all other loans. The bad debt reserve deduction
with respect to  non-qualifying  loans must be based on actual loss  experience.
The amount of the bad debt reserve  deduction  with respect to  qualifying  real
property  loans  may be based  upon  actual  loss  experience  (the  "experience
method") or a percentage of taxable  income  determined  without  regard to such
deduction (the "percentage of taxable income method").

         Bankshares  has elected to use the method that  results in the greatest
deduction  for federal  income tax  purposes,  which  historically  has been the
percentage of taxable income method. The amount of the bad debt deduction that a
thrift  institution  may claim with  respect to additions to its reserve for bad
debts is subject to certain limitations.  First, the full deduction is available
only if at least 60% of the institution's  assets fall within certain designated
categories.  Second,  under the percentage of taxable income method the bad debt
deduction  attributable  to "qualifying  real property  loans" cannot exceed the
greater of (i) the amount  deductible  under the  experience  method or (ii) the
amount which,  when added to the bad debt  deduction for  non-qualifying  loans,
equals the amount by which 12% of the sum of the total  deposits and the advance
payments by borrowers  for taxes and  insurance at the end of the taxable  years
exceeds the sum of the surplus, undivided profits, and reserves at the beginning
of the taxable year. Third, the amount of the bad debt deduction attributable to
qualifying  real property  loans computed using the percentage of taxable income
method is permitted only to the extent that the institution's reserve for losses
on  qualifying  real  property  loans at the close of the taxable  year does not
exceed 6% of such loans outstanding at such time.

         During 1996  legislation  was passed that  repealed  section 593 of the
Internal  Revenue  Code for taxable  years  beginning  after  December 31, 1995.
Section 593 allowed thrift institutions,  including the Association,  to use the
percentage-of-taxable  income bad debt accounting method, if more favorable than
the specific  charge-off  method,  for federal  income tax purposes.  The excess
reserves (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method)  accumulated  post-1987 are required to
be recaptured  ratably over a six year period  beginning in 1996.  There were no
excess  reserves as of  December  31,  1996 and the  recapture  had no effect on
Bankshares' statement of operations as taxes were provided for in prior years in
accordance with SFAS 109,  "Accounting for Income Taxes" ("SFAS 109").  The same
legislation forgave the tax liability on pre-1987  accumulated bad debt reserves
which would have penalized any thrift  choosing to adopt a bank charter  because
the tax would have become due and payable.  The unrecorded  potential  liability
that was forgiven  approximated  $4.3  million.  See Note 12 to the Notes to the
Consolidated  Financial  Statements  in the Annual  Report,  attached  hereto as
Exhibit 13.

         Deferred  income taxes arise from the  recognition  of certain items of
income and expense for tax purposes in years  different from those in which they
are  recognized in the financial  statements.  In February 1992, the FASB issued
SFAS  109.  SFAS 109 was  implemented  by  Bankshares  retroactively,  effective
October 1, 1993.  The  liability  method  accounts for deferred  income taxes by
applying  the enacted  statutory  rates in effect at the  balance  sheet date to
differences  between  the book cost and the tax cost of assets and  liabilities.
The  resulting  deferred  tax  liabilities  and assets are  adjusted  to reflect
changes in tax laws.

         Bankshares is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds  Bankshares'  regular  income tax for the year.
The  alternative  minimum  tax will be imposed at the rate of 20% of a specially
computed tax base.  Included in this base will be a number of preference  items,
including the following: (i) 100% of the

                                       39

<PAGE>
excess of a thrift  institution's  bad debt deduction over the amount that would
have been  allowable  on the basis of actual  experience;  and (ii)  interest on
certain tax-exempt bonds issued after August 7, 1986. In addition.  for purposes
of the new  alternative  minimum tax, the amount of alternative  minimum taxable
income  that  may be  offset  by  net  operating  losses  is  limited  to 90% of
alternative minimum taxable income.

Bankshares  was  audited by IRS for the tax year 1990  during  fiscal year 1994.
Based upon the audit, Bankshares received a "no-change" letter from the IRS. See
Notes 1 and 12 to the  Notes to the  Consolidated  Financial  Statements  in the
Annual Report, attached hereto as exhibit 13.

STATE TAXATION

         Under the laws of the State of Florida,  Bankshares  and its subsidiary
are  generally  subject to 5.5% tax on net  income.  The tax may be reduced by a
credit of up to 65% of the tax due as a result of certain  intangible taxes. The
tax is deductible by Bankshares in determining its federal income tax liability.
Bankshares has not been audited by the State of Florida.

PERSONNEL

         As of December  31,  1997,  Bankshares  had no  compensated  employees.
Officers  of  Bankshares  are  employees  of the  Association  and  receive  all
compensation from the Association.  Because Bankshares' only activity is holding
the stock of the  Association,  employees  of the  Association  perform  limited
duties for Bankshares.

         As of December 31,  1997,  the  Association  had 247  full-time  and 62
part-time  employees.  None of such  employees  is  represented  by a collective
bargaining  group. The Association  believes its relationship with its employees
to be good.

                                       40
<PAGE>

ITEM 2.  PROPERTIES
===============================================================================

         Bankshares owns no property  independently  from the  Association.  The
Association  conducts its business through its home office located in North Palm
Beach,  Florida,  and 21 full  service  branch  offices,  located in Palm Beach,
Martin,  St. Lucie and Indian River  Counties.  The  following  table sets forth
certain  information  concerning  the home office and each branch  office of the
Association  at  December  31,  1997.  The  aggregate  net  book  value  of  the
Association's premises and equipment was $20.2 million at December 31, 1997. For
additional information regarding the Association's properties, see Note 8 to the
Notes to the Consolidated  Financial  Statements in the Annual Report,  attached
hereto as Exhibit 13.

<TABLE>
<CAPTION>

LOCATION                                         ADDRESS                            OPENING DATE       OWNED/LEASE
--------                                         -------                            ------------       -----------
<S>                            <C>                                                    <C>                 <C>
Home Office                    660 U.S. Highway l, North Palm Beach,                  02/19/88            Owned
                               Florida
BRANCH OFFICES

Riviera Beach                  2600 Broadway, Riviera Beach, Florida                  08/19/55            Owned

Tequesta                       101 N. U.S. Highway 1, Tequesta, Florida               07/19/59            Owned

Port Salerno                   5545 SE Federal Highway, Port Salerno,                 11/05/74            Owned
                               Florida

Palm Beach Gardens             9600 N. Alternate AlA,  Palm Beach                     12/19/74            Owned
                               Gardens, Florida

Jensen Beach                   1170 NE Jensen Beach Boulevard,                        01/28/75            Owned
                               Jensen Beach, Florida

Singer Island                  1100 East Blue Heron Boulevard,                        04/01/75            Owned
                               Riviera Beach, Florida

Gallery Square                 389 Tequesta Drive,  Tequesta, Florida                 01/30/76            Lease (1)

Ft. Pierce                     1050 Virginia Avenue, Ft. Pierce, Florida              07/23/85            Owned

Port St. Lucie                 1540 SE Floresta Drive,  Port St. Lucie,               07/30/84            Lease (2)
                               Florida

Martin Downs                   3102 Martin Downs Boulevard,                           07/24/85            Lease (3)
                               Palm City, Florida

Chasewood                      6350 Indiantown Road., Suite 1,                        02/26/86            Lease (4)
                               Jupiter, Florida

Bluffs                         3950 U.S. Highway 1, Jupiter, Florida                  09/18/86            Lease (5)

Village Commons                971 Village Boulevard, West Palm Beach,                06/26/89            Lease (6)
                               Florida

Hobe Sound                     11400 SE Federal Highway, Hobe Sound,                  02/05/90            Owned
                               Florida
</TABLE>

                                       41
<PAGE>

<TABLE>
<CAPTION>

LOCATION                                         ADDRESS                            OPENING DATE        OWNED/LEASE
--------                                         -------                            ------------        -----------
<S>                            <C>                                                    <C>                 <C>

St. Lucie West                 1549 St. Lucie West Boulevard,                         06/06/94            Owned
                               Port St. Lucie, Florida

Jupiter                        520 Toney Penna Drive, Jupiter, Florida                07/10/95            Owned

PGA                            PGA Shoppes on the Green, 7102 Fairway                 04/22/96            Lease (7)
                               Drive, Palm Beach Gardens, Florida

Vero Beach                     6030 20th Street, Vero Beach, Florida                  07/21/97            Lease (8)

Hutchinson Island              4417 NE Ocean Boulevard, Jensen Beach,                 01/21/97            Lease (9)
                               Florida

Lake Worth                     5702 Lake Worth Road, Suite # 3,                       10/20/97            Lease (10)
                               Lake Worth, Florida

</TABLE>

(1)   This lease expires on December 31, 2000 and provides for a renewal  option
      which runs through December 31, 2015.
(2)   This lease  expires on January 31, 1999 and provides for a renewal  option
      which runs through January 31, 2004.
(3)   This lease  expires on August 8, 1998 and  provides  for a renewal  option
      which runs through August 8, 2004. (4)
(4)   This lease  expires on January 31, 1998 and provides for a renewal  option
      which runs through January 31, 2006.
(5)   This lease  expires on October 31, 2001 and provides for a renewal  option
      which runs through October 31, 2016.
(6)   This lease  expires on June 25,  2004 and  provides  for a renewal  option
      which runs through June 25, 2014.
(7)   This lease expires on December 31, 2000 and provides for a renewal  option
      which runs through  December 31, 2005.  There is an option to purchase the
      land which is exerciseable through June 30, 1999.
(8)   This lease expires on July 1, 2002 and provides for a renewal option which
      runs  through  July 1,  2017.  There is an  option  to  purchase  the land
      exerciseable on July 1, 2002.
(9)   This lease  expires on June 30,  1999 and  provides  for a renewal  option
      which runs through December 31, 2002.
(10)  This lease  expires  on March 1, 2000 and  provides  for a renewal  option
      which runs through August 1, 2002.

                                       42

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS
===============================================================================

         There  are  various   claims  and  lawsuits  in  which   Bankshares  is
periodically involved incident to its business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.  See Note
13 in the Notes to the Consolidated  Financial  Statements in the Annual Report,
attached hereto as Exhibit 13.

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

         The Association held a Special Meeting of Shareholders on September 24,
1997 to vote on the proposal to adopt the Agreement  and Plan of  Reorganization
pursuant to which the Association  reorganized  into a two-tier  holding company
structure. Of the 5,090,120 shares eligible to vote, holders of 4,153,712 shares
or 81.6%, including 2,620,144 shares owned by ComFed, were represented in person
or by proxy at the meeting.

         The votes cast produced the following result:

                                 Number of Votes
-------------------------------------------------------------------------------
       FOR                            AGAINST                      ABSTAIN
       ---                            -------                      -------
     4,119,753                         13,056                       20,903


                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER  MATTERS
===============================================================================

         Bankshares had 5,094,920 issued and outstanding  shares at December 31,
1997. For information  concerning the market for Bankshares'  common stock,  see
the section captioned "Corporate Information" in Bankshares' Annual Report which
is incorporated herein by reference.


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
===============================================================================

         The  "Financial  Highlights"  section of  Bankshares'  Annual Report is
incorporated herein by reference.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
===============================================================================

         The  "Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations"  section of  Bankshares'  Annual Report is  incorporated
herein by reference.


ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
===============================================================================

         Information  with respect to quantitative  and qualitative  disclosures
about  market  risk are  incorporated  by  reference  to the  section  captioned
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - " Market Risk  Analysis",  "Market  Value of Portfolio  Equity" and
"GAP Table" in the Annual Report.


ITEM 8.  FINANCIAL STATEMENTS
===============================================================================

         The  financial  statements  identified  in  Item  14(a)(1)  hereof  are
incorporated by reference to Bankshares' Annual Report.

                                       43
<PAGE>

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE
===============================================================================

         Information   required  by  this  section  is  incorporated  herein  by
reference from Bankshares'  definitive Proxy Statement for the Annual Meeting of
Shareholders  dated  March 20, 1998 (the "Proxy  Statement"),  specifically  the
section captioned "Ratification of Appointment of Auditors".


                                    PART III


ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
===============================================================================

         Information  concerning  Directors and Executive Officers of Bankshares
is incorporated  herein by reference from the Proxy Statement,  specifically the
section captioned "Information with Respect to Nominees for Directors, Directors
Whose Term Continues and Executive Officers".


ITEM 11. EXECUTIVE COMPENSATION
===============================================================================

         Information concerning executive compensation is incorporated herein by
reference  from  the  Proxy  Statement,   specifically  the  section   captioned
"Management Compensation".


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
===============================================================================

         Information  concerning security ownership of certain beneficial owners
and management is  incorporated  herein by reference  from the Proxy  Statement,
specifically  the section  captioned  "Beneficial  Ownership  of Common Stock by
Certain Beneficial Owners and Management".


ITEM 13. CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS
===============================================================================

         Information  concerning  relationships and transactions is incorporated
herein by reference from the Proxy Statement, specifically the section captioned
"Indebtedness of Management and Affiliated Transactions."


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
===============================================================================

         The exhibits and financial  statement schedules filed as a part of this
Form 10-K are as follows:

         (a)(1)     Financial Statements
                    --------------------
                      Independent Auditors' Report
                      Consolidated Statements of Financial Condition,
                         December 31, 1997, 1996 and September 30, 1996
                      Consolidated Statements of Operations,
                         Year Ended December 31, 1997, Three Months Ended
                          December 1996, Years Ended September 30, 1996, 1995
                          and 1994.
                      Consolidated Statements of Shareholders' Equity,
                         Year Ended December 31, 1997, Three Months Ended
                          December 31, 1996, Years Ended  September 30, 1996,
                          1995 and 1994.
                      Consolidated Statements of Cash Flows,
                         Year Ended December 31, 1997, Three Months Ended
                          December 31, 1996, Years Ended September 30, 1996,
                          1995 and 1994,
                      Notes to Consolidated Financial Statements.

         (a)(2)     Financial Statement Schedules
                    -----------------------------

                                       44
<PAGE>

                    No  financial  statement  schedules  are filed  because  the
                    required information is not applicable or is included in the
                    consolidated financial statements or related notes.

         (a)(3)   Exhibits
                  --------

                  *3.1   Federal Stock Charter of  Bankshares  (Incorporated  by
                         reference to Exhibit 3.1 of  Bankshares  Form 8-K filed
                         October 1, 1997 ("Form 8-K").

                  *3.2   Bylaws of  Bankshares  (Incorporated  by  reference  to
                         Exhibit 3.2 of the Form 8-K).

                  *4     Common Stock Certificate of Bankshares (Incorporated by
                         reference to Exhibit 4.0 of the Form 8-K).

                  *10.1  1995 Stock  Option Plan  (Incorporated  by reference to
                         Exhibit 10.1 of Bankshares'  Registration  Statement on
                         Form S-8 (file No. 333-38971) filed October 29, 1997).

                   10.2  1995  Recognition  and Retention Plan for Employees and
                         Outside Directors.

                   11.0  Statement of Computation of Earnings.

                   13    1997 Annual Report to Shareholders.

                   21    Subsidiaries  of the  Registrant - Reference is made to
                         Item 1 "Business" for the required information.

                   23    Consent of Deloitte & Touche LLP.

                   27    Financial Data Schedule.

         (b)      Reports on Form 8-K:
                  --------------------

             (1)  Form 8-K Current  Report  filed  October 1, 1997.  "Changes in
                  Control of Registrant".

             (2)  Form  8-K  Current  Report  filed  October  30,  1997.  "Other
                  Events".

             (3)  Form 8-K Current  Report filed  November 6, 1997.  "Changes in
                  Registrant's Certifying Accountant".

         (c)      The exhibits listed under (a)(3) above are filed herewith.

         (d)      Not applicable.

         ------------------------
*                 Previously filed.

                                       45
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

                       COMMUNITY SAVINGS BANKSHARES, INC.


Date: March 26, 1998               By: /s/ JAMES B. PITTARD, JR.
                                       -----------------------------------------
                                           James B. Pittard, Jr.
                                           President and Chief Executive Officer

         Pursuant to the  requirements of the Securities  Exchange of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


By:/s/ James B. Pittard, Jr.             By: /s/ Larry J. Baker, CPA
   ------------------------------------      ----------------------------------
       James B. Pittard, Jr., President          Larry J. Baker, CPA, Senior
         and Chief Executive Officer               Vice president, Chief
       (Principal Executive Officer)               Financial Officer and
                                                   Treasurer
                                                  (Principal Financial and
                                                   Accounting Officer)

Date:     March 26, 1998                 Date:     March 26, 1998



By: /s/ Frederick A. Teed                By: /s/ Forest C. Beaty
    -----------------------------------     -----------------------------------
        Frederick A. Teed, Chairman              Forest C. Beaty, Jr., Director
          the Board
Date:     March 26, 1998                 Date:     March 26, 1998



By:  /s/ Robert F. Cromwell              By: /s/ Karl D. Griffin
     ----------------------------------      ----------------------------------
         Robert F. Cromwell, Director            Karl D. Griffin, Director

Date:     March 26, 1998                 Date:     March 26, 1998



By:   /s/ Harold I. Stevenson
      ---------------------------------
          Harold I. Stevenson, CPA,
            Director


Date:     March 26, 1998

                                       46