U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB

[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

                  For the fiscal year ended December 31, 1997.

                        Commission file number 000-23847

                           SHORE FINANCIAL CORPORATION

                      Virginia                     54-1873994
              (State or other jurisdiction of   (I.R.S Employer
             incorporation or organization)   Identification No.)

                     25253 Lankford Highway, Onley, VA    23418
               (Address of principal executive offices) (Zip Code)

         Issuer's telephone number, including area code: (757) 787-1335

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

        Securities registered pursuant to Section 12(g) of the Exchange Act:

                         Common Stock ($0.33 par value)
                                (Title of Class)

Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ]

State Issuer's Revenues for its most recent fiscal year $7,855,000.

On March 25, 1998, the aggregate market value of the 1,490,051 shares of Common
Stock of the Registrant outstanding on such date, which excludes shares held by
affiliates of the Registrant, was approximately $18.6 million. This figure is
based on the closing price of $12.50 per share of the Registrant's Common Stock
on March 25, 1998.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 25, 1998:

                      Class                 Outstanding at March 25, 1998
          Common Stock, $0.33 par value               [1,804,812]

     DOCUMENTS INCORPORATED BY REFERENCE
(1)  Portions of Registrant's 1998 Proxy Statement are incorporated by reference
     in Part III hereof.

Transitional Small Business Disclosure Format       Yes   [ ]      No   [X]

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                                     PART I

     This Form 10-KSB contains certain forward-looking statements. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors.

Item 1.
                                    BUSINESS

General

     Shore Financial Corporation (the "Company") is a Virginia corporation
organized in September 1997 by Shore Bank (the "Bank") for the purpose of
becoming a unitary holding company of the Bank. The only significant assets of
the Company is the capital stock of the Bank. The business and management of the
Company consists of the business and management of the Bank. The Bank is a
federally chartered savings bank which began business in 1961 and is
headquartered on the Eastern Shore in Onley, Virginia. The Bank operates six
banking offices on the Eastern Shore of Virginia and Maryland, including the
counties of Accomack and Northampton in Virginia and the Salisbury/Wicomico
County area in Maryland. At December 31, 1997, the Bank had assets of $108.1
million, deposits of $95.2 million and stockholders' equity of $12.3 million.

     On August 20, 1997, the Bank completed a public offering of 328,435 shares
of its common stock. The public offering price was $8.25 per share, resulting in
approximately $2.37 million of net new capital (after offering expenses) to the
Bank. In conjunction with the public offering, the Bank completed a subscription
rights offering on August 7, 1997 to its existing shareholders of record on June
30, 1997. Common shares totaling 102,815 were sold at $7.50 per share, resulting
in approximately $736,000 in net additional capital to the Bank. Management
believes that the additional capital raised through the public and rights
offerings will enable the Bank to take advantage of opportunities to expand its
franchise through the acquisition of bank branches or deposits, or both, and
with the establishment of new bank offices in markets on the Delmarva Peninsula
that are presently being under-served by regional bank holding companies.

     During November 1997, the Bank received shareholder approval to consummate
the reorganization of the Bank into the holding company form of organization
(the "Reorganization"). In February and March 1998, the Bank received all
necessary federal and state regulatory approvals for the Reorganization and, in
connection therewith, the subsequent conversion of the Bank from a federally
chartered savings bank to a Virginia chartered, Federal Reserve member,
commercial bank. On March 16, 1998, the Bank effected the Reorganization, and
management anticipates the charter conversion will be effective after the close
of business on March 31, 1998. On December 29, 1997, in anticipation of
completing the Reorganization, the Bank changed its year end from fiscal June 30
to calendar December 31 for financial and income tax reporting purposes. See
"Supervision and Regulation - Holding Company Formation and Charter Conversion."

     During November 1997, the Bank opened a second branch in Salisbury,
Maryland. The Bank's sixth branch is located in the financial district of
downtown Salisbury, which is the economic hub of the Delmarva Peninsula. The
branch has an automated teller machine (ATM) and safe deposit boxes


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and management believes that its location will attract more commercial and
consumer customers and will complement the existing Salisbury location.

     The Bank offers a wide variety of community oriented banking services,
including individual and commercial checking accounts, savings and time
deposits, residential mortgages, commercial and consumer loans, credit card
services and safe deposit boxes. Although residential first mortgage loans
continue to represent the bulk of the Bank's loan portfolio, in recent years the
Bank has focused on diversifying its loan portfolio by building its commercial
and consumer loan portfolios. While real estate mortgage loans represented 66.3%
of the loan portfolio at December 31, 1997, down from 82.3% at 1994 year-end,
commercial loans, including commercial real estate loans, have grown during this
same period from 8.05% of the portfolio at 1994 year-end to 19.6% at December
31, 1997. Consumer loans, including home equity lines of credit, have also
increased during this period from 8.8% to 12.8% of total loans.

     The Bank is a member of the Federal Home Loan Bank ("FHLB") and its
deposits are insured by the SAIF (Savings Association Insurance Fund) of the
Federal Deposit Insurance Corporation ("FDIC"). The Office of Thrift Supervision
("OTS") currently serves as the primary regulator for the Bank. Upon
consummation of the Bank's charter conversion, expected to be after the close of
business on March 31, 1998, Virginia's Bureau of Financial Institutions of the
State Corporation Commission ("SCC"), and the Board of Governors of the Federal
Reserve will become the Bank's primary regulators.

Market Area

     The Bank's Main Office and three additional banking offices are located in
Northampton and Accomack Counties, which comprise the Eastern Shore of Virginia.
Poultry and seafood processing are major industries in the area, with Perdue
Farms, Inc. and Tyson Foods, Inc. being two of the area's largest employers.
Agriculture and tourism are also integral parts of the area's economy.

     In 1995, the Bank expanded into the Salisbury/Wicomico County area of
Maryland, which is approximately 60 miles north of the Bank's Main Office in
Onley, Virginia. The Salisbury/Wicomico County area is the economic hub of the
Delmarva Peninsula and is centrally located as a crossroads among Washington,
D.C., Norfolk, Virginia, Ocean City and Baltimore, Maryland and Dover, Delaware.
Approximately 215,000 people live within a 20-mile radius of the City of
Salisbury. The area has a diversified economy and leading employers in the area
include Perdue Farms, Inc. (poultry processing), Dresser Industries (electronic
controls), Bayliner Marine (yachts), Eaton Corp. (circuit breakers), and
Salisbury State University.

Competition

     The Bank faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
commercial banks and mortgage lenders and to a lesser extent consumer finance
companies, credit unions, and savings and loans. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of service it provides to
borrowers.

     The Bank faces substantial competition in attracting deposits from other
banks, money market and mutual funds, credit unions and other investment
vehicles. The ability of the Bank to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the

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requirements of investors as to rate of return, liquidity, risk, convenience and
other factors. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and being the
largest of only two locally-owned independent banks on the Eastern Shore of
Virginia. The Bank's deposits were relatively flat for the six months ended
December 31, 1997 and increased 9.8% and 18.8% for the years ended June 30, 1997
and 1996, respectively. This deposit growth is a reflection of pricing,
marketing and competitive products and services.

     In its market area, the Bank competes with regional commercial banks and
independent community banks with multiple offices on the Eastern Shore. These
and certain other non-bank competitors may have much greater financial
resources, diversified markets, and branch networks than the Bank and are able
to offer similar services at varying costs with higher lending limits. With
nationwide banking, the Bank also faces the prospect of additional competitors
entering its market area.

Credit Policies

     The principal risk associated with each of the categories of loans in the
Bank's portfolio is the creditworthiness of its borrowers. Within each category,
such risk is increased or decreased, depending on prevailing economic
conditions. The Bank employs extensive written policies and procedures to
enhance management of credit risk. The loan portfolio is managed under a
specifically defined credit process. This process includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for ongoing identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with the Bank's policies. The largest unsecured and secured
individual lending authority currently granted by the Bank is $50,000 and
$100,000, respectively. The President and Chief Lending Officer may approve
unsecured loans between $50,000 and $100,000 and secured loans between $100,000
and $200,000. Loan applications in excess of $200,000 secured and $100,000
unsecured are approved by the Loan Committee on a weekly basis. The Loan
Committee consists of the President and one additional director, with the
directors rotating their service on this committee on a monthly basis.

     In the normal course of business, the Bank makes various commitments and
incurs certain contingent liabilities which are disclosed but not reflected in
its annual financial statements, including commitments to extend credit. At
December 31, 1997, commitments to extend credit totaled $9.5 million.

     One- to Four-Family Residential Real Estate Lending. The Bank's primary
lending program has been the origination of loans secured by one- to four-family
residences, virtually all of which have been located in its market area. The
Bank evaluates both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. Federal law
permits the Bank to make loans in amounts of up to 100% of the appraised value
of the underlying real estate. Loans are made with a loan to value up to 90% for
conventional mortgage loans on primary residences. The Bank generally originates
mortgage loans that have an adjustable rate feature in which the rate changes
every one, three or five years. Most of these loans are tied to comparable
maturity U.S. Treasury Bills. Where loans are not indexed, they generally have a
balloon feature. There are unquantifiable risks resulting from potential
increased costs to the borrower as a result of repricing. It is possible,
therefore, that during periods of rising interest rates, the risk of defaults on
adjustable rate mortgages ("ARMs") may increase due to the upward adjustment of
interest costs to borrowers.

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     Construction Lending. The Bank makes local construction loans, primarily
residential and small commercial loans. The construction loans are secured by
the property for which the loan was obtained. At December 31, 1997, construction
and land loans outstanding were $3.9 million, or 5.2%, of gross loans. The
average life of a construction loan is less than 12 months and they reprice
daily based on the prime rate or are fixed for a 12-month period. Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans involve risks attributable to the fact that loan
funds are advanced upon the security of the home under construction, which is of
uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. To minimize the risks associated with
construction lending, the Bank limits loan amounts to 80% of appraised value, in
addition to its usual credit analysis of its borrowers. Additionally, the Bank's
officers make regular inspections of construction projects prior to disbursement
of loan funds. The Bank also obtains a first lien on the security property as
security for its construction loans.

     Commercial Real Estate Lending. The Bank also originates commercial real
estate loans. These loans are secured by various types of commercial real
estate, including multifamily residential buildings, commercial buildings and
offices. At December 31, 1997, commercial real estate loans aggregated $11.3
million or 15.3% of the Bank's gross loans. The interest rates on commercial
real estate loans is usually fixed for 1 to 3 years, with either a balloon
feature or an additional rate increase feature. Commercial real estate loans
made by the Bank generally amortize over 5 to 15 years and may have a call
provision of 3 or 5 years. The Bank's commercial real estate loans are secured
by properties in its market area.

     In its underwriting of commercial real estate, the Bank may lend, under
federal regulation, up to 100% of the security property's appraised value,
although the Bank's loan to original appraised value ratio on such properties is
80% or less in most cases. Commercial real estate lending entails significant
additional risk, compared with residential mortgage lending. Commercial real
estate loans typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Additionally, the payment experience
on loans secured by income producing properties is typically dependent on the
successful operation of a business or a real estate project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
in the economy generally. The Bank's commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and the Bank generally
requires personal guarantees or endorsements of borrowers.

     Commercial Loans. Beginning in fiscal year 1993, the Bank began to focus on
developing its commercial loan portfolio to qualified small businesses in its
market area. At December 31, 1997, commercial loans aggregated $3.2 million or
4.3% of the Bank's gross loans. Commercial business loans generally have a
higher degree of risk than residential mortgage loans, but have commensurably
higher yields. To manage these risks, the Bank generally secures appropriate
collateral and carefully monitors the financial condition of its business
borrowers. Commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow from its business and
are often secured by business assets, such as commercial real estate, accounts
receivable, equipment and inventory. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral for commercial business
loans may depreciate over time and cannot be appraised with as much precision as
residential real estate. The Bank has a credit review and monitoring system to
regularly review the cash flow and collateral of commercial borrowers.

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     Consumer Lending. The Bank is permitted to make both secured and unsecured
consumer loans reasonably incident to personal or household purposes. In
general, loans made under these investment powers may not exceed 30% of a
federally chartered thrift institution's total assets.

     The Bank offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit, home equity lines of credit,
automobile loans, deposit account loans, installment and demand loans, and
letters of credit. At December 31, 1997, the Bank had consumer loans of $9.4
million or 12.7% of gross loans. During the six months ended December 31, 1997,
the Bank increased its level of consumer loans by 6.8%. Such loans were
generally made to customers with whom the Bank had a preexisting relationship
and were generally in amounts of under $75,000. The Bank originates all of its
consumer loans in its market area and intends to continue its consumer lending
in this geographic area.

     Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as lines of
credit, or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.

Employees

     At December 31, 1997, the Bank had 37 full-time and 16 part-time employees.
The Bank considers relations with its employees to be good.


Banking Regulation

The Company

     General. The Company, as a registered savings and loan holding company
within the meaning of the Home Owners' Loan Act ("HOLA"), is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof.

     Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business

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activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test, as
discussed under "The Bank - Qualified Thrift Lender Test," then such unitary
holding company becomes subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, must register as, and become
subject to the restrictions applicable to, a bank holding company.

     Limitations on Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such 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 other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.

     In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1997, the Bank was in compliance with the above
restrictions.

     Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.

         The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the

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multiple savings and loan holding company involved controls a savings
institution which operated a home or branch office located in the state of the
institution to be acquired as of March 5, 1987; (ii) the acquirer is authorized
to acquire control of the savings institution pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act ("FDIA"); or (iii)
the statutes of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by the state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).

     FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the FRB to approve an application by a bank holding
company to acquire control of a savings institution. FIRREA also authorized a
bank holding company that controls a savings institution to merge or consolidate
the assets and liabilities of the savings institution with, or transfer assets
and liabilities to, any subsidiary bank which is a member of the Bank Insurance
Fund ("BIF") with the approval of the appropriate federal banking agency and the
FRB. As a result of these provisions, there have been a number of acquisitions
of savings institutions by bank holding companies in recent years.

The Bank

     General. As a federally chartered savings bank, the Bank's chartering
authority and primary federal regulator is the OTS. The OTS has extensive
authority over the operations of federally chartered savings institutions. As
part of this authority, such savings institutions are required to file periodic
reports with the OTS and are subject to periodic examinations by the OTS and the
FDIC. The Bank was not required to make any material changes to its operations
as a result of such examination. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Such regulation and supervision is primarily intended
for the protection of depositors.

     The OTS' enforcement authority over savings institutions includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS.

     Insurance of Accounts. The deposits of The Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.

     On September 30, 1996, the Omnibus Appropriations Act was signed into law.
The legislation authorized a one-time charge of SAIF insured institutions at a
rate of 65.7 basis points per $100.00 of March 31, 1995 deposits. As a result,
The Bank's assessment amounted to $447,000. Additional provisions of the Act
include new BIF and SAIF premiums and the merger of BIF and SAIF. The new BIF
and SAIF premiums will include a premium for repayment of the Financing
Corporation ("FICO")

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bonds plus any regular insurance assessment. Until full pro-rata FICO sharing is
in effect, the FICO premiums for BIF and SAIF will be 1.3 and 6.4 basis points,
respectively, beginning January 1, 1997. Full pro-rata FICO sharing is to begin
no later than January 1, 2000. BIF and SAIF are to be merged on January 1, 1999,
provided the bank and savings association charters are merged by that date.

     Under the current risk classification system, institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital --"well capitalized", "adequately capitalized" and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from zero basis points for well capitalized,
healthy institutions to 27 basis points for under capitalized institutions with
substantial supervisory concerns.

     The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, 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. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals,
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.

     Regulatory Capital Requirements. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. Pursuant to the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"),
the OTS has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
institutions on a case-by-case basis.

     Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions must
maintain "tangible" capital equal to at least 1.5% of adjusted total assets,
"core" capital equal to at least 3.0% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least
8.0% of "risk-weighted" assets. For purposes of the regulation, core capital
generally consists of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with only a limited exception
for purchased mortgage servicing rights. At December 31, 1997, the Bank had
$45,000 of goodwill or other intangible assets which are deducted in computing
its tangible capital. Both core and tangible capital are further reduced by an
amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At December 31, 1997, the Bank had no such subsidiaries.

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     In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent one
to four-family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by the FNMA or the FHLMC, qualifying
residential bridge loans made directly for the construction of one to
four-family residences and qualifying multifamily residential loans; and (iv)
100% for all other loans and investments, including consumer loans, commercial
loans, and one to four family residential real estate loans more than 90 days
delinquent, and for repossessed assets.

     In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a three quarter "lag" time between the reporting date
of the data used to calculate an institution's interest rate risk and the
effective date of each quarter's interest rate risk component. However, in
October 1994 the Director of the OTS indicated that it would waive the capital
deductions for banks with a greater than "normal" risk until the OTS publishes
an appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67
which established (i) an appeals process to handle "requests for adjustments" to
the interest rate risk component and (ii) a process by which "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to determine their interest rate risk component. The Director of the OTS
indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will
continue to delay the implementation of the capital deduction for interest rate
risk pending the testing of the appeals process set forth in Thrift Bulletin 67.

     At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 11.10%,
11.10% and 21.69%, respectively.

                                       10


<PAGE>



     Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.

     Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At December 31, 1997, the Bank's liquidity ratio was
approximately 27.00%.

     Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.

     Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. See "- Regulatory Capital Requirements."

     In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. At December 31, 1997, the Bank was a
Tier 1 institution for purposes of this regulation.

     Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Act"), a savings institution
can comply with the QTL test by either meeting the QTL test set forth in the
Home Owners Loan Act, as amended ("HOLA"), and implementing regulations or
qualifying as a domestic building and loan association as defined in Section
7701(a)(19) of the Act. A savings institution that does not comply with the QTL
test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly,

                                       11

<PAGE>


unless such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the savings institution ceases to meet the QTL
test, it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances (subject
to safety and soundness considerations).

     The QTL Test set forth in the HOLA requires that Qualified Thrift
Investments ("QTIs") represent 65% of portfolio assets. Portfolio assets are
defined as total assets less intangibles, property used by a savings bank in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTIs are residential housing related assets. The 1996 amendments
allow small business loans, credit card loans, student loans and loans for
personal, family and household purposes to be included without limitation as
qualified investments. At December 31, 1997, approximately 76.9% of the Bank's
assets were invested in QTIs, which was in excess of the percentage required to
qualify the Bank under the QTL Test in effect at that time.

     While the Bank does not believe that the QTL test will affect its
commercial and consumer lending activities in the short term, after a conversion
to a commercial bank charter, such regulations would not apply to the Bank. As a
commercial bank, no comparable commercial or consumer lending restrictions would
apply to the Bank.

     Branching by Federal Savings Institutions. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if, among
other things, the law of the state where the branch would be located would
permit the branch to be established if the federal savings institution were
chartered by the state in which its home office is located. Furthermore, the OTS
will evaluate a branching applicant's regulatory capital and record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.

     Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. As of
December 31, 1997, the Bank was in compliance with applicable requirements.
However, because required reserves must be maintained in the form of vault cash
or a noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.

     Holding Company Formation and Charter Conversion. As discussed previously,
the Bank formed a holding company for the Bank and management anticipates that
the Bank will convert from a federally chartered savings bank to a Virginia
chartered, Federal Reserve member commercial bank after the close of business on
March 31, 1998. As a bank incorporated under Virginia law, the Bank will be
subject to regulation, supervision and examination by the Virginia State
Corporation Commission (Bureau of Financial Institutions). The holding company
will be subject to the regulatory oversight of the State Corporation Commission
and the provisions of the Virginia Stock Corporation Act, and, upon consummation
of the bank conversion, will be subject to supervision and regulation by

                                       12

<PAGE>


the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and
will report to the Securities and Exchange Commission (SEC).

Federal Taxation

     General. The Company and the Bank are subject to the applicable corporate
tax provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as certain additional provisions of the Code that apply to thrifts and
other types of financial institutions. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.

     Under the applicable statutes of limitation, the Bank's federal income tax
returns for 1993 through 1996 are open to examination by the Internal Revenue
Service (the "Service"). The Bank is unaware, however, of any current or pending
Service examinations of the Bank's returns for any of those open years.

     Historically, the Bank has reported its income and expenses on the accrual
method of accounting and filed its federal income tax returns on a June 30
fiscal year basis. Effective December 29, 1997, the Bank changed its year end to
a calendar year basis for financial and income tax reporting purposes. The
Company's fiscal year end will also be December 31.

     Bad Debt Reserves. Prior to 1996, savings institutions such as the Bank
that met certain definitional tests primarily relating to their assets and the
nature of their business ("Qualifying Thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions
could, within specified formula limits, be deducted by the savings institutions
in arriving at their taxable income. For purposes of the bad debt deduction,
loans were separated into "qualifying real property loans" (which are, in
general, loans secured by interests in improved real property or real property
which is to be improved out of the proceeds of the loan) and "nonqualifying
loans" (which are all other loans).

     During 1996, new tax legislation was enacted that repealed the reserve
method of accounting for bad debts of qualified thrift institutions and, for
years after 1995, the Bank will only be eligible to claim tax deductions for bad
debts under the rules for banks. Because the Bank is a small thrift institution
(one with an adjusted basis of assets of less than $500 million) it is permitted
to compute its bad debt deduction using the experience method in lieu of
deducting bad debts only as they occur. Additionally, the new legislation
requires a thrift institution to recapture over a six-year period its reserve as
of December 31, 1995, to the extent it exceeds its reserve balance at December
31, 1987. As a result of such legislation, the Bank will recapture into taxable
income approximately $497,000 ratably over six fiscal. The income will be
includable over the third through eighth years following the fiscal year ending
June 30, 1997, since the Bank meets the residential loan requirement exception
in the legislation. See Note 2 of the notes to the financial statements.

     Charter Conversion. The Bank's retained earnings at December 31, 1997
included approximately $783,000 representing that portion of the Bank's reserve
for bad debts for which no provision for income taxes has been made. Under
legislation passed in 1996, this amount is not subject to federal income taxes
upon completion of the bank conversion. However, the Bank will be subject to the
same recapture provisions it is presently subject to as a savings association.
The Bank

                                       13

<PAGE>



plans to convert to a Virginia chartered commercial bank after the close of
business on March 31, 1998. See " Regulation - the Bank Holding Company
Formation and Charter Conversion."

     Corporate Minimum Tax. The Bank could be subject to an alternative minimum
tax ("AMT") which is imposed to the extent that it exceeds the Bank's regular
tax liability for a year. The alternative minimum tax generally will apply at a
rate of 20% to a base of regular taxable income plus certain tax preferences and
adjustments ("alternative minimum taxable income" or "AMTI"), less an exemption
amount. Currently no more than 90% of the AMTI may be offset by net operating
losses (as determined for AMTI purposes). Payment of the AMT may be used as a
credit against a portion of the regular tax liabilities in future years. The
Code provisions relating to the AMT also: (i) treat as a preference item
interest on certain tax-exempt private activity bonds issued on or after August
8, 1986; and (ii) include in AMTI (for tax years beginning after 1989) an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceed its AMTI (determined without regard to this preference and before
reduction for the alternative tax net operating losses). The Bank was not
subject to the AMT in 1996, and does not expect to be subject to AMT in the
foreseeable future.

State and Local Taxation

     The Bank, as a federally chartered savings institution, is subject to
Virginia corporate income tax. When the Bank becomes a Virginia chartered bank,
it will not be subject to the Virginia corporate income tax but will instead be
subject to Virginia's Bank Franchise Tax. Under this system, the Bank's net
capital would be subject to tax at a rate of one percent. Net capital is
composed generally of the equity accounts (common stock, additional paid-in
capital, and retained earnings) adjusted for investments in real and personal
property, certain reserves, and certain securities exempt from state taxation.
Management is currently assessing the future impact of state franchise taxes on
its prospective results of operations and financial condition, but believes the
impact will be immaterial to the Bank's financial condition and results of
operations as a whole.

     The Company is subject to Virginia corporate income taxes. The Virginia
corporate income tax is imposed at a rate of six percent on a combined net
income of a Virginia corporation and its subsidiaries as reported for federal
income tax purposes, with certain modifications.


Item 2.
                                   PROPERTIES


     The Main Office of the Bank is located at 25253 Lankford Highway, Onley,
Virginia, a two story colonial brick building built in 1988. The Bank owns the
building free of any encumbrances, but leases the land under an agreement
expiring in 2000, with four five-year renewals. The Bank operates five other
banking offices (3 in Virginia and 2 in Salisbury, Maryland), with all but the
new downtown Salisbury branch being owned free of any encumbrances. The Bank
leases the new Salisbury branch location under an agreement expiring in 2002,
with three five-year renewals.

                                       14


<PAGE>


Item 3.

                                LEGAL PROCEEDINGS

     In the ordinary course of its operations, the Company is a party to various
legal proceedings. Based upon information currently available, management
believes that such legal proceedings, in the aggregate, will not have a material
adverse effect on the business, financial condition, or results of operations of
the Company.


Item 4.
              SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On November 20, 1997, the Bank's stockholders approved the Agreement and
Plan of Reorganization, dated September 9, 1997 (the "Agreement"), by and among
the Company, the Bank and SB Interim Federal Savings Bank ("Interim"). On March
16, 1998, the Company became a unitary thrift holding company in accordance with
the Agreement.

     Pursuant to the Agreement: (1) the Company was organized in a wholly owned
subsidiary of the Bank; (2) Interim was organized as a wholly owned subsidiary
of the Company; (3) Interim merged with and into the Bank, with the Bank as the
surviving institution; and (4) upon merger, (i) the outstanding shares of common
stock, par value $0.33 per share, of the Bank became, by operation of law, on a
one-for-one basis, common stock, par value $0.33 per share, of the Company, (ii)
the common stock of Interim held by the Company was converted into common stock
of the Bank and (iii) the common stock of the Company held by the Bank was
canceled. Accordingly, the Bank became a wholly owned subsidiary of the Company
and the stockholders of the Bank became stockholders of the Company.


                                       15


<PAGE>


                                     PART II

Item 5.

          MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
                                    MATTERS

Market Information

     Effective August 20, 1997, the Bank's common stock became listed on the
Nasdaq National Market under the symbol "SHBK." Prior to that time, there was no
established public trading market for the common stock and trades in the common
stock occurred infrequently on a local basis and generally involved a relatively
small number of shares. Based on information made available to the Bank, it
believes that the selling price per share for the common stock ranged from $5.50
to $6.16 during fiscal 1996 and from $6.16 to $7.00 during fiscal 1997. All of
these amounts have been adjusted to reflect the three-for-one stock split
effected June 10, 1997, and the two-for-one stock split effected in the form of
a dividend on October 15, 1996. Such transactions may not be representative of
all transactions during the indicated periods or the actual fair market of the
common stock at the time of such transaction due to the infrequency of trades
and the limited market for the common stock.

     The following table sets forth the per share high and low sale prices for
the Bank's common stock as reported on the Nasdaq National Market for the period
indicated:

                                               Price Range
                                            High         Low

         1997
         Third Quarter                     $11.75       $ 9.13
         Fourth Quarter                    $14.75       $11.00

     At March 10, 1998, there were 1,804,812 shares of common stock outstanding
held by 888 stockholders of record.

Dividend Policy

     The Bank has not declared or paid any cash dividends during the past five
fiscal years. The Company expects that it will continue to retain earnings to
support the development and growth of its business. Accordingly, the Company
does not anticipate paying any cash dividends on its common stock in the
foreseeable future. Any future determination as to payment of cash dividends
will be at the discretion of the Company's Board of Directors and will depend on
the Company's earnings, financial condition, capital requirements and other
factors relevant to the Board of Directors.


                                       16



<PAGE>


Item 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following selected financial data for the five years ended June 30, 1997 and
the six months ended  December  31, 1997 and 1996 is derived from the  financial
statements  of the Bank,  which  have  been  audited  on an annual  basis by BDO
Seidman,  LLP,  independent  auditors for all periods through fiscal 1996 and by
Goodman and Company,  L.L.P.  for fiscal 1997 and the six months ended  December
31,  1997.  The  financial  data for the six months  ended  December 31, 1996 is
derived  from  an  unaudited  financial  statements.   The  unaudited  financial
statements  include  all  adjustments,   consisting  only  of  normal  recurring
adjustments  necessary to present  fairly the  financial  position and result of
operations  as of such date and for such  period.  The selected  financial  data
information  should be read in conjunction with the financial  statements of the
Bank included elsewhere in this document.



<TABLE>
<CAPTION>

                                             Six Months Ended
                                               December 31,                     Year Ended June 30,
                                            -------------------  ---------------------------------------------------
                                              1997      1996       1997      1996       1995      1994       1993
                                            --------- ---------  --------- ---------  --------- ---------  ---------
                                                             (Unaudited)
                                                             (In thousands, except per share data)
<S> <C>
Income Statement Data:
     Interest income                          $4,200    $3,851     $7,855    $7,068     $5,679    $4,728     $4,928
     Interest expense                          2,213     2,086      4,240     3,837      2,889     2,668      2,827
     Net interest income                       1,987     1,765      3,615     3,231      2,790     2,060      2,101
     Provision for loan losses                    66        72        244       150        187        48         72
     Noninterest income                          325       366        737       531        435       434        382
     Noninterest expense                       1,359     1,560      2,786     2,072      1,817     1,629      1,486
     Income taxes                                327       183        376       568        450       260        333
                                            --------- ---------  --------- ---------  --------- ---------  ---------
     Net income (1) (2)                         $560      $316       $946      $972       $771      $557       $592
                                            ========= =========  ========= =========  ========= =========  =========
Per Share Data:
     Net income - basic and dilutive (1) (2)   $0.33     $0.23      $0.69     $0.71      $0.57     $0.41      $0.44
     Cash dividends                             0.00      0.00       0.00      0.00       0.00      0.00       0.00
     Book value at period end                   6.83      5.75       6.24      5.47       4.79      4.23       3.82
     Tangible book value at period end          6.80      5.72       6.20      5.43       4.75      4.23       3.82
     Average shares outstanding (000's)        1,688     1,366      1,370     1,364      1,364     1,364      1,364
Balance Sheet Data (period end):
     Assets                                 $108,093  $101,778   $104,637   $94,986    $80,753   $70,934    $68,430
     Loans, net of unearned income            73,660    72,734     74,135    68,812     66,148    60,658     57,915
     Securities                               26,263    23,221     23,420    18,308      6,875     6,102      4,007
     Deposits                                 95,213    89,412     94,556    86,154     72,525    63,634     61,180
     Shareholders' equity                     12,330     7,903      8,569     7,455      6,534     5,762      5,205
Performance Ratios:
     Return on average assets (1) (2)           1.03%     0.64%      0.95%     1.07%      1.02%     0.79%      0.89%
     Return on average equity (1) (2)           9.42%     7.59%     12.00%    13.86%     12.51%    10.18%     12.08%
     Net interest margin                        3.89%     3.76%      3.78%     3.79%      3.99%     3.14%      3.17%
     Efficiency (1) (2) (3)                    58.78%    73.21%     64.02%    55.08%     56.34%    65.32%     59.85%
Asset Quality Ratios:
     Allowance for loan losses to
       period end loans                         1.05%     0.96%      1.00%     0.98%      0.84%     0.62%      0.53%
     Allowance for loan losses to
       nonaccrual loans                       204.24%   176.38%    181.46%   239.01%     76.45%    60.85%     69.23%
     Nonperforming assets to period
     end loans and foreclosed properties        1.11%     0.72%      1.38%     0.53%      1.27%     1.01%      0.80%
     Net charge-offs (recoveries) to
     average loans                              0.05%     0.06%      0.24%     0.05%      0.01%    -0.03%      0.03%
Capital and Liquidity Ratios:
     Leverage (4)                              11.41%     7.76%      8.19%     7.85%      8.09%     8.12%      7.61%
     Risk-based:
     Tier 1 capital                            20.70%    14.23%     14.56%    14.61%     14.04%    14.63%     13.50%
     Total capital                             21.69%    15.14%     15.53%    15.46%     14.81%    14.49%     14.13%
     Average loans to average deposits         78.28%    80.46%     82.05%    84.38%     93.25%    92.08%     96.25%

</TABLE>


-------------
(1) Excluding the effect of nonrecurring reorganization expenses and branch
opening costs of $61,000 and $10,000, respectively, incurred by the Bank during
the six months ended December 31, 1997, certain financial information for this
period would be as follows: net income - $631,000; net income per share - $0.37;
return on average assets - 1.16%; return on average equity - 10.62%; efficiency
- 55.71%.

(2) Excluding the effect of the one-time SAIF assessment of $286,000, net of
related taxes of $161,000, incurred by the Bank on September 30, 1996, certain
financial information for the six months ended December 31, 1996 would be as
follows: net income - $602,000; net income per share - $0.44; return on average
assets - 1.21%; return on average equity - 15.62%; efficiency - 52.22%.

(3) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, net of security gains and losses.

(4) Computed as a percentage of stockholders' equity to period end assets.


                                       17



<PAGE>


     All financial and per share information presented in the table above and in
the following discussion have been adjusted to reflect the three-for-one stock
split effected June 10, 1997, and the two-for-one stock split effected in the
form of a dividend on October 15, 1996.

Overview

     The Bank's performance for the six months ended December 31, 1997 improved
over the same period in 1996. Net income for the six months ended December 31,
1997 increased to $560,000, compared to $316,000 for the same period in 1996.
Earnings for the 1997 and 1996 periods were affected by reorganization and
branch opening expenses totaling $71,000, and the one time SAIF assessment of
$447,000 ($286,000 after taxes), respectively. Excluding these expenses,
earnings per share were $0.37 for the six months ended December 31, 1997,
compared to $0.44 for the comparable period of 1996. In November 1997, the Bank
opened its second branch in Salisbury, Maryland (the Bank's sixth branch
office). Opening and operating expenses relating to the new branch had a
negative impact on earnings for the quarter. The new branch is located in the
business district of Salisbury which is the economic hub of the Delmarva
Peninsula.

     Return on assets (ROA) was 1.03% for the six months ended December 31, 1997
(1.16% excluding reorganization and branch opening expenses) compared to .64%
(1.21% excluding the one time SAIF assessment) for the comparable period of
1996. Return on average equity (ROE) increased to 9.42% for the same period in
1997 (10.62% excluding reorganization and branch opening expenses) compared to
7.59% for the same six month period in 1996 (14.46% excluding the one time SAIF
assessment).

     Before paying the one-time SAIF assessment of $447,000 effective September
1996, net income increased by 26.7% in fiscal 1997 to $1,232,000, compared to
$972,000 during fiscal 1996, with earnings per share increasing to $0.90 a share
from $0.71. This increase in earnings was primarily due to higher net interest
income and deposit fee income. The one-time SAIF assessment was $447,000, before
taxes, or $286,000 and $0.21 per share after income taxes.

     Excluding the one-time SAIF assessment, the return on average equity during
fiscal 1997 increased to 15.62%, (11.81% w/SAIF) up from 13.86% for fiscal 1996,
and the return on average assets during this period increased to 1.23% (.95%
w/SAIF), compared to 1.07% for fiscal 1996. Return on average assets increased
from 1.02% in fiscal 1995, to 1.07% in fiscal 1996, and to 1.23% in fiscal 1997.
Return on average equity increased from 12.51% in fiscal 1995, to 13.86% in
fiscal 1996, and to 15.62% in fiscal 1997.

     Deposits increased 48.7% from $63.6 million at June 30, 1994 to $94.6
million at June 30, 1997. During this same period, there was an increase in
commercial and consumer loans, which are rate sensitive and higher yielding than
other loan types, with a corresponding decline in the growth in mortgage loans.
However, loan growth did not keep pace with deposit growth, and the Bank
increasingly invested deposit funds in high quality but lower yielding
securities. Accordingly, management decided to control deposit growth during the
six months ended December 31, 1997, by concentrating on increasing lower cost
commercial and consumer deposits and being less aggressive in pricing time
deposits. These efforts caused total deposits to increase by only 0.7% to $95.2
million at December 31, 1997, while noninterest-bearing deposits increased by
24.0% during the same period to $6.2 million. Securities increased 12.1% to
$26.3 million at December 31, 1997 from $23.4 million at June 30, 1997, while
loans were flat for the period.



                                       18


<PAGE>



     For the fiscal year ended June 30, 1997, commercial and consumer loans
(including home equity lines) increased 24.1% and 15.2%, respectively, over the
same period of 1996, while real estate mortgage loans (including real estate
construction loans) increased only 2.9% over the same period of 1996. Securities
increased 27.4% to $23.4 million during the fiscal year ended June 30, 1997,
from $18.3 million for the same period of 1996, while loans increased 7.7% to
$74.1 million during the fiscal year ended June 30, 1997 from $68.8 million for
the same period of 1996.

     The Bank's net interest margin increased to 3.89% during the six months
ended December 31, 1997, compared to 3.76% during the same period of 1996. The
Bank benefited from the increase in noninterest-bearing deposits over the period
and an increase in interest-earning assets that resulted from the investment of
proceeds of the public offering in August 1997. Nonperforming assets also
increased during the six months ended December 31, 1997 as compared to the same
period of 1996, which limited any further increases in the net interest margin.
At December 31, 1997, the allowance for loan losses to period end loans was
1.05%, and the level of nonperforming assets to period end loans and foreclosed
properties was 1.11%.

     The Bank's net interest margin remained relatively constant at 3.78% in the
fiscal year ended June 30, 1997, compared to the same period of 1996. Net
interest margin increased to 3.99% in fiscal 1995 over the 3.14% and 3.17% for
the fiscal years 1994 and 1993, respectively. The Bank benefited from a greater
increase in yields on interest-earning assets than the increase in its cost of
interest-bearing liabilities during a period of rising interest rates in fiscal
1995. In fiscal 1996, the net interest margin was 3.79%, down slightly from the
prior fiscal year, as the average cost of interest-bearing liabilities increased
more than the average yields on interest-earning assets, a result of a large
increase in high quality but lower yielding securities. Nonperforming assets
also increased in fiscal 1997 from fiscal 1996, which negated any increase in
the net interest margin.

Results of Operation

General

     Net interest income is the major component of the Bank's earnings and is
equal to the amount by which interest income exceeds interest expense. Interest
income is derived from interest-earning assets which are composed primarily of
loans and securities. Interest expense results from interest-bearing
liabilities, the major portion of which consists of deposits and short-term
borrowings. Changes in the volume and mix of these assets and liabilities, as
well as changes in the yields earned and rates paid, determine changes in net
interest income. Net interest margin is calculated by dividing net interest
income by average earning assets and represents the Bank's net yield on its
earning assets.

Interest Income

     During the six months ended December 31, 1997, the Bank earned $4.2 million
in interest income, or an increase of 9.1% as compared to the $3.9 million
earned for the same period of 1996. The improvement in net interest income was
primarily due to volume increases in the securities and loan portfolios. Average
securities increased to $25.7 million during the six months ended December 31,
1997, an increase of 19.5% over an average balance of $21.5 million for the same
period of 1996. Average total loans increased 5.1% to $74.8 million during the
six months ended December 31, 1997 from $71.1 million for the same period of
1996. Increases in securities resulted from investing of


                                       19



<PAGE>



proceeds from the Bank's public offering and deposit growth during the period
that exceeded corresponding loan growth. Loan growth experienced during the
period occurred primarily in consumer loans. Total consumer loans (including
home equity lines) increased 6.8% to $9.4 million during the period, while total
real estate mortgage loans (including real estate construction loans) decreased
2.8% to $49.8 million and commercial loans increased slightly to $14.5 million
during this period. Average earning assets during the six months ended December
31, 1997 increased $8.2 million, or 8.8%, over the same period of 1996. The
yield on average earning assets during the six months ended December 31, 1997
was 8.23%, 2 basis points higher than the 8.21% for the same period of 1996,
while yields on average loans increased 21 basis points to 9.01%, and yields on
average securities decreased 27 basis points to 6.13%, when compared to the same
period of 1996.

     During the fiscal year ended June 30, 1997, the Bank earned $7.9 million in
interest income, or an increase of 11.3% as compared to the $7.1 million earned
in the same period of 1996, and 38.6% greater than the $5.7 million in interest
income earned in the same period of 1995. The improvement in net interest income
was primarily due to volume increases in the securities and loan portfolios.
Average securities increased to $21.7 million in fiscal 1997, an increase of
75.0% and 261.7% over average balances of $12.4 million and $6.0 million in
fiscal 1996 and 1995, respectively. Average total loans increased 5.5% to $73.1
million in fiscal 1997 from $69.3 million in fiscal 1996 and increased 16.6%
over the $62.7 million in fiscal 1995. Increases in securities resulted from
deposit growth during the period that exceeded corresponding loan growth. Loan
growth experienced during the period occurred primarily in commercial and
consumer loans. Total commercial loans increased 65.9% to $14.1 million from
fiscal 1995 to fiscal 1997, while total consumer loans (including home equity
lines) increased 27.5% to $8.8 million during the same period. However, total
real estate mortgage loans (including real estate construction loans) remained
relatively flat at $51.2 million during this period. Average earning assets in
fiscal 1997 increased $10.6 million, or 12.7%, over fiscal 1996 and $25.8
million, or 36.9%, over fiscal 1995. The yield on average earning assets in
fiscal 1997 was 8.21%, 9 basis points lower than the 8.30% in fiscal 1996 and 9
basis points greater than the 8.12% in fiscal 1995, while yields on average
loans increased 41 basis points to 8.77%, and yields on average securities
increased 26 basis points to 6.47%, during the same period.

Interest Expense

     Interest expense was $2.2 million during the six months ended December 31,
1997, a 6.1% increase over the $2.1 million in the same period of 1996. The
increase was primarily due to average interest-bearing liabilities increasing
5.0% to $91.8 million during the six months ended December 31, 1997 period from
$87.5 million for the same period of 1996. These increases resulted from
significant deposit growth during this period. The cost of interest-bearing
liabilities was 4.82% during the six months ended December 31, 1997, 5 basis
points greater than the 4.77% in the same period of 1996.

     Interest expense was $4.2 million in the fiscal year ended June 30, 1997, a
10.5% increase over the $3.8 million in the same period of 1996 and a 46.8%
increase over the $2.9 million in the same period of 1995. The increase was
primarily due to average interest-bearing liabilities increasing 10.1% to $87.9
million in the fiscal year ended June 30, 1997 from $79.9 million in the same
period of 1996, and increasing 33.6% from $65.8 million in the same period of
1995. These increases resulted from significant deposit growth during this
period. The cost of interest-bearing liabilities was 4.82% in the fiscal year
ended June 30, 1997, 2 basis points greater than the 4.80% in the same period of
1996, and 43 basis points greater than the 4.39% in the same period of 1995.


                                       20



<PAGE>



Net Interest Income

     Net interest income was $2.0 million during the six months ended December
31, 1997, 12.6% greater than the $1.8 million reported during same period of
1996. The Bank benefited from an increased net interest margin during the six
months ended December 31, 1997 when compared to the same period of 1996,
resulting from the increased investment liquidity and a 74.8% increase in
average noninterest-bearing deposits. The cost of interest-bearing liabilities
was 4.82% during the six months ended December 31, 1997 period, an increase of 5
basis points over the 4.77% during the same period of 1996, while yields on
interest-earning assets only increased 2 basis points during these periods. The
increase in interest-earning assets resulting from the public offering also had
an impact on net interest income and net interest margin during the period.

     Net interest income was $3.6 million during the fiscal year ended June 30,
1997, 11.9% greater than the $3.2 million reported during the same period of
1996, and 29.6% greater than the $2.8 million reported during the same period of
1995. The decline in net interest margin was due primarily to a greater increase
in the cost of funds than the increase in the yield on earning assets. The cost
of interest-bearing liabilities was 4.82% during the fiscal year ended June 30,
1997, an increase of 2 basis points over the 4.80% during the same period of
1996 and 43 basis points greater than the 4.39% during the same period of 1995,
while yields on interest-earning assets only increased 9 basis points during the
same period. The greater increase in lower yielding securities than loans more
than offset the relatively stronger growth in higher yielding commercial and
consumer loans, as compared with mortgage loans.

     The following tables illustrate average balances of total interest-earning
assets and total interest-bearing liabilities for the periods indicated, showing
the average distribution of assets, liabilities, stockholders' equity and the
related income, expense, and corresponding weighted average yields and costs.
The average balances used in these tables and other statistical data were
calculated using daily average balances for the six months ended December 31,
1997 and monthly averages for all prior periods presented.



                                       21




<PAGE>
              Average Balances, Income and Expenses, Average Yields and Rates


<TABLE>
<CAPTION>
                                                                  Six Months Ended December 31,
                                   -------------------------------------------------------------------------------------
                                                      1997                                            1996
                                   -----------------------------------------         -----------------------------------
                                   Average           Income/          Yield/         Average         Income/      Yield/
                                   Balance           Expense           Rate          Balance         Expense       Rate
                                   -------           -------          ------         -------         -------      ------
                                           (Dollars in thousands)
<S>   <C>
Assets:
   Securities                        $25,664        $  786             6.13%          $21,481       $  687         6.40%
   Loans (net of unearned income):
     Real Estate Mortgage             49,912         2,152             8.62%           50,172        2,071         8.26%
     Real Estate Construction          1,502            71             9.50%              960           46         9.50%
     Commercial                       14,276           709             9.93%           12,052          625        10.38%
     Home Equity Lines                 4,738           225             9.50%            4,183          199         9.50%
     Consumer                          4,342           213             9.82%            3,779          190        10.07%
                                    --------        ------                            -------       ------
           Total loans                74,770         3,370             9.01%           71,146        3,131         8.80%
                                    --------        ------                            -------       ------
   Federal funds sold                      -             -                 -                -            -            -
   Interest-bearing deposits
     in other banks                    1,664            44              5.28%           1,239           33         5.25%
                                    --------        ------                            -------       ------
       Total earning assets          102,098         4,200              8.23%          93,866        3,851         8.21%
                                    --------        ------                            -------       ------
   Less: allowance for loan losses      (771)                                            (702)
   Total nonearning assets             7,119                                            6,007
                                    --------                                          -------
   Total assets                     $108,446                                          $99,171
                                    ========                                          =======

Liabilities
   Interest-bearing deposits:
     Checking and savings           $ 22,208        $  263              2.37%         $21,841       $  247         2.26%
     Time deposits                    69,495         1,947              5.60%          64,404        1,803         5.60%
                                    --------        ------             -----          -------       ------        -----
       Total interest-bearing
              deposits                91,703         2,210              4.82%          86,245        2,050         4.75%
   FHLB advances                         141             3              4.26%           1,224           36         5.88%
                                    --------        ------                            -------       ------
       Total interest-bearing
           liabilities                91,844         2,213              4.82%          87,469        2,086         4.77%
                                                    ------                                          ------
   Non-interest bearing liabilities:
     Demand deposits                   3,813                                            2,181
     Other liabilities                   904                                            1,193
                                    --------                                          -------
   Total liabilities                  96,561                                           90,843
   Stockholders' equity               11,885                                            8,328
                                    --------                                          -------
   Total liabilities and
     stockholders' equity           $108,446                                          $99,171
                                    ========                                          =======
   Net interest income                             $ 1,987                                         $ 1,765
                                                   =======                                         =======
   Interest rate spread                                                 3.41%                                      3.44%
   Net interest margin                                                  3.89%                                      3.76%
</TABLE>


<TABLE>
<CAPTION>
                                                                     Year Ended June 30,
                                           -----------------------------------------------------------------------
                                                          1997                                  1996
                                           -----------------------------------     -------------------------------
                                           Average        Income/       Yield/     Average      Income/     Yield/
                                           Balance        Expense        Rate      Balance      Expense      Rate
                                           -------        -------       ------     -------      -------     ------
                                                                     (Dollars in thousands)
<S>     <C>
Assets:
   Securities                              $21,740        $1,406        6.47%      $12,356        $772       6.25%
   Loans (net of unearned income):
     Real Estate Mortgage                   50,797         4,207        8.28%       51,332       4,292        8.36%
     Real Estate Construction                1,130           107        9.50%        1,415         138        9.75%
     Commercial                             12,823         1,272        9.92%        9,482         974       10.27%
     Home Equity Lines                       4,341           412        9.50%        3,901         380        9.75%
     Consumer                                3,960           406       10.25%        3,151         323       10.24%
                                           -------        ------                   -------      ------
           Total loans                      73,051         6,405        8.77%       69,281       6,107        8.81%
                                           -------        ------                   -------      ------
   Federal funds sold                            -             -           -           685          37        5.40%
   Interest-bearing deposits
     in other banks                            835            44        5.27%        2,852         152        5.33%
                                           -------        ------                   -------      ------
       Total earning assets                 95,626         7,855        8.21%       85,174       7,068        8.30%
                                           -------        ------                   -------      ------
   Less: allowance for loan losses            (604)                                   (625)
   Total nonearning assets                   4,864                                   5,911
                                           -------                                 -------
   Total assets                            $99,886                                 $90,460
                                           =======                                 =======
Liabilities
   Interest-bearing deposits:
     Checking and savings                  $19,936        $  491        2.46%      $21,105      $  447        2.12%
     Time deposits                          66,059         3,663        5.55%       58,281       3,355        5.76%
                                           -------        ------       -----       -------      ------       -----
       Total interest-bearing
              deposits                      85,995         4,154        4.83%       79,386       3,802        4.79%
   FHLB advances                             1,952            86        4.41%          475          35        7.37%
                                           -------        ------                   -------      ------
       Total interest-bearing
           liabilities                      87,947         4,240        4.82%       79,861       3,837        4.80%
                                                          ------                                ------
   Non-interest bearing liabilities:
     Demand deposits                         3,036                                   2,721
     Other liabilities                       1,017                                     867
                                           -------                                 -------
   Total liabilities                        92,000                                  83,449
   Stockholders' equity                      7,886                                   7,011
                                           -------                                 -------
   Total liabilities and
     stockholders equity                   $99,886                                 $90,460
                                           =======                                 =======
   Net interest income                                   $ 3,615                               $ 3,231
                                                         =======                               =======
   Interest rate spread                                                 3.39%                                 3.49%
   Net interest margin                                                  3.78%                                 3.79%
</TABLE>


                                                             1995
                                                -----------------------------
                                                Average    Income/     Yield/
                                                Balance    Expense      Rate
                                                   (Dollars in thousands)
Assets:
   Securities                                   $5,964     $ 370       6.20%
   Loans (net of unearned income):
     Real Estate Mortgage                       49,730     3,946       7.94%
     Real Estate Construction                      662        65       9.75%
     Commercial                                  6,510       652      10.02%
     Home Equity Lines                           3,408       332       9.75%
     Consumer                                    2,341       242      10.32%
                                                ------     -----
           Total loans                          62,651     5,237       8.36%
                                                ------     -----
   Federal funds sold                              215        11       5.12%
   Interest-bearing deposits
     in other banks                              1,090        61       5.60%
                                                ------     -----
       Total earning assets                     69,920     5,679       8.12%
   Less: allowance for loan losses                (413)
   Total nonearning assets                       5,722
                                               -------
   Total assets                                $75,229
                                               =======
Liabilities
   Interest-bearing deposits:
     Checking and savings                      $19,831    $  424       2.14%
     Time deposits                              45,136     2,400       5.32%
                                               -------    ------      -----
       Total interest-bearing
              deposits                          64,967     2,824       4.35%
   FHLB advances                                   882        65       7.37%
                                               -------    ------
       Total interest-bearing
           liabilities                          65,849     2,889       4.39%
   Non-interest bearing liabilities:                      ------
     Demand deposits                             2,222
     Other liabilities                             993
                                               -------
   Total liabilities                            69,064
   Stockholders' equity                          6,165
                                               -------
   Total liabilities and stockholders
     equity                                    $75,229
                                               =======
   Net interest income                                   $ 2,790
                                                         =======
   Interest rate spread                                                3.73%
   Net interest margin                                                 3.99%







                                       22


<PAGE>



     The following table describes the impact on the interest income of the Bank
resulting from changes in average balances and average rates for the periods
indicated. The change in interest due to the mixture of volume and rate has been
allocated solely to rate changes.


<TABLE>
<CAPTION>
<S> <C>
                                                      Volume and Rate Analysis

                                                                                    Years Ended June 30,
                                         December 31, 1997 compared ------------------------------------------------------
                                            to December 31, 1996      1997 compared to 1996       1996 compared to 1995
                                          ------------------------  ---------------------------  -------------------------
                                               Change Due To:              Change Due To:              Change Due To:
                                          ------------------------  ---------------------------  -------------------------
                                                          Increase                    Increase                    Increase
                                         Volume    Rate  (Decrease) Volume    Rate   (Decrease)  Volume    Rate  (Decrease)
                                         -------  -------  -------  -------  --------  --------  -------  -------  -------
                                                                                      (Dollars in thousands)
Assets:
   Securities                              $134     ($35)     $99     $586       $48      $634     $397       $5     $402
   Loans (net of unearned income):
     Real Estate Mortgage                   (10)      91       81      (45)      (40)      (85)     127      219      346
     Real Estate Construction                25        0       25      (28)       (3)      (31)      73        0       73
     Commercial                             116      (32)      84      344       (45)      299      298       24      321
     Home Equity Lines                       26        0       26       43       (11)       32       48        0       48
     Consumer                                28       (5)      23       83         0        83       84       (3)      81
                                         -------  -------  -------  -------  --------  --------  -------  -------  -------
            Total loans                     185       54      239      397       (99)      298      630      240      870
                                         -------  -------  -------  -------  --------  --------  -------  -------  -------
   Federal funds sold                         0        0        0      (37)        0       (37)      24        2       26
   Interest-bearing deposits
     in other banks                          11        0       11     (107)       (1)     (108)      99       (8)      91
                                         -------  -------  -------  -------  --------  --------  -------  -------  -------
       Total earning assets                 330       19      349      839       (52)      787    1,149      240    1,389
                                         =======  =======  =======  =======  ========  ========  =======  =======  =======

Liabilities
   Interest-bearing deposits:
     Checking and savings                    $4      $12      $16     ($25)      $69       $44      $27      ($4)     $23
     Time deposits                          143        1      144      448      (140)      308      699      256      955
                                         ------- ----------------------------------------------------------------- -------

       Total interest-bearing
               deposits                     147       13      160      423       (71)      352      726      252      978

   FHLB advances                            (32)      (1)     (33)     109       (58)       51      (30)      (0)     (30)
                                         ------- --------  -------  -------  --------  --------  -------  -------  -------
       Total interest-bearing
            liabilities                     115       12      127      532      (129)      403      696      252      948
                                         -------  -------  -------  -------  --------  --------  -------  -------  -------

   Change in net interest income            215        7      222      307        77       384      453      (12)     441
                                         =======  =======  =======  =======  ========  ========  =======  =======  =======

</TABLE>




Interest Sensitivity

     An important element of both earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities at a specific time interval. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising
interest rates, a negative gap within shorter maturities would adversely affect
net interest income, while a positive gap within shorter maturities would result
in an increase in net interest income. Conversely, during a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. This gap can be managed by repricing assets or
liabilities, by selling investments available for sale, by replacing an asset or
liability at maturity, or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and liabilities maturing in
the same time interval helps to hedge the risk and minimize the impact on net
interest income in periods of rising or falling interest rates.

     The Bank determines the overall magnitude of interest sensitivity risk and
then formulates policies governing asset generation and pricing, funding sources
and pricing, and off-balance-sheet

                                       23


<PAGE>



commitments in order to reduce sensitivity risk. These decisions are based on
management's outlook regarding future interest rate movements, the state of the
local and national economy, and other financial and business risk factors. The
Bank uses computer generated reports in combination with other available
financial data to measure the effect on net interest income of various interest
rate scenarios. This modeling reflects interest rate changes and the related
impact on net income over specified time horizons.

     The following table presents the Bank's interest sensitivity position at
December 31, 1997. This one-day position, which continually is changing, is not
necessarily indicative of the Bank's position at any other time.


<TABLE>
<CAPTION>


                                                    Interest Sensitivity Analysis

                                                                 December 31, 1997
                                                -----------------------------------------------------
                                                 With-in   91-365     1 to 5       Over
                                                 90 Days    Days       Years      5 Years    Total
                                                --------- ---------  ---------  ---------- ----------
                                                     (Dollars in thousands)
<S> <C>
Interest-Earning Assets:
   Loans (1)                                     $16,873   $25,342    $25,535    $  5,922   $ 73,672
   Securities                                        349     7,101     16,302       2,512     26,264
   Money market and other
   short term securities                           1,841         0          0           0      1,841
                                                --------- ---------  ---------  ---------- ----------

   Total earning assets                          $19,063   $32,443    $41,837    $  8,434   $101,777
                                                ========= =========  =========  ========== ==========
   Cummulative earning assets                    $19,063   $51,506    $93,343    $101,777   $101,777
                                                ========= =========  =========  ========== ==========


Interest-Bearing Liabilities:
   Money market savings                          $ 3,113   $     0    $     0    $      0   $  3,113
   Interest checking (2)                               0         0      8,578           0      8,578
   Savings (2)                                         0         0      8,955           0      8,955
   Certificates of deposit                        11,821    34,695     19,816       2,846     69,178
   FHLB advances                                       0         0          0          75         75
                                                --------- ---------  ---------  ---------- ----------

   Total interest-bearing liabilities            $14,934   $34,695    $37,349     $ 2,921    $89,899
                                                ========= =========  =========  ========== ==========
   Cummulative interest-bearing liabilities      $14,934   $49,629    $86,978     $89,899    $89,899
                                                ========= =========  =========  ========== ==========

   Period gap                                    $ 4,129  ($ 2,252)   $ 4,488     $ 5,513    $11,878
   Cummulative gap                               $ 4,129   $ 1,877    $ 6,365     $11,878    $11,878
   Ratio of cummulative interest-earning
     assets to interest-bearing liabilities       127.65%   103.78%    107.32%     113.21%    113.21%
   Ratio of cummulative gap to total
      earning assets                               21.66%     5.79%     15.21%     140.83%     11.67%
</TABLE>




(1)  Includes nonaccrual loans of $377,000, which are included in the 1 to 5
     years category.

(2)  Management has determined that interest checking and savings accounts are
     not sensitive to changes in related market rates and, therefore, the Bank
     has placed them in the 1 to 5 years category.

Noninterest Income

     During the six months ended December 31, 1997, noninterest income decreased
11.2% to $325,000, compared to $366,000 for the same period of 1996. The
decrease is primarily attributable



                                       24



<PAGE>




to the Bank realizing gains on the sale of repossessed assets of $8,000 and a
gain on disposal of fixed assets of $20,000 for the 1996 period. During the 1997
period the Bank realized approximately $12,000 in losses on disposals of fixed
assets. However, these amounts were offset by increases in the numbers of
checking accounts and the deposit fees that they generate. Checking accounts
generate fees including insufficient funds, check order mark-ups, cashiers
checks, service charges, ATM and others. These fees are core earnings that are
not interest sensitive and have provided a stable source of income for the Bank.
Deposit account fees for the six months ended December 31, 1997 increased 7.8%
to $239,000, compared to $222,000 for the same period of 1996.

     In the fiscal year ended June 30, 1997, noninterest income increased 38.7%
to $737,000, compared to $531,000 and $435,000 for fiscal 1996 and 1995,
respectively. The increase is attributable to increases in the numbers of
checking accounts and the deposit fees that they generate and the sale of real
estate held for investment. Deposit account fees for fiscal 1997 increased 31.7%
to $445,000, compared to $338,000 and $287,000 for fiscal 1996 and 1995,
respectively.


Noninterest Expense

     For the six months ended December 31, 1997, noninterest expense increased
to $1.3 million, or 18.1%, excluding reorganization and branch opening costs of
$61,000 and $10,000, respectively, compared to $1.1 million, excluding the
one-time SAIF assessment of $447,000 before taxes, for the same period of 1996.
The category with the largest increase was compensation and benefits, which
increased by 23.2% when compared to the same period in 1996. This category was
impacted by the addition of a business development officer for the Maryland
market who was employed in the first quarter of 1997 and the opening of the new
branch in Salisbury. Occupancy and equipment increased 29.3% to $307,000 during
the six months ended December 31, 1997, compared to $237,000 in same period of
1996. Planned technological and other bank equipment upgrades, in preparation
for the Year 2000, and the additional Salisbury branch resulted in increases in
occupancy and equipment expense during the 1997 period. Excluding the 1996 SAIF
assessment of $447,000, deposit insurance premiums decreased 65.8% to $30,000
for the six months ended December 31, 1997, compared to $87,000 for the same
period of 1996. Excluding reorganization expenses totaling $61,000, other
noninterest expense increased 21.9% to 142,000 for the six months ended December
31, 1997, compared to $117,000 for the same period of 1996.

     For the fiscal year ended June 30, 1997, noninterest expense increased to
$2.3 million, or 9.5%, excluding the one-time SAIF assessment of $447,000 before
taxes, compared to $2.1 million and $1.8 million for fiscal 1996 and 1995,
respectively. The category with the largest increase was compensation and
benefits, which increased by 24.8% and 35.8% when compared to the same period in
fiscal 1996 and 1995, respectively. This category was impacted by the addition
of a commercial loan officer who was employed in the first quarter of 1997.
Occupancy and equipment increased 22.2% to $496,000 in fiscal 1997, compared to
$406,000 in fiscal 1996 and $334,000 in fiscal 1995. Initial phases of planned
technological and other bank equipment upgrades resulted in increases in
occupancy and equipment expense during fiscal 1997. Occupancy and equipment
expense was impacted in fiscal 1996 by the costs associated with a
newly-constructed full service branch facility in Exmore, Virginia, that was
operational for eleven months of the year, and by the first Salisbury branch
office which was operational for the entire fiscal year compared to only five
months in fiscal year 1995. The cost of providing deposit insurance from the
FDIC continued to account for a significant portion of noninterest expenses,
increasing from $144,000 in fiscal 1995, to $171,000 in fiscal 1996, and to
$562,000 in fiscal 1997, which includes the one-time SAIF assessment of $447,000
before taxes. In



                                       25



<PAGE>





fiscal 1996, the Bank engaged outside consultants to advise management on
strategic planning initiatives and updating its computer systems, which resulted
in legal and professional fees increasing to $71,000, compared to $39,000 in
fiscal 1995.


Financial Condition

Loan Portfolio

     The Bank's loan portfolio is comprised of commercial loans, construction
loans, real estate and mortgage loans, home equity loans, and consumer loans.
The primary market areas in which the Bank makes loans are the counties of
Northampton and Accomack, Virginia and Salisbury/Wicomico County, Maryland.

     Total loans were flat from June 1997 to December 1997, compared to an
increase of 7.8% and 4.0% from June 1996 to June 1997 and from June 1995 to June
1996, respectively. Decrease in real estate loans were offset by increases in
commercial and consumer loans during the six months ended December 31, 1997.
Increases since 1995 primarily are due to the Bank's expansion into the
Salisbury/Wicomico County, Maryland market area in 1995, which accounted for
approximately $9.5 million, or 12.8%, of total loans at December 31, 1997, an
increase in home equity loans and the addition of an experienced commercial loan
officer during July 1996.

     The composition of the Bank's portfolio continued to shift to the
commercial and consumer category in fiscal 1997. Commercial loans, including
commercial real estate loans, increased 2.5% and consumer loans, including home
equity loans, increased 6.8% during the six months ended December 31, 1997.
During the fiscal year ended June 30, 1997, commercial and consumer loans
increased by 24.1% and 15.2%, respectively, compared to the amount of such loans
during the same period of 1996. By comparison, real estate mortgage loans,
including real estate construction loans, increased by only 2.9% in the same
period. As of December 31, 1997, real estate construction loans amounted to
$958,000, compared to the $1.7 million in such loans at June 30, 1997.




                                       26




<PAGE>



     The following table summarizes the composition of the Bank's loan portfolio
at the dates indicated.



<TABLE>
<CAPTION>

                                                           Loan Portfolio

                                                                        June 30,
                                 December 31,---------------------------------------------------
                                     1997      1997       1996       1995      1994       1993
                                   --------  --------   --------   --------  --------   --------
                                                      (Dollars in thousands)
<S> <C>

Commercial (1)                      $14,450   $14,087    $11,351     $8,487    $4,880     $3,780
Real Estate Construction (2)            958     1,696        598      1,347       522        655
Real estate mortgage                 48,850    49,546     49,199     49,513    49,906     48,599
Home Equity Lines of Credit           5,283     4,547      4,175      3,822     3,399      3,606
Consumer                              4,131     4,266      3,471      2,971     1,926      1,254
                                   --------  --------   --------   --------  --------   --------

         Total loans                 73,672    74,142     68,794     66,140    60,633     57,894
Less:
   Deferred loan fees (cost), net       (12)       (7)        18          8        25         21
   Allowance for loan losses           (770)     (744)      (674)      (555)     (373)      (306)
                                   --------- ---------  ---------  --------- ---------  ---------

           Net loans                $72,890   $73,391    $68,138    $65,593   $60,285    $57,609
                                   ========= =========  =========  ========= =========  =========
</TABLE>

-------------------
(1)  Includes commercial real estate loans of approximately $11,281,000,
     $10,871,000, $9,128,000, $ 7,001,000, $4,732,000, and $3,719,000, for the
     respective periods indicated above.

(2)  Amounts are disclosed net of loans in process of approximately $660,000,
     $1,209,000, $558,000, $961,000, $947,000, and $738,000, for the respective
     periods indicated above.

     The following table sets forth the composition of the Bank's loan portfolio
by percentage at the dates indicated.


<TABLE>
<CAPTION>

                                                             Loan Portfolio by Percentage

                                                                        June 30,
                                 December 31, --------------------------------------------------
                                     1997      1997       1996       1995      1994       1993
                                   --------   -------   --------   --------  --------   --------
<S> <C>

Commercial                          19.61%    19.00%     16.50%     12.83%     8.05%      6.53%
Real Estate Construction             1.30%     2.29%      0.87%      2.04%     0.86%      1.13%
Real estate mortgage                66.31%    66.83%     71.52%     74.86%    82.31%     83.94%
Home equity lines of credit          7.17%     6.13%      6.07%      5.78%     5.61%      6.23%
Consumer                             5.61%     5.75%      5.05%      4.49%     3.18%      2.17%
                                 --------  --------   --------   --------  --------   --------
         Total loans               100.00%   100.00%    100.00%    100.00%   100.00%    100.00%
                                 ========  ========   ========   ========  ========   ========
</TABLE>


                                       27




<PAGE>


The following table presents the maturities of selected loans outstanding at
December 31, 1997.


<TABLE>
<CAPTION>

                                            Maturity Schedule of Period End Loans

                                                  December 31, 1997
<S> <C>
                            ---------------------------------------------------------------------
                               1 year or less       1 to 5 years       After 5 years
                            ------------------  ------------------- --------------------
                              Fixed   Variable    Fixed    Variable   Fixed     Variable
                              Rate      Rate      Rate       Rate     Rate      Rate      Total
                            -------- ---------  ---------  -------- --------  --------- ---------
                                                      (Dollars in thousands)

Commercial                   $1,348   $ 4,407    $ 6,190    $  203   $1,088    $ 1,214   $14,450
Real estate construction        958         0          0         0        0          0       958
Real estate mortgage (1)      1,313     5,290     12,391       801    4,121     24,934    48,850
Home Equity Lines                 0     5,283                                              5,283
Consumer                        270        99      3,135         0      627          0     4,131
                            -------- ---------  ---------  -------- --------  --------- ---------

Total                        $3,889   $15,079    $21,716    $1,004   $5,836    $26,148   $73,672
                            ======== =========  =========  ======== ========  ========= =========
</TABLE>

-----------------
(1)  Includes mortgages with terms that include 3 and 5-year balloon payment
     features in the 1 to 5 years and after 5 years fixed rate category.

Securities

     Effective June 30, 1995, the Bank adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, when
securities are purchased, they are classified as securities held to maturity
when management has the positive intent and the Bank has the ability to hold
them until maturity. These investment securities are carried at cost adjusted
for amortization of premium and accretion of discounts. Unrealized losses in the
portfolio are not recognized unless management of the Bank believes that an
other than temporary decline has occurred. Securities held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale at the time of purchase. Securities available for sale are
recorded at fair value. The net unrealized holding gain or loss on securities
available for sale, net of deferred income taxes, is included as a separate
component of stockholders' equity. A decline in the fair value of any securities
available for sale below cost, that is deemed other than temporary, is charged
to earnings and results in a new cost basis for the security. Cost of securities
sold are determined on the basis of specific identification. The Bank holds no
securities classified as trading.

     Investment Securities. The carrying value of investment securities
(effected for all applicable SFAS No. 115 adjustments) amounted to $26.3 million
at December 31, 1997, compared to $23.4 million at June 30, 1997. The comparison
of amortized cost to fair value is shown in Note 3 of the notes to the financial
statements. Note 3 also provides an analysis of gross unrealized gains and
losses of investment securities. Investment securities consist of the following:




                                       28




<PAGE>



<TABLE>
<CAPTION>

                                                               Securities Portfolio

                                          December 31,                June 30,
                                      -------------------  ------------------------------
                                        1997      1996       1997       1996       1995
                                      --------- ---------  ---------  ---------  --------
                                                          (Dollars in thousands)
<S> <C>
Amortized Cost:
       U.S. Treasury and other U.S.
         Government Agencies           $21,733   $19,130    $17,734    $14,335    $6,204
   Tax-exempt municipal bonds              851     1,000      3,039      1,600         0
   State agency bonds                    1,000         0          0          0         0
   Mortgage-backed securities              595       745        684        784       433
   Adjustable Rate Mortgage Fund         1,175     1,106      1,140      1,074       135
   FHLMC stock                               4       596        573        596       103
   Preferred Stock                         500         0          0          0         0
   Other equity securities                 136         0        136          0         0
                                      --------- ---------  ---------  ---------  --------

         Total Securities              $25,994   $22,577    $23,306    $18,389    $6,875
                                      ========= =========  =========  =========  ========
</TABLE>



     Securities Available for Sale. Securities available for sale are used as
part of the Bank's interest rate risk management strategy and may be sold in
response to changes in interest rates, changes in prepayment risk, liquidity
needs, the need to increase regulatory capital and other factors. The fair value
of securities available for sale totaled $21.0 million at December 31, 1997,
compared to $15.4 million at June 30, 1997. The comparison of fair market value
to amortized cost is shown in Note 3 of the notes to the financial statements.
Note 3 also provides an analysis of gross unrealized gains and losses of
securities available for sale.



<TABLE>
<CAPTION>
                                                           Securities Available for Sale



                                          December 31,                June 30,
                                      -------------------  ------------------------------
                                        1997      1996       1997       1996       1995
                                      --------- ---------  ---------  ---------  --------
                                                           (Dollars in thousands)
<S> <C>
Fair Value:
       U.S. Treasury and other U.S.
         Government Agencies           $17,576   $12,694    $12,094    $ 8,208    $3,117
   Tax-exempt municipal bonds              126         0      1,000          0         0
   State agency bonds                    1,021         0          0          0         0
   Mortgage-backed securities              285       730        345        376         0
   Adjustable Rate Mortgage Fund         1,176     1,104      1,141      1,068       135
   FHLMC stock                             176       694        716        670       101
   Preferred stock                         513         0          0          0         0
   Other equity securities                 157         3        149          3         0
                                      --------- ---------  ---------  ---------  --------

         Total Securities              $21,030   $15,225    $15,445    $10,325    $3,353
                                      ========= =========  =========  =========  ========
</TABLE>



     The following table sets forth the maturity distribution and weighted
average yields of the securities portfolio at December 31, 1997. The weighted
average yields are calculated on the basis of book value of the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount.



                                       29



<PAGE>


<TABLE>
<CAPTION>
                                                          Maturities of Investments

                                                            December 31, 1997
<S> <C>
                                     ---------------------------------------------------------------
                                            Held to Maturity               Available for Sale
                                    ------------------------------   -------------------------------
                                                          Weighted                         Weighted
                                     Amortized    Fair     Average   Amortized    Fair      Average
                                        Cost      Value     Yield      Cost       Value      Yield
                                      --------  --------   -------   ---------  ---------  ---------
                                                         (Dollars in thousands)

       U.S. Treasury and other U.S.
         government agencies
         Within one year               $  699    $  697     5.41%     $ 6,748    $ 6,752     5.69%
         After one year to five years   2,997     2,995     6.12%       9,791      9,824     6.14%
         After five years                 502       500     6.63%         996      1,000     6.45%

                    Total              $4,198    $4,192               $17,535    $17,576
                                      --------  --------             ---------  ---------

       Other Securities:
         Within one year                    0         0     0.00%           0          0     0.00%
         After one year to five years     310       302     5.50%       2,941      3,169     6.14%
         After five years                 725       725     6.26%         285        285     7.00%
                                      --------  --------             ---------  ---------

                    Total               1,035     1,027                 3,226      3,454
                                      --------  --------             ---------  ---------

         Total Securities              $5,233    $5,219               $20,761    $21,030
                                      ========  ========             =========  =========
</TABLE>



Deposits

     The Bank depends on deposits to fund its lending activities, generate fee
income opportunities, and create a captive market for loan products. The table
below presents a history of average deposits and the rates paid on
interest-bearing deposit accounts for the periods indicated.


<TABLE>
<CAPTION>

                                              Average Deposits and Average Rates Paid

                                                               December 31,                Years ended June 30,
                                 -------------------------------------  ---------------------------------------------------------
                                        1997                1996               1997                1996                1995
                                 -----------------   -----------------  -----------------   -----------------   -----------------
                                 Average   Average   Average   Average  Average   Average   Average   Average   Average   Average
                                 Balance     Rate    Balance     Rate   Balance     Rate    Balance     Rate    Balance     Rate
                                 -------   -------   -------   -------  -------   -------   -------   -------   -------   -------
                                                                     (Dollars in thousands)
<S> <C>
Interest-bearing deposits:
   Checking and savings          $22,208     2.37%   $21,841     2.26%  $19,936     2.46%   $21,105     2.12%   $19,831     2.14%
   Certificates of deposit:
     Less than $100,000           60,232     5.60%    56,515     5.60%   57,453     5.55%    50,668     5.76%    39,734     5.32%
              $100,000 and over    9,263     5.78%     7,889     5.76%    8,606     5.92%     7,613     5.82%     5,402     5.87%
                                 -------   -------   -------   -------  -------   -------   -------   -------   -------   -------

Total interest-bearing deposits   91,703     4.82%    86,245     4.77%   85,995     4.82%    79,386     4.80%    64,967     4.39%

Noninterest-bearing deposits       3,813               2,181              3,036               2,721               2,222
                                 -------             -------            -------             -------             -------

Total average deposits           $95,516             $88,426            $89,031             $82,107             $67,189
                                 =======             =======            =======             =======             =======
</TABLE>




     Deposits averaged $95.5 million during the six months ended December 31,
1997, compared to $89.0 million during the fiscal year ended June 30, 1997, an
increase of 7.3% during such period. The category accounting for the largest
part of the increase was certificate of deposits under $100,000, which averaged
$60.2 million during the six months ended December 31, 1997, compared to $57.5
million during the fiscal year ended June 30, 1997. The growth in this category
is attributable to the Bank's strategy in the Salisbury/Wicomico County market
area that included paying higher than market rates in order to build a book of
banking customers quickly.



                                       30



<PAGE>



         The following table is a summary of the maturity distribution of
certificates of deposit in amounts of $100,000 or more as December 31, 1997.



                       Maturities of CD's of $100,000 or More

                                                    December 31, 1997
                                             --------------------------------
                                              Amount                 Percent
                                             --------                --------
                                                   (Dollars in thousands)

Three months or less                          $1,550                   15.63%
Over three months to one year                  5,259                   53.02%
Over one year to five years                    2,587                   26.08%
Over five years                                  523                    5.27%
                                             --------                --------

   Total                                      $9,919                  100.00%
                                             ========                ========



Capital Resources

     Capital represents funds, earned or obtained, over which banks can exercise
greater control in comparison with deposits and borrowed funds. The adequacy of
the Bank's capital is reviewed by management on an ongoing basis with reference
to the size, composition, and quality of the Bank's resources and consistent
with regulatory requirements and industry standards. Management seeks to
maintain a capital structure that will support anticipated asset growth and
absorb potential losses.

     The OTS has defined various tests for assessing the capital strength and
adequacy of savings institutions, based on different definitions of capital.
"Tier 1 capital" is a combination of common and qualifying preferred
stockholders' equity less goodwill. "Tier 2 capital" is defined as qualifying
subordinated debt and a portion of the allowance for loan losses. "Total
capital" is defined as Tier 1 capital plus Tier 2 capital. Certain risk-based
capital ratios are computed using the above capital definitions, total assets
and risk-weighted assets and are measured against regulatory minimums to
ascertain adequacy. All assets and off-balance sheet risk items are grouped into
categories according to degree of risk and assigned a risk weighting and the
resulting total is risk-weighted assets. "Tier 1 risk-based capital" is Tier 1
capital divided by risk-weighted assets. "Total risk-based capital" is Total
capital divided by risk-weighted assets. As of December 31, 1997, the Bank
exceeded all of its regulatory capital requirements. See "Regulation Regulatory
Capital Requirements."



                                       31



<PAGE>


     The following table details the components of Tier 1 and Tier 2 capital and
related ratios for the periods indicated.


<TABLE>
<CAPTION>


                                                             Analysis of Capital

                                                  December 31,                 June 30,
                                              -------------------  -------------------------------
                                                 1997      1996       1997       1996       1995
                                              --------- ---------  ---------  ---------  ---------
                                                                     (Dollars in thousands)
<S> <C>
Tier 1 Capital:
     Common stock                              $   596    $  453    $   453     $  450     $  450
     Additional paid-in capital                  3,564       602        602        560        560
     Retained earnings                           8,000     6,811      7,441      6,495      5,524
     Unrealized gains (losses)                     170        37         73        (50)         0
                                              --------- ---------  ---------  ---------  ---------
            Total capital (GAAP)                12,330     7,903      8,569      7,455      6,534
     Less: Intangibles                             (45)      (49)       (47)       (51)       (54)
     Unrealized (gains) losses                    (170)      (37)       (73)        50          2
                                              --------- ---------  ---------  ---------  ---------
                 Total Tier 1 capital          $12,115    $7,817    $ 8,449     $7,454     $6,482
                                              --------- ---------  ---------  ---------  ---------


Tier 2 Capital:
     Allowances for loan losses                    732       687        726        636        555
     Less: Other required deductions              (155)     (187)      (163)      (201)      (200)
                                              --------- ---------  ---------  ---------  ---------
                 Total Tier 2 capital           12,692     8,317      9,012      7,889      6,837
                                              --------- ---------  ---------  ---------  ---------

Risk-weighted assets                           $58,521   $54,920    $58,036    $51,033    $46,152

Capital Ratios (1):
     Tier 1 risk-based capital ratio             20.70%    14.23%     14.56%     14.61%     14.04%
     Total risk-based capital ratio              21.69%    15.14%     15.53%     15.46%     14.81%
     Tier 1 capital to average adjusted
              total assets (2)                   11.39%     7.95%      8.46%      8.24%      8.62%
</TABLE>



(1)  The required minimum capital ratios for capital adequacy purposes, as
     defined collectively by the federal banking agencies, for Tier 1 risk-based
     capital, total risk-based capital, and Tier 1 capital to average adjusted
     assets was 4.0%, 8.0% and 4.0%, respectively. To be considered "well
     capitalized" under federal regulation, these same required ratios are 6.0%,
     10.0% and 5.0%, respectively.

(2)  Core and tangible capital, as defined by OTS regulations, are substantially
     equivalent to Tier 1 capital, as disclosed above. The OTS' core and
     tangible capital requirements were 3.0% and 1.5%, respectively, during the
     indicated periods.

Asset Quality

     Allowance for loan losses. The allowance for loan losses represents an
amount management believes is adequate to provide for probable loan losses
inherent in the loan portfolio. In recent years, the Bank has begun to focus on
diversifying its loan portfolio by emphasizing and expanding its commercial and
consumer lending programs, which generally involve greater risk than residential
mortgage lending. Considering this shift in lending emphasis, together with the
Bank's expansion into the new Salisbury/Wicomico County market, management in
recent years has provided for probable loan losses which may result from the
greater inherent risk present in these loan products by increasing its allowance
for loan losses in accordance with SFAS No. 5, Accounting for Contingencies.
However, risks of future losses which cannot be quantified precisely or
attributed to particular loans or classes of loans. Because those risks are
influenced by general economic trends as well as conditions affecting individual
borrowers, management's judgment of the allowance is necessarily approximate and
imprecise. The allowance is also subject to regulatory examinations and
determinations as to



                                       32




<PAGE>




adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peer
thrifts and banks identified by regulatory agencies.

     Set forth below is a table detailing the allowance for loan losses for the
periods indicated.


<TABLE>
<CAPTION>

                                                                        Allowance for Loan Losses

                                              Six Months Ended
                                                 December 31,                          June 30,
                                            --------------------  --------------------------------------------------
                                               1997      1996       1997       1996      1995       1994      1993
                                             --------- ---------  ---------  --------- ---------  --------- --------
                                                                                 (Dollars in thousands)
<S> <C>

Balance, beginning of period                    $744      $674       $674       $555      $373       $306      $250
Loans charged off:
          Commercial                              26        20        135         26         0          0         0
   Real Estate Construction                        0         0          0          0         0          0         0
   Real estate mortgage                            0        14         14          0         0          3        16
   Home equity lines of credit                     0         0          0          0         0          0         0
            Consumer                              16        12         28          5         5          3         0
                                            --------- ---------  ---------  --------- ---------  --------- ---------

   Total loans charged-off                        42        46        177         31         5          6        16
                                            --------- ---------  ---------  --------- ---------  --------- ---------

Recoveries:
          Commercial                               1         0          1          0         0          0         0
   Real Estate Construction                        0         0          0          0         0          0         0
   Real estate mortgage                            0         0          0          0         0         25         0
   Home equity lines of credit                     0         0          0          0         0          0         0
            Consumer                               1         2          2          0         0          0         0
                                            --------- ---------  ---------  --------- ---------  --------- ---------

    Total recoveries                               2         2          3          0         0         25         0
                                            --------- ---------  ---------  --------- ---------  --------- ---------

Net charge-offs                                  (40)      (44)      (174)       (31)       (5)        19       (16)
Provision for loan losses                         66        72        244        150       187         48        72
                                            --------- ---------  ---------  --------- ---------  --------- ---------

Balance, end of period                          $770      $702       $744       $674      $555       $373      $306
                                            ========= =========  =========  ========= =========  ========= =========

Allowance for loan losses to loans
   outstanding at end of period                 1.05%     0.96%      1.00%      0.98%     0.84%      0.62%     0.53%

Allowance for loan losses to nonaccrual
   loans outstanding at end of period         204.24%   176.38%    181.46%    239.01%    76.45%     60.85%    69.23%

Net charge-offs to average loans
   outstanding during period                   -0.05%    -0.06%     -0.24%     -0.05%    -0.01%      0.03%    -0.03%
</TABLE>



     For the six months ended December 31, 1997, the Bank experienced net
charge-offs of $40,000, compared to net charge-offs of $44,000 for the same
period of 1996. Also included in the table above is the ratio of net charge-offs
to average loans outstanding during the period, which was a negative 0.05%
during the six months ended December 31, 1997 compared to a negative 0.06%
during the same period of 1996.

     For the fiscal year ended June 30, 1997, the Bank experienced net
charge-offs of $174,000. Net charge-offs in 1996 were $31,000, compared to
$5,000 in fiscal 1995. In fiscal 1994, there was a net recovery of $19,000, and
net charge-offs were $16,000 in fiscal 1993. Net charge-offs to average loans
outstanding during the periods have remained relatively stable ranging from a
positive recovery of 0.03% in fiscal 1994 to a negative charge-off of 0.05% as
of June 30, 1996. However, the Bank's net charge-offs increased to 0.24% in
fiscal 1997, primarily because the Bank foreclosed on the properties held as
collateral for loans totaling $600,000 on June 27, 1997. These properties
consisted of one commercial retail space, three parcels of nonresidential
vacation property, and a parcel of residential real estate. The properties had a
collective fair value, before estimated disposition costs, of



                                       33



<PAGE>




approximately $670,000 on the date of foreclosure, based in large part on a June
1997 appraisal of properties. The Bank performed an analysis of the collateral
according to the guidelines established by SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, and initially reported the repossessed asset as other
real estate owned at approximately $557,000, which included a $100,000 charge
off to this loan from a specific allowance. The fair value analysis included an
estimated marketing time of 24 months and disposition costs of approximately
$113,000. The Bank has since sold two of the nonresidential vacation property
parcels and the residential real estate and currently has a contract on the
remaining nonresidential vacation property parcel. The Bank has provided
financing to facilitate sale of these properties and, therefore, has not
recorded or realized gains on the sale of these properties. Additionally, the
Bank sold inventory located in the commercial retail space. At December 31,
1997, the carrying value of the properties is $372,000. Management does not
anticipate an additional loss from the disposition of such property.

     During the period ended December 31, 1997, the Bank identified loans to one
borrower totaling $313,000 that qualify as impaired under the guidelines
established by SFAS No. 114, Accounting by Creditors for Impairment of a Loan,
as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan
Income Recognition and Disclosures. The Bank expects to restructure these loans
during April 1998, but anticipates full repayment under the new terms.

     The allowance for loan losses at June 30, 1997 was $744,000, compared to
$674,000, $555,000, $373,000 and $306,000 at June 30, 1996, 1995, 1994 and 1993,
respectively, representing an increase of 10.4%, 21.4%, 48.8% and 21.9% in the
allowance during the respective periods as compared to the prior period. The
increase in the allowance for loan losses from June 30, 1993 to June 30, 1997
exceeded loan growth.

     In fiscal 1994, the Bank expanded into the Salisbury/Wicomico County market
in Maryland by establishing a de novo branch office. In view of the business and
population growth in that market area, the Bank focused on expanding its
commercial and consumer lending, both secured and unsecured. Due to the Bank's
relative inexperience with both this type of lending and the Salisbury/Wicomico
County market, and its corresponding lack of loan loss history with respect to
commercial and consumer lending, the Bank determined the prudent course was to
increase the allowance for loan losses at a more rapid rate than in past years.
The Bank also considered the historical allowance levels maintained by peer
community banks and thrifts engaged in commercial lending. The allowance for
loan losses as a percentage to period end loans equaled 1.05% at December 31,
1997, compared to 0.96% at December 31, 1996. The ratio of the allowance for
loan losses as a percentage of nonaccrual loans outstanding increased at
December 31, 1997 to 202.24%, compared to 176.38% at December 31, 1996. This
increase was attributable to the replenishing of loan loss reserves during the
twelve months ended December 31, 1997 to compensate for the $174,000 in
write-offs incurred during the fiscal year ended June 30, 1997; and due to the
inherent risk associated with the increased commercial lending activities of the
Bank.

     The allowance for loan losses as a percentage to period end loans equaled
1.00% at June 30, 1997, compared to 0.98% at June 30, 1996, also in line with
industry standards. The ratio of the allowance for loan losses as a percentage
of nonaccrual loans outstanding decreased at June 30, 1997 to 181.46%, compared
to 239.0% at June 30, 1996. This decrease was attributable to the addition of
several small loans to nonaccrual status during 1997, and because the June 30,
1996 amount was unusually low compared to other periods presented and levels
usually maintained under the Bank's normal operating activities. The allowance
to nonaccrual loans was 76.5%, 60.9%, and 69.2%, for the fiscal years ended
1995, 1994, and 1993, respectively.



                                       34




<PAGE>




     An allocation of the allowance for loan losses in dollars and as a percent
of the total allowance is provided in the following tables. Because all of these
factors are subject to change, the allocation is not necessarily predictive of
future loan losses in the indicated categories.


<TABLE>
<CAPTION>


                                                              Allocation of Allowance for Loan Losses

                             Commercial                           Real Estate                Consumer
                         ---------------------------  -------------------------- --------------------------------
                          Reserve       Percentage      Reserve      Percentage      Reserve      Percentage
                         for Loan         of Loan       for Loan       of Loan      for Loan        of Loan
                          Losses         Allowance       Losses       Allowance      Losses        Allowance
                         ---------- ---------------- ------------ -------------- ------------  ------------------
                                                               (Dollars in thousands)
<S> <C>
December 31,
        1997              $356          46.23%         $234             30.39%         $180              23.38%
        1996               260          37.04%          296             42.17%          146              20.80%


    June 30,
        1997              $392          52.69%         $184             24.73%         $168              22.58%
        1996               227          33.68%          329             48.81%          118              17.51%
        1995               145          26.13%          326             58.74%           84              15.14%
</TABLE>



     The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.

<TABLE>
<CAPTION>
<S> <C>
                                                                 Nonperforming Assets

                                                                                       June 30,
                                    December 31, ---------------------------------------------------------------------------------
                                        1997         1996         1997        1996       1995        1994       1993       1992
                                    ------------ ------------  ----------  ---------- ----------  ----------- ---------  ---------
                                                              (Dollars in thousands)
Nonaccrual loans:
          Commercial                        $0          $46          $0          $0       $448         $475      $134        $95
   Real Estate Construction                  0            0           0           0          0            0         0          0
   Real Estate Mortgage
   Real estate mortgage                    306          324         399         277        262          134       307        345
   Home equity lines of credit               0            0           0           0          0            0         0          0
            Consumer                        71           28          11           5         16            4         1          2
                                    ----------- ------------  ----------  ---------- ----------  ----------- ---------  ---------

   Total nonaccrual loans                  377          398         410         282        726          613       442        442
Other real estate owned                    446          129         620          80        115            0        22        520
                                    ----------- ------------  ----------  ---------- ----------  ----------- ---------  ---------

   Total nonperforming assets             $823         $527      $1,030        $362       $841         $613      $464       $962
                                    =========== ============  ==========  ========== ==========  =========== =========  =========

Loans past due 90 or more days
   accruing interest                        $0           $0          $0          $0         $0           $0        $0         $0
Allowance for loan losses to
    nonaccrual loans                    204.24%      176.38%     181.46%     239.01%     76.45%       60.85%    69.23%     56.56%
Nonperforming assets to period end
   loans and other real estate owned      1.11%        0.72%       1.38%       0.53%      1.27%        1.01%     0.80%      1.70%
</TABLE>





     Total nonperforming assets, which consist of nonaccrual loans and
foreclosed properties, net of allowance for other real estate losses, were
$823,000 at December 31, 1997, compared to $527,000 at December 31, 1996. The
table above indicates that as of December 31, 1997, the Bank had no loans past
due more than 90 days that were still accruing interest. The Bank's policy is
that whenever a loan reaches 90 days delinquent the loan no longer accrues
interest. Total nonperforming assets were $1.0 million at June 30, 1997,
compared to $362,000 at June 30, 1996.



                                       35




<PAGE>



     As to the nonaccrual loans at December 31, 1997 referred to above,
approximately $15,000 of interest income would have been recognized during the
fiscal year then ended, if interest thereon had been accrued. No interest income
on the nonaccrual loans outstanding as of December 31, 1997 has been included in
net income during the six months ended December 31, 1997.

     The ratio of nonperforming assets to period end loans and foreclosed
properties is also detailed within the table above. This ratio was 1.11% at
December 31, 1997, compared to 0.72% at December 31, 1996. This ratio was 1.38%
at June 30, 1997, compared to 0.53% at June 30, 1996 and 1.27% at June 30, 1995,
respectively. The ratio was 1.01% and 0.80% for fiscal years 1994 and 1993,
respectively.

     A significant portion of the total of nonperforming assets at June 30,
1997, was composed of one real estate loan with a principal balance of
approximately $600,000. On June 27, 1997, the Bank foreclosed on the properties
held as collateral for such loan. However, during the six months ended December
31, 1997, the Bank sold several pieces of collateral attached to this loan, thus
reducing the carrying value to $372,000 at December 31, 1997, and reducing the
ratios for the period when compared to June 30, 1997.

     Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until sold.
Such property is initially recorded at the lower of its fair value, or the loan
balance at the date of foreclosure or the date the Bank receives ownership of
the property through deed. Property that is held for resale is carried at the
lower of cost or fair value minus estimated selling costs. Costs relating to the
development and improvement of property are capitalized, whereas those costs
relating to holding the property are charged to expense. At December 31, 1997,
the Bank's other real estate owned amounted to $446,000, as compared to $129,000
at December 31, 1996. At June 30, 1997, the Bank's other real estate owned
amounted to $620,000, as compared to $80,000 at June 30, 1996. The increases
resulted from the foreclosure of the $600,000 nonperforming loan on June 27,
1997, as referred to above. Sales of related collateral totaled $185,000
occurring during the six months ended December 31, 1997, reducing the carrying
value of this asset to $372,000 at December 31, 1997.

     The Bank closely monitors loans that are deemed to be potential problem
loans. Loans are viewed as potential problem loans when possible credit problems
of borrowers or industry trends cause management to have doubts as to the
ability of such borrowers to comply with current repayment terms. Those loans
are subject to regular management attention, and their status is reviewed on a
regular basis. In instances where management determines that specific reserves
should be set, the Bank takes such action as is deemed appropriate.

     As of December 31, 1997, all loans 60 days or more delinquent totaled
$1,207,000, which includes performing loans that have possible credit problems
and cause management to have concerns about the borrowers' continuing ability to
comply with existing repayment terms. All loans in this category are subject to
constant management attention, and their status is reviewed on a regular basis.
With the exception of $105,000 of consumer loans, these loans are generally
secured by residential and commercial real estate with appraised values that
exceed the remaining principal balances on such loans.



                                       36



<PAGE>






Liquidity; Asset Management

     Liquidity represents the Bank's ability to meet present and future
obligations through the sale or maturity of existing assets or the acquisition
of additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, federal funds sold, and investments
maturing within one year. The Bank's ability to obtain deposits and purchase
funds at favorable rates determines its liability liquidity. As a result of the
Bank's management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
that is sufficient to satisfy its depositor's requirements and meet its
customers' credit needs. For information on regulatory liquidity requirements
see "Regulation - Liquidity Requirements."


<TABLE>
<CAPTION>

                                                              Summary of Liquid Assets
                                                                       June 30,
                                      December 31,  -----------------------------------------------
                                          1997          1997            1996              1995
                                     -------------  -----------------------------------------------
                                                (Dollars in thousands)
<S> <C>
Cash and due from banks               $ 4,191           $ 3,334         $ 4,831            $ 4,228
Federal funds sold                          0                 0               0                700
Investment securities                     699               400             401                817
Available-for-sale securities          21,030            15,445          10,325              3,353
                                     ---------  ---------------------------------------------------

       Total liquid assets            $25,920           $19,179         $15,557            $ 9,098
                                     =========  ===================================================

Deposits and other liabilities        $95,762           $96,069         $87,531            $74,221
                                     =========  ===================================================

Ratio of liquid assets to
       deposits and other liabilities   27.07%            19.96%          17.77%             12.26%
                                     =========  ===================================================

</TABLE>


     The summary above indicates sufficient liquidity to meet anticipated needs.
Additional sources of liquidity available to the Bank include the capacity to
borrow additional funds when the need arises. The Bank has obtained an available
line of credit with the FHLB for up to $9.0 million and, at December 31, 1997,
had $75,000 in outstanding FHLB advances.

     Total cash and cash equivalents increased to $4.2 million for the six
months ended December 31, 1997, compared to $2.6 million at December 31, 1996.
Net cash provided by operating activities was $289,000 for the six months ended
December 31, 1997, compared to a negative $264,000 for the same period of 1996.
Prior year's negative amount resulted from the one-time SAIF assessment incurred
during the period. Total cash and cash equivalents decreased to $3.3 million for
the fiscal year ended June 30, 1997, compared to $4.8 million and $4.9 million
at June 30, 1996 and 1995, respectively. Net cash provided by operating
activities was $955,000 for the year ended June 30, 1997, compared to $700,000
and $1.5 million for fiscal 1996, and 1995, respectively. The fluctuations in
amounts during the period from June 30, 1995 to June 30, 1997 were primarily the
result of an overall increase in earnings and the timing of related income tax
payments during such period. A decrease in fiscal 1994 taxable income compared
to fiscal 1993 taxable income resulted in smaller required estimated payments in
fiscal 1995. However, since taxable income in fiscal 1995 actually increased
over fiscal 1994, a large tax accrual was required at June 30, 1995, with the
corresponding payment of these amounts actually occurring during fiscal 1996.



                                       37



<PAGE>



     Net cash flows used in investing activities decreased to $2.5 million
during the six months ended December 31, 1997, compared to $8.8 million for the
same period of 1996. The decrease resulted from an increase in investment
maturities and reduced net loan originations during the six months ended
December 31, 1997 when compared to the same period of 1996. Net cash flows used
in investing activities decreased to $11.2 million during the fiscal year ended
June 30, 1997 compared to $14.4 million and $7.3 million for the same period of
1996 and 1995, respectively. During the period beginning June 30, 1994 through
June 30, 1997, deposits grew by approximately $30.9 million. Accordingly, a
significant amount of cash was invested in loans and securities during this
period. Additionally, the Bank purchased and opened a new banking office during
fiscal 1995 and constructed and opened another banking office during fiscal 1995
and 1996. Deposit growth slowed during the fiscal year ended June 30, 1997, as
compared to prior periods, resulting in fewer investing activities.

     Net cash flows provided by financing activities decreased to $3.1 million
for the six months ended December 31, 1997, compared to $6.9 million for the
same period of 1996. As previously mentioned, the Bank had significant deposit
growth during the period of 1994 through June 30, 1997, which resulted in
increased financing activities during these periods. However, such growth slowed
during fiscal 1997, when compared to prior periods resulting in fewer financing
activities. Deposit growth during the six months ended December 31, 1997 was
flat when compared to prior years due to less aggressive pricing during the
period. With approximately $3.1 million in new capital being raised during
August 1997, the Bank required less funding to support loan demand and was able
to be more selective in the type of deposit growth during the period.

     The Bank occasionally finds it necessary to borrow funds on a short term
basis due to fluctuations in loan and deposit levels. The Bank has several
arrangements whereby it may borrow funds overnight and on terms. As a member of
the FHLB, the Bank currently has borrowing capacity of $9.0 million, with the
ability to substantially increase this capacity by providing additional
collateral (mortgage loans and investments) to the FHLB. At December 31, 1997,
the Bank had $75,000 in outstanding FHLB advances.

     The following table details information concerning the Bank's short term
borrowings for the periods presented.


<TABLE>
<CAPTION>
                           Summary of Borrowed Funds

                                          December 31,                        June 30,
                                           ------------------------------------------------------------
                                              1997          1997               1996              1995
                                           ---------     ----------         ----------        ---------
                                                                 (Dollars in thousands)
<S> <C>

Monthly average balance of short-term
borrowings outstanding during
the period                                  $  67           $1,750              $475             $882

Weighted-average interest rate on
monthly average short-term                   5.75%            5.50%             7.37%            7.37%
borrowings

Maximum month-end balance of short-          $800           $4,075              $475             $775
term borrowings outstanding during
the period
</TABLE>




                                       38




<PAGE>


Return on Equity and Assets

     The following table summarizes ratios considered to be significant
indicators of the Bank's profitability and financial condition during the
periods indicated.


<TABLE>
<CAPTION>
                                                                 Return on Equity and Assets

                                                December 31,           June 30,
                                                              ---------------------------
                                               1997     1997    1996     1995      1994
                                              ------- -------  -------  -------  --------
<S> <C>

Return on average assets                       1.03%   0.95%    1.07%    1.02%      0.79%
Return on average equity                       9.42%  12.00%   13.86%   12.51%     10.18%
Average equity to average asset ratio         10.96%   7.90%    7.75%    8.19%      8.19%

</TABLE>







Impact of Accounting Pronouncements

     Statement No. 130, Reporting Comprehensive Income, establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, or losses) in a full set of general-purpose financial
statements, and is effective for fiscal years beginning after December 15, 1997.
This Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This Statement also requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of the other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Bank is currently assessing the impact of
this statement on its future financial statement presentation. However, the only
known item of other comprehensive income to which this standard would apply is
unrealized gains and losses on available-for-sale securities.

     FASB Statement No. 131, Disclosures about Segments of an Enterprise,
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements, requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders, and is effective for financial
statements for periods beginning after December 15, 1997. It also establishes
standards for related disclosures about products and services, geographic area,
and major customers. This Statement requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.

     This Statement also requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other



                                       39



<PAGE>



amounts disclosed for segments to corresponding amounts in the enterprise's
general-purpose financial statements. It requires that all public business
enterprises report information about the revenues derived from the enterprise's
products or services (or groups of similar products and services), about the
countries in which the enterprise earns revenues and holds assets, and about
major customers regardless of whether that information is used in making
operating decisions. However, this Statement does not require an enterprise to
report information that is not prepared for internal use if reporting it would
be impracticable. Management is currently assessing the impact of this statement
on its future financial statement disclosures.

     FASB Statement No. 132, Employer's Disclosures about Pensions and Other
Post Retirement Benefits, revises disclosures regarding pension and other post
retirement benefits and standardizes certain disclosure requirements regarding
these items. This Statement is effective for fiscal years beginning after
December 15, 1997. Management will assess the impact, if any, of this Statement
on the Company's future disclosures.

Effects of Inflation

     The Bank believes that its net interest income and results of operations
have not been significantly affected by inflation during the six months ended
December 31, 1997, and the years ended June 30, 1997 and 1996.

Year 2000 Project

     The Year 2000 presents problems for businesses that are dependent on
computer hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years most likely will not be able to
distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off.

     Management is fully aware this presents a potential business disruption,
and has begun a program of due diligence in addressing the impact of the Year
2000 on the Company and the Bank. Presently, the Company and the Bank are still
in the discovery stage of identifying all areas and processes rendering exposure
to the Year 2000 problem. However, the Company and the Bank, in conjunction with
its outside service bureau, have developed a plan to address Year 2000 exposure
surrounding the Company and the Bank's computer and data processing systems.
Since early 1997, the Bank has been updating its systems hardware to be Year
2000 compliant. The next step involves testing system software which is
scheduled to begin in mid to late 1998 and is estimated that the process will
cost approximately $25,000 to complete. In conjunction with this testing, the
Company and the Bank plan to test its other systems that are not related to the
service bureau. Management anticipates the Company and the Bank will be Year
2000 compliant, thus satisfying all regulatory requirements.



                                       40



<PAGE>




Item 7.
                              FINANCIAL STATEMENTS

The financial statements of the Bank are included (with an index listing all
such statements) in a separate financial section at the end of this Form 10-KSB
filing.


Item 8.

         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                              FINANCIAL DISCLOSURE

     The engagement of BDO Seidman, LLP was terminated in March 1997, and
Goodman & Company, LLP, was engaged in March 1997, and remains as the
independent auditors of the Bank. The decision to change auditors was approved
by the Board of Directors of the Bank. The Bank's financial statements as of
June 30, 1996, and for the year then ended, and included in this document, were
audited by BDO Seidman, LLP, as stated in their report appearing herein, and are
included in reliance of said firm as experts in accounting and auditing.

     During fiscal 1996 and 1995, and up to the date of the discontinuation of
services of BDO Seidman, LLP, there were no disagreements between the Bank and
BDO Seidman, LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of BDO Seidman, LLP, would have caused it to make a reference
to the subject matter of the disagreement in connection with its reports. During
fiscal 1996 and 1995, BDO Seidman, LLP did not issue any adverse opinion with
respect to the Bank's financial statements or any disclaimer of opinion or any
opinion which was qualified or modified as to uncertainty, audit scope or
accounting principles.

     During fiscal 1996 and 1995, and up to the date of the discontinuation of
services of BDO Seidman, LLP, the Bank did not consult Goodman & Company LLP
prior to such firm's engagement with respect to: the application of accounting
principles to a specified transaction, either completed or proposed; the type of
audit opinion that might be rendered on the Bank's financial statements; or, any
matter that was the subject of either a disagreement or a reportable event, in
each case, as described in Item 304(a) of Regulation S-K under the Exchange Act.



                                       41



<PAGE>





                                    PART III

Item 9.
          DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT


Item 10.
                             EXECUTIVE COMPENSATION


Item 11.
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


Item 12.
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     Pursuant to General Instructions E (3), the information called for by Part
     III, Items 10. through 13., is incorporated herein by reference from the
     Company's definitive proxy statement for the Company's Annual Meeting of
     Shareholders to be held in May 1998, which definitive proxy statement is to
     be filed with the Commission pursuant to Rule 14a-6 on or prior to April
     25, 1998.



                                       42




<PAGE>




                                     PART IV


Item  13.
                              EXHIBITS AND FORM 8-K


     (a)  The following exhibits are filed as part of this Form 10-KSB and this
          list includes the Exhibit Index.
<TABLE>
<CAPTION>

         No.                               Description
-------------------------------------------------------------------------------
<S><C>
         2.0      Agreement and Plan of Reorganization, dated September 9, 1997,
                  by and among Shore Bank, Shore Financial Corporation and SB
                  Interim Federal Savings Bank.*

         3.1      Articles of Incorporation of Registrant.*

         3.2      Bylaws of Registrant.*

         4.0      Stock Certificate of Registrant.

        11.0      Earnings Per Share Computation.***

        13.0      1997 Annual Report to Shareholders.**

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

        27.0      Financial Data Schedule.
-------------------------------------------------------------------------------
</TABLE>
     *    Incorporated herein by reference from the Company's Registration
          Statement on Form S-4 (Registration No. 333-35389) filed by the
          Company with the Commission on September 15, 1997.

     **   To be filed supplementally.

     ***  Information required herein is incorporated by reference from Note 15
          on page F-27 of the financial statements attached hereto to this Form
          10-KSB.

     (b) Reports on Form 8-K. No reports were filed by the registrant during the
     quarter ended December 31, 1997.


                                       43



<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.

                                       SHORE FINANCIAL CORPORATION

                                       By:  /s/ Scott C. Harvard
                                          --------------------------------------
                                           Scott C. Harvard
                                           President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act 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.

                Signature                Capacity                     Date

/s/ Henry P. Custis, Jr.        Chairman of the Board and        March 27, 1998
--------------------------------Director
Henry P Custis, Jr.

/s/ Scott C. Harvard            President (Principal Executive   March 27, 1998
--------------------------------Officer) and Director
Scott C. Harvard

/s/ Steven M. Belote            Treasurer (Principal Financial   March 27, 1998
--------------------------------Officer and Accounting Officer)
Steven M. Belote

/s/ Terrell E. Boothe           Director                         March 27, 1998
--------------------------------
Terrell E. Boothe

/s/ D. Page Elmore              Director                         March 27, 1998
--------------------------------
D. Page Elmore

/s/ Richard F. Hall, III        Director                         March 27, 1998
--------------------------------
Richard F. Hall, III

/s/ Lloyd J. Kellam, III        Director                         March 27, 1998
--------------------------------
Lloyd J. Kellam, III

/s/ L. Dixon Leatherbury        Director                         March 27, 1998
--------------------------------
L. Dixon Leatherbury

/s/ A. Jackson Mason            Director                         March 27, 1998
--------------------------------
A. Jackson Mason



                                       44




<PAGE>




                                       F-1

                   Index to Consolidated Financial Statements

                Shore Financial Corporation (Formerly Shore Bank)





Independent Auditors' Reports                                              Page

Goodman & Company, LLP......................................................F-2

BDO Seidman, LLP............................................................F-3

Consolidated Financial Statements

     Consolidated Statements of Financial Condition.........................F-4

     Consolidated Statements of Income......................................F-5

     Consolidated Statements of  Stockholders' Equity.......................F-6

     Consolidated Statements of Cash Flows..................................F-7

     Consolidated Notes to Financial Statements.............................F-8



                                       46



<PAGE>



                                                     1997
                                                     Financial Statements










                                 SHORE FINANCIAL
                                   CORPORATION
                                 AND SUBSIDIARY
                              (FORMERLY SHORE BANK)



                                       47




<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


The Board of Directors
Shore Financial Corporation
(Formerly Shore Bank)
Onley, Virginia


     We have audited the accompanying consolidated statements of financial
condition of Shore Financial Corporation (Formerly Shore Bank) as of December
31, 1997 and June 30, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the six month period ended December 31,
1997, and the year ended June 30, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements of Shore Financial Corporation
(Formerly Shore Bank) for the year ended June 30, 1996, were audited by other
auditors whose report dated July 23, 1996, expressed an unqualified opinion on
those statements.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Shore Financial Corporation (Formerly Shore Bank) as of December 31, 1997 and
June 30, 1997, and the results of its consolidated operations and its
consolidated cash flows for the periods then ended in conformity with generally
accepted accounting principles.


/s/ Goodman & Company, L.L.P.


One Commercial Place
Norfolk, Virginia
January 30, 1998




                                      F-2


                                       48


<PAGE>

Report of Independent Certified Public Accountants


To the Board of Directors of
Shore Bank
Onley, Virginia

We have audited the accompanying statements of financial condition of Shore Bank
as of June  30,  1996  and  1995,  and the  related  statements  of  operations,
stockholders'  equity,  and cash flows for the three years ended June 30,  1996.
These  financial  statements  are  the  responsibility  of  the  Savings  Bank's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Shore Bank at June 30, 1996 and
1995,  and the results of its  operations and its cash flows for the three years
ended  June  30,  1996,  in  conformity  with  generally   accepted   accounting
principles.



Richmond, Virginia                         BDO Seidman, LLP
July 23, 1996



<PAGE>




SHORE FINANCIAL CORPORATION AND SUBSIDIARY
(FORMERLY SHORE BANK)

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                                                                                               December 31,             June 30,
                                                                                                   1997                   1997
------------------------------------------------------------------------------------------------------------------------------------
<S><C>
                                    Assets

 Cash (including interest - earning deposits of
     approximately $1,841,000 and $249,000
     respectively)                                                                         $        4,190,551     $        3,334,017
Investment securities:
     Held to maturity (fair value of $5,219,045 and
         $7,902,340, respectively)                                                                  5,232,587              7,975,008
     Available for sale (amortized costs of $20,761,160 and
         $15,330,402, respectively)                                                                21,029,952             15,444,897
Investment in Federal Home Loan Bank stock,
     at cost                                                                                          580,500                580,500
Loans receivable, net                                                                              72,889,907             73,391,465
Premises and equipment, net                                                                         2,420,457              2,128,841
Real estate owned                                                                                     445,912                619,734
Accrued interest receivable                                                                           915,271                843,224
Prepaid income taxes                                                                                  124,586                 99,113
Prepaid expenses and other assets                                                                     262,791                220,666
                                                                                         -------------------------------------------

                                                                                           $      108,092,514     $      104,637,465
                                                                                         -------------------------------------------

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                                   $       95,213,440     $       94,556,340
Advances from Federal Home Loan Bank                                                                   75,000                775,000
Advance payments by borrowers for taxes
     and insurance                                                                                    215,029                319,468
Income taxes payable:
     Current                                                                                                -                 39,005
     Deferred                                                                                         103,218                 96,045
Accrued interest payable                                                                               35,755                 49,499
Accrued expenses and other liabilities                                                                120,045                233,281
                                                                                         -------------------------------------------
            Total liabilities                                                                      95,762,487             96,068,638
                                                                                         -------------------------------------------

Stockholders' equity
     Preferred stock, par value $1 per share, 500,000
         shares authorized; none issued and
         outstanding                                                                                        -                      -
     Common stock, par value $.33 per share, 5,000,000
         shares authorized; issued and  outstanding:
            December 31, 1997 - 1,804,812
            June 30, 1997 - 1,373,562                                                                 595,588                453,275
     Additional capital                                                                             3,563,592                602,365
     Retained earnings, substantially restricted                                                    8,000,729              7,440,458
     Net unrealized gain on securities available for sale                                             170,118                 72,729
                                                                                         -------------------------------------------
            Total stockholders' equity                                                             12,330,027              8,568,827
                                                                                         -------------------------------------------

                                                                                           $      108,092,514     $      104,637,465
                                                                                         ===========================================
</TABLE>

 The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-4


                                       49
<PAGE>



SHORE FINANCIAL CORPORATION AND SUBSIDIARY
(FORMERLY SHORE BANK)

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                   Six Months Ended
                                                                     December 31,                          Year Ended June 30,
                                                        ----------------------------------------------------------------------------
                                                               1997                1996                 1997                1996
------------------------------------------------------------------------------------------------------------------------------------
<S><C>
                                                                                (Unaudited)
Interest income
     Loans                                               $  3,370,342         $  3,130,993         $  6,405,440        $  6,107,230
     Investments                                              829,837              719,668            1,449,549             961,105
                                                        ----------------------------------------------------------------------------
         Total interest income                              4,200,179            3,850,661            7,854,989           7,068,335
                                                        ----------------------------------------------------------------------------

Interest expense
     Deposits                                               2,209,943            2,049,972            4,154,296           3,802,759
     FHLB advances                                              3,088               36,129               85,785              34,857
                                                       -----------------------------------------------------------------------------
         Total interest expense                             2,213,031            2,086,101            4,240,081           3,837,616
                                                       -----------------------------------------------------------------------------

Net interest income                                         1,987,148            1,764,560            3,614,908           3,230,719

Provision for loan losses                                      66,000               72,000              244,000             150,000
                                                        ----------------------------------------------------------------------------

Net interest income after
     provision for loan losses                              1,921,148            1,692,560            3,370,908           3,080,719
                                                        ----------------------------------------------------------------------------

Noninterest income
     Deposit account fees                                     239,454              222,192              444,606             337,655
     Loan fees                                                 53,200               51,819              100,244              94,446
     Other                                                     31,891               91,449              192,323              98,811
                                                       -----------------------------------------------------------------------------
         Total noninterest income                             324,545              365,460              737,173             530,912
                                                       -----------------------------------------------------------------------------

Noninterest expense
     Compensation and employee
         benefits                                             595,795              483,692            1,061,843             851,034
     Occupancy and equipment                                  306,748              237,352              495,640             405,597
     Advertising                                               27,288               28,155               54,183              47,869
     Data processing                                          195,672              159,851              355,097             315,008
     Federal insurance premium                                 29,631              533,735              562,459             170,822
     Other                                                    203,288              116,719              257,408             281,714
                                                      ------------------------------------------------------------------------------
         Total noninterest expense                          1,358,422            1,559,504            2,786,630           2,072,044
                                                      ------------------------------------------------------------------------------

Income before income taxes                                    887,271              498,516            1,321,451           1,539,587

Income taxes                                                  327,000              183,000              376,000             568,000
                                                        ----------------------------------------------------------------------------

Net income                                              $     560,271     $        315,516     $        945,451    $        971,587
                                                        ============================================================================

Earnings per common share -
     basic and diluted                                  $         .33     $           0.23     $           0.69    $           0.71
                                                        ============================================================================

</TABLE>




 The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-5

                                       50



<PAGE>




SHORE FINANCIAL CORPORATION AND SUBSIDIARY
(FORMERLY SHORE BANK)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY




-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                     Net Unrealized
                                                                                                     Gain (Loss) on
                                                    Common          Additional        Retained         Securities
                                                    Stock             Capital         Earnings     Available for Sale      Total
                                                 -------------  ------------------  ------------  -------------------- ------------
<S> <C>

Balance, June 30, 1995                            $   450,117      $   560,257      $  5,523,420    $       -          $  6,533,794


Net income                                               -                -              971,587            -               971,587


Net unrealized loss on securities
     available for sale, net of taxes                    -                -                 -            (50,028)           (50,028)
                                                 -----------------------------------------------------------------------------------


Balance, June 30, 1996                                450,117          560,257         6,495,007         (50,028)         7,455,353


Net income                                               -                -              945,451            -               945,451


Net unrealized loss on securities
     available for sale, net of taxes                    -                -                 -            122,757            122,757


Common stock issued under
     Employee Stock Option Plan                         3,158           42,108              -               -                45,266
                                                 -----------------------------------------------------------------------------------


Balance, June 30, 1997                                453,275          602,365         7,440,458          72,729          8,568,827


Net income                                               -                -              560,271            -               560,271


Net unrealized gain on securities
     available for sale, net of taxes                    -                -                 -             97,389             97,389


Common stock issued under
     Shareholder Rights Offering, net
     of offering expenses of $35,000                   33,929          702,184              -               -               736,113


Common stock issued under
     Initial Public Offering, net of
     offering expenses of $343,000                    108,384        2,259,043              -               -             2,367,427
                                                 -----------------------------------------------------------------------------------


Balance, December 31, 1997                       $    595,588     $  3,563,592    $    8,000,729    $    170,118     $   12,330,027
                                                 ===================================================================================

</TABLE>






 The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-6


                                       51



<PAGE>




SHORE FINANCIAL CORPORATION AND SUBSIDIARY
(FORMERLY SHORE BANK)

CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                            Months Ended
                                                                            December 31,                Year Ended June 30,
                                                                   ----------------------------------------------------------------
                                                                        1997             1996           1997           1996
<S> <C>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                      (Unaudited)
Cash flows from operating activities
     Net income                                                    $    560,271    $    315,516    $    945,451    $    971,587
     Adjustments to reconcile to net cash provided
         (used) by operating activities:
            Provision for loan losses                                    66,000          72,000         244,000         150,000
            Depreciation and amortization                               113,685          86,265         195,743         163,869
            Amortization of premium and accretion
                of discount on securities, net                           (4,290)        (16,150)        (17,860)        (89,479)
            (Gain) loss on sale of securities                              --            (1,556)         21,444           2,989
            (Gain) loss on sale of premises and
                equipment                                                11,723         (19,659)        (19,665)            573
            Change in net deferred loan fees                              5,463          11,036          25,007          10,065
            (Gain) loss on sale of real estate owned                       --            (8,062)         (9,062)          5,701
            Increase in other assets                                   (143,899)       (190,136)       (194,198)       (224,006)
            Decrease in other liabilities                              (320,448)       (513,716)       (236,003)       (289,914)
                                                                       --------------------------------------------------------
                Net cash provided (used) by operating activities        288,505        (264,462)        954,857         701,385
                                                                       --------------------------------------------------------

Cash flows from investing activities
     Purchase of available-for-sale securities                      (10,523,357)     (6,318,750)     (9,969,009)    (12,513,050)
     Proceeds from maturities and sales of
         available-for-sale securities                                5,090,106       1,538,285       5,061,933       5,546,029
     Purchase of held-to-maturity securities                               --              --          (465,000)     (5,602,888)
     Proceeds from maturities of held-to-maturity
         securities                                                   2,749,493          21,537         450,837       1,143,358
     Loan origination, net of repayments                                419,171      (4,051,404)     (6,095,156)     (2,706,526)
     Proceeds from sale of premises and equipment                        15,500            --            19,665           4,852
     Purchase of premises and equipment                                (428,270)        (73,859)       (245,327)       (328,988)
     Proceeds from sale of real estate owned                            184,746          34,709          42,417          29,961
                                                                     ----------------------------------------------------------
                Net cash used by investing activities                (2,492,611)     (8,849,482)    (11,199,640)    (14,427,252)
                                                                     ----------------------------------------------------------

Cash flows from financing activities
     Net increase in demand deposits                                  1,018,257         635,356       1,999,637       3,043,568
     Net increase (decrease) in time deposits                          (361,157)      2,574,039       6,403,061      10,585,452
     Proceeds from FHLB advances                                           --         9,700,000      22,000,000            --
     Repayments of FHLB advances                                       (700,000)     (6,100,000)    (21,700,000)           --
     Proceeds from the sale of common stock                           3,103,540          45,266          45,266            --
                                                                      ---------------------------------------------------------
                Net cash provided by financing activities             3,060,640       6,854,661       8,747,964      13,629,020
                                                                      ---------------------------------------------------------

Increase (decrease) in cash and cash equivalents                        856,534      (2,259,283)     (1,496,819)        (96,847)

Cash and cash equivalents, beginning of period                        3,334,017       4,830,836       4,830,836       4,927,683
                                                                      ---------------------------------------------------------

Cash and cash equivalents, end of period                           $  4,190,551    $  2,571,553    $  3,334,017    $  4,830,836
                                                                   ============================================================


Supplemental disclosure of cash flow information

     Cash paid during the period for interest                      $  2,226,774    $  2,084,383    $  4,289,966    $  3,837,691
     Cash paid for income taxes                                    $    442,700    $    336,500    $    510,644    $    754,249


Supplemental schedule of non-cash investing and
     financing activities

     Transfers from loans to real estate
         acquired through foreclosure                              $     10,811    $     85,603    $    582,400    $     43,483

</TABLE>



 The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-7

                                       52


<PAGE>





SHORE FINANCIAL CORPORATION AND SUBSIDIARY
(FORMERLY SHORE BANK)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND JUNE 30, 1997
-------------------------------------------------------------------------------


NOTE 1 - ORGANIZATION AND BUSINESS

     Shore Financial Corporation (the "Company") is a Virginia corporation
organized in September 1997 by Shore Bank (the "Bank") for the purpose of
becoming a unitary holding company of the Bank. At December 31, 1997, the
Company possessed no assets, liabilities, income and expenses. Accordingly, the
Company did not present separate parat company financial statements as of that
date. The business and management of the Company consists of the business and
management of the Bank. The Bank is a federally chartered savings bank which
began business in 1961 and is headquartered on the Eastern Shore in Onley,
Virginia. The Bank operates six banking offices on the Eastern Shore of Virginia
and Maryland, including the counties of Accomack and Northampton in Virginia and
the Salisbury/Wicomico County area in Maryland.

     During November 1997, the Bank received shareholder approval to consummate
the reorganization of the Bank into the holding company form of organization
(the "Reorganization"). Subsequent to December 31, 1997, the Bank received all
necessary federal and state regulatory approvals for the Reorganization and , in
connection therewith, the subsequent conversion of the Bank from a federally
chartered savings bank to a Virginia chartered, Federal Reserve member,
commercial bank.

     On August 20, 1997, the Bank completed a public offering of 328,435 shares
of its common stock. The public offering price was $8.25 per share, resulting in
approximately $2.37 million of net proceeds (after offering expenses) to the
Bank. In conjunction with the public offering, the Bank also completed a
subscription rights offering to its existing shareholders of record as of June
30, 1997. Under the rights offering, common shares totaling 102,815 were sold at
$7.50 per share, resulting in approximately $736,000 in net proceeds to the
Bank.




NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Change in Fiscal Year

     In conjunction with the Bank's conversion to a Virginia chartered, Federal
Reserve member, commercial bank, the Company changed its fiscal year from June
30th to December 31st.

     Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.


                         (Notes continued on next page)

                                      F-8


                                       53



<PAGE>





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Investment Securities

         Investments in debt securities classified as held-to-maturity are
stated at cost, adjusted for amortization of premiums and discounts using the
level yield method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their fair value below cost. Investments in debt and equity
securities classified as trading, if any, are stated at fair value. Unrealized
holding gains and losses for trading securities are included in the statement of
income. The Bank held no such securities during the periods reported on in the
financial statements. All other investment securities with readily determinable
fair values are classified as available-for-sale. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and reported, net of
tax effect, as a separate component of stockholders' equity until realized.

         Investment in Federal Home Loan Bank stock is reported at cost, as this
security is restricted and does not have a readily determinable fair value.

         Gains and losses on the sale of securities are determined using the
specific identification method. Other-than-temporary declines in the fair value
of individual held-to-maturity and available- for-sale securities below their
cost, if any, are included in earnings as realized losses.

         Loans Receivable

         Loans receivable consist primarily of long-term real estate loans
secured by first deeds of trust on single family residences, other residential
property, commercial property and land located primarily in an area known as the
Eastern Shore of Virginia and Maryland.

         Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan fees (costs) and discounts.

         The Bank defers certain loan fees, net of direct loan origination
costs, and the net deferred fees (costs) are amortized into interest income over
the lives of the related loans as yield adjustments. Any unamortized fees
(costs) on loans fully repaid or sold are recognized as income (expense) in the
year of repayment or sale. Deferred fees (costs) on permanent adjustable-rate
loans are amortized into income over the period necessary to adjust the yield on
the loans to market rates using the level yield method.

         The Bank places loans on nonaccrual status after being delinquent
greater than 90 days or earlier if the Bank becomes aware that the borrower has
entered bankruptcy proceedings, or in situations in which the loans have
developed inherent problems prior to being 90 days delinquent that indicate
payments of principal or interest will not be made in full. Whenever the accrual
of interest is stopped, a specific reserve is established through a charge to
expense for previously accrued but uncollected interest income. Thereafter,
interest is recognized only as cash is received until the loan is brought
current.







                         (Notes continued on next page)

                                      F- 9


<PAGE>



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Loans Receivable (continued)

         Valuation allowances for estimated losses on loans are provided on a
specific and non-specific basis. Specific allowances are provided when an
identified significant decline in value of a loan occurs. The non-specific
valuation allowance incorporates a number of factors including historical loss
experience, economic conditions, prevailing market conditions, management's
assessment of credit risk considering loan classification categories and
management's judgment. This general allowance has been established to provide
reserves for estimated inherent losses resulting from lending activities. In the
opinion of management, the present allowance is adequate to absorb reasonably
foreseeable loan losses. Additions to the allowance are reflected in current
operations. Charge-offs to the allowance are made when the loan is considered
uncollectible or is transferred to real estate acquired in settlement of loans.

         Effective July 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), Accounting by Creditors for Impairment
of a Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosures). The effect of adopting these new
accounting standards was immaterial to the operating results of the Bank for the
year ended June 30, 1996.

         Under the new accounting standard, a loan is considered to be impaired
when it is probable that the Bank will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
performing loan may be considered impaired. The allowance for loan losses
related to loans identified as impaired is primarily based on the excess of the
loan's current outstanding principal balance over the estimated fair value of
the related collateral. For a loan that is not collateral-dependent, the
allowance is recorded at the amount by which the outstanding principal balance
exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's original effective interest rate.

         For impaired loans that are on nonaccrual status, cash payments
received are generally applied to reduce the outstanding principal balance.
However, all or a portion of a cash payment received on a nonaccrual loan may be
recognized as interest income to the extent allowed by the loan contract,
assuming management expects to fully collect the remaining principal balance on
the loan.

         Real Estate Owned

         Real estate acquired through foreclosure is initially recorded at the
lower of fair value or the loan balance at date of foreclosure. Property that is
held for resale is carried at the lower of cost or fair value minus estimated
selling costs. Costs relating to the development and improvement of property are
capitalized, whereas those relating to holding the property are charged to
expense.

         Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its fair value minus estimated selling costs.






                         (Notes continued on next page)

                                      F-10


<PAGE>



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Premises and Equipment

         Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using declining balance and straight-line
methods over the estimated useful lives of the respective assets. Estimated
useful lives are as follows:

                Buildings                        25 to 40 years
                Furniture and equipment           5 to 15 years
                Automobiles                             5 years

         SAIF Premium Disparity Assessment

         Pursuant to the Economic Growth and Paperwork Reduction Act of 1996
(the "Act"), the FDIC imposed a special assessment on Savings Association
Insurance Fund ("SAIF") members to capitalize the SAIF at the designated reserve
level of 1.25% as of September 30, 1996. Based on the Bank's deposits as of
March 31, 1995, the date for measuring the amount of the special assessment
pursuant to the Act, the Bank paid a special assessment of $447,000 in November,
1996 to capitalize the SAIF.

         Income Taxes

         Deferred income taxes payable represent the cumulative tax effect from
temporary differences in the recognition of taxable or deductible amounts for
income tax and financial reporting purposes.

         In computing Federal income taxes, savings banks that meet certain
definitional tests and other conditions prescribed by the Internal Revenue Code
are allowed, within limitations, to deduct from taxable income an allowance for
bad debts based on actual loss experience, a percentage of taxable income before
such deduction or an amount based on a percentage of eligible loans. The
applicable percentage of taxable income used for the bad debt deduction was 8%
for the years ended June 30, 1996. Effective July 1, 1996, the percentage of
taxable income method and the percentage of eligible loan method for determining
the bad debt deduction are no longer available. At December 31, 1997, the
cumulative bad debt reserve, upon which no taxes have been paid on tax returns,
was approximately $1,280,000. Of this amount, $783,000 represents that portion
of the cumulative bad debt reserve for which financial statement income taxes
have not been provided, in accordance with SFAS No. 109, Accounting for Income
Taxes.















                         (Notes continued on next page)

                                      F-11


<PAGE>



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Income Taxes (continued)

         The Small Business Job Protection Act of 1996 (the "Act") repealed the
percentage of taxable income method of computing bad debt reserves, and required
the recapture into taxable income of "excess reserves," on a taxable basis over
the next six years. Excess reserves are defined in general, as the excess of the
balance of the tax bad debt reserve (using the percentage of taxable income
method) as of the close of the last tax year beginning before January 1, 1996
over the balance of the reserve as of the close of the last tax year beginning
before January 1, 1988. The recapture of the reserves is deferred if the Bank
meets the "residential loan requirement" exception, during either or both of the
first two years beginning after December 31, 1995. The residential loan
requirement is met, in general, if the principal amount of residential loans
made by the Bank during the year is not less than the Bank's "base amount". The
base amount is defined as the average of the principal amounts of residential
loans made during the six most recent tax years beginning before January 1,
1996. As of December 31, 1997, the Bank met the residential loan requirement.

         As a result of the Act, the Bank must recapture into taxable income,
for tax return purposes only, approximately $497,000 ratably over the next six
years, beginning with the year ending June 30, 1997. If the residential loan
requirement exception is met, as discussed above, the income will be includable
over the third through eighth years following the year ended June 30, 1997.

         Earnings Per Common Share

         The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share, on December 31, 1997. This statement establishes
standards for computing and presenting earnings per share (EPS). This Statement
supersedes standards previously set in APB Opinion No. 15, Earnings Per Share.
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement, and it requires a reconciliation of the numerator and
denominator of the basic EPS computation with the numerator and denominator of
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997. In accordance with
the requirements of this Statement, all prior period EPS data have been restated
to reflect the change in reporting requirements.

         Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised, converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.

         Statement of Stockholders' Equity

         All financial and per share information presented in the financial
statements has been adjusted to reflect the three-for-one stock split effected
on June 10, 1997, and the two-for-one stock split effected in the form of a
dividend on October 15, 1996.







                         (Notes continued on next page)

                                      F-12


<PAGE>



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Statement of Cash Flows

         For purposes of this presentation, cash equivalents include federal
funds sold.

         Reclassifications

         Certain reclassifications of prior years information have been made to
conform to the December 31, 1997 presentation.


NOTE 3 - INVESTMENT SECURITIES

         A summary of the amortized cost and estimated fair values of investment
securities is as follows:

<TABLE>
<CAPTION>

                                                                Gross              Gross              Estimated
                                            Amortized        Unrealized          Unrealized             Fair
December 31, 1997                             Cost              Gains              Losses              Value
                                         ---------------      --------------     ---------------     ----------
<S> <C>
Held to Maturity
    United States government
       and agency obligations            $  4,197,613       $  8,283          $  (14,073)        $   4,191,823
    Tax-exempt municipal bonds                725,000            -                  -                  725,000
    Mortgage-backed securities                309,974            -                (7,752)              302,222
                                           ----------         --------           ----------         ----------
                                            5,232,587          8,283             (21,825)            5,219,045
                                           ------------       --------           -----------        -----------

Available for Sale
    United States government
       and agency obligations              17,535,266         47,288              (5,579)           17,576,975
    Va. State Housing Authority
       bonds                                1,000,000         20,600                -                1,020,600
    Tax exempt municipal bonds                126,177            -                  (114)              126,063
    Adjustable Rate Mortgage
       Fund                                 1,174,858          1,282                -                1,176,140
    Mortgage-backed securities                284,827            -                  (302)              284,525
    Marketable equity securities -
       Federal Home Loan
           Mortgage Corporation
           Common stock                         4,113        172,036                -                  176,149
       Travelers preferred
           stock                              500,000         12,500                -                  512,500
       Other equity securities                135,919         21,081                -                  157,000
                                            ----------       ---------          ---------         ------------
                                           20,761,160        274,787              (5,995)           21,029,952
                                           -------------     ---------          ----------        -------------

                                         $  25,993,747     $ 283,070           $  (27,820)        $  26,248,997
                                           =============   ==========          ===========        =============
</TABLE>





                         (Notes continued on next page)

                                      F-13


<PAGE>



NOTE 3 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>


                                                                    Gross              Gross           Estimated
                                              Amortized        Unrealized         Unrealized                Fair
                                                   Cost             Gains             Losses               Value
                                              ---------        ----------         ----------           ---------
<S> <C>
June 30, 1997
Held to Maturity
    United States government
       and agency obligations              $  5,595,769        $  7,893           $  (65,128)         $  5,538,534
    Tax-exempt municipal bonds                2,039,000             210                  -               2,039,210
    Mortgage-backed securities                  340,239             -                (15,643)              324,596
                                           ----------           --------           -----------          ----------
                                              7,975,008            8,103             (80,771)            7,902,340
                                           ------------         --------           -----------          ----------
Available for Sale
    United States government
       and agency obligations                12,137,796           16,476             (60,085)           12,094,187
    Tax exempt municipal bonds                1,000,000              -                   -               1,000,000
    Adjustable Rate Mortgage
       Fund                                   1,140,092            1,305                 -               1,141,397
    Mortgage-backed securities                  343,733            1,205                 -                 344,938
    Marketable equity securities-
       Federal Home Loan
           Mortgage Corporation
           stock:
           Preferred                            568,750              -                   -                 568,750
           Common                                 4,112          142,888                 -                 147,000
       Other equity securities                  135,919           12,706                 -                 148,625
                                             -----------        ---------           --------            ----------
                                              15,330,402         174,580             (60,085)           15,444,897
                                             -----------      ----------         -----------            ----------

                                           $  23,305,410      $  182,683         $  (140,856)        $  23,347,237
                                           =============      ==========         ============         =============


</TABLE>





                         (Notes continued on next page)

                                      F-14


<PAGE>



NOTE 3 - INVESTMENT SECURITIES (Continued)

           The amortized cost and estimated fair value of securities at December
31, 1997 by contractual maturity, are shown below:
<TABLE>
<CAPTION>


                                                                                 Amortized           Estimated
                                                                                   Cost              Fair Value
<S> <C>
Held to Maturity
           Due in one year or less                                           $      699,461       $    697,000
           Due after one year through five years                                  2,996,090          2,995,273
           Due after five years through ten years                                   667,062            664,550
           Due after ten years                                                      560,000            560,000
           Mortgage-backed securities                                               309,974            302,222
                                                                               ------------       ------------

                                                                             $    5,232,587     $    5,219,045
                                                                             ==============     ==============



                                                                                  Amortized          Estimated
                                                                                  Cost               Fair Value

Available for Sale
           Due in one year or less                                           $    6,747,965     $    6,751,618
           Due after one year through five years                                  9,917,876          9,951,322
           Due after five years through ten years                                   495,603            500,100
           Due after ten years                                                      500,000            500,000
           Adjustable Rate Mortgage Fund                                          1,174,858          1,176,140
           Mortgage-backed securities                                               284,827            284,524
           Federal Home Loan Mortgage
                Corporation Common Stock                                              4,112            176,148
           Travelers preferred stock                                                500,000            512,500
           Va. State Housing Authority bonds                                      1,000,000          1,020,600
           Other equity securities                                                  135,919            157,000
                                                                                -----------       ------------

                                                                             $   20,761,160    $    21,029,952
                                                                             ==============    ===============
</TABLE>

           At December 31, 1997 and June 30, 1997, investment securities with a
carrying value of approximately $299,000 were pledged as collateral for public
deposits.


                         (Notes continued on next page)

                                      F-15


<PAGE>



NOTE 4 - LOANS RECEIVABLE
<TABLE>
<CAPTION>

           Loans receivable are summarized below:

                                                                                December 31,        June 30,
                                                                                   1997               1997
<S> <C>                                                                         ------------        --------
Real estate loans:
           Conventional mortgage:
                Secured by one-to-four family
                   residences                                                $    48,049,713    $    48,563,316
                Secured by multi-family
                    residences                                                     1,166,011          1,597,547
                Non-residential and land                                          10,916,543         10,254,997
                Short-term construction                                            1,617,587          2,904,772
           Home equity lines of credit                                             5,282,846          4,547,233
           Consumer loans                                                          4,130,757          4,266,024
           Commercial loans:
                Secured                                                            1,851,003          1,617,056
                Unsecured                                                          1,318,036          1,599,287
                                                                              --------------     --------------
Total loans                                                                       74,332,496         75,350,232
                                                                              --------------     --------------
Less:
           Loans in process                                                         660,000           1,208,614
           Deferred loan fees (costs), net                                           12,098               6,635
           Allowance for loan losses                                                770,491             743,518
                                                                              --------------     --------------

                                                                             $    72,889,907    $    73,391,465
                                                                             ===============    ===============

           The allowance for loan losses is summarized below:


                                                    December 31,                            June 30,
                                            -----------------------------------------------------------------------
                                                   1997               1996                1997             1996
                                            --------------     ---------------     --------------      ------------
                                                                          (Unaudited)
Balance at beginning of period              $     743,518      $     673,851      $     673,851      $     555,693
Provision charged to expense                       66,000             72,000            244,000            150,000
Recoveries(losses) charged to the
     allowance, net                               (39,027)           (43,459)           (174,333)          (31,842)
                                            --------------     --------------     ---------------    --------------

Balance at end of period                    $     770,491      $     702,392      $      743,518      $    673,851
                                            =============      =============      ===============    ==============
</TABLE>

           Impaired loans, as determined in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, were $313,000 and $0
at December 31, 1997 and June 30, 1997, respectively. There was no specific
allowance provided with respect to these impaired loans. For the six months
ended December 31, 1997 and the year ended June 30, 1997, the average recorded
investment in impaired loans was $261,000 and $250,000, respectively, and
interest income recognized on impaired loans was $13,041 and $18,628,
respectively.





                         (Notes continued on next page)

                                      F-16


<PAGE>



NOTE 5 - PREMISES AND EQUIPMENT

        Premises and equipment are summarized below:
<TABLE>
<CAPTION>


                                                                           December 31,          June 30,
                                                                               1997                1997

                                                                          ------------       ------------
<S> <C>
Land                                                                      $    415,596         $  415,596
Buildings                                                                    1,772,848          1,596,529
Furniture and fixtures                                                         825,493            668,401
Computer equipment                                                             474,879            416,779
Automobiles                                                                     79,791             82,046
Construction in process                                                            959              8,925
                                                                          ------------       ------------
                                                                             3,569,566          3,188,276
Less - accumulated depreciation                                              1,149,109          1,059,435
                                                                          ------------       ------------

                                                                          $  2,420,457       $  2,128,841
                                                                          ============       ============
</TABLE>

        Depreciation expense was $111,797, $84,377 (unaudited), $191,835 and
$159,961 for the respective periods ended December 31, 1997 and 1996, and the
years ended June 30, 1997 and 1996.


NOTE 6 - DEPOSITS

        Deposits accounts are summarized below:
<TABLE>
<CAPTION>


                                                                              December 31,         June 30,
                                                                                  1997               1997
                                                                             --------------     --------------
<S> <C>
Demand deposits
        Savings accounts                                                     $   8,908,242     $    9,212,432
        NOW accounts                                                            13,971,888         12,361,089
        Money market deposit accounts                                            3,112,747          3,401,099
                                                                             --------------     --------------
                Total                                                           25,992,877         24,974,620
Time deposits                                                                   69,220,563         69,581,720
                                                                             ---------------    ---------------

                                                                             $  95,213,440      $  94,556,340
                                                                             ===============    ===============


</TABLE>

                         (Notes continued on next page)

                                      F-17


<PAGE>



NOTE 6 - DEPOSITS (Continued)

           The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $9,919,000 and $8,800,000 at December
31, 1997 and June 30, 1997, respectively.

           Time deposits mature as follows:


December 31, 1997
Within one year                             $    46,516,117
One to two years                                  5,639,517
More than two years                              17,064,929
                                            ---------------

                                            $    69,220,563
                                            ===============


NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

         The estimated fair values of the Bank's financial instruments as of
December 31, 1997 and June 30, 1997, are as follows:

<TABLE>
<CAPTION>


                                                                              Carrying             Fair
December 31, 1997                                                              Amount             Value
                                                                              --------            -----
                                                                                    (in thousands)
<S> <C>
Financial assets
         Cash and short-term investments                                   $       4,191      $       4,191
         Securities                                                        $      26,263      $      26,249
         Loans, net of allowance for loan
                losses                                                     $      72,890      $      74,440
Financial liabilities
         Deposits                                                          $      95,213      $      95,758
         Advances from Federal Home
                Loan Bank                                                  $          75      $          75
Unrecognized financial instruments
         Commitments to extend credit                                            N/A                N/A

</TABLE>


                         (Notes continued on next page)

                                      F-18


<PAGE>



NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

<TABLE>
<CAPTION>


                                                                              Carrying              Fair
June 30, 1997                                                                  Amount               Value
                                                                              --------              -----
                                                                                  (in thousands)
<S> <C>
Financial assets
         Cash and short-term investments                                   $       3,334      $       3,334
         Securities                                                        $      23,420      $      23,347
         Loans, net of allowance for loan
                losses                                                     $      73,391      $      75,231
Financial liabilities
         Deposits                                                          $      94,556      $      92,351
         Advances from Federal Home
                Loan Bank                                                  $         775      $         744
Unrecognized financial instruments
         Commitments to extend credit                                            N/A                N/A

</TABLE>


         The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate fair value.

         Cash and short-term investments

         For cash and short-term investments, the carrying amount is a
         reasonable estimate of fair value.

         Securities

         Fair values are based on quoted market prices or dealer quotes. If a
         quoted market price is not available, fair value is estimated using
         quoted market prices for similar securities.

         Loan receivables

         The fair value of loans is estimated by discounting the future cash
         flows using the current rates at which similar loans would be made to
         borrowers with similar remaining maturities. This calculation ignores
         loan fees and certain factors affecting the interest rates charged on
         various loans, such as the borrower's creditworthiness and compensating
         balances, and dissimilar types of real estate held as collateral.

         Deposit liabilities

         The fair value of demand deposits, savings accounts, and certain money
         market deposits is the amount payable on demand at the balance sheet
         date. The fair value of fixed-maturity certificates of deposit is
         estimated using the rates currently offered for deposits of similar
         remaining maturities.

                         (Notes continued on next page)

                                      F-19


<PAGE>



NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

         Advances from Federal Home Loan Bank

         Primarily all advances from Federal Home Loan Bank are due within
         approximately ninety days from the balance sheet date. Therefore, the
         carrying amount approximates fair value.

         Commitments to extend credit

         It is not practicable to separately estimate the fair values for
         off-balance-sheet credit commitments, due to the lack of cost-effective
         reliable measurement methods for these instruments.


NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK

         Borrowings ("advances") from the Federal Home Loan Bank ("FHLB") are
scheduled to mature as follows:



                                        December 31,         June 30,
                                            1997               1997
                                        ------------         --------
Within one year                      $      -           $     700,000
One to two years                            -                  -
More than two years                         75,000             75,000
                                     -------------      -------------

                                     $      75,000      $     775,000
                                     =============      =============

         The weighted average interest rate on advances was 3.00% and 6.14% at
December 31, 1997 and June 30, 1997, respectively. These advances are
collateralized by the Bank's investment in FHLB stock and qualifying real estate
loans with a principal balance of approximately $1,500,000, and government
agency securities with a fair value of approximately $3,500,000 held under a
specific collateral agreement. As a member of the FHLB, the Bank has borrowing
capacity to $9,000,000.


                         (Notes continued on next page)

                                      F-20


<PAGE>



NOTE 9 - OTHER NONINTEREST INCOME AND EXPENSE

<TABLE>
<CAPTION>


                                                  Six Months Ended
                                                    December 31,                      Year Ended June 30,
                                        ------------------------------------------------------------------
                                              1997               1996              1997               1996
                                        ----------------   ----------------- ----------------     ---------
                                                                      (Unaudited)
<S> <C>
Other noninterest income
   FHLB stock dividend                  $    21,101        $    21,122       $    42,000        $    42,180
   Credit life commissions                    4,242              8,876            14,644             11,576
   Income from real estate held for
      investment                              2,434              6,202            11,648             10,787
   Safe deposit box rental                    4,376              3,738             7,078              6,052
   REO property expense                      (3,977)            (6,627)          (13,693)            (5,497)
   Gain (loss) on sale of fixed assets      (11,723)            19,659            19,665               (573)
   Gain (loss) on sale of real estate
      owned                                   -                  8,143             9,062             (5,701)
   Gain on sale of real estate held
      for investment                          -                  -                77,865               -
   Gain (loss) on sale of investments         -                  1,556           (21,445)              -
   Miscellaneous fees and
     commissions                             15,438             28,780            45,499             39,987
                                           --------            --------          --------           --------

                                           $  31,891     $      91,449    $      192,323    $        98,811
                                           =========           =========         ========           ========

Other noninterest expense
   Education and seminars                  $  6,064      $       9,507     $      17,584     $       13,464
   Personnel costs                           15,442             20,845            32,422             21,803
   Travel                                     6,663              8,021            20,834              9,459
   Courier cost                               5,526              6,086            11,440             13,501
   Legal and professional fees               92,863             22,297            53,137             70,697
   OTS supervisory fees                      16,360             15,070            30,869             26,794
   Loan costs                                22,083             17,182            29,899             60,503
   ATM fees                                   6,294              8,712            17,482             15,494
   Insurance                                  7,979              8,151            15,602             13,988
   Bank service charges                      14,501             14,367            28,586             23,592
   Deposit account write-offs
     (recoveries)                             8,486            (12,443)           (7,303)            20,467
   Miscellaneous                              1,027             (1,076)            6,856             (8,048)
                                            -------            ---------          -------            -------

                                           $203,288    $       116,719   $       257,408    $       281,714
                                           =========          ==========         ========           =========

</TABLE>











                         (Notes continued on next page)

                                      F-21


<PAGE>



NOTE 10 - INCOME TAXES

           The provision for income taxes is summarized below:
<TABLE>
<CAPTION>


                                   Six Months Ended
                                     December 31,                       Year Ended June 30,
                       --------------------------------------------------------------------------
                                  1997              1996              1997               1996
                            ---------------     ------------      ------------        -----------
                                        (Unaudited)
<S> <C>
Current
        Federal              $    349,000       $    170,000      $    448,000       $    513,000
        State                      29,000             13,000           (59,000)            55,000
                             -----------        -----------       -------------       -----------
                                  378,000            183,000           389,000            568,000
                             ------------       ------------      ------------       ------------
Deferred
        Federal                   (67,000)           (10,000)          (52,000)            -
        State                      16,000             10,000            39,000             -
                             -----------        -----------       -----------        ------------
                                  (51,000)           -                 (13,000)            -
                             -------------      ----------        -------------      ------------
Total
        Federal                   282,000            160,000           396,000            513,000
        State                      45,000             23,000           (20,000)            55,000
                             -----------        -----------       -------------       -----------

                             $    327,000       $    183,000      $    376,000       $    568,000
                             ============       ============      ============       ============
</TABLE>


                                                  December 31,        June 30,
                                                     1997               1997
                                                  ------------        --------
Deferred tax liability
           FHLB stock                           $     70,020        $    78,175
           Depreciation                              134,864            129,338
           Unrealized gain on securities
                available for sale                    98,672             41,748
           Other                                       8,656              -
                                                  ----------       ------------
Total deferred tax liability                         312,212            249,261
                                                  ----------       ------------
Deferred tax asset
           Bad debts and other provisions            194,714            153,216
           Contribution carryover                     14,280             -
                                                -----------        ------------
Total deferred tax asset                             208,994            153,216
                                                ------------       ------------

Net deferred tax liability                      $    103,218        $    96,045
                                                ============        ===========


                         (Notes continued on next page)

                                      F-22


<PAGE>



NOTE 10 - INCOME TAXES (Continued)

           The differences between expected federal and state income taxes at
statutory rates to actual income tax expense are summarized as follows:

<TABLE>
<CAPTION>


                                                 Six Months Ended
                                                   December 31,                       Year Ended June 30,
                                                   ------------                       -------------------
                                                    1997               1996              1997               1996
                                                ------------     ---------------   --------------     -------------
                                                                             (Unaudited)
<S> <C>
Federal income tax
    expense - at
    statutory rate                          $      301,672     $      169,495    $      449,293     $      523,460
State income tax
    expense - at
    statutory rates, net
    of federal tax effect                           35,136             19,741            52,330             60,968
Tax effect of:
    Tax exempt
       interest income                             (19,469)           (13,474)          (20,860)           (11,594)
    Dividends received
       deduction                                    (4,092)            (6,177)          (12,260)            (4,522)
    U.S. obligation
       interest income                             (33,344)           (22,298)          (41,024)           (25,199)
Nondeductible reorganization
    expense                                         23,156             -                 -                  -
Other, net                                          24,036             35,549           (51,479)            24,887
                                                  ---------          ---------         -----------        ---------

                                                 $  327,000         $ 183,000        $  376,000         $  568,000
                                                  ==========         ==========        ==========         ==========

</TABLE>

NOTE 11 - STOCKHOLDERS' EQUITY

        The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

        Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.




                         (Notes continued on next page)

                                      F-23


<PAGE>



NOTE 11 - STOCKHOLDERS' EQUITY (Continued)

        Savings institutions also must maintain specific capital standards that
are no less stringent than the capital standards applicable to national banks.
The OTS regulations currently have three capital standards including (i) a
tangible capital requirement, (ii) a core capital requirement, and (iii) a
risk-based capital requirement. The tangible capital standard requires savings
institutions to maintain tangible capital of not less than 1.5% of adjusted
total assets. The core capital standard requires a savings institution to
maintain core capital of not less than 3.0% of adjusted total assets. The
risk-based capital standard requires risk-based capital of not less than 8.0% of
risk-weighted assets. Except for net unrealized gains on securities available
for sale, regulatory capital as of December 31, 1997 and June 30, 1997, as
defined by OTS regulation, does not significantly differ from stockholders'
equity, as presented in the financial statements.

        As of June 30, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are presented in the
table.


<TABLE>
<CAPTION>
                                                                                                To Be Well
                                                                                             Capitalized Under
                                                                      For Capital            Prompt Corrective
                                              Actual               Adequacy Purposes         Action Provisions
                                    -------------------------------------------------------------------------------
                                        Amount        Ratio        Amount       Ratio       Amount        Ratio
                                        ------        -----        ------       -----       ------        -----
<S> <C>
As of December 31, 1997:                                            (in thousands)
   Total Capital
   (to Risk-Weighted Assets)           $ 12,694      21.60%       $ 4,682       8.00%      $ 5,852        10.00%
   Tier 1 Capital
   (to Risk-Weighted Assets)           $ 12,117      20.70%       $ 2,341       4.00%      $ 3,511        6.00%
   Tier 1 Capital
   (to Average Assets)                 $ 12,117      11.39%       $ 4,255       4.00%      $ 5,318        5.00%

As of June 30, 1997:
   Total Capital
   (to Risk-Weighted Assets)           $ 9,012       15.53%       $ 4,643       8.00%      $ 5,804        10.00%
   Tier 1 Capital
   (to Risk-Weighted Assets)           $ 8,449       14.56%       $ 2,321       4.00%      $ 3,482        6.00%
   Tier 1 Capital
   (to Average Assets)                 $ 8,449         8.46%      $ 3,992       4.00%      $ 4,991        5.00%


</TABLE>

                         (Notes continued on next page)

                                      F-24


<PAGE>

NOTE 11 - STOCKHOLDERS' EQUITY (Continued)

        The following table presents the Bank's regulatory capital levels
relative to the OTS requirements applicable at that date:

<TABLE>
<CAPTION>


    December 31,                     Amount           Percent             Actual             Actual             Excess
        1997                         Required         Required            Amount             Percent            Amount
                                --------------   ---------------     --------------     ---------------    -----------
<S> <C>
Tangible capital                $    1,627,000        1.50%          $    12,117,000         11.10%        $   10,490,000
Core capital                         3,256,000        3.00%               12,117,000         11.10%             8,861,000
Risk-based capital                   4,682,000        8.00%               12,694,000         21.60%             8,012,000


                                     Amount            Percent            Actual                Actual          Excess
June 30, 1997                        Required          Required           Amount                Percent         Amount
                                --------------    ---------------    --------------     ------------------ -----------

Tangible capital                $    1,585,000         1.50%         $    8,449,000          8.00%         $    6,864,000
Core capital                         3,169,000         3.00%              8,449,000          8.00%              5,280,000
Risk-based capital                   4,643,000         8.00%              9,012,000          15.53%             4,369,000

</TABLE>

           The Bank may not declare or pay a cash dividend, or repurchase any of
its capital stock, if the effect thereof would cause the net worth of the Bank
to be reduced below the net worth requirement imposed by federal regulations.


NOTE 12 - EMPLOYEE BENEFIT PLANS

           Profit Sharing Plan

           The Bank's Profit Sharing Plan Trust (the "Plan") was implemented
effective July 1, 1991. The Plan provides for retirement, death and disability
benefits. An employee becomes eligible for participation after completion of one
year of service, and becomes a member of the Plan on the earliest of January 1
or July 1 occurring on or after qualification.

           Employees may elect to defer 2%-10% of their compensation, with the
Bank making matching contributions equal to 100% of the first 3% of compensation
deferred, and 50% of the next 3%. Matching contributions made by the Bank under
the Plan totalled approximately $14,300 and $12,500 for the six months ended
December 31, 1997 and 1996 (unaudited), respectively and $23,900 and $18,500 for
the years ended June 30, 1997 and 1996, respectively. The Bank may also elect to
make discretionary contributions to the Plan; $40,000 and $35,000 of such
contributions were made during the years ended June 30, 1997 and 1996,
respectively. No such contributions were made during the six months ended
December 31, 1997 and 1996 (unaudited).

                         (Notes continued on next page)

                                      F-25


<PAGE>

NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)

           Stock Option Plan

           At December 31, 1997, the Bank has fixed stock compensation plans for
its employees. The Bank applies Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for these plans against earnings. For those companies applying APB 25, FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires certain
pro-forma disclosures of net income and earnings per share. Net income and
earnings per share computed under FASB Statement No. 123 do not materially
differ from the amounts reported in the primary financial statements.

           On December 21, 1992, the Board of Directors approved the Shore Bank
Stock Option Plan (the "Stock Option Plan"). Pursuant to the Stock Option Plan,
90,000 shares of the Bank's common stock may be used as options and awards to
employees. Options granted under the Stock Option Plan may be incentive, as
defined by the Internal Revenue Code and related rules and regulations, or
non-incentive stock options. In the case of an incentive stock option, the
exercise price for the purchase of shares at the date of grant must be at least
equal to the market value of the shares covered by the incentive stock option on
the date of grant. The exercise price per share subject to a non-incentive stock
option shall be at a price as determined by the Board of Directors, provided
that such price shall not be less than 50% of the fair market value of the
shares covered by the non-incentive stock option on the date of grant. The term
of all options and the period in which options are exercisable is determined at
the discretion of the Board of Directors. The following table represents options
outstanding under the Stock Option Plan:

<TABLE>
<CAPTION>

                                Six Months Ended
                                  December 31,              Year Ended June 30,
                                     1997                         1997                           1996
                          ----------------------------    ----------------------       ----------------------
                                            Weighted -                Weighted -                    Weighted-
                                             Average                    Average                       Average
                                            Exercise                   Exercise                      Exercise
                           Options           Price        Options       Price          Options        Price
                          --------         ----------     -------     ----------       -------      ----------
<S> <C>
Outstanding -
     beginning of year      30,000        $      4.51      30,000   $      4.51           18,000     $     4.51
Granted                     10,000               8.25       9,570          4.73           12,000           4.51
Exercised                   -                    -          9,570          4.73           -                  -
Forfeited                   -                    -             -            -             -                  -
                         ---------         ----------    --------   -----------    -------------     ----------
Outstanding -
    end of year             40,000        $      5.44      30,000   $      4.51           30,000     $     4.51
                        ==========        ===========    ========   ===========    =============     ==========
Exercisable
    end of year             40,000        $      5.44      30,000   $      4.51           30,000     $     4.51
                        ==========        ===========    ========   ===========    =============     ==========

</TABLE>

                         (Notes continued on next page)

                                      F-26


<PAGE>



NOTE 13 - RELATED PARTY TRANSACTIONS

           In the normal course of business, the Bank makes loans to directors,
officers and other related parties. Such loans are made on substantially the
same terms as those prevailing at the time for comparable transactions with
other borrowers, except that the interest rate is reduced by a stated amount for
primary residence loans for employees, as long as such person remains employed
by the Bank. A summary of related party loan activity for the periods indicated
is as follows:


                Balance, June 30, 1996            $    1,585,000
                Originations                             535,000
                Repayments                              (479,000)
                                                   --------------


                Balance, June 30, 1997                 1,641,000
                Originations                             312,000
                Repayments                              (443,000)
                                                   --------------

                Balance, December 31, 1997        $    1,510,000
                                                  ==============


NOTE 14 - COMMITMENTS AND CONTINGENCIES AND OTHER RELATED
                PARTY TRANSACTIONS

           The Bank has a lease agreement with a related party with respect to a
lot at Four Corners Plaza, Onley, Virginia, for $1,200 per month for twelve
years with four five-year renewals. Each renewal will be at the option of the
Bank and the leases will be based on the previous lease rate, after being
adjusted for changes in the consumer price index. The OTS has reviewed and
approved this lease agreement.

           In August 1997, the Bank entered into a lease agreement with a
Maryland general partnership, of which a related party is a general partner,
providing for the use of commercial office space to facilitate the Bank's new
Salisbury, Maryland bank location. The lease term began in September 1, 1997 and
expires in August, 2002. The agreement provides for three five-year renewal
periods at the Bank's option. Monthly lease amounts during the term of the lease
are $2,250 and range from $2,643 to $3,650 monthly during the renewal periods,
if executed.

           Minimum future rental payments for these operating leases are as
follows:

           Period Ending December 31,
                   1998                            $        41,400
                   1999                            $        33,000
                   2000                            $        27,000
                   2001                            $        27,000
                   2002                            $        18,000

           Rental expense under these operating leases was $16,200 and $7,200
for the six months ended December 31, 1997 and 1996 (unaudited), respectively
and $14,400 for the years ended June 30, 1997 and 1996.




                         (Notes continued on next page)

                                      F-27


<PAGE>



NOTE 14 - COMMITMENTS AND CONTINGENCIES AND OTHER RELATED
                PARTY TRANSACTIONS (Continued)

           Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include single
family residences, other residential property, commercial property and land. At
December 31, 1997 and June 30, 1997, the Bank had outstanding commitments to
originate loans with variable interest rates of approximately $3,148,000 and
$1,964,000, respectively. In addition, unused lines of credit amounted to
approximately $6,355,000 and $5,299,000 at December 31, 1997 and June 30, 1997,
respectively. The distribution of commitments to extend credit approximates the
distribution of loans outstanding.

           In the normal course of business, the Bank has entered into an
employment agreement with an executive officer. The employment agreement may be
terminated by the Board of Directors at any time. If the executive officer is
terminated without cause (as defined in the agreement), the executive officer is
entitled to base salary and benefits for a period of one year from the date of
termination.

           During January 1997, the Bank renewed its agreement with a service
company whereby the latter would furnish data processing services to the Bank
for an additional 60 months. The arrangement is similar to the previous
agreement and to those entered into by other entities in the financial
institution industry and the costs represent normal operating costs to the Bank.


NOTE 15 - EARNINGS PER SHARE RECONCILIATION

           The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations.

<TABLE>
<CAPTION>

                                                        Six Months Ended                        Year Ended
                                                          December 31,                           June 30,
                                                         --------------                         ---------
                                                   1997                1996               1997             1996
                                               --------------      --------------     --------------   ---------
                                                                 (Unaudited)
<S> <C>
Net income (numerator, basic and
     diluted)                                 $     560,271       $     315,516      $     945,451    $     971,587
Weighted average shares out-
     standing (denominator)                       1,687,625           1,365,604          1,369,550        1,363,992
                                              --------------      --------------     --------------   ---------------

Earnings per common share-basic               $     0.33          $     0.23         $     0.69       $     0.71
                                              ==============      ==============     ==============   ==========

</TABLE>

                         (Notes continued on next page)


<PAGE>


NOTE 15 - EARNINGS PER SHARE RECONCILIATION (Continued)

<TABLE>
<CAPTION>


                                                              Six Months Ended                        Year Ended
                                                                December 31,                           June 30,
                                                     ---------------------------------     --------------------------
                                                         1997                1996               1997             1996
                                                    --------------      --------------     --------------   ---------
                                                                 (Unaudited)
<S> <C>
Effect of dilutive securities:

Weighted average shares
     outstanding                                    1,687,625           1,365,604          1,369,550        1,363,992
Effect of stock options                                19,350               5,882              6,892            3,443
                                                 ------------          -----------        -----------      -----------
Diluted average shares out-
     standing (denominator)                         1,706,975           1,371,486          1,376,442        1,367,435
                                                 ------------          ----------         -----------      -----------

Earnings per common share-
     assuming dilution                              $    0.33           $    0.23          $    0.69        $    0.71
                                                 =================     ===============   =============     ===========

</TABLE>


                                    * * * * *



                                      F-29