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

Five-Year Financial Summary
Virginia Beach Federal Financial Corporation


<TABLE>
<CAPTION>
                                                                                  At December 31,
                                                      -----------------------------------------------------------------------
                                                           1997          1996          1995          1994           1993
(Dollars in thousands, except per share data)         -----------------------------------------------------------------------

<S>                                                     <C>           <C>           <C>           <C>           <C>
Selected Financial Condition Data
Total assets                                            $ 616,188     $ 606,138     $ 698,962     $719,325       $682,017
Loans held-for-investment, net                            454,477       445,055       433,562      424,435        387,171
Loans held-for-sale                                         8,356         4,785        14,020        8,341         43,733
Mortgage-backed and related securities                    111,006       106,549       137,779      215,470        176,463
Investment securities                                      19,413        27,796        26,917       38,838         43,917
Securities purchased under agreement to resell                 --            --        55,000           --             --
Deposits                                                  407,443       423,389       492,971      505,070        472,728
Borrowings                                                160,117       138,125       158,010      170,510        155,872
Stockholders' equity                                       44,149        40,827        41,032       36,885         41,514
</TABLE>

<TABLE>
<CAPTION>

                                                                              Year ended December 31,
                                                      ------------------------------------------------------------------------
Selected Statement of Operations Data                        1997          1996          1995         1994           1993
                                                      -----------------------------------------------------------------------
<S>                                                     <C>           <C>           <C>           <C>            <C>     
Interest income                                         $  48,599     $  48,345     $  52,286     $ 48,733       $ 47,267
Interest expense                                           29,637        31,629        37,272       35,664         35,784
                                                      -----------------------------------------------------------------------
Net interest income                                        18,962        16,716        15,014       13,069         11,483
Provision for loan losses                                     225           150           175          275            600
                                                      -----------------------------------------------------------------------
Net interest income after provision for loan losses        18,737        16,566        14,839       12,794         10,883
Other income                                                3,901         3,254         5,218        4,608          5,743
Other expense                                              15,981        18,929        18,250       18,661         16,433
                                                      -----------------------------------------------------------------------
Income (loss) before income taxes and cumulative
 effect of accounting change                                6,657           891         1,807       (1,259)           193
Provision (benefit) for income taxes                        2,554           322           641         (688)          (259)
Income (loss) before cumulative effect of
 accounting change                                          4,103           569         1,166         (571)           452
Cumulative effect of change in method of
 accounting for income taxes                                   --            --            --           --            700
Net income (loss)                                       $   4,103     $     569     $   1,166     $   (571)      $  1,152
Earnings per share, basic                               $    0.82     $    0.11     $    0.24     $  (0.12)     $    0.23(a)
Earnings per share, diluted                             $    0.81     $    0.11     $    0.24     $  (0.12)     $    0.23(a)
</TABLE>

<TABLE>
<CAPTION>

                                                                       At or for the year ended December 31,
                                                      ------------------------------------------------------------------------
Selected Financial Ratios and Other Data                     1997          1996          1995         1994           1993
                                                      -----------------------------------------------------------------------
<S>                                                     <C>           <C>           <C>           <C>           <C>  
Return on average assets                                    0.67%         0.09%         0.17%      (  0.08%)         0.17%
Return on average stockholders' equity                      9.82          1.39          2.99       (  1.47)          2.77
Average stockholders' equity to average assets              6.87          6.60          5.59          5.42           6.06
Book value per share                                    $   8.86      $   8.21      $   8.28      $   7.50      $    8.48
Dividend payout ratio                                         25%          145%           67%           --             70%
Number of deposit accounts                                28,998        28,140        25,885        24,374         30,635
Banking offices                                               14            15            12             9              8
</TABLE>

(a) Basic and diluted earnings per share for 1993 include $0.14 related to the
    cumulative effect of a change in the method of accounting for income
    taxes.


                                       11

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations


The discussion  which follows  describes the financial  condition and results of
operations of Virginia Beach Federal Financial Corporation (the Company) and its
subsidiary  First  Coastal  Bank,  (the Bank,  formerly  Virginia  Beach Federal
Savings  Bank)  and  should  be  read  in  conjunction   with  the  accompanying
Consolidated Financial Statements.

FIRST COASTAL BANK
During  1997,  the  Company  changed  the name of its  subsidiary  bank to First
Coastal Bank from Virginia Beach Federal Savings Bank. The new name reflects the
current  and future  intent of the  Company to offer a full range of  commercial
banking  products and services  throughout its market area,  generally  known as
Hampton Roads.

ASSET COMPOSITION AND LOAN PRODUCTION
The  Company's  total  assets were $616.2  million at December 31, 1997, a $10.1
million  increase  from  December  31, 1996.  Also at December  31, 1997,  loans
receivable  held-for-investment  were $454.5  million,  or 74% of total  assets,
representing a $9.4 million increase during 1997.  Management  believes that one
of  the  Company's   significant   strengths  lies  with  its  loan  originating
capabilities  and  expects  that loan  portfolio  growth  will  continue  in all
categories of loans with the possible  exception of 1-4 family residential loans
as described  further below.  During 1997, gross loans receivable  excluding 1-4
family  residential loans grew by $25.7 million or 17% and management's  efforts
are  focused on these  categories  of loans for  future  loan  growth.  For more
information on loans receivable refer to Note 5 to the accompanying Consolidated
Financial Statements.

1-4 family residential  lending is performed by the Company through the Bank and
its wholly-owned  subsidiary  First Coastal Mortgage Corp.  During both 1997 and
1996 the Company originated approximately $118 million in 1-4 family residential
loans. Generally,  the Bank retains the shorter term and variable rate loans for
its portfolio and sells the remainder in the secondary  market.  During 1997 and
1996,  the Company  retained  approximately  $31.3  million  and $46.9  million,
respectively,  for its portfolio.  The decrease is attributable to a combination
of lower  interest  rates and a  flattening  of the yield  curve  that  occurred
throughout 1997. These factors tend to shift the mix of loan  originations  away
from the Bank's  shorter term and variable rate  portfolio  products and towards
longer  term and fixed rate  products  which the Bank  sells into the  secondary
market.  These  same  interest  rate  factors  also  cause  an  increase  in the
prepayments  of the Bank's  existing  shorter  term and  variable  rate loans as
borrowers seeking to lower their borrowing costs refinance their loans into long
term loans with lower fixed rates. As a result of this activity,  repayments and
prepayments of the Bank's 1-4 family  residential loans exceeded new loans added
to the  portfolio by $16.6  million.  If this trend  continues,  the Company may
experience further net decreases in its 1-4 family residential loans receivable.
At year end 1997, the Company was experiencing an increase in loan  originations
due to borrower refinancing  activity,  thus producing the $3.6 million increase
in loans  receivable  available-for-sale  compared  to  year-end  1996 when loan
originations were at their usual seasonal lows.

Throughout  1997  and  1996  the  Bank's  secondary  marketing  sales  were on a
servicing released basis and,  accordingly,  there was no capitalization of loan
servicing rights because none were retained. Prior to 1996, the Company retained
loan servicing  rights and, while it no longer does so, purchased loan servicing
rights either outright or as a by-product of its correspondent  mortgage banking
activities.  At year-end 1997, the Company  serviced $187.0 million in loans for
which no cost has been  capitalized,  and serviced  $32.8  million in loans with
$288,000 of  remaining  cost to acquire  such  servicing.  For more  information
regarding loans serviced for others,  please refer to Note 5 to the accompanying
Consolidated  Financial  Statements.  In the future, the Company may retain loan
servicing rights on loans sold to Freddie Mac, Fannie Mae and Ginnie Mae in part
because of the fee  income  such  servicing  provides,  but also  because of the
continuing  contact the Company will have with the customer,  thus  facilitating
the Bank's  efforts to sell these  customers  additional  banking  products  and
services.


                                       12

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations


INVESTMENTS 
Investment securities and mortgage-backed and related securities totalled $130.4
million at December 31, 1997 or 21.2% of total assets compared to $134.3 million
at December 31, 1996. The Company  maintains a portfolio of investments in order
to enhance its return on shareholders'  equity.  These securities typically have
average  lives at purchase date of less than five years,  or are variable  rate,
and are purchased  with the intent of producing a superior  total return for the
Company  over a  reasonable  period  of time and over a range of  interest  rate
scenarios.  For more  information  regarding the securities  portfolios,  please
refer  to  Note  3  and  Note  4  to  the  accompanying  Consolidated  Financial
Statements.

NONPERFORMING ASSETS
The Company's  nonperforming assets were $8.6 million or 1.4% of total assets at
December 31, 1997  compared to $6.2  million at December 31, 1996.  The increase
during the year is largely  attributable  to impaired  loans which  increased to
$1.8 million at December  31, 1997 from $0.1  million at December 31, 1996.  For
more information  regarding the Company's  nonperforming loans,  impaired loans,
and  foreclosed  real  estate,  please  refer  to  Note  5  and  Note  6 to  the
accompanying Consolidated Financial Statements.

DEPOSITS AND BORROWINGS
The deposits of the Company were $407.4 million or 66% of total  liabilities and
stockholders' equity at December 31, 1997 compared to $423.4 million at December
31, 1996, a decrease of $16.0 million.  During 1997, brokered deposits decreased
by $33.4 million. Thus,  non-brokered retail deposits increased by $17.4 million
or 5.2% during 1997.  This retail deposit growth during 1997 occurred due to the
growth in deposits in the Bank's newer branches,  successful products introduced
throughout   the  year,  and  a  continuing   emphasis  on  generating   deposit
relationships  as  an  integral  part  of  the  Company's  lending   activities,
particularly  commercial small business  lending.  Please refer to Note 9 to the
accompanying   Notes  to  Consolidated   Financial   Statements  for  additional
information regarding the Company's deposits.

The Company also  borrows from the Federal Home Loan Bank of Atlanta  (FHLB) and
through   the  use  of   repurchase   agreements   with  retail   customers   or
broker/dealers.  Please  refer  to  Note  10 and  Note  11 to  the  accompanying
Consolidated  Financial  Statements for more information  regarding  non-deposit
borrowings.

LIQUIDITY AND CAPITAL RESOURCES
Management  of the  Company  views  liquidity  as the  ability to fund its daily
activities and asset balances in an efficient and cost effective  manner.  Daily
activities  are  primarily  focused on  deposit  account  balance  fluctuations,
primarily transaction  accounts,  which the Company manages with cash on hand or
through short term overnight advances from the Federal Home Loan Bank.  Deposits
are used to fund the  majority of the  Company's  assets,  although  retail non-
brokered deposits comprise only 58% of total assets.

Federal Home Loan Bank advances funded 23.2% of the Company's assets at December
31, 1997. Management of the Company believes that the FHLB will endeavor to keep
a  member's  borrowings  below 30% of total  assets or an  amount  supported  by
eligible  collateral,  whichever is less.  At year end 1997,  these  constraints
imposed a limit of approximately  $42.0 million in additional  advances from the
Federal Home Loan Bank.

Brokered  CD's are an additional  source of liquidity for the Company,  although
their  interest  cost is  generally  higher  than the cost of both  retail  time
deposits and advances from the Federal Home Loan Bank. The Company presently has
arrangements with several issuers of brokered CD's. Management estimates that it
has the ability to issue at least


                                       13

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

$150  million in brokered  CD's  compared to the $52.9  million or 8.6% of total
assets presently  outstanding.  However, the unconditional  issuance of brokered
CD's is dependent upon the Bank  maintaining a "well  capitalized"  status under
federal regulations.

The Office of Thrift  Supervision  (the OTS)  establishes the minimum  liquidity
requirements for savings  associations.  Regulations  provide, in part, that the
Bank must  maintain  daily  average  balances  of  liquid  assets in excess of a
certain  percentage  (presently 4%) of net withdrawable  deposits and short-term
borrowings.  The Bank met its liquidity requirements throughout 1997 and expects
to continue to meet these requirements in the future.

The OTS also  sets the  minimum  capital  requirements  for  savings  banks.  At
December 31, 1997, the Bank exceeded all of the minimum capital requirements.

The Bank's  core and  risk-based  capital  ratios  increased  to 7.0% and 12.6%,
respectively,  at  December  31,  1997 from  6.6% and  12.5%,  respectively,  at
December 31, 1996  largely  because of growth in the Bank's  regulatory  capital
without a  corresponding  increase  in  assets.  Please  refer to Note 15 to the
accompanying  Consolidated  Financial Statements for more information  regarding
the Bank's regulatory capital at December 31, 1997.

IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance  with generally  accepted  accounting  principles.  These  principles
require the measurement of financial condition and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.

Unlike most commercial and industrial companies, virtually all of the assets and
liabilities  of a  financial  institution,  such as the Bank,  are  monetary  in
nature.  As a  result,  interest  rates  have a  more  significant  impact  on a
financial  institution's  performance  than the  effects  of  general  levels of
inflation.

ASSET/LIABILITY MANAGEMENT
The Bank has established an Asset/Liability  Management Committee (ALCO) for the
purpose of monitoring and managing market risk,  which is defined as the risk of
loss arising from changes in market rates and prices.

The type of market risk which most affects the Company's  financial  instruments
is interest rate risk,  which is best  quantified by measuring the change in net
interest  income  that would  occur under  specific  changes in interest  rates.
Substantially  all of the Bank's  interest  bearing assets and  liabilities  are
exposed to interest rate risk.

Because the Company's bank  subsidiary is a savings bank and is regulated by the
OTS, it has policies and  procedures in place for  measuring  interest rate risk
pursuant to OTS Bulletin  TB-13,  among others.  These  policies and  procedures
stipulate  acceptable  levels of interest rate risk as measured by the change in
the market  value of  portfolio  equity  (MVPE)  and the change in net  interest
income (NII) over a one year horizon.  The OTS performs its own  calculation  of
MVPE  based  on  input  received  from  the  Bank,  and the  Bank  compares  its
calculations to those of OTS pursuant to the requirement of TB-13 to do so.

In order to measure interest rate risk, the Company uses computer programs which
enable it to simulate  the  changes  that will occur to the Bank's NII over nine
interest rate scenarios  which are developed by "shocking"  interest rates (i.e.
moving them  immediately  and  permanently)  400 basis points up and down in 100
basis point increments, from the current level of interest rates. In addition to
the  level  of  interest  rates,  the most  critical  assumption  regarding  the
estimated  amount of the Bank's NII is the expected  prepayment speed of the 1-4
family residential loans which comprise approximately 45% of the Company's total
assets.  For this prepayment  speed  assumption the Company uses median expected
prepayment  speeds which are obtained from a reliable  third party  source.  The
Company also  incorporates into its simulations the effects of the interest rate
caps and  interest  rate  floors  which are part of the  majority  of the Bank's
variable rate loans. The Company performs its measurements quarterly.


                                       14

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

The Company  uses its business  planning  forecast as the basis for its interest
rate risk measurement  simulations.  Therefore,  planned business activities are
incorporated into the measurement  horizon.  Such activities include assumptions
about new loan and deposit  volumes,  the pricing of loan and deposit  products,
and other  assumptions about future activities which may or may not be realized.
In order to quantify the  Company's  NII  exposure,  the Company  focuses on the
simulations of net interest income in the up 200 basis points and down 200 basis
points  scenarios.  At  December  31,  1997  these  rate  scenarios  represented
approximately  a 35% change in the level of  interest  rates.  Since  these rate
changes are assumed to be immediate and permanent,  management considers them to
cover any reasonably foreseeable one year interest rate scenario. ALCO evaluates
the simulation results and makes adjustments to the Bank's planned activities if
in its view there is a need to do so. At December  31,  1997,  the change in net
interest  income over a one year horizon using these  methodologies  was no more
than a $556,000 decrease in expected net interest income under the scenario that
produced the decrease.  This volatility was within the Bank's policy guidelines.
These  measurements,  however,  are  highly  subjective  in  nature  and are not
intended to be a prediction of the Company's net interest  income under any rate
scenario for the year 1998 or for any other period.

RESULTS OF OPERATIONS
The  operating  results of the Company  depend,  to a great  degree,  on its net
interest  income,  which is the difference  between  interest income on interest
earning assets,  primarily  loans,  mortgage-backed  and related  securities and
investment  securities,  and interest expense on interest  bearing  liabilities,
primarily deposits and borrowings.  The Company's net income is also affected by
the level of its other income, other expenses and provisions for losses on loans
and foreclosed real estate.


                                       15

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

NET INTEREST INCOME
The  following  table  sets  forth the  weighted  average  yields  earned on the
Company's  assets,  the weighted  average  interest  rates paid on the Company's
liabilities,  and the net  yield on  average  interest  earning  assets  for the
periods  indicated.  Average  balances  are  determined  on a  daily  basis  and
nonperforming  loans  are  included  in the  average  loan  amount  (dollars  in
thousands).


<TABLE>
<CAPTION>
                                       1997                              1996                              1995
                         -----------------------------------------------------------------------------------------------------
                           Average                Yield/     Average                Yield/     Average                Yield/
                           Balance    Interest     Cost      Balance    Interest     Cost      Balance    Interest     Cost
                         -----------------------------------------------------------------------------------------------------
<S>                       <C>         <C>           <C>     <C>         <C>        <C>        <C>         <C>           <C>
Assets
Loans                     $463,380    $40,037       8.64%   $436,778    $37,590       8.61%   $444,660    $37,288       8.39%
Mortgage-backed and
 related securities         99,990      6,898       6.90%    122,140      8,232       6.74%    190,617     12,559       6.59%
Investment securities
 and other earning
 assets                     26,754      1,664       6.22%     41,432      2,523       6.09%     39,189      2,439       6.23%
                          --------    -------               --------    -------               --------    -------
 Total earning assets      590,124     48,599       8.24%    600,350     48,345       8.05%    674,466     52,286       7.75%
                                      -------                           -------                           -------
Non-earning assets          17,800                            16,684                            21,653
                          --------                          --------                          --------
 Total assets             $607,924                           617,034                          $696,119
                          ========                          ========                          ========
Liabilities
Time deposits              275,040     15,866       5.77%    343,699     20,464       5.95%   $410,082     24,095       5.87%
Interest bearing
 demand and other
 deposits                  104,891      3,862       3.68%     91,596      3,433       3.75%     85,684      3,405       3.97%
FHLB advances              148,529      9,148       6.16%    118,329      7,567       6.40%    137,372      9,137       6.66%
Other borrowings            13,535        761       5.62%      3,000        165       5.52%     10,545        635       6.02%
                          --------    -------       ----    --------    -------       ----    --------    -------       ----
 Total interest bearing
  liabilities              541,995     29,637       5.47%    556,624     31,629       5.68%    643,683     37,272       5.79%
                                      -------                           -------                           -------
Non-interest bearing
 liabilities                24,160                            19,673                            13,488
                          --------                          --------                          --------
 Total liabilities         566,155                           576,297                           657,171
Stockholders' equity        41,769                            40,737                            38,948
                          --------                          --------                          --------
 Total liabilities and
  stockholders'
  equity                  $607,924                          $617,034                          $696,119
                          ========                          ========                          ========
Net interest income                   $18,962                           $16,716                           $15,014
                                      =======                           =======                           =======
Interest rate spread                                2.77%                             2.37%                             1.96%
                                                    ====                              ====                              ====
Net yield on interest
 earning assets                                     3.21%                             2.78%                             2.23%
                                                    ====                              ====                              ====
</TABLE>


                                       16

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

The following table presents, for the periods indicated,  the change in interest
income and interest  expense (in thousands)  attributed to (i) changes in volume
(changes in the daily weighted  average  balance of the total  interest  earning
asset and interest  bearing  liability  portfolios  multiplied by the prior year
rate),  and (ii)  changes  in rate  (changes  in rate  multiplied  by prior year
volume).  Changes  attributable  to the combined  impact of volume and rate have
been allocated  proportionately  based on the absolute  values of changes due to
volume and changes due to rate.


<TABLE>
<CAPTION>
                                                    1997 vs. 1996                            1996 vs. 1995
                                             Increase (Decrease) Due to               Increase (Decrease) Due to
                                           Volume        Rate         Net          Volume         Rate          Net
                                         -----------------------------------------------------------------------------
<S>                                      <C>           <C>         <C>            <C>           <C>          <C>
Interest income
Loans (1)                                $    774      $  339      $  1,113       $ (5,277)     $1,252       $ (4,025)
Investment securities                        (912)         53          (859)           137         (53)            84
                                         -----------------------------------------------------------------------------
Total change in interest income              (138)        392           254         (5,140)      1,199         (3,941)
                                         -----------------------------------------------------------------------------
Interest expense
Deposits                                   (3,488)       (681)       (4,169)        (3,721)        118         (3,603)
FHLB advances and borrowings                2,462        (285)        2,177         (1,649)       (391)        (2,040)
                                         -----------------------------------------------------------------------------
Total change in interest expense           (1,026)       (966)       (1,992)        (5,370)       (273)        (5,643)
                                         -----------------------------------------------------------------------------
Total change in net interest income      $    888      $1,358      $  2,246       $    230      $1,472       $  1,702
                                         =============================================================================
</TABLE>

(1) Includes mortgage-backed and related securities.

Net interest  income  increased by $2.2 million or 13% to $19.0  million  during
1997 compared with 1996.  Interest  income  increased by $0.3 million due to the
shift in earning asset mix away from lower  yielding  investment  securities and
into higher yielding loans and  mortgage-backed  securities.  Further  enhancing
interest income was a shift in loan mix away from the lowest yielding 1-4 family
residential  loans, and toward higher yielding loan types such as commercial and
construction. Interest expense decreased by $2.0 million due to several factors:
interest rates generally decreased throughout the year; there was a shift in mix
away from  higher  cost  brokered  time  deposits,  and  toward  lower cost FHLB
advances and non-interest bearing deposits;  and the Company's attempts to lower
interest cost by pricing time deposits as  conservatively  as market  conditions
and liquidity concerns would permit.

Net interest income  increased by 11% to $16.7 million during 1996 compared with
1995.  The  increase  was caused in part by an  increase in the ratio of earning
assets as a percent of interest bearing liabilities, which occurred because of a
decrease in  non-performing  and other  non-earning  assets,  and an increase in
non-interest bearing demand deposits.  In addition, a large amount of adjustable
rate loans  repriced  upward during the year,  contributing  to the $1.3 million
rate variance  attributable  to loans.  Net interest income also improved during
1996 due to the  successful  efforts of the  Bank's  management  to control  the
interest cost of its retail  deposits  during a period in which  interest  rates
rose by amounts  ranging  from 10 to 80 basis  points,  while still  maintaining
acceptable levels of such deposits.

PROVISIONS FOR LOSSES ON LOANS RECEIVABLE AND FORECLOSED REAL ESTATE
The Bank maintains, and the Board of Directors monitors, allowances for possible
losses on loans  receivable and  foreclosed  real estate.  These  allowances are
established based upon management's review of individually significant loans and
collateral, delinquent loans, historical trends, individual borrowers, and other
factors which  management  deems  important.  In addition,  general reserves are
established  to provide  for  unidentified  losses  which may exist in the loans
receivable portfolio.  Determining the appropriate reserve level involves a high
degree of management  judgment and is based upon historical and projected losses
in the loans  receivable  portfolio  and the  collateral  value of  specifically
identified problem loans. Further, reserve methodologies are subject to periodic
review and refinement in response to


                                       17

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

market  conditions,   actual  loss  experience  and  management's  expectations.
Accordingly,  there can be no assurance  that reserve levels will be adequate to
cover future losses that may actually occur.

The provision for losses on loans  receivable was $225,000  during 1997 compared
with $150,000 and $175,000  during 1996 and 1995,  respectively.  Net charges to
the loan reserves were $318,000  during 1997. Net recoveries of $272,000  during
1996 and $535,000  during 1995 were added to the  allowance  during these years.
Based on the  Company's  current  underwriting  and credit  review  policies and
procedures,  the  continued  reduction in the Bank's  purchased  and out of area
loans and the low level of cumulative net charges to the allowance over the past
two years,  it is management's  belief that  provisions and reserves  related to
loans  receivable are at adequate levels although no assurance can be given that
additions to the allowance will not be necessary.  Please refer to Note 5 to the
accompanying Consolidated Financial Statements.

The  provision  for losses on  foreclosed  real estate was $100,000  during 1997
compared  with  $484,000 and $200,000  during 1996 and 1995,  respectively.  The
provision  during 1996 was largely related to an increased effort during 1996 to
sell two particular properties.  Such efforts were successful and the properties
were sold during 1996,  producing the majority of the charge to the allowance of
$1.8 million.  At year end 1997,  there remains only one significant  foreclosed
real estate  property,  and the reserves of $335,000 at December 31, 1997 are in
management's  judgment  adequate to absorb the losses  which may  eventually  be
sustained on the sales of foreclosed real estate.  Please refer to Note 6 to the
accompanying Consolidated Financial Statements.

OTHER INCOME

1997 Versus 1996
The Company's  other income  increased by $647,000 or 20% to $3.9 million during
1997  compared to 1996.  Retail  banking  fees  increased by $646,000 due to the
imposition  during  April  1997  of  ATM  surcharge  fees  (i.e.  fees  paid  by
non-customers of the Bank using Bank-owned  ATM's), an increase in the number of
ATM's  producing  both  surcharge  revenue and  foreign  usage  revenue,  and an
increase in charges on deposit  accounts (e.g. NSF charges on commercial  demand
deposit accounts) due, in turn, to an increase in the number of such accounts.

1996 Versus 1995

The  Company's  other income for 1996  decreased by $2.0 million  compared  with
1995.  Gains on sales of loans  decreased by $2.0 million to $1.1 million during
1996,  consistent  with the decrease in loans sold to  correspondents  from $236
million during 1995 to $84 million  during 1996. In addition,  income from other
miscellaneous sources decreased by $381,000,  also due to the decreased level of
mortgage  lending  activity.  Offsetting  these  decreases  was an  increase  of
$251,000  in retail  banking  fees  which is  consistent  with the growth in the
Company's retail banking activities.

OTHER EXPENSE

1997 Versus 1996
The Company's other expenses decreased by $2.9 million during 1997 compared with
1996.  During 1996, the Federal Deposit Insurance  Corporation  (FDIC) imposed a
one-time special  assessment on all members,  including the Bank, whose deposits
were insured by the Savings  Association  Insurance Fund (SAIF). The purpose was
to recapitalize the SAIF, and the Company's  portion of this assessment was $3.3
million.  In addition,  the FDIC lowered the deposit insurance premium rates for
1997 for most members,  including the Bank, by 16.6 basis points.  These actions
by the FDIC,  combined with a lower deposit  insurance base during 1997 compared
to 1996,  caused the  Company's  deposit  insurance  to decrease by $4.2 million
during 1997 compared to 1996.

Absent the deposit insurance reduction noted above, the Company's other expenses
increased by $1.3 million  during 1997  compared to 1996.  Salaries and employee
benefits increased by $1.3 million and other expenses increased by


                                       18

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

$0.3 million due to the  expansion of the Company's  lending and retail  banking
activities during 1996 and 1997. At the end of 1995 the Company had 57 personnel
assigned  to the  lending  areas of the Bank,  95  personnel  assigned to retail
banking areas, 11 branches (including  supermarket  branches) open, and 17 ATM's
installed.  At the end of 1997 the Company had 79 lending and 125 retail banking
personnel,  and operated 14 branches  and 32 ATM's.  The increase in expenses is
consistent with these franchise-building activities of the Bank.

1996 Versus 1995

The Company's  other expenses  during 1996 included the SAIF  assessment of $3.3
million  which is described  above.  Excluding the SAIF charge,  other  expenses
would have been $15.6 million  during 1996  compared  with $18.2 million  during
1995.  The decrease of $2.6 million  during 1996 is mainly  associated  with the
production,  overhead  and  infrastructure  expenses  incurred  throughout  1995
related to the Company's five loan production offices which were sold during the
fourth quarter of 1995.

INCOME TAXES
The Company's  effective tax rate for 1997 was 38.4%  compared with 36.1% during
1996  and  35.5%  during  1995.  Please  refer  to Note  12 to the  accompanying
Consolidated  Financial  Statements  for  additional  information  regarding the
Company's income taxes.

On August 20, 1996,  President  Clinton  signed into law the Small  Business Job
Protection Act of 1996. This bill, among other things, equalizes the taxation of
thrifts  and banks.  For tax years up  through  1995,  thrifts  had been able to
deduct a portion of their  bad-debt  reserves set aside to cover  potential loan
losses ("bad-debt  reserves").  Under the bill, large thrifts must change to the
specific  charge-off  method for computing their bad debt deduction for 1996 and
future years.  Furthermore,  the bill repeals current law mandating recapture of
thrifts' bad debt reserves if they convert to banks. Bad debt reserves set aside
through 1987  generally  will not be taxed,  however,  any reserves  added since
January  1,  1988,  will be taxed  over a six  year  period  beginning  in 1997.
Institutions   can   delay   these   taxes   for  two   years  if  they  meet  a
residential-lending  test.  This  legislation is not expected to have a material
adverse  effect on the  financial  condition  or  results of  operations  of the
Company taken as a whole.

IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS
The  Financial  Accounting  Standards  Board  (FASB)  has  issued  Statement  of
Financial  Accounting  Standards  No. 130 (SFAS 130),  "Reporting  Comprehensive
Income," which will be effective for fiscal years  beginning  after December 15,
1997.  SFAS  130  establishes   standards  for  reporting  and  presentation  of
comprehensive  income and its components  (revenues,expenses,  gains and losses)
within the Company's consolidated financial statements. Generally, comprehensive
income includes net income along with other  transactions not typically recorded
as a component of net income,  including  changes in unrealized gains and losses
on securities available for sale. The provisions of this statement are effective
with 1998 interim reporting.  The disclosure requirements will have no impact on
financial position or results of operations of the Company.

The FASB has also issued  Statement of Financial  Accounting  Standards  No. 131
(SFAS  131),   "Disclosures   about   Segments  of  an  Enterprise  and  Related
Information," which establishes  standards for determining a company's operating
segments and the type and level of financial information to be disclosed in both
annual and interim  financial  statements.  It also  establishes  standards  for
related  disclosures  about products and services,  geographic  areas, and major
customers.  SFAS 131 will be effective for financial statements for fiscal years
beginning  after  December  15,  1997.  However,  SFAS 131 is not required to be
applied for interim reporting in the initial year of application.


                                       19

<PAGE>

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

Management's Discussion and Analysis of
Financial Condition and Results of Operations

YEAR 2000
During  1997 the  Company  instituted  a  comprehensive  set of  procedures  and
timetables to address and resolve issues  surrounding  what is commonly known as
the "year 2000 problem" which is related to computer-based business applications
and the potential for such  applications  to fail to recognize the year 2000 and
beyond and thus to fail to operate  properly.  These  procedures  and timetables
generally  provide for  identification of all potentially  problematic  software
applications  by  year  end  1997,  the  development  of a  plan  for  modifying
problematic applications and the commencement of such modifications by mid-1998,
the completion of  modifications  and  commencement of testing by year end 1998,
and the completion of testing and software modifications by mid-1999.


Nearly all of the computer-based  applications which are used by the Company and
which  are the  object of year  2000  concerns  are  either  purchased  software
applications, such as general ledger and loan application processing systems run
in-house,  or are  related to  outsourced  data  processing  activities  such as
deposit account  transaction  processing and loan  servicing.  In most cases the
software  vendor  or  outsourced  processors  will be  required  to adapt  their
respective  software and systems to be year 2000 compliant.  Because the Company
has historically  dealt only with vendors with large customer bases, the Company
believes  that it is not at  substantially  greater risk because of this loss of
direct  control  over  year  2000  remediation   activities  of  these  vendors.
Nevertheless,  the Company is overseeing  the  activities of such vendors to the
extent that it can, as if such activities were the Company's own.

The Company  generally  expects to carry out its year 2000  activities  with its
human resources  presently on hand. The impact of year 2000  expenditures is not
expected  to have a material  impact on the  Company's  results  of  operations,
liquidity and capital resources.

FORWARD-LOOKING STATEMENTS
A number of matters and subject  areas  discussed in this Annual Report that are
not  historical or current  facts involve  potential  future  circumstances  and
developments.  These include expected future financial results, liquidity needs,
management's  or the  Company's  expectations  and beliefs  and similar  matters
discussed in  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations or elsewhere in this Annual  Report.  The  discussions  of
such  matters  and  subject  areas  are  qualified  by  the  inherent  risk  and
uncertainties surrounding future expectations generally, and also may materially
differ from the Company's actual future experience.

The Company's  business,  operations  and financial  performance  are subject to
certain risks and  uncertainties  which could result in material  differences in
actual results from  management's or the Company's current  expectations.  These
risks and  uncertainties  include,  but are not  limited  to,  general  economic
conditions,  market interest rate levels,  demand for the Company's products and
services and costs of operations.


                                       20

<PAGE>

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

Report of Independent Auditors
Virginia Beach Federal Financial Corporation



To the Board of Directors and Stockholders of
Virginia Beach Federal Financial Corporation


We have audited the accompanying  consolidated  statement of financial condition
of Virginia Beach Federal  Financial  Corporation and subsidiaries (the Company)
as of December 31, 1997 and 1996,  and the related  consolidated  statements  of
operations,  cash  flows and  stockholders'  equity for each of the years in the
three-year  period  ended  December  31,  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.


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 consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of Virginia  Beach
Federal Financial Corporation and subsidiaries as of December 31, 1997 and 1996,
and the results of their  operations  and their cash flows for each of the years
in the three-year  period ended  December 31, 1997 in conformity  with generally
accepted accounting principles.

                                                   /s/ KPMG Peat Marwick LLP



Richmond, Virginia
January 30, 1998

                                       21

<PAGE>

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

Consolidated Statement of Financial Condition
Virginia Beach Federal Financial Corporation



<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                          -------------------------
                                                                                              1997          1996
(Dollars in thousands, except share data)                                                 -------------------------
<S>                                                                                        <C>           <C>
Assets
Cash and amounts due from banks                                                            $  7,236      $  3,059
Federal funds sold and interest bearing deposits                                                194         4,276
Investment securities
 Held-to-maturity (approximate fair value $10,786 in 1997 and $14,687 in 1996)               11,006        14,943
 Available-for-sale                                                                           8,407        12,853
Mortgage-backed and related securities
 Held-to-maturity (approximate fair value $23,780 in 1997 and $28,849 in 1996)               24,369        29,764
 Available-for-sale                                                                          86,637        76,785
Loans receivable, net
 Held-for-investment                                                                        454,477       445,055
 Held-for-sale                                                                                8,356         4,785
Foreclosed real estate, net                                                                   2,382         2,047
Accrued income receivable, net                                                                4,414         4,289
Property and equipment, net                                                                   6,888         5,642
Other assets                                                                                  1,822         2,640
                                                                                          -------------------------
                                                                                           $616,188      $606,138
                                                                                          =========================
Liabilities and Stockholders' Equity
Liabilities
 Deposits                                                                                  $407,443      $423,389
 Advances from the Federal Home Loan Bank                                                   143,084       133,110
 Securities sold under agreements to repurchase                                              17,033         5,015
 Advance payments by borrowers for taxes and insurance                                          906           966
 Other liabilities                                                                            3,573         2,831
                                                                                          -------------------------
                                                                                            572,039       565,311
                                                                                          -------------------------
Stockholders' equity
 Serial preferred stock, 5,000,000 shares authorized, no shares issued or outstanding            --            --
 Common stock, $.01 par value, 10,000,000 shares authorized; issued and outstanding
  4,980,611 shares in 1997 and 4,970,307 shares in 1996                                          50            50
 Capital in excess of par value                                                               9,465         9,336
 Unrealized gain (loss) on available-for-sale securities, net of tax                             46           (39)
 Retained earnings -  substantially restricted                                               34,588        31,480
                                                                                          -------------------------
                                                                                             44,149        40,827
                                                                                          -------------------------

Commitments and contingencies                                                             -------------------------
                                                                                           $616,188      $606,138
                                                                                          =========================
</TABLE>

The notes to consolidated financial statements are an integral part of this
statement

                                       22

<PAGE>

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

Consolidated Statement of Operations
Virginia Beach Federal Financial Corporation



<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                           --------------------------------------
                                                             1997           1996           1995
(Dollars in thousands, except per share data)              --------------------------------------
<S>                                                        <C>            <C>            <C>
Interest and fees on loans                                 $ 40,037       $ 37,590       $ 37,288
Interest on mortgage-backed and related securities            6,898          8,232         12,559
Other interest and dividend income                            1,664          2,523          2,439
                                                           --------------------------------------
Total interest income                                        48,599         48,345         52,286
                                                           --------------------------------------
Interest on deposits                                         19,728         23,897         27,500
Interest on advances from the Federal Home Loan Bank          9,148          7,567          9,137
Interest on repurchase agreements                               761            165            635
                                                           --------------------------------------
Total interest expense                                       29,637         31,629         37,272
                                                           --------------------------------------
Net interest income                                          18,962         16,716         15,014
Provision for loan losses                                       225            150            175
                                                           --------------------------------------
Net interest income after provision for loan losses          18,737         16,566         14,839
                                                           --------------------------------------
OTHER INCOME
 Gain on sales of securities available-for-sale                  15             --            103
 Gain on sales of loans                                       1,258          1,132          3,166
 Gain on sales of foreclosed real estate                         60            181             94
 Retail banking fees                                          1,496            850            599
 Mortgage loan servicing fees                                   687            726            641
 Other                                                          385            365            615
                                                           --------------------------------------
                                                              3,901          3,254          5,218
                                                           --------------------------------------
OTHER EXPENSES
 Salaries and employee benefits                               7,904          6,564          8,500
 Net occupancy expense                                        3,103          3,078          3,388
 Provision for losses on foreclosed real estate                 100            484            200
 Other net expense of foreclosed real estate                     97            126            202
 Federal deposit insurance premiums                             333          4,514          1,314
 Other                                                        4,444          4,163          4,646
                                                           --------------------------------------
                                                             15,981         18,929         18,250
                                                           --------------------------------------
Income before income taxes                                    6,657            891          1,807
Provision for income taxes                                    2,554            322            641
                                                           --------------------------------------
Net income                                                 $  4,103       $    569       $  1,166
                                                           ======================================
Earnings per share, basic                                  $   0.82       $   0.11       $   0.24
Earnings per share, diluted                                $   0.81       $   0.11       $   0.24
</TABLE>

The notes to consolidated financial statements are an integral part of this
statement

                                       23

<PAGE>

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

Consolidated Statement of Cash Flows
Virginia Beach Federal Financial Corporation



<TABLE>
<CAPTION>
                                                                                December 31,
                                                                 ------------------------------------------
                                                                     1997            1996            1995
(Dollars in thousands)                                           ------------------------------------------
<S>                                                              <C>             <C>             <C>
Cash flows from operating activities
 Net income                                                      $    4,103      $      569      $    1,166
 Adjustments to reconcile net income to net cash provided by
    operating activities
  Provision for loan losses                                             225             150             175
  Provision for losses on foreclosed real estate                        100             484             200
  Depreciation                                                        1,155           1,131           1,041
  Amortization of loan discounts, premiums and fees, net               (794)         (1,090)         (1,001)
  Amortization of other discounts and premiums, net                  (1,395)            379             896
  Gain on sales of securities available-for-sale                        (15)             --            (103)
  Gain on sales of foreclosed real estate                               (60)           (181)            (94)
  Gain on sales of loans                                             (1,258)         (1,132)         (3,166)
  Loss on sales of property and equipment                                --              --              59
  Acquisition of loans held-for-sale                               (117,790)       (118,488)       (216,770)
  Proceeds from sales of loans held-for-sale                        115,477         128,855         214,257
  Decrease (increase) in accrued income receivable                     (125)            257             327
  Decrease in other assets                                              773           4,671           4,032
  Increase (decrease) in other liabilities                              742          (2,906)            343
                                                                 ------------------------------------------
   Net cash provided by operating activities                          1,138          12,699           1,362
                                                                 ------------------------------------------
Cash flows from investing activities
 Net increase in loans receivable                                   (11,097)        (11,869)        (11,950)
 Principal payments received on mortgage-backed and related
  securities                                                         28,972          31,161          29,680
 Proceeds from maturities of investment securities                    9,122           9,000          15,038
 Proceeds from sales of
  Securities purchased under agreements to resell                        --          55,000              --
  Investment securities available-for-sale                            2,015              --              --
  Mortgage-backed and related securities available-for-sale              --              --          52,407
  Foreclosed real estate                                              2,005           4,795           5,929
  Property and equipment                                                 --               8             288
 Purchases of
  Securities purchased under agreement to resell                         --              --         (55,000)
  Investment securities held-to-maturity                                 --          (8,000)         (3,000)
  Investment securities available-for-sale                           (2,684)         (2,000)             --
  Mortgage-backed and related securities available-for-sale         (31,959)             --              --
  Property and equipment                                             (2,401)         (1,466)         (1,546)
  Improvements to foreclosed real estate                               (136)            (62)         (1,325)
                                                                 ------------------------------------------
   Net cash provided by (used for) investing activities              (6,163)         76,567          30,521
                                                                 ------------------------------------------
</TABLE>

                                                                    (continued)

                                       24

<PAGE>

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

Consolidated Statement of Cash Flows
Virginia Beach Federal Financial Corporation



<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                     -----------------------------------------
                                                                        1997           1996           1995
(Dollars in thousands)                                               -----------------------------------------
<S>                                                                  <C>            <C>            <C>
Cash flows from financing activities
 Net increase in money market deposit accounts,
  NOW accounts and savings deposits                                      31,509          8,775         10,134
 Net decrease in time deposits                                          (47,455)       (78,358)       (22,233)
 Proceeds from advances from the Federal Home Loan Bank                 232,700        359,000        427,000
 Payments on advances from the Federal Home Loan Bank                  (222,726)      (383,900)      (425,000)
 Net increase (decrease) in securities sold under agreements to
  repurchase                                                             12,018          5,015        (14,500)
 Net decrease in advance payments by borrowers for taxes and
  insurance                                                                 (60)          (286)          (254)
 Proceeds from sale of common stock                                         129             99            269
 Cash dividends paid                                                       (995)          (795)          (789)
                                                                     -----------------------------------------
 Net cash provided by (used for) financing activities                     5,120        (90,450)       (25,373)
                                                                     -----------------------------------------
 Increase (decrease) in cash and cash equivalents                            95         (1,184)         6,510
 Cash and cash equivalents at beginning of year                           7,335          8,519          2,009
                                                                     -----------------------------------------
 Cash and cash equivalents at end of year                            $    7,430     $    7,335     $    8,519
                                                                     =========================================
Cash and cash equivalents includes:
 Cash                                                                $    7,236     $    3,059     $    6,093
 Federal funds sold and interest bearing deposits                           194          4,276          2,426
                                                                     -----------------------------------------
                                                                     $    7,430     $    7,335     $    8,519
                                                                     =========================================
Supplemental cash flow information
 Interest paid on deposits, advances and other borrowings            $   30,151     $   32,930     $   37,155
 Income taxes paid                                                        1,995          1,606          1,327
Schedule of noncash investing and financing activities
 Real estate acquired in settlement of loans, net of allowances      $    2,244     $      312     $    3,649
</TABLE>

The notes to consolidated financial statements are an integral part of this
statement

                                       25

<PAGE>

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

Consolidated Statement of
Stockholders' Equity
Virginia Beach Federal Financial Corporation



<TABLE>
<CAPTION>
                                                                                Unrealized
                                                             Capital in       Gain (Loss) on
(Dollars in thousands,                  Common Stock          Excess of     Available-for-Sale      Retained
                                      Shares      Amount      Par Value         Securities          Earnings       Total
except share data)                 -------------------------------------------------------------------------------------
<S>                                 <C>             <C>        <C>               <C>                <C>          <C>
Balance, December 31, 1994          4,920,651       $49        $8,969            $ (3,462)          $31,329      $36,885
 Net income for 1995                       --        --            --                  --             1,166        1,166
 Sale of common stock to
  employee stock purchase
  plan                                 20,259         1           167                  --                --          168
 Exercise of stock options             16,512        --           101                  --                --          101
 Change in unrealized gain
  (loss) on available-for-sale
  securities, net of tax                   --        --            --               3,501                --        3,501
 Cash dividends paid
  ($0.16 per share)                        --        --            --                  --              (789)        (789)
                                    -------------------------------------------------------------------------------------
Balance, December 31, 1995          4,957,422        50         9,237                  39            31,706       41,032
 Net income for 1996                       --        --            --                  --               569          569
 Sale of common stock to
  employee stock purchase
  plan                                 10,935        --            87                  --                --           87
 Exercise of stock options              1,950        --            12                  --                --           12
 Change in unrealized gain
  (loss) on available-for-sale
  securities, net of tax                   --        --            --                 (78)               --          (78)
 Cash dividends paid
  ($0.16 per share)                        --        --            --                  --              (795)        (795)
                                    ------------------------------------------------------------------------------------- 
Balance, December 31, 1996          4,970,307        50         9,336                 (39)           31,480       40,827
 Net income for 1997                       --        --            --                  --             4,103        4,103
 Sale of common stock to
  employee stock purchase
  plan                                  6,091        --            78                  --                --           78
 Exercise of stock options                750        --             5                  --                --            5
 Sale of common stock to
  dividend reinvestment plan            3,463        --            46                  --                --           46
 Change in unrealized gain
  (loss) on available-for-sale
  securities, net of tax                   --        --            --                  85                --           85
 Cash dividends paid
  ($0.20 per share)                        --        --            --                  --              (995)        (995)
                                    ------------------------------------------------------------------------------------- 
Balance, December 31, 1997          4,980,611       $50        $9,465            $     46           $34,588      $44,149
                                    =====================================================================================
</TABLE>

The notes to  consolidated  financial  statements  are an integral  part of this
statement

                                       26

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The  consolidated  financial  statements  include the accounts of Virginia Beach
Federal  Financial  Corporation  (the "Company") and its wholly owned subsidiary
First Coastal Bank and its wholly-owned  subsidiaries.  The Company is a unitary
thrift  holding  company  with its primary  market area and majority of business
being in the Hampton  Roads region of  Virginia.  All  significant  intercompany
balances and transactions have been eliminated.

Investments in Debt and Equity Securities

The  Company  accounts  for its  investments  in debt and equity  securities  in
accordance with Statement of Financial  Accounting  Standards No. 115 (FAS 115),
"Accounting  for Certain  Investments  in Debt and Equity  Securities."  FAS 115
requires  that these  securities  be  classified  and accounted for according to
three categories:  held-to-maturity,  available-for-sale or trading. The Company
does not trade securities.  Realized gains and losses on investments in debt and
equity securities are determined on a specific cost basis.

Held-to-maturity  securities are stated at cost,  adjusted for  amortization  of
premiums and accretion of discounts  using the level yield  method.  The Company
has adequate  liquidity and capital,  and it is  management's  intention to hold
such assets to maturity.

Available-for-sale  securities  are  carried at fair value  based upon market or
broker  quotations  except for Federal  Home Loan Bank stock which is carried at
par value.  Deferred  income  taxes are  provided on any increase or decrease in
fair value.  Such  increase or  decrease in fair value,  net of deferred  income
taxes,  is  reflected  as  a  separate   component  of   stockholders'   equity.
Amortization  of premiums and  accretion of discounts are  determined  using the
level yield method.

Lending Activities

The Company  originates  mortgage loans for its own portfolio or for sale in the
secondary  market.  Loan  origination  fees and certain direct loan  origination
costs are  deferred.  Once  originated,  mortgage  loans are  designated as held
either for investment or sale. Mortgage loans  held-for-investment are stated at
unpaid  principal  balances,  less  the  allowance  for loan  losses  and net of
deferred  loan  origination   costs,  fees  and  premiums  or  discounts.   Loan
origination  fees,  net of related  direct costs,  are  amortized  into interest
income on loans using the level yield method.  Mortgage  loans held for sale are
carried at the lower of cost or market value,  determined on an aggregate basis.
The Company hedges its interest rate risk on loan  commitments and the inventory
of mortgage loans held for sale through  mandatory and optional delivery forward
commitments to permanent investors,  or through forward sales of mortgage-backed
securities.  Hedging  gains and  losses are  deferred  and  recognized  when the
related loans are sold.

Allowance for Loan Losses

The  allowance  for loan  losses is  maintained  at an amount  management  deems
adequate  to  cover  estimated  losses  inherent  in  the  loan  portfolio.   In
determining  the amount to be maintained,  management  considers the Bank's past
loan  loss  experience,  known  and  inherent  risks in the  portfolio,  adverse
situations that may affect borrowers' abilities to repay, the estimated value of
underlying  collateral and current  economic  conditions.  The Company's  actual
credit losses may differ from those  estimates  used to establish the allowance.
The  allowance for loan losses is increased by charges to earnings and decreased
by net charge-offs.

The Company  measures  the value of impaired  loans based  either on  discounted
expected  future cash flows,  the observable  market value of a loan or the fair
value of the collateral  securing the loan and establishes an allowance for loan
losses based on this measurement.  The Company  includes,  as a component of its
allowance of loan losses,  amounts it deems adequate to cover  estimated  losses
related to impaired loans.  Interest income on impaired loans is recognized on a
cash basis.  Cash received on impaired  loans is recorded as interest  income or
applied as a reduction  of  principal  if in  management's  opinion the ultimate
collectibility of principal is in doubt.


                                       27

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Provision for Uncollected Interest

The Company  classifies  loans as  non-accrual  and  provides an  allowance  for
uncollected  interest when loans become 90 days  delinquent or are identified as
impaired.  The allowance is netted against accrued interest income receivable in
the financial statements.  Loans are restored to accrual status when the loan is
brought current and is judged by management to no longer be impaired.

Foreclosed Real Estate

At the date of foreclosure, real estate is recorded at the lower of the carrying
value of the loan or its fair value,  provided by independent  appraisals,  less
estimated costs of sale. Costs related to the development of the real estate are
capitalized.  Costs in excess of estimated  fair value of individual  properties
and net cost related to holding properties are expensed.

Subsequent to foreclosure,  valuations are periodically performed by management,
and an  allowance  for  losses is  established  by a charge to  earnings  if the
carrying  value of a property  exceeds its estimated  fair value less  estimated
costs of sale.  Actual  losses  sustained  by the  Company may differ from those
estimates used to determine the fair value of foreclosed real estate.

Property and Equipment

Property  and  equipment  is stated at cost less  accumulated  depreciation  and
amortization.   Assets  are  depreciated  using  the  straight-line  method  for
financial  reporting  purposes and accelerated  methods for income tax purposes.
Leasehold  improvements  are amortized using the  straight-line  method over the
shorter of the lease term or the estimated  life of the  improvement.  Estimated
lives are three to eight years for equipment and five to  thirty-nine  years for
buildings and leasehold improvements.

Securities Sold Under Agreements to Repurchase

The Company  enters into sales of  securities  under  agreements  to  repurchase
(repurchase agreements). These fixed-coupon repurchase agreements are treated as
financings and the obligations to repurchase  securities sold are reflected as a
liability in the statement of financial condition. The securities underlying the
agreements remain in the consolidated asset accounts.

Income Taxes

The Company  recognizes  deferred tax assets and  liabilities  for the estimated
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases.

Use of Estimates

Management  of the  Company  has  made a number  of  estimates  and  assumptions
relating  to the  reporting  of assets and  liabilities  and the  disclosure  of
contingent  assets and  liabilities  to  prepare  these  consolidated  financial
statements in accordance with generally accepted accounting  principles.  Actual
results may differ from these estimates.

Derivative Financial Instruments

The  Company  uses  derivative  financial  instruments  in order to  manage  its
financial asset and liability  portfolio interest rate risk. It is the Company's
intent that such transactions qualify for hedge accounting treatment.

Changes in the fair value of derivative  financial  instruments  qualifying  for
hedge  accounting  treatment are not recognized in the results of operations and
the statement of financial  condition.  As such,  amounts paid or received under
interest rate swap agreements are recognized in the periods in which they accrue
as an adjustment to the interest income or expense  associated with the specific
assets or  liabilities to which the swap  agreements are assigned.  In addition,
gains or losses on hedges of  specific  mortgage  loan rate  commitments  ("rate
locks") and closed loans are


                                       28

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
deferred, included in the carrying value of loans receivable held-for-sale,  and
recognized  as part of gain on sales of loans  when the loans are  funded by the
permanent investor.

Derivative  financial  instruments  which do not  qualify  for hedge  accounting
treatment  are  carried  at fair  value  and  included  in other  assets  in the
statement of financial  condition,  and realized and unrealized gains and losses
on financial instruments are recognized in results of operations each period.

Reclassifications

Certain 1996 and 1995 amounts  have been  reclassified  to conform with the 1997
presentation.


NOTE 2 - EARNINGS PER SHARE
Basic and  diluted  earnings  per share have been  computed in  accordance  with
Statement of Financial  Accounting  Standards No. 128,  "Earnings per Share" and
all prior periods have been restated to reflect this new standard. Net income is
the numerator for both basic and diluted  calculations.  A reconciliation of the
weighted  average number of common shares used in the  determination of earnings
per share follows (in thousands):

                                                   December 31,
                                           ----------------------------
                                             1997      1996      1995
                                           ----------------------------
Weighted average basic common shares        4,973     4,962     4,936
Dilutive stock options                         93        17        19
                                           ----------------------------
Weighted average diluted common shares      5,066     4,979     4,955
                                            ===========================

NOTE 3 - INVESTMENT SECURITIES
Investment securities are summarized as follows (in thousands):


<TABLE>
<CAPTION>
                                                                  December 31, 1997
                                                 -------------------------------------------------------
                                                 Amortized     Unrealized     Unrealized     Estimated
                                                   Cost          Gains         Losses       Fair Value
                                                 -------------------------------------------------------
<S>                                              <C>             <C>            <C>          <C>
Held-to-maturity, carried at amortized cost
 U.S. Treasuries                                 $ 3,988         $ --           $  1         $ 3,987
 Federal Agencies                                  7,018            8            227           6,799
                                                 -------------------------------------------------------
                                                 $11,006         $  8           $228         $10,786
                                             
Available-for-sale, carried at fair value
 U.S. Treasuries                                 $   999         $  4           $ --         $ 1,003
 Federal Home Loan Bank stock                      7,404           --             --           7,404
                                                 -------------------------------------------------------
                                                 $ 8,403         $  4           $ --         $ 8,407
                                                 =======================================================
</TABLE>

                                       29

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES (continued)


<TABLE>
<CAPTION>
                                                                  December 31, 1996
                                               -------------------------------------------------------
                                                Amortized     Unrealized     Unrealized     Estimated
                                                   Cost          Gains         Losses       Fair Value
                                               -------------------------------------------------------
<S>                                              <C>              <C>           <C>          <C>
Held-to-maturity, carried at amortized cost
 U. S. Treasuries                                $ 5,953          $--           $ 25         $ 5,928
 Federal Agencies                                  8,990           42            273           8,759
                                               -------------------------------------------------------
                                                 $14,943          $42           $298         $14,687
                                               =======================================================
Available-for-sale, carried at fair value
 U. S. Treasuries                                $   998          $ 3           $ --         $ 1,001
 Federal Agencies                                  2,000           10             --           2,010
 Federal Home Loan Bank stock                      9,842           --             --           9,842
                                               -------------------------------------------------------
                                                 $12,840          $13           $ --         $12,853
                                               =======================================================
</TABLE>

The amortized cost and estimated fair value of investment securities at December
31, 1997 by contractual maturity are as follows (in thousands):

                                            Amortized     Estimated
                                               Cost       Fair Value
                                            ------------------------
Held-to-maturity
 Due in one year or less                     $ 7,018       $ 6,795
 Due after one year but within 5 years         3,988         3,991
                                            ------------------------
                                             $11,006       $10,786
                                            ========================
Available-for-sale
 Due after one year but within 5 years       $   999       $ 1,003
 No contractual maturity                       7,404         7,404
                                            ------------------------
                                             $ 8,403       $ 8,407
                                            ========================

In  1997,  proceeds  from  the  sale  of  investment  securities  classified  as
available-for-sale  were approximately  $2,015,000 and gross realized gains were
$15,000.   There  were  no  sales  of   investment   securities   classified  as
available-for-sale during 1996 and 1995.


                                       30

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities are summarized as follows (in thousands):


<TABLE>
<CAPTION>
                                                                  December 31, 1997
                                               -------------------------------------------------------
                                                Amortized     Unrealized     Unrealized     Estimated
                                                   Cost          Gains         Losses       Fair Value
                                               -------------------------------------------------------
<S>                                              <C>             <C>            <C>          <C>
Held-to-maturity, carried at amortized cost
 Collateralized mortgage obligations
  Private - fixed rate                           $24,369         $  8           $597         $23,780
                                                 =====================================================
Available-for-sale, carried at fair value
 FHLMC fixed rate                                $ 5,246         $110           $ --         $ 5,356
 FNMA variable rate                                3,103           57             --           3,160
 FHLMC variable rate                              13,121          139             28          13,232
Collateralized mortgage obligations
 Agency
  Fixed rate                                      33,225           55             62          33,218
  Variable rate                                   15,519            1            162          15,358
 Private
  Fixed rate                                      15,252           50             90          15,212
  Variable rate                                    1,104            8             11           1,101
                                                 -----------------------------------------------------
                                                 $86,570         $420           $353         $86,637
                                                 =====================================================

</TABLE>


<TABLE>
<CAPTION>
                                                                  December 31, 1996
                                               -------------------------------------------------------
                                                Amortized     Unrealized     Unrealized     Estimated
                                                   Cost          Gains         Losses       Fair Value
                                               -------------------------------------------------------
<S>                                              <C>             <C>            <C>          <C>
Held-to-maturity, carried at amortized cost
 Collateralized mortgage obligations
  Private - fixed rate                           $29,764         $ 36           $951         $28,849
                                                 =====================================================
Available-for-sale, carried at fair value
 FHLMC fixed rate                                $ 6,858         $163           $ --         $ 7,021
 FNMA variable rate                                4,489           64             --           4,553
 FHLMC variable rate                              16,770          264             --          17,034
Collateralized mortgage obligations
 Agency
  Fixed rate                                         704           --              3             701
  Variable rate                                   21,784            2            325          21,461
 Private
  Fixed rate                                      23,718           26            242          23,502
  Variable rate                                    2,534            4             25           2,513
                                                 ----------------------------------------------------
                                                 $76,857         $523           $595         $76,785
                                                 =====================================================
</TABLE>


                                       31

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES (continued)
Proceeds   from   the   sale   of   mortgage-backed   and   related   securities
available-for-sale,  gross  realized  gains and  gross  realized  losses  are as
follows (in thousands):

                            Year ended December 31,
                          ----------------------------
                           1997     1996       1995
                          ----------------------------
Sale proceeds              --       --       $52,407
                           =========================
Gross realized gains       --       --       $   235
                           =========================
Gross realized losses      --       --       $   132
                           =========================

NOTE 5 - LOANS RECEIVABLE
Loans receivable held-for-investment consist of the following (in thousands):

                                                    December 31,
                                              -------------------------
                                                  1997          1996
                                              -------------------------
First mortgage loans
 1-4 family residential                        $278,766      $295,322
 Multi-family residential                         3,735        13,673
 Commercial real estate                          68,380        65,893
 Land                                            14,891        16,504
 Commercial                                      24,183        10,710
 Construction
  1-4 family residential                         38,320        15,661
  Multi-family residential                        3,697         3,042
  Commercial                                      6,767         8,276
Other loans
 Second mortgage participations purchased           979         5,360
 Property improvement and consumer               20,438        16,538
                                              -------------------------
                                                460,156       450,979
Less
 Net deferred premiums (discounts)                   23           (64)
 Net deferred loan fees                          (1,405)       (1,470)
 Allowance for loan losses                       (4,297)       (4,390)
                                              -------------------------
                                               $454,477      $445,055
                                              =========================

Included in loans  receivable at December 31, 1997 and 1996 are  $6,516,000  and
$7,294,000,  respectively, of loans granted to facilitate the sale of foreclosed
real estate.

Real estate  securing first mortgage loans  originated by the Company is located
primarily within the Commonwealth of Virginia.

Loans  serviced  for  others   amounted  to   $219,844,000,   $250,959,000   and
$281,890,000 at December 31, 1997, 1996 and 1995, respectively.  At December 31,
1997, loans serviced for others consisted of the following:  FHLMC $156,104,000,
FNMA  $62,471,000,  other  $1,269,000.  The carrying value of this servicing was
$288,000 at December 31, 1997,  representing  the remaining  unamortized cost to
acquire such servicing from others.


                                       32

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 5 - LOANS RECEIVABLE (continued)
Nonperforming  loans totaled  $6,247,000,  $4,126,000 and $3,795,000 at December
31, 1997, 1996 and 1995,  respectively.  Foregone  interest on these loans is as
follows (in thousands):

                                   Year ended December 31,
                                  -------------------------
                                   1997     1996      1995
                                  -------------------------
Interest at contractual rates      $538     $350     $330
Interest income recognized          396      223      198
                                  -------------------------
Interest income foregone           $142     $127     $132
                                  =========================

Changes in the allowance for loan losses follows (in thousands):

                                         1997        1996        1995
                                       ------------------------------
Balance, January 1                     $4,390      $3,968      $4,328
Provision for loan losses                 225         150         175
Less net charge-offs (recoveries)         318        (272)       (535)
                                       -------------------------------
Balance, December 31                   $4,297      $4,390      $3,968
                                       ===============================

Nonperforming  loans at  December  31,  1997 and 1996  included  $1,783,000  and
$113,000,  respectively,  of loans  which  were  considered  to be  impaired  in
accordance  with FAS 114.  Each  impaired  loan had an allowance for loan losses
determined on a specific  identification  basis. The allowance for possible loan
losses  as of  December  31,  1997  and  1996  included  $305,000  and  $70,000,
respectively, related to loans considered to be impaired. During the years ended
December 31, 1997, 1996 and 1995, the Company had an average recorded investment
in impaired  loans of $463,000,  $132,000 and $607,000,  respectively.  Interest
income on impaired  loans is recognized  on a cash basis and was $27,000  during
1995. No interest income was recorded on impaired loans during 1997 and 1996.

Loans  receivable  held-for-sale  consist  entirely  of newly  originated  first
mortgage loans secured by single-family  residences located primarily within the
Commonwealth of Virginia.

The Company makes loans to executive officers,  directors, and their affiliates.
At December 31, 1997 and 1996, such loans amounted to $5,003,000 and $1,016,000,
respectively.  During  1997,  $4,115,000  of such loans  were made and  $128,000
principal payments were received by the Company.


NOTE 6 - FORECLOSED REAL ESTATE
Foreclosed real estate consists of the following (in thousands):


                                                            December 31,
                                                        ---------------------
                                                           1997        1996
                                                        ---------------------
Properties acquired through foreclosure                  $2,717      $2,282
Less allowance for losses on foreclosed real estate        (335)       (235)
                                                        ---------------------
                                                         $2,382      $2,047
                                                        =====================

                                       33

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 6 - FORECLOSED REAL ESTATE (continued)
Changes in the allowance for losses on foreclosed real estate follows (in
thousands):


<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                   --------------------------------
                                                    1997        1996         1995
                                                   --------------------------------
<S>                                                 <C>      <C>           <C>
Balance, January 1                                  $235     $  1,599      $1,571
Provision for losses on foreclosed real estate       100          484         200
Charges to the allowance                              --       (1,848)       (172)
                                                   --------------------------------
Balance, December 31                                $335     $    235      $1,599
                                                   ================================
</TABLE>

NOTE 7 - ACCRUED INCOME RECEIVABLE
Accrued income receivable consists of the following (in thousands):


                                                           December 31,
                                                       ---------------------
                                                          1997        1996
                                                       ---------------------
Interest on loans                                       $3,647      $3,435
Interest on mortgage-backed and related securities         784         749
Other interest and dividends                               319         422
                                                       ---------------------
                                                         4,750       4,606
Less allowance for uncollectible interest                 (336)       (317)
                                                       ---------------------
                                                        $4,414      $4,289
                                                       =====================

NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):


                                                         December 31,
                                                   -------------------------
                                                       1997          1996
                                                   -------------------------
Land and improvements                               $  1,346      $  1,346
Buildings                                              2,183         1,723
Leasehold improvements                                 1,924         1,797
Furniture and equipment                                7,181         5,939
                                                   -------------------------
                                                      12,634        10,805
Less accumulated depreciation and amortization        (5,746)       (5,163)
                                                   -------------------------
                                                    $  6,888      $  5,642
                                                   =========================

                                       34

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 9 - DEPOSITS
Deposits consist of the following (in thousands):

                                      Weighted
                                       Average
                                       Rate at
                                    December 31,            December 31,
                                   ---------------------------------------------
                                        1997             1997            1996
                                   ---------------------------------------------
Demand accounts                            --         $  20,427       $  15,637
NOW accounts                             1.84%           17,216          15,806
Money market deposit accounts            4.27%           67,377          38,399
Savings deposits                         3.94%           40,755          44,423
Time deposits
 Brokered                                6.11%           52,908          86,273
 Retail                                  5.56%          208,760         222,851
                                                      --------------------------
                                                      $ 407,443       $ 423,389
                                                      ==========================
Weighted average interest rate                             4.88%           5.00%
                                                      ==========================

The aggregate  amount of time deposit accounts with balances of $100,000 or more
approximated  $29,889,000  and  $19,327,000  at  December  31,  1997  and  1996,
respectively.

At  December  31,  1997,   approximately   $16,290,000  in  mortgage-backed  and
investment  securities  were pledged as  collateral  on certain  deposits  which
exceed FDIC insurance limits.

A summary of time deposits by maturity follows (in thousands):

                        December 31,
                  -------------------------
                      1997          1996
                  -------------------------
Within 1 year      $195,731      $203,865
1-2 years            36,453        70,515
2-3 years            11,718        20,791
3-4 years             6,707         6,591
4-5 years            10,835         6,710
Over 5 years            224           652
                  -------------------------
                   $261,668      $309,124
                  =========================

Interest on deposits follows (in thousands):


                                           Year ended December 31,
                                    -------------------------------------
                                       1997         1996          1995
                                    -------------------------------------
OW accounts                         $   333      $   328       $   348
Money Market Deposit accounts          1,626        1,392         1,310
Savings deposits                       1,903        1,713         1,747
Time deposits
 Brokered                              4,082        7,889        10,837
 Retail                               11,844       12,623        13,309
Less early withdrawal penalties          (60)         (48)          (51)
                                    -------------------------------------
                                     $19,728      $23,897       $27,500
                                    =====================================

                   35

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank are as follows (in thousands):


                                                    Weighted Average Rate
                              December 31,             at December 31,
                        --------------------------------------------------
                            1997         1996         1997         1996
                        --------------------------------------------------
1997                     $     --      $ 37,000          --         5.84%
1998                       97,000        65,000        5.80%        5.86
1999                       30,000        25,000        6.33         6.33
2000                       10,000            --        6.35           --
2001 and thereafter         6,084         6,110        6.04         6.03
                         ----------------------
                         $143,084      $133,110
                         ======================

The  Bank's   investment  in  Federal  Home  Loan  Bank  stock  of   $7,404,200,
mortgage-backed  and related  securities of $21,177,000 and first mortgage loans
of approximately $249,299,000 are pledged as collateral for advances at December
31, 1997.  The total  additional  amount of advances  available from the Federal
Home Loan Bank was estimated to be $42,000,000 at December 31, 1997.


NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of certain  information  regarding  investment  securities  sold under
agreements to repurchase follows (in thousands):


<TABLE>
<CAPTION>
                                                                     1997               1996            1995
                                                               ----------------------------------------------
<S>                                                               <C>                <C>             <C>
Balance at December 31                                            $  17,033          $  5,015        $     --
Maximum month-end balance during the year                            17,704             5,110          20,358
Monthly average balance during the year                              13,257             3,000          10,545
Investment securities underlying the agreements at year end
 Carrying value                                                      19,387            12,499              --
 Estimated market value                                              19,153            12,512              --
Monthly average interest rate during the year                          5.58%             5.59%           6.06%
Weighted average interest rate at year end                             5.63%             5.71%             --
Weighted average maturity at year end                               40 days           21 days              --
</TABLE>

The  investment   securities  underlying  the  agreements  to  repurchase  these
identical  securities  were  delivered  to, and held by,  the broker  dealers or
regional bank who arranged the transactions.


NOTE 12 - INCOME TAXES
The provision for income taxes consists of the following (in thousands):

                 Year ended December 31,
             -------------------------------
                1997        1996       1995
             -------------------------------
Current       $2,614      $  449      $612
Deferred         (60)       (127)       29
             -------------------------------
              $2,554      $  322      $641
             ===============================

                                       36

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 12 - INCOME TAXES (continued)
A reconciliation of the income tax provision at the statutory federal income tax
rate of 34% to the amount reported in the  consolidated  statement of operations
follows (in thousands):


<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                           ---------------------------------
                                                              1997       1996        1995
                                                           ---------------------------------
<S>                                                         <C>         <C>          <C>
Expected income tax expense at federal income tax rate      $2,263      $ 303        $614
Increase (decrease) in taxes resulting from
 Nondeductible expenses                                         11         28          13
 State income tax                                              371         11          20
 Other, net                                                    (91)       (20)         (6)
                                                           ---------------------------------
                                                            $2,554      $ 322        $641
                                                           =================================
</TABLE>

Prior to 1996,  the Internal  Revenue  Code  provided  that a qualified  savings
institution  could compute its bad debt reserve,  and the related  deduction for
income tax  reporting  purposes,  based upon  either the  percentage  of taxable
income method or the ratio of actual charge-offs to loans  outstanding,  subject
to a base year amount  determined at December 31, 1987. The Company computed its
bad debt  deduction for income tax reporting  purposes  using the  percentage of
taxable  income  method for 1995.  Due to law changes  effective  for 1996,  the
Company computed its bad debt deduction using the direct  charge-off  method for
1996 and 1997.

The Company's retained earnings at December 31, 1997 includes  $8,279,000 of tax
bad debt  reserves  for which  deferred tax has not been  provided.  Pursuant to
provisions in the Small  Business Job Protection Act of 1996, the reserves would
be  subject  to tax only if the  Company  fails to qualify as a "bank" or in the
case of certain excess distributions to shareholders.

The tax effects of temporary  differences that give rise to significant portions
of the  deferred  tax assets and  deferred  tax  liabilities  are as follows (in
thousands):

                                                           December 31,
                                                       ---------------------
                                                          1997        1996
                                                       ---------------------
Deferred tax assets
 Book bad debt reserves                                 $1,633      $1,668
 Mark-to-market adjustment on securities available-
  for-sale                                                  --          20
 Deferred loan fees                                         --         176
 Non-accrual interest                                      127          --
 AMT credit carryfoward                                    316          --
 Other                                                     365         221
                                                       ---------------------
                                                         2,441       2,085
                                                       ---------------------
Deferred tax liabilities
 Federal Home Loan Bank stock dividends                    721       1,182
 Mark-to-market adjustment on securities available-
  for-sale                                                  24          --
 Deferred loan fees                                        329          --
 Other                                                     123          89
                                                       ---------------------
                                                         1,197       1,271
                                                       ---------------------
Net deferred tax asset, included in other assets        $1,244      $  814
                                                       =====================

                                       37

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 12 - INCOME TAXES (continued)
There was no valuation  allowance  for gross  deferred tax assets as of December
31, 1997 or 1996 since management  believes that it is more likely than not that
the entire  amount of the gross  deferred  tax assets will be realized  based on
projected future taxable income,  reversals of taxable temporary differences and
taxable income in the available carryback periods.


NOTE 13 - EMPLOYEE BENEFIT PLANS

Employee Savings Plan
The Company maintains an employee savings plan (the "Savings Plan") covering all
employees  who have  completed  one year of  service  and  attained  age 21. The
Savings  Plan  provides for an employee  salary  reduction  feature  pursuant to
Section  401(k) of the  Internal  Revenue  Code.  The Company  matches 50% of an
employee's  contributions.  The  Company's  contribution  is limited to 3% of an
employee's  total  compensation.   These  matching  contributions  vest  to  the
participants over a four-year period. The Company's  matching  contributions for
1997, 1996 and 1995 were $114,000, $43,500 and $120,000, respectively.

Employee Stock Ownership Plan

The Company  maintains  an employee  stock  ownership  plan (ESOP)  covering all
employees who have attained the age of 21.  Contributions to the ESOP are at the
Board of Directors'  discretion and are allocated to participants based upon the
participant's percentage of total covered compensation. These contributions vest
to the  recipients  over a four-year  period or less depending on their years of
service.  The Company's  contribution to the ESOP was $60,000 for the year ended
December 31, 1996.  There were no  contributions to the ESOP for the years ended
December  31,  1997 and 1995.  ESOP  shares  receive  normal  dividends  and are
included in total shares outstanding for earnings per share purposes.

Employee Stock Purchase Plan

The Company also maintains an employee stock purchase plan (ESPP). All employees
of the Company are eligible to participate in the ESPP which allows participants
to  purchase  common  stock at 95% of the  current  market  price.  The  Company
contributes the remaining 5%. The Company's contribution to the ESPP was $3,700,
$4,200  and  $7,200  for the  years  ended  December  31,  1997,  1996 and 1995,
respectively.


NOTE 14 - STOCK OPTION PLANS
The Company has stock  option plans (the Plans) that provide for the granting of
both qualified and  nonqualified  options to employees and directors.  Under the
Plans,  the option  price cannot be less than the fair market value of the stock
on the date  granted.  An  option's  maximum  term is ten years from the date of
grant.  Options  granted  under  the Plans may be  subject  to a graded  vesting
schedule.  An  aggregate  of 524,432  shares of the  Company's  common  stock is
reserved for issuance upon exercise of the options granted under the Plans.

The Company  applies  Accounting  Principles  Board (APB) Opinion 25 and related
interpretations in accounting for the Plans.  Accordingly,  no compensation cost
has been  recognized  for its fixed stock  options.  Had  compensation  cost for
options granted under the Plans been  determined  based on the fair value at the
grant dates  consistent  with the  alternative  method of FASB Statement No. 123
(FAS 123),  the  Company's  net income and  earnings per common share would have
been reduced to the pro forma amounts indicated below.  These results may not be
representative of the effects on reported net income for future years.


                                       38

<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements

NOTE 14 - STOCK OPTION PLANS (continued)


<TABLE>
<CAPTION>
                                                          1997      1996       1995
In thousands except per share data                     ----------------------------
<S>                                    <C>              <C>         <C>      <C>
Net income                             As reported      $4,103      $569     $1,166
                                       Pro forma         3,315       454        985
Earnings per common share, basic       As reported         .82       .11        .24
                                       Pro forma           .67       .09        .20
Earnings per common share, diluted     As reported         .81       .11        .24
                                       Pro forma           .65       .09        .20
</TABLE>

For purposes of computing the pro forma amounts  indicated above, the fair value
of each option on the grant date is  estimated  using the  Black-Scholes  option
pricing model with the following  assumptions used for grants in 1997:  dividend
yield of 1.2%;  expected  volatility of 45%; a risk-free interest rate of 5.7%to
6.8%; and an expected option life of 8 years. The assumptions used for grants in
1996 and 1995  were:  dividend  yield of 1.5%;  expected  volatility  of 49%;  a
risk-free interest rate of 5.5%to 6.9%; and an expected option life of 8 years.

The  weighted-average  fair value of each option  granted by the Company  during
1997, 1996 and 1995 was $6.89, $3.37 and $4.38,  respectively.  A summary of the
status of the Plans as of  December  31 and  changes  during the years  ended on
those dates is presented below:

<TABLE>
<CAPTION>
                                              1997                        1996                        1995
                                    ---------------------------------------------------------------------------------
                                                   Weighted-                   Weighted-                    Weighted-
                                                    Average                     Average                      Average
                                                    Exercise                    Exercise                    Exercise
                                       Shares        Price         Shares        Price         Shares         Price
                                    ---------------------------------------------------------------------------------
<S>                                   <C>           <C>           <C>           <C>            <C>          <C>
Outstanding, Jan 1                    287,500       $ 7.29        257,450       $  7.31        182,962      $  6.41
Granted                               146,500        14.59         43,500          7.46         92,000         8.89
Exercised                                (750)        7.00         (1,950)         5.56        (16,512)        6.14
Forfeited                                  --           --        (11,500)         8.66         (1,000)        7.38
                                      -------                     -------                      -------
Outstanding, Dec 31                   433,250         9.76        287,500          7.29        257,450         7.31
                                      =======                     =======                      =======
Options exercisable at year end       424,083       $ 9.81        252,162       $  7.21        216,449      $  7.31
                                      =======                     =======                      =======
</TABLE>

The  following  table  summarizes  information  about fixed price stock  options
outstanding as of December 31, 1997:

<TABLE>
<CAPTION>
                                       Weighted
                                       Average       Weighted                     Weighted
                        Total         Remaining       Average                     Average
                       Options       Contractual     Exercise       Options       Exercise
Range of             Outstanding         Life          Price      Exercisable      Price
Exercise Prices     ----------------------------------------------------------------------
<S>                    <C>          <C>             <C>             <C>           <C>
$4.25 to 6.88           90,000      5.4 years       $  5.54          88,333       $  5.52
 7.00 to 7.81           94,750      6.8                 7.28         88,917          7.29
 8.13 to 9.38          102,000      7.7                 8.86        100,333          8.87
10.00 to 13.13          50,500      9.4                11.34         50,500         11.34
16.25 to 18.38          96,000      9.9                16.29         96,000         16.29
                       -------                                      -------
$4.25 to 18.38         433,250      7.7                 9.76        424,083          9.81
                       =======                                      =======
</TABLE>

During 1993,  the Company  reserved  80,000 shares for  non-employee  directors'
stock options,  to be granted in five equal annual installments with an exercise
price  equal to the  market  value at the date of the  grant.  Under  this plan,
options for 16,000 shares were granted during each year ended December 31, 1997,
1996 and 1995 and are included in the above tables.

                                       39
<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 15 - REGULATORY REQUIREMENTS AND RESTRICTIONS
The Bank is subject  to  regulatory  capital  requirements  administered  by the
Office  of  Thrift  Supervision  (the  OTS).  Failure  to meet  minimum  capital
requirements   can  initiate   certain   mandatory   and   possibly   additional
discretionary  actions  by the OTS  that,  if  undertaken,  could  have a direct
material  adverse  effect on the Company's  financial  condition.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Bank  must  meet  specific  capital  guidelines  that  involve  quantitative
measures  of  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 OTS  about
components, risk weightings and other factors.

Quantitative  measures established by the OTS to ensure capital adequacy provide
for three capital  standards:  a tangible  capital  requirement,  a core capital
requirement and a risk-based capital  requirement.  Management  believes,  as of
December  31, 1997,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.  As of December 31, 1997, the most recent notification from
the OTS  categorized  the  Bank  as  "well  capitalized"  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  has  changed  the  institution's
category.

The Bank's actual and regulatory  capital amounts and ratios are set forth below
(in thousands).


<TABLE>
<CAPTION>
                                                           Minimum                To Be Well
                                                      Requirements For        Capitalized Under
                                                      Capital Adequacy        Prompt Corrective
                                   Actual                 Purposes            Action Provisions
                           -----------------------------------------------------------------------
                           Amount       Ratio       Amount      Ratio       Amount       Ratio
                           -----------------------------------------------------------------------
<S>                         <C>            <C>       <C>            <C>      <C>           <C>
As of December 31, 1997
Tangible                    $43,298         7.0%     $ 9,331        1.5%     $21,771         3.5%
Core                         43,298         7.0%      18,661        3.0%      31,102         5.0%
Risk-Based                   47,074        12.6%      29,826        8.0%      37,283        10.0%
As of December 31, 1996
Tangible                    $40,456         6.6%     $ 9,212        1.5%     $21,494         3.5%
Core                         40,456         6.6%      18,424        3.0%      30,706         5.0%
Risk-Based                   44,487        12.5%      28,503        8.0%      35,628        10.0%
</TABLE>

                                       40

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 16 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
The following  table  presents the carrying  values and estimated fair values of
the Company's  recorded  financial  instruments,  as well as  information  about
certain specific off-balance sheet financial instruments (in thousands):


<TABLE>
<CAPTION>
                                                     December 31, 1997                December 31, 1996
                                             ------------------------------------------------------------------
                                                                    Estimated                         Estimated
                                              Notional   Carrying      Fair     Notional   Carrying     Fair
                                               Amount      Value      Value      Amount      Value      Value
                                             ------------------------------------------------------------------
<S>                                           <C>        <C>        <C>         <C>        <C>        <C>
Recorded financial instruments
Financial assets:
 Cash and cash equivalents                    $    --    $  7,430   $  7,430    $    --    $  7,335   $  7,335
 Investment securities                             --      19,413     19,193         --      27,796     27,540
 Mortgage-backed and related securities            --     111,006    110,417         --     106,549    105,634
 Loans held-for-sale                               --       8,356      8,363         --       4,785      4,790
 Loans held-for-investment, net                    --     454,477    465,734         --     445,055    468,545
Financial liabilities:
 Deposits with no stated maturity                  --     145,775    145,775         --     114,265    114,265
 Time deposits                                     --     261,668    261,678         --     309,124    312,185
 Securities sold under agreements to
  repurchase                                       --      17,033     17,033         --       5,015      5,015
 Advances from the Federal Home Loan
  Bank                                             --     143,084    143,344         --     133,110    133,554
Off-balance sheet financial instruments
 Interest rate swap agreements - hedging       25,000          --       (161)    25,000          --       (310)
 Loan commitments with mandatory rates
  and terms                                    34,121          --        113     17,769          --         19
Forward sales of mortgage-backed
 securities - mandatory delivery                2,000          --         11         --          --         --
Forward sales of loans - optional delivery     19,716          --        182      8,510          --         67
Letters of credit                               5,963          --         --      3,783          --         --
</TABLE>


                                       41

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 16 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS (continued)
The estimated fair values of financial  instruments  have been determined  using
available market information and appropriate  valuation  methodologies.  Much of
the information used to determine fair value is highly subjective and judgmental
in nature and therefore the results may not be precise.  In addition,  estimates
of cash flows, risk  characteristics,  credit quality and interest rates are all
subject to change.  Since the fair value is  estimated  as of the balance  sheet
date,  the amounts  which will  actually be realized or paid upon  settlement or
maturity of the various instruments could be significantly different.

Recorded Financial Instruments

The carrying amount reported for cash and cash  equivalents  approximates  those
assets' fair values. Fair value for investments and  mortgage-backed  securities
is based on quoted market prices or dealer quotes.

The fair value for loans  held-for-sale is based upon either actual  commitments
to sell  individual  loans or, if  uncommitted,  the market  prices for  similar
loans.

Residential  mortgages,  and  consumer  installment  loans  which  have  similar
characteristics,  have been  valued on a pooled  basis using  market  prices for
securities  backed by loan  transactions with similar rates and terms. All other
loans,  which are principally  commercial real estate and land loans,  have been
individually  valued by discounting the estimated  future  contractual loan cash
flows to their  present  value using an assigned  discount rate which may or may
not be the contractual rate in effect with the obligor.  This discount rate used
is the rate at which loans with  similar  credit risk and  remaining  maturities
would be  entered  into at the  balance  sheet  date.  The  fair  value of loans
receivable does not include the value of the customer  relationship or the right
to fees generated by the customer's accounts.

The fair value of demand deposits, savings accounts and money market deposits is
the amount  payable  on demand at the  reporting  date.  The fair value of fixed
maturity  certificates of deposit is estimated using the rates currently offered
for deposits with similar remaining  maturities.  As with loan receivables,  the
fair  value of  deposit  liabilities  also  does not  include  the  value of the
customer relationships or the right to fees generated by the accounts.

For securities  sold under  agreements to repurchase,  the carrying  amount is a
reasonable  estimate of fair value.  The fair value of advances from the Federal
Home Loan Bank is based on rates  currently  offered for  advances  with similar
remaining maturities.

Off-Balance Sheet Financial Instruments

Interest  rate swaps have been used by the Company to extend the duration of its
liabilities. At the inception of the contract, the Company agreed to pay a fixed
rate to the counterparty and receive a floating rate. The floating rate received
by  the  Company   approximates  the  actual  borrowing  costs  on  specifically
identified short term borrowings  including  repurchase  agreements and variable
rate Federal Home Loan Bank advances.  The Company has entered into an aggregate
of $25 million  notional swap agreements under which it pays fixed rates ranging
from 6.52% to 6.60% and receives 3 month LIBOR. These agreements expire in 1998.
The fair  value  of swap  agreements  is the  estimated  amount  to  settle  the
positions  as  provided by dealer  quotes.  The fair value of letters of credit,
commitments  to  originate,  purchase  or sell  loans is  determined  based upon
differences between current and contractual interest rates.

Credit Risks

The  Company  has  credit  risk to the  extent  that the  counterparties  to the
derivative  financial  instruments  do not perform  their  obligation  under the
agreements.   Counterparties   to   the   Company's   agreements   are   primary
broker/dealers  and it is not  expected  that  they  will  fail  to  meet  their
obligations.


                                       42

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 17 - COMMITMENTS AND CONTINGENCIES
In addition to  undisbursed  loan funds of $34,503,000 at December 31, 1997, the
Company has issued  commitments  to originate  loans  amounting to  $40,314,000.
These  commitments  are  agreements to lend funds to a customer as long as there
has been no  violation  of any  condition  established  in the  agreement.  Each
customer's   creditworthiness  is  evaluated  on  a  case  by  case  basis.  All
outstanding loan commitments are expected to be disbursed within 90 days.

In connection with its loans held-for-sale and its loan commitments, the Company
has also entered into commitments to sell loans of approximately  $19,716,000 at
December 31, 1997. The risks  associated with loan sale commitments are that the
buyer will be unable to perform.  Each buyer is  evaluated  as to its ability to
perform in accordance with Company guidelines.

Also, at December 31, 1997, the Company had issued $5,963,000 in standby letters
of credit.  Standby letters of credit  generally  provide for collateral of real
estate or other personal  property.  All standby letters of credit expire within
three years.

Loans are  primarily  sold to  third-party  investors,  some of whom require the
repurchase  of loans in the event of default or faulty  documentation.  Recourse
periods  for the  third-party  investor  loans vary from 90 days to one year and
conditions for repurchase vary with the investor.  Mortgages subject to recourse
are collateralized by one-to-four family residences,  have loan-to-value  ratios
of 80% or less, or have private mortgage insurance, or are insured or guaranteed
in whole or in part by an agency of the  United  States  government.  Management
does not  expect  any  material  losses to occur on loans  repurchased,  if any,
pursuant  to  recourse  provisions.  Loans  that  are sold to  Federal  National
Mortgage  Association,  Federal Home Loan  Mortgage  Corporation  or  Government
National Mortgage  Association are on a nonrecourse basis,  whereby  foreclosure
losses are generally not the responsibility of the Company.

The Company is a defendant in certain  litigation arising in the ordinary course
of  business.  In the  opinion  of  management,  after  consultation  with legal
counsel,  the ultimate  disposition  of these  matters is not expected to have a
material adverse effect on the consolidated financial position of the Company.

Total rent expense under operating leases amounted to $1,220,000, $1,235,000 and
$1,542,000 in 1997, 1996 and 1995, respectively.

Minimum rentals under  noncancelable  leases with initial terms of more than one
year are as follows (in thousands):

 Year ending December 31,      Amount
-------------------------------------
  1998                        $1,380
  1999                         1,350
  2000                         1,220
  2001                           235
  2002                           125
  After 2002                     393

Included in the above table is the minimum rental  commitment  associated with a
mortgage  lending  office  sold  during  1995  for  which  the  Company  remains
contingently liable.


                                       43

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial  statements of Virginia Beach Federal Financial  Corporation
(the Parent Company) are shown below (in  thousands).  The Parent Company has no
significant operating activities.


CONDENSED STATEMENT OF FINANCIAL CONDITION

                                                        December 31,
                                                   -----------------------
                                                      1997         1996
                                                  -----------------------
Assets
Cash in bank                                        $   769      $   504
Investment in subsidiary                             43,379       40,452
Other assets                                             16           16
                                                  -----------------------
  Total assets                                      $44,164      $40,972
                                                  =======================
Liabilities and Stockholders' Equity
Liabilities                                         $    15      $   145
                                                  -----------------------
Stockholders' Equity
 Common stock                                            50           50
 Capital in excess of par value                       9,465        9,336
 Unrealized gain (loss) on available-for-sale
   securities, net of tax                                46          (39)
 Retained earnings                                   34,588       31,480
                                                  -----------------------
  Total stockholders' equity                         44,149       40,827
                                                  -----------------------
  Total liabilities and stockholders' equity        $44,164      $40,972
                                                  =======================

CONDENSED STATEMENT OF OPERATIONS

                                         Year ended December 31,
                                     --------------------------------
                                        1997       1996        1995
                                     --------------------------------
Equity in earnings of subsidiary      $4,122      $ 587      $1,189
Interest income                           15         18          26
Other expense                             47         48          60
                                     --------------------------------
Income before income taxes             4,090        557       1,155
Income tax benefit                       (13)       (12)        (11)
                                     --------------------------------
Net income                            $4,103      $ 569      $1,166
                                     ================================



                                       44

<PAGE>

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

Notes to Consolidated Financial Statements

NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                             --------------------------------------
                                                                 1997         1996          1995
                                                             --------------------------------------
<S>                                                           <C>           <C>          <C>
Cash flows from operating activities
 Net income                                                   $  4,103       $ 569       $  1,166
 Adjustments to reconcile net income to net cash provided
  (used) by operating activities
  (Increase) decrease in other assets                               --          (8)            18
  Increase (decrease) in liabilities                              (130)         29             28
  Equity in net income of subsidiary                            (4,122)       (587)        (1,189)
                                                             --------------------------------------
   Net cash provided (used) by operating activities               (149)          3             23
                                                             --------------------------------------
Cash flows from investing activities
 Dividends from subsidiary                                       1,280         550            400
                                                             --------------------------------------
   Net cash provided by investing activities                     1,280         550            400
                                                             --------------------------------------
Cash flows from financing activities
 Issuance of common stock                                          129          99            269
 Cash dividends paid                                              (995)       (795)          (789)
                                                             --------------------------------------
   Net cash used for financing activities                         (866)       (696)          (520)
                                                             --------------------------------------
Net increase (decrease) in cash                                    265        (143)           (97)
Cash at beginning of year                                          504         647            744
                                                             --------------------------------------
Cash at end of year                                           $    769       $ 504       $    647
                                                             ======================================
</TABLE>

Under Virginia law, the Company may not pay a cash dividend to its  stockholders
if, after giving  effect to the  dividend,  the Company would not be able to pay
its debts as they become due or if the Company's total assets would be less than
the sum of its  total  liabilities,  plus the  amount  that  would be  needed to
satisfy  any  preferential   rights  upon  dissolution  to  stockholders   whose
preferential  rights  are  superior  to  those  of  stockholders  receiving  the
dividend. Because the Company has no separate operations apart from ownership of
the Bank, the Company's ability to pay dividends is substantially dependent upon
funds received by it from the Bank.

The  OTS  has  adopted  regulations  that  impose  limitations  on  all  capital
distributions by savings  institutions.  The OTS may prohibit a proposed capital
distribution  by any  institution,  which would  otherwise  be  permitted by the
regulation,  if the OTS determines that such  distribution  would  constitute an
unsafe or unsound  practice.  The Bank paid cash  dividends  of  $1,280,000  and
$550,000 to the  Company  during  1997 and 1996,  respectively.  There can be no
assurance  that the OTS will not object to any amount of future  cash  dividends
declared by the Bank.


                                       45

<PAGE>

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

Notes to Consolidated Financial Statements
NOTE 19 - QUARTERLY CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED



<TABLE>
<CAPTION>
                                                                     1997 Quarter ended
                                                ------------------------------------------------------------
                                                  March 31      June 30      September 30       December 31
(in thousands, except per share data)           ------------------------------------------------------------
<S>                                             <C>           <C>         <C>                 <C>
Interest income                                 $11,943       $12,223     $12,300             $12,133
Provision for loan losses                            75           100          50                  --
Net interest income after provision for loan
 losses                                           4,575         4,704       4,721               4,737
Other income                                        787           890       1,088               1,136
Other expenses                                    3,919         3,962       4,036               4,064
Income before income taxes                        1,443         1,632       1,773               1,809
Net income                                          895           987       1,099               1,122
Earnings per share, basic (1)                       .18           .20         .22                 .23
Earnings per share, diluted (1)                     .18           .20         .22                 .22
Dividends paid per share                            .05           .05         .05                 .05
</TABLE>


<TABLE>
<CAPTION>


                                                                      1996 Quarter ended
                                                ---------------------------------------------------------------
                                                March 31      June 30      September 30       December 31
                                                ------------------------------------------------------------
<S>                                             <C>           <C>          <C>                <C>    
Interest income                                 $12,558       $11,979      $11,862            $11,946
Provision for loan losses                            --           100          50                  --
Net interest income after provision for loan
 losses                                           3,920         4,109       4,148               4,389
Other income                                        951           829         759                 715
Other expenses                                    3,971         3,930       7,105               3,923
Income (loss) before income taxes                   900         1,008      (2,198)              1,181
Net income (loss)                                   547           625      (1,363)                760
Earnings (loss) per share, basic (1)                .11           .13        (.27)                .15
Earnings (loss) per share, diluted (1)              .11           .13        (.27)                .15
Dividends paid per share                            .04           .04          .04                .04
</TABLE>

(1)  Quarterly  amounts are  independently  calculated  and may not total to the
annual amounts.

                                       46
<PAGE>

VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION

     corporate
           information
<TABLE>
<CAPTION>


<S>                                                      <C>      
          Securities and
          Regulatory Counsel
          Malizia, Spidi, Sloane & Fisch, P.C.
          Washington, DC

          Independent Auditors
          KPMG Peat Marwick LLP
          Richmond, VA

          Stock Transfer Agent
          American Stock Transfer & Trust Company
          New York, NY

          Form 10-K
          A copy of the Company's Annual Report on
          Form 10-K for the fiscal year ended
          December 31, 1997, including financial 
          statement schedules, as filed with the         Common Stock
          Securities and Exchange Commission, will       The Company's common stock is traded on
          be furnished without charge to stockholders    the over-the-counter market and is listed
          as of the record date upon written request     National Market System under the symbol
          to:  Corporate Secretary, Virginia Beach       "VABF."  As of march 13, 1998, there were
          Federal Financial Corporation, 2101 Parks      approximately 557 shareholders o record.
          Avenue, Suite 400, P.O. Box 848, Virginia      Following are the high and low closing
          Beach, VA 23451.                               prices in 1997 and 1996 as reported by 
                                                         Nasdaq and dividends paid by quarters.
          Annual Meeting                                 Over-the-counter market quotations reflect
          The Annual Meeting of the Virginia Beach       inter-dealer prices, without retail mark-up,
          Federal Financial Corporation will be held     mark-down or commission and may not necessarily
          on April 29, 1998 at 2:00 p.m. at the Clarion  represent actual transactions.
          Hotel, 4453 Bonney Road, Virginia Beach, VA.

</TABLE>


<TABLE>
<CAPTION>

                                                                                   1997                              1996
                                                                         high       low      dividend    high        low    dividend
                                                         ---------------------------------------------------------------------------
<S>                                                                    <C>         <C>         <C>      <C>       <C>         <C>  
                                                         1st quarter   $11 5/16    $ 9 3/8     $0.05    $    9    $6 13/16    $0.04
                                                         2nd quarter     13 1/2      9 3/4      0.05     8 5/8       6 7/8     0.04
                                                         3rd quarter     16 3/4     13 1/4      0.05     3 3/4       6 7/8     0.04
                                                         4th quarter     18 3/4         15      0.05     9 5/8       8 5/8     0.04

                                                         See   Note  18  of  the Notes to Consolidated Financial Statements 
                                                         regarding dividend restrictions.
</TABLE>


<TABLE>
<CAPTION>

<S>                                                                <C>

                                                                   Dividend Reinvestment Plan
                                                                   The Company's shareholders may purchase common stock with the 
                                                                   reinvestment dividends and have the opportunity to make optional
                                                                   cash investments up to $2,000 per calendar quarter for the 
                                                                   purchase of shares of common stock. Participants pay no brokerage
                                                                   commissions on purchases and avoid safekeeping costs on shares
                                                                   held in the Plan.  For a prospectus, please contact Investor 
                                                                   Relations at (757) 428-9331.
</TABLE>


<PAGE>
                                    branches

                               FIRST COASTAL BANK

                                    AND ATMs
<TABLE>
<CAPTION>

<S>                                          <C>                               <C>
    Executive and                            Additional ATM locations
    Administrative Offices                   Wal-Mart ATM                      McDonalds ATM
    2101 Parks Avenue                        1521 Sam's Circle                 908 General Booth Boulevard
    Virginia beach, Virginia 23451           Chesapeak                         Virginia Beach

                                             Wal-Mart ATM                      McDonald's ATM
     Executive and Administrative            4107 Portsmouth Blvd.             16th Street and Atlantic
     Offices Peninsula                       Chesapeake                        Virginia Beach
     601 Thimble Shoals Blvd.                 
     Newport News Firginia 23606             Wal-Mart ATM                      McDonald's ATM
                                             12401 Jefferson Aenue             21st Street and Pacific
     Chesapeake                              Newport News                      Virginia Beach
     Cedar Road Financial Center             
     1000 Cedar Road                         Wal-Mart ATM                      McDonalds ATM
                                             1170 N. Military Highway          28th Street and Atlantic
     Greenbrier Financial                    Norfolk                           Virginia Beach
     and Mortgage Center                
     1172 Greenbrier Parkway                 Wal-Mart ATM                      McDonald's ATM
                                             657 Phoenix Drive                 2057 General Booth Boulevard
     Greenbrier MarketCenter                 Virginia Beach                    Virginia Beach
     Inside Harris Teeter Supermarket       
     1216 Greenbrier Parkway                 Selden Arcade ATM                 McDonalds ATM
                                             210 East Main Street              1507 Atlantic Avenue
                                             Norfolk                           Virginia Beach
     Newport News                        
     Denbigh Crossing Financial Center       Sam's Club ATM
     12705 Jefferson Avenue                  1501 Sam's Circle
                                             Chesapeake
     Oyster Point Financial                
     and Mortgage Center                     Sam's Club ATM
     601 Thimble Shoals Blvd.                12407 Jefferson Avenue
                                             Newport News

     Virginia Beach                          Other Virginia ATM locations
     Aragona Financial Center                Sam's Club ATM                    Wal-Mart ATM
     4860 Virginia Beach Blvd.               901 Wal-Mart Way                  640 Highway 58 East
                                             Midlothian                        Norton

     Courthouse Financial Center             Sam's Club ATM                    Wal-Mart ATM
     2400 Princess Anne Road                 9400 West Broad Street            126 Sandy Court
                                             Richmond                          Danville

     Fairfield Financial Center              Wal-Mart ATM                      Wal-Mart ATM
     5224 Providence Road                    900 Wal-Mart Way                  1000 Memorial Drive
                                             Midlothian                        Pulaski

     Great Neck Financial Center             Wal-Mart ATM                      Wal-Mart ATM
     1324 N. Great Neck Road                 US Highway 23 Bypass              125 Washington Plaza
                                             Big Stone Gap                     Fredericksburg

     Little Neck Financial Center            Wal-Mart ATM                      Wal-Mart ATM
     Inside Harris Teeter Supermarket        1077 East Stuart Drive            1121 East Atlantic Street
     HQ Plaza, 3333 Virginia Beach Blvd.     Galax                             South Hill

     Lynnhaven Financial Center
     230 N. Lynnhaven Road

     Pavilion Financial 
     and Mortgage Center
     2101 Parks Avenue

     Shore Drive Financial Center
     3037 Shore Drive

     Williamsburg
     Five Forks Financial Center              FIRST COASTAL BANK
     215 Ingram Road                          -------------------------------
                                              Solution Banking  
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