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

                                    FORM 10-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1996

                                       OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ________________________ to _____________________

Commission file number 1-10506

                               Essex Bancorp, Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


       Delaware                                                54-1721085
-----------------------                                     ----------------
(State of organization)                                     (I.R.S. Employer
                                                           Identification No.)

   The Koger Center
 Building 9, Suite 200
   Norfolk, Virginia                                              23502
 ---------------------                                          ----------
 (Address of principal                                          (Zip Code)
  executive offices)

Registrant's telephone number, including area code (757) 893-1300

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

Common Stock, Par Value $.01 Per Share               American Stock Exchange
--------------------------------------               -----------------------
          (Title of Class)                        (Exchange on Which Registered)

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

                                      None
                                      ----
                                (Title of Class)

      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

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

         The aggregate market value of the Registrant's common stock on the
American Stock Exchange on March 20, 1997 held by nonaffiliates of the
Registrant was $2,101,730.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the year ended December 31,
1996 are incorporated by reference into Parts I and II hereof.

Portions of the Proxy Statement for the Annual Meeting to be held on May 29,
1997 are incorporated by reference into Part III hereof.
<PAGE>

                               Essex Bancorp, Inc.
                       Annual Report on Form 10-K for the
                          Year Ended December 31, 1996

                                Table of Contents

                                                                            Page
                                                                            ----
Part I

Item 1     Business.......................................................    3
Item 2     Properties.....................................................   44
Item 3     Legal Proceedings..............................................   44
Item 4     Submission of Matters to a Vote
               of Security Holders........................................   45

Part II

Item 5     Market for Registrant's Common Equity
               and Related Stockholder Matters............................   45
Item 6     Selected Financial Data........................................   46
Item 7     Management's Discussion and
               Analysis of Financial Condition
               and Results of Operations..................................   46
Item 8     Financial Statements and
               Supplementary Data.........................................   46
Item 9     Changes in and Disagreements with
               Accountants on Accounting and
               Financial Disclosure.......................................   46


Part III

Item 10    Directors and Executive Officers
               of the Registrant..........................................   46
Item 11    Executive Compensation.........................................   47
Item 12    Security Ownership of Certain
               Beneficial Owners and Management...........................   48
Item 13    Certain Relationships and
               Related Transactions.......................................   48


Part IV

Item 14    Exhibits, Financial Statement Schedules
               and Reports on Form 8-K....................................   49


                                       2
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                                     PART I

Item  1. Business

Organization and Background

      General. The following organizational chart depicts Essex Bancorp, Inc.
and its subsidiaries as of December 31, 1996. It is intended to facilitate the
readers' understanding of the companies discussed in this report. Following the
chart is a glossary of terms which are used throughout this report.


                      Essex Bancorp, Inc. and Subsidiaries
                              Organizational Chart


                                [GRAPHIC OMITTED]


      Unless otherwise noted, each company is owned 100% by its parent entity.


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Defined Term                      Formal Name
------------                      -----------

Company          Essex Bancorp, Inc., successor to Essex Financial Partners,
                   L.P. and Essex Bancorp.
Partnership      Essex Financial Partners, L.P.
Bancorp          Essex Bancorp.
EAC              Essex Acquisition Corporation
Bank             Essex Savings Bank, F.S.B.
EMC              Essex Mortgage Corporation
Essex First      Essex First Mortgage Corporation
ECC              Essex Capital Corporation
Essex Home       Essex Home Mortgage Servicing Corporation
EHADC            E H Asset Disposition Corporation
TMS              Thrift Management Services, Inc. - General Partner

      The Company is a Delaware corporation that is the holding company for the
Bank, a federally-chartered savings bank which operates four branches located in
North Carolina and Virginia. The Company is the successor by merger to the
Partnership, a Delaware limited partnership, which was formed in 1989 in order
to acquire an existing corporation that was the holding company for one of the
Bank's predecessor institutions. The Partnership and Bancorp, the Bank's former
holding company, were merged into the Company in January 1995. The Company is
engaged primarily in the operation of the Bank as a wholly-owned subsidiary. The
Company's other principal operating subsidiaries are Essex First, a wholly-owned
subsidiary of the Bank that is engaged primarily in the origination and sale of
residential mortgage loans, and Essex Home, an indirect subsidiary of the
Company and the Bank that is engaged primarily in the servicing of mortgage
loans owned by the Bank, various governmental agencies and various third party
investors. Because the merger described below did not occur until January 1995,
the financial statements included herein for years prior to 1995 are those of
the Partnership. At December 31, 1996, the Company had total assets of $174.3
million, total liabilities of $159.2 million, including total deposits of $131.0
million, and total shareholders' equity of $15.1 million.

      In January 1995, following approval by the holders of the Partnership's
limited partnership units ("LPUs"), both the Partnership and Bancorp were merged
with and into the Company (collectively, the "Merger"), which resulted in a
single holding company structure for the Bank and the other subsidiaries of the
Company. As a result of the consummation of the Merger, each holder of LPUs
received one share of Company common stock ("Common Stock") for every two LPUs
beneficially owned, and the former corporate general partner of the Partnership
received 10,496 shares of Common Stock (which represented 1.0% of the issued and
outstanding Common Stock) in exchange for its general partner's interest. The
Merger was undertaken, among other reasons, in order (i) to eliminate a
cumbersome business structure that no longer provided the originally intended
benefits to the Partnership's unitholders, (ii) to expand the base of potential
investors in the Company by eliminating a complicated and nontraditional holding
company structure, and (iii) to provide the Company with greater access to
public and private equity capital markets. The Company had 1,049,687 shares of
Common Stock outstanding immediately following the Merger. As a consequence of
the Merger, the Company succeeded to all of the assets and liabilities of the
Partnership and Bancorp. In this report, unless the context otherwise requires,
the term "Company" refers to the Partnership prior to the Merger and/or the
Company subsequent to the Merger, in each case including all subsidiaries
thereof.


                                       4
<PAGE>

      Operations of the Partnership Prior to the Merger. The Partnership was the
predecessor to the Company and was formed in 1989 as a publicly-traded master
limited partnership with the issuance of 2,078,382 LPUs priced at $20 per LPU.
The Partnership's former business plan was based on the premise that the thrift
industry was undergoing structural changes similar to those experienced by the
commercial banking industry during the decades of the 1960s and 1970s. These
structural changes were believed to portend the consolidation of the thrift
industry into larger holding company structures characteristic of the commercial
banking industry.

      Specifically, the Partnership's goal was to use the proceeds of its public
offering to fund the acquisition of smaller, predominantly undercapitalized
thrift institutions located in the southeastern United States. These thrift
institutions would then be operationally linked through common control by
Bancorp, a multi-state thrift holding company. The bank branch network was
considered to be little more than a platform from which to raise deposits,
largely "mini-jumbo" certificates of deposit in denominations of $25,000 to
$80,000, offering yields typically priced at the top of the deposit market. The
funds provided by these deposits would be used to operate an active secondary
marketing function which would acquire mortgage loans, principally second
mortgage loans in geographically dispersed markets purchased at premiums, in the
secondary market. Pools of loans were then to be aggregated and sold to or
participated among Bancorp's bank subsidiaries.

      The Partnership made only three acquisitions, however. The initial
acquisition was of Bancorp and its principal subsidiary, Essex Savings Bank,
Inc. of Elizabeth City, North Carolina, also referred to as the Bank, a $300
million thrift owned by the original corporate general partner of the
Partnership. The Partnership also acquired in 1990 a $65 million thrift
institution based in Emporia, Virginia. The Partnership's acquisition activity
was concluded in May 1990 with the acquisition from the Resolution Trust Company
("RTC") of the former Financial Security Savings & Loan Association of Delray
Beach, Florida, a $107 million thrift institution.

      In addition to the $41.6 million in partnership equity raised by the
Partnership, in January 1991 EMC, the Partnership's non-bank mortgage
subsidiary, issued $23.4 million in mortgage servicing backed notes (the "Essex
11's") through a private placement. Proceeds of these notes were used over a
17-month period to acquire purchased mortgage servicing rights ("PMSRs") for
sale on the secondary market. Issuance of the Essex 11's coincided with the
decline in interest rates to their lowest level in 20 years and, not
unexpectedly, the Partnership and its subsidiaries suffered the adverse
financial impact of impairment to the carrying value of the Partnership's PMSR
portfolio, capitalized excess servicing, and loan premiums. Concurrently, the
Partnership also suffered dramatic deterioration in the quality of its loan
portfolio, necessitating substantial additional loan loss reserves and
provisions for losses on foreclosed properties.

      In March 1991, as a result of regulatory findings made during the 1990
examination of the Partnership and its subsidiaries, the Office of Thrift
Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the
Commissioner of Savings Institutions for the State of North Carolina imposed a
broadly restrictive supervisory agreement on the operations of the Partnership's
three subsidiary banks. During the second quarter of 1991 the Partnership also
announced the reduction in its dividend per partnership unit to $.25 per quarter
from the prior level of $.40 per unit. Fiscal year 1991 concluded with the Bank
failing its regulatory capital requirements, an event which required the
submission of a capital restoration plan.

      During the second quarter of 1992 it became increasingly apparent that EMC
would default on certain terms of the indenture under which the Essex 11's were
issued, and in April 1992 the Partnership announced that the $.25 per unit
dividend declared on March 19, 1992 payable on May 15, 1992 would be delayed as
a result of a lack of liquidity at the Partnership. In response to the serious
deterioration in the financial condition of the Partnership, in May 1992 the


                                       5
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Investment Committee of the Partnership, a body effectively controlled by
members employed by the Partnership's investment banker, PaineWebber Inc.
("PWI"), acting pursuant to certain provisions of the Agreement of Limited
Partnership, removed the Partnership's corporate general partner.

      The change of control of the Partnership was initiated on May 1, 1992 and
was concluded on May 6, 1992 with the installation of an interim corporate
general partner of the Partnership. Following regulatory approval in 1993, TMS
was installed as the permanent corporate general partner of the Partnership. TMS
was controlled by Gene D. Ross, the present president and chief executive
officer of the Company, who had also been the president and chief executive
officer of the interim general partner since the 1992 change in control.

      The Partnership's new management undertook four principal courses of
action. First, the Company replaced certain members of its former senior
management with individuals with significant experience in banking and problem
asset rehabilitation. Second, the Company reorganized its risk management and
collections department in order to focus on the early identification of
potential problem assets and the administration, rehabilitation or liquidation
of the Company's nonperforming assets. Third, the Partnership's three separate
savings bank subsidiaries were consolidated into the Bank in May 1993, which
created operating efficiencies and a simplified organizational structure. At the
time of the consolidation, the Bank did not comply with its minimum regulatory
capital requirements. As a result, the Partnership obtained a $3.0 million loan
from PaineWebber Capital Inc. ("PWC"), the proceeds of which were contributed to
the Bank in order to bring the institution into regulatory capital compliance.
This $3.0 million loan was evidenced by a seven-year note (the "Seven-Year
Note") from the Partnership to PWC. Fourth, PWC successfully tendered for and
repurchased at par all of the outstanding Essex 11's. In exchange for the
cancellation of substantially all of the Essex 11's, the Partnership delivered a
ten-year note (the "Ten-Year Note") in the original principal amount of $14.2
million to PWC in May 1993, and PWC received the proceeds of the sale of the
balance of EMC's PMSRs, which was consummated in mid-1993. On October 24, 1994,
the total outstanding principal and interest owed with respect to the Seven- and
Ten-Year Notes and the remaining Essex 11's held by PWC were forgiven in
connection with the settlement of the litigation discussed below.

      By the end of 1993, although the Bank had made significant progress in
resolving many of its financial and operational problems, it again fell out of
compliance with its minimum regulatory capital requirements. Management of the
Bank had already concluded that in order to reposition the Bank's activities
along the lines of a more traditional financial institution and in order to
focus the Bank's lending and deposit gathering activities within the Bank's
primary market of North Carolina and Virginia, it would be necessary to sell the
Bank's Florida branches. The sale of the Florida branches to a third party,
which was consummated on June 30, 1994, brought the Bank into compliance with
its minimum regulatory capital requirements.

      In December 1993, the Partnership also became a defendant, together with
PaineWebber and others, in certain class action litigation (the "Litigation")
relating to the original offering by the Partnership and the management of the
Partnership and its subsidiaries prior to the 1992 change in control. In
September 1994, the United States District Court for the Eastern District of
Texas entered an order approving a proposed class action settlement (the
"Settlement") of the Litigation. The Settlement substantially improved the
financial condition of the Partnership and its subsidiaries by providing for the
forgiveness by PaineWebber, effective October 24, 1994, of all of the debt
outstanding under the Seven- and Ten-Year Notes and the remaining Essex 11's.
The aggregate amount of such debt totaled approximately $20.7 million at October
24, 1994.

      The benefit of the debt forgiveness was offset to some extent by (i)
litigation expenses of approximately $90,000, (ii) the Partnership's
contribution of $1.3 million to a settlement fund established by the defendants
to pay the plaintiffs' attorneys' fees and certain costs associated with


                                       6
<PAGE>

the Settlement and to make certain payments to the named plaintiffs, and (iii)
the issuance by the Company to former holders of LPUs of a total of $1.0 million
in preferred stock (the "Series A Preferred Stock"). As a result of the
Settlement, the Company also recognized approximately $330,000 of alternative
minimum taxes ("AMT") and the Company's net operating loss ("NOL") carryforwards
were reduced by approximately $20.0 million, resulting in a NOL carryforward of
$20.5 million and a $330,000 AMT carryover at December 31, 1994.

Business Strategy of the Company and the Bank

      General. Since the change in management which occurred in May 1992, the
Company's new management achieved substantial progress in addressing its various
financial, regulatory and operating problems. Such achievements included the
consolidation of the Partnership's three savings bank subsidiaries into the
Bank, the restructuring of the Essex 11's, the sale of the Bank's Florida
branches, and the Settlement of the Litigation (which resulted in the
forgiveness of approximately $20.7 million of debt). Nevertheless, due to the
Bank's financial condition and continued losses from operations, the Bank again
failed certain of its minimum regulatory capital requirements at December 31,
1994. Management had already determined that the raising of additional capital
was critical to the Bank's long-term viability and the accomplishment of the
Bank's business objectives, as well as the Bank's compliance with applicable
regulatory capital requirements

      Capital Raising Efforts. Following discussions with the Company's
financial advisor, the Board of Directors of the Company (the majority of which
were independent) determined that the most expeditious method of raising capital
was through a private placement offering and unanimously approved a proposed
recapitalization plan. Accordingly, on March 13, 1995, the Company's financial
advisor began distributing a preliminary placement memorandum to a select group
of institutional and accredited investors. A series of meetings was held with
potential investors in order to determine their level of interest. On June 29,
1995, the OTS, the Bank's primary regulator, formally notified the Bank that
unless it raised additional capital by June 30, 1995, the Bank would be subject
to the appointment of a conservator or a receiver, as well as other enforcement
actions. The OTS further advised that if the Bank was unable to provide written
evidence by June 30, 1995 that it had entered into a binding agreement to
recapitalize the Bank, the OTS would transfer the Bank to the RTC, an
instrumentality of the U.S. Government which had the authority to sell and
liquidate depository institutions. Therefore, it was imperative that the Bank
raise capital in order to prevent its imminent seizure by the RTC. In the final
analysis, only one party was able to step forward within the required
time-frame. On June 30, 1995, the Company and the Bank signed an Agreement and
Plan of Reorganization (the "Agreement") with Home Bancorp, Inc. ("Home
Bancorp") and its wholly-owned subsidiary Home Savings Bank, F.S.B. ("Home
Savings"), a Norfolk, Virginia based savings institution. On September 15, 1995,
the Company and the Bank merged with Home Bancorp and Home Savings (the "Home
Acquisition"). After this transaction, the Bank exceeded all of the minimum
regulatory capital requirements imposed by federal law.

      The Home Acquisition was accounted for using the purchase method of
accounting and the purchase price was allocated among the assets and liabilities
of Home Bancorp and Home Savings at their fair value, which was $60.1 million
and $52.6 million, respectively, as of September 15, 1995. The excess of cost
over net assets acquired("goodwill") recognized in connection with the Home
Acquisition was approximately $8.6 million.

      In exchange for all of the outstanding stock of Home Bancorp, the
stockholders of Home Bancorp received 2,250,000 shares of nonvoting perpetual
preferred stock of the Company with an aggregate redemption and liquidation
value of $15 million and warrants to purchase 7,949,000 shares of the Company's
common stock at a price of $0.9375 per share, which was the price of


                                       7
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the Company's Common Stock as of June 30, 1995. The warrants are exercisable
beginning in September 1998 and expire in September 2005. The fair market value
of the preferred stock and the warrants was estimated in a third party valuation
to approximate $15.5 million at the time of the Home Acquisition. Following the
completion of the transaction, two representatives designated by Home Bancorp
joined the Boards of Directors of the Company and the Bank, filling existing
vacancies on those Boards.

      Development of Full-Service Branches. The original business plan of the
Bank resulted in mostly limited service branches that were designed primarily to
accumulate large deposits in non-transactional accounts by offering attractive
interest rates. Almost all of the Bank's branches were limited service branches,
which received deposits but originated very few loans and had almost no presence
in the communities they served. The consolidation of the Partnership's three
savings bank subsidiaries in 1993, the sale of the Florida branches in 1994, and
the Home Acquisition in 1995, were important initial steps in management's
efforts to reposition the Bank's activities along the lines of a more
traditional savings institution while allowing the Bank to focus its lending and
deposit gathering activities within its primary market of Virginia and North
Carolina.

      Not long after the Home Acquisition was assimilated, the Board of
Directors of the Company formed a Strategic Evaluation Committee (the
"Committee") to explore the possibility of further expansion or contraction by
branch sales. It was concluded, with assistance from an independent consultant,
that selling non-strategic bank branches and effectively shrinking the size of
the assets base by approximately 50% was a strategy that ultimately would be in
the best interests of the common and preferred shareholders of the Company.
Accordingly, the Bank sold its branches in Charlotte, Raleigh, Greensboro and
Wilmington, North Carolina and in Norfolk, Portsmouth, Hampton, Newport News and
Grafton, Virginia (collectively, the "Branches") in three separate transactions
over a nine-month period in 1996. The outcome of this strategy is that the
Company has retained the most strategic branches with the greatest potential for
significant market share growth, has approximately 8.7% tangible capital as of
December 31, 1996 and has largely removed goodwill from its balance sheet. See
Note 5 on pages 50 and 51 of the Notes to Consolidated Financial Statements of
the 1996 Annual Report to Stockholders, which is attached hereto as Exhibit 13
and incorporated herein by reference.

      During this downsizing period in 1996, the Bank continued its efforts to
position the remaining strategic branches to more nearly conform to the
activities of a traditional savings institution. To that end, the Bank and its
mortgage banking subsidiary introduced a wider range of consumer and mortgage
loan products to attract new business and maximize the potential of its existing
customer base. In addition, in September 1996 the Bank executed a purchase
agreement on a parcel in Suffolk, Virginia with the intent to relocate its
Suffolk branch from a leased facility location to a location with potential for
significant growth.

      Expansion of Residential Construction and Consumer Lending. Since 1992,
the Company has begun to emphasize the origination and purchase of residential
construction and consumer loans because of the shorter-term nature of such loans
and the higher yields available thereon when compared to permanent residential
mortgage lending. However, construction and consumer lending is generally
considered to involve a higher level of risk as compared to single-family
residential lending. Notwithstanding the higher risk aspect, the portfolio of
residential construction loans has grown steadily since 1992 without a loss. For
additional information, see "Lending Activities - Construction Loans" and "-
Consumer Loans."

      Reduction in Operating Expenses. Historically, the Company's operating
expenses have been high relative to those of other savings institutions of
similar asset size. This has been primarily due to the presence of duplicative
operating procedures and personnel, a high level of professional fees resulting
from the various financial and operating problems of the Partnership, an


                                       8
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increase in expenses relating to the allocation of resources to the collection
and work-out of nonperforming assets, high levels of provisions for losses on
foreclosed properties and high levels of impairment adjustments relating to
PMSRs, excess servicing fees and loan premiums. Significant reductions have been
made in operating expenses since the change in management which occurred in May
1992. Nevertheless, management continues to evaluate the Bank's personnel needs
and operating requirements in order to identify areas where additional measures
may be taken to reduce costs, and is in the process of implementing additional
cost reductions so that the on-going expense structure is compatible with an
institution that has dramatically downsized during 1996. Although the Bank is
committed to achieving a lower level of operating expenses relative to the
Bank's operations, management recognizes that operating expenses will remain
higher than much of the Bank's peer group due to the relatively low level of
assets of Essex Home.

      Reduction of Nonperforming Assets. As previously discussed, the Company's
new management reorganized the Bank's risk management and collections department
and revised its loan underwriting, collection and monitoring procedures in an
effort to reduce the level of nonperforming assets. As a result, nonperforming
assets have declined from $24.8 million or 5.92% of total assets at December 31,
1992 to $5.2 million or 2.99% of total assets at December 31, 1996. In addition,
loans delinquent 30 to 89 days have declined from $7.0 million or 2.66% of total
loans held for investment at December 31, 1992 to $1.5 million or 1.01% of total
loans held for investment at December 31, 1996. Reduced provisions for loan
losses and provisions for losses on foreclosed properties are expected to
contribute to improved operating results. Nevertheless, future additions to the
allowance for loan losses or reductions in the carrying values of foreclosed
properties could become necessary as a result of future increases in
nonperforming assets or for other reasons, including any adjustments required in
connection with future regulatory examinations of the Bank.

      Expansion of Subservicing Activities. The Bank is also committed to
securing a reliable source of fee income by providing competitive and profitable
residential mortgage loan servicing and subservicing. Essex Home is a service
corporation subsidiary licensed by the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Government National Mortgage Association ("GNMA"). Essex Home also services and
subservices loans for approximately 28 other private investors.

      In April 1993, Essex Home began a marketing effort to acquire subservicing
contracts as a means of generating loan servicing fees and ancillary income.
Through various networking and referral opportunities and advertising efforts,
Essex Home has successfully attracted other financial institutions and mortgage
banking firms interested in subcontracting their loan servicing function. By
subservicing loans for others, the Bank will be able to utilize more fully its
available resources in a cost efficient and profitable manner. At December 31,
1996, approximately 13,300 loans with an aggregate principal balance of $1.1
billion were serviced or subserviced by Essex Home. However, on February 28,
1997, the Company was notified by its largest subservicing client of its
intention not to renew its contract beyond June 1, 1997. As of December 31,
1996, the Company serviced approximately 7,000 loans totaling $858.9 million for
this client and servicing fee income for 1996 included approximately $409,000
attributable to servicing activities performed for this client. While the
Company's management has intensified its marketing efforts in order minimize the
impact of this loss on the earnings performance of Essex Home and the Company,
no assurances can be made that this significant servicing volume can be replaced
in its entirety in the near term. Management believes, however, that its
marketing efforts will be buoyed by the much-improved capital position of the
Bank, which is deemed a "well-capitalized" institution under the Prompt
Corrective Action provisions of the Federal Deposit Insurance Act. In the
meantime, the Company is examining expenses associated with the servicing of
this client in contemplation of reductions to minimize the loss in servicing fee
income.


                                       9
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      Strengthening of Loan Policies. Since May 1992, the loan underwriting
policies of the Bank have been substantially revised and strengthened with the
objective of reducing the risk profile of the Bank's loan portfolio. In
addition, the Company's loan portfolio has been restructured in order to improve
its asset quality, reduce the risk-weighting of the Bank's assets and minimize
the Company's exposure to interest rate risk. Specifically, the Company has
significantly reduced its portfolio of second mortgage loans while emphasizing
the origination of both construction and permanent loans secured by
single-family residential real estate. Efforts were made to effect these changes
while continuing to be responsive to the borrowing needs in the Bank's markets.
In addition to strengthening the Bank's underwriting policies and procedures,
other measures were taken to improve the Bank's asset quality, including the
formation of a loan committee, further strengthening of the Bank's internal
audit and quality control functions and enhanced loan origination standards and
practices.

      Interest Rate Risk Management. Deposit accounts typically adjust more
quickly to changes in market interest rates than mortgage loans because of the
shorter maturities of deposits. As a result, significant increases in interest
rates may adversely affect the Bank's earnings. To reduce the potential
volatility of the Bank's earnings, management has sought to improve the match
between asset and liability maturities and rates, while maintaining an
acceptable interest rate spread. Pursuant to this strategy, the Bank has (i)
emphasized investment in adjustable-rate single-family residential loans or
shorter-term (seven years or less), fixed-rate single-family residential loans;
(ii) sold longer-term (over seven years), fixed-rate single-family residential
loans in the secondary market; (iii) purchased adjustable-rate mortgage-backed
securities; (iv) maintained higher liquidity by holding short-term investments
and cash equivalents; and (v) increased the average maturity of the Bank's
interest-bearing liabilities by utilizing long-term advances and attempting to
attract longer-term retail deposits.

      The interest rate sensitivity gap is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
with a given time period. As a result of the acquisition of Home Savings, whose
loans were predominantly fixed-rate mortgage loans with maturities in excess of
seven years, and whose deposits were predominantly fixed-rate certificates with
maturities of one year or less, the Bank's one-year interest rate sensitivity
gap amounted to a negative 7.7% of total assets at December 31, 1995. However,
through the balance sheet restructuring that resulted from the sale of branches
during 1996, the Bank was able to significantly improve its one-year interest
rate sensitivity gap to zero as of December 31, 1996. Furthermore, the total
cumulative ratio of interest earning assets to interest-bearing liabilities
increased from 97.2% at December 31, 1995 to 101.4% at December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management" on pages 27 through 30 of the 1996
Annual Report to Stockholders, which is attached hereto as Exhibit 13 and
incorporated herein by reference.

General

      The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the OTS and is subject to various reporting and
other requirements of the Securities and Exchange Commission (the "Commission").
The Bank, as a federally chartered savings bank, is subject to comprehensive
regulation and examination by the OTS, as its chartering authority and primary
regulator, and by the FDIC, which administers the Savings Association Insurance
Fund ("SAIF"), which insures the Bank's deposits to the maximum extent permitted
by law. The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB"),
which is one of 12 regional banks which comprise the Federal Home Loan Bank
System. The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.


                                       10
<PAGE>

      The principal business of the Company has in the past consisted of
attracting deposits from the general public through its offices (primarily
mini-jumbo certificates of deposit) and using such deposits, together with
advances from the FHLB and other sources of funds, to originate and purchase
mortgage loans secured by first and second liens on single-family residential
real estate. Historically, the Company has also engaged in the origination of
construction loans (including residential development loans), and, to a lesser
extent, commercial real estate loans, commercial business loans and consumer
loans. The Company's principal focus is currently on the origination (through
Essex First) of both construction and permanent single-family residential loans
(of which substantially all fixed-rate single-family residential loans with
terms to maturity in excess of seven years are being sold by Essex First in the
secondary market). Moreover, in order to provide a full range of services to its
customers and in accordance with the Company's asset and liability management
policies, the Company recently has increased its emphasis of the origination of
various types of consumer loans. In addition, the Company generates fee income
by providing to third parties residential mortgage loan servicing and
subservicing through Essex Home. Furthermore, the Company invests in
mortgage-backed securities which are insured or guaranteed by the U.S.
Government and agencies thereof and other similar investments permitted by
applicable laws and regulations.

Lending Activities

      General. At December 31, 1996, the Company's net loan portfolio (excluding
loans classified as held for sale) totaled $145.6 million, representing
approximately 83.5% of its $174.3 million of total assets at that date. The
principal categories of loans in the Company's portfolio are residential real
estate loans, which are secured by single-family (one-to-four units) residences;
loans for the construction of single-family properties; commercial real estate
loans, which are secured by multi-family (over five units) residential and
commercial real estate; commercial business loans; and consumer loans.
Substantially all of the Company's mortgage loan portfolio consists of
conventional mortgage loans, which are loans that are neither insured by the FHA
nor partially guaranteed by the VA.

      As a federally chartered savings institution, the Bank has general
authority to originate and purchase loans secured by real estate located
throughout the United States. Prior to the change in management which occurred
in May 1992, the Company was engaged primarily in the origination and purchase
of loans secured by second liens (and, to a lesser extent, first liens) on
single-family residential real estate located throughout the continental United
States. The Company has ceased its nationwide lending and currently originates
substantially all of its loans within Virginia and North Carolina. Nevertheless,
the Company continues to purchase from time to time loans secured by properties
located outside of its market area and continues to hold a relatively
diversified portfolio.

      Federal regulations permit the Bank to invest without limitation in
residential mortgage loans and up to four times its capital in loans secured by
non-residential or commercial real estate. The Bank is also permitted to invest
in secured and unsecured consumer loans in an amount not exceeding 35% of the
Bank's total assets; however, such 35% limit may be exceeded for certain types
of consumer loans, such as home equity, property improvement and education
loans. In addition, the Bank is permitted to invest up to 20% of its total
assets in secured (by other than real estate) and unsecured loans for
commercial, corporate, business or agricultural purposes, provided that any
investments which in the aggregate total 10% may only be used for small business
loans.

      Since the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), a savings institution generally may not make
loans to one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a


                                       11
<PAGE>

borrower if the loans are fully secured by readily marketable securities. See
"Regulation - Regulation of the Bank - General." At December 31, 1996, the
Bank's limit on loans-to-one borrower was $2.5 million. The loans-to-one
borrower limitation may restrict the Bank's ability to do business with certain
existing customers.

      At December 31, 1996, the Bank's five largest commercial loans-to-one
borrower and their related entities amounted to $1.4 million, $1.3 million,
$677,000, $430,000 and $307,000. In addition, as of December 31, 1996, the
Bank's largest lines of credit with unaffiliated home builders consisted of one
in the amount of $2.0 million (of which $531,000 had been drawn upon as of such
date), another in the amount of $1.5 million (of which $609,000 had been drawn
upon as of such date), another in the amount of $1.5 million (of which $455,000
had been drawn upon as of such date) and another in the amount of $1.5 million
(of which $252,000 had been drawn upon as of such date). At December 31, 1996,
the $1.4 million loan and the $430,000 loan were classified based on a rating
system adopted by the Company. Refer to "-Asset Quality - Classified Assets" for
a description of the classifications for problem assets.

      The $430,000 loan is secured by one improved commercial property and four
residential lots located on the Outer Banks of North Carolina. This loan was
originally an $830,000 portion of a $2.7 million loan made in February 1990. See
"-Lending Activities - Nonperforming Assets" for a discussion of the $1.75
million portion of this loan (referred to as the "Richmond Apartments loan").
The commercial property and residential lots had an aggregate appraised value of
$1.0 million pursuant to appraisals obtained in October 1996 for the commercial
property and December 1994 for the residential lots. Interest is being paid
monthly with principal repayment expected to result from the sale or refinance
of the subject commercial and residential properties. The borrower is currently
marketing the residential lots and commercial properties for sale. As of
December 31, 1996, the loan was classified as substandard.

      The $1.4 million group of loans consists of (i) a commercial real estate
loan which was originated in October 1987 in the amount of $1.0 million for the
purpose of refinancing a mini-storage/office facility (76 mini-storage units and
38 office units) located in Virginia Beach, Virginia, and (ii) a line of credit
in the amount of $600,000. The Company occupies approximately 12,000 square feet
of the office facility. The lease payments largely service the principal and
interest on the two loans. The term of the lease coincides with the maturity of
the loans, which are scheduled to mature on December 31, 2001. In addition, as
of December 31, 1996, the Bank and its subsidiaries leased 16 of the
mini-storage units. The property was most recently appraised in November 1992
for $915,000. As of December 31, 1996, the Bank had established a $300,000
specific reserve with respect to the loans and the remaining $1.1 million was
classified as substandard.


                                       12
<PAGE>

      Loan Portfolio Composition. The following table sets forth information
concerning the Company's loan portfolio (excluding loans held for sale) by type
of loan at the dates indicated:

<TABLE>
<CAPTION>
                                                                            December 31,
                                               ------------------------------------------------------------------
                                                        1996                    1995                    1994
                                                        ----                    ----                    ----
                                                   $         %             $         %             $         %
                                                  ---       ---           ---       ---           ---       ---
                                                                       (dollars in thousands)
<S>                                            <C>          <C>         <C>         <C>         <C>         <C>
Real estate:
   Single-family residential:
     First mortgages................           $103,643     70.0%       $223,531    82.1%       $187,607    77.7%
     Second mortgages...............             12,384      8.3          13,398     4.9          18,717     7.8
   Construction and development.....             17,190     11.6          15,078     5.5          15,501     6.4
   Commercial real estate...........              6,313      4.3          10,611     3.9          11,499     4.8
                                               --------    -----        --------   -----        --------   -----
     Total real estate loans........            139,530     94.2         262,618    96.4         233,324    96.7

Commercial business loans...........              1,915      1.3           2,171      .8           1,824      .8

Consumer loans:
   Other............................              5,828      3.9           6,488     2.4           5,320     2.2
   Secured by deposits..............                842       .6             994      .4             835      .3
                                               --------    -----        --------   -----        --------   -----
     Total consumer loans...........              6,670      4.5           7,482     2.8           6,155     2.5
                                               --------    -----        --------   -----        --------   -----

           Total Loans..............            148,115    100.0%        272,271   100.0%        241,303   100.0%
                                                           =====                   =====                   =====
Less:
   Unearned loan fees and discounts.                  8                      388                     482
   Allowance for loan losses........              2,556                    5,251                   3,429
                                              ---------                ---------               ---------
                                                  2,564                    5,639                   3,911
                                              ---------                ---------               ---------

           Net Loans................          $ 145,551                $ 266,632               $ 237,392
                                              =========                =========               =========

<CAPTION>
                                                      1993                    1992
                                                      ----                    ----
                                                   $         %             $         %
                                                   -         -             -         -
Real estate:
   Single-family residential:
     First mortgages................           $159,398     75.8%       $177,442    67.7%
     Second mortgages...............             24,851     11.8          54,386    20.7
   Construction and development.....              9,137      4.4           8,735     3.3
   Commercial real estate...........             10,781      5.1           8,817     3.4
                                               --------    -----        --------   -----
     Total real estate loans........            204,167     97.1         249,380    95.1

Commercial business loans...........              1,946       .9           3,692     1.4

Consumer loans:
   Other............................              2,884      1.4           7,088     2.7
   Secured by deposits..............              1,263       .6           1,987      .8
                                               --------    -----        --------   -----
     Total consumer loans...........              4,147      2.0           9,075     3.5
                                               --------    -----        --------   -----

           Total Loans..............            210,260    100.0%        262,147   100.0%
                                                           =====                   =====
Less:
   Unearned loan fees and discounts.                440                      864
   Allowance for loan losses........              3,039                    4,489
                                               --------                 --------
                                                  3,479                    5,353
                                               --------                 --------

           Net Loans................           $206,781                 $256,794
                                               ========                 ========
</TABLE>


                                       13
<PAGE>

      The size of the Company's loan portfolio has declined significantly
primarily due to sales of second mortgage loans, the sale of loans in connection
with the sale of the Bank's Florida branches in 1994 and the sale of loans in
connection with the sale of the Branches in 1996. Total loans decreased by an
aggregate of $114.0 million or 43.5% from December 30, 1992 to December 31,
1996. During this period, the Company placed increased emphasis on single-family
first mortgage loans which increased from 67.7% of total loans held for
investment at December 31, 1992 to 70.0% of total loans held for investment at
December 31, 1996. Single-family second mortgage loans declined substantially
during such period from 20.7% of total loans held for investment at December 31,
1992 to 8.3% of total loans held for investment at December 31, 1996. The
decline in second mortgage loans resulted from loan sales undertaken to reduce
the regulatory risk-weighting of the Bank's assets and, thus, improve its
risk-based capital ratio, while at the same time reducing earnings volatility
associated with the amortization of deferred premiums and the increased credit
risk associated with second mortgage loans. Construction loans increased from
$8.7 million or 3.3% of total loans held for investment at December 31, 1992 to
$17.2 million or 11.6% of total loans held for investment at December 31, 1996.
The Company, through Essex First, is currently emphasizing its origination of
construction loans with respect to single-family properties. Commercial real
estate loans increased from 3.4% of total loans held for investment at December
31, 1992 to 4.3% of total loans held for investment at December 31, 1996, while
commercial business loans declined from 1.4% of total loans held for investment
to 1.3% of total loans held for investment at December 31, 1996. Consumer loans
increased from 3.5% of total loans held for investment at December 31, 1992 to
4.5% of total loans held for investment at December 31, 1996. The Company has
begun to emphasize the origination and purchase of various types of consumer
loans and, consequently, expects the balance of such loans to increase.

      The following table presents the maturity distribution and interest
sensitivity of selected loan categories (excluding residential mortgage and
consumer loans) at December 31, 1996. Maturities are presented on a contractual
basis. Loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Scheduled contractual principal repayments
do not reflect the actual maturities of loans.

<TABLE>
<CAPTION>
                                                    Commercial        Commercial
                                Construction        Real Estate        Business       Total
                                ------------        -----------        --------       -----
                                                       (dollars in thousands)
<S>                              <C>                   <C>              <C>          <C>
Amounts due:
    One year or less             $ 16,383              $  738           $  655       $ 17,776
    After one year through
      five years                      171               3,010            1,260          4,441
    Beyond five years                 636               2,565                -          3,201
                                 --------              ------           ------       --------
        Total                    $ 17,190              $6,313           $1,915       $ 25,418
                                 ========              ======           ======       ========

Interest rate terms on
    amounts due after one
    year:
      Fixed                     $     495              $1,563           $1,126       $  3,184
                                 ========              ======           ======       ========
      Adjustable                $     312              $4,012          $   134       $  4,458
                                 ========              ======           ======       ========
</TABLE>

      Origination, Purchase and Sale of Loans. Historically, the Company has
been primarily engaged in attracting deposits from the general public and using
such deposits, together with advances from the FHLB and other sources of funds,
to originate and purchase mortgage loans secured by first and second liens on
single-family residential real estate. Historically, the Company has also
engaged in the origination of construction loans (including residential
development loans), and, to a lesser extent, commercial real estate loans,
commercial business loans and consumer loans. In earlier years, the Bank
operated as a wholesale financial institution and conducted its deposit
gathering activities through a network of limited service branches that were
designed to primarily accumulate large non-transactional deposit accounts. The
Bank's


                                       14
<PAGE>

lending activities were not generally conducted through its branch offices.
Instead, substantially all of the Company's loan product was either originated
by Essex First or purchased in the secondary market.

      As part of management's efforts to reposition the Bank's activities along
the lines of a more traditional financial institution, the Bank converted its
existing branch offices into full-service retail facilities, which will enable
the Bank to, among other things, increase its origination of both consumer and
mortgage loans directly through its branch network. Nevertheless, substantially
all of the Company's mortgage loan product is expected to continue to be either
originated by Essex First or purchased in the secondary market.

      Mortgage Banking Activities. Since 1992, Essex First has significantly
expanded its mortgage banking operations in order to, among other things,
increase the Company's level of loan originations that generate fee income. At
December 31, 1996, Essex First conducted its operations out of four offices,
which are located in Virginia Beach, Richmond, and Chester, Virginia, and
Elizabeth City, North Carolina. Essex First also currently accepts applications
through the Bank's branch office in Emporia, Virginia. During the years ended
December 31, 1996, 1995, and 1994, Essex First originated $104.2 million, $101.8
million, and $116.5 million of loans (consisting primarily of both permanent and
construction loans secured by single-family residential real estate). During
such periods, $29.3 million, $26.3 million, and $33.6 million of such loans,
respectively, were sold by Essex First to the Bank, with the remainder
(excluding construction loans) being sold by Essex First primarily to other
private investors in the secondary market.

      Although the majority of the Bank's loan product is currently originated
by Essex First, Essex First was established primarily to increase the volume of
loans being originated for sale to private investors in the secondary market.
Such loan sales generate fee income, while avoiding the interest rate and credit
risk associated with holding long-term fixed-rate mortgage loans in its
portfolio. Loans originated by Essex First for sale in the secondary market are
originated in accordance with terms, conditions and documentation prescribed by
the FHLMC, FNMA and GNMA. However, Essex First does not generally sell mortgage
loans to such government agencies and, instead, sells loans to private investors
in the secondary market. Consequently, loans originated by Essex First for sale
in the secondary market must also comply with any particular requirements of
such private investors. Upon approval of a particular loan, Essex First provides
an independent title company or attorney instructions to close the loan. Loan
proceeds are disbursed and funded at the closing by Essex First. The loan
documents are generally delivered to the private investor within 10 days of the
closing and the price paid by the private investor for purchasing the loan is
generally remitted within five to 10 days after such delivery. Although Essex
First currently sells substantially all non-government conventional loans
without recourse (so that losses incurred as a result of nonperformance with
respect to the loan become the responsibility of the purchaser of the loan as of
the date of the closing), Essex First has in the past occasionally sold
non-government conventional loans in the secondary market with recourse, and may
continue to sell certain government conventional loans in the secondary market
with recourse. However, as of December 31, 1996 there were no loans outstanding
which were previously originated and sold by Essex First in the secondary market
with recourse.

      A majority of all residential mortgage loans originated by Essex First for
sale in the secondary market are sold with servicing released to third party
investors. Management anticipates that substantially all of the loans originated
by Essex First and not sold with servicing released to third party investors are
sold to the Bank, which enables the Company to retain the servicing. When loans
are sold with servicing rights released to the buyer, the Company recognizes
current income from receipt of servicing release fees. In the alternative, when
loans are sold with servicing retained, the Company recognizes additional gains
based on the estimated


                                       15
<PAGE>

fair value of the servicing retained. For additional information, see "- Loan
Servicing" and "- Loan Fee Income."

      Management of the Bank and Essex First believe that "pipeline risk," which
is created by offering loan applicants agreed upon interest rates for a future
closing, is currently being minimized because Essex First's loan originators are
compensated based on the purchase price they receive from the third party
investors purchasing the loans. Therefore, in most cases, the loan originator
will lock-in a purchase price with the third party investor simultaneously with
making the rate commitment to the borrower and therefore eliminate any interest
rate risk. If the loan is not locked-in simultaneously with the commitment to
the borrower, any market movement that occurs prior to the third party investor
locking-in the purchase price is shared by the loan originator and Essex First
for the first 1% of the loan amount, while any additional market movement is
reflected in the loan originator's compensation and not absorbed by Essex First
or the Bank.

      Loan Purchases and Sales. The Bank purchases from Essex First
single-family mortgage loans which generally have adjustable rates or a term to
maturity of seven years or less. In addition, the Bank continues to purchase
first mortgage loans secured by single-family residential properties from
selected financial institutions and mortgage banking companies in the secondary
market. Such loans generally consist of ARMs or fixed-rate loans with terms of
five, seven, or to a lesser extent, 15 years. Such loan purchases are secured by
properties located both within and outside the Bank's primary market. Purchased
loans are generally made for immediate delivery. During the years ended December
31, 1995 and 1994, the Bank purchased $50.7 million and $45.7 million of loans,
respectively, from various financial institutions and mortgage banking companies
(other than Essex First) in the secondary market. However, the amount of loans
purchased during 1995 was predominantly attributable to the Home Acquisition.
The Company purchased less than $600,000 of loans in the secondary market during
1996 because of its emphasis on loan sales to accomodate the sale of the
Branches.

      At December 31, 1996, 1995, and 1994, loans classified by the Company as
held for sale amounted to $2.5 million, $3.3 million, and $1.5 million,
respectively. Except for loans originated for sale in the secondary market by
Essex First, it is generally management's intention to hold originated and
purchased loans for investment. Under certain circumstances, however, the
Company may sell loans originally acquired for investment in order to address
needs regarding liquidity, regulatory capital, interest rate risk, or other
objectives. During 1996, the Bank sold first mortgage loans totaling $118.3
million in order to provide funds for the sale of the Branches. See Note 5 on
pages 50 and 51 of the Notes to Consolidated Financial Statements of the 1996
Annual Report to Stockholders, which is attached hereto as Exhibit 13 and
incorporated herein by reference.

      Loan Underwriting. Applications for all types of loans offered by the Bank
are taken at all of the Bank's branch offices. Applications for residential
mortgage loans are taken at all of Essex First's offices. Residential mortgage
loan applications are generally attributable to referrals from real estate
brokers and builders, existing customers and, to a lesser extent, walk-in
customers. Essex First also obtains applications for residential mortgage loans
through several loan originators who solicit and refer mortgage loan
applications to Essex First. These loan originators are compensated in part on a
commission basis and provide convenient origination services during banking and
nonbanking hours. During 1996, Essex First established a wholesale
construction/permanent ("C/P") lending program. Currently a network of
approximately 40 approved brokers are responsible for originating and processing
C/P loans and submitting them to the Bank for underwriting approval.

      Loans purchased by the Bank from Essex First or other financial
institutions and mortgage banking companies in the secondary market are
underwritten by the Bank in accordance with its


                                       16
<PAGE>

underwriting guidelines and procedures (which generally follow FHLMC and FNMA
guidelines) and may be approved by various lending officers of the Bank within
designated limits, which are established and modified from time to time to
reflect an individual's expertise and experience. All loans in excess of an
individual's designated limits are referred to an officer with the requisite
authority. Specifically, when acting individually, the Chief Executive Officer
and the Senior Underwriter are authorized to approve secured loans of up to
$250,000 and unsecured loans of up to $25,000. When the Senior Underwriter acts
together with the Chief Executive Officer, he is authorized to approve secured
loans of up to $500,000 and unsecured loans of up to $50,000. All secured loans
greater than $500,000 but not exceeding $750,000 require approval by the Bank's
loan committee, which consists of the aforementioned officers, the Senior Loan
Officer and the Chief Executive Officer of Essex First. All secured loans
greater than $750,000 and all unsecured loans greater than $50,000 must be
approved by the Bank's loan committee and the Board of Directors of the Bank. In
addition, all loans committed or approved by the Bank's loan committee are
reported to the Board of Directors on a monthly basis. Management of the Bank
believes that its relatively centralized approach to approving loan applications
ensures strict adherence to the Bank's underwriting guidelines while still
allowing the Bank to approve loan applications on a timely basis.

      Loan Servicing. Essex Home services or subservices residential real estate
loans owned by the Bank as well as for other private mortgage investors. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making advances to cover delinquent payments, making
inspections as required of mortgaged premises, contacting delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults and generally administering the loans. The majority of the funds that
have been escrowed by borrowers for the payment of mortgage related expenses,
such as property taxes and hazard and mortgage insurance premiums, are
maintained in noninterest-bearing accounts at nonaffiliated banks.

      Essex Home receives fees for servicing and/or subservicing mortgage loans.
Such fees serve to compensate Essex Home for the costs of performing the
servicing/subservicing function. Other sources of loan servicing revenues
include late charges and other ancillary fees. Servicing and subservicing fees
are collected by Essex Home out of the monthly mortgage payments made by
borrowers. For additional information concerning Essex Home and its servicing
and subservicing portfolio, see "- Loan Fee Income."

      Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth, pursuant to the mandates of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), uniform regulations prescribing standards
for real estate lending. Real estate lending is defined as extensions of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.

      The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio, which is the total amount of credit
to be extended divided by the appraised value of the property at the time the
credit is originated, must be established for each category of real estate
loans. If not a first lien, the lender must include all senior liens when


                                       17
<PAGE>

calculating this ratio. The Guidelines, among other things, establish the
following supervisory LTV limits: raw land (65%); land development (75%);
construction (commercial, multi-family and nonresidential) (80%); improved
property (85%); and one-to-four family residential (owner occupied) (no maximum
ratio; however any LTV ratio in excess of 90% should require appropriate
mortgage insurance or readily marketable collateral). In most cases, the
Company's loan underwriting guidelines with respect to LTV ratios are more
stringent than the Guidelines set forth above.

      Single-Family Residential Real Estate Loans. As part of management's
efforts to reposition the Bank along the lines of a more traditional thrift
institution, the Bank has increased its emphasis on loans secured by first liens
on single-family residential real estate. At December 31, 1996, $103.6 million
or 70.0% of the Company's total loans held for investment consisted of such
loans.

      In recent years, the Company has been emphasizing for its portfolio
single-family residential mortgage adjustable-rate loans which provide for
periodic adjustments to the interest rate. The loans currently emphasized by the
Company have 30-year terms and an interest rate which adjusts annually in
accordance with a designated index after a specified period has elapsed.
Depending on the loan product selected by the borrower, this period can range
from one year to seven years. In order to be competitive and generate
production, the ARMs offered by the Company provide for initial rates of
interest below the rates which would prevail when the index used for repricing
is applied. However, the Company underwrites each loan on a basis that is no
less stringent than the underwriting guidelines of the FNMA. The Company has not
engaged in the practice of using a cap on the payments that could allow the loan
balance to increase rather than decrease, resulting in negative amortization.
Approximately 53.7% of the permanent single-family residential loans in the
Company's loan portfolio held for investment at December 31, 1996 had adjustable
interest rates.

      The demand for adjustable-rate loans in the Company's primary market area
has been a function of several factors, including the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the interest rates and loan fees offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.

      Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment. In addition, the Company underwrites these loans based on a
borrower's qualification at a fully-indexed interest rate.

      The Company continues to originate long-term, fixed-rate loans in order to
provide a full range of products to its customers, but generally only under
terms, conditions and documentation which permit the sale thereof in the
secondary market. Currently, fixed-rate single-family residential loans with
terms to maturity of seven years or less are generally retained in the Company's
portfolio while fixed-rate single-family residential loans with terms to
maturity of over seven years are generally sold in the secondary market as
market conditions permit. At December 31, 1996, approximately 46.3% of the
permanent single-family residential loans held by the Company for investment
consisted of loans which provide for fixed rates of interest. Although these
loans provide for repayments of principal over a fixed period of up to 30 years,
it is the


                                       18
<PAGE>

Company's experience that such loans remain outstanding for a substantially
shorter period of time.

      The Company is generally permitted to lend up to 100% of the appraised
value of the real property securing a residential loan (referred to as the LTV
ratio); however, if the amount of a residential loan originated or refinanced
exceeds 90% of the appraised value, the Company is required by federal
regulations to obtain appropriate credit enhancement in the form of either
mortgage insurance or readily marketable collateral. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Company will lend up to 95% of
the appraised value of the property securing a single-family residential loan,
and generally requires borrowers to obtain private mortgage insurance on loans
which have a principal amount that exceeds 80% of the appraised value of the
security property. The extent of coverage is dependent upon the LTV ratio at the
time of origination.

      The Company generally requires title insurance insuring the priority of
its mortgage lien, as well as fire and extended coverage casualty insurance in
order to protect the properties securing its residential and other mortgage
loans. Borrowers may be required to advance funds, with each monthly payment of
principal and interest, to a loan escrow account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums and
mortgage insurance premiums as they become due. The properties securing all of
the Company's mortgage loans originated or closed by the Bank and/or Essex First
are appraised by independent appraisers that conform to guidelines established
pursuant to FIRREA and regulations promulgated thereunder.

      Home equity line of credit loans have a maximum commitment of five years,
which may be extended within the sole discretion of the Bank, and the interest
rate is set at the Bank's prime rate plus a margin. The Company will lend up to
a 90% LTV ratio and the loan can be secured by a primary or subordinate mortgage
on the property. The Company will originate the loan even if another institution
holds the first mortgage. At December 31, 1996, home equity lines of credit
totaled $677,000 ($344,000 of which had been funded as of such date).

      Construction Loans. In recent years, the Company has been increasingly
active in originating loans to construct primarily single-family residences.
These construction lending activities generally are limited to the Company's
primary market, with particular emphasis in the greater Richmond, Virginia
market and the Tidewater, Virginia area. With the success of the
builder/construction program in these areas, the Company is expanding this
program to include counties in northeastern North Carolina. At December 31,
1996, construction loans amounted to $17.2 million or 11.6% of the Company's
total loans held for investment. As of such date, the Company's entire portfolio
of construction loans consisted of loans for the construction of single-family
residences.

      The Company offers construction loans to individual borrowers as well as
to local real estate builders, contractors and developers for the purpose of
constructing single-family residences. Substantially all of the Company's
construction lending to individuals is originated on a C/P mortgage loan basis.
C/P loans are made to individuals who hold a contract with a licensed general
contractor to construct their personal residence. The construction phase of the
loan currently provides for monthly payments on an interest only basis at a
designated prime rate (plus 100 basis points) for up to six months. Upon
completion of construction, the loan converts to a permanent loan at either an
adjustable or fixed interest rate, consistent with the Company's policies with
respect to residential real estate financing. Essex First's construction loan
department approves the proposed contractors and administers the loan during the
construction phase. The Company's C/P loan program has been successful due to
its ability to offer borrowers a single closing and, consequently, reduced
costs. At December 31, 1996, the Company's C/P portfolio included 60
construction/permanent loans with an aggregate principal balance of $6.8


                                       19
<PAGE>

million (and an additional $7.8 million was subject to legally binding
commitments but had not been advanced as of such date).

      The Company also offers construction loans to real estate builders,
contractors and developers in order that they may construct single-family
residences on both a presold and speculative basis. Construction loans to
builders generally have a three-year note with annual renewals throughout the
term, with payments being made monthly on an interest only basis (at 1% to 2%
over a designated prime rate). Upon application, credit review and analysis of
personal and corporate financial statements, the Company will grant builders
lines of credit up to designated amounts. These credit lines may be used for the
purpose of construction of speculative (or unsold) residential properties. The
Company will generally limit the number of homes that may be built by any
individual builder or developer on a speculative basis depending on the
builder's financial strength and total exposure to other lenders. Although at
December 31, 1996, the Company did not have any real estate acquisition and
development loans in its portfolio, the Company may in the future, on a
case-by-case basis, grant a limited amount of real estate acquisition and
development loans. At December 31, 1996, the Company's construction loan
portfolio included 107 loans to 41 different builders with an aggregate
principal balance of $9.0 million (and an additional $28.6 million was subject
to legally binding commitments but had not been advanced as of such date). Of
this $9.0 million of builder loans, approximately $8.0 million consisted of
construction loans for which there were no contracts for sale at the time of
origination.

      The Company intends to continue to increase its involvement in
construction lending. Such loans afford the Company the opportunity to increase
the interest rate sensitivity of its loan portfolio. Construction lending is
generally considered to involve a higher level of risk as compared to
single-family residential lending, due to the concentration of principal in a
limited number of loans and borrowers and the effects of general economic
conditions on real estate developers and managers. Moreover, a construction loan
can involve additional risks because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost
(including interest) of the project. The nature of these loans is such that they
are generally more difficult to evaluate and monitor. In addition, speculative
construction loans to a builder are not necessarily pre-sold and thus pose a
greater potential risk to the Company than construction loans to individuals on
their personal residences.

      The Company has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Company has adopted underwriting guidelines which
impose stringent loan-to-value (80% during the construction phase with respect
to single-family residential real estate), debt service and other requirements
for loans which are believed to involve higher elements of credit risk, by
limiting the geographic area in which the Company will do business and by
working with builders with whom it has established relationships or knowledge
thereof.

      Commercial Real Estate Loans. The Company has also originated mortgage
loans secured by multi-family residential and commercial real estate. At
December 31, 1996, $6.3 million or 4.3% of the Company's total loans held for
investment consisted of such loans.

      Commercial real estate loans originated by the Company are primarily
secured by office buildings, retail stores, warehouses and general purpose
industrial space. Commercial real estate loans also include multi-family
residential loans, substantially all of which are secured by small apartment
buildings. At December 31, 1996, $1.4 million or 21.8% of the Company's total
commercial real estate loans were comprised of multi-family residential loans.

      Although terms vary, commercial real estate loans generally are amortized
over a period of up to 20 years and mature in seven years or less. The Company
will originate these loans either


                                       20
<PAGE>

with fixed interest rates or with interest rates which adjust in accordance with
a designated index, which generally is negotiated at the time of origination.
Loan-to-value ratios on the Company's commercial real estate loans are currently
limited to 80% or lower. As part of the criteria for underwriting commercial
real estate loans, the Company generally imposes a specified debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service). It is also the Company's general policy to seek additional protection
to mitigate any weaknesses identified in the underwriting process. Additional
strength may be provided via mortgage insurance, secondary collateral and/or
personal guarantees from the principals of the borrower.

      Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Company attempts to minimize
its risk exposure by limiting the extent of its commercial lending. In addition,
the Company imposes stringent LTV ratios, requires conservative debt coverage
ratios, and continually monitors the operation and physical condition of the
collateral.

      Commercial Business Loans. From time to time, and in connection with its
community bank activities, the Company has originated secured or unsecured loans
for commercial, corporate, business and agricultural purposes. However, the
Company's originations of commercial business loans and the total amount of
commercial business loans in its loan portfolio have decreased in recent
periods. At December 31, 1996, $1.9 million or 1.3% of the Company's total loans
held for investment consisted of commercial business loans. The Company's
commercial business loans consist primarily of loans and lines of credit secured
by various equipment, machinery and other corporate assets.

      Consumer Loans. Subject to restrictions contained in applicable federal
laws and regulations, the Company is authorized to make loans for a wide variety
of personal or consumer purposes. The Company has recently begun to emphasize
the origination and purchase of consumer loans in order to provide a full range
of financial services to its customers and because such loans generally have
shorter terms and higher interest rates than mortgage loans. At December 31,
1996, $6.7 million or 4.5% of the Company's total loans held for investment
consisted of consumer loans. The consumer loans offered by the Company include
automobile loans, boat and recreational vehicle loans, mobile home loans, home
equity line of credit loans, loans secured by deposit accounts and unsecured
personal loans.

      The Company currently offers loans secured by deposit accounts, which
amounted to $842,000 at December 31, 1996. Such loans are originated for up to
90% of the account balance, with a hold placed on the account restricting the
withdrawal of the account balance. At December 31, 1996, the Company's loan
portfolio also included $2.1 million of automobile loans, $475,000 of mobile
home loans and $73,000 of boat and recreational vehicle loans. The Company also
offers home equity lines of credit in amounts up to 90% of the appraised value
of the property, including the amount of any existing prior liens.

      Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of


                                       21
<PAGE>

the underlying security. The remaining deficiency may not warrant further
substantial collection efforts against the borrower.

      Loan Fee Income. In addition to interest earned on loans, the Company
receives income through servicing of loans, unamortized loan fees in connection
with loan sales and fees in connection with loan modifications, late payments,
prepayments and for miscellaneous services related to its loans. Income from
these activities varies from period to period with the volume and type of loans
made and competitive conditions.

      In connection with its loan origination activities, the Company often
charges loan origination fees that are calculated as a percentage of the amount
borrowed. The Company generally charges a borrower on a single-family home loan
a loan origination fee based on the principal amount of the loan, with the
actual amount being dependent upon, among other things, the interest rate and
market conditions at the time the loan application is taken. These fees are in
addition to appraisal and other fees paid by the borrower to the Company at the
time of the application. The Company's policy is to defer all loan origination
fees net of direct origination costs and amortize those fees over the
contractual lives of the related loans. Amortization of loan fees is included in
interest income. Nevertheless, the predominant portion of the Company's loans
are originated for resale and, consequently, related net loan fees are
recognized as mortgage banking income upon consummation of the loan sales.

      When loans are sold with servicing rights released to the buyer, the
Company also recognizes current income from receipt of servicing release fees in
addition to receiving a premium or deducting a discount based on the market
value of the loan, which is dependent upon, among other things, the interest
rate and market conditions at the time the sales price is committed to by the
buyer. Sales prices for loans originated for resale are generally committed to
with a buyer at the time of origination in order to minimize the Company's
interest rate risk. When loans are sold with servicing retained, the Company
recognizes additional gains based on the estimated fair value of the servicing
retained. Recognition of such gains creates originated mortgage servicing rights
("OMSRs") for the Company on a consolidated basis, which are capitalized and
amortized against servicing fee income over the estimated remaining lives of the
related loans. OMSRs amounted to $1.1 million, $1.6 million, and $2.1 million at
December 31, 1996, 1995 and 1994, respectively. For additional information
regarding the Company's servicing assets, see Note 2 of the Notes to
Consolidated Financial Statements on pages 44 through 47 of the 1996 Annual
Report to Stockholders, which is attached hereto as Exhibit 13 and incorporated
herein by reference.

      Through Essex Home, the Company services loans that are owned by the Bank
and other investors. At December 31, 1992, Essex Home serviced or subserviced
approximately 24,200 loans with principal balances outstanding of $1.4 billion.
At December 31, 1996, approximately 13,300 loans with principal balances of $1.1
billion were serviced or subserviced by Essex Home, a reduction that reflects
the sale of EMC's PMSRs in connection with the restructuring of the Essex 11's.
However, on February 28, 1997, the Company was notified by its largest
subservicing client of its intention not to renew its contract beyond June 1,
1997. As of December 31, 1996, the Company serviced approximately 7,000 loans
totaling $858.9 million for this client and servicing fee income for 1996
included approximately $409,000 attributable to servicing activities performed
for this client. While the Company's management has intensified its marketing
efforts in order minimize the impact of this loss on the earnings performance of
Essex Home and the Company, no assurances can be made that this significant
servicing volume can be replaced in its entirety in the near term. Management
believes, however, that its marketing efforts will be buoyed by the
much-improved capital position of the Bank. In the meantime, the Company is
examining expenses associated with the servicing of this client in contemplation
of reductions to minimize the loss in servicing fee income.


                                       22
<PAGE>

Asset Quality

      Delinquent Loans. When a borrower fails to make a required payment on a
loan, the Company attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made on the 15th day after a payment is
due and a late charge is assessed at such time. In most cases, deficiencies are
cured promptly. If a delinquency extends beyond 30 days, the loan and payment
history is carefully reviewed, additional notices are sent to the borrower and
additional efforts are made to collect the loan. While the Company generally
prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Company institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.

      The following table sets forth information concerning the principal
balances and percent of the total loan portfolio held for investment represented
by delinquent loans at the dates indicated:

<TABLE>
<CAPTION>
                                                       December 31,
                                         -----------------------------------------
                                               1996                   1995                   1994
                                         ----------------    ----------------------    -----------------
                                         Amount   Percent       Amount    Percent      Amount    Percent
                                         ------   -------       ------    -------      ------    -------
                                                             (dollars in thousands)
<S>                                      <C>        <C>         <C>        <C>        <C>         <C>
      30-59 days (1).................    $1,156     .78%        $2,222     .82%       $   895     .37%
      60-89 days (1).................       335     .23            942     .34            641     .27
      90 or more days (1), (2).......     2,938    1.98          6,258    2.30          7,313    3.03
                                         ------    ----         ------    ----         ------    ----
                                         $4,429    2.99%        $9,422    3.46%        $8,849    3.67%
                                         ======    ====         ======    ====         ======    ====
</TABLE>

      (1)   Includes at December 31, 1996, $185,000, $70,000 and $611,000 of
            loans delinquent 30-59 days, 60-89 days and 90 days or more,
            respectively, which were acquired in connection the Home
            Acquisition. Includes at December 31, 1995, $977,000, $381,000 and
            $1.2 million of loans delinquent 30-59 days, 60-89 days and 90 days
            or more, respectively, which were acquired in connection with the
            Home Acquisition.

      (2)   Includes $30,000, $177,000, and $539,000 of loans that were accruing
            interest at December 31, 1996, 1995, and 1994, respectively.

      Nonperforming Assets. All loans are reviewed on a regular basis and are
placed on nonaccrual status based on the loan's delinquency status, an
evaluation of the related collateral, and the borrower's ability to repay the
loan. Generally, loans past due more than 90 days are placed on nonaccrual
status; however, in instances where the borrower has demonstrated an ability to
make timely payments, loans past due more than 90 days are returned to an
accruing status. Such loans may be returned to accruing status, even though the
loans have not been brought fully current, provided two criteria are met: (i)
all principal and interest amounts contractually due (including arrearages) are
reasonably assured of repayment within a reasonable period, and (ii) there is a
sustained period of repayment performance (generally a minimum of six months) by
the borrower. Consumer loans generally are charged-off or fully reserved for
when the loan becomes over 120 days delinquent. When a loan is placed on
nonaccrual status, interest accruals cease and uncollected accrued interest is
reversed and charged against current income. Additional interest income on such
loans is recognized only when received.

      In certain circumstances, for reasons related to a borrower's financial
difficulties, the Company may grant a concession to the borrower that it would
not otherwise consider. Such restructuring of troubled debt may include a
modification of loan terms and/or a transfer of assets (or equity interest) from
the borrower to the Company.

      If a foreclosure action is instituted with respect to a particular loan
and the loan is not reinstated, paid in full or refinanced, the property is sold
at a foreclosure sale in which the Company may participate as a bidder. If the
Company is the successful bidder, the acquired property is classified as
foreclosed property until it is sold. Properties acquired in settlement of


                                       23
<PAGE>

loans are initially recorded at fair value less estimated cost to sell.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair market value less the estimated cost to sell. Costs incurred in
connection with ownership of the property, including interest on senior
indebtedness, are expensed to the extent not previously allowed for in
calculating fair value less estimated cost to sell. Costs relating to the
development or improvement of the property are capitalized to the extent these
costs increase fair value less estimated cost to sell. Sales of foreclosed
properties are recorded under the accrual method of accounting. Under this
method, a sale is not recognized unless the buyer has assumed the risks and
rewards of ownership, including an adequate cash down payment. Until the
contract qualifies as a sale, all collections are recorded as deposits.

         In recent periods, foreclosed properties also included loans classified
as in-substance foreclosures. Such loans were identified as in-substance
foreclosures when all of the following had occurred: (i) the borrower had little
or no equity remaining in the underlying collateral, (ii) repayment of the loan
could be expected only from the operation or sale of the collateral, and (iii)
the borrower had formally or effectively abandoned control of the collateral to
the Company or it was doubtful the borrower could rebuild equity in the
collateral or repay the loan in the foreseeable future. During 1993, the Company
adopted SFAS No. 114, which limits loans classified as in-substance foreclosures
to those in which the creditor receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings have occurred. As a
result, loans previously classified as in-substance foreclosures were
reclassified during 1993 from foreclosed properties to collateral-dependent real
estate loans. The prior period has also been restated to reflect the
reclassification of in-substance foreclosures, net of allowance for losses, to
collateral-dependent real estate loans.


                                       24
<PAGE>

      The following table sets forth information regarding nonperforming assets
held by the Company at the dates indicated.

<TABLE>
<CAPTION>
                                                                           December 31,
                                                 -----------------------------------------------------------------
                                                        1996                   1995                     1994
                                                        ----                   ----                     ----
                                                             % of                    % of                    % of
                                                             Total                   Total                   Total
                                                 Amount      Loans       Amount      Loans       Amount      Loans
                                                 ------      -----       ------      -----       ------      -----
                                                                      (dollars in thousands)
<S>                                              <C>         <C>        <C>          <C>        <C>          <C>
Nonaccrual loans, net:
   Single-family residential................     $2,513      1.70%      $  2,959     1.09%      $  3,158     1.31%
   Construction.............................        220       .15            378      .14          1,253      .52
   Commercial...............................         22       .01          2,636      .97          2,306      .96
   Consumer.................................        153       .10            108      .04             57      .02
                                                 ------      ----       --------     ----       --------     ----
     Total nonaccrual loans.................      2,908      1.96          6,081     2.24          6,774     2.81

Accruing loans 90 days or more past due.....         30       .02            177      .06            539      .22

Troubled debt restructurings................        223       .15            143      .05          1,049      .44
                                                 ------      ----       --------     ----       --------     ----
     Total nonperforming loans..............      3,161      2.13          6,401     2.35          8,362     3.47

Foreclosed properties, net..................      2,054      1.39          4,856     1.78          5,290     2.19
                                                 ------      ----       --------     ----       --------     ----

     Total nonperforming assets.............     $5,215      3.52%       $11,257     4.13%       $13,652     5.66%
                                                 ======      ====        =======     ====        =======     ====

Nonperforming loans to total loans..........                 2.13%                   2.35%                   3.47%
Nonperforming assets to total assets........                 2.99                    3.32                    4.61
Allowance for loan losses to total loans....                 1.73                    1.93                    1.42
Allowance for loan losses to nonaccrual
   loans....................................                87.90                   86.35                   50.62
Allowance for loan losses to nonperforming
   loans....................................                80.86                   82.03                   41.01

<CAPTION>
                                                        1993                   1992
                                                        ----                   ----
                                                             % of                    % of
                                                             Total                   Total
                                                 Amount      Loans       Amount      Loans
                                                 ------      -----       ------      -----
<S>                                            <C>           <C>         <C>         <C>
Nonaccrual loans, net:
   Single-family residential................   $  4,801      2.28%       $10,101     3.85%
   Construction.............................         17       .01              7        -
   Commercial...............................        513       .25          3,703     1.41
   Consumer.................................         93       .04            196      .08
                                               --------      ----        -------     ----
     Total nonaccrual loans.................      5,424      2.58         14,007     5.34

Accruing loans 90 days or more past due.....      1,136       .54            139      .05

Troubled debt restructurings................      2,948      1.40          2,300      .88
                                               --------      ----        -------     ----
     Total nonperforming loans..............      9,508      4.52         16,446     6.27

Foreclosed properties, net..................      8,582      4.08          8,371     3.20
                                               --------      ----        -------     ----

     Total nonperforming assets.............    $18,090      8.60%       $24,817     9.47%
                                                =======      ====        =======     ====

Nonperforming loans to total loans..........                 4.52%                   6.27%
Nonperforming assets to total assets........                 4.63                    5.92
Allowance for loan losses to total loans....                 1.45                    1.72
Allowance for loan losses to nonaccrual
   loans....................................                56.03                   32.05
Allowance for loan losses to nonperforming
   loans....................................                31.96                   27.30
</TABLE>


                                       25
<PAGE>

      Gross interest income that would have been recorded during the years ended
December 31, 1996, 1995, and 1994 if the Company's nonaccrual loans at the end
of such periods had been performing in accordance with their terms during such
periods was $291,000, $678,000, and $406,000, respectively.

      The $2.9 million of nonaccrual loans at December 31, 1996 consisted of
$2.5 million of loans secured by single-family residential property, $220,000 of
construction loans (which were secured by residential property), $22,000 of
loans secured by commercial property and $153,000 of consumer loans. The $30,000
of accruing loans 90 days or more past due at December 31, 1996 consisted of one
loan secured by single-family residential property. The $223,000 of troubled
debt restructurings at December 31, 1996 consisted of four loans secured by
single-family residential property, one secured commercial loan and one
unsecured loan.

      The Company's decrease in nonaccrual loans during 1996 occurred primarily
in loans secured by commercial property. This $2.6 million decrease was
attributable to the $2.7 million charge-off of a loan made by the Bank in 1990
in the amount of $1.75 million for the purpose of acquiring a 360-unit
low-income apartment complex located in Richmond, Virginia, and renovating 124
unrentable units (the "Richmond Apartments loan"). The loan was modified several
times and the property was sold to a third party which assumed and became the
principal obligor (albeit on a nonrecourse basis) with respect to the $1.75
million loan. In addition to the modification with the Bank, the purchaser
succeeded in gaining the cooperation of the City of Richmond for extensive
renovations to the apartment complex. The Bank received regulatory approval to
utilize its salvage powers and in October 1994 the Bank committed to advance an
additional $1.3 million to finance contemplated improvements, of which $955,000
had been advanced as of December 31, 1995. Therefore, the total balance of loans
to the third party purchaser totaled $2.7 million at December 31, 1995.
Additional funds were advanced during 1996 bringing the loan to $2.8 million
when management concluded that the sale of the apartment complex, which was
intended to be the source of repayment of the Richmond Apartments loan, would
not occur in the foreseeable future and the loan was charged off in its entirety
in 1996.

      The Company's $164,000 foreclosed property at December 31, 1996 consisted
of six residential lots, which resulted from a real estate loan which was
originated in 1990 in the amount of $1.1 million and was secured by 14
residential lots located in the Outer Banks of North Carolina. During 1994, the
borrower sold five of the lots which reduced the principal balance of the loan.
Consequently, as of December 31, 1994, the loan balance was reduced to $895,000
and the loan was secured by nine residential lots. On January 3, 1995, the Bank
learned of the principal borrower's death and the loan was placed in nonaccrual
status. The Bank received no principal or interest payments since that time and
foreclosed on the lots in July 1995. The Company has recognized $477,000 of
charge-offs on this credit. During 1996, the Company sold three of the lots.
Subsequent to December, 1996, the Bank has sold an additional five lots and
continues to market the single remaining lot for sale.

      During 1996, the Company completed the sale of its largest foreclosed
property at December 31, 1995, which consisted of 2,554 acres of farmland
located in Currituck County, North Carolina. The Company recognized $1.8 million
of charge-offs on this credit that originated in 1990 with an aggregate
principal balance of $3.3 million. Upon completion of the sale, the Company
recognized a gain of $295,000 during 1996.

      Also, during 1996 the Company completed the sale of the fourteen
undeveloped lots and eight townhouse pads located in Richmond, Virginia it held
at December 31, 1995 with an aggregate net carrying value of $321,000. This
credit originated in 1988 as a $5.0 million unsecured commercial business loan
to a real estate development and property management company. The loan was
restructured in 1992 and the Bank accepted the property described above, an
interest in the cash flows of a partnership (which had a net carrying value of
$200,000


                                       26
<PAGE>

as of December 31, 1996), whose sole function was to develop and sell a single
tract of land, and $350,000 in cash in consideration for terminating the note.
The Company charged off an aggregate of $4.0 million with respect to the
restructuring. Upon completion of the sale of the remaining lots during 1996,
the Company recognized a gain of $69,000.

      In addition, the Company through ECC (a subsidiary of the Bank and EMC) is
a preferred stockholder of Essex Commercial Mortgage Corporation ("ECMC"), a
commercial real estate brokerage firm and an affiliate of the borrower of the
$5.0 million unsecured commercial business loan discussed above. ECC's
investment in ECMC originally amounted to $410,000, prior to a reserve for
potential loss of $40,000 recorded at December 31, 1991. In connection with the
final settlement with the borrower, an agreement was reached to redeem the
preferred stock, the reserve was eliminated and the investment in ECMC was
reduced to $307,500. The majority owner of the borrower has personally endorsed
a note held by ECMC that was made by the borrower. Payments on the note
represent the source of funds for the stock redemption. As further collateral
for the note between ECMC and the borrower, a general partnership interest in an
office/warehouse building was pledged by the borrower. The personal endorsement
and pledged partnership interest are for the sole benefit of ECC and their value
is now limited to $195,000, which was the carrying value of the ECMC preferred
stock at December 31, 1996.

      For additional information about the Company's nonperforming assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Nonperforming Assets" on pages 15 through 17
and Notes 8 and 9 of the Notes to Consolidated Financial Statements on pages 53
through 55 of the 1996 Annual Report to Stockholders, which is attached hereto
as Exhibit 13 and incorporated herein by reference.

      Classified Assets. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Another
category designated "special mention" also must be established and maintained
for assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified as loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's risk-based capital, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and amounts reserved.

      In addition to the nonperforming assets discussed above, at December 31,
1996, the Company had classified for regulatory and internal purposes an
additional $2.7 million of assets, $2.2 million of which were classified
substandard, $119,000 of which were classified doubtful and $378,000 of which
were classified loss.


                                       27
<PAGE>

      Allowance for Losses on Loans and Foreclosed Properties. An allowance for
loan losses is maintained at a level that management considers adequate to
provide for potential losses based upon an evaluation of the inherent risks in
the loan portfolio. Management's determination of the adequacy of the allowance
is based on an evaluation of the portfolio, past loss experience, current
economic conditions, volume, growth and composition of the portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses which
are charged against income. While management uses the best information available
to make such evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in making
the evaluations. For additional information, see Notes 8 and 9 of the Notes to
Consolidated Financial Statements on pages 53 through 55 of the 1996 Annual
Report to Stockholders, which is attached hereto as Exhibit 13 and incorporated
herein by reference.

      The following table sets forth information concerning the activity in the
Company's allowance for loan losses during the years indicated:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                    -----------------------------------------------------------
                                                     1996         1995           1994        1993        1992
                                                     ----         ----           ----        ----        ----
                                                                       (dollars in thousands)
<S>                                                 <C>          <C>           <C>         <C>         <C>
Loans, net of unearned fees and discounts:
     Year-end..................................     $148,107     $271,883      $240,821    $209,820    $261,283
     Average outstanding during period.........      216,803      251,108       218,806     267,143     298,365

Allowance for loan losses:
     Balance, beginning of year................     $  5,251     $  3,429      $  3,039    $  4,489    $  5,454
     Allowance transferred in connection
         with the Home Acquisition.............           --          500            --          --          --
     Provision for loan losses.................        1,411        2,477         1,604       1,085       4,569
                                                    --------     --------      --------    --------    --------
                                                       6,662        6,406         4,643       5,574      10,023
     Charge-offs, net of recoveries (1):
         Commercial (2)........................        2,892          644            --          82       1,660
         Real estate - mortgage................          894          494         1,255       2,248       3,763
         Consumer .............................          320           17           (41)        205         111
                                                    --------     --------      --------    --------    --------
              Total (2)........................        4,106        1,155         1,214       2,535       5,534
                                                    --------     --------      --------    --------    --------
     Balance, end of year......................     $  2,556     $  5,251      $  3,429    $  3,039    $  4,489
                                                    ========     ========      ========    ========    ========

Ratio of net charge-offs to average
  outstanding loans (2)........................        1.89%          .46%          .55%        .95%       1.85%
Allowance for loan losses to year-end
  total nonperforming loans....................       80.86%        82.03%        41.01%      31.96%      27.30%
Allowance for loan losses to year-end
  loans, net of unearned fees and discounts....        1.73%         1.93%         1.42%       1.45%       1.72%
</TABLE>

(1)   Recoveries of prior loan charge-offs were not significant for the periods
      presented.

(2)   Charge-offs during 1996 include the $2.8 million write-off of the Richmond
      Apartments loan. Excluding the impact of this charge-off, the ratio of net
      charge-offs to average outstanding loans for 1996 was .59%.


                                       28
<PAGE>

      The following table sets forth information concerning the allocation of
the Company's allowance for loan losses by loan categories at the dates
indicated.

<TABLE>
<CAPTION>
                                                             December 31,
                       -------------------------------------------------------------------------------------------
                            1996              1995                1994                 1993             1992
                       ---------------   ---------------    ----------------    ----------------  ----------------
                       Amount  Percent   Amount  Percent    Amount   Percent    Amount   Percent  Amount   Percent
                       ------  -------   ------  -------    ------   -------    ------   -------  ------   -------
                                                        (dollars in thousands)

<S>                    <C>       <C>     <C>       <C>       <C>      <C>       <C>       <C>     <C>       <C>
Residential mortgage   $1,636    89.9%   $2,607    92.5%     2,068    91.9%     $2,080    92.0%   $2,895    91.7%
Commercial (1)            505     5.6     1,530     4.7        861     5.6         387     6.0       598     4.8
Consumer                  299     4.5       323     2.8        467     2.5         424     2.0       195     3.5
Unallocated               116      --       791      --         33      --         148      --       801      --
                       ------   -----    ------   -----     ------   -----      ------   -----    ------   -----
                       $2,556   100.0%   $5,251   100.0%    $3,429   100.0%     $3,039   100.0%   $4,489   100.0%
                       ======   =====    ======   =====     ======   =====      ======   =====    ======   =====
</TABLE>

(1)   Includes commercial real estate and commercial business loans.

      The Company also maintains an allowance for losses on foreclosed
properties. The following table sets forth information concerning the activity
in the Company's allowance for losses on foreclosed properties during the
periods indicated:

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                  ----------------------------------------
                                                  1996             1995              1994
                                                  ----             ----              ----
                                                          (dollars in thousands)
<S>                                               <C>              <C>             <C>
      Balance at beginning of year.............   $199             $ 418           $   724
      Provision for losses on
        foreclosed properties..................    (21)               79             1,923
                                                  ----             -----           -------
                                                   178               497             2,647
      Charge-offs on foreclosed properties.....      1              (298)           (2,229)
                                                  ----             -----           -------
      Balance at end of year...................   $179             $ 199           $   418
                                                  ====             =====           =======
</TABLE>

Investment Activities

      Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government agencies
and government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
FNMA and the GNMA.

      The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are Quasi-Government and U.S. Government-sponsored enterprises,
respectively, these securities are considered to be among the highest quality
investments with minimal credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which is intended to help
finance government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on GNMA securities are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the
GNMA were established to provide support for low- and middle-income housing,
there are limits to the maximum size of loans that qualify for these


                                       29
<PAGE>

programs. To accommodate larger-sized loans, and loans that, for other reasons,
do not conform to the agency programs, a number of independent companies have
established their own home-loan origination and securitization programs.

      Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.

      The Company's mortgage-backed securities include collateralized mortgage
obligations ("CMOs"), which include securities issued by entities which have
qualified under the Internal Revenue Code (the "Code") as Real Estate Mortgage
Investment Conduits ("REMICs"). CMOs and REMICs (collectively CMOs) have been
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by government agencies, government sponsored enterprises and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.

      Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Company.

      The following table sets forth the activity in the Company's
mortgage-backed securities portfolio during the periods indicated:

<TABLE>
<CAPTION>
                                                       At or For the Year Ended December 31,
                                                    ------------------------------------------
                                                      1996              1995             1994
                                                      ----              ----             ----
                                                               (dollars in thousands)
<S>                                                 <C>                <C>             <C>
      Balance at beginning of year............      $15,650            $18,223         $27,241
      Purchases (1)...........................           --                 --           4,813
      Sales...................................       (9,915) (2)            --          (9,840)
      Repayments..............................       (3,668) (3)        (2,724)         (4,028)
      Amortization............................           (8)                (3)            (59)
      Valuation adjustments...................         (154)               154              96
                                                    -------            -------         -------
      Balance at end of year..................      $ 1,905            $15,650 (4)     $18,223
                                                    =======            =======         =======

      Weighted average coupon at end
         of year..............................         6.40%             7.25%            7.04%
                                                    =======            =======         =======
</TABLE>

      (1)   Includes applicable premiums and discounts.

      (2)   Represents sale of mortgage-backed securities in connection with the
            sale of branches during 1996.

      (3)   Includes the termination and reclassification of a company-issued
            second mortgage REMIC totaling $2.7 million from mortgage-backed
            securities to loans.

      (4)   Includes $13.7 million of mortgage-backed securities classified as
            available for sale at December 31, 1995.


                                       30
<PAGE>

      The Company's investment in mortgage-backed securities at December 31,
1996 consists solely of a $1.9 million FNMA guaranteed adjustable rate REMIC.
The Company does not currently own and does not anticipate investing in
mortgage-backed securities that would be deemed "high risk" securities pursuant
to OTS Thrift Bulletin 52. The Company's mortgage-backed securities are carried
in accordance with generally accepted accounting principles. See Note 7 of the
Notes to Consolidated Financial Statements on pages 52 through 53 of the 1996
Annual Report to Stockholders, which is attached hereto as Exhibit 13 and
incorporated herein by reference.

      Investment Securities. Federally-chartered savings institutions have
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various Federal agencies and of state and
municipal governments, certificates of deposit at federally-insured banks and
savings and loan associations, certain bankers' acceptances and Federal funds.
Subject to various restrictions, federally-chartered savings institutions may
also invest a portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the investments that
federally-chartered savings institutions are otherwise authorized to make
directly.

      The Bank's investment securities portfolio is managed by the Treasurer of
the Bank in accordance with a comprehensive investment policy which addresses
strategies, types and levels of allowable investments and which is reviewed and
approved by the Board of Directors on an annual basis and by the Asset and
Liability Management Committee as circumstances warrant. The Bank currently
emphasizes lending activities in order to increase the weighted average yield on
the Bank's interest-earning assets. The Bank's investment securities are carried
in accordance with generally accepted accounting principles. See Note 6 of the
Notes to Consolidated Financial Statements on pages 51 through 52 of the 1996
Annual Report to Stockholders, which is attached hereto as Exhibit 13 and
incorporated herein by reference.

      The following table sets forth certain information relating to the
Company's investment securities held for investment at the dates indicated:

<TABLE>
<CAPTION>
                                                                      December 31,
                                       -------------------------------------------------------------------------
                                                1996                      1995                       1994
                                       ---------------------     ----------------------    ----------------------
                                       Carrying       Market     Carrying      Market      Carrying      Market
                                         Value        Value       Value        Value        Value        Value
                                         -----        -----       -----        -----        -----        -----
                                                                 (dollars in thousands)
<S>                                      <C>          <C>        <C>          <C>          <C>          <C>
     U.S. Government securities......    $1,003       $1,003     $  1,000     $    999     $  3,996     $  3,929
     U.S. Government agency
        securities (1)...............     5,000        4,887        6,998        6,841        6,991        6,332
     FHLB stock......................     2,540        2,540        3,603        3,603        4,887        4,887
                                         ------       ------     --------     --------     --------     --------
         Total (2)...................    $8,543       $8,430      $11,601      $11,443      $15,874      $15,148
                                         ======       ======      =======      =======      =======      =======
</TABLE>

      (1)   Of the $5.0 million of U.S. Government agency securities held for
            investment at December 31, 1996, $3.0 million consisted of a bond
            issued by the FNMA and $2.0 million consisted of a note issued by
            the FHLB. The $3.0 million FNMA bond adjusts monthly based on the
            11th District cost of funds and qualifies for regulatory liquidity.
            The $2.0 million FHLB note adjusts semi-annually based on the yield
            of three-year constant maturity treasury notes.

      (2)   Does not include investment securities classified as available for
            sale which consisted of a $9,000, $1.5 million and $828,000
            investment in a money market mutual fund at December 31, 1996, 1995
            and 1994, respectively.


                                       31
<PAGE>

      Information regarding the carrying values, contractual maturities and
weighted average yield of the Company's investment securities held for
investment (excluding FHLB stock) at December 31, 1996 is presented below.

<TABLE>
<CAPTION>
                                                    One Year  After One to  After Five to  Over 10
                                                    or Less   Five Years       10 Years      Years        Total
                                                    -------   ----------       --------      -----        -----
                                                                          (dollars in thousands)
<S>                                                 <C>       <C>             <C>          <C>           <C>
     U.S. Government securities.............        $1,003    $    --         $    --     $     --       $1,003
     U.S. Government agency securities......         3,000      2,000              --           --        5,000
                                                    ------    -------         -------     --------       ------
         Total                                      $4,003    $ 2,000         $    --     $     --       $6,003
                                                    ======    =======         =======     ========       ======

     Weighted average yield.................         4.45%       5.23%             --%          --%        4.72%
                                                    ======    =======         =======     ========       ======
</TABLE>

Sources of Funds

      General. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments, prepayments, advances from the
FHLB and other borrowings. Loan repayments are a relatively stable source of
funds, while deposits inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes, including asset/liability management.

      Deposits. Deposits obtained through bank branch offices of the Company
have traditionally been the principal source of the Company's funds for use in
lending and for other general business purposes. The Company's current deposit
products include regular passbook and statement savings accounts, negotiable
order of withdrawal ("NOW") accounts, money market accounts, fixed-rate,
fixed-maturity retail certificates of deposit ranging in terms from 90 days to
60 months, mini-jumbo (generally $25,000 - $100,000) and jumbo (generally
greater than $100,000) certificates of deposit and individual retirement
accounts.

      The Bank had previously operated as a wholesale financial institution
which conducted its deposit gathering activities through a network of limited
service branches that were designed to primarily accumulate large
non-transactional deposit accounts by offering attractive interest rates. The
Bank's prior business strategy consisted of offering a limited number of deposit
products to various businesses and high income and net worth individuals, which
strategy was expected to reduce the Bank's operating costs per transaction. The
Bank was able to attract such accounts (i.e., mini-jumbo certificates of
deposit) by offering rates of interest that were higher than the average rates
paid by the Bank's competitors.

      The Bank's deposits are currently obtained primarily from residents in its
primary market area. The principal methods currently used by the Company to
attract deposit accounts include offering a wide variety of services and
accounts and competitive interest rates. The Company utilizes traditional
marketing methods to attract new customers and savings deposits, including print
media advertising. Currently, the Company does not advertise for retail deposits
outside of its local market area or utilize the services of deposit brokers.
Management estimates that as of December 31, 1996, deposit accounts totaling
$4.5 million or 3.5% of the Bank's total deposits were held by nonresidents of
Virginia or North Carolina. These out-of-market deposits include jumbo
certificates of deposits owned largely by financial institutions which totaled
$2.8 million at December 31, 1996, and represented a decline from the $3.9
million of such certificates at December 31, 1995. These jumbo certificates of
deposit were obtained through the posting of deposit rates on national
computerized bulletin boards at no cost to the Company and were not obtained
through deposit brokers.


                                       32
<PAGE>

      The following table sets forth the average balances of the Company's
deposits for the periods indicated:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                         ----------------------------------------------------------------------
                                                 1996                       1995                    1994
                                         -------------------         -----------------      --------------------
                                         Average                      Average               Average
                                         Amount         Rate          Amount      Rate      Amount        Rate
                                         ------         ----          ------      ----      ------        ----
                                                                   (dollars in thousands)
<S>                                      <C>                         <C>                     <C>
     Noninterest-bearing deposits...     $  1,433          --%       $  1,285        --%     $    927        --%
     Interest checking and
         passbook savings...........        6,782        3.33           5,465      3.33         5,224      3.32
     NOW accounts...................        5,332        2.80           4,859      2.85         4,866      2.73
     Money market accounts..........       21,104        4.50          21,760      4.14        40,429      3.41
     Certificates of deposit:
         Consumer...................       92,771        5.83          95,363      5.99        51,321      4.90
         Mini-jumbo.................       71,269        5.69          90,216      5.60       131,197      4.70
         Jumbo......................       19,670        5.86          28,026      5.46        34,205      4.50
                                         --------                    --------                --------
                                         $218,361                    $246,974                $268,169
                                         ========                    ========                ========
</TABLE>

      The following table shows the interest rate and maturity information for
the Company's time deposits at December 31, 1996.

<TABLE>
<CAPTION>
                                                                    Maturity Date
                                    -------------------------------------------------------------------------
                                    One Year                                             Over
                                    or Less          1-2 Years         2-3 Years        3 Years         Total
                                    -------          ---------         ---------        -------         -----
                                                                  (dollars in thousands)
<C>                                  <C>            <C>               <C>              <C>             <C>
4.01% to 5.00%.............          $ 5,064        $       15        $        2       $       -       $  5,081
5.01% to 6.00%.............           48,798            18,531             5,379           2,414         75,122
6.01% to 7.00%.............            7,093             5,934             4,766           3,704         21,497
7.01% to 8.00%.............              307               589               236           2,804          3,936
8.01% to 9.00%.............                -                31                 -               6             37
                                     -------           -------           -------          ------       --------
                                     $61,262           $25,100           $10,383          $8,928       $105,673
                                     =======           =======           =======          ======       ========
</TABLE>

      The following table shows the Company's certificates of deposit of
$100,000 or more outstanding at the dates indicated:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                       ------------------------------------------------
                                                         1996                1995                1994
                                                         ----                ----                ----
                                                                     (dollars in thousands)
<S>                                                    <C>                 <C>                 <C>
      3 months or less........................         $  2,709            $  6,638            $  5,831
      Over 3 through 6 months.................            3,505              11,270               9,432
      Over 6 through 12 months................            2,625              12,834               8,836
      Over 12 months .........................            5,919              10,489              10,309
                                                       --------            --------            --------
               Total..........................         $ 14,758            $ 41,231            $ 34,408
                                                       ========            ========            ========
</TABLE>

      The ability of the Company to attract and maintain deposits and the
Company's cost of funds on these deposit accounts have been, and will continue
to be, significantly affected by economic and competitive conditions.


                                       33
<PAGE>

      Borrowings. The Bank is a member of the FHLB System, which consists of 12
regional FHLBs subject to supervision and regulation by the Federal Housing
Finance Board. The FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Atlanta, is required to hold
shares of common stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and
mortgage-backed securities, 3/10 of 1% of total assets at the end of the
calendar year, or 5% of its advances (borrowings) from the FHLB, whichever is
greater. The Bank had a $2.5 million investment in stock of the FHLB at December
31, 1996, which was in compliance with this requirement. At December 31, 1996,
the Bank had $25.7 million of advances outstanding from the FHLB.

      The following table presents certain information regarding the Company's
FHLB advances at the dates and for the periods indicated:

<TABLE>
<CAPTION>
                                                                At or For the Year Ended December 31,
                                                         -------------------------------------------------
                                                          1996                  1995                 1994
                                                          ----                  ----                 ----
                                                                       (dollars in thousands)
<S>                                                      <C>                   <C>                 <C>
         Balance at end of period..................      $25,690               $29,833             $58,952
         Weighted average interest rate
              at end of period.....................         6.14%                 6.00%              5.97%
         Maximum amount outstanding
              at any month's end...................      $29,833               $59,952             $97,387
         Average amount outstanding
              during the period....................      $27,137               $46,617             $50,034
         Weighted average interest rate
              during the period....................         5.99%                 6.00%               5.54%
</TABLE>

      The outstanding FHLB advances at December 31, 1996 mature as follows:

                                                             December 31,
                                                                 1996
                                                                 ----
                                                            (in thousands)

                  1997....................................       16,144
                  1998....................................        7,138
                  1999....................................        1,808
                  2000....................................          600
                                                                -------
                                                                $25,690
                                                                =======

      The Company's notes payable amounted to $96,000, $120,000, and $2.7
million at December 31, 1996, 1995, and 1994, respectively. Notes payable at
December 31, 1996 and 1995 consisted solely of a note payable to the former
president of Home Bancorp and Home Savings. The note accrues interest at 9.50%
per annum. The note is due in five equal annual installments, plus accrued
interest thereon. The decrease in notes payable from December 31, 1994 to
December 1995 was attributable to the $2.5 million of notes payable to PWC,
which were forgiven effective September 15, 1995 in connection with the Home
Acquisition. Also, in March 1995, EMC's credit facility was paid in full through
a sale to a third party of substantially all of the underlying collateral and
through the forgiveness of debt totaling approximately $262,000.

      The Company's subordinated capital notes amounted to $628,000 and $616,000
at December 31, 1995 and 1994, respectively. During 1989 and 1990, one of the
Bank's predecessor savings institutions sold $3.3 million of subordinated
capital notes with a ten-year maturity. The notes were issued in minimum
denominations of $2,500 at interest rates ranging between 11.5% and 12.0%. In
July 1993, the Bank redeemed $2.8 million of the subordinated


                                       34
<PAGE>

capital notes. In August 1996, the Bank redeemed the remaining subordinated
capital notes at par in their entirety.

Competition

      The Company faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in Virginia and North Carolina, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, the Company has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The ability of the Company to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.

      The Company experiences strong competition for real estate and other loans
principally from other savings institutions, commercial banks, mortgage banking
companies, insurance companies and other institutional lenders. The Company
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.

Employees

      As of December 31, 1996, the Company employed 102 full-time employees and
12 part-time employees.

Regulation of the Company

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

      Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to, the
restrictions applicable to, a bank holding company. See "- Regulation of the
Bank - Qualified Thrift Lender Test."


                                       35
<PAGE>

      Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.

      In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the association's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings association to all
insiders cannot exceed the association's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1996, the Bank was in compliance with the above
restrictions.

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


Regulation of the Bank

      General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.


                                       36
<PAGE>

      FIRREA imposed limitations on the aggregate amount of loans that a savings
association could make to any one borrower, including related entities. See "-
Lending Activities - General" for a discussion of such limitations.

      The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties. FIRREA requires,
except under certain circumstances, public disclosure of final enforcement
actions by the OTS.

      Insurance of Accounts. The deposits of the Bank are insured up to $100,000
per insured member (as defined by law and regulation) by the SAIF administered
by the FDIC and are backed by the full faith and credit of the United States
Government. As insurer, the FDIC is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action.

      The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.

      The FDIA, as amended on December 31, 1991, required the FDIC to promulgate
regulations which establish a risk-based assessment system, and gave the FDIC
the authority to promulgate regulations governing the transition from a
fixed-rate assessment system to a risk-based assessment system. Under FDIC
regulations, institutions are assigned to one of three capital groups - "well
capitalized," "adequately capitalized" and "undercapitalized" which are defined
in the same manner as the regulations establishing the prompt corrective action
system under Section 38 of the FDIC, as discussed under "-Prompt Corrective
Action" below. These three groups are then divided into subgroups which are
based on supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for SAIF-insured institutions range (except as described below)
from 0 basis points of insured deposits for well-capitalized institutions with
minor supervisory concerns to 27 basis points of insured deposits for
undercapitalized institutions with substantial supervisory concerns. In
addition, an additional assessment approximating 6.5 basis points will be added
to the regular SAIF-assessment until December 31, 1999 in order to cover
Financing Corporation ("FICO") debt service payments.

      Both the SAIF and the Bank Insurance Fund ("BIF"), the deposit insurance
fund that covers most commercial bank deposits, are statutorily required to be
recapitalized to a ratio of 1.25% of insured reserve deposits. The BIF has
achieved the required reserve ratio, and as a result, the FDIC reduced the
average deposit insurance premium paid by BIF-insured banks to a


                                       37
<PAGE>

level substantially below the average premium paid by savings institutions.
Banking legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable deposits held by affected institutions
as of March 31, 1995. However, as a result of the Bank's financial condition, on
November 8, 1996, the Bank was notified by the FDIC that its application for
exemption had been approved. As a result, the Bank was exempt from paying the
special one-time assessment (which would have amounted to $1.8 million).
Instead, the Bank will continue to pay future assessments through 1999 at the
assessment rate schedule in effect as of June 30, 1995. Therefore, as of
December 31, 1996, the Bank's annual assessment for deposit insurance was 30
basis points of insured deposits as opposed to 6.4 basis points of insured
deposits (the assessment rate for "well capitalized" savings institutions).

      Another component of the SAIF recapitalization plan provides for the
merger of the SAIF and the BIF on January 1, 1999, provided no insured
depository institution is a savings association on that date. If legislation is
enacted which required the Bank to convert to a bank charter, the Company would
become a bank holding company subject to the more restrictive activity limits
imposed on bank holding companies unless special grandfather provisions are
included in the legislation. The Company does not believe that its activities
would be materially affected in the event that it was required to become a bank
holding company.

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

      Current OTS capital standards require savings associations to satisfy
three different capital requirements. Under these standards, savings
associations must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets, with only a limited exception
for purchased mortgage servicing rights. Both core and tangible capital are
further reduced by an amount equal to a savings association's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). A savings association is allowed to
include both core capital and supplementary capital in the calculation of its
total capital for purposes of the risk-based capital requirement, provided that
the amount of supplementary capital does not exceed the savings association's
core capital. Supplementary capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
core capital; subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for repossessed assets or loans more
than 90 days past due. Single-family residential first mortgage loans which are
not past-due or non-


                                       38
<PAGE>

performing and which have been made in accordance with prudent underwriting
standards are assigned a 50% level in the risk-weighting system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.

      An association which is not in capital compliance or which is otherwise
deemed to require more than normal supervision, such as the Bank, is subject to
restrictions on its ability to grow pursuant to OTS Regulatory Bulletin 3a-1. In
addition, a provision of the HOLA generally provides that, among other
restrictions, the Director of OTS must restrict the asset growth of savings
institutions not in regulatory capital compliance, subject to a limited
exception for growth not exceeding interest credited.

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

      In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital requirement. As a
result, such an institution will be required to maintain additional capital in
order to comply with the risk-based capital requirement. The final rule was
effective January 1, 1994. However, the date that institutions are first
required to deduct the interest rate risk component has been postponed
indefinitely until a final rule is published by the OTS. Pursuant to the rule,
the Bank would have not been subject an interest rate risk component as of
December 31, 1996.

      At December 31, 1996, the Bank's actual capital ratios and the minimum
requirements under FIRREA were as follows (dollars in thousands):

                                                        Minimum
                                    Actual             Requirement        Excess
                                    ------             -----------        ------
     Tangible capital         $15,090     8.66%      $2,613     1.5      $12,477
     Core capital              15,090     8.66        5,227     3.0        9,863
     Risk-based capital        16,495    14.73        8,959     8.0        7,536

      For further information regarding the Bank's actual capital ratios and
minimum requirements under FDICIA, see Note 21 of the Notes to Consolidated
Financial Statements on pages 65 through 66 of the 1996 Annual Report to
Stockholders, which is attached hereto as Exhibit 13 and incorporated herein by
reference. At December 31, 1996, the Bank exceeded its core capital and
risk-based capital requirements under FDICIA.

      Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies, including the OTS, adopted substantially similar regulations to
implement Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital


                                       39
<PAGE>

ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0% and does not meet the definition of "critically undercapitalized," and
(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. Section 38 of the FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized). At
December 31, 1996, the Bank was considered a "well capitalized" institution
under the prompt correction action provisions of FDIA.

      Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 5%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at December 31, 1996, had a liquidity ratio of 7.26%.

      Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term United States Government obligations), and long-term assets (e.g.,
United States Government obligations of more than one and less than five years
and state agency obligations with a maximum term of two years). The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Association of Primary Dealers in United States
Government Securities or banks whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial future position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of such securities. FIRREA also
authorized the OTS to designate as liquid assets certain mortgage-related
securities with less than one year to maturity. Short-term liquid assets
currently must constitute at least 1% of an association's average daily balance
of net withdrawable deposit accounts and current borrowings. Monetary penalties
may be imposed upon associations for violations of liquidity requirements.

      Qualified Thrift Lender Test. All savings associations are required to
meet a QTL test set forth in Section 10(m) of HOLA and regulations of the OTS
thereunder in order to avoid certain restrictions on their operations. A savings
association that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the association may not engage
in any new activity or make any new investment, directly or indirectly, unless
such activity or investment is permissible for a national bank; (ii) the
branching powers of the association shall be restricted to those of a national
bank; (iii) the association shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the association shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).


                                       40
<PAGE>

      Under recent legislation and applicable regulations, any savings
institution is a QTL if (i) it qualifies as a domestic building and loan
association under Section 7701(a)(19) of the Code (which generally requires that
at least 60% of the institution's assets constitute housing-related and other
qualifying assets) or (ii) at least 65% of the institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a monthly
average basis in at least nine out of every 12 months. At December 1996, the
Bank was in compliance with the QTL test.

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

      Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
risk-based capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets. "Fully phased-in capital requirement" is defined to mean
an association's capital requirement under the statutory and regulatory
standards applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association.

      Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions during any calendar year up to 75% of net income over
the most recent four-quarter period.

      In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination.

      Tier 3 associations, which are associations that do not meet current
minimum regulatory capital requirements, or that have capital in excess of
either their fully phased-in capital requirement or minimum capital requirement
but which have been notified by the OTS that they will be treated as Tier 3
associations because they are in need of more than normal supervision, cannot
make any capital distribution without obtaining OTS approval prior to making
such distributions. Due to the Bank requiring more than normal supervision, it
currently is a Tier 3 institution for purposes of the regulation dealing with
capital distributions.

      On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined above under "- Prompt Corrective Action." Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to continue to provide notice to the OTS of its intent to make a capital
distribution.


                                       41
<PAGE>

      Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

      As a member, the Bank is required to purchase and maintain stock in the
FHLB in an amount equal to at least 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. At December 31, 1996, the Bank had $2.5 million in FHLB stock,
which was in compliance with this requirement.

      As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the years ended December
31, 1996, 1995, and 1994, dividends paid by the FHLB to the Bank totaled
approximately $221,000, $293,000, and $276,000, respectively.

      Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. At December 31, 1996, the
Bank was in compliance with applicable requirements. However, because required
reserves must be maintained in the form of vault cash or a noninterest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.

      Safety and Soundness. Effective August 9, 1995, the federal banking
regulatory agencies jointly implemented Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") for all insured depository
institutions relating to internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, compensation, fees and benefits, and employment contracts and
other compensation arrangements of executive officers, employees, directors and
principal stockholders of insured depository institutions that would prohibit
compensation and benefits and arrangements that are excessive or that could lead
to a material financial loss for the institution. In addition, the federal
banking regulatory agencies adopted asset quality and earnings standards, which
became effective October 1, 1996. If an insured depository institution fails to
meet any of its prescribed standards as described above, it may be required to
submit to the appropriate federal banking agency a compliance plan specifying
the steps that will be taken to cure the deficiency and the time within which
these steps will be taken. If an institution fails to submit an acceptable plan
or fails to implement the plan, the appropriate federal banking agency will
require the institution or holding company to correct the deficiency and until
corrected, may impose restrictions on the institution or holding company,
including any of the restrictions applicable under the prompt corrective action
provisions of FDICIA. The Bank does not currently meet some of the standards for
earnings. Accordingly, the Bank may be required to file a safety and soundness
compliance plan.

Taxation

      Federal Taxation. The Company and its subsidiaries are subject to those
rules of federal income taxation generally applicable to corporations under the
Code. The Company and its principal subsidiary, the Bank, as members of an
affiliated group of corporations within the meaning of Section 1504 of the Code,
file a consolidated federal income tax return, which has the


                                       42
<PAGE>

effect of eliminating or deferring the tax consequences of inter-company
transactions and distributions, including dividends, in the computation of
consolidated taxable income.

      In addition to regular corporate income tax, corporations are subject to
an alternative minimum tax which generally is equal to 20% of alternative
minimum taxable income (taxable income, increased by certain tax preference
items and determined with adjustments to certain regular tax items). The
adjustments which are generally applicable include an amount equal to a
percentage of the amount by which a financial institution's adjusted current
earnings (generally alternative minimum taxable income computed without regard
to this adjustment and prior to reduction for alternative tax net operating
losses) exceeds its alternative minimum taxable income without regard to this
adjustment. Alternative minimum tax paid can be credited against regular tax due
in later years. See Note 14 of the Notes to Consolidated Financial Statements on
pages 58 through 59 of the 1996 Annual Report to Stockholders, which is attached
hereto as Exhibit 13 and incorporated herein by reference.

      State Taxation. The Commonwealth of Virginia imposes a tax at the rate of
6.0% on the combined "Virginia taxable income" of the Bank, EMC and its
subsidiaries. Virginia taxable income is equal to federal taxable income with
certain adjustments. Significant modifications include the subtraction from
federal taxable income of interest or dividends on obligations or securities of
the United States that are exempt from state income taxes, and a recomputation
of the bad debt reserve deduction on reduced modified taxable income.

      Because consolidated or combined income tax returns are not allowed under
North Carolina law, the Bank and its subsidiaries that conduct business in North
Carolina are separately subject to an annual corporate income tax of 7.75% of
their federal taxable income as computed under the Code, subject to certain
prescribed adjustments. In addition to the state corporate income tax, the Bank
and its subsidiaries are subject to an annual state franchise tax, which is
imposed at a rate of .15% applied to the greater of the Company's and the Bank's
respective (i) capital stock, surplus, and undivided profits, (ii) investments
in tangible property in North Carolina; or (iii) appraised valuation of property
in North Carolina.

      Furthermore, the Company is separately subject to income taxes and an
annual state franchise tax in Delaware.


                                       43
<PAGE>

      Item  2. Properties

      The following table sets forth information with respect to offices of the
Company and its subsidiaries as of December 31, 1996.

<TABLE>
<CAPTION>
                                                       Lease           Date           Total      Net Book
                                   Owned/         Expiration Date    Acquired/       Office      Value at
Location                           Leased        Including Options    Leased     Square Ft. (1)12/31/96 (2)
--------                           ------        -----------------    ------     --------------------------
<S>                                <C>                 <C>              <C>           <C>         <C>
The Company
Executive Office:
The Koger Center                   Leased              01/31/02         10/96         7,328       $22,533
Building 9, Suite 200
Norfolk, VA  23502

The Bank
Main Office:
400 W. Ehringhaus Street            Owned                --             11/78         3,805       213,983
Elizabeth City, NC  27906

Branch Offices:
520 South Main Street               Owned                --             05/86         6,517       699,797
Emporia, VA  23847

1401 Gaskins Road                  Leased             09/07/98          05/95         5,876          --
Richmond, VA  23233

1455 N. Main Street                Leased             12/31/99          09/95         1,200          --
Suffolk, VA  23434

12599 Warwick Boulevard            Owned(4)              --             09/95         1,794       274,809
Newport News, VA  23606

3511 High Street                   Owned(5)              --             09/95         3,739       214,676
Portsmouth, VA  23707

Essex First
The Koger Center                   Leased             01/31/02          10/96         5,554          --
Building 9, Suite 200
Norfolk, VA  23502

1401 Gaskins Road                  Leased(3)          09/07/98          05/95         3,078          --
Richmond, VA  23233

2430 Southland Drive, 3rd Floor    Leased             05/31/98          06/93         2,000          --
Chester, VA  23831

400 W. Ehringhaus Street           Leased(3)             --             07/94           750          --
Elizabeth City, NC  27906

Essex Home
2420 Virginia Beach Blvd.          Leased              12/31/01         12/91        11,950        12,057
Virginia Beach, VA  23454
</TABLE>

(1)   Total office square feet excludes leased common area.
(2)   Consists of the net book value of land and buildings if owned, or
      leasehold improvements if leased.
(3)   Leased or subleased from the Bank.
(4)   Branch was vacated in October 1995 because of its proximity to an existing
      branch. It is currently under contract for sale.
(5)   Branch was vacated in September 1996 in connection with the sale of the
      Branches. It is currently being marketed for sale.

Item  3. Legal Proceedings

      The Company and its subsidiaries are involved in routine legal proceedings
occurring in the ordinary course of business which in the aggregate are believed
by management to be immaterial to the financial condition of the Company.


                                       44
<PAGE>

Item  4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of the stockholders of the Company
through the solicitation of proxies, or otherwise, during the fourth quarter of
the year ended December 31, 1996.

                                     PART II

Item  5. Market for Registrant's Common Equity and Related Stockholder Matters

      The Common Stock is currently traded on the AMEX under the symbol "ESX."
The information contained on page 70 of the 1996 Annual Report to Stockholders,
which is attached hereto as Exhibit 13, under the caption "Stock Price
Information," is incorporated herein by reference.

      As of March 20, 1997, there were 1,053,379 shares of Common Stock
outstanding, which were held by approximately 2,600 persons. The number of
persons holding shares of Common Stock reflects an estimate of the number of
persons or entities holding their stock in nominee or "street" name through
various brokerage firms or other entities.

Dividends

      Neither the Company nor its predecessor (the Partnership) has declared any
capital distributions since the fourth quarter of 1991. Due to its financial
condition, its recent results of operations and regulatory restrictions on the
payment of dividends imposed on the Company and the Bank, the Company does not
anticipate the payment of dividends on the Common Stock in the foreseeable
future.

      The Company's ability to pay dividends on the Common Stock will depend
primarily on the receipt of dividends from the Bank. While the completion of the
Home Acquisition resulted in the termination of the supervisory agreements the
Company and the Bank had entered into with the OTS, the Boards of Directors of
the Company and the Bank have undertaken, as required by the OTS, to continue to
implement and adhere to the spirit of the provisions of the agreements.
Therefore, the Bank is currently precluded from making dividend payments to the
Company.

      In connection with the Home Acquisition, the Company issued 2,250,000
shares of nonvoting perpetual preferred stock with an aggregate redemption and
liquidation value of $15 million in exchange for all of the outstanding stock of
Home Bancorp. The 2,125,000 shares of Series B preferred stock bear a cumulative
annual dividend rate of 9.5% (based on redemption value) and the 125,000 shares
of Series C preferred stock bear a cumulative annual dividend rate of 8.0%
(based on redemption value). The Series C preferred stock is senior to Series B
preferred stock with respect to the payment of dividends, and the holders of the
Series C preferred stock may, in their discretion, from time to time in whole or
in part, elect to convert such shares of Series C preferred stock into a like
amount of Series B preferred stock. At December 31, 1996, dividends and accrued
interest thereon in arrears on the Series B and Series C preferred stock were
$1,729,472 and $85,418, respectively.

      Also in connection with the Home Acquisition, the stockholders of Home
Bancorp received warrants to purchase 7,949,000 shares of Common Stock at a
price of $0.9375 per share, which was the price of the Common Stock as of June
30, 1995. The warrants are exercisable beginning in September 1998 and expire in
September 2005.


                                       45
<PAGE>

Item 6.  Selected Financial Data

      The selected financial data for the five years ended December 31, 1996,
which appears on page 12 of the 1996 Annual Report to Stockholders attached
hereto as Exhibit 13, is incorporated by reference in this Form 10-K Annual
Report.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

      The information contained on pages 13 through 33 of the 1996 Annual Report
to Stockholders, which is attached hereto as Exhibit 13, under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

      The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the related consolidated statements of operations, shareholders'
equity, partners' capital (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1996, along with the related notes to
consolidated financial statements and the report of Price Waterhouse LLP,
independent accountants, are incorporated herein by reference from pages 34
through 69 of the Company's 1996 Annual Report to Stockholders, which is
attached hereto as Exhibit 13.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

      Not applicable.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

      Information regarding the directors of the Company is included in the
Company's Proxy Statement for the Annual Meeting to be held on May 29, 1997
under the heading "Election of Two Directors for a Term of Three Years" on pages
3 through 6 and the information included therein is incorporated herein by
reference.


                                       46
<PAGE>

      Set forth below is information with respect to the executive officers of
the Company and its subsidiaries who do not serve as directors.

Earl C. McPherson          43    President and Chief Executive Officer of Essex
                                 First and Executive Vice President of Loan
                                 Production and Secondary Marketing of the Bank

Roy H. Rechkemmer, Jr.     34    Vice President of Finance and Treasurer of the
                                 Company and the Bank

Mary-Jo Rawson             43    Vice President and Chief Accounting Officer of
                                 the Company and the Bank

      Earl C. McPherson. Mr. McPherson presently serves as a director as well as
President and Chief Executive Officer of Essex First and as Executive Vice
President of Loan Production and Secondary Marketing of the Bank. Mr. McPherson
served as President of Essex Industrial Loan Association/Virginia Beach from
January 1992 through May 1992. From January 1990 through December 1991, Mr.
McPherson served as President of Mortgage Centers, Inc. ("MCI"). Prior to his
employment with MCI, Mr. McPherson served as Divisional, Regional, and Training
Director for Security Pacific Financial Services, Inc. Mr. McPherson has a
Bachelor of Arts from the University of Richmond. Mr. McPherson also attended
the American Financial Services Association Management program at the University
of North Carolina at Chapel Hill.

      Roy H. Rechkemmer, Jr. Mr. Rechkemmer presently serves as Vice President
of Finance and Treasurer of the Company and the Bank. Mr. Rechkemmer also serves
as chairman of the Bank's Asset and Liability Management Committee, manager of
the Bank's investment portfolio and administrator of the Bank's branches. Mr.
Rechkemmer received a Bachelor of Science Degree in Finance from the University
of Wisconsin-La Crosse in 1985. He has been employed by the Bank and
subsidiaries since 1987.

      Mary-Jo Rawson. Ms. Rawson presently serves as Vice President and Chief
Accounting Officer of the Company and the Bank. Prior to her employment with the
Company, Ms. Rawson served in various accounting officer positions at
NationsBank Corporation and its predecessor institution C&S/Sovran. Ms. Rawson's
primary responsibilities emphasized regulatory reporting and accounting policies
and procedures. At the time of her departure from NationsBank in 1992, Ms.
Rawson was a Senior Vice President and the controller of the Bankcard Division.
Ms. Rawson received a Bachelor of Science Degree in Business Administration from
Old Dominion University in 1976.

      Information regarding compliance with Section 16(a) of the Securities
Exchange Act is included in the Company's Proxy Statement for the Annual Meeting
to be held on May 29, 1997 under the heading "Compliance with Section 16(a) of
the Exchange Act" on page 13, and the information included therein is
incorporated herein by reference.

Item 11. Executive Compensation

      Information regarding compensation of executive officers and directors is
incorporated herein by reference to the Company's Proxy Statement for the Annual
Meeting to be held on May 29, 1997 under the headings "Directors Fees" on page 6
and "Executive Compensation" on pages 6 through 9.


                                       47
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

      Information regarding security ownership of certain beneficial owners and
management is included in the Company's Proxy Statement for the Annual Meeting
to be held on May 29, 1997 under the headings "Securities Ownership of Certain
Beneficial Owners" on pages 2 through 3, and "Information with Respect to
Nominee and Continuing Directors" on pages 4 through 5, and the information
included therein is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

      Information regarding certain relationships and related transactions is
included in the Company's Proxy Statement for the Annual Meeting to be held on
May 29, 1997 under the heading "Transactions with Certain Related Persons" on
page 13, and the information included therein is incorporated herein by
reference.


                                       48
<PAGE>

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)        1. Financial Statements:

                                                                         Page in
                                                                         Annual
                                                                         Report*
                                                                         -------

              The following documents are filed as part of this report:

              Report of Independent Accountants ............................  34

              Consolidated Balance Sheets at December 31, 1996 and 1995.....  35

              Consolidated Statements of Operations for the three
                 years ended December 31, 1996..............................  37

              Consolidated Statements of Shareholders' Equity for
                 the two years ended December 31, 1996......................  39

              Consolidated Statement of Partners' Capital (Deficit)
                 for the year ended December 31, 1994.......................  40

              Consolidated Statements of Cash Flows for the three
                 years ended December 31, 1996..............................  41

              Notes to Consolidated Financial Statements....................  44

              *Incorporated by reference from the indicated pages of the 1996
              Annual Report to Stockholders.

              The financial statements, together with the report thereon of
              Price Waterhouse LLP dated February 25, 1997, appearing on pages
              34 through 69 of the accompanying 1996 Annual Report to
              Stockholders are incorporated by reference in this Form 10-K
              Annual Report. With the exception of the aforementioned
              information and the information incorporated in Items 1, 6, 7 and
              8, the 1996 Annual Report to Stockholders is not to be deemed
              filed as part of this Form 10-K Annual Report.

           2. Financial Statement Schedules:

              All schedules are omitted because they are not required or are not
              applicable or the required information is shown in the
              consolidated financial statements or notes thereto.


                                       49
<PAGE>

           3. Exhibits:

              The following exhibits are either filed as part of this Part IV or
              are incorporated herein by reference:

              Exhibit No.    Description

                  3.1*       Certificate of Incorporation of Essex Bancorp,
                             Inc., dated June 21, 1994. Filed as Exhibit 3.1 to
                             the Registrant's Form S-4 Registration Statement
                             under the Securities Act of 1933 as filed on August
                             15, 1994.

                  3.2*       Certificate of Amendment of Essex Bancorp, Inc.,
                             dated August 10, 1994. Filed as Exhibit 3.2 to the
                             Registrant's Form S-4 Registration Statement under
                             the Securities Act of 1933 as filed on August 15,
                             1994.

                  3.3*       Bylaws of Essex Bancorp, Inc., effective July 25,
                             1994. Filed as Exhibit 3.3 to the Registrant's Form
                             S-4 Registration Statement under the Securities Act
                             of 1933 as filed on August 15, 1994.

                  4.1*       Certificate of Designation of the Series A
                             Preferred Stock of Essex Bancorp, Inc. Filed as
                             Exhibit 4.1 to the Registrant's Annual Report on
                             Form 10-K for the year ended December 31, 1995.

                  4.2*       Certificate of Designations of Cumulative Perpetual
                             Preferred Stock, Series B of Essex Bancorp, Inc.
                             Filed as Exhibit 4.1 to the Registrant's Quarterly
                             Report on Form 10-Q for the quarter ended September
                             30, 1995.

                  4.3*       Certificate of Designations of Cumulative Perpetual
                             Preferred Stock, Series C of Essex Bancorp, Inc.
                             Filed as Exhibit 4.2 to the Registrant's Quarterly
                             Report on Form 10-Q for the quarter ended September
                             30, 1995.

                  4.4*       Form of Common Stock Purchase Warrant Certificate.
                             Filed as Exhibit 4.3 to the Registrant's Quarterly
                             Report on Form 10-Q for the quarter ended September
                             30, 1995.

                  4.5*       Specimen Common Stock Certificate of Essex Bancorp,
                             Inc. Filed as Exhibit 4.1 to the Registrant's
                             Pre-Effective Amendment No. 1 to Form S-4
                             Registration Statement under the Securities Act of
                             1933, as filed on October 12, 1994.

*    Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
     Regulations under the Securities Exchange Act of 1934, reference is made to
     the document previously filed with the Commission.


                                       50
<PAGE>

                  4.6*       Specimen Series B 9.5% Cumulative Preferred Stock
                             Certificate of Essex Bancorp, Inc. Filed as Exhibit
                             4.6 to the Registrant's Annual Report on Form 10-K
                             for the year ended December 31, 1995.

                  4.7*       Specimen Series C 8% Cumulative Preferred Stock
                             Certificate of Essex Bancorp, Inc. Filed as Exhibit
                             4.7 to the Registrant's Annual Report on Form 10-K
                             for the year ended December 31, 1995.

                 10.1*       FNMA/FHLMC/Private Investor Mortgage Servicing
                             Purchase and Sale Agreement by and between Essex
                             Mortgage Corporation and Chase Home Mortgage
                             Corporation dated June 8, 1993. Filed as Exhibit
                             10.19 to Essex Financial Partners, L.P.'s Annual
                             Report on the Second Amended and Restated Form 10-K
                             for the year ended December 31, 1992.

                 10.2*       Essex Bancorp, Inc. Non-Employee Directors Stock
                             Option Plan. Filed as Exhibit 10.18 to the
                             Registrant's Form 10-K for the year ended December
                             31, 1994.

                 10.3*       First Amendment to the Essex Bancorp, Inc.
                             Non-Employee Directors Stock Option Plan dated July
                             29, 1995. Filed as Exhibit 10.6 to the Registrant's
                             Annual Report on Form 10-K for the year ended
                             December 31, 1995.

                 10.4*       Essex Bancorp, Inc. Stock Option Plan. Filed as
                             Exhibit 10.19 to the Registrant's Form 10-K for the
                             year ended December 31, 1994.

                 10.5*       First Amendment to the Essex Bancorp, Inc. Stock
                             Option Plan dated June 29, 1995. Filed as Exhibit
                             10.8 to the Registrant's Annual Report on Form 10-K
                             for the year ended December 31, 1995.

                 10.6        Second Amendment to the Essex Bancorp, Inc. Stock
                             Option Plan dated May 23, 1996. Filed as an exhibit
                             to this report.

                 10.7*       Essex Bancorp, Inc. Employee Stock Purchase Plan.
                             Filed as Exhibit 10.20 to the Registrant's Form
                             10-K for the year ended December 31, 1994.

                 10.8*       First Amendment to the Essex Bancorp, Inc. Employee
                             Stock Purchase Plan dated June 29, 1995. Filed as
                             Exhibit 10.10 to the Registrant's Annual Report on
                             Form 10-K for the year ended December 31, 1995.


*    Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
     Regulations under the Securities Exchange Act of 1934, reference is made to
     the document previously filed with the Commission.


                                       51
<PAGE>

                 10.9*       Agreement and Plan of Reorganization dated as of
                             June 30, 1995 by and among Essex Bancorp, Inc.,
                             Essex Savings Bank, F.S.B., Home Bancorp, Inc., and
                             Home Savings Bank, F.S.B. Filed as Exhibit 10.1 to
                             the Registrant's Quarterly Report on Form 10-Q for
                             the quarter ended June 30, 1995.

                 10.10*      Employment Agreement dated January 4, 1996 by and
                             among Essex Bancorp, Inc., Essex Acquisition Corp.,
                             Essex Savings Bank, F.S.B., Essex Mortgage
                             Corporation, and Gene D. Ross. Filed as Exhibit
                             10.12 to the Registrant's Annual Report on Form
                             10-K for the year ended December 31, 1995.

                 10.11*      Executive Services Agreement dated October 28, 1993
                             by and between Essex Savings Bank, F.S.B. and its
                             subsidiaries, and Earl C. McPherson. Filed as
                             Exhibit 10.11 to the Registrant's Annual Report on
                             Form 10-K for the year ended December 31, 1993.

                 10.12*      First Amendment to Executive Services Agreement by
                             and between Essex Savings Bank, F.S.B., Essex First
                             Mortgage Corporation, and Earl McPherson dated as
                             of April 1, 1995. Filed as Exhibit 10.14 to the
                             Registrant's Annual Report on Form 10-K for the
                             year ended December 31, 1995.

                 10.13*      Branch Purchase and Deposit Assumption Agreement
                             between Essex Savings Bank, F.S.B. and Bank of
                             Mecklenburg dated as of December 8, 1995. Filed as
                             Exhibit 10.15 to the Registrant's Annual Report on
                             Form 10-K for the year ended December 31, 1995.

                 10.14*      Branch Purchase and Deposit Assumption Agreement
                             between Essex Savings Bank, F.S.B. and Centura Bank
                             dated as of April 11, 1996. Filed as Exhibit 10.1
                             to the Registrant's Quarterly Report on Form 10-Q
                             for the quarter ended March 31, 1996.

                 10.15*      Branch Purchase and Deposit Assumption Agreement
                             between Essex Savings Bank, F.S.B. and CENIT Bank,
                             FSB dated as of July 2, 1996. Filed as Exhibit 10.1
                             to the Registrant's Current Report on Form 8-K
                             dated July 3, 1996.

                 11          Statement re computation of per share earnings.

                 13          The 1996 Annual Report is attached as Exhibit 13.
                             Portions of the 1996 Annual Report are incorporated
                             by reference into this Form 10-K.

*    Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
     Regulations under the Securities Exchange Act of 1934, reference is made to
     the document previously filed with the Commission.


                                       52
<PAGE>

                 21*         Subsidiaries of the Registrant. Filed as Exhibit 21
                             to the Registrant's Annual Report on Form 10-K for
                             the year ended December 31, 1995.

                 27          Financial Data Schedule.


*    Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
     Regulations under the Securities Exchange Act of 1934, reference is made to
     the document previously filed with the Commission.


                                       53
<PAGE>

(b)   Reports on Form 8-K Filed in the Fourth Quarter of 1996

      On October 9, 1996, the Registrant filed a Form 8-K in which it disclosed
      under Item 2-Acquisition or Disposition of Assets-the Bank's sale of the
      deposits and related assets of its Norfolk, Portsmouth, Hampton and
      Newport News, Virginia branches to CENIT Bank, FSB pursuant to the Branch
      Purchase and Deposit Assumption Agreement dated July 2, 1996. In addition,
      under Item 7-Financial Statements and Exhibits-unaudited pro forma
      financial information was provided which included the historical financial
      statements of the Registrant, pro forma adjustments directly attributable
      to the sale of the branches and pro forma results as of June 30, 1996 with
      regard to the pro forma consolidated balance sheet and for the year ended
      December 31, 1995 and for the six months ended June 30, 1996 with regard
      to the unaudited pro forma consolidated statements of operations.

(c)   Exhibits

      See Exhibit Index contained herein.

(d)   Financial Statements Excluded from Annual Report to Shareholders Pursuant
      to Rule 14a3(b)

      Not applicable.


                                       54
<PAGE>

                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       Essex Bancorp, Inc.


                                       By: /s/ Gene D. Ross
                                           ----------------------------------
                                           Gene D. Ross
                                           Chairman, President,
                                           and Chief Executive
                                           Officer

                                               March 21, 1997
                                           ----------------------
                                                   (Date)

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


By: /s/ Gene D. Ross                           March 21, 1997
    ------------------------------         ----------------------
    Gene D. Ross                                   (Date)
    Chairman, President, Chief
    Executive Officer and
    Principal Financial Officer


By: /s/ Mary-Jo Rawson                         March 21, 1997
    ------------------------------         ----------------------
    Mary-Jo Rawson                                 (Date)
    Chief Accounting Officer


By: /s/ Roscoe D. Lacy, Jr.                    March 21, 1997
    ------------------------------         ----------------------
    Roscoe D. Lacy, Jr.                            (Date)
    Director


By: /s/ Harry F. Radcliffe                     March 21, 1997
    ------------------------------         ----------------------
    Harry F. Radcliffe                             (Date)
    Director


By: /s/ Robert G. Hecht                        March 21, 1997
    ------------------------------         ----------------------
    Robert G. Hecht                                (Date)
    Director


                                       55
<PAGE>

* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated by reference.

                     Exhibit Index

            Exhibit No.  Description
            -----------  -----------

               3.1*      Certificate of Incorporation of Essex Bancorp, Inc.,
                         dated June 21, 1994.

               3.2*      Certificate of Amendment of Essex Bancorp, Inc., dated
                         August 10, 1994.

               3.3*      Bylaws of Essex Bancorp, Inc., effective July 25, 1994.

               4.1*      Certificate of Designation of the Series A Preferred
                         Stock of Essex Bancorp, Inc.

               4.2*      Certificate of Designations of Cumulative Perpetual
                         Preferred Stock, Series B of Essex Bancorp, Inc.

               4.3*      Certificate of Designations of Cumulative Perpetual
                         Preferred Stock, Series C of Essex Bancorp, Inc.

               4.4*      Form of Common Stock Purchase Warrant Certificate

               4.5*      Specimen Common Stock Certificate of Essex Bancorp,
                         Inc.

               4.6*      Specimen Series B 9.5% Cumulative Preferred Stock
                         Certificate of Essex Bancorp, Inc.

               4.7*      Specimen Series C 8% Cumulative Preferred Stock
                         Certificate of Essex Bancorp, Inc.

              10.1*      FNMA/FHLMC/Private Investor Mortgage Servicing Purchase
                         and Sale Agreement by and between Essex Mortgage
                         Corporation and Chase Home Mortgage Corporation dated
                         June 8, 1993.

              10.2*      Essex Bancorp, Inc. Non-Employee Directors Stock Option
                         Plan.

              10.3*      First Amendment to the Essex Bancorp, Inc. Non-Employee
                         Directors Stock Option Plan dated July 29, 1995.

              10.4*      Essex Bancorp, Inc. Stock Option Plan.

----------
* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated be reference.


                                       E-1
<PAGE>

              10.5*      First Amendment to the Essex Bancorp, Inc. Stock Option
                         Plan dated June 29, 1995.

              10.6       Second Amendment to the Essex Bancorp, Inc. Stock
                         Option Plan dated May 23, 1996.

              10.7*      Essex Bancorp, Inc. Employee Stock Purchase Plan.

              10.8*      First Amendment to the Essex Bancorp, Inc. Employee
                         Stock Purchase Plan dated June 29, 1995.

              10.9*      Agreement and Plan of Reorganization dated as of June
                         30, 1995 by and among Essex Bancorp, Inc., Essex
                         Savings Bank, F.S.B., Home Bancorp, Inc., and Home
                         Savings Bank, F.S.B.

              10.10*     Employment Agreement dated January 4, 1996 by and among
                         Essex Bancorp, Inc., Essex Acquisition Corp., Essex
                         Savings Bank, F.S.B., Essex Mortgage Corporation, and
                         Gene D. Ross.

              10.11*     Executive Services Agreement dated October 28, 1993 by
                         and between Essex Savings Bank, F.S.B. and its
                         subsidiaries, and Earl C. McPherson.

              10.12*     First Amendment to Executive Services Agreement by and
                         between Essex Savings Bank, F.S.B., Essex First
                         Mortgage Corporation, and Earl McPherson dated as of
                         April 1, 1995.

              10.13*     Branch Purchase and Deposit Assumption Agreement
                         between Essex Savings Bank, F.S.B. and Bank of
                         Mecklenburg dated as of December 8, 1995.

              10.14*     Branch Purchase and Deposit Assumption Agreement
                         between Essex Savings Bank, F.S.B. and Centura Bank
                         dated as of April 11, 1996.

              10.15*     Branch Purchase and Deposit Assumption Agreement
                         between Essex Savings Bank, F.S.B. and CENIT Bank, FSB
                         dated as of July 2, 1996.

              11         Statement re computation of per share earnings.

----------
* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated be reference.


                                       E-2
<PAGE>

              13         The 1996 Annual Report is attached as Exhibit 13.
                         Portions of the 1996 Annual Report are incorporated by
                         reference into this Form 10-K.

              21*        Subsidiaries of the Registrant, as updated.

              27         Financial Data Schedule

----------
* For exhibit reference see Item 14(c) for statement of location of exhibits
incorporated be reference.


                                       E-3