EXHIBIT 13





                                      ESSEX
                                  BANCORP, INC.



                               1998 ANNUAL REPORT


<PAGE>

                                      ESSEX
                                  BANCORP, INC.

                                Table of Contents


                                                                           Page
                                                                           ----

     Report to Our Stockholders                                              1

     Five Year Financial Summary                                             4

     Management's Discussion and Analysis                                    5

     Report of Independent Accountants                                      24

     Consolidated Financial Statements                                      25

     Notes to Consolidated Financial Statements                             33

     Investor Information                                                   54

     Directors and Officers                                                 55

     Corporate Information                                                  56



<PAGE>
                           Forward-Looking Statements

From time to time, the Company may publish forward-looking  statements,  such as
the ones included in this Annual Report, relating to such matters as anticipated
financial  performance,  business  prospects,  and similar matters.  The Private
Securities   Litigation   Reform  Act  of  1995   provides  a  safe  harbor  for
forward-looking  statements.  In order  to  comply  with  the  terms of the safe
harbor,  the Company  notes that a variety of factors  could cause the Company's
actual results and experience to differ materially from the anticipated  results
or other  expectations  expressed in the Company's  forward-looking  statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include but are not limited to
the following:

a.   Deterioration in local economic conditions;
b.   Deterioration in national or global economic conditions;
c.   Significant  changes  in  laws  and  regulations  affecting  the  financial
     services industry; and
d.   Significant changes in the markets in which our businesses compete.

<PAGE>
                            ESSEX BANCORP, INC. LOGO


                           MESSAGE TO OUR STOCKHOLDERS



To Our Stockholders:

I am pleased to report that Essex Bancorp,  Inc.  ("Essex") reported earnings of
$1.0 million in 1998. This is the first year,  since the change in management in
1992, that Essex has achieved core  profitability from operations and recognized
a portion of the tax  benefits  associated  with  historical  losses  because of
favorable expectations in the near term. While we are pleased with the progress,
we will  not be  satisfied  until  Essex  is  identified  as a high  performance
financial  institution  when  compared  with  similar-type  franchises  and core
profitability exceeds the accrued dividends on our preferred stock.

During 1998, Essex experienced improved fundamentals in many areas. For example,
(i) total assets of $231  million at December  31, 1998  reflects an increase of
approximately   19%  from  1997,   (ii)   non-performing   assets   declined  by
approximately  44% to a ratio to total  assets of .79% - the  lowest in  Essex's
history,  (iii) our  Suffolk,  Virginia  full-service  branch,  reported in last
year's message,  accomplished growth in deposits of $11 million or 94%, and (iv)
Essex's regulatory  relationship and overall risk profile,  discussed frequently
in previous years,  has  strengthened  and improved  significantly  from 1997. I
encourage  you to read the  Management's  Discussion  and  Analysis of Financial
Condition  and Results of  Operations  in order to enhance your  perspective  of
Essex's performance during 1998.


                                        1

<PAGE>



Management's ability to concentrate on developing business opportunities without
being distracted by past problems is contributing to the overall franchise value
and a more  productive  company.  Essex  Savings  Bank grew its deposit base $34
million,  representing  22% growth,  from its four existing  branches.  Both our
mortgage division and loan servicing  operations also had excellent years. Essex
First Mortgage originated  residential mortgage loans totaling $78.1 million and
construction  permanent  loan  commitments  of $27.7  million  and funded  $19.6
million  for  builder   construction   loans.   Essex  Home  Mortgage  Servicing
Corporation  increased its third-party loan servicing portfolio from 5,480 loans
with principal  balances of $354 million at the end of 1997 to 12,155 loans with
principal  balances of $1.1 billion.  The 122% increase in total loans  serviced
for  nonaffiliates is especially  notable in view of the loss in 1997 of Essex's
largest contract, representing 7,400 loans.

1999 will be a challenging year for Essex's management.  Our business plan calls
for continued emphasis on each of our three principal lines of business:  retail
community banking, mortgage banking, and loan servicing. However, within each of
those areas we are developing strategies to enhance existing revenues and at the
same time pursue new sources of revenues. While the business plan provides for a
sluggish first quarter in 1999, it is anticipated  that projected loan growth in
higher-  yielding loan products,  such as  construction  loans,  will ultimately
enhance Essex's core profitability in 1999.  Management is focused on the future
and the  opportunities  that a rapidly  changing  marketplace  creates.  In this
regard,  Essex is well  positioned  in growth  markets and should  benefit  from
further  consolidations  in the financial  services  industry and the increasing
disenchantment of consumers with large banking institutions. We have worked hard
to  transition  to  community  banking  over  the  past  several  years  and our
deliberateness  in targeting  our markets is  reflected in our growing  customer
bases. Soon we will break ground on another new full-service  branch in Ashland,
Virginia.  We are excited  about  opportunities  in this market  because we have
already  established  a presence  through our retail  deposit  products  and our
builder construction loan relationships in our Richmond, Virginia branch.

Looking  back,  1998 was  clearly  a year of  performance  and  accomplishments.
Successes  don't just happen;  they are the result of planning and the hard work
of Essex's directors, officers and

                                        2

<PAGE>
employees.  We appreciate  their dedication and the support of our customers and
shareholders.


                                               /s/ Gene D. Ross


                                               Gene D. Ross
                                               President and CEO
                                               Essex Bancorp, Inc.
                                               March 31, 1999





















                                        3

<PAGE>
<TABLE>

                                           FIVE YEAR FINANCIAL SUMMARY
                                     (Dollars in Thousands, Except Per Share)
<CAPTION>

                                                            At or For the Year Ended December 31,
                                                  1998         1997           1996         1995           1994
                                                  ----         ----           ----         ----           ----
     <S>                                        <C>           <C>           <C>          <C>            <C>     
     BALANCE SHEET DATA:
       Total assets.........................    $231,040      $195,088      $174,267     $338,724       $296,231
       Net loans ...........................     192,668       167,441       145,551      266,632        237,392
       Deposits  ...........................     187,632       153,927       131,033      283,497        222,462
       Federal Home Loan Bank advances......      24,908        23,547        25,690       29,833         58,952
       Notes payable........................           -            72            96          120          2,691
       Shareholders' equity and total
         partners' capital..................      15,835        14,817        15,106       22,630          8,140
       Nonperforming assets.................       1,835         3,298         5,215       11,257         13,652
       Allowance for loan losses............       1,845         2,382         2,556        5,251          3,429

     OPERATIONS DATA:
       Interest income......................    $ 15,430      $ 14,547      $ 19,872     $ 22,547       $ 22,966
       Interest expense.....................       9,778         9,230        13,764       16,627         15,956
       Net interest income..................       5,652         5,317         6,108        5,920          7,010
       Provision for loan losses............          13           113         1,411        2,477          1,604
       Noninterest income...................       2,713         2,463         4,282        3,172          4,068
       Noninterest expense:
         Amortization.......................         503           531         7,011          956          1,360
         Other..............................       7,354         7,433         9,345        9,814         15,619
       Income (loss) before cumulative
         effect of change in accounting
         principle, extraordinary items,
         and income taxes...................         495          (297)       (7,377)      (4,155)        (7,505)
       Cumulative effect of change in
         accounting principle...............           -             -             -            -            179
       Extraordinary items, net of tax......           -             -             -        2,945 (1)     20,416 (2)
       Provision for (benefit from) income
         taxes..............................        (518)            -             -            -              -
       Net income (loss)....................       1,013          (297)       (7,377)      (1,210)        13,090
       Net income (loss) available to
         common stockholders................        (777)       (1,932)       (8,824)      (1,578)        13,090
       Basic and diluted net loss per
         common share.......................        (.73)       (1.83)         (8.39)      (1.50)              -
       Pro forma basic and diluted net
         income (loss) per common
         share..............................           -             -             -            -          12.47

     OTHER DATA:
       Return on average assets.............         .49%        (.16)%        (2.73)%       (.39)% (1)     3.88% (2)
       Return on average capital............        6.71%       (1.96)%       (39.51)%     (10.59)%           (3)
       Average capital to average assets....        7.28%        8.13%          6.92%        3.67%            (4)
       Net interest spread..................        2.54%        2.69%          2.20%        2.00%          2.46%
       Net interest margin..................        2.93%        3.01%          2.41%        2.01%          2.20%
       Nonperforming assets as a percent
         of total assets at end of year.....         .79%        1.69%          2.99%        3.32%          4.61%
       Allowance for loan losses as a
         percent of total loans at end
         of year ...........................         .95%        1.40%          1.73%        1.93%          1.42%
       Net charge-offs as a percent of
         average total loans................         .32%         .18%          1.89%         .46%           .55%
       Retail banking offices...............           4             4             4           12              8
</TABLE>
     (1) The Company recognized a $2.9 million  extraordinary credit to earnings
         related to the  forgiveness  of debt during 1995. The return on average
         assets excluding the impact of this  extraordinary item was (1.33)% for
         the year ended December 31, 1995.
     (2) The Company  recognized a $20.4  million  extraordinary  credit (net of
         income  taxes) to earnings  related to a litigation  settlement  during
         1994.  The  return  on  average  assets  excluding  the  impact of this
         extraordinary item was (2.17)% for the year ended December 31, 1994.
     (3) Ratio exceeds (100.00)%. (4) Ratio is less than 0.00%.

                                                        4
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


         Essex Bancorp,  Inc. (the "Company") is a Delaware corporation that was
formed in 1994 to be the single thrift  holding  company for Essex Savings Bank,
F.S.B. (the "Bank"), a federally-chartered  savings bank which operates (i) four
retail  banking  branches in North Carolina and Virginia and (ii) Essex First, a
division that engages  principally  in the  origination  and sale of residential
mortgage loans. The Company's other principal operating subsidiary is Essex Home
Mortgage Servicing  Corporation  ("Essex Home"), a majority-owned  subsidiary of
the Bank that is engaged  primarily in the servicing of mortgage  loans owned by
the Bank,  governmental  agencies,  and third party  investors.  Essex  Mortgage
Corporation  ("EMC")  is also a  subsidiary  of the  Company  that was  formerly
engaged in mortgage banking activities and, at December 31, 1998, held loans and
other assets as a result of its past activities.

         In January  1996,  the  Company's  Board of Directors  formed a special
committee of the Board, the Strategic  Evaluation  Committee (the  "Committee").
Although the Bank exceeded all regulatory capital  requirements after the Bank's
acquisition  of  Home  Bancorp,  Inc.  ("Home  Bancorp")  and  its  wholly-owned
subsidiary Home Savings Bank, F.S.B. ("Home Savings") on September 15, 1995 (the
"Home  Acquisition"),  the  core  operations  of  the  Company  since  the  Home
Acquisition  had not been  profitable and the retail banking  branches  acquired
from  Home  Savings  required  additional  capital  in  order  to be  successful
full-service  facilities.  In early 1996,  the  Committee  began  exploring  the
possible  benefits of further  expansion or contraction by branch sales.  In May
1996, an  independent  consultant  retained by the Company  issued a report that
validated the Committee's  conclusions that selling  non-strategic bank branches
and effectively  shrinking the size of the asset base by approximately 50% was a
strategy that  ultimately  would be in the best  interests of the common and the
preferred shareholders of the Company. Accordingly, the Company sold nine of the
Bank's  13  branches.  Collectively,  the nine  branches  sold  during  1996 are
referred to as the  "Branches."  The outcome of the strategy to downsize is that
the Company has retained the most strategic branches with the greatest potential
for significant  market share growth,  has positioned itself to maintain a "well
capitalized"  status for regulatory  capital  purposes and has removed  goodwill
associated with the Home  Acquisition  from its balance sheet. In addition,  the
Company's  post-1996  operating  expenses were reduced due to the elimination of
the  amortization  of goodwill and the operating  expenses  associated  with the
Branches.

         The  following  discussion  and  analysis of  financial  condition  and
results of  operations  should also be read in  conjunction  with the "Five Year
Financial Summary" and the Consolidated  Financial  Statements and related Notes
included herein.


Financial Condition

         General.  Total  assets of the Company at December 31, 1998 were $231.0
million as  compared  to $195.1  million at December  31,  1997,  an increase of
approximately  $35.9  million or 18.4%.  The  increase  in assets was  primarily
attributable  to (i) a $6.9  million  increase  in  cash  and  cash  equivalents
resulting primarily from an increase in escrow deposits maintained by Essex Home
at the Bank, (ii) a $25.2 million  increase in loans held for investment,  which
reflected the Company's  strategy of investing  funds  provided by the growth in
deposits into higher yielding loans, (iii) a $2.3 million increase in loans held
for sale,  which reflected the impact of the lower interest rate  environment on


                                       5
<PAGE>

the  production of residential  loans held for sale in the secondary  market and
(iv) a $1.3 million increase in premises and equipment resulting from the Bank's
completion of a newly-constructed branch in Suffolk, Virginia for the relocation
of an existing branch, the acquisition of the Bank's previously-leased branch in
Richmond,  Virginia and the  acquisition  of land for the Bank's  expansion into
Ashland,   Virginia,   as  well  as  the  Company's   investment  in  technology
enhancements such as the implementation of a wide area network.

         Cash and Cash  Equivalents.  Cash and cash  equivalents  (consisting of
cash,   interest-bearing  deposits  in  other  banks,  federal  funds  sold  and
securities  purchased under  agreements to resell)  increased by $6.9 million or
62.7% during 1998 due to the excess  liquidity  maintained  at December 31, 1998
resulting from an increase in noninterest-bearing  escrow deposits maintained by
Essex Home at the Bank.

         Investment  Securities.  As a matter of policy,  the Company  generally
emphasizes lending  activities (as opposed to investing  activities) in order to
enhance the weighted average yield on its interest-earning assets and, thus, its
results of operations. Investment securities (including securities classified as
available for sale) consist of U.S. government agency obligations,  Federal Home
Loan Bank ("FHLB")  stock,  and mutual fund  investments.  During the year ended
December  31,  1998,  investment  securities  increased  $570,000 or 15.2%.  The
increase  during 1998 was  attributable  to (i) the purchase of $118,000 of FHLB
stock  in  order  to  satisfy  the  minimum  investment  requirements  for  FHLB
membership,  which increased  because of the Bank's loan growth in 1998 and (ii)
the  utilization  of  funds  from  the  maturity  of a  $300,000  callable  U.S.
government  agency  security  in 1998 for the  acquisition  of a  $750,000  U.S.
government agency security,  which has been pledged to secure public deposits at
December 31, 1998.

         Mortgage-Backed  Securities.  Mortgage-backed  securities  increase the
credit quality of the Company's  assets by virtue of the insurance or guarantees
of federal  agencies  that back  them,  generally  require  less  capital  under
risk-based  regulatory  capital  requirements than non-insured or non-guaranteed
mortgage loans, are more liquid than individual  mortgage loans, and may be used
to  collateralize  borrowings or other  obligations of the Company.  Because the
Company is  emphasizing  lending and the  investment  of the  proceeds  from the
maturities  of  securities  into  higher  yielding  loans,  there  were  no  new
investments in mortgage-backed securities in 1998.

         Loans.  Net  loans  (including  loans  classified  as  held  for  sale)
increased by $27.5 million or 16.2% during 1998 resulting from secondary  market
purchases of  adjustable-rate  first  mortgage loan  portfolios  totaling  $32.3
million and fixed-rate home improvement loans totaling $3.2 million,  which were
partially  offset by a decline  in the  Company's  fixed-rate  first and  second
mortgage loans. The Company relied on acquisitions of adjustable-rate portfolios
during 1998 because  customer demand during the period of low interest rates has
emphasized fixed rate loans, which the Company sells in the secondary market.


                                       6
<PAGE>

         Nonperforming  Assets.  The  Company's  nonperforming  assets,  net  of
specific  reserves for  collateral-dependent  real estate loans  ("CDRELs")  and
foreclosed properties,  decreased from $3.3 million at December 31, 1997 to $1.8
million at  December  31,  1998,  and  consisted  of the  following  (dollars in
thousands):
<TABLE>
<CAPTION>
                                                            1998                   1997
                                                            ----                   ----
                                                                 % of                     % of
                                                                 Total                    Total
                                                     Amount      Loans        Amount      Loans
                                                     ------      -----        ------      -----
     <S>                                             <C>          <C>         <C>         <C> 
     Nonaccrual loans, net:
       First and second mortgages................    $   697      .36%        $1,203      .71%
       Construction and development..............          -        -            133      .08
       Commercial................................        328      .17            132      .08
       Consumer..................................        141      .07             88      .05
     Accruing loans 90 days or more past due.....          -        -             21      .01
     Troubled debt restructurings................         98      .05            209      .12
                                                     -------      ---         ------     ----
         Total nonperforming loans...............      1,264      .65          1,786     1.05
     Foreclosed properties, net..................        571      .29          1,512      .89
                                                     -------      ---         ------     ----
         Total nonperforming assets..............     $1,835      .94%        $3,298     1.94%
                                                       =====      ===          =====     ====

     Nonperforming assets to total assets........                 .79%                   1.69%
     Nonperforming loans to total loans..........                 .65                    1.05
     Allowance for loan losses to
       total loans...............................                 .95                    1.40
     Allowance for loan losses to
       nonaccrual loans..........................              158.23                  153.09
     Allowance for loan losses to
       nonperforming loans.......................              145.97                  133.37
</TABLE>

         The decrease in nonperforming assets consisted of a $522,000 decline in
nonperforming  loans  and a  $941,000  decline  in  foreclosed  properties.  The
decrease  in  nonaccrual  loans was  attributable  to the  improvement  in asset
quality evidenced by the decline in delinquencies  from $940,000 at December 31,
1997 to $708,000 at December 31,  1998.  Gross  interest  income that would have
been  recognized  for the  years  ended  December  31,  1998,  1997  and 1996 if
nonaccrual  loans at the respective dates had been performing in accordance with
their original terms approximated $115,000, $171,000 and $291,000, respectively.
The Company's  future results of operations will be favorably  affected if it is
able to achieve a further  reduction in nonperforming  assets without  incurring
additional material losses.

         The Company's decrease in foreclosed properties reflected the impact of
the continuing decline in nonperforming and delinquent loans during 1998 and the
sale of 12 of the 13  properties  held at December  31,  1997.  The  $571,000 of
foreclosed  properties included in nonperforming  assets at December 31, 1998 is
reported net of related reserves totaling $114,000.  In addition,  approximately
$246,000 of losses and write-downs have been previously recognized on foreclosed
properties held at December 31, 1998.

         The following  table sets forth the types of properties  which comprise
the Company's foreclosed properties (net of related reserves) at December 31 (in
thousands):

                                                        1998              1997
                                                        ----              ----
         Residential real estate development
            projects                                    $    -          $   485
         Single-family residential real estate             486              770
         Land and subdivisions                              85              257
                                                        ------           ------
                                                          $571           $1,512
                                                           ===            =====

                                       7
<PAGE>

         In addition to the $1.8 million of nonperforming assets at December 31,
1998,  the Company had classified  for  regulatory  purposes an additional  $1.6
million of assets  (including  accrued interest and advances and net of specific
loss reserves)  based on a rating system adopted by the Company,  as compared to
$3.3 million of  nonperforming  assets and $1.8 million of classified  assets at
December 31, 1997.  These  classified  loans evidence one or more  weaknesses or
potential  weaknesses and,  depending on the regional economy and other factors,
may become  nonperforming  assets in future  periods.  There can be no assurance
that the regulatory  examiners would agree with the Company's  classification of
its  assets.  However,  during the third  quarter of 1998,  the Office of Thrift
Supervision  ("OTS")  completed  its safety  and  soundness  examination  of the
Company and the Bank and did not require  any changes to the  classification  of
assets.

         Mortgage  Servicing  Rights and Loan Premiums.  As of December 31, 1998
and 1997,  the Company  reported  $831,000 and $1.2  million,  respectively,  of
purchased and originated  mortgage servicing rights  (collectively,  "MSRs") and
$951,000 and $668,000,  respectively, of capitalized loan premiums. The increase
in  loan  premiums  was  attributable  to  secondary  market  purchases  of loan
portfolios  during 1998. The decrease in MSRs was  attributable  to amortization
during 1998,  which  included a $54,000  increase in the valuation  allowance in
order to  reduce  the  carrying  value of MSRs to the  estimated  fair  value at
December 31, 1998.  The carrying  value of the Company's  MSRs and loan premiums
are dependent upon the cash flows from the  underlying  mortgage loans and their
carrying value may be impaired if prepayment activity exceeds  expectations.  At
December  31,  1998,  no  assurance   can  be  made  that  further   significant
amortization or impairment adjustments will not be necessary with respect to the
Company's  MSRs  or  capitalized  loan  premiums  if  the  lower  interest  rate
environment  results in the  acceleration  of  prepayment  activity in excess of
current expectations.

         Deposits.   Deposits,  the  primary  source  of  the  Company's  funds,
increased by $33.7 million or 21.9% during the year ended December 31, 1998. The
increase  in  deposits  was  attributable  to (i) an $11.7  million  increase in
noninterest-bearing  accounts  largely  because of the  increase in Essex Home's
servicing  escrow  accounts  maintained  at the Bank  and (ii) an $18.5  million
increase in certificates of deposit  predominantly  at the Suffolk and Richmond,
Virginia  branches,  which  experienced  deposit  growth  of  91.5%  and  25.5%,
respectively.

         Borrowings. The Company's borrowings consist primarily of advances from
the FHLB. FHLB advances  increased by $1.4 million or 5.8% during the year ended
December 31, 1998. At December 31, 1998, the unused  lendable  collateral  value
for additional FHLB advances was $31.6 million.

         Shareholders'  Equity.  Total shareholders' equity at December 31, 1998
was $15.8  million,  an increase of $1.0  million from  shareholders'  equity of
$14.8  million at December 31, 1997.  This change  reflects  the  Company's  net
income of $1.0 million for the year ended  December  31, 1998,  which is further
described under Results of Operations.

         As part of the  Home  Acquisition,  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 $15.0 million, and bearing
cumulative annual dividend rates of either 8% or 9.5%. Cumulative but undeclared
dividends and accrued  interest  thereon for the Series B and Series C preferred
stock  approximated  $5.2 million at December 31,  1998.  Because the  Company's
income is not yet sufficient to cover the  cumulative  dividends on the Series B
and C preferred  stock,  the equity of the holders of the  Company's  common and
preferred stock will continue to be affected.  Accordingly,  the Company's Board
of Directors and the Committee continue to evaluate  profitability  enhancements
and possibilities for corporate restructurings.

         On May 28, 1998,  the Company's  shareholders  approved an amendment of
the  Company's   Certificate  of  Incorporation  whereby  the  total  authorized


                                       8
<PAGE>

capitalization  increased to 30 million shares,  consisting of 20 million shares
of common  stock and 10 million  shares of  preferred  stock.  The  increase  in
authorized   capitalization   increases  the  Company's   flexibility  to  issue
additional  shares of common stock and preferred  stock to enable the Company to
engage in strategic  transactions,  such as possible  mergers or share exchanges
with other entities.  However,  the Company has no present plans to issue shares
in connection with any particular transaction.


Results of Operations

         Overview of Business  Activity.  The  Company's  results of  operations
depend substantially on its net interest income, which is the difference between
interest  income  (including  the  amortization  of purchased  loan premiums) on
interest-earning    assets,   primarily   loans,   and   interest   expense   on
interest-bearing   liabilities,   primarily  deposits  and  FHLB  advances.  The
Company's  results of operations are also  significantly  affected by provisions
for loan losses  resulting from the Company's  assessment of the adequacy of the
allowance for loan losses,  the level of its noninterest  income  including loan
servicing  and  other  fees and  mortgage  banking  income  and the level of its
noninterest expenses,  such as salaries and employee benefits, net occupancy and
equipment costs,  amortization of MSRs,  deposit insurance premiums and expenses
associated with the administration of nonperforming and other classified assets.

         The  Company's  major  business  activities  consist of (i)  attracting
deposits  from the  general  public  and  using  such  deposits,  together  with
borrowings in the form of advances from the FHLB and other sources of funds, for
reinvestment   in  real  estate   mortgages,   other  loans,   investments   and
mortgage-backed  securities,  (ii) the origination by Essex First of real estate
mortgage loans for sale to third parties  predominantly on a  servicing-released
basis in order to generate  higher  income and (iii) the  servicing  of mortgage
loans by Essex Home in order to generate  fee income.  As of December  31, 1998,
Essex Home  serviced  approximately  12,200  loans  totaling  $1.1  billion  for
nonaffiliated  servicing clients. For additional segment  information,  refer to
Note 23 of the Notes to Consolidated Financial Statements.

         General.  The Company's net income for the year ended December 31, 1998
totaled  $1.0  million,  compared to a net loss of  $297,000  for the year ended
December 31, 1997 and a net loss of $7.4 million for the year ended December 31,
1996.

         The Company's net income for the year ended  December 31, 1998 included
a $550,000 tax benefit  resulting  from the  recognition of a deferred tax asset
for a portion of the Company's net operating tax loss ("NOL") carryforwards. The
recognition of this NOL benefit was made possible by the Company's return to and
projected  maintenance  of  core  profitability.   Excluding  this  NOL  benefit
recognized  in 1998 and excluding  nonrecurring  items in 1997 for the aggregate
gain of  $97,000  on the sale of  vacant  branch  facilities,  termination  fees
approximating   $113,000   received  by  Essex  Home  in  connection   with  the
cancellation of a subservicing client's contract and a $498,000 charge for stock
option  compensation,  the Company's net income effectively improved $472,000 in
1998. This  improvement  occurred as a result of (i) an increase in net interest
income  resulting from an increase in  interest-earning  assets,  the benefit of
which was  partially  offset by a decline  in the net  interest  margin,  (ii) a
decline  in  the  provision  for  loan  losses  resulting  from a  reduction  in
nonperforming  assets during 1998,  (iii) an increase in mortgage banking income
resulting from an increase in residential loan  originations  coupled with sales
in the  secondary  market  and  (iv) an  increase  in other  noninterest  income
resulting from service charges and fees on the higher  servicing volume at Essex
Home and higher  deposit  levels at the Bank.  These  increases  were  partially
offset by (i) a decrease in loan  servicing  fees resulting from a lower average
servicing  portfolio in the first half of 1998,  (ii) an increase in noninterest
expenses  associated  with the increase in the Company's  loan  origination  and
servicing volumes and deposit levels and (iii) state income tax expense.



                                       9
<PAGE>

         The Company's  operating  results for the year ended  December 31, 1996
included  nonrecurring  transactions  associated  with the sale of the Branches.
Excluding the impact of these  transactions,  the Company incurred a net loss of
$2.8 million  during 1996  resulting in an  effective  $2.5 million  increase in
operating  results during the year ended December 31, 1997. This  improvement in
operating results during 1997 reflected the impact of (i) an increase in the net
interest margin on interest earning assets,  (ii) a $1.3 million decrease in the
provision for loan losses resulting from a decline in  nonperforming  assets and
(iii) a decrease in noninterest  expenses resulting from the elimination of $1.7
million of operating  expenses  associated  with the Branches  sold during 1996.
These favorable impacts were partially offset by the loss of net interest income
on  interest-earning  assets sold in  connection  with the sale of the Branches.
Refer to Note 5 of the Notes to Consolidated Financial Statements for a detailed
description of the sale of the Branches.

         Net Interest  Income.  Net interest  income totaled $5.7 million,  $5.3
million and $6.1 million for the years ended  December 31, 1998,  1997 and 1996,
respectively.  In addition,  the net interest margin was 2.93%,  3.01% and 2.41%
for the years ended December 31, 1998, 1997 and 1996, respectively.

         The increase in net  interest  income from 1997 to 1998  reflected  the
favorable impact of the increase in the ratio of average interest-earning assets
to average interest-bearing  liabilities coupled with a decline in the Company's
cost of funds  resulting from the lower interest rate  environment  during 1998.
However,  there was an eight  basis  point  decline in the net  interest  margin
resulting from the impact of the lower interest rate  environment in 1998 on the
volume  of   refinancings   to  lower  fixed  rate  loans,   rate  decreases  on
adjustable-rate mortgages and secondary market purchases at lower market yields.
Typically,  declining interest rates favorably impact the Company's earnings due
to  the   repricing  of  deposits   with  shorter   maturities  as  compared  to
interest-earning  assets,  predominantly loans, which have either fixed interest
rates or interest rates that adjust over longer periods. However, in an extended
period of lower interest rates,  the Company can also expect pressure on the net
interest  margin  resulting  from an increase in the volume of  refinancings  to
lower fixed rate loans.  While the Company continues to emphasize  investment in
adjustable-rate loan portfolios,  customer demand for such loans is lessening as
borrowers' demand for lower fixed-rate loans is increasing.  Within the spectrum
of loan products offered by the Bank, balloon payment and adjustable-rate  loans
with longer initial adjustment terms predominate.

         The decrease in net interest income from 1996 to 1997 reflects the loss
of net interest  income  associated  with assets and deposits sold in connection
with the sale of the Branches during 1996.  However,  the net interest margin on
interest-earning  assets  increased  60 basis  points from 2.41%  during 1996 to
3.01%  during 1997 as a result of an  increase in the ratio of  interest-earning
assets to  interest-bearing  liabilities  from  103.98%  during  1996 to 106.13%
during 1997, along with an increase in the yield on loans from 8.08% during 1996
to 8.53% during 1997,  which  reflected  the Bank's  emphasis on  investment  in
adjustable-rate single-family residential loans.

         The following table presents for the periods indicated the total dollar
amount of  interest  from  average  interest-earning  assets  and the  resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin.



                                       10
<PAGE>
<TABLE>
<CAPTION>
                                                        1998                                 1997
                                         --------------------------------     -------------------------------      
                                         Average                   Yield/     Average                  Yield/      
                                         Balance      Interest      Rate      Balance      Interest     Rate       
                                         -------      --------      ----      -------      --------     ----       
                                                                 (dollars in thousands)
<S>                                      <C>          <C>           <C>       <C>          <C>           <C>       
   Interest-earning assets:
      Loans (1)......................    $178,078     $14,608       8.20%     $159,370     $13,588       8.53%     
      Investment securities..........       3,902         226       5.79         6,457         354       5.48      
      Mortgage-backed securities (2).       1,871         122       6.50         1,905         124       6.54      
      Federal funds sold and securities
        purchased under agreements
        to resell....................       2,069         111       5.37         2,757         151       5.48      
      Other..........................       6,835         363       5.29         6,024         330       5.48
                                         --------    --------                 --------    --------                 
         Total interest-earning assets    192,755      15,430       8.00       176,513      14,547       8.24      
   Cash..............................       4,615                                2,065                             
   Other, less allowance for loan losses                9,866                                7,831                 
                                                     --------                             --------                 
      Total assets...................    $207,236                             $186,409
                                          =======                              =======                             

   Interest-bearing liabilities:
      Time deposits..................    $121,752       6,904       5.67%     $111,394       6,381       5.73%     
      Other deposits.................      35,431       1,587       4.48        29,584       1,298       4.39      
                                         --------     -------                 --------     -------                 
         Total deposits..............     157,183       8,491       5.40       140,978       7,679       5.45      
      Notes payable..................           8           1       9.32            96           9       9.50      
      FHLB advances..................      21,553       1,230       5.71        24,885       1,474       5.92      
      Subordinated capital notes.....           -           -         -              -           -          -      
      Other..........................         303          56      18.30           360          68      18.29
                                        ---------   ---------                ---------    --------               --
         Total interest-bearing
            liabilities..............     179,047       9,778       5.46       166,319       9,230       5.55
                                                       ------                              -------                 
   Demand deposits...................       9,504                                3,143                             
   Other.............................       3,589                                1,795                             
                                        ---------                            ---------                            -
      Total liabilities..............     192,140                              171,257                             

   Shareholders' equity..............      15,096                               15,152                             
                                         --------                             --------                             
      Total liabilities and
         shareholders' equity........    $207,236                             $186,409                             
                                          =======                              =======                             

   Net interest earnings.............                 $ 5,652                             $  5,317                 
                                                       ======                              =======                 
   Net interest spread...............                               2.54%                                2.69%     
                                                                    ====                                 ====      
   Net interest margin (3)...........                               2.93%                                3.01%
                                                                    ====                                 ====
   Average interest-earning assets
      to average interest-bearing
      liabilities....................                             107.66%                              106.13%
                                                                  ======                               ======
<CAPTION>
                                                       1996
                                         -------------------------------
                                         Average                  Yield/
                                         Balance     Interest      Rate
                                         -------     --------      ----
                                              (dollars in thousands)
   Interest-earning assets:
      Loans (1)......................    $221,215    $17,882       8.08%
      Investment securities..........      11,012        615       5.59
      Mortgage-backed securities (2).       6,320        498       7.95
      Federal funds sold and securities
        purchased under agreements
        to resell....................       6,094        319       5.24
      Other..........................      10,094        558       5.38
                                         --------   --------
         Total interest-earning assets    254,735     19,872       7.80
   Cash..............................       3,083
   Other, less allowance for loan losses              11,944
                                                    --------
      Total assets...................    $269,762
                                          =======

   Interest-bearing liabilities:
      Time deposits..................    $183,710     10,620       5.78%
      Other deposits.................      33,218      1,325       3.99
                                         --------    -------
         Total deposits..............     216,928     11,945       5.51
      Notes payable..................         113         11       9.50
      FHLB advances..................      27,137      1,626       5.99
      Subordinated capital notes.....         399         52      13.15
      Other..........................         405        130      18.32
                                        ---------   --------
         Total interest-bearing
            liabilities..............     244,982     13,764       5.60
                                                      ------
   Demand deposits...................       1,433
   Other.............................       4,675
                                        ---------
      Total liabilities..............     251,090

   Shareholders' equity..............      18,672
                                         --------
      Total liabilities and
         shareholders' equity........    $269,762
                                          =======

   Net interest earnings.............               $  6,108
                                                     =======
   Net interest spread...............                              2.20%
                                                                   ====
   Net interest margin (3)...........                              2.41%
                                                                   ====
   Average interest-earning assets
      to average interest-bearing
      liabilities....................                            103.98%
                                                                 ======
</TABLE>
(1)  Nonaccrual  loans and loans classified as held for sale are included in the
     average balance of loans.
(2)  Calculation  is  based  on  historical  cost  balances  of  mortgage-backed
     securities  available  for sale and does not give effect to changes in fair
     value that are reflected as a component of shareholders' equity.
(3)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets.


                                       11
<PAGE>

         The  following  table  presents the extent to which changes in interest
rates and  changes in volume of  interest-related  assets and  liabilities  have
affected the Company's interest income and expense during the periods indicated.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume  multiplied by prior year rate),  (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined  effect  of  changes  in  both  rate  and  volume  has  been  allocated
proportionately to the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
                                                Increase (Decrease) From            Increase (Decrease) From
                                                   1997 to 1998 Due to                 1996 to 1997 Due to    
                                                   -------------------                 -------------------    
                                              Rate      Volume        Net           Rate     Volume      Net
                                              ----      ------        ---           ----     ------      ---
                                                                  (dollars in thousands)
     <S>                                      <C>       <C>         <C>             <C>     <C>        <C>
     Interest income on:
       Loans (1)                              $(529)    $1,549      1,020           $934    $(5,228)   $(4,294)
       Investment securities                     19       (147)      (128)           (11)      (250)      (261)
       Mortgage-backed securities                 -         (2)        (2)           (77)      (297)      (374)
       Federal funds sold and securities
         purchased under agreements
         to resell                               (3)       (37)       (40)            14       (182)      (168)
       Other interest-earning assets            (11)        44         33              9       (237)      (228)
                                              -----    -------    -------          -----    -------    -------
               Total interest income (2)       (524)     1,407        883            869     (6,194)    (5,325)
                                               ----      -----     ------            ---     ------     ------


     Interest expense on:
       Time deposits                            (65)       588        523            (96)    (4,143)    (4,239)
       Other deposits                            27        262        289            126       (153)       (27)
       Notes payable                              -         (8)        (8)             -         (2)        (2)
       FHLB advances                            (53)      (191)      (244)           (18)      (134)      (152)
       Subordinated capital notes                 -          -          -            (26)       (26)       (52)
       Other interest-bearing
         liabilities                              -        (12)       (12)             -        (62)       (62)
                                            -------    -------    -------        -------   --------   --------
               Total interest expense           (91)       639        548            (14)    (4,520)    (4,534)
                                              -----     ------     ------          -----     ------     ------

               Net interest income            $(433)   $   768    $   335           $883    $(1,674)  $   (791)
                                               ====     ======     ======            ===     ======    =======
</TABLE>

     (1) Includes loans classified as held for sale.
     (2) Includes the amortization of premiums.

         Provision for Loan Losses. The provision for loan losses represents the
charge against  earnings that is required to fund the allowance for loan losses.
The level of the  allowance  for loan losses is  determined by management of the
Company  based upon its  evaluation  of the inherent  risks within the Company's
loan portfolio.  This evaluation  consists of an ongoing  analysis of individual
loans and the overall risk  characteristics,  size and  composition  of the loan
portfolio.  The  Company  also  considers,   among  other  things,  present  and
prospective industry trends and regional and national economic conditions,  past
estimates of loan losses as compared to actual losses,  potential  problems with
sizable loans,  large loan  concentrations  and historical  losses on loans.  As
adjustments become identified through this ongoing managerial  assessment,  they
are reported in the earnings of the period in which they become known.

         For the years ended  December 31, 1998,  1997 and 1996,  provisions for
loan losses  amounted to $13,000,  $113,000 and $1.4 million,  respectively.  At
December 31, 1998,  total  nonperforming  assets as a percentage of total assets
were .79% as compared to 1.69% at December 31, 1997. In addition,  nonperforming
assets  totaled $1.8 million at December 31, 1998 as compared to $3.3 million at
December 31, 1997. These measures reflect the highest level of credit quality in
the Company's  history as a public  company.  Based on the  favorable  trends in


                                       12
<PAGE>

nonperforming  assets  and the  coverage  of the  general  loan  loss  reserves,
management  considered the loan loss  allowance  sufficient to absorb losses and
provided for minimal  additional losses during the year ended December 31, 1998.
The lower  provision for loan losses  during 1997 as compared to 1996  reflected
the impact of the improvement in asset quality. In addition, a $329,000 recovery
on a loan guarantee during 1997 was used to increase the loan loss allowance.

         Although  management  utilizes  its  best  judgment  in  providing  for
possible  losses,  there can be no  assurance  that the Company will not have to
increase its  provision  for loan losses in the future as a result of unforeseen
changes in the portfolio. Any such increase could adversely affect the Company's
results  of  operations.  In  addition,  the  OTS,  as an  integral  part of its
regulatory examination process, periodically reviews the Company's allowance for
loan losses and the carrying value of its other  nonperforming  assets.  The OTS
may require the Company to recognize  additions to its  allowance  for losses on
loans and  allowance  for  losses on  foreclosed  properties  based on the OTS's
judgment  about  information  available  to it at the  time of its  examination.
However,  upon the completion of its safety and soundness examination during the
third  quarter  of  1998,  the OTS  did  not  require  any  adjustments  to loss
allowances.

         Noninterest   Income.   The  following  table  sets  forth  information
regarding noninterest income for the years ended December 31:
<TABLE>
<CAPTION>
                                                           1998             1997              1996
                                                           ----             ----              ----
         <S>                                            <C>               <C>             <C>        
         Loan servicing fees.........................   $1,222,478        $1,312,476      $ 1,665,768
         Mortgage banking income.....................      755,450           458,520          577,130
         Other service charges and fees..............      466,135           368,671          497,316
         Net gain (loss) on sales of:
              Securities.............................            -                 -          153,188
              Loans..................................            -            (1,458)      (1,018,185)
              Deposits...............................            -                 -        1,940,010
         Other.......................................      268,890           324,596          466,519
                                                        ----------        ----------      -----------
                                                        $2,712,953        $2,462,805      $ 4,281,746
                                                         =========         =========       ==========
</TABLE>

         Total noninterest income amounted to $2.7 million during the year ended
December 31, 1998, a $250,000 or 10.2% increase from the $2.5 million recognized
during the year ended December 31, 1997. However, noninterest income during 1997
included  (i) an  aggregate  gain of $97,000  on the sale of the  Bank's  former
Newport News and Portsmouth,  Virginia branch facilities,  which had been vacant
since the sale of related  deposits in September 1996 and (ii)  termination fees
approximating  $113,000  received in connection  with the  cancellation of Essex
Home's largest subservicing  client's contract effective May 31, 1997. Excluding
the  impact  of these  nonrecurring  transactions  in 1997,  noninterest  income
effectively  increased  $460,000 or 20.4%  during 1998 as a result of a $297,000
increase in mortgage banking income, a $97,000 increase in other service charges
and fees and a $154,000  increase in other noninterest  income.  The increase in
mortgage  banking  income  resulted  from the impact of the lower  interest rate
environment in 1998 on Essex First's production of residential loans sold in the
secondary  market.  The  increase in other  service  charges  and fees  occurred
primarily at the Bank in service  charges on deposit  accounts,  which reflected
the impact of a 19.1% growth in the number of deposit accounts.  The increase in
other  noninterest  income  resulted  from  higher  insurance   commissions  and
administrative fees at Essex Home, which has more than doubled its mortgage loan
subservicing portfolio during 1998.

         The  increases in  noninterest  income for the year ended  December 31,
1998 were partially offset by lower loan servicing fees during the first half of
1998  resulting from the  nonrenewal of a significant  subservicing  contract in
1997.  However,  new  contracts  negotiated  in 1998  provide  for  servicing  a
substantial  number  of  loans,  which  have  begun to  generate  servicing  and
ancillary  fee income in 1998 to  significantly  mitigate the impact of the lost
servicing volume in 1997.



                                       13
<PAGE>

         Total noninterest income amounted to $2.5 million during the year ended
December  31,  1997,  a $1.8  million or 42.5%  decrease  from the $4.3  million
recognized  during the year ended  December 31, 1996. As  previously  described,
noninterest  income  during  1997  included  $210,000  of  nonrecurring  income.
Noninterest income in 1996 included the gains on sales of securities,  deposits,
and premises and equipment, which totaled $2.3 million, associated with the sale
of the  Branches,  which were  partially  offset by a $1.0 million loss on loans
sold to  partially  fund the sale of the  Branches.  Exclusive of the impacts of
these  transactions  during 1997 and 1996, the effective  decline in noninterest
income during the year ended  December 31, 1997 was  $738,000.  This decline was
primarily   attributable  to  (i)  lower  loan  servicing  fees  resulting  from
fluctuations in loan servicing  volume  including the impact of the subservicing
contract cancellation effective May 31, 1997, (ii) lower mortgage banking income
resulting from fewer loans  originated for sale in the secondary market as Essex
First focused on expanding  its  construction  lending  programs and (iii) lower
service  charges  and  fees  resulting  primarily  from the  Bank's  sale of the
Branches during 1996.

         Noninterest   Expense.  The  following  table  sets  forth  information
regarding noninterest expense for the years ended December 31:
<TABLE>
<CAPTION>
                                                           1998             1997              1996
                                                           ----             ----              ----
         <S>                                            <C>               <C>            <C>         
         Salaries and employee benefits..............   $3,476,785        $3,788,695     $  4,554,540
         Net occupancy and equipment.................      954,804         1,084,593        1,470,284
         Deposit insurance premiums..................      497,081           478,684          674,730
         Amortization of intangible assets...........      503,148           530,707        7,011,288
         Service bureau fees.........................      513,826           461,217          599,207
         Professional fees...........................      296,295           349,218          507,031
         Foreclosed properties, net..................      150,461           182,880         (175,055)
         Other.......................................    1,464,473         1,087,362        1,713,958
                                                         ---------         ---------      -----------
                                                        $7,856,873        $7,963,356      $16,355,983
                                                         =========         =========       ==========
</TABLE>

         Total noninterest expense declined $1065,000 or 1.3% from $7.96 million
during the year ended  December 31, 1997 to $7.86 million  during the year ended
December 31, 1998.  Noninterest  expense as a percent of average assets was 3.8%
for 1998 as compared to 4.3% for 1997.  The  improvement  in this ratio reflects
the impact of asset growth coupled with cost containment.

         Salaries and employee  benefits  declined $312,000 or 8.2% during 1998.
This decrease  resulted  primarily from nonrecurring  personnel  expenses during
1997 for (i) a $136,500  severance  settlement  with the former  president of an
acquired savings  institution and its holding company and (ii) $498,000 of stock
option  compensation.  Excluding these nonrecurring  transactions,  salaries and
benefits  increased  $323,000 during 1998. This increase was  attributable to an
increase in total  full-time and part-time  employees from 99 as of December 31,
1997 to 119 as of December 31, 1998. The growth in personnel  positions occurred
as loan origination and servicing volumes increased.

         Net occupancy and equipment  expense declined  $130,000 or 12.0% during
1998.  This  decrease  reflected the impact of the Bank (i) opening a Bank-owned
retail bank branch in Suffolk,  Virginia, which had previously been located in a
leased facility and (ii) exercising a purchase option for the Richmond, Virginia
retail bank branch,  which had previously been a leased facility.  Occupancy and
equipment  expense  also  benefited  from  lower  depreciation  expense in 1998.
However, depreciation in future periods will reflect the impact of the Company's
investment in technology  enhancements such as the implementation of a wide area
network.

         Deposit insurance  premiums increased $18,000 or 3.8% during 1998. This
increase  reflects an increase in the deposit  assessment  base  resulting  from


                                       14
<PAGE>

deposit growth.  Refer to "Regulatory Capital" below for a discussion of matters
impacting the Company's  deposit  assessment  in the future.  Likewise,  service
bureau fees increased  $53,000 or 11.4% during 1998. This increase was primarily
attributable  to the increases in (i) loan servicing  volume from 8,400 loans at
December  31, 1997 to 15,100  loans at December  31, 1998 and (ii) the number of
deposit accounts, which increased 19.1% during 1998.

         Amortization of intangible assets declined $28,000 or 5.2% during 1998.
Notwithstanding  this  decrease,  amortization  during  1998  included a $54,000
increase in the MSR valuation allowance in order to reduce the carrying value of
the  Company's  MSRs to the  estimated  fair  value at  December  31,  1998.  No
assurance can be made that further  adjustments  to the MSR valuation  allowance
will not be required in future  periods if the lower  interest rate  environment
results  in the  acceleration  of  prepayment  activity  in  excess  of  current
expectations.

         Professional  fees declined $53,000 or 15.2% during 1998. This decrease
was attributable to nonrecurring  legal fees incurred in 1997 in connection with
a  severance  settlement  with  the  former  president  of an  acquired  savings
institution and its holding company.

         Foreclosed  properties  expense  declined $32,000 or 17.7% during 1998,
which was attributable to the decline in foreclosed properties from $1.5 million
at December 31, 1997 to $571,000 at December 31, 1998.

         The  significant  components  of the  increase  in other  miscellaneous
noninterest expense for the years ended December 31, 1998 and 1997 are presented
below and reflect the impact of the increase in the Company's  loan  origination
and servicing volumes and deposit levels on general operating expenses:
<TABLE>
<CAPTION>
                                                                                            Change
                                                   1998               1997            Amount      Percent
                                                   ----               ----            ------      -------
         <S>                                   <C>               <C>                  <C>          <C> 
         Loan expense.......................   $   211,092       $   150,457          $ 60,635     40.3
         Telephone..........................       249,770           175,474            74,296     42.3
         Postage and courier................       185,819           153,349            32,470     21.2
         Stationery and supplies............       115,111            99,545            15,566     15.6
         Advertising and marketing..........       198,399           155,654            42,745     27.5
         Corporate insurance................       100,630           116,882           (16,252)   (13.9)
         Officers life insurance............        30,692           (41,082)           71,774    100.0+
         Travel.............................        62,060            47,453            14,607     30.8
         Year 2000 readiness................        48,270               510            47,760     93.7
         Other..............................       262,630           229,120            33,510     14.6
                                                ----------        ----------          --------
                                                $1,464,473        $1,087,362          $377,111     34.7
                                                 =========         =========           =======
</TABLE>

         Total  noninterest  expense  amounted to $8.0  million  during the year
ended  December  31,  1997,  a decrease of $8.4  million or 51.3% from the $16.4
million  recognized  during the year ended  December 31,  1996.  The sale of the
Branches during 1996 had a pervasive impact on noninterest  expense. In addition
to the $5.9  million  write  down in the net asset  value of certain of the sold
Branches, total noninterest expense associated with the sold Branches, including
normal amortization of goodwill, approximated $1.7 million during the year ended
December  31, 1996.  In addition to the $7.6  million  impact of the sale of the
Branches on the decline in noninterest  expense during 1997,  there were further
decreases in (i) salaries and employee benefits resulting from the impact of the
Company's downsizing efforts, (ii) net occupancy and equipment expense resulting
from the relocation of the Company's  headquarters  to a smaller more economical
facility and (iii) deposit insurance  premiums resulting from the improvement in
the Bank's risk  classification  for  insurance  assessment  purposes.  The only
category  of  noninterest   expense  to  increase  during  1997  was  foreclosed
properties  expense,  which was attributable to nonrecurring gains recognized in
1996 in  connection  with the sale of the  Bank's  largest  foreclosed  property
consisting  originally of 2,554 acres of farmland  located in  Currituck,  North
Carolina and the sale of lots and  townhouse  pads  associated  with a townhouse
development in Richmond.



                                       15
<PAGE>

         The  significant  components  of the  decrease  in other  miscellaneous
noninterest expense for the years ended December 31, 1997 and 1996 are presented
below and reflect the impact of the sale of the Branches  during 1996 on general
operating expenses in 1997:
<TABLE>
<CAPTION>
                                                                                            Change
                                                   1997               1996            Amount      Percent
                                                   ----               ----            ------      -------
         <S>                                   <C>               <C>                 <C>          <C>   
         Loan expense.......................   $   150,457       $   280,041         $(129,584)   (46.3)
         Telephone..........................       175,474           225,599           (50,125)   (22.2)
         Postage and courier................       153,349           200,300           (46,951)   (23.4)
         Stationery and supplies............        99,545           131,572           (32,027)   (24.3)
         Advertising and marketing..........       155,654           185,191           (29,537)   (15.9)
         Corporate insurance................       116,882           182,009           (65,127)   (35.8)
         Travel.............................        47,453            76,301           (28,848)   (37.8)
         Provision for servicing losses.....        24,000            26,000            (2,000)    (7.7)
         Other..............................       164,548           406,945          (242,397)   (59.6)
                                                ----------        ----------          --------
                                                $1,087,362        $1,713,958         $(626,596)   (36.6)
                                                 =========         =========          ========
</TABLE>

         Provision For Income Taxes.  As a result of historical  losses prior to
1998,  the Company  accumulated  net  deferred  tax assets of $7.7 million as of
December 31, 1997,  the largest  component of which was the deferred tax benefit
of net operating  loss  carryforwards.  The Company had  established a valuation
allowance for the net deferred tax assets in their entirety because the ultimate
realization of the tax benefit within the carryforward  periods  available under
the tax law could not be assured.  This resulted in the recognition of no income
tax provision or benefit  during the years ended  December 31, 1997 and 1996. In
December 1998, however, the Company partially reduced the deferred tax valuation
allowance, thus recognizing a deferred tax asset of $550,000. This reduction was
predicated  upon the Company's  favorable  trends in actual and  projected  core
profitability.  Continuation  of these  favorable  trends in core  profitability
would support  further  reductions  in the deferred tax  valuation  allowance in
future  periods.  However,  there can be no  assurance  that these  trends  will
continue or that the net deferred tax assets will be  realized.  For  additional
information, refer to Note 14 of the Notes to Consolidated Financial Statements.


Market Risk Management

         The Bank, like other thrift institutions,  is vulnerable to an increase
in interest  rates to the extent  that  interest-bearing  liabilities  mature or
reprice more rapidly than  interest-earning  assets.  The lending  activities of
thrift  institutions,  including  the Bank,  have  historically  emphasized  the
origination  of long-term  loans secured by  single-family  residences,  and the
primary source of funds for such  institutions  has been  deposits.  The deposit
accounts  of thrift  institutions  largely  mature or are  subject to  repricing
within a short period of time.  This factor,  in  combination  with  substantial
investments in long-term  loans,  has  historically  caused the income earned by
thrift  institutions,  such as the Bank, on their loan portfolios to adjust more
slowly to changes in  interest  rates  than  their cost of funds.  While  having
liabilities that reprice more frequently than assets is generally  beneficial to
net  interest   income  in  times  of   declining   interest   rates,   such  an
asset/liability  mismatch  is  generally  unfavorable  during  periods of rising
interest rates. To reduce the effect of adverse changes in interest rates on its
operations, the Bank has implemented the asset and liability management policies
described below.

         The Bank has an Asset and Liability  Management Committee ("ALCO") that
meets  quarterly to structure  and price the Bank's  assets and  liabilities  in
order to maintain an acceptable  interest rate spread while reducing the effects


                                       16
<PAGE>

of changes in  interest  rates.  The ALCO  implements  and  maintains  asset and
liability  management  policies  designed  to better  match the  maturities  and
repricing  terms of the  Bank's  interest-earning  assets  and  interest-bearing
liabilities  in order to minimize the adverse  effects of material and prolonged
increases in interest rates on the Bank's  results of  operations.  The Bank may
undertake  a variety of  strategies  to reduce its  exposure  to  interest  rate
fluctuations,   including  (i)   emphasizing   investment   in   adjustable-rate
single-family  residential loans ("ARMs") or shorter-term (seven years or less),
fixed-rate single-family residential loans, (ii) selling longer-term (over seven
years),  fixed-rate  single-family  residential  loans in the secondary  market,
(iii) purchasing adjustable-rate  mortgage-backed  securities,  (iv) maintaining
higher liquidity by holding short-term  investments and cash equivalents and (v)
increasing the average  maturity of the Bank's  interest-bearing  liabilities by
utilizing  long-term  advances  and  attempting  to attract  longer-term  retail
deposits.

         The effect of interest rate changes on a financial institution's assets
and liabilities may be analyzed by examining the extent to which such assets and
liabilities  are "interest rate  sensitive"  and by monitoring an  institution's
interest  rate  sensitivity  "gap." An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that  time  period.  The  interest  rate  sensitivity  "gap" is  defined  as the
difference  between  interest-earning  assets and  interest-bearing  liabilities
maturing or repricing within a given time period.  A gap is considered  positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate  sensitive  liabilities.  A gap is  considered  negative when the amount of
interest rate sensitive  liabilities  exceeds  interest rate  sensitive  assets.
During a period  of  falling  interest  rates,  a  positive  gap  would  tend to
adversely affect net interest income,  while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest  income while
a negative gap would tend to affect net interest income adversely.

         The  following  table  presents  the  difference   between  the  Bank's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at December 31, 1998.  Data for this table was obtained from the FHLB
Interest  Rate Risk  Service  Sensitivity  Report,  adjusted in some cases where
management was able to use more detailed  information  than was available to the
FHLB. Using the Bank's Thrift Financial Report, which details scheduled maturity
and  interest  rates,  the FHLB  applies  asset  prepayment  rates  and  deposit
retention  rates which  management  believes to be reasonable in determining the
interest rate  sensitivity  gaps. This table does not  necessarily  indicate the
impact of general  interest  rate  movements on the Bank's net  interest  income
because  the  repricing  of  certain  assets  and   liabilities  is  subject  to
competition and other limitations.  As a result,  certain assets and liabilities
indicated as maturing or otherwise  repricing within a stated period may in fact
mature or reprice at different times and at different volumes. In addition,  the
following  table  presents  information  as of  December  31,  1998  and  is not
necessarily  indicative  of the Bank's  interest rate  sensitivity  at any other
time.





                              [intentionally blank]

                                       17
<PAGE>
<TABLE>
<CAPTION>


                                                   Anticipated Period Until Maturity or Repricing               
                                --------------------------------------------------------------------------------
                                    0 to       7 months      1-3         3-5        Over 5        Total     % of
                                  6 months     to 1 year    years       years        years       Balance    Total
                                  --------     ---------    -----       -----        -----       -------    -----
                                                             (dollars in thousands)
<S>                                <C>         <C>        <C>         <C>      <C>              <C>          <C>  
Interest-earning assets:
Loans receivable and
  mortgage-backed securities:
    First mortgage:
      Adjustable-rate              $27,662     $45,104    $  7,148    $ 13,445    $      -      $  93,359    43.7%
      Fixed-rate                     6,544       5,944      19,015      14,438      35,873         81,814    38.3
    Second mortgage                  3,462         511       1,562         992         809          7,336     3.4
    All other                        5,792         855       3,860       3,254         422         14,183     6.7
Investments                         16,116           -           -         750           -         16,866     7.9
                                    ------      ------     -------     -------     -------       --------  ------

    Total                           59,576      52,414      31,585      32,879      37,104       $213,558   100.0%
                                                                                                  =======   =====

Interest-bearing liabilities:
    Deposits                        58,429      65,731      37,407      13,500       9,262       $184,329    88.0%
    Fixed-rate borrowings            9,530       5,300       7,850           -           -         22,680    10.8
    Variable-rate borrowings         2,500           -           -           -           -          2,500     1.2
                                    ------      ------     -------     -------     -------       --------  ------

    Total                           70,459      71,031      45,257      13,500       9,262       $209,509   100.0%
                                                                                                  =======   =====

Effect of off-balance sheet
    items (1)                      (11,579)        664       3,244       1,497       6,176
                                    ------      ------     -------     -------     -------   

Maturity gap                      $(22,462)   $(17,953)   $(10,428)   $ 20,876     $34,018
                                   =======     =======     =======      ======      ======

Cumulative gap                    $(22,462)   $(40,415)   $(50,843)   $(29,967)   $  4,051
                                   =======     =======     =======     =======     =======

Cumulative gap as a percent
    of total assets                   (9.9)%     (17.9)%     (22.5)%     (13.3)%       1.8%
                                      ====       =====       =====       =====         ===

Cumulative ratio of interest-
    earning assets to interest-
    bearing liabilities               84.6%       79.2%       76.9%       88.1%      101.9%
                                      ====        ====        ====        ====       =====

(1)  Reflects  the effect of entering  into  commitments  with third  parties to
originate and sell loans.

         The  Bank's  one-year  interest  rate  sensitivity  gap  amounted  to a
negative  17.9% at December 31, 1998,  which  reflects the impact of  shortening
deposit  maturities as the Bank's deposit  customers are reluctant to enter into
extended  maturities in the current low interest rate environment.  The negative
gap also  reflects  near-term  maturities  of FHLB  advances.  The Company  will
benefit  from the lower  cost of funds as these  FHLB  advances  mature and will
consider  extended  maturities in order to mitigate the impact of an increase in
interest  rates  in  the  future.  While  the  Company  continues  to  emphasize
investment  in  adjustable-rate  loans,  customer  demand  for  such  loans  has
decreased as borrowers'  demand for fixed-rate  loans has increased.  Within the
spectrum  of  loan   products   offered  by  the  Bank,   balloon   payment  and
adjustable-rate loans with longer initial adjustment terms predominate.

         In addition to monitoring its interest rate  sensitivity  gap, the Bank
utilizes interest rate sensitivity analyses, as developed by the OTS, to measure
the changes in net  portfolio  value  ("NPV"),  expressed as a percentage of the
Bank's market value of assets,  assuming certain  percentage changes in interest
rates. NPV is the difference between incoming and outgoing discounted cash flows
from assets, liabilities,  and off-balance sheet contracts. The following tables
present the Bank's NPV at December 31, 1998 and 1997.


                                       18
<PAGE>

As of December 31, 1998
<CAPTION>
                                        Net Portfolio Value                      NPV as % of PV of Assets
     Change in             -------------------------------------------           ------------------------
  Interest Rates           $ Amount          $ Change         % Change           NPV Ratio        Change
  --------------           --------          --------         --------           ---------        ------
      +400bp               $  9,282           $(9,444)        (50.43)%            4.20%          (378)bp
      +300bp                 12,577            (6,149)        (32.84)             5.59           (239)bp
      +200bp                 15,392            (3,334)        (17.80)             6.72           (126)bp
      +100bp                 17,510            (1,216)         (6.49)             7.54            (44)bp
   Base Scenario             18,726                                               7.98
      -100bp                 19,198               472           2.52              8.12             14bp
      -200bp                 19,645               919           4.91              8.25             27bp
      -300bp                 20,570             1,844           9.85              8.55             57bp
      -400bp                 21,268             2,542          13.58              8.76             78bp

As of December 31, 1997
<CAPTION>

                                        Net Portfolio Value                      NPV as % of PV of Assets
     Change in             -------------------------------------------           ------------------------
  Interest Rates           $ Amount          $ Change         % Change           NPV Ratio        Change
  --------------           --------          --------         --------           ---------        ------
      +400bp               $  7,069          $(10,816)        (60.48)%            3.86%          (519)bp
      +300bp                 10,322            (7,563)        (42.29)             5.51           (353)bp
      +200bp                 13,407            (4,477)        (25.04)             7.01           (204)bp
      +100bp                 16,039            (1,846)        (10.32)             8.23            (81)bp
   Base Scenario             17,885                                               9.05
      -100bp                 18,779               894           5.00              9.41             36bp
      -200bp                 18,957             1,073           5.99              9.43             38bp
      -300bp                 19,395             1,510           8.44              9.57             52bp
      -400bp                 20,234             2,349          13.13              9.88             83bp
</TABLE>

         The ALCO has  established  limits for the impact of changes in interest
rates on NPV.  As of  December  31,  1998,  the  Bank is more at risk to  rising
interest rate  environments  than declining  interest rate  environments,  which
reflects the Bank's  liability-sensitive  position. As of December 31, 1998, the
Bank's  sensitivity of NPV was within internal policy limits,  which reflects an
improvement  over  December 31, 1997 when the Bank was outside its policy limits
for  increases  in  interest  rates  of  200  basis  points  or  more.  However,
computation of  prospective  effects of  hypothetical  interest rate changes are
based on many assumptions,  including  relative levels of market interest rates,
loan  prepayments  and  deposits  decay.  They  should  not be  relied  upon  as
indicative of actual  results.  Further,  the  computations  do not  contemplate
certain  actions  management  could undertake in response to changes in interest
rates.


Liquidity and Commitments

         Liquidity refers to the Company's  ability to generate  sufficient cash
to meet the funding needs of current loan demand,  deposit  withdrawals,  and to
pay  operating  expenses.  The Company  generally has no  significant  source of
income other than  dividends  from its  subsidiaries.  While the Company and the
Bank are not operating  under any supervisory  agreements,  the Bank must seek a
letter of  nonobjection  from the OTS prior to making  dividend  payments to the
holding company.

         All savings  associations  are  required  to maintain an average  daily
balance of liquid  assets  (including  cash,  certain time  deposits and savings
accounts, bankers' acceptances, certain government obligations and certain other
investments)  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
4%. The Bank has  consistently  exceeded such regulatory  liquidity  requirement
and, at December 31, 1998, had a liquidity ratio of 12.74%.



                                       19
<PAGE>

         The Bank monitors its liquidity in accordance with internal  guidelines
and  applicable  regulatory  requirements.  The  Bank's  need for  liquidity  is
affected by loan demand and net changes in deposit levels. The Bank can minimize
the cash required during the times of strong loan demand by modifying its credit
policies or reducing  its  marketing  efforts.  Liquidity  demand  caused by net
reductions  in deposits  are usually  caused by factors  over which the Bank has
limited  control.  The Bank  derives  its  liquidity  from both its  assets  and
liabilities.  Liquidity  is  derived  from  assets by receipt  of  interest  and
principal  payments  and  prepayments,  by the  ability to sell assets at market
prices and by  utilizing  assets as  collateral  for  borrowings.  Liquidity  is
derived from liabilities by maintaining a variety of funding sources,  including
deposits and advances from the FHLB.

         The Bank's liquidity  management is both a daily and long-term function
of funds management.  Liquidity is generally invested in short-term  investments
such as federal funds sold,  certificates of deposit,  and in U.S.  Treasury and
U.S.  Government agency  securities.  If the Bank requires funds which cannot be
generated internally,  borrowings from the FHLB may provide an additional source
of funds.  At  December  31,  1998,  the Bank had $24.9  million in  outstanding
borrowings  from the FHLB.  The Bank has not relied upon brokered  deposits as a
source of new  liquidity,  and does not  anticipate a change in this practice in
the foreseeable future.

         The Bank  anticipates  that it will have sufficient  funds available to
meet  its  current  loan  commitments.  At  December  31,  1998,  the  Bank  had
outstanding  commitments  (including unused lines of credit) to originate and/or
purchase  mortgage  and  non-mortgage  loans of $4.7  million.  The  undisbursed
portions  of  construction  builder  loans and  construction/permanent  loans in
process totaled $6.2 million and $10.1 million, respectively, as of December 31,
1998.  Certificates  of deposit  which are  scheduled to mature  within one year
totaled $94.1 million at December 31, 1998,  and  borrowings  from the FHLB that
are scheduled to mature within the same period amounted to $17.3 million.


Regulatory Capital

         The Bank is required  pursuant to the  Financial  Institutions  Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and OTS regulations  promulgated
thereunder to have (i) tangible  capital equal to 1.5% of adjusted total assets,
(ii) core or leverage capital equal to 3.0% of adjusted total assets,  and (iii)
total capital equal to 8.0% of  risk-weighted  assets.  As of December 31, 1998,
the Bank's tangible and core capital  amounted to 6.97% of adjusted total assets
and the Bank's total  capital  amounted to 13.09% of  risk-weighted  assets and,
consequently,  the Bank was in compliance  with its core and risk-based  capital
requirements as of such date.

         Furthermore,   the  federal   regulations  under  the  Federal  Deposit
Insurance   Corporation  ("FDIC")  Improvement  Act  of  1991  classify  savings
institutions  based on four  separate  requirements  of  specified  capital as a
percent of the  appropriate  asset  base:  tangible  equity,  Tier I or leverage
capital,  Tier I risk-based  capital,  and total risk-based capital. At December
31, 1998,  the Bank's Tier I, Tier I risk-based,  and total  risk-based  capital
ratios were 6.97%,  12.12%,  and 13.09%,  respectively,  compared to the minimum
capital  standards to be "well  capitalized"  under the FDIC  Improvement Act of
1991 ("FDICIA") of =>5%, =>6%, and =>10%, respectively.  As a result, the dollar
amount of the excess in the Bank's  Tier I, Tier I  risk-based,  and  risk-based
regulatory  capital under FDICIA  totaled $4.5 million,  $8.1 million,  and $4.1
million, respectively, at December 31, 1998.

         Deposits of the Bank are currently  insured by the Savings  Association
Insurance Fund ("SAIF").  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


                                       20
<PAGE>

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 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  assessments  through  1999  at the
assessment  rate  schedule  in  effect  as of June 30,  1995.  Therefore,  as of
December 31, 1998,  the Bank's annual  assessment  for deposit  insurance was 26
basis  points of insured  deposits as opposed to three  basis  points of insured
deposits (the assessment rate otherwise in effect for "well capitalized" savings
institutions). In addition, insured depository institutions began paying in 1997
a portion of the  interest due annually on the  Financing  Corporation  ("FICO")
bonds  issued in the 1980s to  provide  funding  for the SAIF.  Accordingly,  an
additional  assessment  approximating  6.1 basis  points is added to the regular
SAIF-assessment  until  December  31,  1999 in order to cover FICO debt  service
payments.

         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. The merger of the
SAIF  and BIF did not  occur  on such  date  as  there  continue  to be  savings
associations.  Such a merger of the SAIF and the BIF may occur in the  future if
legislation  containing  such a provision is enacted.  If legislation is enacted
which requires 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.


Year 2000 Readiness

         As previously reported, the Company has established a company-wide task
force to assess and remediate business risks associated with the Year 2000. This
task force has developed and implemented a seven-phase Year 2000 plan consisting
of the following components:

o    Awareness -  communication  of the Year 2000 issue  throughout the Company,
     including the Company's board of directors and senior management;

o    Assessment -  development  of  inventories  and analysis and  evaluation of
     hardware, software, services, forms, agencies and business partnerships and
     the   assignment   of  rankings  of  business   risk  (the  highest   being
     "mission-critical") associated with each;

o    Planning -  development  of  comprehensive  strategies  and  timelines  for
     correcting   non-compliant   items,   testing  and   documenting   results,
     implementing  and  migrating  enhancements  and  monitoring  implementation
     results;

o    Renovation - implementation  of the required software and hardware changes,
     systems and interface modifications and conversions to replacement systems;



                                       21
<PAGE>

o    Validation - completion of formal unit, system and integration  testing and
     documentation of results;

o    Implementation  - integration of all corrected and validated items into the
     production environment;

o    Post-Implementation - monitoring  implementation  results and responding to
     situations that invalidate corrections as implemented.

         The Company has completed the awareness, assessment and planning phases
of its  Year  2000  plan  and is  now  proceeding  with  the  renovation  phase.
Substantially  all  reprogramming  and  replacement  efforts  were  complete  by
December 31, 1998. Because the Company outsources  substantially all of its data
processing for loans,  deposits and loan servicing,  a significant  component of
the Year 2000 plan  entails  working with  external  vendors to test and certify
their  systems  as Year  2000  compliant.  The  Company  plans to  complete  its
validation of  mission-critical  internal and external systems and operations by
March 31, 1999.  Concurrently with the readiness  measures  described above, the
Company is  developing  contingency  plans  intended  to mitigate  the  possible
disruption in business operations that may result from the Year 2000 issue.

         The total cost of the Year 2000 project (including the capitalized cost
of new hardware and software approximating $280,000) is estimated to be $350,000
and is being funded through operating cash flows. This estimate does not include
any costs associated with the  implementation of contingency plans, which are in
the process of being  developed.  Most of the  capitalized  costs are associated
with  technology  changes  that will  enhance the  Company's  ability to provide
competitive  services.  During the year ended  December  31,  1998,  the Company
recognized $48,000 of expense associated with this project. This amount does not
include the implicit costs  associated  with the  reallocation of internal staff
hours to the Year 2000 project.  Management  believes the Company can incur Year
2000  project  costs  without  adversely  affecting  future  operating  results.
However, because of the complexity of the issue and possible unidentified risks,
actual costs may vary from the estimate.  Furthermore,  the Year 2000 compliance
status of integral  third party  suppliers and networks,  which could  adversely
impact the Company's mission critical applications,  cannot be fully known. As a
result,  the  Company  is  unable  to  determine  the  impact  that  any  system
interruption  would have on its results of  operations,  financial  position and
cash flows. However, such impact could be material.

         Inability to reach  substantial  Year 2000  compliance in the Company's
systems and  integral  third  party  systems  could  result in  interruption  of
telecommunications services, interruption or failure of the Company's ability to
service  customers,  failure of  operating  and other  information  systems  and
failure of certain date-sensitive  equipment. Such failures could result in loss
of  revenue  due to service  interruption,  delays in the  Company's  ability to
service its customers  accurately and timely and increased  expenses  associated
with  stabilization  of  operations  following  such  failures or  execution  of
contingency plans.


Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

         The above discussion contains certain  forward-looking  statements that
involve  potential risks and  uncertainties.  The Company's future results could
differ  materially from those discussed  herein.  Readers should not place undue
reliance on these  forward-looking  statements,  which are applicable only as of
the date hereof.



                                       22
<PAGE>

Quarterly Results of Operations

         Quarterly  unaudited  financial  data for the years ended  December 31,
1998 and 1997 is presented below (in thousands, except per share data). The most
significant  factor impacting  operating  results for the fourth quarter of 1998
was the recognition of a $550,000 income tax benefit for the partial reversal of
the deferred tax valuation  allowance based on favorable trends in the Company's
actual and projected core profitability.
<TABLE>
<CAPTION>

                                                                    Year Ended December 31, 1998           
                                                 --------------------------------------------------------------
                                                    1st                 2nd             3rd               4th
                                                  Quarter             Quarter         Quarter           Quarter
                                                  -------             -------         -------           -------

         <S>                                        <C>                <C>              <C>             <C>
         Net interest income                        $1,385             $1,425           $1,407          $1,435
         Provision for loan losses                       -                  -                -              13
                                                    ------             ------           ------          ------
         Net interest income after
           provision for loan losses                 1,385              1,425            1,407           1,422
         Noninterest income                            552                619              765             776
         Noninterest expenses                        1,839              1,907            2,014           2,097
                                                    ------             ------           ------          ------
         Income before provision for
            (benefit from) income taxes                 98                137              158             101
         Provision for (benefit from)
            income taxes                                 -                  -               29            (547)
                                                    ------             ------           ------          ------
         Net income                                 $   98             $  137           $  129          $  648
                                                    ======             ======           ======          ======

         Basic and diluted net income
           (loss) available to common
           stockholders                             $ (335)            $ (304)          $ (321)         $  182
                                                    ======             ======           ======          ======
         Net income (loss) per common share:
              Basic                                 $ (.32)            $ (.29)          $ (.30)         $  .17
                                                    ======             ======           ======          ======
              Diluted                               $ (.32)            $ (.29)          $ (.30)         $  .04
                                                    ======             ======           ======          ======
         Weighted average shares
           outstanding:
              Basic                                  1,058              1,059            1,059           1,060
                                                     =====              =====            =====           =====
              Diluted                                1,058              1,059            1,059           5,030
                                                     =====              =====            =====           =====
<CAPTION>

                                                                    Year Ended December 31, 1997           
                                                 --------------------------------------------------------------
                                                    1st                 2nd             3rd               4th
                                                  Quarter             Quarter         Quarter           Quarter
                                                  -------             -------         -------           -------

         Net interest income                        $1,212             $1,367           $1,353          $1,385
         Provision for loan losses                     (22)               107               30              (1)
                                                    ------             ------           ------          ------
         Net interest income after
           provision for loan losses                 1,234              1,260            1,323           1,386
         Noninterest income                            603                806              521             532
         Noninterest expenses                        1,819              1,676            2,335           2,131
                                                    ------             ------           ------          ------
         Net income (loss)                          $   18             $  390           $ (491)         $ (213)
                                                    ======             ======           ======          ======
         Basic and diluted net loss
           available to common
           stockholders                             $ (378)            $  (14)          $ (903)         $ (638)
                                                    ======             ======           ======          ======
         Basic and diluted net loss
           per common share                         $ (.36)            $ (.01)          $ (.85)         $ (.60)
                                                    ======             ======           ======          ======
         Basic and diluted weighted
           average shares outstanding                1,053              1,055            1,057           1,058
                                                     =====              =====            =====           =====

</TABLE>

                                       23
<PAGE>

       Report of Independent Accountants


       To the Board of Directors and
       Shareholders of Essex Bancorp, Inc.

       In our opinion,  the  accompanying  consolidated  balance  sheets and the
       related consolidated  statements of operations,  of shareholders' equity,
       and of cash flows present fairly, in all material respects, the financial
       position of Essex Bancorp, Inc. and its subsidiaries at December 31, 1998
       and 1997,  and the results of their  operations  and their cash flows for
       each of the  three  years in the  period  ended  December  31,  1998,  in
       conformity with generally accepted accounting principles. These financial
       statements  are  the  responsibility  of the  Company's  management;  our
       responsibility  is to express an  opinion on these  financial  statements
       based on our  audits.  We  conducted  our audits of these  statements  in
       accordance with generally  accepted auditing standards which require that
       we plan and  perform  the  audit to  obtain  reasonable  assurance  about
       whether the financial  statements are free of material  misstatement.  An
       audit  includes  examining,  on a test  basis,  evidence  supporting  the
       amounts  and  disclosures  in the  financial  statements,  assessing  the
       accounting  principles used and significant estimates made by management,
       and evaluating the overall financial statement  presentation.  We believe
       that our audits  provide a  reasonable  basis for the  opinion  expressed
       above.


       PricewaterhouseCoopers LLP

       Virginia Beach, Virginia



       February 19, 1999


                                       24
<PAGE>
<TABLE>

                                     ESSEX BANCORP, INC. AND SUBSIDIARIES
                                         CONSOLIDATED BALANCE SHEETS
                                          December 31, 1998 and 1997
<CAPTION>

                                                                                    1998            1997
                                                                                    ----            ----
ASSETS
<S>                                                                           <C>             <C>
    Cash..................................................................... $    5,315,805  $    2,023,197
    Interest-bearing deposits................................................     11,314,478       6,261,686
    Federal funds sold and securities purchased under agreements to resell...      1,314,397       2,748,000
                                                                               -------------   -------------
             Cash and cash equivalents.......................................     17,944,680      11,032,883
    Federal Home Loan Bank stock.............................................      1,548,800       1,431,000
    Securities available for sale - cost approximates market.................         18,406          17,451
    Securities held for investment - market value of $2,704,000 in 1998
      and $2,217,000 in 1997.................................................      2,750,089       2,299,120
    Mortgage-backed securities held for investment - market value of
      $1,454,000 in 1998 and $1,886,000 in 1997..............................      1,455,738       1,904,989
    Loans, net of allowance for loan losses of $1,845,000 in 1998 and
      $2,382,000 in 1997.....................................................    192,667,763     167,440,733
    Loans held for sale......................................................      4,486,271       2,165,074
    Mortgage servicing rights................................................        831,197       1,169,766
    Foreclosed properties, net...............................................        571,294       1,511,629
    Accrued interest receivable..............................................      1,250,349       1,196,980
    Excess of cost over net assets acquired, less accumulated
      amortization of $2,140,000 in 1998 and $2,078,000 in 1997..............         97,692         159,754
    Advances for taxes, insurance, and other.................................      1,572,225         633,053
    Premises and equipment, net..............................................      3,183,577       1,926,729
    Other assets.............................................................      2,661,487       2,198,598
                                                                               -------------   -------------
             Total Assets....................................................   $231,039,568    $195,087,759
                                                                                 ===========     ===========



                                                     (Continued)


                                                     25
<PAGE>

                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                      CONSOLIDATED BALANCE SHEETS (continued)
                                            December 31, 1998 and 1997
<CAPTION>

                                                                                    1998            1997
                                                                                    ----            ----
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
    Deposits:
      Noninterest-bearing....................................................  $  16,791,063  $    5,055,545
      Interest-bearing.......................................................    170,841,193     148,871,154
                                                                                 -----------     -----------
             Total deposits..................................................    187,632,256     153,926,699
    Federal Home Loan Bank advances..........................................     24,908,333      23,546,667
    Notes payable............................................................              -          72,102
    Capital lease obligations................................................        268,123         331,970
    Other liabilities........................................................      2,395,768       2,393,814
                                                                               -------------   -------------
             Total Liabilities...............................................    215,204,480     180,271,252

COMMITMENTS AND CONTINGENCIES (Notes 8, 10 and 15)

SHAREHOLDERS' EQUITY
    Series B preferred stock, $6.67 stated value (Note 18):
      Authorized shares - 2,250,000
      Issued and outstanding shares - 2,125,000 in 1998 and 1997.............     14,173,750      14,173,750
    Series C preferred stock, $6.67 stated value (Note 18):
      Authorized shares - 125,000
      Issued and outstanding shares - 125,000 in 1998 and 1997...............        833,750         833,750
    Common stock, $.01 par value:
      Authorized  shares - 20,000,000 in 1998 and  10,000,000 in 1997 
      Issued and outstanding shares - 1,060,642 in 1998 and 1,058,136
         in 1997.............................................................         10,606          10,581
    Additional paid-in capital...............................................      8,687,772       8,681,739
    Accumulated deficit......................................................     (7,870,790)     (8,883,313)
                                                                                ------------    ------------
             Total Shareholders' Equity......................................     15,835,088      14,816,507
                                                                                ------------    ------------
             Total Liabilities and Shareholders' Equity......................   $231,039,568    $195,087,759
                                                                                 ===========     ===========




                               See notes to consolidated financial statements.


                                                     26
<PAGE>

                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                For the years ended December 31, 1998, 1997 and 1996
<CAPTION>

                                                                1998                1997             1996
                                                                ----                ----             ----
INTEREST INCOME
    Loans, including fees............................         $14,608,478        $13,588,215     $17,881,529
    Federal funds sold and securities purchased
      under agreements to resell.....................             111,054            150,972         319,298
    Investment securities, including dividend
      income.........................................             226,042            353,957         615,429
    Mortgage-backed securities.......................             121,643            124,515         497,879
    Other............................................             362,943            329,846         558,139
                                                              -----------        -----------     -----------
             Total Interest Income...................          15,430,160         14,547,505      19,872,274
                                                              -----------        -----------     -----------

INTEREST EXPENSE
    Deposits ........................................           8,491,101          7,679,314      11,945,273
    Federal Home Loan Bank advances..................           1,229,741          1,473,949       1,625,574
    Notes payable....................................                 792              9,079          10,750
    Subordinated capital notes.......................                   -                  -          52,444
    Other............................................              56,858             67,793         130,297
                                                              -----------        -----------     -----------
             Total Interest Expense..................           9,778,492          9,230,135      13,764,338
                                                              -----------        -----------     -----------

             Net Interest Income.....................           5,651,668          5,317,370       6,107,936
PROVISION FOR LOAN LOSSES............................              12,699            113,467       1,410,710
                                                              -----------        -----------     -----------

             Net Interest Income After
             Provision for Loan Losses...............           5,638,969          5,203,903       4,697,226

NONINTEREST INCOME
    Loan servicing fees..............................           1,222,478          1,312,476       1,665,768
    Mortgage banking income, including
      gain on sale of loans..........................             755,450            458,520         577,130
    Other service charges and fees...................             466,135            368,671         497,316
    Net gain (loss) on sale of:
      Securities.....................................                   -                  -         153,188
      Loans..........................................                   -             (1,458)     (1,018,185)
      Deposits.......................................                   -                  -       1,940,010
    Other............................................             268,890            324,596         466,519
                                                              -----------        -----------     -----------
             Total Noninterest Income................           2,712,953          2,462,805       4,281,746
                                                              -----------        -----------     -----------



                                                     (Continued)


                                                     27
<PAGE>
                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
                                For the years ended December 31, 1998, 1997 and 1996
<CAPTION>

                                                                   1998              1997            1996
                                                                   ----              ----            ----
NONINTEREST  EXPENSE
    Salaries and employee benefits...................           3,476,785          3,788,695       4,554,540
    Net occupancy and equipment......................             954,804          1,084,593       1,470,284
    Deposit insurance premiums.......................             497,081            478,684         674,730
    Amortization of intangible assets................             503,148            530,707       7,011,288
    Service bureau fees..............................             513,826            461,217         599,207
    Professional fees................................             296,295            349,218         507,031
    Foreclosed properties, net.......................             150,461            182,880        (175,055)
    Other............................................           1,464,473          1,087,362       1,713,958
                                                              -----------        -----------      ----------
             Total Noninterest Expense...............           7,856,873          7,963,356      16,355,983
                                                              -----------        -----------      ---------- 

             Income (Loss) Before Income Taxes.......             495,049           (296,648)     (7,377,011)

NET BENEFIT FROM INCOME TAXES........................            (517,474)                 -               -
                                                              -----------        -----------      ---------- 

             Net Income (Loss).......................        $  1,012,523       $   (296,648)    $(7,377,011)
                                                              ===========        ===========      ==========


    Net Loss Available to Common
      Shareholders (Note 4)..........................        $   (777,204)       $(1,932,136)    $(8,823,879)
                                                              ===========         ==========      ==========

    Basic and Diluted Loss Per Common
      Share (Note 4).................................               $(.73)            $(1.83)         $(8.39)
                                                                     ====              =====           =====



                               See notes to consolidated financial statements.


                                                     28
<PAGE>

                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                               For the years ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                          Series B       Series C                                      
                                            Common        Preferred      Preferred       Additional                    
                                          Stock, $.01   Stock, $6.67   Stock, $6.67        Paid-in       Accumulated   
                                           Par Value    Stated Value   Stated Value        Capital         Deficit     
                                           ---------    ------------   ------------        -------         -------     
Balance, January 1, 1996..................  $10,497     $14,173,750       $833,750       $8,667,135      $(1,209,654)
Common stock issued under the
   Employee Stock Purchase Plan...........       37               -              -            7,198                -
Comprehensive loss (Note 3):
   Net loss...............................        -               -              -                -       (7,377,011)  
   Other comprehensive loss:
      Reclassification adjustment for
         gains on securities available for
         sale included in net loss........        -               -              -                -                -   
   Total comprehensive loss...............         -                 -            -               -                -   
                                            -------     -----------       --------       ----------      -----------   

Balance December 31, 1996.................   10,534      14,173,750        833,750        8,674,333       (8,586,665)  
Common stock issued under the
   Employee Stock Purchase Plan...........       47               -              -            7,406                -   
Comprehensive net loss....................         -                 -            -               -         (296,648)  
                                            -------     -----------       --------       ----------      -----------

Balance, December 31, 1997................   10,581      14,173,750        833,750        8,681,739       (8,883,313)
Common stock issued under the
   Employee Stock Purchase Plan...........       25               -              -            6,033                -
Comprehensive net income..................         -                 -            -               -        1,012,523
                                            -------     -----------       --------       ----------      -----------

Balance, December 31, 1998................  $10,606     $14,173,750       $833,750       $8,687,772      $(7,870,790)
                                             ======      ==========        =======        =========       ==========
<CAPTION>
                                                Accumulated
                                                   Other
                                               Comprehensive
                                               Income (Loss)       Total
                                               -------------       -----
Balance, January 1, 1996.................        $154,174       $22,629,652
Common stock issued under the
   Employee Stock Purchase Plan..........               -             7,235
Comprehensive loss (Note 3):
   Net loss..............................               -
   Other comprehensive loss:
      Reclassification adjustment for
         gains on securities available fo
         sale included in net loss.......        (154,174)
   Total comprehensive loss..............               -        (7,531,185)
                                                 --------       -----------

Balance December 31, 1996................               -        15,105,702
Common stock issued under the
   Employee Stock Purchase Plan..........               -             7,453
Comprehensive net loss...................               -          (296,648)
                                                 --------       -----------

Balance, December 31, 1997...............               -        14,816,507
Common stock issued under the
   Employee Stock Purchase Plan..........               -             6,058
Comprehensive net income.................               -         1,012,523
                                                 --------       -----------

Balance, December 31, 1998...............        $      -       $15,835,088
                                                  =======        ==========

                               See notes to consolidated financial statements.

                                                     29

<PAGE>

                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                               For the years ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                                       1998               1997           1996
                                                                       ----               ----           ----
OPERATING ACTIVITIES
    Net income (loss).........................................    $  1,012,523     $     (296,648) $  (7,377,011)
    Adjustments to reconcile net income (loss) to cash
      provided by (used in) operating activities:
      Provision for:
           Losses on loans, foreclosed properties, and
               servicing......................................         163,038            296,808      1,415,365
           Depreciation and amortization of premises
               and equipment..................................         368,838            419,829        538,561
           Amortization (accretion) of:
               Premiums and discounts on loans, investments
                 and mortgage-backed securities...............         130,161             77,038        211,642
               Mortgage servicing rights......................         441,087            468,647        528,444
               Excess of costs over net assets acquired.......          62,062             62,061      6,482,843
               Other..........................................               -                  -        (94,399)
      Mortgage banking activities:
           Proceeds from loan sales...........................      63,636,477         40,717,559     56,311,191
           Loan originations and purchases....................     (65,277,646)       (39,725,806)   (54,961,912)
           Realized gains from sale of loans..................        (680,028)          (414,902)      (548,744)
      Realized (gains) and losses from sales of:
           Mortgage-backed securities available for sale......               -                  -       (153,188)
           Loans..............................................               -              1,458      1,018,185
           Deposits...........................................               -                  -     (1,940,011)
           Other..............................................         (70,377)          (185,283)      (599,062)
      Changes in operating assets and liabilities exclusive 
           of business acquisitions:
           Accrued interest receivable........................         (53,369)           (49,047)     1,000,846
           Advances for taxes, insurance and other............        (963,172)           133,875       (214,597)
           Other assets.......................................        (462,889)          (647,246)       539,749
           Other liabilities..................................           2,666            453,828        483,325
                                                                   -----------       ------------   ------------
    Net cash provided by (used in) operating activities.......      (1,690,629)         1,312,171      2,641,227
                                                                   -----------       ------------   ------------



                                                    (Continued)

                                                     30
<PAGE>


                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                 CONSOLIDATED    STATEMENTS    OF   CASH   FLOWS
                               (continued)  For the  years  ended  December  31,
                                                1998, 1997 and 1996
<CAPTION>

                                                                       1998              1997             1996
                                                                       ----              ----             ----
INVESTING ACTIVITIES
    Purchase of certificates of deposit in other
        financial institutions................................      (4,000,000)        (5,000,000)   (17,000,000)
    Proceeds from maturities of certificates of deposit
        in other financial institutions.......................       4,000,000          5,000,000     17,000,000
    Purchase of Federal Home Loan Bank stock..................        (117,800)           (95,800)             -
    Redemption of Federal Home Loan Bank stock................               -          1,204,800      1,062,800
    Purchase of securities held to maturity...................        (750,023)          (298,406)    (1,020,625)
    Proceeds from maturities of securities held to maturity...         300,000          4,000,000      3,000,000
    Purchase of securities available for sale.................            (955)        (2,508,289)    (5,165,516)
    Proceeds from sale of securities available for sale.......               -          2,500,000      6,650,000
    Principal remittances on mortgage-backed securities.......         448,012                  -              -
    Principal remittances on mortgage-backed securities
        available for sale....................................               -                  -        990,065
    Proceeds from sales of mortgage-backed securities
        available for sale....................................               -                  -     10,068,189
    Purchases of loans........................................     (35,514,557)       (22,224,143)             -
    Proceeds from sales of loans..............................               -                  -    117,509,060
    Net (increase) decrease in net loans......................       9,550,071         (1,428,880)     1,834,572
    Proceeds from sales of foreclosed properties..............       1,547,763          2,146,555      5,270,509
    Additions to foreclosed properties........................         (69,026)          (358,419)      (174,753)
    Increase in mortgage servicing rights.....................        (102,518)          (289,253)      (243,297)
    Purchase of premises and equipment........................      (1,625,686)          (388,145)      (197,281)
    Proceeds from sales of premises and equipment.............             525            601,714      1,414,705
                                                                   -----------        -----------    -----------
    Net cash provided by (used in) investing activities.......     (26,334,194)       (17,138,266)   140,998,428
                                                                   -----------        -----------    -----------

FINANCING ACTIVITIES
    Net increase in NOW and savings deposits..................      15,179,844         13,305,806      4,898,050
    Net increase in certificates of deposit...................      18,525,713          9,587,515     10,211,469
    Proceeds from Federal Home Loan Bank advances.............      46,000,000         25,500,000      4,000,000
    Repayment of Federal Home Loan Bank advances..............     (44,638,334)       (27,643,333)    (8,143,333)
    Payments on notes payable.................................         (72,102)           (24,040)       (24,061)
    Payments on capital lease obligation......................         (63,847)           (53,281)       (39,705)
    Repayments of mortgages payable on foreclosed
       properties.............................................               -            (10,391)       (25,258)
    Redemption of Settlement Preferred Stock..................            (712)            (6,002)      (103,385)
    Common stock issued under the Employee Stock
       Purchase Plan..........................................           6,058              7,453          7,235
    Decrease in deposits attributable to branch sales:
       NOW and savings deposits...............................               -                  -    (18,937,078)
       Certificates of deposit................................               -                  -   (144,669,198)
    Redemptions of subordinated notes.........................               -                  -       (627,858)
                                                                   -----------        -----------   ------------
    Net cash provided by (used in) financing activities.......      34,936,620         20,663,727   (153,453,122)
                                                                   -----------        -----------   ------------

       Increase (decrease) in cash and cash equivalents.......       6,911,797          4,837,632     (9,813,467)
       Cash and cash equivalents at beginning of period.......      11,032,883          6,195,251     16,008,718
                                                                   -----------      ------------- --------------

       Cash and cash equivalents at end of period.............    $ 17,944,680       $ 11,032,883$     6,195,251
                                                                   ===========        =========== ==============



                                                     (Continued)


                                                     31
<PAGE>


                                     ESSEX BANCORP, INC. AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (continued) For the years ended December 31,
                                             1998, 1997 and 1996
<CAPTION>

                                                                       1998              1997             1996
                                                                       ----              ----             ----
NONCASH INVESTING AND FINANCING ACTIVITIES
    Transfer from loans to foreclosed properties..............    $    594,888       $  1,294,615  $   1,865,227
    Termination of Essex Mortgage Trust I REMIC...............               -                  -      2,678,222
    Increase (decrease) in mortgages payable on
        foreclosed properties.................................               -                  -         10,391

SUPPLEMENTAL CASH FLOW INFORMATION 
    Cash paid (received) during the year for:
        Interest..............................................    $  9,827,556       $  9,199,677   $ 13,814,733
        Income taxes, net of refunds..........................          29,526                  -       (109,244)

</TABLE>


                               See notes to consolidated financial statements.


                                                     32
<PAGE>

                      ESSEX BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 1998, 1997 and 1996


NOTE 1 - ORGANIZATION

Essex Bancorp, Inc. ("EBI") is a Delaware corporation that was formed in 1994 to
be the single  thrift  holding  company  for Essex  Savings  Bank,  F.S.B.  (the
"Bank"), a federally-chartered  savings bank which at December 31, 1998 operates
(i) four retail banking branches located in North Carolina and Virginia and (ii)
Essex First, a division of the Bank ("Essex First"), that engages principally in
the  origination and sale of residential  mortgage loans.  EBI's other principal
operating  subsidiary  is Essex  Home  Mortgage  Servicing  Corporation  ("Essex
Home"), a majority-owned subsidiary of the Bank that is engaged primarily in the
servicing of mortgage loans owned by the Bank,  governmental agencies, and third
party investors.  Essex Mortgage Corporation ("EMC") is also a subsidiary of EBI
that was formerly  engaged in mortgage  banking  activities and, at December 31,
1998, held loans and other assets as a result of its past activities.


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The consolidated  financial statements include the
accounts of EBI and its subsidiaries (collectively, the "Company").  Significant
intercompany accounts and transactions have been eliminated in consolidation.

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

Cash and Cash Equivalents:  Cash equivalents include interest-bearing  deposits,
federal  funds  sold  and  securities  purchased  under  agreements  to  resell.
Generally,  federal  funds sold and  securities  purchased  under  agreements to
resell are purchased for one-day periods.  Securities purchased under agreements
to  resell  are  purchased  from  a  commercial  bank  and   collateralized   by
mortgage-backed   securities   issued  by  the  Government   National   Mortgage
Association ("Ginnie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie
Mac"), or the Federal National Mortgage Association ("Fannie Mae").

Investments   and   Mortgage-Backed   Securities:   Investment   securities  and
mortgage-backed   securities  are  classified  upon   acquisition  as  held  for
investment  or  available  for sale.  Those  securities  designated  as held for
investment  are  carried at cost  adjusted  for  amortization  of  premiums  and
accretion of discounts.  Interest income, including amortization of premiums and
accretion of  discounts,  is  recognized  by the interest  method,  adjusted for
effects of changes in prepayments and other assumptions.

Those securities designated as available for sale are carried at fair value, and
unrealized  gains and losses are reported as a component of other  comprehensive
income within shareholders' equity. If securities are sold, the adjusted cost of
the specific  security sold is used to compute the gain or loss on the sale. The
market value of securities  available for sale is based upon valuations obtained
from brokers and their market analyses and management estimates.



                                       33
<PAGE>

Derivatives: On June 15, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133 - Accounting
for Derivative  Instruments  and Hedging  Activities  ("SFAS 133").  SFAS 133 is
effective for all fiscal  quarters of all fiscal years  beginning after June 15,
1999  (January 1, 2000 for the Company).  SFAS 133 requires that all  derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current  earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction.  The Company's
management  anticipates that, due to its limited use of derivative  instruments,
the  adoption of SFAS 133 will not have a  significant  effect on its results of
operations or its financial position.

Loans and  Foreclosed  Properties:  Loans held for  investment are stated at the
principal amount outstanding with adjustments for related premiums or discounts,
net deferred loan fees,  participations  sold, and an allowance for loan losses.
The allowance for loan losses is  maintained to absorb  potential  losses in the
loan portfolio.  Management's  determination of the adequacy of the allowance is
based on an  evaluation of the  portfolio,  past loan loss  experience,  current
economic conditions,  volume, growth and composition of the loan portfolio,  and
other relevant factors. The allowance is increased by provisions for loan losses
charged  against  income.  Actual future  losses may differ from  estimates as a
result of unforeseen events.

SFAS No. 114 - Accounting by Creditors  for  Impairment of a Loan, as amended by
SFAS 118 - Accounting by Creditors for  Impairment of a Loan-Income  Recognition
and Disclosures, requires certain loans to be adjusted for impairment. A loan is
impaired when, based on current  information and events, it is probable that the
Company  will be  unable to  collect  all  contractual  interest  and  principal
payments as scheduled in the loan agreement.

The impaired value of  collateral-dependent  loans is generally determined based
on the fair value of the collateral  when it is determined  that  foreclosure is
probable.  Generally,  it is  management's  policy to  charge-off  the  impaired
portion of any collateral-dependent  loan where supported by appraisals or other
evidence of value. Otherwise,  the impairment is determined based on the present
value of the expected cash flows and  deficiencies  are provided for through the
allowance for loan losses. Any change in the carrying value of the impaired loan
is reported as an addition or a reduction in the related allowance.

Properties  acquired  in  settlement  of loans are  recorded  at fair value less
estimated selling costs upon acquisition and thereafter are carried at the lower
of cost or fair value less  estimated  selling costs.  Revised  estimates to the
fair value less selling costs are reported as adjustments to the carrying amount
of the asset  provided that such adjusted value is not in excess of the carrying
amount  at  acquisition.  Gains  or  losses  on  the  sale  of  and  revaluation
adjustments to foreclosed  properties are credited or charged to expense.  Costs
incurred in connection  with  ownership of the property,  including  interest on
senior  indebtedness,  are expensed to the extent not previously provided for in
calculating  fair value less  estimated  selling  costs.  Costs  relating to the
development or  improvement of the property are  capitalized to the extent these
costs increase fair value less estimated selling costs.

Management  believes  that the  allowances  for  losses on loans and  foreclosed
properties  are  adequate.   While  management  uses  available  information  to
recognize  losses on loans and foreclosed  properties,  future  additions to the
allowances may be necessary based on changes in economic conditions.

Loan  Income:  Income on loans is derived from  interest,  the sale of loans and
various  fees.  Interest  on  loans,  including  amortization  of  premiums  and
accretion of discounts,  is computed using methods that result in level rates of


                                       34
<PAGE>

return on principal amounts  outstanding.  Loan origination fees and direct loan
origination  costs are deferred and amortized over the contractual  lives of the
related  loans  using  methods  that  result in a  constant  effective  yield on
principal amounts outstanding.

The accrual of interest on loans is discontinued based on delinquency status, an
evaluation of the related collateral, and on the borrower's ability to repay the
loan.  Generally,  loans  past due more than 90 days are  placed  in  nonaccrual
status;  however, in instances where the borrower has demonstrated an ability to
make  timely  payments,  loans past due more than 90 days may be  returned to an
accruing  status  provided two criteria are met: (1) all  principal and interest
amounts  contractually  due (including  arrearages)  are  reasonably  assured of
repayment  within a reasonable  period,  and (2) there is a sustained  period of
repayment performance (generally a minimum of six months) by the borrower.  Cash
receipts from an impaired loan, whether designated as principal or interest, are
applied to reduce the carrying value of the loan. When future  collection of the
loan balance is expected, interest income may be recognized on a cash basis.

Mortgage  Banking  Activities:  Loans held for sale are  carried at the lower of
aggregate cost or market.  The market value of loans held for sale is determined
by commitment  agreements  with  investors or estimates by  management  based on
comparable loan sales in the secondary market. Gains or losses on loan sales are
recognized  for  financial  reporting  purposes  at the  time  of  sale  and are
determined by the  difference  between the sales proceeds and the carrying value
of the loans, with an adjustment for recourse provisions or an allocation of the
basis to the estimated fair value of servicing rights if servicing is retained.

Capitalized  mortgage  servicing assets consist of both purchased and originated
servicing rights  (collectively,  "MSRs").  MSRs are amortized in proportion to,
and over the period of, the  estimated  future  net  servicing  revenues  of the
underlying mortgage loans. The Company's policy for assessing impairment of MSRs
is based on their fair values and is evaluated by stratifying  the MSRs based on
predominant risk  characteristics  of the underlying loans,  primarily  interest
rate. Fair value is estimated based on discounted anticipated future cash flows,
taking into consideration  market-based  prepayment  estimates.  If the carrying
value of the MSRs exceeds the  estimated  fair value,  a valuation  allowance is
established.  Changes to the valuation allowance are charged against or credited
to amortization of MSRs.

Fees for  servicing  loans are  credited to mortgage  servicing  income when the
related mortgage payments are collected. Depending on the terms of the servicing
contracts,  such fees are normally based upon either the  outstanding  principal
balance of such loans or the number of loans processed.  Servicing  expenses are
charged to operations when incurred.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at cost,  less
accumulated  depreciation and are being  depreciated over their estimated useful
lives, using the straight-line method of depreciation.

Long-Lived  Assets:  The Company  periodically  evaluates the carrying  value of
long-lived assets in accordance with the provisions of SFAS No. 121 - Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.

Income Taxes:  Consolidated  corporate  income tax returns are filed for EBI and
its  subsidiaries.  The  Company  applies  the  provisions  of  SFAS  No.  109 -
Accounting for Income Taxes ("SFAS 109"),  which requires an asset and liability
approach for determining income taxes. Under SFAS 109, deferred income taxes are
recognized  for the  estimated tax effects of  differences  between the basis of
assets and liabilities for financial reporting and income tax purposes. Deferred
tax assets are only recognized  when, in the judgment of management,  it is more
likely than not that they will be realized.


                                       35
<PAGE>

Stock-Based  Compensation Plans:  Effective January 1, 1997, the Company adopted
SFAS No. 123 - Accounting for Stock Based  Compensation  ("SFAS 123").  SFAS 123
permits either the  recognition of cost for the estimated fair value of employee
stock-based compensation arrangements on the date of grant, or disclosure in the
notes to the  financial  statements  of the pro forma  effects on net income and
earnings  per  share,  determined  as if the fair  value-based  method  had been
applied in measuring  compensation  cost. The Company has adopted the disclosure
option and  continues to apply APB Opinion No. 25 - Accounting  for Stock Issued
to  Employees  ("APB  25") in  accounting  for its  plans  using  the  intrinsic
value-based  method.  Accordingly,  no compensation cost has been recognized for
the Company's stock options granted during 1998 and 1997.


NOTE 3 - COMPREHENSIVE INCOME

In June 1997,  the FASB  issued SFAS No. 130 -  Reporting  Comprehensive  Income
("SFAS  130"),   which  establishes   standards  for  reporting  and  displaying
comprehensive  income and its components.  Comprehensive  income is the total of
all  components  of  comprehensive  income,   including  net  income  and  other
comprehensive income. Other comprehensive income represents revenues,  expenses,
gains and losses that are included in comprehensive income but excluded from net
income under generally accepted accounted principles.  SFAS 130 became effective
in 1998 and requires that comparative  financial  statements for earlier periods
be  reclassified  to  reflect   application  of  the  provisions  of  SFAS  130.
Accordingly,  the Company adopted SFAS 130 in 1998.  Because there were no items
of other  comprehensive  income for the years ended  December 31, 1998 and 1997,
the Company is not providing a report of comprehensive income for those periods.
Comprehensive  income for the year ended  December  31, 1996  consisted of a net
loss of $7.4  million and a $154,000  reclassification  adjustment  for gains on
securities available for sale included in the net loss for 1996.


NOTE 4 - EARNINGS PER SHARE

The Company  calculates  its basic and  diluted  earnings  per share  ("EPS") in
accordance with SFAS No. 128 Earnings Per Share ("SFAS 128").  Accordingly,  the
components of the Company's EPS calculations for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
                                                                1998               1997                1996
                                                                ----               ----                ----
     <S>                                                    <C>               <C>                  <C>         
     Net income (loss)                                      $ 1,012,523       $   (296,648)        $(7,377,011)
     Preferred stock dividends (Note 18)                     (1,789,727)        (1,635,488)         (1,446,868)
                                                             ----------         ----------          ----------
     Net loss available to common shareholders             $   (777,204)       $(1,932,136)        $(8,823,879)
                                                            ===========         ==========          ==========

     Weighted average common shares
       outstanding                                            1,059,138          1,055,776           1,051,180
                                                              =========          =========           =========
</TABLE>

The Company's  outstanding  options and warrants (Note 19) are antidilutive with
respect  to  loss  available  to  common  shareholders  for  each  of the  years
presented; therefore, basic and diluted EPS are the same.


NOTE 5 - SALES OF BRANCHES

In January 1996, the Company formed a Strategic  Evaluation Committee to explore
the possible  benefits 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 asset base
by  approximately  50% was a  strategy  that  ultimately  would  be in the  best
interests  of  the  common  and  the  preferred  shareholders  of  the  Company.


                                       36
<PAGE>

Accordingly,  in  addition to  completing  the  already-negotiated  sales of the
Bank's Charlotte,  Raleigh, Greensboro and Wilmington,  North Carolina branches,
the Company  proceeded to negotiate the sale of the Bank's Norfolk,  Portsmouth,
Hampton,  Newport  News and Grafton,  Virginia  branches,  which were  completed
during the last two  quarters  of 1996.  Collectively,  the nine  branches  sold
during  1996 are  referred  to as the  "Branches"  and the sales are  summarized
below.

In the aggregate,  the Bank sold deposits and related accrued interest  totaling
$167.5 million, along with loans and related accrued interest totaling $204,000,
premises and equipment totaling $1.2 million, and other assets totaling $69,000.
The sale of the Branches  required cash of $162.0  million,  which was funded by
the sale of fixed-rate and adjustable-rate  first mortgage loans totaling $118.3
million and mortgage-backed securities available for sale totaling $9.9 million,
as well as the utilization of a portion of the Bank's excess liquidity. The Bank
recognized  a net loss of $1.0  million and a gain of $153,000  from the sale of
loans and mortgage-backed securities,  respectively.  In the aggregate, the Bank
recognized  net gains of $1.9  million and  $216,000 on the sale of deposits and
premises and  equipment,  respectively,  during 1996. In addition to transaction
costs, the gain on the sale of deposits was reduced by a $1.9 million  write-off
of the remaining goodwill  associated with certain of the Branches.  The Company
recognized a $5.9 million  write-down  in the net asset value of these  branches
prior to the consummation of their sale.


NOTE 6 - INVESTMENT SECURITIES

The amortized cost and fair value of securities  held for investment at December
31 were as follows (in thousands):
<TABLE>
<CAPTION>
                                                 1998                                        1997                  
                             ------------------------------------------  ------------------------------------------
                               Amortized   Gross Unrealized      Fair     Amortized    Gross Unrealized      Fair
                                 Cost      Gains     Losses      Value      Cost       Gains     Losses      Value
<S>                             <C>     <C>         <C>          <C>        <C>     <C>         <C>          <C>   
Securities of U.S. govern-
   ment agencies other than
   the U.S. Treasury            $2,750  $       -   $     46     $2,704     $2,299  $       -   $     82     $2,217
                                 =====   ========    =======      =====      =====   ========    =======      =====
</TABLE>

The $2.8 million of U.S.  government  agency  securities  held for investment at
December  31, 1998  consisted  of a $2.0 million note issued by the Federal Home
Loan Bank ("FHLB")  which matures in the year 2000 and a $750,000 note issued by
the FHLB which  matures in the year 2002  provided a one-time call option is not
exercised in October 1999. The U.S. government agency security with a book value
of $750,000  and a fair value of $743,000  is pledged as  collateral  for public
depository  accounts  over  $100,000 at December 31, 1998.  The U.S.  government
agency  security  with a book  value of $2.0  million  and a fair value of $1.96
million at December  31, 1998 is pledged as  collateral  for FHLB  advances.  No
securities held for investment were sold in 1998, 1997, and 1996.

Securities  available  for sale at  December  31, 1998 and 1997  consisted  of a
mutual  fund  investment  that  is  designed  for  use  as an  overnight  liquid
investment.  The  mutual  fund  portfolio  is  invested  in  federal  funds  and
repurchase agreements,  which are fully collateralized by U.S. Government and/or
agency  obligations.  The fund is managed to have an average  maturity of one to
seven days,  and to maintain a stable net asset value of $1.00 per share.  There
were no sales of securities  available for sale in 1998.  Proceeds from the sale
of securities  available for sale totaled  $2,500,000 and $6,650,000 in 1997 and
1996, respectively. No gains or losses were realized on these sales.


                                       37
<PAGE>

NOTE 7 - MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of mortgage-backed securities ("MBS") held for
investment,  which consisted solely of the Company's  interests in a real estate
mortgage  investment  conduit  ("REMIC"),  at  December  31 were as follows  (in
thousands):
<TABLE>
<CAPTION>
                                                 1998                                        1997                  
                             ------------------------------------------  ------------------------------------------
                               Amortized   Gross Unrealized      Fair     Amortized    Gross Unrealized      Fair
                                 Cost      Gains     Losses      Value      Cost       Gains     Losses      Value
<S>                             <C>     <C>         <C>          <C>        <C>     <C>         <C>          <C>   
U.S. government agencies:
    Floating-rate REMIC         $1,456  $       -   $      2     $1,454     $1,905  $       -   $     19     $1,886
                                 =====   ========    =======      =====      =====   ========    =======      =====

The REMIC is pledged as collateral for FHLB advances at December 31, 1998. There
were no sales of MBS held for investment in 1998, 1997 and 1996.

Proceeds from the sale of MBS available  for sale totaled  $10,068,189  in 1996.
Gross gains of $196,525 and gross losses of $43,337  were  realized in 1996.  No
MBS were classified as available for sale at December 31, 1998 and 1997.


NOTE 8 - LOANS

Net loans at December 31 include (in thousands):
<CAPTION>
                                                                                    1998                1997
                                                                                    ----                ----
    Real estate:
        First mortgages                                                            $152,891             $130,486
        Second mortgages                                                              7,525                8,699
        Construction and development                                                 19,430               16,583
        Commercial                                                                    6,470                5,970
    Consumer                                                                          5,984                5,426
    Commercial - other                                                                1,601                1,883
    Secured by deposits                                                                 621                  805
                                                                                 ----------            ---------
           Total Loans                                                              194,522              169,852

    Less:
        Unearned loan fees and discounts                                                  9                   29
        Allowance for loan losses                                                     1,845                2,382
                                                                                  ---------            ---------
           Net Loans                                                               $192,668             $167,441
                                                                                    =======              =======

Included in total loans at December 31, 1998 and 1997 are  unamortized  premiums
of $951,000 and $668,000, respectively.

At December  31, net loans  included  the  following  collateral-dependent  real
estate loans (in thousands):
<CAPTION>
                                                                                     1998                 1997
                                                                                     ----                 ----
    First mortgages                                                                  $298                 $611
    Second mortgages                                                                    -                   79
                                                                                    -----                 ----
           Total collateral-dependent real estate loans                               298                  690

    Less:
        Allowance for loan losses                                                      37                  130
                                                                                     ----                  ---
           Net collateral-dependent real estate loans                                $261                 $560
                                                                                      ===                  ===
</TABLE>

                                       38
<PAGE>

As of  December  31,  1998,  the Bank  had  outstanding  commitments  (including
unfunded  portions of lines of credit and construction loan commitments) to fund
approximately $20.5 million in mortgage loans and $435,000 in nonmortgage loans.
In  addition,   the  Bank's   construction  loan  portfolio  includes  loans  to
individuals   that  will  convert  to  permanent   loans  upon   completion   of
construction.  As of December 31, 1998, such commitments aggregated $1.3 million
of fixed rate  mortgage  loans and $20.3  million of  adjustable  rate  mortgage
loans. Commitments to extend credit are agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee.  Because it is possible that the  commitments
can  expire  without  being  drawn  upon,  the total  commitment  amounts do not
necessarily  represent  future cash  requirements.  The Company  evaluates  each
customer's  creditworthiness  on a case-by-case  basis. The amount of collateral
obtained,  if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held generally
consists of real estate.

The Bank  originates  first and second  mortgage and consumer loans primarily in
North  Carolina and Virginia.  The Bank will also acquire  residential  mortgage
loans from third parties. Loans previously acquired comprised  approximately 44%
and 42% of total loans at December  31,  1998 and 1997,  respectively.  The Bank
requires  collateral  on all  residential  mortgage  loans and, at  origination,
generally  requires  that  loan-to-value  ratios be no greater than 80%,  unless
private mortgage insurance has been obtained, in which case higher loan-to-value
ratios may be maintained.

At December 31, 1998 and 1997,  the Company had $1.2  million and $1.6  million,
respectively,  in  nonaccrual  loans.  Interest  income  which  would  have been
recorded in accordance with the original terms of the nonaccrual  loans amounted
to  approximately  $115,000,  $171,000 and $291,000 for the years ended December
31, 1998, 1997 and 1996, respectively.

Changes in the allowance for loan losses for the years ended  December 31 are as
follows:
<TABLE>
<CAPTION>
                                                                1998               1997             1996
                                                                ----               ----             ----
         <S>                                                  <C>               <C>              <C>        
         Balance at beginning of period                       $2,381,639        $2,555,688       $ 5,251,295
         Provision for loan losses                                12,699           113,467         1,410,710
                                                             -----------        ----------        ----------
                                                               2,394,338         2,669,155         6,662,005
         Loans charged-off, net of recoveries                   (549,043)         (287,516)       (4,106,317)
                                                              ----------        ----------        ----------
         Balance at end of period                             $1,845,295        $2,381,639       $ 2,555,688
                                                               =========         =========        ==========
</TABLE>

Loans held for sale at December 31, 1998 and 1997  consisted  of first  mortgage
loans  originated  by Essex  First.  As of December  31,  1998,  Essex First had
outstanding  commitments  to fund mortgage  loans  totaling  approximately  $1.7
million, which were committed for sale to unaffiliated third parties.

Essex First sells  substantially all conventional loans without recourse so that
losses  incurred as a result of  nonperformance  with  respect to the loans sold
become the  responsibility  of the  purchaser  of the loan as of the date of the
closing. On occasion,  however,  Essex First will sell conventional loans in the
secondary market with recourse.  As of December 31, 1998, there were $969,000 of
loans  outstanding  which were previously  originated and sold by Essex First in
the secondary market with recourse.


                                       39
<PAGE>

NOTE 9 - FORECLOSED PROPERTIES

Foreclosed properties at December 31 consist of the following:
<TABLE>
<CAPTION>
                                                                                1998                1997
                                                                                ----                ----
             <S>                                                              <C>                <C>       
             Properties acquired through foreclosure                          $684,900           $1,666,381
             Less allowance for losses                                         113,606              154,752
                                                                               -------           ----------
                                                                              $571,294           $1,511,629
                                                                               =======            =========

Changes in the allowance for losses on foreclosed  properties for the year ended
December 31 are as follows:
<CAPTION>
                                                                          1998             1997           1996
                                                                          ----             ----           ----
             Balance at beginning of year                              $ 154,752        $ 178,937       $199,145
             Provision for losses on
               foreclosed properties                                     126,338          159,341        (21,345)
                                                                         -------         --------       --------
                                                                         281,090          338,278        177,800
             Charge-offs, net of recoveries                             (167,484)        (183,526)         1,137
                                                                        --------         --------      ---------
             Balance at end of year                                    $ 113,606        $ 154,752       $178,937
                                                                        ========         ========        =======


NOTE 10 - PREMISES AND EQUIPMENT

Premises and equipment at December 31 include:
<CAPTION>
                                                                                1998                  1997
                                                                                ----                  ----
                  Land                                                      $   842,190          $   573,675
                  Buildings                                                   2,051,194            1,046,570
                  Furniture and equipment                                     3,027,647            2,681,370
                  Leasehold improvements                                        194,254              192,556
                  Property under capitalized lease                              537,737              537,737
                                                                             ----------           ----------
                                                                              6,653,022            5,031,908
                  Less accumulated depreciation
                    and amortization                                          3,469,445            3,105,179
                                                                              ---------            ---------
                                                                             $3,183,577           $1,926,729
                                                                              =========            =========
</TABLE>

Certain premises are occupied under  noncancelable  operating lease  agreements.
Leases  having  contractual  attributes  of purchased  premises or equipment are
capitalized and shown in the table above along with related amortization.


                                       40
<PAGE>

Future  minimum lease  commitments  with terms in excess of one year at December
31, 1998, including cost escalation provisions, are as follows:

                                                    Capital      Noncancelable
                                                     Lease      Operating Leases
   1999                                            $119,201        $251,546
   2000                                             119,201         249,381
   2001                                             119,201         219,279
   2002                                                   -          16,848
   2003                                                   -               -
   Later years                                            -               -
                                                -----------    ------------
     Total minimum lease payments                   357,603        $737,054
                                                                    =======
     Amount representing interest                    89,480
                                                    -------
     Present value of net minimum capitalized
       payments                                    $268,123
                                                    =======

Rent expense for the years ended  December 31, 1998,  1997 and 1996  amounted to
$342,496, $435,147 and $602,190, respectively.


NOTE 11 - DEPOSITS

Deposits at December 31 include (dollars in thousands):
<TABLE>
<CAPTION>
                                                         1998                                1997       
                                               ------------------------            -----------------------
                                               Amount           Percent            Amount          Percent
                                               ------           -------            ------          -------
         <S>                                   <C>                <C>                <C>              <C>  
         NOW accounts -
           noninterest-bearing                 $  16,791          8.95%              $  5,056         3.28%
         Passbook and Christmas
           Club                                    4,385          2.34                  3,948         2.57
         NOW accounts                              4,792          2.55                  3,965         2.58
         Money market                             27,878         14.86                 25,698        16.69
         Certificate accounts -
           4.01% to 6.00%                        113,403         60.44                 87,378        56.77
           6.01% to 8.00%                         20,377         10.86                 27,844        18.09
           8.01% to 10.00%                             6           .00                     38          .02
                                                 -------        ------                -------       ------
                                                $187,632        100.00%              $153,927       100.00%
                                                 =======        ======                =======       ======
</TABLE>

A summary of certificate  accounts by scheduled maturity at December 31, 1998 is
as follows (in thousands):

                             1999                           $  94,139
                             2000                              23,436
                             2001                               6,476
                             2002                               5,518
                             2003 and thereafter                4,217
                                                             --------
                                                             $133,786
                                                             ========

Certificate  accounts of $100,000 or more at December 31, 1998 and 1997 amounted
to $22.7 million and $18.5 million, respectively.


                                       41
<PAGE>

Interest and weighted average rates on  interest-bearing  deposits for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
                                      1998                       1997                         1996        
                            ----------------------      ----------------------      ----------------------
                               Interest    Rate             Interest    Rate           Interest    Rate
                               --------    ----             --------    ----           --------    ----
   <S>                       <C>           <C>            <C>           <C>         <C>            <C>  
   Passbook and
     Christmas Club          $   147,405   3.49%          $   133,737   3.48%       $    225,525   3.33%
   NOW accounts                  122,330   2.81               122,773   2.83             149,324   2.80
   Money Market
     accounts                  1,317,156   4.91             1,041,566   4.87             949,835   4.50
   Certificate accounts        6,904,210   5.67             6,381,238   5.73          10,620,589   5.78
                               ---------                    ---------                 ----------
                              $8,491,101   5.40%           $7,679,314   5.45%        $11,945,273   5.51%
                               =========                    =========                 ==========


NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES

Borrowings from the FHLB at December 31 consist of the following (in thousands):
<CAPTION>

Maturity                            Interest Rate                           1998                   1997   
--------                            -------------                       -----------             ----------
1998                                4.01% to 7.00%                         $     -                $21,139
1999                                5.01% to 6.00%                          17,308                  1,808
2000                                4.01% to 6.00%                           7,600                    600
                                                                           -------               --------
                                                                           $24,908                $23,547
                                                                            ======                 ======

Weighted average rate at end of period                                       5.89%                  5.75%
                                                                             ====                   ====
</TABLE>

With the exception of $2.5 million and $2.0 million of FHLB advances outstanding
at December 31, 1998 and 1997,  respectively,  all FHLB advances  outstanding at
December  31, 1998 and 1997 carried  fixed rates of  interest.  The $2.5 million
adjustable  rate FHLB advances  outstanding  at December 31, 1998 will mature in
1999 and the applicable rate is indexed to the FHLB overnight  deposit rate. The
$2.0 million adjustable rate FHLB advance at December 31, 1997 matured in 1998.

Advances from the FHLB at December 31, 1998 are  collateralized  by (i) mortgage
loans  with a total  principal  balance of  approximately  $64.2  million,  (ii)
investment  securities  with a book value of $2.0  million  and (iii) MBS with a
book value of $1.5  million.  The  unused  lendable  collateral  value was $31.6
million at December 31, 1998.


NOTE 13 - SUBORDINATED CAPITAL NOTES

During 1989 and January 1990, the Bank 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 of 11.5% to 12%, the rates prevailing at the time of
issuance.  In July 1993,  the Bank  redeemed  $2.8  million of the  subordinated
capital  notes.  In August 1996,  the Bank redeemed the  remaining  subordinated
capital notes at par in their entirety.


                                       42
<PAGE>

NOTE 14 - INCOME TAXES

The  Company  is  subject  to  federal  and  state  income  taxes,  and  files a
consolidated  federal  income tax return with its  subsidiaries.  The  Company's
provision for income taxes for  financial  reporting  purposes  differs from the
amount  computed  by  applying  the  statutory  federal  tax rate to loss before
extraordinary items and income taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
                                                     1998                       1997                    1996         
                                           ------------------------  ----------------------- ------------------------
                                             Amount           %         Amount       %          Amount         %
                                             ------           -         ------       -          ------         -
<S>                                          <C>             <C>       <C>         <C>        <C>            <C>    
Provision for (benefit from) income taxes
  at statutory federal tax rate              $ 168,317       34.0%     $(100,860)  (34.0)%    $(2,508,184)   (34.0)%
Increase (decrease) resulting from:
   Unrecognized (recognized) tax benefits     (192,437)     (38.8)        91,443    30.8          991,196     13.4
   Future benefit of net deferred tax assets
      not previously recognized               (550,000)    (111.1)             -     -                  -      -
   State income taxes                           21,467        4.3              -     -                  -      -
   Amortization of excess of cost
     over net assets acquired                   21,101        4.3         21,101     7.1        1,507,950     20.5
   Other                                        14,078        2.8        (11,684)   (3.9)           9,038      0.1
                                             ---------     ------      ---------    ----     ------------     ----

                                             $(517,474)    (104.5)%    $       -       -%     $         -       -%
                                              ========     ======       =========   ====       ==========     ==== 

Significant  components of the Company's  deferred tax assets and liabilities as
of December 31 were as follows:

                                                                              1998                    1997
                                                                              ----                    ----
Deferred tax liabilities
           FHLB stock                                                   $      92,297            $      92,297
           Basis in acquired loans                                          1,776,015                2,114,303
           Premises and equipment                                              (4,424)                  32,331
           Other                                                               31,282                   26,362
                                                                         ------------             ------------
                  Total deferred liabilities                                1,895,170                2,265,293

Deferred tax assets
          Net operating loss ("NOL") carryforwards7,252,973                 7,562,091
           Alternative minimum tax ("AMT")
             credit carryover                                                 330,000                  330,000
           MSRs                                                                58,710                   78,280
           Allowance for losses on loans and
             foreclosed properties                                            449,908                  596,417
           Core deposit intangible                                            968,590                1,049,306
           Other                                                              364,462                  383,524
                                                                          -----------              -----------
                  Total deferred assets                                     9,424,643                9,999,618
                                                                           ----------               ----------
                  Net deferred tax assets before valuation
                    allowance                                               7,529,473                7,734,325
                  Valuation allowance for net deferred tax
                     assets                                                (6,979,473)              (7,734,325)
                                                                           ----------               ----------
                  Net deferred tax assets                                $    550,000              $         -
                                                                          ===========               ==========
</TABLE>

The Company applies an asset and liability approach for determining income taxes
as  required  by SFAS 109. A  valuation  allowance  has been  established  for a
significant  portion  of the  Company's  deferred  tax  assets  and  liabilities
because, based on management's assessment,  their ultimate realization cannot be
assured.  In 1998,  the Company  recorded net deferred tax assets of $550,000 on
the basis of improvements in  profitability  and  management's  expectation that
sufficient  taxable  income  will be  generated  to  utilize  a  portion  of the
Company's  NOLs and  reversing  temporary  differences.  It is possible that the


                                       43
<PAGE>

Company's  financial  position  and  management's  assessment  of its ability to
generate  taxable  income  will change in the near term and result in a material
adjustment to the valuation allowance.

The Bank and its  subsidiaries  qualify under provisions of the Internal Revenue
Code that permit  federal  income  taxes to be  computed  after  deductions  for
additions to bad debt  reserves.  These  deductions may be computed using either
actual  charge-offs or additions to its reserves based on the Bank's  historical
experience.  If  the  amounts  which  have  qualified  as  bad  debt  deductions
(approximately  $525,000 at December 31, 1998) are used for purposes  other than
to absorb bad debt  losses,  they will be  subject to federal  income tax at the
then applicable rates.

At December 31, 1998, the Company had NOL  carryforwards for income tax purposes
of  approximately  $19.1 million  expiring in the years 2007 through  2011.  The
utilization  of such NOL  carryforwards  may be limited by the Internal  Revenue
Code in certain circumstances,  including a change in ownership of the Company's
common stock. In addition,  the Company had an AMT credit  carryover of $330,000
at December 31, 1998, which can be carried forward indefinitely.


NOTE 15 - MORTGAGE LOAN SERVICING

At December  31,  1998,  1997,  and 1996,  the Company  serviced or  subserviced
approximately 15,100, 8,400 and 13,300 loans,  respectively,  with the following
outstanding  principal  balances  (in  thousands)  at  December  31 and  related
servicing fee income during the respective years ended December 31:
<TABLE>
<CAPTION>
                                      1998                           1997                        1996        
                            -------------------------       -------------------------   ------------------------
                                Loan           Loan             Loan          Loan          Loan          Loan
                             Principal      Servicing        Principal     Servicing     Principal     Servicing
                             Balances       Fee Income       Balances      Fee Income    Balances      Fee Income
                             --------       ----------       --------      ----------    --------      ----------
<S>                         <C>            <C>               <C>          <C>           <C>           <C>       
Loans owned by the
   Company                  $  144,602     $        -        $128,430     $        -    $  126,373    $        -
Servicing and sub-
  servicing rights owned/
  participated in by the
  Company                    1,056,677      1,222,478         354,245      1,312,476       997,279     1,665,768
                             ---------      ---------         -------      ---------    ----------     ---------
                            $1,201,279     $1,222,478        $482,675     $1,312,476    $1,123,652    $1,665,768
                             =========      =========         =======      =========     =========     =========
</TABLE>

Servicing  fee  income  is net of  $1,088,046  in  1998,  $858,992  in 1997  and
$1,878,725 in 1996 paid to unaffiliated subservicing clients.

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. Servicing
fee income  for 1997 and 1996  included  approximately  $196,000  and  $409,000,
respectively, attributable to servicing activities performed for this client. In
addition,  the Company received  termination  fees of approximately  $113,000 in
1997 related to this contract.

As agent for investors for whom loans are serviced, the Company maintains escrow
and custodial accounts in which borrower payments for principal, interest, taxes
and insurance are deposited.  At December 31, 1998,  approximately $10.6 million
of such accounts were on deposit at unaffiliated banks and $15.7 million of such
accounts were on deposit at the Bank.

The fair value of MSRs was  $831,000  and $1.2  million at December 31, 1998 and
1997, respectively. As a result of accelerated mortgage loan prepayment activity


                                       44
<PAGE>

during 1998, the Company recognized a valuation allowance in order to reduce the
carrying  value of its MSRs to the  estimated  fair value at December  31, 1998.
There were no valuation  allowances for MSRs at December 31, 1997.  Following is
an analysis of the changes in the  Company's  MSRs for the years ended  December
31:

                                              Carrying        Valuation
                                                Value         Allowance
                                                -----         ---------
       Balance at January 1, 1996            $1,634,307         $      -
       Purchases                                243,297                -
       Amortization                            (528,444)               -
                                             ----------           ------
       Balance at December 31, 1996           1,349,160                -
       Purchases                                289,253                -
       Amortization                            (468,647)               -
                                             ----------           ------
       Balance at December 31, 1997           1,169,766                -
       Purchases                                102,518                -
       Amortization                            (387,545)         (53,542)
                                             ----------           ------
       Balance at December 31, 1998         $   884,739         $(53,542)
                                             ==========           ======

Advances for taxes,  insurance  and other  disbursements  consist of advances on
behalf of  investors  and  advances  on behalf of  certain  investors  that have
requested the Company to perform special collection and administrative services.
In addition, certain investors have recourse against the Company in the event of
default  on loans  which  are  serviced  under a  regular  servicing  option.  A
valuation  allowance has been established for advances for taxes,  insurance and
other  disbursements and for the Company's  recourse  obligations to provide for
future losses related to the Company's servicing portfolio.


NOTE 16 - NOTES PAYABLE

Notes  payable at December  31, 1997  consisted  solely of a note payable to the
former president of an acquired savings institution and its holding company. The
note accrued interest at 9.50% per annum.  Originally,  the note was due in five
equal  annual   installments,   plus  accrued  interest  thereon.   However,  in
conjunction with a severance settlement with the former employee,  EBI agreed to
repay this note in its entirety in February 1998.


NOTE 17 - EMPLOYEE BENEFIT PLANS

Employees  of  EBI's  subsidiaries  participate  in  a  401(k)  retirement  plan
administered  by EBI. Annual  contributions  to the plan are  discretionary,  as
authorized by the boards of directors of EBI and its subsidiaries.  In 1998, the
Company  initiated  a 25% match  for  employee  contributions  of up to 6.00% of
compensation  as  defined  by the plan,  which  resulted  in a $35,829  matching
contribution  by the  Company for the plan year ended  December  31,  1998.  The
Company made a  "qualified  non-elective"  contribution  of $38,379 for the plan
year ended  December  31, 1997 in order to  maintain  the plan's  qualified  tax
status. The Company did not make a contribution to the plan for 1996.

Certain employees of EBI's subsidiaries  participate in a Supplemental Executive
Retirement  Plan  ("SERP").  An expense of  $38,808,  $37,808  and  $38,836  was
recognized in 1998,  1997 and 1996,  respectively,  in connection  with employee
vesting in the SERP. The SERP provides  deferred  compensation of 5% to 10% of a
covered   employee's   salary.   Deferred   compensation  in  excess  of  5%  is
discretionary  and  subject  to the  approval  of EBI's  Executive  Compensation
Committee. Participants in the SERP as of December 31, 1998 are 100% vested.


                                       45
<PAGE>

NOTE 18 - PREFERRED STOCK

On September 15, 1995, EBI merged with Home Bancorp,  Inc. ("Home  Bancorp") and
its wholly-owned subsidiary Home Savings Bank, F.S.B., a Norfolk, Virginia-based
savings  institution  (the  "Home  Acquisition").  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 EBI with a redemption
and  liquidation  value of $14.2  million for the Series B  preferred  stock and
$834,000 for the Series C preferred  stock. The preferred stock is redeemable at
the option of the Company. The 2,125,000 shares of Series B preferred stock bear
a cumulative  annual  dividend rate of 9.5% (based on the redemption  value) and
the 125,000 shares of Series C preferred stock bear a cumulative annual dividend
rate of 8.0% (based on the 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.  Cumulative but undeclared
dividends and accrued  interest  thereon for the Series B and Series C preferred
stock were $4,997,493 and $242,613, respectively, as of December 31, 1998.


NOTE 19 - COMMON STOCK

Warrants:  In connection  with the Home  Acquisition,  the  stockholders of Home
Bancorp received warrants to purchase  7,949,000 shares of EBI common stock at a
price of $0.9375 per share,  which was the price of EBI common  stock as of June
30, 1995. The warrants  became  exercisable in September 1998 and will expire in
September 2005.

Stock Options: In 1995, the Company adopted the Essex Bancorp, Inc. Stock Option
Plan  (the  "Option  Plan"),   which  was  submitted  to  and  approved  by  the
shareholders of EBI in May 1995. In June 1995, EBI's Board of Directors approved
the First  Amendment to the Option Plan which  reduced the number of options and
rights  which can be granted with respect to EBI's common stock under the Option
Plan to 930,000  shares.  Stock  appreciation  rights  ("SARs") may be issued in
tandem with  options  granted  under the Plan.  These SARs entitle the holder to
receive,  without any payment to EBI, either cash or shares of EBI common stock,
or a combination thereof, in an amount, or having a fair market value determined
as of the date of  exercise,  equal to the excess of the fair  market  value per
share on the date of exercise  of the SAR over the price of the related  option.
SARs become  exercisable  only in the event of a change of control as defined in
the Second  Amendment  to the  Option  Plan.  Such a change in control  occurred
during  1996 as a result  of the sale of the  Branches,  thus  accelerating  the
vesting of all of the Company's employee stock options granted June 30, 1995 and
their related SARs. All options granted June 30, 1995 were exercised during 1997
and 1996 under the SAR provisions of the options.  The options outstanding as of
December 31, 1998 consist of the following:  102,200 exercisable on May 28, 2000
that will expire on May 28, 2007;  6,000  exercisable  on February 17, 2001 that
will expire on February 17, 2008; and, 20,000 exercisable on March 31, 2001 that
will expire on March 31, 2008.

In 1995, the Company also adopted the Essex Bancorp, Inc. Non-Employee Directors
Stock Option Plan (the  "Directors  Option  Plan"),  which was  submitted to and
approved by the  shareholders  of EBI in May 1995. In June 1995,  EBI's Board of
Directors  approved the First Amendment to the Directors  Option Plan. The First
Amendment  reduced the maximum number of options and rights which can be granted
with  respect to EBI common  stock  under the  Directors  Option  Plan to 20,000
shares.  Similar to the Option  Plan,  SARs may be issued in tandem with options
granted under the Directors Option Plan.

                                       46
<PAGE>

The following table  summarizes  activity under the option plans for years ended
December 31, 1998, 1997 and 1996 and the status at December 31, 1998.
<TABLE>
<CAPTION>
                                                           Option Plan              Directors Option Plan 
                                                           -----------              --------------------- 
                                                      Number of      Option        Number of        Option
                                                       Options        Price         Options          Price
                                                       -------        -----         -------          -----
    <S>                                               <C>           <C>             <C>        <C>   
    Options outstanding, January 1, 1996               441,541       $0.9375         2,900     $0.9375-3.8750
    Granted                                             40,398        3.2500         1,350          2.0625
    Exercised                                         (210,955)       0.9375        (1,000)         0.9375
    Canceled                                           (10,000)       3.2500             -             -
    Canceled                                           (46,294)       0.9375             -             -
                                                     ---------                  ----------
    Options outstanding, December 31, 1996             214,690   0.9375-3.2500       3,250      0.9375-3.8750
    Granted                                            110,200        1.3750         1,350          5.6250
    Exercised                                         (184,292)       0.9375             -             -
    Canceled                                            (8,000)       1.3750             -             -
    Rescinded for replacement                          (30,398)       3.2500             -             -
                                                     ---------                  ----------
    Options outstanding as of December 31, 1997        102,200        1.3750         4,600      0.9375-5.6250
    Granted                                              6,000        5.8750         1,350          2.2500
    Granted                                             20,000        4.8750             -             -
                                                     ---------                  ----------
    Options outstanding as of December 31, 1998        128,200   1.3750-5.8750       5,950      0.9375-5.6250
                                                      ========                       =====

    Options exercisable as of December 31, 1998              -                       4,600
                                                      ========                       =====
    Options available for future grant
       as of December 31, 1998                         406,553                      13,050
                                                       =======                      ======
</TABLE>

The Company recognized  compensation expense of $498,051 and $412,743 during the
years ended December 31, 1997 and 1996,  respectively,  for the options  granted
June 30, 1995 under the Option  Plan,  which were  exercised  in their  entirety
under the SAR  provisions of the options.  As of December 31, 1998,  the Company
continued to recognize an obligation of $703,000 to its Chief Executive  Officer
resulting  from the exercise of his SARs in November 1997. A  determination  has
not yet  been  made as to the  date  and  method  of  payment  to  satisfy  this
obligation.

Had compensation cost of the Option Plan been determined based on the fair value
at the grant date for awards made under the plan,  consistent with the method of
SFAS 123,  the  Company's  net income  (loss) and loss per share would have been
$969,000 and $.77 for the year ended  December 31, 1998 and $(312,000) and $1.84
for the year ended  December  31, 1997.  The weighted  average fair value of the
options  granted  during 1998 and 1997 would have been $2.58 per share and $0.71
per share, respectively.  The fair value of each option granted under the Option
Plan  during  1998 and  1997  was  estimated  on the  date of  grant  using  the
Black-Scholes  option  pricing model with the following  assumptions:  risk-free
rates of return of 5.61% in 1998 and 6.29% in 1997 and a dividend yield of zero,
expected life of five years and volatility of 50% for 1998 and 1997.

Stock  Purchase  Plan:  In 1995,  the Company  adopted the Essex  Bancorp,  Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan"), which was submitted to
and approved by the  shareholders  of EBI in May 1995.  The Stock  Purchase Plan
permits all  eligible  employees  of the Company to purchase  through  after-tax
payroll  deductions,  at a 15% discount,  shares of the Company's  common stock.
During the years ended  December  31,  1998,  1997 and 1996  employees  acquired
approximately 2,506, 4,757 and 3,694,  respectively,  newly-issued shares of the
Company's  common stock under the Stock Purchase Plan.  Effective  October 1998,
the Company  suspended  purchases of the Company's  common stock under the Stock
Purchase Plan.


                                       47
<PAGE>

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement  of Financial  Accounting  Standards  No. 107 - Disclosure  About Fair
Value  of  Financial  Instruments  ("SFAS  107"),  requires  the  disclosure  of
estimated  fair values for  financial  instruments.  Quoted  market  prices,  if
available,  are  utilized  as  an  estimate  of  the  fair  value  of  financial
instruments. Because no quoted market prices exist for a significant part of the
Company's  financial  instruments,  the fair value of such  instruments has been
based on assumptions,  which management believes to be reasonable,  with respect
to future  economic  conditions,  the amount and timing of future cash flows and
estimated discount rates. Different assumptions could significantly affect these
estimates. Because these estimates do not necessarily represent actual purchases
or sales  of  financial  instruments,  the  market  value  could  be  materially
different from the estimates  presented  below.  In addition,  the estimates are
only  indicative of individual  financial  instruments'  value and should not be
considered an indication of the fair value of the Company taken as a whole.

The  following  summary  presents  the  methodologies  and  assumptions  used to
estimate  the fair value of the  Company's  financial  instruments.  Much of the
information used to determine fair value is highly  subjective and judgmental in
nature,  and therefore,  the results may not be precise.  The subjective factors
utilized   include,   among  other  things,   estimates  of  cash  flows,   risk
characteristics, credit quality, and interest rates, all of which are subject to
change. In addition, the calculation of estimated fair values is based on market
conditions at December 31, 1998 and 1997 and may not be reflective of current or
future fair values.

Financial  Assets.  The carrying amounts reported for cash and cash equivalents,
FHLB stock,  loans held for sale, and securities  available for sale approximate
those  assets'  fair  values.  Fair values for  securities  and  mortgage-backed
securities  held for  investment  are  based on quoted  market  prices or dealer
quotes.  The fair value of residential and consumer loans held for investment is
based on the  Sensitivity  Report  produced  for the Bank by the FHLB.  The fair
values in this Sensitivity  Report are determined by discounted cash flows based
upon yield, maturity,  repricing,  and current rate data reported by the Bank to
the OTS.  Commercial  real estate and  construction  and  development  loans are
valued based upon discounted cash flows with discount rates  approximating rates
that would be offered those  individual  borrowers to extend their credits as of
December 31, 1998 and 1997. For nonperforming loans, the estimated fair value is
not greater than the estimated fair value of the underlying collateral.

Financial Liabilities.  The fair value of demand deposits, savings accounts, and
money market deposits is the amount payable on demand at the reporting date. The
fair values of fixed  maturity  certificates  of deposit and FHLB  advances  are
based on the  Sensitivity  Report  produced  for the Bank by the FHLB.  The fair
values in this Sensitivity  Report are determined by discounted cash flows based
upon  maturity,  cost, and current rate data as reported by the Bank to the OTS.
The  carrying  amount of notes  payable  approximates  the fair  value for those
liabilities.

The  Company  has  off-balance  sheet  financial  instruments  in  the  form  of
commitments to extend credit,  recourse on MSRs acquired from third parties, and
recourse on loans sold to third  parties.  Because  commitments to extend credit
approximate  current market commitment terms, their fair value is not considered
significant.  The fair value of recourse on MSRs acquired from third parties and
loans sold to third parties is the estimated loss allocated to off-balance sheet
recourse.


                                       48
<PAGE>
<TABLE>
<CAPTION>
                                                             December 31, 1998              December 31, 1997     
                                                      ----------------------------     ---------------------------
                                                                        Estimated                       Estimated
                                                         Carrying         Fair            Carrying        Fair
                                                           Value          Value             Value         Value
                                                           -----          -----             -----         -----
                                                                              (in thousands)
<S>                                                      <C>             <C>              <C>          <C>      
Financial Assets
     Cash and cash equivalents.....................      $  17,945       $  17,945        $  11,033    $  11,033
     FHLB stock....................................          1,549           1,549            1,431        1,431
     Securities available for sale.................             18              18               17           17
     Securities held for investment................          2,750           2,704            2,299        2,217
     Mortgage-backed securities held for
        investment.................................          1,456           1,454            1,905        1,886
     Loans held for sale...........................          4,486           4,486            2,165        2,165
     Loans held for investment, net................        192,668         197,288          167,441      169,843

Financial Liabilities
     Deposits with no stated maturity..............      $  53,846       $  53,846        $  38,667    $  38,667
     Time deposits.................................        133,786         134,895          115,260      115,624
     FHLB advances.................................         24,908          25,030           23,547       23,558
     Notes payable.................................              -               -               72           72
     Capital lease obligations.....................            268             269              332          332
     Off-balance sheet commitments
        and recourse obligations...................              -              71                -           62
</TABLE>

NOTE 21 - REGULATORY MATTERS

The Bank is required pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Office of Thrift Supervision  ("OTS")
regulations  promulgated  thereunder to satisfy three separate  requirements  of
specified capital as a percent of the appropriate asset base: a tangible capital
requirement,  a core or leverage capital  requirement,  and a risk-based capital
requirement.  At December 31, 1998, the Bank was in compliance  with the capital
requirements established by FIRREA.

Section  38 of  the  Federal  Deposit  Insurance  Act,  as  added  by  the  FDIC
Improvement Act ("FDICIA"),  requires each  appropriate  agency and the FDIC to,
among  other  things,  take  prompt  corrective  action  ("PCA") to resolve  the
problems of insured  depository  institutions  that fall below  certain  capital
ratios.  Federal regulations under FDICIA classify savings institutions based on
four separate  requirements of specified capital as a percent of the appropriate
asset base:  tangible  equity,  Tier I or leverage  capital,  Tier I  risk-based
capital,  and total  risk-based  capital.  As of December 31, 1998 and 1997, the
Bank was "well capitalized" for PCA purposes.


                                       49
<PAGE>

The Bank's  capital  amounts  and ratios as of  December  31,  1998 and 1997 are
presented in the following tables (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                              To Be Well
                                                                   For Capital             Capitalized Under
                                          Actual                Adequacy Purposes           PCA Provisions    
                                          ------                -----------------           --------------    
                                     Amount       Ratio        Amount         Ratio       Amount        Ratio
                                     ------       -----        ------         -----       ------        -----
<S>                                  <C>         <C>            <C>          <C>          <C>           <C>  
As of December 31, 1998
   Total risk-based capital          $17,364     13.09%         $10,609      8.0%         $13,261     =>10.0%
   Tier I risk-based capital          16,071     12.12%           5,304      4.0%           7,957      =>6.0%
   Tier I (core) capital              16,071      6.97%           9,223      4.0%          11,529      =>5.0%
   Tangible equity                    16,071      6.97%           3,459      1.5%               -          -

As of December 31, 1997
   Total risk-based capital          $16,762     14.33%          $9,354      8.0%         $11,692     =>10.0%
   Tier I risk-based capital          15,298     13.08%           4,677      4.0%           7,015      =>6.0%
   Tier I (core) capital              15,298      7.86%           7,790      4.0%           9,738      =>5.0%
   Tangible equity                    15,298      7.86%           2,921      1.5%               -          -


NOTE 22 - PARENT COMPANY ONLY Financial Information

Condensed  financial  information of EBI is presented  below.  While EBI and the
Bank are not operating under any  supervisory  agreements with the OTS, the Bank
must  seek a letter  of  nonobjection  from the OTS  prior  to  making  dividend
payments to EBI.
<CAPTION>
                                                  Balance Sheets
                                            December 31, 1998 and 1997
                                                  (in thousands)
<CAPTION>
                                                                               1998                1997
                                                                               ----                ----
ASSETS
  Cash                                                                     $       92            $     190
  Investment in subsidiaries                                                   16,646               15,638
  Other                                                                           260                  257
                                                                             --------             --------
                                                                              $16,998              $16,085
                                                                               ======               ======

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Notes payable                                                           $         -            $      72
  Redeemable Preferred Stock redemption proceeds payable                           84                   85
  Other                                                                         1,079                1,111
                                                                              -------              -------
    Total Liabilities                                                           1,163                1,268

SHAREHOLDERS' EQUITY                                                           15,835               14,817
                                                                               ------               ------
                                                                              $16,998              $16,085
                                                                               ======               ======
</TABLE>

                                       50
<PAGE>
<TABLE>

                                             Statements of Operations
                               For the years ended December 31, 1998, 1997 and 1996
                                                  (in thousands)
<CAPTION>

                                                                   1998               1997              1996
                                                                   ----               ----              ----

<S>                                                              <C>                 <C>             <C>      
Interest expense on notes payable                                $     (1)           $   (9)         $    (11)
Stock option compensation                                               -              (601)                -
Net operating income                                                    5                25                60
                                                                  -------             -----           -------
  Net income (loss) before undistributed
    income (loss) of subsidiaries                                       4              (585)               49
Undistributed income (loss) of subsidiaries                         1,009               288            (7,426)
                                                                    -----              ----            ------
  Net  income (loss)                                               $1,013             $(297)          $(7,377)
                                                                    =====              ====            ======

                                             Statements of Cash Flows
                               For the years ended December 31, 1998, 1997 and 1996
                                                  (in thousands)
<CAPTION>
                                                                   1998               1997              1996
                                                                   ----               ----              ----
OPERATING ACTIVITIES
  Net income (loss)                                               $ 1,013             $(297)          $(7,377)
  Adjustments to reconcile net income (loss)
    to cash (used in) provided by operating
    activities:
      Equity in (income) loss of subsidiaries                      (1,009)             (288)            7,426
      Dividends from subsidiaries                                       -               108                 -
      Decrease (increase) in other assets                              (3)             (256)                1
      Increase (decrease) in other liabilities                        (32)              827                (7)
                                                                 --------              ----           -------
        NET CASH (USED IN) PROVIDED BY
         OPERATING ACTIVITIES                                         (31)               94                43
                                                                 --------             -----            ------

FINANCING ACTIVITIES
  Payments on notes payable                                           (72)              (24)              (24)
  Redemption of Settlement Preferred Stock                             (1)               (5)             (104)
  Common stock issued under the Employee Stock
    Purchase Plan                                                       6                 8                 7
                                                                 --------            ------           -------
       NET CASH USED IN FINANCING
       ACTIVITIES                                                     (67)              (21)             (121)
                                                                  -------             -----             -----

        NET INCREASE (DECREASE) IN CASH                               (98)               73               (78)
        Cash at beginning of period                                   190               117               195
                                                                  -------              ----             -----

        CASH AT END OF PERIOD                                    $     92             $ 190            $  117
                                                                  =======              ====             =====

SUPPLEMENTAL CASH FLOW INFORMATION
  Cash interest paid                                             $     13          $      -           $    11
</TABLE>

As of  December  31,  1998 and  1997,  other  liabilities  included  a  $703,000
obligation to the Company's Chief Executive  Officer resulting from the exercise
of his SARs in November  1997. A  determination  has not yet been made as to the
date and method of  payment  to satisfy  this  obligation.  EBI's  stock  option
compensation  during 1997 reflects expense recognized at the holding company for
the  SARs  held  by  the  Chief  Executive  Officer  after  the  obligation  was
transferred from the Bank to EBI in March 1997.




                                       51
<PAGE>

NOTE 23 - SEGMENT INFORMATION

The Company  adopted SFAS No. 131 - Disclosures  about Segments of an Enterprise
and Related  Information ("SFAS 131"), as required for this Annual Report.  SFAS
131 requires companies to report information about the revenues derived from the
enterprise's segments,  about the geographical divisions in which the enterprise
earns revenues and holds assets and about major customers.

The Company operates through three primary business  segments:  retail community
banking,  mortgage  banking and  mortgage  loan  servicing.  These  segments are
evaluated  based  primarily  on  revenues  from  customers  and  pre-tax  profit
contribution to the total Company.  Segment  revenues from customers  consist of
(i) net interest income, which represents the difference between interest earned
on loans and investments and interest paid on deposits and other  borrowings and
(ii)  noninterest  income,  which consists  primarily of mortgage loan servicing
fees, mortgage banking income (primarily gains on the sale of loans) and service
charges and fees (primarily on deposits and the loan servicing  portfolio).  All
inter-segment transactions are eliminated to arrive at the total Company revenue
and pre-tax income (loss). In addition,  the impact of the sales of the Branches
recognized  by the Company in 1996 are not  allocated  to the  segments  and are
presented separately.  Segment revenues and pre-tax income (loss) are determined
using  accounting  policies  consistent with those applied in the preparation of
the consolidated financial statements.
<TABLE>
<CAPTION>
                                 Retail                       Mortgage
                                Community      Mortgage         Loan          Corporate/      Sales of
                                 Banking        Banking       Servicing      Eliminations     Branches      Total
                                 -------        -------       ---------      ------------     --------      -----
                                                           (in thousands)
1998 Segment Information
<S>                              <C>            <C>             <C>           <C>           <C>            <C>    
Customer revenues              $  4,047        $ 2,672         $ 1,565       $      81      $       -     $  8,365
Affiliate revenues                    -            497             443            (940)             -            -
Depreciation and amortizaion         99             63              81             126              -          369
Pre-tax income (loss)             1,008          1,552             158          (2,223)             -          495
Total assets                    207,189         23,710           9,063          (8,922)             -      231,040

1997 Segment Information
Customer revenues                 3,666          2,158           1,511             445              -        7,780
Affiliate revenues                    -            385             536            (921)             -            -
Depreciation and amortizaion         70             87              94             169              -          420
Pre-tax income (loss)               422          1,037             543          (2,299)             -         (297)
Total assets                    181,072         18,865           6,683         (11,532)             -      195,088

1996 Segment Information
Customer revenues                 5,394          2,051           1,567              87          1,291       10,390
Affiliate revenues                    -            456             711          (1,167)             -            -
Depreciation and amortizaion        134            101             121             183              -          539
Pre-tax income (loss)              (421)           573             700          (3,640)        (4,589)      (7,377)
Total assets                    159,622         19,096           6,732         (11,183)             -      174,267
</TABLE>

Retail Community Banking. The Company provides retail community banking services
through the Bank,  which operates four retail banking  branches located in North
Carolina and Virginia.  The Bank is a savings association that attracts deposits
from the  general  public in its  primary  market  area,  which,  together  with
borrowings  from the FHLB,  fund the  Bank's  investment  predominately  in real
estate mortgage  loans.  

Mortgage  Banking.  The Company engages in mortgage banking  activities  through
Essex First,  which conducts its operations out of four offices located in North
Carolina and Virginia.  Essex First was established primarily to originate loans
for sale to private  investors in the secondary  market in order to generate fee
income while avoiding the interest rate and credit risk  associated with holding
long-term fixed-rate mortgage loans in its portfolio.  In addition, the majority


                                       52
<PAGE>

of the Bank's loan product is currently originated by Essex First. 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 in
order to enhance fee income.  Substantially all of the loans originated by Essex
First and not sold with servicing  released to third party investors are sold to
the  Bank  on a  whole  loan  basis.  In  addition  to its  secondary  marketing
activities,   Essex  First  derives   interest   revenue  from  its  residential
construction  loan programs for individuals and builders.  Construction  lending
activities   generally  are  limited  to  Essex  First's  primary  market,  with
particular  emphasis in the greater  Richmond,  Virginia market,  the Tidewater,
Virginia area and counties in northeastern North Carolina. More recently,  Essex
First has expanded its  construction  lending into the Raleigh,  North Carolina,
Northern  Virginia and  Maryland  markets.  Revenues and pre-tax  income for the
mortgage banking segment are presented before cost of funds allocation.

Mortgage Loan Servicing.  The Company provides  mortgage loan servicing  through
Essex Home, which conducts its operations out of a leased operations facility in
Virginia Beach, Virginia.  Revenues generated by Essex Home consist primarily of
loan  servicing  fees,  late charges and other  ancillary  fees.  In addition to
servicing  loans for the Bank and Essex First and being  licensed by Fannie Mae,
Freddie  Mac and Ginnie  Mae,  Essex Home  services  and  subservices  loans for
approximately eight private investors and 47 subservicing  clients.  While Essex
Home services  mortgage loans secured by residential real estate  throughout the
United States,  approximately  83% of its mortgage loan  servicing  portfolio is
concentrated among New York, California,  Virginia,  North Carolina, New Jersey,
Maryland,  Florida,  South Carolina and the District of Columbia. As of December
31, 1998, Essex Home serviced for affiliates and  nonaffiliates in the aggregate
approximately 15,100 loans totaling $1.2 billion.





                              [intentionally blank]

                                       53
<PAGE>
<TABLE>
                                      ESSEX
                                  BANCORP, INC.

                              INVESTOR INFORMATION
<S>                                                   <C>
Annual Meeting of Stockholders                        Annual Report on Form 10-K and
                                                      Additional Information
     The Annual  Meeting of  Stockholders  of Essex
Bancorp,  Inc.  will be held at The  Koger  Center,        A  copy  of  Form  10-K  as  filed   with  the
Building #5, First Floor Conference Room,  Norfolk,   Securities  and  Exchange  Commission  is available
Virginia on May 27, 1999 at 1:00 p.m.                 without   charge  to   stockholders   upon  written
                                                      request.  Requests  for  this  or  other  financial
Stock Price Information                               information  about Essex  Bancorp,  Inc.  should be
                                                      directed to:
     Essex  Bancorp,  Inc.'s common stock is listed
on the American Stock  Exchange  ("AMEX") under the   Jennifer L. DeAngelo, Corporate Secretary
symbol  "ESX." The table  below sets forth the high   Essex Bancorp, Inc.
and  low  sales  prices  of the  common  stock,  as   The Koger Center, Building #9, Suite 200
reported by the AMEX during 1998 and 1997.            Norfolk, Virginia  23502
                                                      Telephone (757) 893-1326
                   1998                 1997
             ----------------   ------------------    Independent Accountants
Quarter       High        Low      High       Low
-------       ----        ---      ----       ---     PricewaterhouseCoopers LLP
First       $6.7500    $3.9375  $ 2.1875   $1.0000    One Columbus Center, Suite 400
Second       5.1250     3.0000    1.8750    1.0000    Virginia Beach, Virginia 23462
Third        3.2500     1.9375   10.0000    1.0000    Telephone (757) 493-7700
Fourth       2.3750     1.3125    7.3750    3.5000

Stock Transfer Agent

     Stockholders  who have  questions  about their
accounts or who wish to change ownership or address
of stock;  to  report  lost,  stolen  or  destroyed
certificates;  or to consolidate  accounts,  should
contact:

Continental Stock Transfer and Trust Co.
2 Broadway
New York, NY  10004
Telephone (212) 509-4000

                                                    54
<PAGE>


                                      ESSEX
                                  BANCORP, INC.

                             DIRECTORS AND OFFICERS

EXECUTIVE OFFICERS                                    DIRECTORS

Gene D. Ross                                          Gene D. Ross
Chairman, President and Chief Executive               Chairman, President and Chief Executive
  Officer                                               Officer
Essex Bancorp, Inc.,                                  Essex Bancorp, Inc.
Essex Savings Bank, F.S.B. and
Essex Home Mortgage Servicing                         Roscoe D. Lacy, Jr.
   Corporation                                        Vice President and General Manager
                                                      Miles Jennings, Inc.
Roy H. Rechkemmer, Jr.                                Elizabeth City, North Carolina
Senior Vice President-Finance/Treasurer               (industrial supply company)
Essex Bancorp, Inc. and
Essex Savings Bank, F.S.B.                            Robert G. Hecht
                                                      Chief Executive Officer
Mary-Jo Rawson                                        Trumbull Corporation
Vice President/Chief Accounting Officer               Pittsburgh, Pennsylvania
Essex Bancorp, Inc. and                               (highway construction company)
Essex Savings Bank, F.S.B.
                                                      Harry F. Radcliffe
Earl C. McPherson                                     President and Chief Executive Officer
President                                             Fort Pitt Capital Management
Essex First Mortgage, a Division of                   Pittsburgh, Pennsylvania
Essex Savings Bank, F.S.B.                            (investment management company)


                                                    55
<PAGE>

                                      ESSEX
                                  BANCORP, INC.

                              CORPORATE INFORMATION

Executive Offices                                     Essex Savings Bank, F.S.B.
                                                      Retail Banking Offices
The Koger Center
Building #9, Suite 200                                Virginia
Norfolk, Virginia  23502                                   520 South Main Street
Telephone (757) 893-1300                                   Emporia, Virginia  23847

Subsidiaries of Essex Bancorp, Inc.                        1401 Gaskins Road
                                                           Richmond, Virginia  23233
Essex Savings Bank, F.S.B.
The Koger Center                                           2825 Godwin Boulevard
Building #9, Suite 200                                     Suffolk, Virginia  23434
Norfolk, Virginia  23502
Telephone (757) 893-1300                              North Carolina
                                                           400 W. Ehringhaus Street
Essex Home Mortgage Servicing                              Elizabeth City, North Carolina 27909
  Corporation
2420 Virginia Beach Boulevard, Suite 109              Essex First Mortgage, a Division of Essex
Virginia Beach, Virginia  23454                       Savings Bank, F.S.B.
Telephone (757) 631-4240                              Mortgage Loan Production Offices

                                                      Virginia
                                                           1401 Gaskins Road
                                                           Richmond, Virginia  23233

                                                           2430 Southland Drive, 3rd Floor
                                                           Chester, Virginia  23831

                                                           The Koger Center
                                                           Building #9, Suite 100
                                                           Norfolk, Virginia  23502

                                                      North Carolina
                                                           400 W. Ehringhaus Street
                                                           Elizabeth City, North Carolina  27909
</TABLE>

                                                    56