SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
 -------------------------------------------------------------------------------

                                    FORM 10-K

(Mark One)

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

                     For fiscal year ended December 31, 1996

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (No Fee Required)

        Transition Period:                      To
                           --------------------    ----------------------

                         Commission File Number: 0-19398

                  VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
                  --------------------------------------------
             (Exact name of Registrant as Specified in its Charter)

                        Virginia                            54-1534067
                        --------                            ----------
(State or other  jurisdiction of incorporation          (IRS Employer ID No.)
or organization)


2101 Parks Avenue, Virginia Beach, Virginia                      23451
-------------------------------------------                      -----
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code:         (757) 428-9331
                                                            --------------

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

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

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of Class)

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

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

        The  aggregate  value of the Common Stock held by  nonaffiliates  of the
registrant  as of March 14, 1997,  computed by reference to the closing price of
such stock on the Nasdaq Stock Market on that date, was $42,742,355.  Solely for
purposes  of this  calculation,  the term  "affiliate"  is deemed to include all
executive officers and directors of the registrant.  As of March 14, 1997, there
were issued and outstanding 4,971,399 shares of the Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.       Portions of Proxy  Statement for 1997 Annual  Meeting of  Stockholders.
         (Part III)


<PAGE>

                                     PART I

Item  1.  Business

General.

        The  Company.   Virginia  Beach  Federal   Financial   Corporation  (the
"Company") was  incorporated  under the laws of the  Commonwealth of Virginia in
February  1989,  for the purpose of becoming a savings and loan holding  company
and owning all of the issued and outstanding  Common Stock of First Coastal Bank
("the Bank"), which was chartered as Virginia Beach Federal Savings Bank at that
time. On June 28, 1991, the Company acquired all of the outstanding Common Stock
of the  Bank  pursuant  to the  Amended  and  Restated  Agreement  and  Plan  of
Reorganization  of the Bank in connection  with the  reorganization  of the Bank
into a savings and loan holding company  structure (the  "Reorganization").  The
Reorganization  had originally been approved by the  stockholders of the Bank in
1989.  Because the  Reorganization  was not consummated within one year from the
date of such approval, however, the Reorganization was reauthorized at the April
24, 1991, annual meeting of the Bank's stockholders.

        Prior to the  Reorganization,  the Company had no assets or  liabilities
and  engaged  in  no  significant   business   activities.   Subsequent  to  the
Reorganization,  the Company has engaged in no significant activities other than
the  ownership  of the Common  Stock of the Bank and  operating as a savings and
loan  holding  company  for the Bank.  Accordingly,  the  information  presented
herein,  including  financial  statements and related data, relates primarily to
the Bank and its subsidiaries.  References throughout this Report to the Company
include the Bank and its subsidiaries, unless the context otherwise requires.

        The  Company's  principal  executive  offices  are located at 2101 Parks
Avenue, Virginia Beach, Virginia 23451, and its telephone number at that address
is (757) 428-9331.

        The Bank.  First  Coastal  Bank was  originally  chartered  in 1935 as a
federal  mutual  savings and loan  association.  Since that time,  it has been a
member of the Federal Home Loan Bank ("FHLB") System, and its deposits have been
federally  insured  up to  applicable  limits.  On  August  29,  1980,  the Bank
converted  from mutual to stock form.  In November,  1996,  the Bank changed its
name from  Virginia  Beach  Federal  Savings  Bank to First  Coastal  Bank.  The
principal  executive  offices  of the Bank are  located  at 2101  Parks  Avenue,
Virginia Beach, Virginia 23451 and its telephone number at that address is (757)
428-9331.

Lending Activities

        General.  The Bank  originates  loans  directly and through its mortgage
banking  subsidiary,  First Coastal  Mortgage Corp ("First  Coastal  Mortgage"),
which was previously known as Beach Fed Mortgage Corp.

        The types and amounts of loans which may be made by First  Coastal  Bank
are  prescribed  by federal law. The Bank is authorized to make loans secured by
first liens on  residential  property  and by junior liens on  residential  real
estate.  Subject  to  certain  limits,  the Bank also  engages  in  secured  and
unsecured consumer, commercial, corporate and business lending activities.

                                        1


<PAGE>



        Loans  Receivable  Held for  Investment.  Set forth below is information
concerning loans receivable held for investment at the specified  periods.  This
information does not include mortgage-backed securities. Other than as disclosed
below,  there  were no  concentrations  of loans at  December  31,  1996,  which
exceeded 10% of total loans.
<TABLE>
<CAPTION>

                                                                           At December 31,
                                 ---------------------------------------------------------------------------------------------------
                                        1996                 1995                1994                 1993               1992
                                 ---------------------------------------------------------------------------------------------------
                                   Amount   Percent     Amount   Percent    Amount    Percent    Amount    Percent   Amount  Percent
                                 ===================================================================================================
<S>                              <C>        <C>       <C>         <C>    <C>          <C>     <C>         <C>    <C>         <C>
Type of Loan                                                            (Dollars in Thousands)
Conventional real estate loans
   Interim construction loans... $  58,834    13.22%   $ 43,246     9.97% $ 25,427      5.99%  $ 15,233     3.93% $ 29,755     8.39%
   Loans on existing
     property (1) (2)...........   398,219    89.48     395,917    91.32   413,920     97.52    370,637    95.73   324,191    91.37
Commercial......................    10,731     2.41       4,343     1.00     1,059      0.25      1,826     0.47       ---      ---
Consumer loans
   Deposit account loans........       725      .16       1,030     0.24       878      0.21      1,484     0.38     2,012     0.57
   Home improvement and
     consumer loans.............    12,698     2.85       8,864     2.04     4,966      1.17      7,790     2.02    10,229     2.88
   Equity line of credit........     3,232      .73       2,572     0.59     1,726      0.41      1,424     0.37     1,111     0.30
Less
   Loans in process.............    33,460     7.52      16,422     3.79    16,632      3.92      4,825     1.25     5,195     1.46
   Discounts and other..........     1,534      .34       2,020     0.47     2,581      0.61      2,225     0.57     2,642     0.74
   Loan loss reserve............     4,390      .99       3,968     0.90     4,328      1.02      4,173     1.08     4,651     1.31
                                 ---------------------------------------------------------------------------------------------------

     Total...................... $ 445,055   100.00%  $ 433,562   100.00% $424,435    100.00%  $387,171   100.00% $354,810   100.00%
                                 ===================================================================================================
Type of Security

Residential real estate
   1-to-4 family................ $ 347,779    78.15%  $ 348,780     80.45%$353,434     83.27%  $302,658    78.17% $272,377    76.77%
   Other dwelling units.........    27,723     6.23       5,797     1.33    13,116      3.09     10,010     2.59     5,129     1.45
Commercial or industrial
   real estate..................    84,783    19.05      87,158    20.10    74,523     17.56     74,626    19.28    76,464    21.55
Commercial......................    10,731     2.41       4,343     1.00     1,059      0.25      1,826     0.47       ---      ---
Deposits........................       725      .16       1,030     0.24       878      0.21      1,484     0.38     2,012     0.57
Other...........................    12,698     2.85       8,864     2.04     4,966      1.17      7,790     2.01    11,316     3.17
Less
   Loans in process.............    33,460     7.52      16,422     3.79    16,632      3.92      4,825     1.25     5,195     1.46
   Discounts and other..........     1,534      .34       2,020     0.47     2,581      0.61      2,225     0.57     2,642     0.74
   Loan loss reserve............     4,390      .99       3,968     0.90     4,328      1.02      4,173     1.08     4,651     1.31
                                 ---------------------------------------------------------------------------------------------------

     Total...................... $ 445,055    100.00% $ 433,562    100.00%$424,435    100.00%  $387,171   100.00% $354,810   100.00%
                                 ===================================================================================================
</TABLE>


-------------------
(1)      Includes construction loans converted to permanent loans.
(2)      Excludes  $433,000 in net loans that were  in-substance  foreclosed  at
         December  31, 1992 that would have been  reclassified  from  foreclosed
         real estate to loans  receivable as a result of the Company's  adoption
         of FAS114.

                                                                 2


<PAGE>



        Out of Area Lending.  The following table summarizes certain information
concerning  those loans and commitments  made by the Bank outside of its primary
market area of Virginia.  Residential single family loans, including wrap loans,
are primarily located in Texas,  Massachusetts,  Georgia, New Mexico,  Kentucky,
Nevada,  Michigan  and  Maryland.  Commercial/industrial  real estate  loans are
primarily located in Illinois, Texas, Utah and Washington.  The information does
not include mortgage-backed  securities. The Company presently does not actively
solicit new loans from outside its primary market area.

<TABLE>
<CAPTION>
                                                                       At December 31,
                              ------------------------------------------------------------------------------------------------------
                                      1996             1995                  1994                    1993              1992
                              ------------------------------------------------------------------------------------------------------
                               Amount      No.   Amount        No.      Amount       No.     Amount         No.    Amount    No.
                              ======================================================================================================
                                                                       (Dollars in Thousands)
<S>                            <C>      <C>     <C>           <C>     <C>           <C>     <C>           <C>     <C>        <C>
Type of Loan (1)
Conventional loans
   Residential-Single-family   $ 43,360   947   $ 60,779      1,202   $ 76,820      1,458   $106,705      1,926   $142,871   3,180
   Other dwelling units ....         18     6         18         10         46         33        106        113         62       1
   Commercial or industrial      10,041    39     10,053         43     13,687         55     20,981         72     14,906      82
Wrap loans--residential-
  Single-family ............      5,402   435      7,108        534      9,294        655      8,156        547      9,450     572
                               -------- -----   --------      -----   --------      -----   --------      -----   --------   -----
        Total ..............   $ 58,821 1,427   $ 77,958      1,789   $ 99,987      2,201   $135,948      2,658   $167,289   3,835
                               ======== =====   ========      =====   ========      =====   ========      =====   ========   =====


Percentage of out-of-area
  loans to total loans
  receivable, net...........       13.2%            18.0%                 23.4%                 35.1%                         47.1%
                                   ====             ====                  ====                  ====                          ====
</TABLE>




-------------------
(1)      Excludes $770,000 in gross loans that were  in-substance  foreclosed at
         December  31, 1992 that would have been  reclassified  from  foreclosed
         real estate to loans  receivable as a result of the Company's  adoption
         of FAS 114.






                                        3


<PAGE>



        Loan Activity.  The following table shows the Bank's lending  activities
during the periods indicated. The information includes loans originated and sold
into the  secondary  market but does not include  mortgage-backed  securities or
loans exchanged for mortgage-backed securities.
<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                            --------------------------------------------------------------------------------------
                                                      1996              1995            1994              1993              1992
                                            ======================================================================================
                                                                                (In Thousands)
<S>                                                 <C>             <C>              <C>               <C>              <C>

Loans Originated
Conventional single-family residential
  Construction loans.......................         $  72,193       $   42,966       $  41,613         $ 18,600         $ 28,191
  Loans on existing property...............           127,250          258,596         237,258          313,708          243,781
Other loans................................            18,746           16,668           6,385            7,754            4,486
                                            --------------------------------------------------------------------------------------
  Total loans originated...................         $ 218,189       $  318,230        $285,256         $340,062         $276,458
                                            ======================================================================================

Loans Purchased
Loans on existing property
   Individual loans from                            $      --       $      339       $  47,866         $ 41,397         $ 63,222
     correspondents........................
   Bulk purchases..........................                --               --           3,881           18,273           41,544
                                            --------------------------------------------------------------------------------------
   Total loans purchased...................         $      --       $      339       $  51,747         $ 59,670         $104,766
                                            ======================================================================================

Loans Sold
Loans on existing property.................         $  81,114        $ 236,299        $318,560         $341,119         $256,830
                                            ======================================================================================
</TABLE>



        During fiscal year 1996, the Bank originated approximately  $118,400,000
single-family  first mortgage loans and sold  approximately  $71,500,000 of such
loans.  While  the  Bank's  single  family  residential  loan  originations  are
generally  underwritten for sale into the secondary market,  $46,900,000 of such
loans made during 1996 were  retained for the Bank's loan  portfolio.  It is the
Bank's policy to retain those loans,  generally loans with  adjustable  interest
rates and/or reset or call  provisions  within five years of  origination  date,
which  facilitate  the  attainment of the Bank's  interest rate risk  management
objectives.  Please refer to "Management's  Discussion and Analysis of Financial
Condition  and  Results of  Operations"  for  additional  information  regarding
asset/liability  management.  For further discussion of First Coastal Mortgage's
activities, see "Subsidiary Activities."

        Residential  Mortgages.  The Bank offers  various  types of  residential
mortgage  loans in addition to traditional  long-term,  fixed-rate  loans.  Such
loans  include 30 and  15-year  amortizing  mortgage  loans with fixed  rates of
interest,  fixed-rate  mortgage loans with terms of 30 years but subject to call
after five,  seven or ten years at the option of the Bank and  several  types of
adjustable-rate mortgage loans.

        Adjustable-rate  mortgage loans vary with respect to maturity,  interest
rate adjustment  periods and basis for adjustment.  These loans generally have a
fixed rate for an initial one or three year period and then have  interest  rate
adjustments based on the yield on United States Treasury securities, adjusted to
a constant one-year maturity.  The adjustment rates have been generally 2.75% to
3.50%  above the  index.  The loans  have  annual  and  lifetime  limits on rate
increases of 1 to 2 and 3 to 6 percentage points, respectively.

                                        4


<PAGE>



        Commercial Real Estate, Construction, Acquisition and Development Loans.
The Bank's  permanent loans secured by commercial  real estate have  customarily
been  15-year to  20-year  amortizing  loans with  principal  and  interest  due
monthly.  Such loans are ordinarily callable after three, five or seven years at
the  option  of the  Bank.  Currently,  the  Bank is  offering  adjustable  rate
commercial  real estate loans with interest  rates that  typically  adjust every
one, three or five years based on the one-year,  three-year or five-year  United
States  Treasury  note rate.  The initial  interest  rate is a market rate.  The
Bank's  policies permit loans to be made for up to 75% of the appraised value of
the commercial real estate securing the loans. The Bank's commercial real estate
loans are secured primarily by office buildings, strip shopping centers, motels,
warehouses  and  apartment  buildings.  As of  December  31,  1996,  the  Bank's
commercial real estate loans ranged in size up to $3.7 million.

        The  Bank  makes  construction  loans  for  residential   properties  to
individuals  and builders.  Loans to individuals are made for six to nine months
at a fixed interest rate of up to two  percentage  points above the Bank's prime
rate at the time of the loan.  Loans to builders  are made up to two  percentage
points above the Bank's prime rate, adjusted monthly.  Residential  construction
loans  are  made  at up to  80%  loan-to-value  ratios.  Construction  loans  on
commercial  real  estate  are  made  generally  for a term of one year at a rate
generally at one to two percentage points above the Bank's prime rate,  adjusted
monthly.  Such loans are made with loan-to-value ratios of up to 75%.

        The Bank makes land  acquisition  and  development  loans on  properties
intended for future development. The Bank lends up to 75% of the appraised value
of the property.  Such loans are made for specified  periods on an interest only
basis. These periods may be extended,  subject to negotiation and the payment of
an extension fee. The Bank's  current policy is to make such loans  generally at
one to two percentage  points above the Bank's prevailing prime rate at the time
the loan is made with interest rates adjusted monthly thereafter.

        Commercial real estate and commercial land  acquisition and construction
lending are  generally  considered to involve a higher level of credit risk than
one-to four-family  residential lending due to the concentration of principal in
a limited  number of loans and  borrowers  and the  effects of general  economic
conditions on real estate developers and managers.  The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's  sell-out value upon completion of the project,  the estimated
cost of the  project and the time to complete  and/or sell the  project.  If the
estimated cost of construction or development proves to be inaccurate,  the Bank
may be compelled  to advance  funds  beyond the amount  originally  committed to
permit  completion  of the  project.  If the  estimate  of  value  proves  to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project the value of which may appear to be  insufficient  to assure full
repayment.  When loan payments  become due,  borrowers may experience  cash flow
from the project  which is not  adequate to service  total debt.  This cash flow
shortage  may result in the failure to make loan  payments.  In such cases,  the
Bank may be compelled to modify the terms of the loan.  In addition,  the nature
of these  loans  is such  that  they are  generally  less  predictable  and more
difficult to evaluate and monitor.

        Commercial  Loans.  The Bank makes fixed and  variable  rate  commercial
loans to individuals and  corporations  on either a secured or unsecured  basis.
Fixed rate loans bear interest rates generally  between 250 and 350 basis points
above the like term United States Treasury  securities and have maturities of up
to 5 years.  Variable rate loans are originated at market rate with  adjustments
based on the Bank's prime rate plus 100 to 250 basis points.

        Consumer Loans.  The Bank is permitted to invest up to 35% of its assets
in consumer  loans.  The Bank  originates  property  improvement  loans  through
contacts with contractors and through its branches.  It also makes loans secured
by deposits. The Bank also offers home equity lines of credit, automobile loans,
boat loans and unsecured personal loans. Such loans vary as to rate and term.

                                        5


<PAGE>



        Loan Maturity and Repricing Information.  The following table sets forth
certain  information at December 31, 1996,  regarding the dollar amount of loans
maturing  or  repricing  in  the  Bank's  loan  and  mortgage-backed  securities
portfolio based on their maturity or repricing date. Demand loans,  loans having
no  stated  schedule  of  repayments  and no  stated  maturity,  overdrafts  and
delinquent loans maturing prior to December 31, 1996, are reported as due in one
year or less.  At  December  31,  1996,  scheduled  payments of  principal,  and
expected  prepayments  of  principal  which  are  based  on  consensus  expected
prepayment  speeds  obtained  from  dealers or other  sources  which  management
believes to be reliable,  are shown in the period  during  which such  principal
reduction is expected to occur.
<TABLE>
<CAPTION>

                                                          Due 1/1/97         Due 1/1/98 -          Due After
                                                          - 12/31/97           12/31/2001         12/31/2001
                                                  ============================================================
                                                                          (In Thousands)
<S>                                                       <C>                  <C>                  <C>
Held or Available-for-sale
    Real estate mortgage loans...................         $      268           $      195           $  4,322
    Mortgage-backed securities...................             56,583               16,190              3,616
                                                  ------------------------------------------------------------

                                                              56,851               16,385              7,938
                                                  ------------------------------------------------------------
Held-for-investment
    Real estate mortgage loans...................            196,407              141,871             58,212
    Real estate construction loans...............             26,214                  765                 --
    Mortgage-backed securities...................              4,843               12,739             11,890
    Commercial...................................              7,506                3,220                 --
    Consumer loans...............................              5,995                7,252              3,406
                                                  ------------------------------------------------------------

                                                             240,965              165,847             73,508
                                                  ------------------------------------------------------------

Total............................................          $ 297,816            $ 182,232           $ 81,446
                                                  ============================================================
</TABLE>






                                        6


<PAGE>




        The  table  below  sets  forth  the  dollar  amount  of  all  loans  and
mortgage-backed  securities  at December 31, 1996,  that mature or reprice after
December 31, 1997 which have  predetermined  interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>

                                                                        Predetermined                Floating or
                                                                                Rates            Adjustable Rate
                                                             =====================================================
                                                                                (In Thousands)
<S>                                                                        <C>                         <C>
Held or Available-for-sale
    Real estate mortgage loans..............................               $      195                  $   4,322
    Mortgage-backed securities..............................                   19,806                         --
                                                             -----------------------------------------------------
                                                                               20,001                      4,322
                                                             -----------------------------------------------------
Held-for-investment
    Real estate mortgage loans..............................                  143,059                     57,789
    Mortgage-backed securities..............................                   24,629                         --
    Commercial..............................................                    3,220                         --
    Consumer loans..........................................                   10,658                         --
                                                             -----------------------------------------------------
                                                                              181,566                     57,789
                                                             -----------------------------------------------------

   Total....................................................                $ 201,567                   $ 62,111
                                                             =====================================================
</TABLE>


        Loan Commitments.  The Bank issues commitments to prospective  borrowers
to originate  loans.  At December 31, 1996,  the Bank had committed to originate
$15,788,000 in loans, not including loans in process,  the majority of which are
secured  by  property  located  in its  local  market  area.  Making  relatively
long-term  commitments  involves the risk that the interest  rate to be received
will be below the market rate at the time the loan is  originated  or purchased.
The Bank finances loans its originates for sale until such time as the loans can
be sold.  The period of time between  issuance of a loan  commitment and closing
and sale of the loan  generally  ranges  from 60 to 120 days.  In the event that
interest  rates rise between the time of a loan  commitment  and closing and the
sale of the loan,  the Bank may be unable to sell the loans without  incurring a
loss. The Bank attempts to protect itself from changes in interest rates through
the use of best efforts forward delivery  commitments,  whereby the Bank commits
to sell a loan at the time the  borrower  commits to an  interest  rate with the
intent that  interest  rate risk on the loan has been assumed by the buyer.  See
Note 17 of Notes to Consolidated Financial Statements.

        Collection  Procedures  and  Loan  Quality.   Collection  procedures  on
delinquent  loans  serviced by the Bank  provide  that when a loan payment is 30
days overdue,  the borrower will be contacted by mail and payment requested.  If
the delinquency continues, subsequent efforts are made to contact the delinquent
borrower.  In certain instances after considering the ability of the borrower to
repay,  the nature of the property and the proposed  interest rate, the Bank may
modify the loan or grant a limited  moratorium  on loan  payments  to enable the
borrower to reorganize his or her financial affairs.  If the loan continues in a
delinquent  status for 90 days,  the Bank  generally  will initiate  foreclosure
proceedings.  Any property acquired by the Bank as a result of foreclosure or by
deed in lieu of foreclosure is listed for sale to attempt to recover all or part
of the Bank's  investment and is classified as real estate owned until such time
as it is sold.  When such  property is acquired,  it is recorded on the books of
the Bank at the lower of the unpaid principal balance of the related loan or its
fair value less its  estimated  costs of sale.  Any  further  write-down  of the
property is charged to the allowance for losses on foreclosed real estate.  With
respect to loans  subserviced  for the Bank,  the  subservicer  follows the same
procedures  as the Bank and is  contacted  by the Bank  when any loan is 60 days
delinquent in order to determine the status of action being taken.

                                        7


<PAGE>



        Impaired  Loans.   The  Company  has  adopted   Statement  of  Financial
Accounting Standards No. 114 (FAS 114),  "Accounting by Creditors for Impairment
of a Loan," and Statement of Financial  Accounting  Standards No. 118 (FAS 118),
"Accounting  by Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures."   Management  periodically  reviews  its  entire  loan  portfolio,
particularly each of its classified  assets,  which includes all  non-performing
and loans  contractually  delinquent 90 days or more, to determine  whether such
loans are impaired in accordance  with FAS 114.  Each of the Company's  impaired
loans  has  been  measured  based  on the  value of the  loan's  collateral.  An
allowance  for  possible  loan  losses has been  established  for any  shortfall
between the  Company's  investment  in impaired  loans and the  impaired  loans'
collateral values.

                                        8


<PAGE>




        The following  table sets forth  information  with respect to the Bank's
non-performing assets at the periods indicated.
<TABLE>
<CAPTION>
                                                                               At December 31,
                                       ---------------------------------------------------------------------------------------------
                                               1996               1995               1994               1993              1992
                                        ============================================================================================
                                                                            (Dollars in Thousands)
<S>                                             <C>                <C>                  <C>                <C>             <C>
Loans accounted for on a non-accrual
basis (1) (4):
   Commercial real estate..............         $      95          $      99            $ 2,076            $ 3,817         $      --
   Consumer............................                --                125                250                 --                --
                                        --------------------------------------------------------------------------------------------
                                                       95                224              2,326              3,817               770
                                        --------------------------------------------------------------------------------------------
Accruing loans which are contractually
 past due 90 days or more (2):
   Real Estate:
    Residential........................             4,009              3,553              3,507              4,460             4,674
    Commercial.........................                --                 --                194                267             6,364
    Construction.......................                --                 --                 --                 --                --
    Consumer...........................                22                 18                 77                 --                --
                                        --------------------------------------------------------------------------------------------
                                                    4,031              3,571              3,778              4,727            11,038
                                        --------------------------------------------------------------------------------------------
   Total of non-accrual and
    90-days past due loans.............          $  4,126           $  3,795            $ 6,104            $ 8,544           $11,038
                                        ============================================================================================

Non-accrual and 90-days past
  due loans as a percentage
  of total loans receivable, net.......              0.93%              0.88%              1.44%              2.21%            3.11%
                                        ============================================================================================
Other non-performing assets (3)........          $  2,047           $  5,767            $ 6,828            $ 9,798           $17,585
                                        ============================================================================================
</TABLE>



----------------------
(1) Non-accrual status denotes loans on which, in the opinion of management, the
    collection  of  additional  interest  is  unlikely.  Payments  received on a
    non-accrual loan are either applied to the outstanding  principal balance or
    the allowance  for  delinquent  interest,  depending on an assessment of the
    collectibility of the loan.
(2) The Bank fully  reserves  against the interest on all accruing loans 90 days
    past due and those loans that are identified by management as impaired.
(3) Other non-performing assets represents property acquired by the Bank through
    foreclosure or repossession or reclassified as an in substance  foreclosure.
    This property is initially  carried at the lower of its estimated fair value
    less cost of  disposition  or the carrying  value of the related loan at the
    time of foreclosure.
(4) Excludes  $770,000  in gross  loans  that were  in-substance  foreclosed  at
    December 31, 1992, that would have  reclassified from foreclosed real estate
    to loans  receivable  accounted for on a nonaccrual basis as a result of the
    Company's adoption of FAS 114.

                                        9


<PAGE>




        As of the  dates  indicated  in the table  above,  the Bank had no loans
categorized as troubled debt  restructuring.  As of December 31, 1996, there are
no loans  included in the table above where  known  information  about  possible
credit  problems  of the  borrower  caused  management  to have doubts as to the
ability of the borrower to comply with the present loan repayment terms.

        At December 31, 1996,  nonperforming  loans  included  $113,000 of loans
which were  considered  impaired.  The  allowance for possible loan losses as of
December 31, 1996, included $70,000 related to loans considered to be impaired.

        Other  non-performing  assets comprise  properties  acquired by the Bank
through  foreclosure or repossession  (collectively  "REO").  An analysis of the
activity in REO for the periods shown is set forth below.
<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                       -------------------------------------------------------------
                                                                    1996                1995                  1994
                                                       =============================================================
                                                                              (In Thousands)

<S>                                                            <C>                  <C>                    <C>
Beginning balance......................................        $   5,767            $  6,828               $ 9,798
Foreclosures ..........................................            1,316               3,649                 3,848
Other additions (1)....................................               62               1,325                 1,367
Provision..............................................             (484)               (200)                 (100)
Dispositions, net......................................           (4,614)             (5,835)               (8,085)
                                                       -------------------------------------------------------------

Ending balance.........................................        $   2,047            $  5,767               $ 6,828
                                                       =============================================================
</TABLE>


-----------------
(1)     Consists of  improvements  and advances  pursuant to the Bank's  salvage
        powers in an effort to make the projects  more saleable and purchases by
        the Bank of the interests of other lenders in the projects.

        Real  Estate  Owned  ("REO").  At December  31, 1996 the REO  properties
comprised  Condominium  Campsites,  described  below,  with a carrying  value of
$1,843,000,  and  three  additional  residential  properties  with an  aggregate
carrying value of $204,000 and no individual value greater than $87,000.

        Condominium  Campsites,  Virginia  Beach,  Virginia.  In 1989,  the Bank
originated a loan for the purchase of a 254 campsite  campground located on over
62 acres of land in the  Sandbridge  section of Virginia  Beach,  Virginia.  The
campsites were then divided into condominium  units by the borrower and marketed
on an individual basis.  Prior to the foreclosure by the Bank in 1991, 53 of 254
campsites had been sold. During the third quarter of 1993, the Bank entered into
an agreement with a company which  specializes in the development and management
of recreational  vehicle parks to develop and market the Bank's interest in this
property.  Development of the property was completed  during 1996 and a total of
87 lots have been sold. The Bank  anticipates  continued  marketing of the sites
through 1998. No assurance can be given,  however, that the property can be sold
for an amount equal to or greater than the carrying value.

        Regulatory  Loan  Classification.  Federal  regulations  require savings
associations  to  review  and  classify  their  assets on a  regular  basis.  In
addition,  in connection with examinations of savings  associations,  regulatory
examiners  have  authority  to identify  problem  assets  and,  if  appropriate,
classify them. The regulation provides for three asset classification categories
(i.e.,  substandard,  doubtful  and loss).  The  regulations  also provide for a
special mention category, described as assets which do not

                                       10


<PAGE>



currently expose a savings association to a sufficient degree of risk to warrant
classification  but do  possess  credit  deficiencies  or  potential  weaknesses
deserving  management's  close  attention.  Loans  classified as  substandard or
doubtful  require the savings  association to establish  general  allowances for
loan losses.  If an asset or portion  thereof is  classified  loss,  the savings
association  must either  establish a specific  allowance for loan losses in the
amount of 100% of the portion of the asset  classified  loss, or charge off such
amount.  General loss allowances established to cover possible losses related to
loans  classified  substandard  or doubtful  may be included  in  determining  a
savings association's risk-based capital, subject to certain limitations,  while
specific  valuation  allowances  for loan  losses do not  qualify as  risk-based
capital.  Examiners may disagree with the savings association's  classifications
and amounts  reserved.  At December 31, 1996,  the Bank had $7,170,000 in assets
classified as substandard, and $77,000 classified as doubtful.

        Allowances  for  Possible   Losses  on  Loans  and  Real  Estate  Owned.
Management  of the Bank  assesses  the adequacy of the  allowances  for possible
losses on loans and foreclosed real estate on a quarterly  basis,  and additions
to the allowances  for losses on loans and foreclosed  real estate are made when
deemed  necessary.  The Bank's Board of Directors  reviews the reserves for loan
and  foreclosed  real estate losses  quarterly.  An allowance for loan losses is
provided when  collectibility  of specific real estate loans is in doubt and the
value of the security  property has declined below the outstanding  principal of
the related loan.  The Bank also  provides  allowances  for accrued  interest on
delinquent  loans  and for  estimated  losses  against  the  carrying  value  of
foreclosed real estate when management  determines  that  collectibility  of the
interest  is in doubt or a  decline  in the fair  value of the  foreclosed  real
estate  has  occurred.  Additions  to the  allowances  for  losses  on loans and
foreclosed  real  estate are charged to  earnings  through a provision  for loan
losses.  The  allowances  are reduced  when a loss  actually is incurred or such
allowance is charged-off in accordance with the accounting  principles set forth
in FAS 114. See  "Impaired  Loans." In certain  instances,  reserves may also be
reduced when the assumptions under which the reserves were established  indicate
that all or a portion of the reserve is no longer necessary.

        During the fiscal year ended  December 31, 1996, the Bank added $150,000
and $484,000,  respectively,  to its allowances for possible loan and foreclosed
real estate losses.  As of December 31, 1996, the Bank had a total of $4,625,000
in  its  allowances  for  possible  loan  and  foreclosed  real  estate  losses.
Approximately  $4,390,000 of the loss reserves are general unallocated loan loss
reserves and have been established in addition to the reserves indicated after a
specific loan evaluation methodology.  See "Management's Discussion and Analysis
of Financial  Condition and Results of Operations" and Notes 5 and 6 of Notes to
Consolidated Financial Statements.

                                       11


<PAGE>




        The following  table sets forth an analysis of the Bank's  allowance for
possible loan losses for the periods indicated.
<TABLE>
<CAPTION>

                                                                              Year Ended December 31,

                                              --------------------------------------------------------------------------------------
                                                    1996           1995             1994              1993              1992
                                              ======================================================================================
                                                                              (Dollars in Thousands)

<S>                                                 <C>             <C>                <C>                <C>               <C>
Balance at beginning of period...............       $   3,968       $ 4,328            $ 4,173            $4,651            $2,650

Net loans (charged-off) recovered (1):

  Real estate-mortgage.......................             272          (535)              (120)           (1,188)             (249)
  Real estate- construction..................              --            --                 --               110                --
                                              --------------------------------------------------------------------------------------

Total (charge-offs) recoveries, net..........             272          (535)              (120)           (1,078)             (249)
Provisions for loan losses...................             150           175                275               600             2,250
                                              --------------------------------------------------------------------------------------

Balance at end of period.....................        $  4,390       $ 3,968            $ 4,328            $4,173            $4,651
                                              ======================================================================================
Rates of net (charge-offs) recoveries
  during the period to average loans
  outstanding during the period............             0.06%         (0.12%)            (0.03%)           (0.26%)           (0.06%)
                                              ======================================================================================

</TABLE>

---------------------
(1) Includes  charge-offs  associated  with loans  reclassified  as in-substance
foreclosure in years prior to 1994.

        The  following  table sets forth the  breakdown  for the  allowance  for
possible loan losses by loan category at the periods indicated.
<TABLE>
<CAPTION>

                                                                                At December 31,
                  ------------------------------------------------------------------------------------------------------------------
                           1996                     1995                  1994                      1993                    1992
                  ==================================================================================================================
                                Percent             Percent               Percent                 Percent                 Percent
                               of loans            of loans              of loans                 of loans                of loans
                                in each             in each               in each                 in each                 in each
                               category            category              category                 category                category
                               to total            to total              to total                 to total                to total
                      Amount      loans    Amount     loans   Amount        loans      Amount      loans       Amount     loans
                  ==================================================================================================================
                                                          (Dollars in Thousands)

<S>                <C>          <C>       <C>       <C>       <C>          <C>         <C>           <C>       <C>          <C>
Unallocated....... $   4,390      (0.98)% $ 3,865    (0.92%) $ 3,652        (0.86)%   $ 3,923        (1.01)%  $ 3,790       (1.07)%
Real estate
   mortgage:
  Residential.....        --      70.42        --     74.04      ---        80.90         ---         76.24        61        69.09
  Commercial......        --      18.42        --     16.69      426        16.39         250         19.23       800        21.31
Real estate-
   Construction...        --       6.03        --      6.32      ---         2.01         ---          2.68       ---         6.93
Commercial........        --       2.40        --      0.99      ---         0.25         ---          0.47       ---          ---
Consumer..........        --       3.71       103      2.86      250         1.31         ---          2.39       ---         3.74
                  ------------------------------------------------------------------------------------------------------------------
Total Allowances
   for Loan

   Losses......... $   4,390     100.00%   $ 3,968    100.00% $ 4,328      100.00%     $ 4,173       100.00%   $ 4,651      100.00%
                  ==================================================================================================================
</TABLE>



                                       12


<PAGE>



        The unallocated or "general"  portion of the allowance for possible loan
losses represents management's best estimate of the inherent loss present in the
Bank's  loan  portfolio  at  December  31,  1996.  Management  divides  the loan
portfolio  into  two  groups,  classified  loans  and  pass  loans,  in order to
determine the general loan loss reserve.

        Management  reviews  each  classified  loan  greater  than or  equal  to
$400,000 and assigns a general  reserve  percentage to it based on the following
parameters:

                                              General Reserve
            Classification                            %
=====================================================================

Special Mention                                    0% - 5%
Substandard                                        5% - 25%
Doubtful                                          40% - 60%

        These  percentages  are  increased  or decreased  based on  management's
review of the borrower's overall financial condition,  type of collateral,  loan
payment history,  economic  conditions and trends,  guarantors,  historical loss
experience on similar loans and any other relevant information. Classified loans
less than $400,000 are reviewed on a pool basis using the same criteria  defined
above.

        The pass loans are organized into pools with common  characteristics  in
terms  of  their  risk  profile,  year  originated,  loan-to-value  ratio,  loan
collateral or any other characteristic  considered appropriate by management.  A
general  reserve  percentage  is  assigned  to each  pool  based  on the  Bank's
historical loss experience for similar pools of loans.

        The unallocated portion of the allowance for loan losses is management's
estimation  of the  losses  that may be  realized  over  the  life of the  loans
included in its portfolio at December 31, 1996. Management is unable to estimate
the timing or the amount of related future charge-offs.

        Investment  Activities.  Federal  savings  banks have the  authority  to
invest in certain types of securities and other  investments  subject to various
restrictions  largely  related to  limitations  on the type of  investments as a
percentage of total assets.  The Bank's  investment  activities  are within such
restrictions.

        The Bank's investment securities,  excluding mortgage-backed and related
securities,  are described in Note 3 to the Consolidated  Financial  Statements.
Debt securities of certain  federal  agencies,  securities  issued by the United
States  Treasury and federal funds sold amounting to $15,050,000 at December 31,
1996,  are  retained  to satisfy  the Bank's  liquidity  requirements.  For more
information  regarding liquidity  requirements see "Management's  Discussion and
Analysis of Financial Condition and Results of Operations." See "Regulation" for
further information regarding the Bank's regulatory capital requirements.

                                       13


<PAGE>




        The carrying  value of the Bank's  investment  portfolio at December 31,
1996, by maturity is as follows:
<TABLE>
<CAPTION>

                                                                                                              Weighted
                                                                        Amortized         Estimated           Average
Remaining Maturity                                                           Cost        Fair Value              Rate
=======================================================================================================================
                                                                                (Dollars in Thousands)
<S>                                                                      <C>               <C>                  <C>
Within one year
        U. S. Treasuries......................................           $  2,980          $  2,982              5.53%
        Federal Agencies......................................              2,003             2,019              7.56
                                                               --------------------------------------------------------
                                                                            4,983             5,001              6.35
                                                               --------------------------------------------------------
After one year but within 5 years
        U. S. Treasuries......................................              3,971             3,947              5.06
        Federal Agencies......................................              8,987             8,750              5.59
                                                               --------------------------------------------------------
                                                                           12,958            12,697              5.43
                                                               --------------------------------------------------------
No stated maturity
        Federal Home Loan Bank stock..........................              9,842             9,842              7.25
                                                               --------------------------------------------------------

                                                                         $ 27,783          $ 27,540              6.24%
                                                               ========================================================
</TABLE>

        The Bank also invests in mortgage-backed and related securities, subject
to regulations affecting such activities.  Federal associations such as the Bank
have no limitations on the purchase of mortgage-backed and related securities if
such  securities  are  issued by GNMA,  FNMA or FHLMC or qualify  under  section
3(a)(41) of the Securities  Exchange Act of 1934, as amended,  commonly referred
to as Secondary Mortgage Market Enhancement Act or "SMMEA" securities.  See Note
4 of the Notes to  Consolidated  Financial  Statements  for further  information
regarding mortgage-backed and related securities.

        It is the  Bank's  practice  to  purchase  mortgage-backed  and  related
securities to  supplement  its loan  portfolio and to make  efficient use of the
Bank's  capital.  The Bank may  purchase  securities  for a short period of time
under  agreements to resell those same  securities  at a given date.  The Bank's
risk-based capital  requirements  assign the Bank's  mortgage-backed and related
securities  to a 20%  risk-weighted  category.  In  addition,  it is the  Bank's
intention to use purchased floating rate  mortgage-backed and related securities
to  assist  it in  managing  its  interest  rate  risk in  conjunction  with its
asset/liability management.  Management also expects the price volatility of the
floating rate mortgage-backed and related securities to be low and, accordingly,
classifies such securities as  "available-for-sale" in accordance with Statement
of Financial  Accounting  Standards No. 115, "Accounting for Certain Investments
in Debt  and  Equity  Securities."  Please  refer  to  Notes 2 and 4 of Notes to
Consolidated Financial Statements.

        At  December  31,  1996,  1995 and  1994,  the  Bank  had  $106,621,000,
$137,743,000 and  $220,635,000,  respectively,  in  mortgage-backed  and related
securities, at amortized cost.

                                       14


<PAGE>



        The table  below sets forth  certain  information  regarding  the Bank's
investment in collateralized mortgage obligations at December 31, 1996.
<TABLE>
<CAPTION>

                                      Security            Amortized        Estimated         Index/Frequency      Estimated
                                      Rating(1)                 Cost       Fair Value          of Adjustment      Duration (3)
                                     ===========================================================================================
                                                                       (Dollars in Thousands)
<S>                                     <C>               <C>              <C>             <C>                      <C>

Floating Rate
   Resolution Trust Corporation (2)..   AAA               $  21,426        $  21,103         1 yr. CMT/Annual          .48 Yrs
   Resolution Trust Corporation .....   AAA                     358              358         3 yr. CMT/3 yrs.          .32 Yrs
   Corporate Issuance................   AAA                   2,534            2,513       1 mth.LIBOR/Monthly         .04 Yrs
                                                  ------------------------------------
                                                             24,318           23,974
                                                  ------------------------------------
Fixed Rate
   Corporate Issuance................   AAA                  53,482           52,351                N/A               3.02 Yrs.
   FNMA .............................   AAA                     704              701                N/A                .09 Yrs.
                                                  ------------------------------------
                                                          $  54,186        $  53,052
                                                  ------------------------------------
         Total.......................                     $  78,504        $  77,026
                                                  ====================================
</TABLE>


------------------
(1)      The security rating is as of the issue date.

(2)      Each loan in these pools adjusts  annually based on the 1 Year Constant
         Maturity  Treasury  ("CMT") index; the entire pool adjusts at a rate of
         approximately 6 to 12% per month throughout each annual period.

(3)      Estimated at December 31, 1996

         High Risk Securities.  The Company periodically measures its securities
individually  to  determine  if they  are  "high  risk" in  accordance  with OTS
regulations.  At December 31, 1996 the Company had one mortgage-backed  security
in the amount of $6,360,000  which was deemed high risk in accordance with these
regulations.

Source of Funds

         Deposits.  The primary source of funds for the Bank's lending and other
investment activities has been deposits solicited from the general public. Prior
to 1988, the Bank pursued a strategy of soliciting  certificates of deposit with
maturities of one to ten years from depositors outside of its local area market.
The purpose of attracting  long-term  deposits was both to fund asset growth and
lengthen the  maturities of the deposits in the Bank in order to match them more
closely to the maturities of loans  purchased.  The Bank, on a retail basis,  no
longer  actively  advertises  for deposits  outside of its local area market and
offers customers outside its local market, with maturing deposits, renewal rates
no  higher  than  those  offered  to  customers  in the  Bank's  local  markets.
Currently,  the Bank uses alternate  sources,  such as advances from the FHLB of
Atlanta and brokered  deposits,  for its long term funds if retail deposit rates
are judged by management to be unattractive.

                                       15


<PAGE>



Deposit activity is set forth as follows:
<TABLE>
<CAPTION>

                                                               Retail Deposits                     Brokered
                                                          Local Area                 Other         Deposits              Total
                                                  ==============================================================================
                                                                              (Dollars in Thousands)
<S>                                                        <C>                   <C>              <C>                <C>

Year Ended December 31, 1996
Beginning balance................................          $ 289,162             $  44,587        $ 159,222          $ 492,971
Deposits purchased...............................                 --                    --               80                 80
Net cash inflow (outflow)........................                494                (7,617)         (73,029)           (80,152)
Interest credited................................              7,927                 2,563               --             10,490
                                                  ------------------------------------------------------------------------------

         Total...................................          $ 297,583             $  39,533        $  86,273          $ 423,389
                                                  ==============================================================================

Year Ended December 31, 1995
Beginning balance................................          $ 268,488             $  59,541        $ 177,041          $ 505,070
Deposits purchased...............................                 --                    --           71,350             71,350
Net cash inflow (outflow)........................             10,807               (18,336)         (89,169)           (96,698)
Interest credited................................              9,867                 3,382               --             13,249
                                                  ------------------------------------------------------------------------------

         Total...................................          $ 289,162             $  44,587        $ 159,222          $ 492,971
                                                  ==============================================================================

Year Ended December 31, 1994
Beginning balance................................           $263,608              $148,839          $60,281           $472,728
Deposits purchased...............................                 --                    --          136,183            136,183
Net cash inflow outflow..........................             (3,134)              (94,533)         (19,423)          (117,090)
Interest credited................................              8,014                 5,235               --             13,249
                                                  ------------------------------------------------------------------------------

         Total...................................           $268,488              $ 59,541         $177,041           $505,070
                                                  ==============================================================================
</TABLE>



Characteristics of time deposits as of December 31, 1996, are set forth below:
<TABLE>
<CAPTION>

                                                       Retail Deposits                         Brokered Deposits
                                            ----------------------------------------------------------------------------
                                                                  Average                                   Average
Remaining Maturity                                Amount            Rate                     Amount           Rate
========================================================================================================================
                                                                       (Dollars in Thousands)

<S>                                                <C>                   <C>                  <C>                <C>
Within three months........................        $  39,615             5.22%                $  14,995          6.43%
Three to six months........................           54,450             5.41%                   16,458          5.97%
Six months to one year.....................           56,456             5.38%                   21,892          6.26%
One year to two years......................           37,587             5.81%                   32,928          6.28%
Two years to three years...................           20,791             5.80%                       --            --
Over three years...........................           13,952             6.10%                       --            --
                                            ------------------                          -----------------

  Total....................................        $ 222,851                                    $86,273
                                            ==================                          =================
</TABLE>





                                       16


<PAGE>




A  summary  of time  deposits  $100,000  or  greater  by  maturity  follows  (in
thousands):

                   Remaining Maturity                            Balance
               ================================================================

                   Within three months........................   $  4,472
                   Three months to six months.................      8,670
                   Six months to one year.....................      8,089
                   One year to two years......................      6,904
                   Two to three years.........................      3,449
                   Over three years...........................      1,942
                                                               -----------------

                      Total...................................   $ 33,526
                                                               =================


         Borrowings.  As a member  of the  FHLB  System,  the  Bank  may  obtain
additional  funds through  loans,  which are called  advances,  from the FHLB of
Atlanta.  Advances  are secured by a blanket  floating  lien on  qualifying  1-4
family first mortgage loans and certain  mortgage-backed and related securities.
At December 31, 1996,  fixed-rate  advances totaled  $98,110,000 with a weighted
average  maturity  of 20  months,  and had a  weighted  average  cost of  6.14%.
Variable rate advances  totaled  $35,000,000 and had a weighted average maturity
of 20 months and a weighted  average cost of 5.43%.  The  interest  rates on the
variable  rate  advances are based on either  1-month LIBOR or the Federal funds
rate and adjust monthly or quarterly.

         The Bank  periodically  uses reverse  repurchase  agreements and dollar
roll reverse  repurchase  agreements to assist in meeting  short-term  cash-flow
needs.  Reverse repurchase  agreements involve a borrowing pursuant to which the
lender agrees to return to the Bank the same securities given as collateral. The
Bank enters into reverse  repurchase  agreements for a limited term, usually 30,
60 or 90 days, or due on demand. The reverse repurchase agreements are repaid by
the  Bank  when  excess  cash  is  available.  Dollar  roll  reverse  repurchase
agreements are  agreements  pursuant to which the lender agrees to return to the
Bank  securities that are  substantially  the same as those that were pledged as
collateral.  The dollar roll reverse repurchase  agreements have terms of 30, 60
or 90 days. At December 31, 1996,  the Bank had  $4,920,000  reverse  repurchase
agreements  outstanding  which matured within 90 days. There were no dollar roll
agreements   outstanding  at  December  31,  1996.  See  Note  11  of  Notes  to
Consolidated Financial Statements.

         Reverse  repurchase  agreements  and  dollar  roll  reverse  repurchase
agreements  have  certain  risks.  An  increase in market  interest  rates could
decrease the market value of the  securities  used by the Bank as  collateral in
reverse  repurchase  transactions,  and thus the  amount of funds  that the Bank
could obtain through such transactions  would decrease if additional  collateral
is not  available.  In  addition,  if the Bank sells  securities  pursuant  to a
reverse repurchase  agreement to an entity which subsequently becomes insolvent,
the Bank may experience difficulty obtaining the return of such securities.  The
borrowing  represented  by a reverse  repurchase  agreement is  generally  over-
collateralized,  i.e., the market value of the securities  involved  exceeds the
price at which the Bank agrees to sell and repurchase the  securities.  Thus, if
the Bank has difficulty  obtaining the return of the  securities,  it could lose
the amount of such  difference.  In order to seek to reduce such risks, the Bank
transacts  all of its  reverse  repurchase  agreement  borrowings  with  primary
dealers  or  regional  banks,  the  financial  conditions  of which  it  reviews
periodically.

                                       17


<PAGE>




Subsidiary Activities

         First  Coastal Bank is permitted to invest an amount equal to 2% of its
assets in service corporations.  An additional investment of 1% of assets may be
made where such  investment is primarily for community,  inner-city or community
development purposes.  The Bank has four first tier subsidiaries,  First Coastal
Mortgage,  VBF  Financial  Services  Corp.  ("VBFFSC"),  Princess  Anne  Service
Corporation ("PASC"), and Eighth Princess Anne Properties, Inc. ("8thPA").

         First Coastal  Mortgage is a wholly owned  subsidiary of the Bank,  and
was formed in 1987 for the purpose of engaging in mortgage  banking  activities.
First Coastal  Mortgage  solicits loan  applicants for a variety of conventional
and government insured mortgage loans secured by residential real estate. During
1992 through  1994,  First  Coastal had expended its  operations to include loan
production offices through central and northern Virginia and into Maryland. Late
in 1995 the Company sold five of its seven loan production  branches leaving two
branches  operating in the Hampton  Roads  market  contiguous  to the  Company's
retail banking operations.

         Princess Anne Service  Corporation and its  subsidiaries  (collectively
"PASC") were formed  throughout  the 1980s to invest in a variety of real estate
development  projects,  and to hold  title to or  operate  certain  real  estate
properties of the Bank which had been acquired  through  foreclosure.  PASC is a
"non-includable subsidiary" for purpose of compliance with the Bank's regulatory
capital  requirements.  See "Regulation -- Regulatory Capital  Requirements." At
December 31, 1996, the Bank had $34,500 of investment in and advances to PASC.

         The Bank is presently  winding down the activities of PASC. At December
31, 1996, PASC's assets consist of a partnership  investment  holding one parcel
of undeveloped  commercial  real estate.  At the present time, the Bank does not
intend to make  additional  investments  in PASC and  expects  that its  present
investment will be recovered over the next several years.

         Eighth Princess Anne Properties,  Inc. ("8thPA") was acquired from PASC
during 1994 in order to hold a certain piece of foreclosed  real estate  located
in Virginia Beach,  VA. The foreclosed real estate held by 8thPA was sold during
1995. At December 31, 1996, the Bank had $3,000 of net advances due from 8thPA.

         VBF Financial  Services Corp. is a wholly owned  subsidiary of the Bank
and was formed in April  1992 to sell  fixed-rate  annuities,  a range of mutual
funds and  tax-exempt  investments  on an  agency  basis  for a  commission.  At
December 31, 1996,  the Bank had $205,000 of  investment  in and advances to VBF
Financial Services Corp.

Competition

         First  Coastal  Bank faces  strong  competition  in the  attraction  of
deposits,  its primary source of lendable funds,  and in the origination of real
estate  loans.  The Bank  competes  for  deposits by offering a wide  variety of
accounts,  competitive  rates,  premiums and  numerous  customer  services,  and
competes  for loans  principally  through  the  interest  rates and loan fees it
charges and the availability of funds to make loan commitments.  The Bank's most
direct  competition for savings deposits has  historically  come from commercial
banks,  other thrift  institutions  and credit unions in the Hampton Roads area.
The Bank's  competition for real estate loans comes  principally from commercial
banks, other thrift  institutions,  mortgage banking  companies,  life insurance
companies and other institutional lenders.

                                       18


<PAGE>





Personnel

     As of December 31, 1996,  the Company had 181  full-time  employees  and 23
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining agreement.  The Company believes relationships with its employees are
satisfactory.

Regulation

         General. As a federally chartered,  Savings Association  Insurance Fund
("SAIF")  insured  savings  association,   the  Bank  is  subject  to  extensive
regulation  by the Office of Thrift  Supervision  (the  "OTS")  and the  Federal
Deposit  Insurance  Corporation  (the  "FDIC").  Lending  activities  and  other
investments   must  comply  with  various   federal   statutory  and  regulatory
requirements.   The  Bank  is  also  subject  to  certain  reserve  requirements
promulgated by the Federal Reserve Board.

         The OTS, in conjunction with the FDIC,  regularly examines the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
law,  especially  in such matters as the  ownership of savings  accounts and the
form and content of the Bank's mortgage documents.

         The Bank must file  reports  with the OTS and the FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the  protection of the SAIF and depositors
of the Bank.  The regulatory  structure  also gives the  regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for regulatory purposes. Any change in such regulations, whether by the OTS, the
FDIC or the U. S. Congress could have a material  adverse impact on the Company,
the Bank and their  operations.  The Company is also  required  to file  certain
reports with, and otherwise  comply with,  the rules and  regulations of the OTS
and the Securities and Exchange Commission ("SEC").

         Set forth below is a brief  description of certain laws which relate to
the regulation of the Bank and the Company.  The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

         Insurance of Deposit Accounts.  The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured  member (as defined by law
and regulation).  The FDIC has the authority,  should it initiate proceedings to
terminate an institution's  deposit  insurance,  to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying  intangible assets, the FDIC cannot
suspend deposit  insurance unless capital declines  materially,  the institution
fails to enter into and remain in  compliance  with an approved  capital plan or
the institution is operating in an unsafe or unsound manner.

         Regardless of an institution's capital level, insurance of deposits may
be  terminated  by the FDIC upon a finding that the  institution  has engaged in
unsafe or unsound  practices,  is in an unsafe or unsound  condition to continue
operations  or has violated  any  applicable  law,  regulation,  rule,  order or
condition  imposed  by the  FDIC or the  institution's  primary  regulator.  The
management of the Bank is unaware of any practice,  condition or violation  that
might lead to termination of its deposit insurance.

                                       19


<PAGE>




         The FDIC  charges an annual  assessment  for the  insurance of deposits
based on the risk a particular  institution poses to its deposit insurance fund.
This  risk  classification  is  based  on an  institution's  capital  group  and
supervisory subgroup assignment. In addition, the FDIC is authorized to increase
such deposit insurance rates, on a semi-annual basis, if it determines that such
action is  necessary  to cause the  balance in the SAIF to reach the  designated
reserve  ratio of 1.25% of  SAIF-insured  deposits.  In  addition,  the FDIC may
impose special  assessments  on SAIF members to repay amounts  borrowed from the
U.S.  Treasury or for any other reason deemed  necessary by the FDIC. The Bank's
federal deposit  insurance premium expense for the year ended December 31, 1996,
amounted to approximately $4,514,000.

         Prior to September 30, 1996,  savings  associations paid within a range
of .23% to .31% of domestic deposits and the SAIF was substantially underfunded.
By comparison,  prior to September 30, 1996,  members of the Bank Insurance Fund
("BIF"),  predominantly  commercial  banks,  were required to pay  substantially
lower, or virtually no, federal deposit insurance premiums.  Effective September
30, 1996,  federal law was revised to mandate a one-time  special  assessment on
SAIF members such as the Savings Bank of approximately .657% of deposits held on
March 31, 1995. The Savings Bank recorded a $3,311,000  pre-tax expense for this
assessment at September 30, 1996.  Beginning January 1, 1997,  deposit insurance
assessments for SAIF members were reduced to approximately  .064% of deposits on
an annual  basis;  this rate may continue  through the end of 1999.  During this
same  period,  BIF members are  expected to be assessed  approximately  0.13% of
deposits.  Thereafter,  assessments  for BIF and SAIF members should be the same
and the  SAIF  and BIF may be  merged.  It is  expected  that  these  continuing
assessments  for both  SAIF and BIF  members  will be used to repay  outstanding
Financing Corporation bond obligations.  As a result of these changes, beginning
January 1, 1997,  the rate of deposit  insurance  assessed the Bank  declined by
approximately 70% from rates in effect prior to September 30, 1996.

         Examination  Fees. In addition to federal deposit  insurance  premiums,
savings  institutions,  like the Bank,  are required by OTS  regulations  to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a  semi-annual  basis and is  computed  based on total  assets of the
institution,  including subsidiaries.  The Bank's OTS assessment expense for the
year ended December 31, 1996 totalled approximately $143,000.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted  assets,  (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted  assets and (3) a risk-based  capital  requirement
equal to 8.0% of total risk-weighted assets.

         Tangible capital is defined as core capital less all intangible  assets
(including  supervisory  goodwill),  plus purchased  mortgage  servicing  rights
valued  at the lower of the  maximum  percentage  established  by the OTS or the
amount   includable  in  core  capital.   Core  capital  is  defined  as  common
stockholders'  equity (including  retained  earnings),  noncumulative  perpetual
preferred  stock and minority  interests in the equity  accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.

         The risk-based capital standard for savings  institutions  requires the
maintenance of total  risk-based  capital (which is defined as core capital plus
supplementary  capital)  of 8.0% of  risk-weighted  assets.  The  components  of
supplementary capital include, among other items, cumulative perpetual preferred
stock,  perpetual  subordinated debt, mandatory  convertible  subordinated debt,
intermediate-term preferred stock and the allowance for loan losses. The portion
of the allowance for loan and lease losses  includable in supplementary  capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets

                                       20


<PAGE>



by multiplying each asset and off-balance  sheet item by various risk factors as
determined  by the OTS,  which  range  from 0% for  cash to 100% for  delinquent
loans, property acquired through foreclosure, commercial loans and other assets.

         Please  refer to  "Management's  Discussion  and  Analysis of Financial
Condition  and Results of  Operations"  and to Note 15 of Notes to  Consolidated
Financial Statements for more information about the Bank's regulatory capital at
December 31, 1996.

         Prompt  Corrective  Action.  Federal law established a system of prompt
corrective  action to resolve  the  problems of  undercapitalized  institutions.
Under this system,  banking regulators are required to take certain  supervisory
actions  against  undercapitalized  institutions,  the severity of which depends
upon the institution's degree of  undercapitalization.  Under the OTS final rule
implementing the prompt  corrective action  provisions,  an institution shall be
deemed to be (i) "well capitalized" if it has total risk- based capital of 10.0%
or more,  has a Tier I  risk-based  capital  ratio (core or leverage  capital to
risk- weighted  assets) of 6.0% or more, has a leverage  capital of 5.0% or more
and is not subject to any order or final capital  directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately  capitalized"
if it  has a  total  risk-based  capital  ratio  of  8.0%  or  more,  a  Tier  I
risked-based  ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under  certain  circumstances)  and does not meet the  definition of "well
capitalized,"  (iii)  "undercapitalized"  if it has a total  risk-based  capital
ratio that is less than 6.0%,  a Tier I  risk-based  capital  ratio that is less
than 4.0% or a  leverage  capital  ratio that is less than 4.0% (3.0% in certain
circumstances),   (iv)  "significantly  undercapitalized"  if  it  has  a  total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio that is less than 3.0% or a leverage  capital ratio that is less than 3.0%
and (v)  "critically  undercapitalized"  if it has a ratio of tangible equity to
total  assets that is equal to or less than 2.0%.  In  addition,  under  certain
circumstances,  a federal  banking  agency  may  reclassify  a well  capitalized
institution as adequately  capitalized and may require an adequately capitalized
institution  or an  undercapitalized  institution  to  comply  with  supervisory
actions as if it were in the next lower  category  (except that the FDIC may not
reclassify  a   significantly   undercapitalized   institution   as   critically
undercapitalized).

         Immediately upon becoming undercapitalized, an institution shall become
subject to the  provisions  of Section 38 of the Federal  Deposit  Insurance Act
("FDIA") (i) restricting  payment of capital  distributions and management fees,
(ii) requiring that the appropriate federal banking agency monitor the condition
of the  institution  and its efforts to restore  its  capital,  (iii)  requiring
submission of a capital  restoration  plan,  (iv)  restricting the growth of the
institution's  assets and (v)  requiring  prior  approval  of certain  expansion
proposals.  The  appropriate  federal  banking  agency  for an  undercapitalized
institution also may take any number of discretionary supervisory actions if the
agency determines that any of these actions is necessary to resolve the problems
of the institution at the least possible long term cost to the deposit insurance
fund,  subject in certain  cases to specified  procedures.  These  discretionary
supervisory  actions  include:  requiring the  institution  to raise  additional
capital;  restricting  transactions with affiliates;  restricting interest rates
paid by the institution on deposits;  requiring  replacement of senior executive
officers and directors;  restricting  the activities of the  institution and its
affiliates;  requiring  divestiture  of  the  institution  or  the  sale  of the
institution to a willing  purchaser;  and any other supervisory  action that the
agency deems appropriate.

         The Bank is currently a "well  capitalized  institution"  as defined in
the  prompt  corrective  action  regulations  and as such is not  subject to any
prompt corrective action measures.

         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require  the  Bank to give  the OTS 30  days'  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.

                                       21


<PAGE>



OTS regulations  impose  limitations  upon all capital  distributions by savings
institutions,  such as cash  dividends,  payments  to  repurchase  or  otherwise
acquire  its  shares,  payments  to  shareholders  of another  institution  in a
cash-out  merger  and other  distributions  charged  against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional capital  distributions  require prior regulatory approval. In the
event the Bank's capital fell below its fully  phased-in  requirement or the OTS
notified  it that it was in need of more than  normal  supervision,  the  Bank's
ability to make capital distributions could be restricted.  In addition, the OTS
could prohibit a proposed capital  distribution by any institution,  which would
otherwise  be  permitted  by the  regulation,  if the OTS  determines  that such
distribution would constitute an unsafe or unsound practice.

         Finally, under Federal Deposit Insurance Corporation Improvement Act of
1991  ("FDICIA"),  a savings  association  is  prohibited  from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized"   (not  meet  any  one  of  its  minimum  regulatory  capital
requirements).

         As of December 31, 1996,  the Bank was a Tier 1  institution.  However,
there  can  be  no  assurance  that  the  OTS  will  not  prohibit  any  capital
distribution by the Bank to the Company.

         Qualified  Thrift  Lender  Test.  The Home Owners' Loan Act, as amended
("HOLA"),  requires  savings  institutions  to meet a  qualified  thrift  lender
("QTL") test. The required  percentage of qualified thrift investments  ("QTIs")
is 65% of  portfolio  assets  (defined as all assets  minus  intangible  assets,
property used by the  institution  in conducting  its business and liquid assets
equal to 10% of total  assets).  Certain  assets  are  subject  to a  percentage
limitation of 20% of portfolio  assets.  In addition,  savings  associations may
include shares of stock of the FHLBs as qualifying QTIs. Compliance with the QTL
test is measured on a monthly  basis.  As of December 31, 1996,  the Bank was in
compliance with its QTL requirement with 83.4% of its assets invested in QTIs.

         A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following  restrictions  on its operations:
(i) the savings  association  may not engage in any new activity or make any new
investment,  directly or  indirectly,  unless such  activity  or  investment  is
permissible  for a  national  bank;  (ii) the  branching  powers of the  savings
association  shall be restricted to those of a national bank;  (iii) the savings
association  shall be restricted on advances from its FHLB;  and (iv) payment of
dividends  by the savings  association  shall be subject to the rules  regarding
payment of dividends by a national bank. Upon the expiration of three years from
the date the savings  association ceases to be a QTL, it must cease any activity
and  not  retain  any  investment  not  permissible  for  a  national  bank  and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).

         Loans-to-One Borrower. Under the HOLA, savings institutions are subject
to the national bank limits on loans-to-one borrower. With respect to the dollar
amount of credit  that  savings  institutions  may extend to a single or related
group of borrowers,  savings  associations are subject,  since 1989, to the same
limits as those  applicable  to national  banks,  which  under  current law have
lending  limits in an amount equal to 15% of unimpaired  capital and  unimpaired
surplus on an unsecured basis and an additional

                                       22


<PAGE>



amount equal to 10% of unimpaired  capital and unimpaired surplus if the loan is
secured by readily  marketable  collateral,  which is defined to include certain
securities and bullion,  but generally does not include real estate. At December
31, 1996,  the Bank's  lending limit to one borrower was $6.7  million.  Current
lending  limits to one  borrower  may  adversely  affect the  Bank's  ability to
conduct its operations, particularly its ability to make real estate development
and  construction  loans which typically  carry large balances.  At December 31,
1996, the Bank's  largest  aggregate  loans and  commitments to one borrower was
$6.65 million.

         Liquidity  Requirements.  All  savings  associations  are  required  to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At December 31, 1996,  the required  liquid
asset ratio was 5%. The Bank's liquidity ratio at December 31, 1996, was 6.46%.

         Liquid assets for purposes of this ratio include  specified  short-term
assets (e.g.,  cash,  certain time deposits,  certain  banker's  acceptances and
short-term  U.S.  Government  obligations),  and long-term  assets  (e.g.,  U.S.
Government  obligations  of more  than one and less  than  five  years and state
agency obligations with a maximum remaining term of 24 months).  The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from, or debt securities subject to repurchase
agreements  with,  members  of the Bank of  Primary  Dealers  in  United  States
Government  Securities  or banks whose  accounts  are insured by the FDIC,  debt
securities  directly hedged with a short  financial  future  position,  and debt
securities  that  provide the holder with a right to redeem the  security at par
value,  regardless of the stated maturities of the securities.  The OTS may also
designate as liquid assets certain  mortgage-related  securities  with less than
one year to maturity.  Short-term  liquid assets  currently  must  constitute at
least 1% of an association's  average daily balance of net withdrawable  deposit
accounts  and  current  borrowings.  Monetary  penalties  may  be  imposed  upon
associations for violations of liquidity requirements.

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

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to the greater of 5% of outstanding  advances
or at least 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar  obligations at the beginning of each year. At December 31,
1996, the Bank had $9.8 million in FHLB stock, which was in compliance with this
requirement.

         The FHLBs are required to provide funds for the  resolution of troubled
savings  associations  and to contribute to affordable  housing programs through
direct loans or interest subsidies on advances targeted for community investment
and  low-  and  moderate-income  housing  projects.   These  contributions  have
adversely  affected the level of FHLB dividends paid and could continue to do so
in the future. For the year ended December 31, 1996,  dividends paid by the FHLB
of Atlanta to the Bank totaled approximately $714,000.

                                       23


<PAGE>



         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository institutions to maintain  non-interest-bearing  reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the  liquidity  requirements  that are imposed by the OTS. The Bank's
reserve requirement at December 31, 1996, was $25,000.

         Savings  associations have authority to borrow from the Federal Reserve
Bank "discount  window," but Federal Reserve policy  generally  requires savings
associations  to exhaust  all FHLB  sources  before  borrowing  from the Federal
Reserve  System.  The Bank had no borrowings  from the Federal Reserve System at
December 31, 1996.

         Holding Company Regulation.  General.  The Company is a unitary savings
and loan holding  company  subject to regulatory  oversight by the OTS. As such,
the Company is required to register and file reports with the OTS and is subject
to regulation and  examination by the OTS. In addition,  the OTS has enforcement
authority over the Company and its non-savings  association  subsidiaries.  This
regulation  and  oversight  is  intended  primarily  for the  protection  of the
depositors of the Bank and not for the benefit of stockholders of the Company.

         As a unitary savings and loan holding company, the Company generally is
not be subject to activity  restrictions,  provided the Bank  satisfies  the QTL
test.  If the  Company  acquires  control of another  savings  association  as a
separate  subsidiary,  it  would  become a  multiple  savings  and loan  holding
company,  and the activities of the Company and any of its  subsidiaries  (other
than  the Bank or any  other  SAIF-insured  savings  association)  would  become
subject to restrictions  applicable to bank holding  companies unless such other
associations  each also  qualify  as a QTL and were  acquired  in a  supervisory
acquisition.

         The Company must obtain approval from the OTS before acquiring  control
of  any  other  SAIF-  insured  association.  Such  acquisitions  are  generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

         Federal law  generally  provides that no "person,"  acting  directly or
indirectly or through or in concert with one or more other persons,  may acquire
"control," as that term is defined in OTS  regulations,  of a federally  insured
savings  institution  without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. The
Federal  Reserve Board may approve an application  by a bank holding  company to
acquire control of a savings association. A bank holding company that controls a
savings  association  may merge or consolidate the assets and liabilities of the
savings  association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the  appropriate  federal
banking agency and the Federal Reserve Board.  Federal savings  associations are
permitted to acquire or be acquired by any insured depository institution.  As a
result of these provisions,  there have been a number of acquisitions of savings
associations  by bank holding  companies  and other  financial  institutions  in
recent years.

         A bill has been  introduced to the House Banking  Committee  that would
consolidate  the OTS with the Office of the  Comptroller  of the  Currency.  The
resulting  agency would regulate all federally  chartered  commercial  banks and
thrift institutions.  In addition,  the bill would abolish the current authority
of a unitary savings and loan holding company (i.e., a holding company with only
one thrift  institution  subsidiary)  that has a thrift  institution  subsidiary
which meets the qualified thrift lender test

                                       24


<PAGE>



from  investing  in  activities  other than  those  permitted  for bank  holding
companies.  Under current regulations,  a savings and loan holding company, such
as the Company,  which has only one thrift  subsidiary which meets the qualified
thrift  lender  test,  such as the Bank,  has broad  investment  authority.  The
proposed limitation on investment activities by unitary savings and loan holding
companies,  if enacted,  would  restrict the ability of the Company to engage in
certain non-banking and other business activities.  As of December 31, 1996, the
Company was not engaged in any such activities.

Executive Officers of the Registrant

         Set  forth  below  is  current  information  concerning  the  Company's
executive officers.

Name                            Position                                     Age
================================================================================

John A.B. Davies, Jr.           President and Chief Executive Officer        45
Dennis R. Stewart               Executive Vice President                     47
John M. Chattleton              Executive Vice President of the Bank         48


         John A. B.  Davies,  Jr. has served as  President  and  Director of the
Company since June 1991. Previously, he was employed with First American Bank of
Virginia as a Senior Vice President/Retail Administration.

         Dennis R. Stewart has been employed by the Company since April 1990. He
is  responsible  for the  accounting,  regulatory,  tax,  treasury,  investment,
interest rate risk management and financial management activities of the Bank.

         John M.  Chattleton  has served as  Executive  Vice  President  - Chief
Retail Officer of the Bank since he joined the Bank in August,  1992.  From 1990
to 1992, Mr. Chattleton was Senior Vice President of Small Business and Consumer
Lending at the Bank of Maryland, in Baltimore, Maryland.

ITEM 2. PROPERTIES

         The Bank  engages  in its  business  from its home  office  and  branch
offices,  which are located  throughout the Hampton Roads area in Virginia.  The
Bank's principal executive office contains  approximately 40,000 square feet and
is leased for a term of ten years,  with two  five-year  renewal  options.  This
office  is  located  at 2101  Parks  Avenue,  Virginia  Beach,  Virginia  23451.
Information regarding the Bank's offices is set forth below.

Executive and Administrative Offices      Financial Center Locations

2101 Parks Avenue                         Chesapeake
Virginia Beach, VA  23451                 Cedar Road Financial Center
(757) 428-9331                            1000 Cedar Road

                                          Greenbrier Financial Center
                                          1172 Greenbrier Parkway

                                       25


<PAGE>



Greenbrier Market Center                        Mortgage Lending Offices
Harris Teeter Supermarket
1216 Greenbrier Parkway                         Virginia Beach
                                                2101 Parks Avenue, Suite 103
Newport News

Denbigh Crossing Financial Center               Chesapeake
12705 Jefferson Avenue                          1172 Greenbrier Parkway

Oyster Point Financial Center                   Newport News
601 Thimble Shoals Boulevard                    601 Thimble Shoals Boulevard

Norfolk
Selden Financial Center
210 E. Main Street, Suite I-1

Virginia Beach
Aragona Financial Center
4848-17 Virginia Beach Boulevard

Courthouse Financial Center
2400 Princess Anne Road

Fairfield Financial Center
5224 Providence Road

Great Neck Financial Center
1324 N. Great Neck Road

Little Neck Financial Center
Harris Teeter Supermarket
3333 Virginia Beach Boulevard

Lynnhaven Financial Center
230 N. Lynnhaven Road

Pavilion Financial Center
2101 Parks Avenue

Shore Drive Financial Center
3037 Shore Drive

Williamsburg

Five Forks Financial Center
213 Ingram Road

                                       26


<PAGE>



ITEM 3. LEGAL PROCEEDINGS
-------------------------

         The  Company  is not  engaged  in any legal  proceedings  of a material
nature at the present time.  From time to time,  the Company is a party to legal
proceedings incident to its business, including foreclosures.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year ended December 31, 1996.

                                     PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
            SECURITY HOLDER MATTERS
--------------------------------------------------------------------------------

Common Stock

The  Company's  common  stock is traded in the  over-the-counter  market  and is
listed for quotation on the Nasdaq Stock Market National Market System under the
symbol "VABF." As of March 14, 1997, there were  approximately  570 shareholders
of record.  Following  are the high and low  closing  prices in 1996 and 1995 as
reported  by Nasdaq and  dividends  paid by  quarters.  Over-the-counter  market
quotations reflect  inter-dealer  prices,  without retail mark-up,  mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>

                                       1996                                             1995
                  --------------------------------------------------------------------------------------------------
                           High            Low        Dividend                 High             Low       Dividend

                  ==================================================================================================

<C>                       <C>         <C>               <C>             <C>             <C>                 <C>
1st quarter              $9            $6 13/16          $0.04           $7 3/4          $6                  $0.04
2nd quarter               8 5/8         6  7/8            0.04            9 3/4           7 1/4               0.04
3rd quarter               8 3/4         6  7/8            0.04            9 15/16         8 3/8               0.04
4th quarter               9 5/8         8  5/8            0.04            9 1/8           7                   0.04

</TABLE>

See Note 18 of the Notes to Consolidated Financial Statements regarding dividend
restrictions.

Dividend Reinvestment Plan

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

                                       27


<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>

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


                                                                                     At December 31,
                                                               ------------------------------------------------------------------
(Dollars in thousands, except per share data)                      1996        1995        1994         1993         1992
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>         <C>          <C>          <C>
Selected Financial Condition Data
  Total assets ..............................................   $ 606,138   $ 698,962   $ 719,325    $ 682,017    $ 631,236

  Loans held-for-investment, net ............................     445,055     433,562     424,435      387,171      354,810
  Loans held-for-sale .......................................       4,785      14,020       8,341       43,733       38,605
  Mortgage-backed and related securities ....................     106,549     137,779     215,470      176,463      145,985
  Investment securities .....................................      27,796      26,917      38,838       43,917       55,489
  Securities purchased under agreement to resell ............        --        55,000        --           --           --
  Deposits ..................................................     423,389     492,971     505,070      472,728      446,948
  Borrowings ................................................     138,125     158,010     170,510      155,872      135,978
  Stockholders' equity ......................................      40,827      41,032      36,885       41,514       41,145

                                                                                  Year ended December 31,
                                                               ------------------------------------------------------------------
                                                                                                                 ---------
Selected Statement of Operations Data .......................        1996        1995        1994         1993         1992
                                                               ------------------------------------------------------------------
                                                                                                                  ---------
  Interest income ...........................................   $  48,345   $  52,286   $  48,733    $  47,267    $  55,931
  Interest expense ..........................................      31,629      37,272      35,664       35,784       42,419
                                                               ------------------------------------------------------------------
                                                                                                                  ---------
  Net interest expense ......................................      16,716      15,014      13,069       11,483       13,512
  Provision for loan losses .................................         150         175         275          600        2,250
                                                               ------------------------------------------------------------------
  Net interest income after provision for loan losses .......      16,566      14,839      12,794       10,883       11,262
  Other income ..............................................       3,254       5,218       4,608        5,743        5,056
  Other expense .............................................      18,929      18,250      18,661       16,433       12,782
                                                               ------------------------------------------------------------------
  Income (loss) before income taxes, cumulative effect of
  accounting change and extraordinary item ..................         891       1,807      (1,259)         193        3,536

  Provision (benefit) for income taxes ......................         322         641        (688)        (259)       1,435
                                                              ------------------------------------------------------------------
  Income (loss) before cumulative effect of
    accounting change and extraordinary item ................         569       1,166        (571)         452        2,101
  Cumulative effect of change in method of
    accounting for income taxes .............................        --          --          --            700         --
  Extraordinary item ........................................        --          --          --           --         (1,068)
                                                               ------------------------------------------------------------------
                                                                                                            
  Net income (loss) .........................................   $     569   $   1,166   $    (571)   $   1,152    $   1,033
                                                               ==================================================================
  Earnings per common and common equivalent share:
  Income (loss) before cumulative effect of accounting
    change and extraordinary item ...........................   $    0.11   $    0.24   $   (0.12)   $    0.09    $    0.43
</TABLE>


                                       28


<PAGE>
<TABLE>
<CAPTION>



<S>                                                             <C>         <C>         <C>            <C>      <C>   <C> 

  Cumulative effect of accounting change .....................         --            --            --           0.14            --
  Extraordinary item .........................................         --            --            --             --         (0.22)
                                                                 ------------------------------------------------------------------
                                                                                                                    
  Net income (loss) ..........................................   $    0.11   $     0.24 $       (0.12) $        0.23 $        0.21
                                                                 ==================================================================

                                                                                     At or for the year ended December 31,
                                                                                     -------------------------------------


Selected Financial Ratios and Other Data .....................         1996          1995        1994           1993        1992
                                                                 ------------------------------------------------------------------

  Return on average assets ...................................         0.09%         0.17%      (0.08%)         0.17%       0.15%
  Return on average stockholders' equity .....................         1.39          2.99       (1.47)          2.77        2.47
  Average stockholders' equity to average assets .............         6.60          5.59        5.42           6.06        6.25
  Book value per share .......................................   $     8.21  $       8.28 $      7.50  $        8.48 $      8.41
  Dividend payout ratio ......................................       145.45%        66.67%         --          69.57%      76.19%
  Number of deposit accounts .................................       28,140        25,885      24,374         30,635      30,183
  Banking offices open .......................................           15            12           9              8           8

</TABLE>


                                                        29


<PAGE>



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

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

FIRST COASTAL BANK

On November 21, 1996, the Company's  Board of Directors voted to change the name
of its subsidiary bank to First Coastal Bank from Virginia Beach Federal Savings
Bank.  The new name  reflects  the current  and future  intent of the Company to
offer a full range of commercial  banking  products and services  throughout its
market area,  generally known as Hampton Roads. The name change was announced to
the general public on February 18, 1997.

SAIF RECAPITALIZATION

Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
enacted on  September  30,  1996,  the  Federal  Deposit  Insurance  Corporation
("FDIC") imposed a special  assessment on members whose deposits were insured by
the Savings Association  Insurance Fund ("SAIF").  The purpose of the assessment
was to  capitalize  the  SAIF at the  designated  reserve  level  of 1.25% as of
October 1, 1996. Based on the Bank's deposits as of March 31, 1995, the date for
measuring  the amount of the  deposits to be assessed  pursuant to the Act,  the
Bank  paid  its  special   assessment   of  $3,311,000  on  November  27,  1996.
Subsequently,  the FDIC  lowered the deposit  insurance  premium rate by 5 basis
points for the fourth quarter of 1996, producing a $57,000 refund to the Bank of
premiums  previously  paid.  In addition,  the FDIC lowered the premium for many
SAIF members for 1997 by 16.6 basis points.

Pursuant  to the Act,  the Bank will pay,  in  addition  to its  normal  deposit
insurance  premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the  retirement of the  Financing  Corporation  bonds ("Fico
Bonds")  issued in the 1980s to assist in the  recovery  of the savings and loan
industry.  Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal  deposit  insurance  premium,  approximately  1.3 basis
points.  Beginning  no later than  January 1, 2000,  the rate paid to retire the
Fico  Bonds  will be equal for  members  of the BIF and the  SAIF.  The Act also
provides  for the  merging of the BIF and the SAIF by  January 1, 1999  provided
there are no financial  institutions still chartered as savings  associations at
that time. Should the insurance funds be merged before January 1, 2000, the rate
paid by all members of this new fund to retire the Fico Bonds would be equal.

If the Bank's  deposits  were to remain at their  December 31,  1996,  level all
throughout  1997,  the reduction in deposit  insurance  premiums would produce a
$703,000 deposit insurance expense reduction compared to what the annual premium
would have been prior to the Act.

ASSET COMPOSITION AND LOAN PRODUCTION

Total assets of the Company were $606.1  million at December 31, 1996,  compared
with $699.0  million at December  31, 1995.  The  majority of the $92.9  million
decrease is the result of management's  decision to  de-emphasize  brokered time
deposits  as a source  of funds,  and to fund the  reduction  in these  deposits
through the maturity and repayment of securities  purchased under  agreements to
resell  and  mortgage-backed  and  related   securities.   Consequently,   these
investments decreased by an aggregate of $86.2

                                       30


<PAGE>


Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations million. In addition,  the Company's foreclosed real estate and other
assets decreased by $3.7 million and $4.9 million, respectively.

Loans receivable held-for-investment increased by $11.5 million during 1996. The
growth  largely  occurred,  as planned,  in the Company's  higher  yielding loan
products:  commercial (i.e. business),  land,  commercial real estate,  property
improvement and consumer,  and multi-family  categories  increased by a total of
$22.6 million. The Company's 1-4 family residential  portfolio decreased by $9.4
million as loan repayments and  prepayments of $51.7 million  exceeded new loans
added of $42.3 million. Please refer to Note 5 to the accompanying  Consolidated
Financial  Statements  for more  information  regarding the  composition  of the
Company's loan portfolio.

Single family  residential  lending is performed by the Company through the Bank
and First Coastal  Mortgage Corp (formerly Beach Fed Mortgage Corp).  The Bank's
strategy is to originate loans throughout Hampton Roads,  retain an amount which
keeps the Bank's total assets and loans receivable at their desired levels,  and
sell the remainder  into the secondary  market.  During 1996, the Company closed
$118.4  million,  retained $46.9 million for its own  portfolio,  and sold $71.5
million into the secondary market. Loan closings during 1996 were $126.2 million
lower than the $244.6 million closed during 1995 as the Company  experienced the
effects of the sale during the fourth  quarter of 1995 of five of its seven loan
production  offices.  Lower loan volume  throughout 1996 compared with 1995 also
resulted in the decrease in loans receivable held-for-sale at December 31, 1996,
which was $4.8 million compared with $14.0 million at December 31, 1995.

Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards  No.  122  ("FAS  122")   "Accounting  for  Certain  Mortgage  Banking
Activities" which requires,  among other things,  that the Company capitalize an
amount related to the value of retained servicing for the Bank's loan production
which is sold into the secondary  market.  Throughout  1996 and 1995, the Bank's
secondary  marketing sales were on a servicing released basis and,  accordingly,
there was no  capitalization  of loan servicing rights since none were retained.
In years  prior to 1995,  the Company had  retained  servicing  on loans sold to
Freddie  Mac and Fannie Mae  resulting  in the  majority  of the loan  servicing
portfolio of $251 million at year end 1996, which is further described in Note 5
to the accompanying  Consolidated  Financial  Statements.  Because of accounting
principles  in effect  prior to FAS 122,  the  Company  did not  capitalize  the
servicing  value  related to its in-house  originated  loans.  The book value of
$347,000  at December  31, 1996  associated  with the loan  servicing  portfolio
relates to purchased loan servicing,  an activity in which the Company no longer
engages.

The Company's  nonperforming assets ("NPA's") comprise foreclosed real estate of
$2.0  million,  and  delinquent  loans  receivable  held for  investment of $4.1
million.  Total NPA's were 1.0% of total assets at December  31, 1996,  compared
with 1.4% of total assets at December 31, 1995.

DEPOSIT AND BORROWINGS

The deposits of the Company were $423.4 million at December 31, 1996, a decrease
of $69.6  million from December 31, 1995.  Brokered  time deposits  decreased by
$72.9 million during 1996 as maturing brokered time deposits were funded largely
by the repayments and prepayments of mortgage-backed and related securities, and
securities  purchased  under  agreements  to resell.  Management  of the Company
intends to reduce its  reliance  of the use of  brokered  deposits to the extent
that it is able to fund the Bank through its retail branch network. During 1996,
the Bank opened  three new retail  banking  centers:  two inside new stores of a
supermarket   chain  which  is  expanding  into  Hampton   Roads,   and  one  in
Williamsburg, Virginia which is at a temporary site at year end 1996 pending the
completion  of a permanent  facility  during the summer of 1997.  As a result of
these  initiatives and the growth of the Bank's newer branches,  retail deposits
other than brokered time deposits, grew by $3.4 million or 1%

                                       31


<PAGE>


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

during 1996.  Please refer to Note 9 in the  accompanying  Notes to Consolidated
Financial  Statements for information  regarding the Company's deposits.  If the
Bank were to eliminate  its reliance on brokered  time  deposits,  growth of the
Bank's total earning  assets will be limited by retail deposit growth and by the
extent to which funds can be obtained from other sources.

The Company also borrows from the Federal Home Loan Bank of Atlanta (the "FHLB")
and  typically  uses the FHLB as the  source  of its  longer  term  funding.  In
addition,  the Company uses short term or overnight  borrowings from the FHLB to
adjust  its  daily  cash  needs.  Please  refer  to Note 10 to the  accompanying
Consolidated   Financial  Statements  for  more  information  on  the  Company's
borrowings from the FHLB.

LIQUIDITY AND CAPITAL RESOURCES

The Office of Thrift Supervision,  (the "OTS") establishes the minimum liquidity
requirements for savings banks. Regulations provide, in part, that the Bank must
maintain  daily  average  balances  of  liquid  assets  in  excess  of a certain
percentage   (presently  5%)  of  net   withdrawable   deposits  and  short-term
borrowings). The Bank met its liquidity requirements throughout 1996 and expects
to continue to meet these requirements in the future.

The OTS also  sets the  minimum  capital  requirements  for  savings  banks.  At
December 31, 1996, the Bank exceeded all of the minimum capital requirements.

The Bank's  core and  risk-based  capital  ratios  increased  to 6.6% and 12.5%,
respectively,  at  December  31,  1996,  from 5.8% and 11.1%,  respectively,  at
December 31, 1995,  largely  because of the reduction in the nominal  assets and
risk adjusted assets which are the basis of the respective calculations.  Please
refer to Note 15 to the accompanying  Consolidated Financial Statements for more
information regarding the Bank's regulatory capital at December 31, 1996.

IMPACT OF INFLATION AND CHANGING PRICES

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

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

ASSET/LIABILITY MANAGEMENT

The Bank has established an  Asset/Liability  Management  Committee ("ALCO") for
the purpose of monitoring  and managing  interest rate risk.  Interest rate risk
represents the net interest  income  variation that would occur under a specific
change in interest  rates.  One commonly used measure of interest rate risk is a
gap report. A gap report identifies what percentage of the Bank's assets, net of
its  liabilities,  will mature or reprice  within a given time period.  A gap is
considered  positive when the amount of interest rate sensitive  assets within a
specific time frame exceeds the amount of interest  rate  sensitive  liabilities
within  that same time  frame.  During a period of  falling  interest  rates,  a
positive gap would tend to adversely  affect net interest  income and a negative
gap would tend to result in an  increase  in net  interest  income.  In a rising
interest  rate  environment,  a bank  with a  positive  gap would  generally  be
expected to experience a greater increase in the yield of its assets relative to
the costs of its liabilities and

                                       32


<PAGE>


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

thus an  increase in net  interest  income,  whereas a bank with a negative  gap
would be expected to experience the opposite results.

Certain  features of the Bank's assets,  in particular,  and its liabilities can
also have a significant  adverse effect on the Bank's net interest  income.  For
example, when interest rates rise during a period by an amount which exceeds the
periodic   interest   rate  cap  in  an   adjustable   rate   mortgage  loan  or
mortgage-backed  and related security,  the Bank does not fully benefit from the
rate increase until at least the subsequent rate adjustment cycle. Additionally,
the spread between the Bank's assets, such as prime- based loans, and the Bank's
liabilities can narrow. A gap table is not intended to reflect these effects.

The  following is the Bank's gap report,  as of December  31,  1996.  The Bank's
loans  held-for-investment  and mortgage-backed and related securities have been
adjusted for market-based  prepayment assumptions as appropriate.  Time deposits
and  borrowings are stated at  contractual  maturity.  Then, as presented in the
management adjustment line, other interest bearing deposits,  primarily checking
and savings accounts,  have been distributed over a number of periods to reflect
those  portions of such  accounts  that are estimated to be replaced or repriced
fully with market  rates  during the  respective  periods.  As shown,  after the
management  adjustment,  the Bank was in a positive gap position  (excess assets
over liabilities) in the one year horizon,  with a cumulative  adjusted gap as a
percent of earning assets of 7.67%.

                                                        33


<PAGE>

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations
<TABLE>
<CAPTION>

                                                                                              Maturity and Rate Sensitivity
                                                      -----------------------------------------------------------------------------
                                                         Within         4 - 6       7 - 12        1 - 5         Over
Dollars in thousands                                   3 Months        Months       Months        Years      5 Years          Total
===================================================================================================================================
<S>                                                    <C>           <C>          <C>          <C>          <C>            <C>
Earning assets
  Loans............................................... $118,176      $ 36,871     $ 85,732     $153,108     $ 61,746       $455,633
  Investments and mortgage-backed securities..........   36,077        16,209       28,257       41,979       15,506        138,028
                                                      -----------------------------------------------------------------------------
   Total earning assets...............................  154,253        53,080      113,989      195,087       77,252        593,661
                                                      -----------------------------------------------------------------------------
Interest bearing liabilities
  Other deposits......................................   98,531            --           --           --           --         98,531
  Time deposits.......................................   39,724        54,669       56,351       71,654          550        222,948
  FHLB borrowings.....................................   52,000        10,000       10,000       60,000        1,110        133,110
  Other borrowings including brokered time deposits...   15,090        24,279       18,991       32,928           --         91,288
                                                      -----------------------------------------------------------------------------
   Total interest bearing liabilities.................  205,345        88,948       85,342      164,582        1,660        545,877
                                                      -----------------------------------------------------------------------------
Gap before interest rate swaps .......................  (51,092)      (35,868)       28,647       30,505       75,592             --
Cumulative gap before swaps ..........................  (51,092)      (86,960)     (58,313)     (27,808)       47,784             --
Cumulative unhedged gap as % of earning assets........   (8.61%)      (14.65%)      (9.82%)      (4.68%)        8.05%             --
Net interest rate swaps...............................   25,000            --           --      (25,000)          --             --
                                                      -----------------------------------------------------------------------------
Gap after swaps ......................................  (26,092)      (35,868)       28,647        5,505       75,592             --
Cumulative gap after swaps ...........................  (26,092)      (61,960)      (33,313)      27,808       47,784             --
Cumulative hedged gap as % of earning assets..........   (4.40%)      (10.44%)       (5.61%)     (4.68%)         8.05%            --
Management adjustments................................   93,605        (4,927)       (9,853)    (49,266)      (29,559)            --
                                                      -----------------------------------------------------------------------------
Cumulative management adjusted gap....................   67,513        26,718       45,512        1,751       47,784              --
Cumulative management adjusted gap as a % of
   earnings assets....................................    11.37%         4.50%        7.67%         .29%        8.05%             --
</TABLE>






For more information  about the Company's risk management  activities,  refer to
Note 16 to the accompanying Consolidated Financial Statements.

                                       34


<PAGE>


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

RESULTS OF OPERATIONS

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

NET INTEREST INCOME

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

                                       35


<PAGE>


Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations
<TABLE>
<CAPTION>

                            ------------------------------------------------------------------------------------------------------
                                           1996                              1995                              1994
                            ------------------------------------------------------------------------------------------------------
                               Average                   Yield/    Average                Yield/   Average                 Yield/
                               Balance      Interest       Cost    Balance    Interest      Cost   Balance    Interest       Cost
                            ------------------------------------------------------------------------------------------------------
<S>                           <C>            <C>          <C>     <C>          <C>         <C>    <C>          <C>          <C>
Assets
  Loans.....................  $436,778       $37,590      8.61%   $444,660     $37,288     8.39%  $416,868     $32,799      7.87%
  Mortgage-backed and
    related securities......   122,140         8,232      6.74%    190,617      12,559     6.59%   197,577      12,255      6.20%
  Investment securities
    and other earning
    assets..................    41,432         2,523      6.09%     39,189       2,439     6.23%    68,816       3,679      5.35%
                              --------       -------              --------     -------            --------     -------
    Total earning assets....   600,350        48,345      8.05%    674,466      52,286     7.75%   683,261      48,733      7.13%
                                             -------                           -------                         -------
  Non-earning assets........    16,684                              21,653                          31,284
                              --------                            --------                        --------
   Total assets.............   617,034                            $696,119                        $714,545
                              ========                            ========                        ========

Liabilities
  Time deposits.............   343,699        20,464      5.95%   $410,082      24,095     5.87%  $384,659      23,250      6.04%
  Interest bearing demand
    and other deposits......    91,596         3,433      3.75%     85,684       3,405     3.97%    95,774       3,645      3.81%
  FHLB advances.............   118,329         7,567      6.40%    137,372       9,137     6.66%   159,462       7,351      4.61%
  Other borrowings..........     3,000           165      5.52%     10,545         635     6.02%    31,468       1,418      4.50%
                               -------        ------              --------     -------            --------     -------
    Total interest
      bearing liabilities...   556,624        31,629      5.68%    643,683      37,272     5.79%   671,363      35,664      5.32%
                                              ------                           -------                         -------
  Non-interest
    bearing liabilities.....    19,673                              13,488                           4,416
                              --------                            --------                        --------
    Total liabilities.......   576,297                             657,171                         675,779
  Stockholders' equity......    40,737                              38,948                          38,766
                              --------                            --------                        --------
    Total liabilities and
      stockholders' equity    $617,034                            $696,119                        $714,545
                              ========                            ========                        ========
Net interest income.........                 $16,716                           $15,014                         $13,069
                                             =======                           =======                         =======
Interest rate spread........                              2.37%                            1.96%                            1.81%
                                                          =====                            =====                           ======
Net yield on interest
  earning assets..........                                2.78%                            2.23%                            1.91%
                                                          =====                            =====                           ======

</TABLE>









                                                                 36


<PAGE>


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

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

                                              1996 vs. 1995                    1995 vs. 1994
                                        Increase (Decrease) Due to       Increase (Decrease) Due to
                                       Volume      Rate      Net       Volume      Rate         Net
                                        ------------------------------------------------------------
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>
Interest income
 Loans (1) ........................   $(5,277)   $ 1,252    $(4,025)   $ 1,818    $ 2,975    $ 4,793
 Investments ......................       137        (53)        84     (1,772)       532     (1,240)
                                      --------------------------------------------------------------
                                                                                             -------
 Total change in interest income ..    (5,140)     1,199     (3,941)        46      3,507      3,553
                                      --------------------------------------------------------------
                                                                                            -------
 Interest expense

 Deposits .........................    (3,721)       118     (3,603)     1,111       (506)       605
 Borrowings .......................    (1,649)      (391)    (2,040)    (2,279)     3,282      1,003
                                      --------------------------------------------------------------

 Total change in interest expense .    (5,370)      (273)    (5,643)    (1,168)     2,776      1,608
                                      --------------------------------------------------------------
 Total change in net interest income  $   230    $ 1,472    $ 1,702    $ 1,214    $   731    $ 1,945
                                      ==============================================================
</TABLE>


   (1)  Includes mortgage-backed and related securities.

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

Net  interest  income  during 1995  increased by $1.9 million or 15% as compared
with 1994.  Because of the sharp  increase in short term  interest  rates during
1994,  combined with the periodic  adjustment caps in these loans, the Company's
adjustable rate loan portfolio did not fully adjust in 1994 to its fully indexed
rate (i.e. the index plus the margin), thus temporarily depressing the Company's
yield on such assets.  During 1995, most of these assets adjusted to their fully
indexed rates,  thus enhancing 1995's income even though the short term rates to
which these loans  adjusted  decreased  during 1995.  This sequence of events is
reflected in the $3.0 million rate variance  attributable  to loans for the 1995
period  versus the 1994  period.  The rate  variance  during  1995  versus  1994
attributable  to  borrowings  also  occurred  because  of  rising  rates and the
refunding  during 1995 and late 1994 of FHLB advances  obtained  during 1992 and
1993 at much lower rates.

                                       37


<PAGE>


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

PROVISIONS FOR LOSSES ON LOANS RECEIVABLE AND FORECLOSED REAL ESTATE

The Bank maintains and the Board of Directors  monitors  allowances for possible
losses on loans  receivable and  foreclosed  real estate.  These  allowances are
established based upon management's review of individually significant loans and
collateral, delinquent loans, historical trends, individual borrowers, and other
factors which  management  deems  important.  In addition,  general reserves are
established  to provide  for  unidentified  losses  which may exist in the loans
receivable portfolio.  Determining the appropriate reserve level involves a high
degree of management  judgment and is based upon historical and projected losses
in the loans  receivable  portfolio  and the  collateral  value of  specifically
identified problem loans. Further, reserve methodologies are subject to periodic
review and refinement in response to market  conditions,  actual loss experience
and  management's  expectations.  Accordingly,  there can be no  assurance  that
reserve levels will be adequate to cover future losses that may actually occur.

The provision for losses on loans  receivable was $150,000  during 1996 compared
with $175,000 and $275,000 during 1995 and 1994, respectively. Net recoveries of
$272,000 during 1996 were added to the allowance compared to a total of $655,000
in net  charge-offs  during the two years prior to 1996.  Based on the Company's
current  underwriting  and credit review policies and procedures,  the continued
reduction  in the  Bank's  purchased  and out of area loans and the low level of
cumulative   charges  to  the  allowance  over  the  past  three  years,  it  is
management's belief that provisions and reserves related to loans receivable are
at adequate  levels.  Please  refer to Note 5 to the  accompanying  Consolidated
Financial Statements.

The  provision  for losses on  foreclosed  real estate was $484,000  during 1996
compared  with  $200,000 and $100,000  during 1995 and 1994,  respectively.  The
provision  during 1996 was largely related to an increased effort during 1996 to
sell two particular properties.  Such efforts were successful and the properties
were sold during 1996,  producing the majority of the charge to the allowance of
$1.8 million.  At year end 1996,  there remains only one significant  foreclosed
real estate  property,  and the reserves of $235,000 at December 31, 1996 are in
management's  judgment  adequate to absorb the losses  which may  eventually  be
sustained on the sales of foreclosed real estate.  Please refer to Note 6 to the
accompanying Consolidated Financial Statements.

OTHER INCOME

1996 VERSUS 1995

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

1995 VERSUS 1994

Other income  increased by $610,000  during 1995 compared to 1994.  Market value
adjustments  on derivative  contracts  were  negative  $0.2 million  during 1995
compared to negative $2.1 million  during 1994.  During 1995,  these  derivative
contracts were sold.

Other income  improved by an additional  $2.5 million due to increased  gains on
sale of loans.  During 1994,  intense price  competition,  poor hedging  results
during a  period  of  rising  interest  rates,  and the  cost of  retained  loan
servicing, which was not capitalized under accounting rules prior to adoption of
FAS

                                       38


<PAGE>


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

122, all  combined to produce a gain of $0.6  million on sales of loans.  During
1995,  the Company sold nearly all of its loans on a "best  efforts,"  servicing
released  basis  and,  accordingly,  incurred  no hedging  gains or losses,  and
recognized the income  associated  with the loan servicing  which was sold. As a
result,  the Company recorded income of $3.2 million during 1995. Loan servicing
retained  during 1994 was $101  million as compared  to none  during  1995.  For
additional  discussion  of  retained  loan  servicing,  please  refer to  "Asset
Composition and Loan Production" above.

Other  income  decreased  during 1995 as  compared to 1994  because of the gains
associated with the bulk sale of loan servicing during 1994 which produced gains
of $3.0 million  during 1994 compared with $0.1 million during 1995. As a result
of these sales during 1994,  loan  servicing  revenue  decreased by $0.8 million
during 1995 as compared to 1994.  For more  information  regarding the Company's
remaining  loan  servicing,  refer  to Note 5 to the  accompanying  Consolidated
Financial Statements.

OTHER EXPENSE

1996 VERSUS 1995

The Company's  other expenses  during 1996 included the SAIF  assessment of $3.3
million which is described under the caption "SAIF Recapitalization."  Excluding
the SAIF  charge,  other  expenses  would have been $15.6  million  during  1996
compared with $18.2  million  during 1995.  The decrease of $2.6 million  during
1996 is mainly  associated  with the  production,  overhead  and  infrastructure
expenses incurred  throughout 1995 related to the Company's five loan production
offices which were sold during the fourth  quarter of 1995.  Please refer to the
caption "Asset Composition and Loan Production" for a discussion of the sale.

1995 VERSUS 1994

Other expense during 1995  decreased by $411,000 to $18.2 million.  Salaries and
benefits,  and net occupancy  expenses of premises  increased by $343,000 during
1995  primarily  due to the cost  associated  with opening and  operating  three
financial  centers and scheduled  rent  increases of the remainder of the Bank's
leased  premises.  Other net  expense of  foreclosed  real estate  decreased  by
$428,000 in  conjunction  with the  decrease in the  Company's  foreclosed  real
estate and the resultant  decrease in costs  associated  with the management and
sale of such assets.

INCOME TAXES

The Company's  effective tax rate for 1996 was 36.1%  compared with 35.5% during
1995.  The Company  incurred a tax benefit  during 1994 at an effective  rate of
54.6%.  The  Company's  effective  tax benefit  rate during 1994 was affected by
adjustments related to the method the Bank was permitted to use to calculate its
bad debt deduction for financial statement purposes.  Please refer to Note 12 to
the accompanying  Consolidated  Financial Statements for additional  information
regarding the Company's income taxes.

On August 20, 1996,  President  Clinton  signed into law the Small  Business Job
Protection Act of 1996. This bill, among other things, equalizes the taxation of
thrifts  and banks.  For tax years up  through  1995,  thrifts  had been able to
deduct a portion of their  bad-debt  reserves set aside to cover  potential loan
losses ("bad-debt  reserves").  Under the bill, large thrifts must change to the
specific  charge-off  method for computing their bad debt deduction for 1996 and
future years. Furthermore, the bill repeals current law

                                       39


<PAGE>


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

mandating  recapture of thrifts' bad debt reserves if they convert to banks. Bad
debt reserves set aside through 1987 generally will not be taxed,  however,  any
reserves  added  since  January  1, 1988,  will be taxed over a six year  period
beginning in 1997. Institutions can delay these taxes for two years if they meet
a residential-lending  test. This legislation is not expected to have a material
adverse  effect on the  financial  condition  or  results of  operations  of the
Company taken as a whole.

IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 125 ("FAS 125"), "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishments of Liabilities"
was  issued  during  June,  1996.  FAS 125  provides  accounting  and  reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities and  establishes new criteria for determining  whether a transfer of
financial assets in exchange for cash or other consideration should be accounted
for  as a sale  or as a  pledge  of  collateral  in a  secured  borrowing.  This
statement is effective for such transactions  occurring after December 31, 1996,
and is to be applied  prospectively.  Earlier or retroactive  application is not
permitted.  In  addition,   during  December,  1996,  the  Financial  Accounting
Standards Board ("FASB") issued Statement of Financial  Accounting Standards No.
127 which provides for the deferral for one year the  implementation  of certain
provisions of FAS 125. These statements will be adopted by the Company effective
January 1, 1997, and are not expected to have a material effect on the Company's
financial condition or results of operations.

                                       40


<PAGE>





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

REPORT OF INDEPENDENT AUDITORS 1996 AND 1995

--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation


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

We have audited the accompanying  consolidated  statement of financial condition
of Virginia Beach Federal Financial Corporation and subsidiaries (the "Company")
as of December 31, 1996 and 1995,  and the related  consolidated  statements  of
operations,  cash flows and stockholders' equity for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of  Virginia  Beach  Federal
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

                                         \s\  KPMG Peat Marwick LLP
                                         ---  ---------------------

Richmond, Virginia
January 31, 1997

                                       41


<PAGE>











                     REPORT OF INDEPENDENT ACCOUNTANTS 1994
                     --------------------------------------

The Board of Directors
Virginia Beach Federal Financial Corporation

In our opinion, the consolidated statements of operations,  of cash flows and of
changes in stockholders'  equity for the year ended December 31, 1994 (appearing
on pages 43 through 72 of the Virginia  Beach  Federal  Financial  Corporation's
1996 Annual Report on Form 10-K) present fairly, in all material  respects,  the
results  of  operations  and cash  flows of  Virginia  Beach  Federal  Financial
Corporation  and its  subsidiary  for the  year  ended  December  31,  1994,  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  audit.  We  conducted  our audit 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  statements  presentation.  We
believe  that our audit  provided a reasonable  basis for the opinion  expressed
above.  We have not audited the  consolidated  financial  statements of Virginia
Beach Federal Financial  Corporation for any periods  subsequent to December 31,
1994.

\s\  PRICE WATERHOUSE
---  ----------------

February 7, 1995

                                       42


<PAGE>




                  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
                  Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>

                                                                                 December 31
                                                                           ----------------------
(Dollars in thousands, except share data)                                      1996         1995
==========================================================================================================================
<S>                                                                        <C>          <C>
Assets
Cash and amounts due from banks ........................................   $   3,059    $   6,093
Federal funds sold and interest bearing deposits .......................       4,276        2,426
Securities purchased under agreements to resell ........................        --         55,000
Investment securities

  Held-to-maturity (approximate fair value $14,687 in 1996
   and $14,853 in 1995) ................................................      14,943       15,050
  Available-for-sale ...................................................      12,853       11,867
Mortgage-backed and related securities
  Held-to-maturity (approximate fair value $28,849 in 1996
  and $34,186 in 1995) .................................................      29,764       34,458
  Available-for-sale ...................................................      76,785      103,321
Loans receivable, net
  Held-for-investment ..................................................     445,055      433,562
  Held-for-sale ........................................................       4,785       14,020
Foreclosed real estate, net ............................................       2,047        5,767
Accrued income receivable, net .........................................       4,289        4,546
Property and equipment, net ............................................       5,642        5,275
Other assets ...........................................................       2,640        7,577
                                                                           ----------------------
                                                                           $ 606,138    $ 698,962
                                                                           ======================
LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

  Deposits .............................................................   $ 423,389    $ 492,971

  Advances from the Federal Home Loan Bank .............................     133,110      158,010
  Securities sold under agreements to repurchase .......................       5,015         --
  Advance payments by borrowers for taxes and insurance ................         966        1,252
  Other liabilities ....................................................       2,831        5,697
                                                                           ----------------------
                                                                             565,311      657,930
                                                                           ----------------------
Stockholders' equity

  Serial preferred stock, 5,000,000 shares authorized,
   no shares issued or outstanding .....................................        --           --
  Common stock, $.01 par value, 10,000,000 shares authorized; issued and
  outstanding 4,970,307 shares in 1996 and 4,957,422 shares in 1995 ....          50           50
  Capital in excess of par value .......................................       9,336        9,237
  Unrealized gain (loss) on available-for-sale securities, net of tax ..         (39)          39
  Retained earnings - substantially restricted .........................      31,480       31,706
                                                                           ----------------------
                                                                              40,827       41,032
                                                                           ----------------------
Commitments and contingencies
                                                                           ----------------------
                                                                            $606,138     $698,962

                                                                           ======================
</TABLE>

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

                                       43


<PAGE>




                      CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
                  Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>

                                                                Year ended December 31,
                                                          -------------------------------
(Dollars in thousands, except per share data)                1996      1995        1994
=========================================================================================

<S>                                                       <C>        <C>         <C>
Interest and fees on loans ............................   $ 37,590   $ 37,288    $ 32,799
Interest on mortgage-backed and related securities ....      8,232     12,559      12,255
Other interest and dividend income ....................      2,523      2,439       3,679
                                                          -------------------------------
  Total interest income ...............................     48,345     52,286      48,733
                                                          -------------------------------
Interest on deposits ..................................     23,897     27,500      26,895
Interest on advances from the Federal Home Loan Bank ..      7,567      9,137       7,351
Interest on repurchase agreements .....................        165        635       1,418
                                                          -------------------------------
  Total interest expense ..............................     31,629     37,272      35,664
                                                          -------------------------------
Net interest income ...................................     16,716     15,014      13,069
Provision for loan losses .............................        150        175         275
                                                          -------------------------------
Net interest income after provision for loan losses ...     16,566     14,839      12,794
                                                          -------------------------------

OTHER INCOME

  Gain (loss) on sales of securities available-for-sale       --          103        (202)
  Market value adjustment on derivative contracts .....       --         (242)     (2,115)
  Gain on sales of loans ..............................      1,132      3,166         617
  Gain on sales of mortgage loan servicing rights .....       --          111       2,984
  Gain on sales of foreclosed real estate .............        181         94         557
  Retail banking fees .................................        850        599         341
  Mortgage loan servicing fees ........................        726        641       1,442
  Other ...............................................        365        746         984
                                                          -------------------------------
                                                             3,254      5,218       4,608
                                                          -------------------------------
OTHER EXPENSES

  Salaries and employee benefits ......................      6,564      8,500       8,612
  Net occupancy expense ...............................      3,078      3,388       2,933
  Provision for losses on foreclosed real estate ......        484        200         100
  Other net expense of foreclosed real estate .........        126        202         630
  Federal deposit insurance premiums ..................      4,514      1,314       1,236
  Other ...............................................      4,163      4,646       5,150
                                                          -------------------------------
                                                            18,929     18,250      18,661
                                                          -------------------------------

Income (loss) before income taxes .....................        891      1,807      (1,259)
Provision (benefit) for income taxes ..................        322        641        (688)
                                                          -------------------------------
Net income (loss) .....................................   $    569   $  1,166    $   (571)
                                                          ===============================

Net income (loss) per share ...........................   $    .11   $    .24    $  (0.12)
                                                          ===============================

</TABLE>


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

                                       44


<PAGE>




                      CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
                  Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>

                                                                           December 31,
                                                               ------------------------------------
(Dollars in thousands)                                             1996         1995         1994
===================================================================================================
<S>                                                            <C>          <C>          <C>
Cash flows from operating activities
  Net income (loss) ........................................   $     569    $   1,166    $    (571)
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities
   Provision for loan losses ...............................         150          175          275
   Provision for losses on foreclosed real estate ..........         484          200          100
   Depreciation ............................................       1,131        1,041          916
   Amortization of loan discounts, premiums and fees, net ..      (1,090)      (1,001)        (927)
   Amortization of other discounts and premiums, net .......         379          896          278
   Market value adjustment on derivative contracts .........        --            242        2,115
   (Gain) loss on sales of securities available-for-sale ...        --           (103)         202
   Gain on sales of foreclosed real estate .................        (181)         (94)        (557)
   Gain on sales of loans ..................................      (1,132)      (3,166)        (617)
   Gain on sales of mortgage loan servicing rights .........        --           (111)      (2,984)
   Loss on sales of property and equipment .................        --             59         --
   Stock dividend on Federal Home Loan Bank stock ..........        --           --           (122)
   Acquisition of loans held-for-sale ......................    (118,488)    (216,770)    (283,168)
   Proceeds from sales of loans held-for-sale ..............     128,855      214,257      319,177
   Decrease (increase) in accrued income receivable ........         257          327         (217)
   Decrease (increase) in other assets .....................       4,671        3,783       (6,334)
   Increase (decrease) in other liabilities ................      (2,906)         343       (4,766)
                                                               -----------------------------------
    Net cash provided by operating activities ..............      12,699        1,244       22,800
                                                               -----------------------------------
Cash flows from investing activities
  Net increase in loans receivable .........................     (11,869)     (11,950)     (40,460)
  Principal payments received on mortgage-backed and related
   securities ..............................................      31,161       29,680       45,703
  Proceeds from maturities of investment securities ........       9,000       15,038        9,076
  Proceeds from sales of
   Securities purchased under agreements to resell .........      55,000         --           --
   Investment securities available-for-sale ................        --           --         41,391
   Mortgage-backed and related securities available-for-sale        --         52,407       36,318
   Mortgage loan servicing rights ..........................        --            118        3,060
   Foreclosed real estate ..................................       4,795        5,929        8,642
   Property and equipment ..................................           8          288         --
  Purchases of
   Securities purchased under agreement to resell ..........        --        (55,000)        --
   Investment securities held-to-maturity ..................      (8,000)      (3,000)     (11,970)
   Investment securities available-for-sale ................      (2,000)        --        (25,371)
   Mortgage-backed and related securities held-to-maturity .        --           --        (57,328)
   Mortgage-backed and related securities available-for-sale        --           --        (77,350)
   Property and equipment ..................................      (1,466)      (1,546)      (2,234)
   Improvements to foreclosed real estate ..................         (62)      (1,325)      (1,367)
                                                                 ---------------------------------
    Net cash provided by (used for) investing activities ...      76,567       30,639      (71,890)
                                                                 ---------------------------------
</TABLE>

                                                             (continued)

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

                                       45


<PAGE>






                      CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------
                  Virginia Beach Federal Financial Corporation

<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                                    -------------------------------------
(Dollars in thousands)                                                  1996         1995       1994
=========================================================================================================
<S>                                                                 <C>          <C>          <C>

Cash flows from financing activities
    Net increase (decrease) in money market deposit accounts,
        NOW accounts and savings deposits                               8,775       10,134      (21,114)

    Net increase (decrease) in time deposits .....................     (78,358)     (22,233)      53,456
    Proceeds from advances from the Federal Home Loan Bank .......     359,000      427,000      302,500
    Payments on advances from the Federal Home Loan Bank .........    (383,900)    (425,000)    (295,500)
    Net increase (decrease) in securities sold under agreements to
       repurchase ................................................       5,015      (14,500)       7,638
    Net increase (decrease) in advance payments by borrowers for
       taxes and insurance .......................................        (286)        (254)        (277)
    Proceeds from sale of common stock ...........................          99          269          188
    Cash dividends paid ..........................................        (795)        (789)        (784)
                                                                     -----------------------------------
       Net cash provided by (used for) financing activities ......     (90,450)     (25,373)      46,107
                                                                     -----------------------------------
    Increase (decrease) in cash and cash equivalents .............      (1,184)       6,510       (2,983)
    Cash and cash equivalents at beginning of year ...............       8,519        2,009        4,992
                                                                     -----------------------------------
    Cash and cash equivalents at end of year .....................   $   7,335    $   8,519    $   2,009
                                                                     ===================================
Cash and cash equivalents includes
    Cash .........................................................   $   3,059    $   6,093    $   1,461
    Federal funds sold and interest bearing deposits .............       4,276        2,426          548
                                                                     -----------------------------------
                                                                     $   7,335    $   8,519    $   2,009
                                                                     ===================================
Supplemental cash flow information
    Interest paid on deposits, advances and other borrowings .....   $  32,930    $  37,155    $  33,619
    Income taxes paid (refunded) .................................       1,606        1,327         (353)
Schedule of noncash investing and financing activities

    Real estate acquired in settlement of loans, net of allowances   $     312    $   3,649    $   3,848

</TABLE>
The notes to  consolidated  financial  statements  are an integral  part of this
statement

                                       46


<PAGE>



                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
                  Virginia Beach Federal Financial Corporation

                    (Dollars in thousands, except share data)
<TABLE>
<CAPTION>

                                                                      Unrealized
                                                                        Gain
                                                                        (Loss)
                                                                          on
                                                          Capital in   Available-
                                        Common Stock      Excess of    for-sale    Retained
                                    Shares      Amount    Par Value  Securities    Earnings        Total
                                  ========================================================================
<S>                                <C>         <C>         <C>         <C>          <C>          <C>
Balance, December 31, 1993 .....   4,894,455   $      49   $   8,781   $    --      $  32,684    $  41,514
Net loss for 1994 ..............        --          --          --          --           (571)        (571)
Sale of common stock to
  employee stock purchase plan .      12,546        --            95        --           --             95
Exercise of stock options ......      13,650        --            93        --           --             93
Cumulative effect of change in
  method of accounting for
  investments in debt and equity
  securities, net of tax .......        --          --          --          (532)        --           (532)
Change in unrealized gain
  (loss) on available-for-sale
  securities,  net of tax ......        --          --          --        (2,930)        --         (2,930)
Cash dividends paid ($0.16 per
  share) .......................        --          --          --          --           (784)        (784)
                                   --------------------------------------------------------------------------
Balance, December 31, 1994 .....   4,920,651          49       8,969      (3,462)      31,329       36,885
Net income for 1995 ............        --          --          --          --          1,166        1,166
Sale of common stock to
  employee stock purchase plan .      20,259           1         167        --           --            168
Exercise of stock options ......      16,512        --           101        --           --            101
Change in unrealized gain
  (loss) on available-for-sale
  securities, net of tax .......        --          --          --         3,501         --          3,501
Cash dividends paid ($0.16 per
  share) .......................        --          --          --          --           (789)        (789)
                                   --------------------------------------------------------------------------
                                                                                                ---------
Balance, December 31, 1995 .....   4,957,422          50       9,237          39       31,706       41,032
Net income for 1996 ............        --          --          --          --            569          569
Sale of common stock to
  employee stock purchase plan .      10,935        --            87        --           --             87
Exercise of stock options ......       1,950        --            12        --           --             12
Change in unrealized gain
  (loss) on available-for-sale
  securities, net of tax .......        --          --          --           (78)        --            (78)
Cash dividends paid ($0.16 per
  share) .......................        --          --          --          --           (795)        (795)
                                   --------------------------------------------------------------------------
Balance, December 31, 1996 .....   4,970,307   $      50   $   9,336   $     (39)   $  31,480    $  40,827
                                   ===========================================================================
</TABLE>


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

                                       47


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The  consolidated  financial  statements  include the  accounts of Virginia
Beach  Federal  Financial  Corporation  (the  "Company")  and  its  wholly-owned
subsidiary  First Coastal Bank and its wholly-owned  subsidiaries.  In November,
1996,  the  Company's  Board  of  Directors  voted  to  change  the  name of its
subsidiary  bank to First Coastal Bank from Virginia Beach Federal Savings Bank.
The name change was  announced  to the general  public in  February,  1997.  The
Company is a unitary  thrift  holding  company with its primary  market area and
majority  of  business  being in the  Hampton  Roads  region  of  Virginia.  All
significant intercompany balances and transactions have been eliminated.

Securities Purchased Under Agreements to Resell

The Company enters into purchases of securities under agreements to resell.  The
amounts  advanced  under these  agreements  represent  short-term  loans and are
reflected  as  assets  in  the  statement  of  financial  condition.  Securities
underlying  the agreements are held by the Company in safekeeping at the Federal
Home Loan Bank.

Investments in Debt and Equity Securities

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

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

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

Lending Activities

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

Allowance for Loan Losses

The  allowance  for loan  losses is  maintained  at an amount  management  deems
adequate  to  cover  estimated  losses  inherent  in  the  loan  portfolio.   In
determining the amount to be maintained, management considers

                                       48


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company  measures  the value of impaired  loans based  either on  discounted
expected future cash flows, the observable  market value of a loan or the market
value of the collateral  securing the loan and establishes an allowance for loan
losses based on this measurement.  The Company  includes,  as a component of its
allowance of loan losses,  amounts it deems adequate to cover  estimated  losses
related to impaired loans.  Interest income on impaired loans is recognized on a
cash basis.

Provision for Uncollected Interest

The Company provides an allowance for uncollected  interest when loans become 90
days  delinquent or are identified as impaired.  The allowance is netted against
accrued interest income receivable in the financial statements.

Foreclosed Real Estate

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

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

Property and Equipment

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

Securities Sold Under Agreements to Repurchase

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

Income Taxes

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

                                       49


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

Earnings (loss) per share has been computed based on the weighted average number
of shares  outstanding.  The  weighted  average  number  of  shares  used in the
computation of earnings (loss) per share was 4,964,107,  4,935,535 and 4,899,292
in 1996, 1995, and 1994,  respectively.  The potential  issuance of shares under
the  Company's  stock  option plan does not have a material  dilutive  effect on
earnings per share.

Use of Estimates

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

Derivative Financial Instruments

The  Company  uses  derivative  financial  instruments  in order to  manage  its
financial asset and liability  portfolio interest rate risk. It is the Company's
intent that such transactions qualify for hedge accounting treatment. Derivative
financial  instruments  which do not qualify for hedge accounting  treatment are
carried at fair value and included in other assets in the statement of financial
condition, and realized and unrealized gains and losses on financial instruments
are  recognized  in results of  operations  each period  unless the  instruments
qualify for hedge accounting.

Changes in the fair value of derivative  financial  instruments  qualifying  for
hedge  accounting  treatment are not recognized in the results of operations and
the  statement  of  financial  condition.  Amounts  paid or received  under such
interest rate swap agreements are recognized in the periods in which they accrue
as an adjustment to the interest income or expense  associated with the specific
assets or liabilities to which the swap agreements are assigned.

Reclassifications

Certain 1995 and 1994 amounts  have been  reclassified  to conform with the 1996
presentation.

                                       50


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 2 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Securities purchased under agreements to resell at December 31, 1995, consist of
$55,000,000  of FNMA  mortgage-backed  securities at a rate of 5.53% with a face
value of $57,642,000 and an estimated fair value of $58,171,000. The outstanding
repurchase agreement at December 31, 1995, was with a primary  broker/dealer and
matured  within ninety days.  Securities  purchased  under  agreements to resell
averaged $9,016,000 and $591,000 during 1996 and 1995, respectively. The maximum
amount outstanding at any month-end during 1996 and 1995 was $55,000,000.

NOTE 3 - INVESTMENT SECURITIES

Investment securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                     December 31, 1996
                                             -------------------------------------------------------------------
                                                 Amortized       Unrealized       Unrealized           Estimated
                                                      Cost            Gains           Losses          Fair Value

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

<TABLE>
<CAPTION>

                                                                      December 31, 1995
                                             -------------------------------------------------------------------
                                                 Amortized       Unrealized       Unrealized           Estimated
                                                      Cost            Gains           Losses          Fair Value
                                             ===================================================================
<S>                                              <C>                <C>              <C>                <C>

Held-to-maturity, carried at
  amortized cost
    Federal Agencies.........................     $ 15,050           $   85          $   282            $ 14,853
                                             ===================================================================
Available-for-sale, carried
  at fair value
    U. S. Treasuries.........................     $  2,001           $   24          $    --            $  2,025
    Federal Home Loan Bank stock.............        9,842               --               --               9,842
                                             -------------------------------------------------------------------
                                                  $ 11,843           $   24          $    --            $ 11,867
                                             ===================================================================

</TABLE>




                                       51


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

The amortized cost and estimated fair value of investment securities at December
31, 1996, by contractual maturity are as follows (in thousands):
<TABLE>
<CAPTION>

                                                              Amortized           Estimated
                                                                                 Fair Value
                                                                   Cost
                                                           --------------------------------
<S>                                                            <C>                 <C>
Held-to-maturity
Due in one year or less....................................    $  3,985            $  4,000
Due after one year but within 5 years......................      10,958              10,687
                                                           --------------------------------
                                                               $ 14,943            $ 14,687
                                                           ================================
Available-for-sale
Due in one year or less....................................     $   998            $  1,001
Due after one year but within 5 years......................       2,000               2,010
No contractual maturity....................................       9,842               9,842
                                                           --------------------------------
                                                               $ 12,840            $ 12,853
                                                           ================================
</TABLE>


There were no sales of investment  securities  classified as  available-for-sale
during 1996 and 1995. In 1994,  proceeds from the sale of investment  securities
classified  as  available-for-sale  were  approximately  $41,000,000  and  gross
realized losses were $1,000,000.

                                                        52


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES

Mortgage-backed and related securities are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 December 31, 1996
                                                             ------------------------------------------------------------
                                                              Amortized   Unrealized      Unrealized    Estimated
                                                                 Cost        Gains          Losses      Fair Value
                                                              ============================================================
<S>                                                            <C>        <C>             <C>             <C>
Held-to-maturity, carried at
  amortized cost

  Collateralized mortgage obligations

   Private - fixed rate....................................    $ 29,764   $    36         $   951         $28,849
                                                               ==================================================
Available-for-sale, carried at fair value

  FHLMC fixed rate.........................................       6,858   $   163         $    --         $ 7,021
  FNMA variable rate.......................................       4,489        64              --           4,553
  FHLMC variable rate......................................      16,770       264              --          17,034
  Collateralized mortgage obligations
   Agency

     Fixed rate............................................         704        --               3             701
     Variable rate.........................................      21,784         2             325          21,461
   Private

     Fixed rate............................................      23,718        26             242          23,502
     Variable rate.........................................       2,534         4              25           2,513
                                                                -------------------------------------------------
                                                                $76,857   $   523         $   595         $76,785
                                                                =================================================
</TABLE>

<TABLE>
<CAPTION>

                                                                            December       31, 1995
                                                       ------------------------------------------------------------
                                                       Amortized   Unrealized      Unrealized    Estimated
                                                       Cost        Gains           Losses        Fair Value
                                                       ============================================================
<S>                                                    <C>         <C>             <C>           <C>
Held-to-maturity, carried at
  amortized cost

  Collateralized mortgage obligations

   Private - fixed rate................................$ 34,458    $  121          $  393        $ 34,186
                                                       ============================================================
Available-for-sale, carried at fair value

  FHLMC fixed rate.....................................$  8,535    $  232          $   --        $  8,767
  FNMA variable rate..................................    6,542       108              --           6,650
  FHLMC variable rate..................................  22,439       291              --          22,730
Collateralized mortgage obligations
  Agency

   Fixed rate..........................................   4,992        --              44           4,948
   Variable rate.......................................  25,254        31             299          24,986
  Private

   Fixed rate..........................................  31,797       117             176          31,738
   Variable rate.......................................   3,726        --             224           3,502
                                                       ------------------------------------------------------------
                                                       $103,285    $  779          $  743        $103,321
                                                       ============================================================
</TABLE>


                                       53


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

In  accordance  with  supplemental   guidelines  established  by  the  Financial
Accounting  Standards  Board  pertaining  to the  implementation  of FAS 115, in
December, 1995, the Company transferred  mortgage-backed  securities with a book
value of $45,324,000  from  held-to-maturity  to  available-for-  sale. The fair
value of the transferred  securities at the date of transfer was $45,453,000 and
the related unrealized gain of $129,000 is included in the separate component of
stockholders' equity net of deferred income taxes. This transfer was executed to
afford the  Company  greater  flexibility  in  managing  its  available-for-sale
portfolio in response to market conditions.

Proceeds   from   the   sale   of   mortgage-backed   and   related   securities
available-for-sale,  gross  realized  gains and  gross  realized  losses  are as
follows (in thousands):
<TABLE>
<CAPTION>

                                                                Year ended December 31,
                                                 ------------------------------------------------------
                                                     1996                   1995                   1994
                                                 ------------------------------------------------------

<S>                                              <C>                   <C>                    <C>
Sale proceeds....................................      --              $  52,407              $  36,318
                                                 ======================================================
Gross realized gains.............................      --              $     235              $     933
                                                 ======================================================
Gross realized losses............................      --              $     132              $     194
                                                 ======================================================
</TABLE>


NOTE 5 - LOANS RECEIVABLE

Loans receivable held-for-investment consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                      ----------------------------------------
                                                                               1996                       1995
                                                                      ========================================
<S>                                                                        <C>                        <C>
First mortgage loans
  1-4 family residential..............................................     $295,322                   $304,720
  Multi-family residential............................................       13,673                     10,428
  Commercial real estate..............................................       65,893                     61,271
  Land................................................................       16,504                     11,802
  Commercial..........................................................       10,710                      4,307
  Construction
   1-4 family residential.............................................       41,338                     26,663
   Multi-family residential...........................................       10,825                      5,434
   Commercial.........................................................        8,276                     12,623
Other loans
  Second mortgage participations purchased............................        5,360                      7,096
  Property improvement and consumer...................................       16,538                     12,404
                                                                      ----------------------------------------
                                                                            484,439                    456,748
Less
  Undisbursed portion of construction loans in
   process............................................................      (33,460)                   (17,197)
  Net deferred discounts..............................................          (64)                      (303)
  Net deferred loan fees..............................................       (1,470)                    (1,718)
  Allowance for loan losses...........................................       (4,390)                    (3,968)
                                                                      ----------------------------------------
                                                                           $445,055                   $433,562
                                                                      ========================================
</TABLE>


                                       54


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation




Included in loans  receivable at December 31, 1996 and 1995 are  $7,294,000  and
$8,509,000,  respectively, of loans granted to facilitate the sale of foreclosed
real estate.

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

Loans  serviced  for  others  amounted  to   $250,959,000,   $281,890,000,   and
$315,001,000 at December 31, 1996, 1995 and 1994, respectively.  At December 31,
1996, loans serviced for others consisted of the following:  FHLMC $177,468,000,
FNMA  $71,849,000,  other  $1,642,000.  The carrying value of this servicing was
$347,000 at December 31, 1996,  representing  the remaining  unamortized cost to
acquire such servicing from others.

Nonperforming loans totaled $4,126,000,  $3,795,000,  and $6,104,000 at December
31, 1996, 1995 and 1994,  respectively.  Foregone  interest on these loans is as
follows (in thousands):
<TABLE>
<CAPTION>

                                                                                 Year ended December 31,
                                                                       --------------------------------------------
                                                                             1996              1995            1994
                                                                       ============================================

<S>                                                                        <C>              <C>             <C>
Interest at contractual rates..........................................    $  350           $   330         $   518
Interest income recognized.............................................       223               198             221
                                                                       --------------------------------------------
Interest income foregone...............................................    $  127           $   132         $   297
                                                                       ============================================
</TABLE>

Changes in the allowance for loan losses follows (in thousands):
<TABLE>
<CAPTION>

                                                                       --------------------------------------------
                                                                             1996              1995            1994
                                                                       ============================================

<S>                                                                       <C>               <C>            <C>
Balance, January 1.....................................................   $ 3,968           $ 4,328        $  4,173
Provision for loan losses..............................................       150               175             275
Charges to the allowance, net of recoveries............................       272              (535)           (120)
                                                                       --------------------------------------------
Balance, December 31...................................................   $ 4,390           $ 3,968        $  4,328
                                                                       ============================================
</TABLE>


Nonperforming  loans  at  December  31,  1996 and 1995  included  $113,000,  and
$242,000,  respectively,  of loans  which  were  considered  to be  impaired  in
accordance  with FAS 114. The  allowance for possible loan losses as of December
31, 1996 and 1995 included $70,000 and $172,000, respectively,  related to loans
considered to be impaired.  During the years ended  December 31, 1996,  1995 and
1994,  the  Company had an average  recorded  investment  in  impaired  loans of
$132,000, $607,000 and $1,868,000,  respectively. Interest income of $27,000 and
$32,000  was  recognized  on a cash  basis  related  to loans  considered  to be
impaired  during the years ended  December 31, 1995 and 1994,  respectively.  No
interest  income was recognized on such loans during the year ended December 31,
1996.

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

                                       55


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 6 - FORECLOSED REAL ESTATE

Foreclosed real estate consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                                        December 31,
                                                                -----------------------------
                                                                       1996              1995
                                                                =============================

<S>                                                                 <C>               <C>
Properties acquired through foreclosure.........................    $ 2,282           $ 7,366
Less allowance for losses on foreclosed real estate.............       (235)           (1,599)
                                                                -----------------------------
                                                                    $ 2,047           $ 5,767
                                                                =============================
</TABLE>


Changes in the  allowance  for losses on  foreclosed  real  estate  follows  (in
thousands):
<TABLE>
<CAPTION>

                                              ---------------------------------------------------
                                                                Year ended December 31,
                                              ---------------------------------------------------
                                                    1996                 1995                1994
                                              ===================================================

<S>              <C>                             <C>                 <C>                 <C>
Balance, January 1............................   $ 1,599             $  1,571            $  2,038
Provision for losses on foreclosed
   real estate................................       484                  200                 100
Charges to the allowance......................    (1,848)                (172)               (567)
                                              ---------------------------------------------------
Balance, December 31..........................    $  235             $  1,599            $  1,571
                                              ===================================================
</TABLE>



                                       56


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 7 - ACCRUED INCOME RECEIVABLE

Accrued income receivable consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                            -------------------------------------
                                                                                  1996                       1995
                                                                            =====================================

<S>                                                                            <C>                        <C>
Interest on loans...........................................................   $ 3,435                    $ 3,359
Interest on mortgage-backed and related securities..........................       749                        959
Other interest and dividends................................................       422                        501
                                                                            -------------------------------------
                                                                                 4,606                      4,819
Less allowance for uncollectable interest...................................      (317)                      (273)
                                                                            -------------------------------------
                                                                               $ 4,289                    $ 4,546
                                                                            =====================================
</TABLE>


NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                             ---------------------------------
                                                                                    1996                  1995
                                                                             =================================

<S>                                                                             <C>                   <C>
Land and improvements........................................................   $  1,346              $  1,016
Buildings....................................................................      1,723                 1,391
Leasehold improvements.......................................................      1,797                 1,642
Furniture and equipment......................................................      5,939                 5,795
                                                                             ---------------------------------
                                                                                  10,805                 9,844
Less accumulated depreciation and amortization...............................     (5,163)               (4,569)
                                                                             ---------------------------------
                                                                                 $ 5,642               $ 5,275
                                                                             =================================
</TABLE>




                                       57


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 9  - DEPOSITS

Deposits consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                            Rate at
                                                         December 31,                             December 31,
                                                   --------------------------------------------------------------------
                                                             1996                            1996                1995
                                                   --------------------------------------------------------------------

<S>                                                     <C>                             <C>                 <C>
Demand accounts...................................            --                        $  15,637           $  11,792
NOW accounts......................................           2.08%                         15,806              15,519
Money market deposit accounts.....................           3.52%                         38,399              34,007
Savings deposits..................................           3.96%                         44,423              44,172
Time deposits
    Brokered......................................       5.00% - 7.30%                     86,273             159,222
    Retail........................................       4.00% - 7.99%                    222,851             228,259
                                                                           --------------------------------------------
                                                                                         $423,389            $492,971
                                                                           ============================================
Weighted average interest rate....................                                          5.00%               5.38%
                                                                           ============================================

</TABLE>


The aggregate  amount of time deposit accounts with balances of $100,000 or more
approximated  $19,327,000  and  $21,635,000  at  December  31,  1996  and  1995,
respectively.

At December 31, 1996,  approximately  $12,211,000 in mortgage-backed  securities
were pledged as  collateral  on certain  deposits  which  exceed FDIC  insurance
limits.

A summary of time deposits by maturity follows (in thousands):
<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                        ------------------------------------------
                                                                                      1996                  1995
                                                                        ------------------------------------------

<S>                                                                               <C>                   <C>
Within 1 year..........................................................           $150,520              $223,741
1 - 2 years............................................................             57,547                89,509
2 - 3 years............................................................             87,104                52,253
3 - 4 years............................................................              6,591                 6,260
4 - 5 years............................................................              6,710                15,094
Over 5 years...........................................................                652                   624
                                                                        ------------------------------------------
                                                                                  $309,124              $387,481
                                                                        ==========================================
</TABLE>



                                       58


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

Interest on deposits follows (in thousands):
<TABLE>
<CAPTION>

                                                                                       Year ended December 31,

                                                                     -----------------------------------------------------------
                                                                                   1996               1995                1994
                                                                     -----------------------------------------------------------

<S>                                                                            <C>                <C>                <C>
NOW accounts........................................................           $    328           $    348           $     272
Money Market Deposit accounts.......................................              1,392              1,310                 956
Savings deposits....................................................              1,713              1,747               2,417
Time deposits
  Brokered..........................................................              7,889             10,837               5,962
  Retail............................................................             12,623             13,309              17,342
Less early withdrawal penalties.....................................                (48)               (51)                (54)
                                                                     -----------------------------------------------------------
                                                                               $ 23,897           $ 27,500           $  26,895
                                                                     ===========================================================
</TABLE>


NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                                 Weighted Average Rate
                                                               December 31,                         at December 31,
                                                  ------------------------------------------------------------------------------
Maturity                                                        1996               1995               1996                1995
                                                  ------------------------------------------------------------------------------

<C>                                                     <C>                   <C>                    <C>                    <C>
1996.............................................       $         --          $ 146,900                 --%               6.06%
1997.............................................             37,000              5,000               5.84                7.40
1998.............................................             65,000              5,000               5.86                7.60
1999.............................................             25,000                 --               6.33                  --
2000 and thereafter..............................              6,110              1,110               6.03                3.50
                                                  ---------------------------------------
                                                          $  133,110          $ 158,010
                                                  =======================================
</TABLE>


The  Bank's   investment  in  Federal  Home  Loan  Bank  stock  of   $9,842,000,
mortgage-backed  and related  securities of $30,175,000 and first mortgage loans
of approximately $132,147,000 are pledged as collateral for advances at December
31, 1996.  The total  additional  amount of advances  available from the Federal
Home Loan Bank was estimated to be $50,890,000 at December 31, 1996.

                                       59


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

A summary of certain  information  regarding  investment  securities  sold under
agreements to repurchase follows (in thousands):
<TABLE>
<CAPTION>

                                                                             1996                1995                  1994
                                                              ---------------------------------------------------------------

<S>                                                                       <C>              <C>                     <C>
Balance at December 31.......................................             $ 5,015          $       --              $ 14,500
Maximum month-end balance during the year....................               5,110              20,358                49,646
Monthly average balance during the year......................               3,000              10,545                31,468
Investment securities underlying the
  agreements at year end
    Carrying value...........................................              12,499                  --                15,572
    Estimated market value...................................              12,512                  --                14,806
Monthly average interest rate during the year................                5.59%               6.06%                 4.39%
Weighted average interest rate at year end...................                5.71%                 --                  5.99%
Weighted average maturity at year end........................             21 days                  --               71 days
</TABLE>


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

NOTE 12 - INCOME TAXES

The  provision  (benefit)  for  income  taxes  consists  of  the  following  (in
thousands):
<TABLE>
<CAPTION>

                                                                                   Year ended December 31,
                                                                -------------------------------------------------------------
                                                                         1996                   1995                   1994
                                                                -------------------------------------------------------------

<S>                                                                     <C>                  <C>                  <C>
Current.........................................................        $ 449                $   612              $    (869)
Deferred........................................................         (127)                    29                    181
                                                                -------------------------------------------------------------
                                                                        $ 322                $   641              $    (688)
                                                                =============================================================
</TABLE>


The deferred income tax provision in 1994 is net of a $580,000  reclassification
from the current tax liability  account resulting from a change in the method by
which the Company is accounting for loan fees for tax reporting purposes.

60


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

A reconciliation of the income tax provision  (benefit) at the statutory federal
income tax rate of 34% to the amount reported in the  consolidated  statement of
operations follows (in thousands):
<TABLE>
<CAPTION>

                                                                                         Year ended December 31,
                                                                             ------------------------------------------------
                                                                                        1996          1995           1994
                                                                             ------------------------------------------------



<S>                                                                                    <C>           <C>           <C>
Expected income tax expense (benefit) at federal income tax rate............           $ 303         $  614        $  (428)

Increase (decrease) in taxes resulting from

    Effect of statutory bad debt deduction..................................              --             --           (202)

    Nondeductible expenses..................................................              28             13             --

    State income tax........................................................              11             20             --

    Other, net..............................................................             (20)            (6)           (58)
                                                                             ------------------------------------------------

                                                                                       $ 322         $  641        $  (688)
                                                                             ================================================
</TABLE>


Prior to 1996,  the Internal  Revenue  Code  provided  that a qualified  savings
institution  could compute its bad debt reserve,  and the related  deduction for
income tax  reporting  purposes,  based upon  either the  percentage  of taxable
income method or the ratio of actual charge-offs to loans  outstanding,  subject
to a base year amount  determined at December 31, 1987. The Company computed its
bad debt  deduction for income tax reporting  purposes  using the  percentage of
taxable  income method for 1995 and the  experience  method for 1994. Due to law
changes  effective for 1996, the Company  computed its bad debt deduction  using
the direct charge-off method for 1996.

The  Company's  retained  earnings at December 31,  1996,  1995 and 1994 include
$8,279,000  of tax bad  debt  reserves  for  which  deferred  tax  has not  been
provided.  Pursuant to provisions in the Small  Business Job  Protection  Act of
1996,  the reserves would be subject to tax only if the Company fails to qualify
as a "bank" or in the case of certain excess distributions to shareholders.

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

                                       61


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                        ---------------------------------------
                                                                                 1996                    1995
                                                                       ---------------------------------------
<S>                                                                           <C>                    <C>

Deferred tax assets
    Book bad debt reserves.............................................       $ 1,668                $  1,594
    Mark-to-market adjustment on securities
        available-for-sale.............................................            20                      --
    Deferred loan fees.................................................           176                     271
    Other..............................................................           221                     112
                                                                        ---------------------------------------
                                                                                2,085                   1,977
                                                                        ---------------------------------------
Deferred tax liabilities
    Federal Home Loan Bank stock dividends.............................         1,182                   1,182
    Mark-to-market adjustment on securities
      available-for-sale...............................................            --                      20
    Other..............................................................            89                     196
                                                                        ---------------------------------------
                                                                                1,271                   1,398
                                                                        ---------------------------------------
Net deferred tax asset, included in other assets.......................       $   814                 $   579
                                                                        =======================================
</TABLE>


There was no valuation  allowance  for gross  deferred tax assets as of December
31, 1996 or 1995 since management  believes that it is more likely than not that
the entire  amount of the gross  deferred  tax assets will be realized  based on
projected future taxable income,  reversals of taxable temporary differences and
taxable income in the available carryback periods.

NOTE 13 - EMPLOYEE BENEFIT PLANS

Employee Savings Plan

The Company maintains an employee savings plan (the "Savings Plan") covering all
employees  who have  completed  one year of  service  and  attained  age 21. The
Savings  Plan  provides for an employee  salary  reduction  feature  pursuant to
Section  401(k) of the  Internal  Revenue  Code.  The Company  matches 50% of an
employee's  contributions.  The  Company's  contribution  is limited to 3% of an
employee's  total  compensation.   These  matching  contributions  vest  to  the
participants over a four-year period. The Company's  matching  contributions for
1996, 1995 and 1994 were $43,500, $120,000 and $117,000, respectively.

Employee Stock Ownership Plan

The Company  maintains an employee stock  ownership  plan ("ESOP")  covering all
employees who have attained the age of 21.  Contributions to the ESOP are at the
Board of Directors'  discretion and are allocated to participants based upon the
participant's percentage of total covered compensation. These contributions vest
to the  recipients  over a four-year  period or less depending on their years of
service.  The Company's  contribution to the ESOP was $60,000 for the year ended
December 31, 1996.  There were no  contributions to the ESOP for the years ended
December 31, 1995 and 1994.

                                       62


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

Employee Stock Purchase Plan

During 1994,  the Company  established an employee stock purchase plan ("ESPP").
All  employees  of the Company are  eligible  to  participate  in the ESPP which
allows participants to purchase common stock at 95% of the current market price.
The Company contributes the remaining 5%. The Company's contribution to the ESPP
was $4,200,  $7,200 and $6,800 for the years ended  December 31, 1996,  1995 and
1994, respectively.

NOTE 14 - STOCK OPTION PLANS

The Company has stock option plans (the  "Plans")  that provide for the granting
of both qualified and nonqualified options to employees and directors. Under the
Plans,  the option  price cannot be less than the fair market value of the stock
on the date  granted.  An  option's  maximum  term is ten years from the date of
grant.  Options  granted  under  the Plans may be  subject  to a graded  vesting
schedule.  An  aggregate  of 499,432  shares of the  Company's  common  stock is
reserved for issuance upon exercise of the options granted under the Plans.

The Company  applies  Accounting  Principles  Board (APB) Opinion 25 and related
interpretations in accounting for the Plans.  Accordingly,  no compensation cost
has been  recognized  for its fixed stock  options.  Had  compensation  cost for
options granted under the Plans been  determined  based on the fair value at the
grant dates  consistent  with the  alternative  method of FASB Statement No. 123
(FAS 123),  the  Company's  net income and  earnings per common share would have
been reduced to the pro forma amounts indicated below.  These results may not be
representative  of the  effects on  reported  net income  for future  years.  In
accordance  with the  transition  provisions  of FAS 123, the pro forma  amounts
reflect fixed stock options with grant dates subsequent to January 1, 1995.

<TABLE>
<CAPTION>

In thousands except per share data                                                                1996                 1995
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                                <C>                           <C>                <C>
Net income                                                         As reported Pro               $ 569              $ 1,166
                                                                             forma                 418                  916


Earnings per common share                                          As reported Pro                 .11                  .24
                                                                             forma                 .10                  .20

</TABLE>


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

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

                                       63


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>

                                               1996                              1995                 1994
                             -------------------------------------------------------------------------------------------------------
                                                       Weighted-                         Weighted-                         Weighted-
                                                         Average                           Average                           Average
                                                        Exercise                          Exercise                          Exercise
                                        Shares             Price          Shares             Price          Shares             Price
                             =======================================================================================================



<S>                                    <C>                <C>            <C>                <C>            <C>                <C>
Outstanding, Jan 1                     257,450            $ 7.31         182,962            $ 6.41         171,762            $ 6.16

Granted                                 43,500              7.46          92,000              8.89          32,500              8,06

Exercised                               (1,950)             5.56         (16,512)             6.14         (13,650)             6.84

Forfeited                              (11,500)             8.66          (1,000)             7.38          (7,650)             7.00
                             -------------------                 -----------------                 -----------------

Outstanding, Dec 31                    287,500              7.29         257,450              7.31         182,962              6.41
                             ===================                 =================                 =================



Options exercisable at
    year end                           252,162                           216,449                           176,296
                             ===================                 =================                 =================

</TABLE>


The  following  table  summarizes  information  about fixed price stock  options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>

                                                           Weighted
                                                            Average        Weighted                            Weighted
                                          Total           Remaining         Average                             Average
Range of                                Options         Contractual        Exercise            Options         Exercise
Exercise Prices                     Outstanding                Life           Price        Exercisable            Price
=========================================================================================================================



<C>                                    <C>              <C>                <C>                <C>              <C>
$ 4.25 to 6.88                           90,000           6.4 years          $ 5.54             86,667           $ 5.49

  7.00 to 7.81                           95,500           7.5 years            7.28             83,833             7.30

  8.13 to 9.38                          102,000           8.7 years            8.86             81,662             8.93
                             --------------------                                   --------------------

$ 4.25 to 9.38                          287,500           7.6 years            7.29            252,162             7.21
                             ====================                                   ====================

</TABLE>


During 1993,  the Company  reserved  80,000 shares for  non-employee  directors'
stock options,  to be granted in five equal annual installments with an exercise
price  equal to the  market  value at the date of the  grant.  Under  this plan,
options for 16,000 shares were granted during each year ended December 31, 1996,
1995 and 1994 and are included in the above tables.

                                       64


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 15 - REGULATORY REQUIREMENTS AND RESTRICTIONS

Savings  institutions  must maintain specific capital standards that are no less
stringent than the capital  standards  applicable to national banks. The Bank is
subject to regulatory capital requirements  administered by the Office of Thrift
Supervision  (the  "OTS").  Failure to meet  minimum  capital  requirements  can
initiate certain mandatory and possibly additional  discretionary actions by the
OTS that, if undertaken,  could have a direct  material  effect on the Company's
financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework for prompt  corrective  action,  the Bank must meet  specific  capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments by the OTS about components, risk weightings and other factors.

Quantitative  measures established by the OTS to ensure capital adequacy provide
for three capital  standards:  a tangible  capital  requirement,  a core capital
requirement and a risk-based capital  requirement.  Management  believes,  as of
December  31, 1996,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.  As of December 31, 1996, the most recent notification from
the OTS  categorized  the  Bank  as  "well  capitalized"  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  has  changed  the  institution's
category.

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

                                                                             Minimum                      To Be Well
                                                                         Requirements For             Capitalized Under
                                                                         Capital Adequacy             Prompt Corrective
                                                Actual                       Purposes                 Action Provisions
                                   --------------------------------------------------------------------------------------------
                                           Amount          Ratio          Amount         Ratio        Amount          Ratio
                                   ============================================================================================
<S>                                         <C>            <C>             <C>           <C>          <C>              <C>
As of December 31, 1996
Tangible..........................          $ 40,456         6.6%          $ 9,212        1.5%        $ 21,494           3.5%
Core..............................            40,456         6.6%           18,424        3.0%          30,706           5.0%
Risk-Based........................            44,487        12.5%           28,503        8.0%          35,628          10.0%

As of December 31, 1995
Tangible..........................          $ 40,408         5.8%          $10,527        1.5%         $24,563           3.5%
Core..............................            40,408         5.8%           21,054        3.0%          35,090           5.0%
Risk-Based........................            43,993        11.1%           31,700        8.0%          39,626          10.0%

</TABLE>


                                       65


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 16 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS

The following  table  presents the carrying  values and estimated fair values of
the Company's  recorded  financial  instruments,  as well as  information  about
certain specific off-balance sheet financial instruments (in thousands):
<TABLE>
<CAPTION>

                                                    December 31, 1996                                  December 31, 1995
                                       --------------------------------------------------------------------------------------------
                                                                        Estimated
                                           Notional      Carrying            Fair        Notional        Carrying         Estimated
                                             Amount         Value           Value          Amount           Value        Fair Value
                                       =============================================================================================
<S>                                      <C>           <C>             <C>             <C>            <C>                  <C>
Recorded financial instruments
Financial assets:
   Cash and cash equivalents...........  $       --    $    7,335      $    7,335      $       --     $     8,519          $  8,519
   Securities purchased under
      agreements to resell.............          --            --              --              --          55,000            55,000
   Investment securities...............          --        27,796          27,540              --          26,917            26,720
   Mortgage-backed and related
      securities.......................          --       106,549         105,634              --         137,779           137,507
   Loans held-for-sale.................          --         4,785           4,790              --          14,020            14,222
   Loans held-for-investment, net......          --       445,055         468,545              --         433,562           466,003
   Interest rate cap agreement
      trading..........................          --            --              --           5,000              --                --
   Interest rate cap agreements
      hedging..........................          --            --              --          35,000             169                22
Financial liabilities:
   Deposits with no stated maturity....          --       114,265         114,265              --         105,490           105,490
   Time deposits.......................          --       309,124         312,185              --         387,481           390,942
   Securities sold under agreements to
      repurchase.......................          --         5,015           5,015              --              --                --
   Advances from the Federal Home
      Loan Bank........................          --       133,110         133,554              --         158,010           158,690
Off-balance sheet financial instruments
   Interest rate swap agreements -
      hedging..........................      25,000            --            (310)         25,000              --             (719)
   Loan commitments with mandatory
      rates and terms..................      17,769            --              19          28,567              --                84
   Forward sales of loans - optional
      delivery.........................       8,510            --              67          19,868              --               301
   Letters of credit...................       3,783            --              --           2,795              --                --

</TABLE>



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

                                       66


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

Recorded Financial Instruments

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

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

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

The Company has used certain derivative financial instruments for the purpose of
interest  rate  risk  management.  All of  the  Company's  derivative  financial
instruments  are for purposes other than trading.  The Company has used interest
rate  caps to limit its short  term  borrowing  costs  related  to  specifically
identified short term borrowings,  including repurchase  agreements and variable
rate Federal Home Loan Bank advances.  Interest rate caps also have been used by
the Company to remove,  for a limited period of time, the lifetime caps inherent
in  certain  of  the  Company's  floating  rate   mortgage-backed   and  related
securities.  Interest  rate caps  have  also  been  used to limit the  Company's
exposure  to  adverse  market  value  changes  in  other  derivative   financial
instruments.  Fair  values of interest  rate cap  agreements  are the  estimated
amounts to settle the positions as provided by dealer quotes.

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

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

Off-Balance Sheet Financial Instruments

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

                                       67


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

Credit Risks

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

NOTE 17 - COMMITMENTS AND CONTINGENCIES

In addition to  undisbursed  loan funds at December  31,  1996,  the Company has
issued commitments to originate loans amounting to $15,788,000.  All outstanding
loan  commitments  are  scheduled to be disbursed  within 90 days. In connection
with its loans  held-for-sale  and its loan  commitments,  the  Company has also
entered into commitments to sell loans of  approximately  $8,510,000 at December
31,  1996.  Also,  at December 31, 1996,  the Company had issued  $3,783,000  in
standby  letters of credit.  Standby  letters of credit  generally  provide  for
collateral of real estate or other  personal  property.  All standby  letters of
credit expire within three years.

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

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

Total rent expense under  long-term  operating  leases  amounted to  $1,235,000,
$1,542,000  and  $1,299,000  in 1996,  1995 and 1994,  respectively.  One of the
long-term operating leases provides a 21% equity interest in the appreciation in
underlying real estate.

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

               Year ending
               December 31,             Amount
               ================================
               1997                     $1,332
               1998                      1,327
               1999                      1,369
               2000                      1,276
               2001                        233
               After 2001                  577


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

                                       68

NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

Condensed financial  statements of Virginia Beach Federal Financial  Corporation
(the "Parent Company") are shown below (in thousands). The Parent Company has no
significant operating activities.

CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

                                                                          December 31,
                                                                        --------------------
                                                                          1996        1995
                                                                        ====================
<S>                                                                     <C>         <C>
ASSETS
Cash in bank ........................................................   $    504    $    647
Investment in subsidiary ............................................     40,452      40,493
Other assets ........................................................         16           8
                                                                        --------------------
  Total assets ......................................................   $ 40,972    $ 41,148
                                                                        ====================

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities .........................................................   $    145    $    116
                                                                        --------------------
STOCKHOLDERS' EQUITY
  Common stock ......................................................         50          50
  Capital in excess of par value ....................................      9,336       9,237
  Unrealized gain (loss) on available-for-sale securities, net of tax        (39)         39
  Retained earnings .................................................     31,480      31,706
                                                                        --------------------
   Total stockholders' equity .......................................     40,827      41,032
                                                                        --------------------
   Total liabilities and stockholders' equity .......................   $ 40,972    $ 41,148
                                                                        ====================

</TABLE>

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                          ------------------------------
                                             1996      1995       1994
                                          ------------------------------
CONDENSED STATEMENT OF OPERATIONS

<S>                                       <C>        <C>        <C>
Equity in earnings (loss) of subsidiary   $   587    $ 1,189    $  (550)
Interest income .......................        18         26         41
Other expense .........................        48         60         64
                                          -----------------------------
Income (loss) before income taxes .....       557      1,155       (573)
Income tax benefit ....................       (12)       (11)        (2)
                                          -----------------------------
Net income (loss) .....................   $   569    $ 1,166    $  (571)
                                          =============================
</TABLE>


                                       69


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>

                                                               
                                                                        Year ended December 31,
                                                                   ------------------------------
                                                                     1996       1995       1994
                                                                   ------------------------------
<S>                                                                <C>        <C>        <C>

CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities
     Net income (loss) .........................................   $   569    $ 1,166    $  (571)
     Adjustments to reconcile net income (loss) to net cash
     provided by operating activities
        (Increase) decrease in other assets ....................        (8)        18          7
        Increase in liabilities ................................        29         28         29
        Equity in net (income) loss  of subsidiary .............      (587)    (1,189)       550
                                                                   -----------------------------
            Net cash provided by operating activities ..........         3         23         15
                                                                   -----------------------------
Cash flows from investing activities
     Dividends from subsidiary .................................       550        400       --
     Additional capital contribution in subsidiary .............        --         --       (400)
                                                                    ----------------------------
            Net cash provided by (used for) investing activities       550        400       (400)
                                                                    ------------------------------
Cash flows from financing activities
     Issuance of common stock ..................................        99        269        188
     Cash dividends paid .......................................      (795)      (789)      (784)
                                                                     ---------------------------
            Net cash used for financing activities .............      (696)      (520)      (596)
                                                                     ---------------------------
Net decrease in cash ...........................................      (143)       (97)      (981)
Cash at beginning of year ......................................       647        744      1,725
                                                                   ------------------------------
Cash at end of year ............................................   $   504    $   647    $   744
                                                                   =============================
</TABLE>



                                       70


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

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

The  OTS  has  adopted  regulations  that  impose  limitations  on  all  capital
distributions by savings  institutions.  The OTS may prohibit a proposed capital
distribution  by any  institution,  which would  otherwise  be  permitted by the
regulation,  if the OTS determines that such  distribution  would  constitute an
unsafe or  unsound  practice.  The Bank  paid cash  dividends  of  $550,000  and
$400,000 to the  Company  during  1996 and 1995,  respectively.  There can be no
assurance  that the OTS will not object to any amount of future  cash  dividends
declared by the Bank.

                                       71


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

NOTE 19 - QUARTERLY CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>

(in thousands, except per share data)            1996 Quarter ended
                                     ---------------------------------------------
                                      March 31    June 30 September 30 December 31
                                     ---------------------------------------------

<S>                                   <C>        <C>        <C>         <C>
Interest income ...................   $ 12,558   $ 11,979   $ 11,862    $ 11,946
Net interest income after provision
  for loan losses .................      3,920      4,109      4,148       4,389
Other income ......................        951        829        759         715
Other expenses ....................      3,971      3,930      7,105       3,922
Income before income taxes ........        900      1,008     (2,198)      1,182
Net income (loss) .................        547        625     (1,363)        760
Earnings (loss) per share .........        .11        .13       (.27)        .15
Dividends paid per share ..........        .04        .04        .04         .04
</TABLE>

<TABLE>
<CAPTION>

(in thousands, except per share data)              1995 Quarter ended
                                    ------------------------------------------------
                                      March 31     June 30 September 30 December 31
                                    ------------------------------------------------

<S>                                   <C>         <C>        <C>        <C>
Interest income ...................   $ 13,076    $ 13,332   $ 13,314   $ 12,564
Net interest income after provision
  for loan losses .................      3,938       3,638      3,572      3,691
Market value adjustment on
  derivative contracts ............       (312)         80       --          (10)
Gain on sales of mortgage loan
  servicing rights ................       --          --         --          111
Other income ......................        921       1,322      1,828      1,278
Other expenses ....................      4,390       4,629      4,809      4,422
Income before income taxes ........        157         411        591        648
Net income ........................        104         271        390        401
Earnings per share ................        .02         .06        .08        .08
Dividends paid per share ..........        .04         .04        .04        .04

</TABLE>






                                       72


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

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

  The  registrant  has not had any  disagreements  with its  accountants  on any
matter of accounting principles or practices or financial statement disclosure.

  On August 9, 1995,  the Board of Directors of the Company  selected  KMPG Peat
Marwick LLP, Suite 1900, 1021 East Cary Street,  Richmond,  Virginia 23219-4023,
as the new  certified  public  accounting  firm.  KPMG Peat Marwick LLP replaced
Price Waterhouse LLP, 700 World Trade Center, Norfolk, Virginia 23510.

  During the two most recent  calendar  years audited by Price  Waterhouse  LLP,
there were no  reportable  disagreements  related  to any  matter of  accounting
principles or practices,  financial  statement  disclosure or auditing  scope or
procedure.

  Price  Waterhouse  LLP  rendered an  unqualified  opinion on the  consolidated
financial  statements of the Company and its subsidiary,  Virginia Beach Federal
Savings Bank, for each of the last two years  audited.  Such years were the year
ended December 31, 1994 and the year ended December 31, 1993.

  The Company did not, nor did anyone on the  Company's  behalf  consult  during
1993,  1994 or prior to August 9, 1995, with KMPG Peat Marwick LLP regarding the
application  of  accounting  principles  to  a  specified  transaction,   either
completed or proposed.  Neither were they consulted during such period regarding
the  type of audit  opinion  that  might be  rendered  on the  Bank's  financial
statements;  nor was a  written  report  provided  to the  Bank  or oral  advice
provided that KMPG Peat Marwick LLP concluded was an important factor considered
by the  Company  in  reaching  a  decision  as to the  accounting,  auditing  or
financial  reporting  issue;  or any matter  that was  either  the  subject of a
disagreement or a reportable event.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------  --------------------------------------------------

  The information  contained under the section captioned "Election of Directors"
in the  Company's  definitive  proxy  statement  for the 1997 Annual  Meeting of
Stockholders  (the  "Proxy  Statement")  is  incorporated  herein by  reference.
Information  regarding  executive officers is contained in the section captioned
"Executive  Officers of the Registrant"  under Part I hereof and is incorporated
herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION
--------  ----------------------

  The information  contained under the section captioned "Election of Directors"
in the Proxy Statement is incorporated herein by reference.

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

    (a)  Security Ownership of Certain Beneficial Owners

         Information  required by this item is incorporated  herein by reference
         to the section  captioned  "Voting  Securities  and  Principal  Holders
         Thereof" in the Proxy Statement.

                                       73


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation

    (b)  Security Ownership by Management

         Information  required by this item is incorporated  herein by reference
         to the section captioned "Election of Directors" and "Voting Securities
         and Principal Holders Thereof" in the Proxy Statement.

    (c)  Changes in Control

         Management  of the  Company  knows of no  arrangements,  including  any
         pledge by any person of  securities  of the Company,  the  operation of
         which may at a  subsequent  date  result in a change in  control of the
         registrant.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item is incorporated herein by reference to
the section captioned  "Certain  Transactions with Management and Others" in the
Proxy Statement.

                                       74


<PAGE>




                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                  ON FORM 8-K
----------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                          Page in
                                                                                                                           Annual
                                                                                                                           Report
                                                                                                                               On
                                                                                                                             Form
                                                                                                                             10-K
                                                                                                                   ----------------



(a)      The following documents are filed as part of this report.

         1.    Consolidated Financial Statements

<S>            <C>                                                                                                             <C>
               Report of Independent Auditors as of December 31, 1996 and 1995...........................                      41

               Report of Independent Auditors as of December 31, 1994....................................                      42

               Virginia Beach Federal Financial Corporation

               o   Consolidated Statement of Financial Condition

                  December 31, 1996 and 1995.............................................................                      43

               o   Consolidated Statement of Operations for the three years ended December

                  31, 1996, 1995 and 1994................................................................                      44

               o   Consolidated Statement of Cash Flows for the three years ended December

                  31, 1996, 1995 and 1994................................................................                 45 - 46

               o   Consolidated Statement of Stockholders' Equity for the three years ended

                  December 31, 1996, 1995 and 1994.......................................................                      47

               o  Notes to Consolidated Financial Statements.............................................                 48 - 72



         2.    Financial Statement Schedules
               (None)

               All schedules have been omitted as they are not applicable or the
               required  information  is  shown  in the  Notes  to  Consolidated
               Financial Statements.

               Exhibits

               (3.1)       Restated Articles of Incorporation of Virginia Beach Federal
                           Financial Corporation (Incorporated by reference to Post-Effective
                           Amendment No. 1 to the Registrant's Form S-4 Registration
                           Statement dated March 21, 1991, File No. 33-27398).

               (3.2)       Bylaws of Virginia Beach Federal Financial Corporation
                           (Incorporated by reference to Post-Effective Amendment No. 1 to
                           the Registrant's Annual Report on Form S-4 Registration
                           Statement dated March 21, 1991, File No. 33-27398).

</TABLE>

                                                   75


<PAGE>


<TABLE>
<CAPTION>


<S>            <C>         <C>
               (10.1)      Virginia Beach Federal Financial Corporation 1981 Stock Option
                           Plan, as amended (Incorporated by reference to the Registrant's
                           Annual Report on Form 10-K for the Fiscal Year Ended December
                           31, 1984).

               (10.2)      Lease between the Runnymede  Corporation and Virginia
                           Beach  Federal  Savings  Bank,  dated  April 20, 1989
                           (Incorporated by reference to the Registrant's Annual
                           Report  on  Form  10-K  for  the  Fiscal  Year  Ended
                           December 31, 1989).

               (10.3)      Virginia Beach Federal  Financial  Corporation - 1991
                           Stock Option Plan  (Incorporated  by reference to the
                           Registrant's  Annual  Report  on  Form  10-K  for the
                           Fiscal Year Ended December 31, 1990).

               (10.4)      Amended   and   Restated   Agreement   and   Plan  of
                           Reorganization,  dated  February  21,  1991,  by  and
                           between Virginia Beach Federal Savings Bank, Virginia
                           Beach  Federal  Financial  Corporation  and  Virginia
                           Beach Federal Interim Savings Bank  (Incorporated  by
                           reference to  Post-Effective  Amendment  No. 1 to the
                           Registrant's  Form S-4  Registration  Statement dated
                           March 21, 1991, File No. 33-27398).

               (10.5)      Employment Agreement with John A. B. Davies, Jr., President
                           and Chief Executive Officer of the Corporation, Dennis R.
                           Stewart, Executive Vice President and Chief Financial Officer of
                           the Corporation and John M. Chattleton, Executive Vice President
                           of the Bank.

               (10.6)      Employee Stock Purchase Plan.  (Incorporated by reference to the
                           Registrant's Annual Report on Form 10-K for the fiscal year ended
                           December 31, 1995).

               (21)        Subsidiaries.

               (23.1)      Consent of Independent Auditors - KPMG Peat Marwick LLP

               (23.2)      Consent of Independent Auditors - Price Waterhouse LLP

               (23.3)      Consent of Independent Auditors - Price Waterhouse LLP

               (99.1)      Annual Report on Form 11-K for the fiscal year ended December
                           31, 1996.
</TABLE>

                                       76


<PAGE>






(b)      Reports on Form 8-K

         During the quarter ended  December 31, 1996,  the  Registrant  filed no
         current reports on Form 8-K.

(c)      The exhibits set forth above are either filed herewith or incorporated
         by reference herein.

(d)      All schedules  have been omitted as the required  information is either
         inapplicable  or  included  in  the  Notes  to  Consolidated  Financial
         Statements.

                                       77


<PAGE>



                                   SIGNATURES

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

                  VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION

Dated:  March 27, 1997          By: /s/ John A. B. Davies, Jr.
       ---------------             ---------------------------------------------
                                   John A. B. Davies, Jr.
                                   President and Chief Executive Officer
                                  (Duly Authorized Representative)

         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

<S>        <C>                                                    <C>      <C>
By:          /s/ John A. B. Davies, Jr.                               By:   /s/ Charles P. Fletcher
           ----------------------------------------------------           --------------------------------------------------
             John A. B. Davies, Jr.                                         Charles P. Fletcher
             President and Director                                         Chairman of the Board
             (Principal Executive Officer)

Date:        March 27, 1997                                         Date:   March 27, 1997

By:          /s/ Dennis R. Stewart                                    By:   /s/ Floyd E. Kellam, Jr.
           ----------------------------------------------------           --------------------------------------------------
             Dennis R. Stewart                                              Floyd E. Kellam, Jr.
             Executive Vice President/                                      Vice Chairman of the Board
             Chief Financial Officer
             (Principal Financial Officer)

Date:        March 27, 1997                                         Date:   March 27, 1997

By:          /s/ Edward E. Brickell                                   By:   /s/ Robert H. DeFord, Jr.
           ----------------------------------------------------           --------------------------------------------------
             Edward E. Brickell                                             Robert H. DeFord, Jr.
             Director                                                       Director

Date:        March 27, 1997                                         Date:   March 27, 1997

By:          /s/ Betty Anne Huey                                      By:   /s/ Rufus S. Kight, Jr.
           ----------------------------------------------------           --------------------------------------------------
             Betty Anne Huey                                                Rufus S. Kight, Jr.
             Director                                                       Director

Date:        March 27, 1997                                         Date:   March 27, 1997

By:          /s/ Ivan D. Mapp                                         By:   /s/ George R. C. McGuire
           ----------------------------------------------------           --------------------------------------------------
             Ivan D. Mapp                                                   George R. C. McGuire
             Director                                                       Director

Date:        March 27, 1997                                         Date:   March 27, 1997


</TABLE>



<PAGE>



                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>

EXHIBITS
<S>             <C>
(3.1)           Restated   Articles  of   Incorporation   of  Virginia  Beach  Federal   Financial   Corporation
                (Incorporated   by   reference  to   Post-Effective   Amendment   No.  1  to  the   Registrant's
                Form S-4 Registration Statement dated March 21, 1991, File No. 33-27398).

(3.2)           Bylaws  of  Virginia   Beach   Federal   Financial   Corporation   (Incorporated   by  reference
                to   Post-Effective    Amendment   No.   1   to   the   Registrant's   Form   S-4   Registration
                Statement dated March 21, 1991, File No. 33-27398).

(10.1)          Virginia   Beach   Federal   Financial   Corporation   1981  Stock  Option   Plan,   as  amended
                (Incorporated   by  reference  to  the   Registrant's   Annual  Report  on  Form  10-K  for  the
                Fiscal Year Ended December 31, 1984).

(10.2)          Lease   between   the   Runnymede    Corporation    and   Virginia    Beach   Federal    Savings
                Bank,   dated  April  20,  1989   (Incorporated   by  reference  to  the   Registrant's   Annual
                Report on Form 10-K for the Fiscal Year Ended December 31, 1989).

(10.3)          Virginia    Beach    Federal    Financial    Corporation    -    1991    Stock    Option    Plan
                (Incorporated   by  reference  to  the   Registrant's   Annual  Report  on  Form  10-K  for  the
                Fiscal Year Ended December 31, 1990).

(10.4)          Amended   and   Restated   Agreement   and   Plan  of   Reorganization,   dated   February   21,
                1991,  by  and  between   Virginia   Beach  Federal   Savings  Bank,   Virginia   Beach  Federal
                Financial     Corporation     and    Virginia    Beach    Federal     Interim    Savings    Bank
                (Incorporated   by   reference  to   Post-Effective   Amendment   No.  1  to  the   Registrant's
                Form S-4 Registration Statement dated March 21, 1991, File No. 33-27398).

(10.5)          Employment   Agreement   with  John  A.  B.  Davies,   Jr.,   President   and  Chief   Executive
                Officer  of  the   Corporation,   Dennis  R.  Stewart,   Executive   Vice  President  and  Chief
                Financial   Officer   of   the   Corporation   and   John   M.   Chattleton,    Executive   Vice
                President of the Bank.

(10.6)          Employee   Stock   Purchase   Plan.    (Incorporated    by   reference   to   the   Registrant's
                Annual Report on Form 10-K for the fiscal year ended December 31, 1995)

(21)            Subsidiaries.

(23.1)          Consents of Independent Auditors - KPMG Peat Marwick LLP

(23.2)          Consent of Independent Auditors - Price Waterhouse LLP

(23.3)          Consent of Independent Auditors - Price Waterhouse LLP

(99.1)          Annual Report on Form 11-K for the Fiscal Year Ended December 31, 1996.


</TABLE>