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

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended                 December 31, 1998
                         -------------------------------------------------------

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to
                              --------------------------------------------------

Commission file number                          1-10506
                      ----------------------------------------------------------

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

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

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

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

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

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

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

                                      None
                                      ----
                                (Title of Class)

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

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

         The  aggregate  market  value of the  Registrant's  common stock on the
American  Stock  Exchange  on  March  24,  1999  held  by  nonaffiliates  of the
Registrant was $2,839,336.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to  Stockholders  for the year ended  December 31,
1998 are incorporated by reference into Parts I and II hereof.

Portions  of the Proxy  Statement  for the Annual  Meeting to be held on May 27,
1999 are incorporated by reference into Part III hereof.

                                       1
<PAGE>

                               Essex Bancorp, Inc.
                       Annual Report on Form 10-K for the
                          Year Ended December 31, 1998

                                Table of Contents


                                                                           Page
                                                                           ----
Part I
------

Item 1            Business...............................................    3
Item 2            Properties.............................................   36
Item 3            Legal Proceedings......................................   37
Item 4            Submission of Matters to a Vote
                      of Security Holders................................   37


Part II
-------

Item 5            Market for Registrant's Common Equity
                      and Related Stockholder Matters....................   37
Item 6            Selected Financial Data................................   38
Item 7            Management's Discussion and
                      Analysis of Financial Condition
                      and Results of Operations..........................   38
Item 7A           Quantitative and Qualitative Disclosures
                      About Market Risk..................................   38
Item 8            Financial Statements and
                      Supplementary Data.................................   38
Item 9            Changes in and Disagreements with
                      Accountants on Accounting and
                      Financial Disclosure...............................   38


Part III
--------

Item 10           Directors and Executive Officers
                      of the Registrant..................................   39
Item 11           Executive Compensation.................................   40
Item 12           Security Ownership of Certain
                      Beneficial Owners and Management...................   40
Item 13           Certain Relationships and
                      Related Transactions...............................   40


Part IV
-------

Item 14           Exhibits, Financial Statement Schedules,
                      and Reports on Form 8-K............................   41


                                       2
<PAGE>

                                     PART I

Item 1.           Business

Organization and Background

         General. The following organizational chart depicts Essex Bancorp, Inc.
and its  subsidiaries  as of December 31, 1998. It is intended to facilitate the
readers' understanding of the companies discussed in this report.  Following the
chart is a glossary of terms which are used throughout this report.


                      Essex Bancorp, Inc. and Subsidiaries
                              Organizational Chart

<TABLE>
<S> <C>
                                             ---------------------
                                             |                   |
                                             |    The Company    |
                                             |                   |
                                             ---------------------
                                                      |
                                                      |
                                                      |
                                                      |
                                 ------------------------------------------
                                 |                                        |           
                       ---------------------                     ---------------------
                       |                   |                     |                   |
                       |     The Bank      |                     |        EMC        |
                       |                   |                     |                   |
                       ---------------------                     ---------------------
                                 |                                        |
                                 |                                        |
            ---------------------------------------------------------------
            |                                  69%    |     31%
-----------------------                     ---------------------
|                     |                     |                   |
|    First Title      |                     |     Essex Home    |
|                     |                     |                   |
-----------------------                     ---------------------
                                                      |
                                                      |
                                            ---------------------
                                            |                   |
                                            |       EHADC       |
                                            |                   |
                                            ---------------------
</TABLE>

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

                                       3
<PAGE>

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

Company                    Essex Bancorp, Inc.
Partnership                Essex Financial Partners, L.P.
Bancorp                    Essex Bancorp.
Bank                       Essex Savings Bank, F.S.B.
EMC                        Essex Mortgage Corporation
Essex First                Essex First Mortgage, a division of the Bank
First Title                First Title Insurance Agency LLC
Essex Home                 Essex Home Mortgage Servicing Corporation
EHADC                      E H Asset Disposition Corporation


         The Company is a Delaware  corporation  that is the holding company for
the Bank,  a  federally-chartered  savings  bank which  operates (i) four retail
banking  branches located in North Carolina and Virginia and (ii) Essex First, a
division that engages  principally  in the  origination  and sale of residential
mortgage  loans.  The Company's other  principal  operating  subsidiary is Essex
Home, a majority-owned  subsidiary of the Bank that is engaged  primarily in the
servicing of mortgage loans owned by the Bank,  governmental  agencies and third
party  investors.  At December 31, 1998,  the Company had total assets of $231.0
million, total liabilities of $215.2 million, including total deposits of $187.6
million, and total shareholders' equity of $15.8 million.

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

         On June 30, 1995, the Company and the Bank signed an Agreement and Plan
of Reorganization (the "Agreement") with Home Bancorp, Inc. ("Home Bancorp") and
its  wholly-owned  subsidiary  Home Savings Bank,  F.S.B.  ("Home  Savings"),  a
Norfolk, Virginia based savings institution.  On September 15, 1995, the Company
and the Bank merged with Home Bancorp and Home Savings (the "Home Acquisition").
In exchange for all of the outstanding  stock of Home Bancorp,  the stockholders
of Home Bancorp received 2,250,000 shares of nonvoting perpetual preferred stock
of the Company  with an  aggregate  redemption  and  liquidation  value of $15.0
million and warrants to purchase  7,949,000 shares of the Company's common stock
at a price of $0.9375  per share,  which was the price of the  Company's  Common
Stock as of June 30, 1995. The warrants became exercisable in September 1998 and
will expire in September 2005.

         On May 28, 1998,  the Company's  shareholders  approved an amendment of
the  Company's   Certificate  of  Incorporation   whereby  the  Company's  total
authorized  capitalization  increased  to 30 million  shares,  consisting  of 20
million  shares of common stock and 10 million  shares of preferred  stock.  The


                                       4
<PAGE>

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


Business Strategy of the Company and the Bank

         General.  The Company  has  improved  its  financial,  operational  and
competitive  position  over the past three years.  As of December 31, 1998,  the
Company  is  well-capitalized  and  profitable  on a  core  basis,  experiencing
relatively  strong  growth in retail  deposits  and  postured to be  competitive
within  the  geographic  markets  served  and the  market  niches  pursued.  The
Company's  business  strategy is to raise the core  earnings  level  through (i)
continued  asset  growth,  (ii) an improved  net interest  income ratio  through
continued  emphasis in a broader  range of loan and deposit  products  and (iii)
enhanced  noninterest  revenues through  increased  cross-selling  and continued
growth in mortgage lending and servicing activities.

         Enhancement of Bank  Franchise.  In 1996, the Board of Directors of the
Company formed a Strategic Evaluation Committee (the "Committee") to explore the
possibility  of  further  expansion  or  contraction  by  branch  sales.  It was
concluded,  with  assistance  from  an  independent  consultant,   that  selling
non-strategic bank branches and effectively shrinking the size of the asset base
by  approximately  50% was a  strategy  that  ultimately  would  be in the  best
interests of the common and preferred shareholders of the Company.  Accordingly,
the Bank sold its branches in Charlotte,  Raleigh,  Greensboro  and  Wilmington,
North Carolina and in Norfolk,  Portsmouth,  Hampton,  Newport News and Grafton,
Virginia  (collectively,  the "Branches") in three separate  transactions over a
nine-month  period in 1996.  The outcome of this  strategy  was that the Company
retained its most strategic branches with the greatest potential for significant
market share growth.  See Note 5 on pages 36 and 37 of the Notes to Consolidated
Financial  Statements  of the  1998  Annual  Report  to  Stockholders,  which is
attached hereto as Exhibit 13 and incorporated herein by reference.

         During this  downsizing  period in 1996, the Bank continued its efforts
to position itself as a service-oriented  community-based institution to compete
against the large  regional/national  banking  companies  whose  orientation  is
towards larger accounts, centralized operations and higher service fees. To that
end, the Bank and its mortgage  banking  subsidiary  introduced a wider range of
consumer  and  mortgage  loan  products to attract new  business,  maximize  the
potential  of its  existing  customer  base  and  enhance  yields.  The  Company
envisions further improving its franchise through emphasizing growth at existing
branches  through  increased  cross-selling,  increasing  market  penetration in
Tidewater and Richmond,  Virginia and  Northeastern  North  Carolina and opening
complementary  branches,  such as a new branch site in Ashland,  Virginia.  This
site was  acquired  in 1998 and a new retail bank  branch is  anticipated  to be
completed in September 1999. In addition,  the Bank expects to offer its deposit
customers a telephone information access system and debit cards.

         Diversification  of Loan Products.  The Company  continues to emphasize
the  origination  and purchase of  residential  construction  and consumer loans
because of the shorter-term nature of such loans and the higher yields available
thereon  when  compared to  permanent  residential  mortgage  lending.  However,
construction  and consumer  lending is generally  considered to involve a higher
level of risk as compared to single-family residential lending.  Notwithstanding
the higher risk aspect,  the  portfolio of  residential  construction  loans has
grown steadily since the product's  introduction  in 1992 with a negligible loss
on one  foreclosed  property  in  1998  constituting  the  first  loss  in  this
portfolio. At this time, opportunities for consumer loan origination are limited


                                       5
<PAGE>

in the  Bank's  markets.  Therefore,  the  Bank  continues  to  review  consumer
portfolios in the secondary market that have acceptable  credit risk and yields.
For additional information,  see "- Lending Activities - Construction Loans" and
"- Consumer Loans."

         Maintenance  of Asset  Quality.  The Bank has a  multi-faceted  program
designed to control and  continually  monitor the credit  risks  inherent in the
loan portfolio.  This program consists of, among other things, a structured loan
approval  process  including a loan committee,  the periodic  assessment of loan
classifications,  an annual  review of all  commercial  real  estate and builder
relationships  and the periodic  evaluation of the adequacy of general loan loss
allowances.   By  deploying  these  processes  and  adhering  to   predetermined
underwriting  procedures,  management has been successful in reducing previously
unacceptable levels of delinquencies and nonperforming  assets. As a result, the
 .79% ratio of  nonperforming  assets to total assets at December 31, 1998 is the
lowest since the Company went public in 1989.

         Expansion of  Subservicing  Activities.  In its efforts to generate fee
income,  the Bank  continues  to pursue  profitable  residential  mortgage  loan
servicing  and  subservicing.  Essex  Home is a service  corporation  subsidiary
licensed  by the Federal  National  Mortgage  Association  ("Fannie  Mae"),  the
Federal  Home Loan  Mortgage  Corporation  ("Freddie  Mac")  and the  Government
National  Mortgage  Association  ("Ginnie  Mae").  Essex Home also  services and
subservices loans for approximately  eight private investors and 47 subservicing
clients.

         Through various  networking and referral  opportunities and advertising
efforts,  Essex Home has attracted  other  financial  institutions  and mortgage
banking firms  interested  in  outsourcing  their loan  servicing  function.  By
subservicing  loans for others,  the Bank will be able to utilize more fully its
available  resources in a cost  efficient and  profitable  manner.  Essex Home's
largest  subservicing  contract was terminated effective June 1, 1997, but Essex
Home has  rebuilt  the  portfolio  and its  nonaffiliate  servicing/subservicing
portfolio  increased from 5,500 loans totaling $354.2 million as of December 31,
1997 to 12,200 loans totaling $1.1 billion as of December 31, 1998.

         Containment  of  Operating   Expenses.   Historically,   the  Company's
operating   expenses   have  been  high  relative  to  those  of  other  savings
institutions  of similar asset size.  Significant  reductions  have been made in
operating  expenses and the Company has  achieved a level of operating  expenses
that  is  appropriate   considering  the  Company's   activities  in  both  loan
origination and loan servicing.  Nevertheless,  management continues to evaluate
the Bank's personnel needs and operating requirements in order to identify areas
where  additional  measures may be taken to reduce  costs.  Although the Bank is
committed  to  achieving a lower  level of  operating  expenses  relative to the
Bank's  operations,  management  recognizes that operating  expenses will remain
higher  than much of the Bank's  peer group due to the  relatively  low level of
assets of Essex Home.

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



                                       6
<PAGE>

         The interest rate sensitivity gap is defined as the difference  between
interest-earning  assets and interest-bearing  liabilities maturing or repricing
within a given time period.  The Bank's one-year  interest rate  sensitivity gap
amounted to a negative 17.9% at December 31, 1998,  which reflects the impact of
(i) the lengthening of the initial adjustment term for adjustable-rate  mortgage
loans and (ii) the shortening deposit maturities as the Bank's deposit customers
are reluctant to enter into extended maturities in the current low interest rate
environment.  The negative gap also reflects near-term maturities of higher-rate
Federal Home Loan Bank advances. The Company will benefit from the lower cost of
funds as these borrowings mature and may consider  extended  maturities in order
to mitigate the impact of an increase in interest rates in the future. While the
Company continues to emphasize  investment in  adjustable-rate  loan portfolios,
customer  demand  for such loans is  lessening  as  borrowers'  demand for lower
fixed-rate loans is increasing.  Within the spectrum of loan products offered by
the Bank,  the  percentage  of balloon  payment and  adjustable-rate  loans with
longer initial adjustment terms has increased.  See "Management's Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  - Market  Risk
Management"  on pages 16 through 19 of the 1998 Annual  Report to  Stockholders,
which is attached hereto as Exhibit 13 and incorporated herein by reference.

General

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

         The Company's principal focus is currently on the origination  (through
Essex First) of both construction and permanent single-family  residential loans
(of which  substantially  all fixed-rate  single-family  residential  loans with
terms to  maturity in excess of seven years are being sold by Essex First in the
secondary  market).  Because of borrowers'  preferences for fixed-rate  mortgage
loans  during  1998,   the  Company   also  relied  upon  the   acquisition   of
adjustable-rate   residential   loan  portfolios  to  supplement  Essex  First's
production of loans to be retained by the Bank. Moreover,  in order to provide a
full range of services to its  customers  and in  accordance  with the Company's
asset and liability management policies,  the Company recently has increased its
emphasis of the origination of various types of consumer loans. In addition, the
Company generates fee income by providing to third parties residential  mortgage
loan servicing and subservicing through Essex Home.

Lending Activities

         General.  At  December  31,  1998,  the  Company's  net loan  portfolio
(excluding   loans   classified  as  held  for  sale)  totaled  $192.7  million,
representing  approximately  83.4% of its $231.0 million of total assets at that
date.  The  principal  categories  of  loans  in  the  Company's  portfolio  are
residential real estate loans,  which are secured by single-family  (one-to-four
units)  residences;  loans for the  construction  of  single-family  properties;
commercial  real  estate  loans,  which are secured by  multi-family  (over five
units)  residential and commercial real estate;  commercial  business loans; and


                                       7
<PAGE>

consumer  loans.  Substantially  all of the Company's  mortgage  loan  portfolio
consists  of  conventional  mortgage  loans,  which are loans  that are  neither
insured by the Federal Housing  Administration  ("FHA") nor partially guaranteed
by the Veterans Administration ("VA").

         As a  federally  chartered  savings  institution,  the Bank has general
authority  to  originate  and  purchase  loans  secured by real  estate  located
throughout the United States. The Company currently originates substantially all
of its loans  within  Virginia  and North  Carolina.  Nevertheless,  the Company
continues  to purchase  from time to time loans  secured by  properties  located
outside  of its  market  area and  continues  to hold a  relatively  diversified
portfolio.

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

         Since the enactment of the Financial Institutions Reform,  Recovery and
Enforcement Act of 1989 ("FIRREA"), a savings institution generally may not make
loans to one borrower and related entities in an amount which exceeds 15% of its
unimpaired  capital  and  surplus,  although  loans  in an  amount  equal  to an
additional  10% of  unimpaired  capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities.  See "Regulation -
Regulation  of the Bank - General." At December  31,  1998,  the Bank's limit on
loans-to-one borrower was $2.6 million. The loans-to-one borrower limitation may
restrict the Bank's  ability to do business with certain  existing and potential
customers.

         At December 31, 1998, the Bank's five largest  commercial  loans-to-one
borrower and their  related  entities  amounted to $1.4  million,  $1.2 million,
$789,000,  $470,000  and  $356,000.  In addition,  as of December 31, 1998,  the
Bank's largest lines of credit with unaffiliated home builders  consisted of one
in the  amount of $2.5  million  (of  which no funds  had been  drawn as of such
date),  another in the amount of $2.5 million (of which  $435,000 had been drawn
upon as of such  date),  another  in the amount of $2.4  million  (of which $1.3
million  had been  drawn  upon as of such  date),  another in the amount of $1.5
million (of which  $361,000  had been drawn upon as of such date) and another in
the amount of $1.5  million  (of which  $286,000  had been drawn upon as of such
date).

         At December 31, 1998, the $1.4 million  commercial  loan was classified
based on a rating  system  adopted  by the  Company.  Refer to  "-Asset  Quality
Classified Assets" for a description of the  classifications for problem assets.
The components of this credit are (i) a commercial  real estate loan of $939,000
as of December 31, 1998,  which was  originated in October 1987 in the amount of
$1.0 million for the purpose of refinancing a  mini-storage/office  facility (76
mini-storage units and 38 office units) located in Virginia Beach, Virginia, and
(ii) a line of credit in the amount of $600,000 with an  outstanding  balance of
$433,000 as of December  31, 1998.  The Company  occupies  approximately  12,000
square  feet of the office  facility.  The lease  payments  largely  service the
principal and interest on the two loans.  The term of the lease  coincides  with
the maturity of the loans,  which are  scheduled to mature on December 31, 2001.
In addition,  as of December 31, 1998, the Bank and its subsidiaries leased nine
of the mini-storage  units. The property was most recently appraised in November
1992 for $915,000.  As of December 31, 1998, the Bank had established a $300,000
specific  reserve with respect to the loans and the  remaining  $1.1 million was
classified as substandard.


                                       8
<PAGE>

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

                                                                            December 31,                          
                                             ---------------------------------------------------------------------
                                                        1998                    1997                    1996
                                                        ----                    ----                    ----
                                                  $          %             $         %             $         %
                                                  -          -             -         -             -         -
                                                                      (dollars in thousands)
<S>                                            <C>          <C>         <C>         <C>         <C>         <C>  
Real estate:
   Single-family residential:
     First mortgages................           $152,891     78.6%       $130,486    76.8%       $103,643    70.0%
     Second mortgages...............              7,525      3.9           8,699     5.1          12,384     8.3
   Construction and development.....             19,430     10.0          16,583     9.8          17,190    11.6
   Commercial real estate...........              6,470      3.3           5,970     3.5           6,313     4.3
                                              ---------   ------       ---------  ------       ---------  ------
     Total real estate loans........            186,316     95.8         161,738    95.2         139,530    94.2

Commercial business loans...........              1,601       .8           1,883     1.1           1,915     1.3

Consumer loans:
   Other............................              5,984      3.1           5,426     3.2           5,828     3.9
   Secured by deposits..............                621       .3             805      .5             842      .6
                                             ----------    -----      ----------   -----      ----------   -----
     Total consumer loans...........              6,605      3.4           6,231     3.7           6,670     4.5
                                              ---------    -----       ---------   -----       ---------   -----

           Total loans..............            194,522    100.0%        169,852   100.0%        148,115   100.0%
                                                           =====                   =====                   =====
Less:
   Unearned loan fees and discounts.                  9                       29                       8
   Allowance for loan losses........              1,845                    2,382                   2,556
                                              ---------                ---------               ---------
                                                  1,854                    2,411                   2,564
                                              ---------                ---------               ---------

           Net Loans................           $192,668                 $167,441                $145,551
                                                =======                  =======                 =======
<CAPTION>

                                                        1995                    1994
                                                        ----                    ----
                                                    $         %             $         %
                                                    -         -             -         -
Real estate:
   Single-family residential:
     First mortgages................           $223,531     82.1%       $187,607    77.7%
     Second mortgages...............             13,398      4.9          18,717     7.8
   Construction and development.....             15,078      5.5          15,501     6.4
   Commercial real estate...........             10,611      3.9          11,499     4.8
                                               --------   ------        --------  ------
     Total real estate loans........            262,618     96.4         233,324    96.7

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

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

           Total loans..............            272,271    100.0%        241,303   100.0%
                                                           =====                   =====
Less:
   Unearned loan fees and discounts.                388                      482
   Allowance for loan losses........              5,251                    3,429
                                              ---------                ---------
                                                  5,639                    3,911
                                                                       ---------

           Net Loans................           $266,632                 $237,392
                                                =======                  =======
</TABLE>

                                       9
<PAGE>

         Total loans  decreased by an  aggregate of $46.8  million or 19.4% from
December 31, 1994 to December 31, 1998 primarily due to sales of second mortgage
loans,  the sale of  loans in  connection  with the sale of the  Bank's  Florida
branches  in 1994  and the  sale of  loans  in  connection  with the sale of the
Branches  in 1996.  The  acquisition  of $32.3  million  and  $22.2  million  of
adjustable  rate first mortgage loans in 1998 and 1997,  respectively,  and $3.2
million  of fixed  rate home  improvement  loans in 1998  partially  offset  the
decline and  reflects the  Company's  strategy of  investing  proceeds  from the
maturities of investment securities and funds provided by the growth in deposits
into higher yielding  loans.  Over the five year period ended December 31, 1998,
the Company has placed increased emphasis on single-family first mortgage loans,
which,  together with  construction  loans secured by single-family  residences,
increased  from 84.1% of total loans held for investment at December 31, 1994 to
88.6% of total loans held for  investment  at December 31,  1998.  Single-family
second mortgage loans declined  substantially  from 7.8% of total loans held for
investment  at December 31, 1994 to 3.9% of total loans held for  investment  at
December 31, 1998. The decline in second mortgage loans resulted from loan sales
undertaken  to reduce the  regulatory  risk-weighting  of the Bank's assets and,
thus,  improve its  risk-based  capital  ratio,  while at the same time reducing
earnings  volatility  associated with the amortization of deferred  premiums and
the increased credit risk associated with second mortgage loans. Commercial real
estate loans  decreased from 4.8% of total loans held for investment at December
31, 1994 to 3.3% of total loans held for investment at December 31, 1998, as did
commercial  business  loans.  Consumer loans  increased from 2.5% of total loans
held for  investment  at  December  31,  1994 to 3.47% of total  loans  held for
investment at December 31, 1998. The Company  increased its emphasis during 1998
on the  origination  and  purchase  of  various  types of  consumer  loans  and,
consequently, expects the balance of such loans to increase.

         The following  table  presents the maturity  distribution  and interest
sensitivity  of selected loan  categories  (excluding  residential  mortgage and
consumer loans) at December 31, 1998.  Maturities are presented on a contractual
basis.  Loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Scheduled  contractual principal repayments
do not reflect the actual maturities of loans.
<TABLE>
<CAPTION>

                                                             Commercial        Commercial
                                         Construction        Real Estate        Business           Total
                                         ------------        -----------        --------           -----
                                                                (dollars in thousands)
<S>                                        <C>                 <C>              <C>                <C>    
Amounts due:
    One year or less                       $17,756             $   260          $   706            $18,722
    After one year through
      five years                             1,558               5,305              778              7,641
    Beyond five years                          116                 905              117              1,138
                                          --------             -------           ------            -------
        Total                              $19,430              $6,470           $1,601            $27,501
                                            ======               =====            =====             ======

Interest rate terms on
    amounts due after one
    year:
      Fixed                               $    154              $2,698          $   778           $  3,630
                                           =======               =====           ======            =======
      Adjustable                           $ 1,520              $3,512          $   117           $  5,149
                                            ======               =====           ======            =======
</TABLE>

         Origination,  Purchase and Sale of Loans.  In earlier  years,  the Bank
operated  as  a  wholesale  financial  institution  and  conducted  its  deposit
gathering  activities  through a network of limited  service  branches that were
designed to primarily accumulate large  non-transactional  deposit accounts. The
Bank's  lending  activities  were not  generally  conducted  through  its branch
offices.  Instead,  substantially  all of the Company's  loan product was either
originated by Essex First or purchased in the secondary market.

         As part of  management's  efforts to reposition  the Bank's  activities
along the lines of a more traditional financial institution,  the Bank converted
its existing  branch  offices into  full-service  retail  facilities,  which has


                                       10
<PAGE>

enabled the Bank to,  among  other  things,  increase  its  origination  of both
consumer and mortgage loans directly through its branch network.

         Mortgage  Banking  Activities.   At  December  31,  1998,  Essex  First
conducted  its  operations  out of four  offices,  which are located in Norfolk,
Richmond, and Chester, Virginia, and Elizabeth City, North Carolina. Essex First
also  accepts loan  applications  through the Bank's  branch  office in Emporia,
Virginia.  During the years ended December 31, 1998, 1997, and 1996, Essex First
originated $98.8 million,  $65.6 million and $104.2 million of loans (consisting
primarily of both  permanent and  construction  loans  secured by  single-family
residential real estate).  During such periods, $33.5 million, $25.9 million and
$29.3 million of such loans, respectively, were sold by Essex First to the Bank,
with  the  remainder  being  sold by Essex  First  primarily  to  other  private
investors in the secondary market.

         Although   the  majority  of  the  Bank's  loan  product  is  currently
originated by Essex First, Essex First was established primarily to increase the
volume of loans being originated for sale to private  investors in the secondary
market.  Such loan sales  generate fee income,  while avoiding the interest rate
and credit risk associated with holding long-term  fixed-rate  mortgage loans in
its portfolio.  Loans originated by Essex First for sale in the secondary market
are originated in accordance with terms, conditions and documentation prescribed
by the Freddie  Mac,  Fannie Mae and Ginnie Mae.  However,  Essex First does not
generally sell mortgage loans to such government  agencies and,  instead,  sells
loans  to  private  investors  in  the  secondary  market.  Consequently,  loans
originated by Essex First for sale in the secondary market must also comply with
any  particular  requirements  of such  private  investors.  Upon  approval of a
particular loan,  Essex First provides an independent  title company or attorney
instructions  to close the loan.  Loan  proceeds are disbursed and funded at the
closing by Essex  First.  The loan  documents  are  generally  delivered  to the
private investor within 10 days of the closing and the price paid by the private
investor for  purchasing the loan is generally  remitted  within five to 10 days
after such delivery.  Although Essex First  currently  sells  substantially  all
conventional  loans  without  recourse  (so that losses  incurred as a result of
nonperformance  with  respect  to the  loan  become  the  responsibility  of the
purchaser  of the loan as of the date of the  closing),  Essex  First has in the
past occasionally sold conventional loans in the secondary market with recourse,
and may continue to sell certain conventional loans in the secondary market with
recourse. As of December 31, 1998 there were $969,000 of loans outstanding which
were previously  originated and sold by Essex First in the secondary market with
recourse.

         A majority of all residential  mortgage loans originated by Essex First
for sale in the secondary market are sold with servicing released to third party
investors. Substantially all of the loans originated by Essex First and not sold
with  servicing  released to third party  investors are sold to the Bank,  which
enables the Company to retain the servicing.  When loans are sold with servicing
rights released to the buyer, the Company recognizes current income from receipt
of servicing  release fees.  Alternatively,  when loans are sold with  servicing
retained,  the Company  recognizes  additional gains based on the estimated fair
value  of the  servicing  retained.  For  additional  information,  see "-  Loan
Servicing" and "- Loan Fee Income."

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



                                       11
<PAGE>

         Loan  Purchases  and  Sales.   The  Bank  purchases  from  Essex  First
single-family  mortgage loans which generally have adjustable rates or a term to
maturity of seven years or less.  In  addition,  the Bank  continues to purchase
first  mortgage  loans  secured by  single-family  residential  properties  from
selected financial  institutions and mortgage banking companies in the secondary
market.  Such loans generally  consist of ARMs or fixed-rate loans with terms of
five, seven, or to a lesser extent, 15 years. Such loan purchases are secured by
properties  located both within and outside the Bank's primary  markets.  During
the years ended December 31, 1998 and 1997, the Bank purchased $32.3 million and
$22.2 million of loans,  respectively,  from various financial  institutions and
mortgage banking companies (other than Essex First) in the secondary market. The
Company  purchased  less than $600,000 of loans in the  secondary  market during
1996  because  of its  emphasis  on loan  sales to  accommodate  the sale of the
Branches.

         At December 31, 1998,  1997, and 1996,  loans classified by the Company
as held for sale  amounted  to $4.5  million,  $2.2  million  and $2.5  million,
respectively.  Except for loans  originated for sale in the secondary  market by
Essex First,  it is generally  management's  intention  to hold  originated  and
purchased  loans for  investment.  Under  certain  circumstances,  however,  the
Company may sell loans  originally  acquired for  investment in order to address
needs  regarding  liquidity,  regulatory  capital,  interest rate risk, or other
objectives.  During 1996, the Bank sold first  mortgage  loans  totaling  $118.3
million in order to provide  funds for the sale of the  Branches.  See Note 5 on
pages 36 and 37 of the Notes to  Consolidated  Financial  Statements of the 1998
Annual  Report to  Stockholders,  which is  attached  hereto as  Exhibit  13 and
incorporated herein by reference.

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

         Loans  purchased  by the Bank  from  Essex  First  or  other  financial
institutions  and  mortgage  banking  companies  in  the  secondary  market  are
underwritten  by the Bank in accordance  with its  underwriting  guidelines  and
procedures  (which generally follow Freddie Mac and Fannie Mae guidelines).  All
loans in excess of an individual's  designated limits are referred to an officer
with the requisite authority.  Specifically, when acting individually, the Chief
Executive  Officer and the Senior  Underwriter are authorized to approve secured
loans of up to $250,000 and  unsecured  loans of up to $25,000.  When the Senior
Underwriter acts together with the Chief Executive Officer,  they are authorized
to approve secured loans of up to $500,000 and unsecured loans of up to $50,000.
All secured loans greater than  $500,000 but not  exceeding  $1,000,000  require
approval  by the Bank's loan  committee,  which  consists of the  aforementioned
officers and the Executive Vice President of the Bank. All secured loans greater
than $1,000,000 and all unsecured loans greater than $50,000 must be approved by
the Bank's loan  committee  and the Board of Directors of the Bank. In addition,
all loans committed or approved by the Bank's loan committee are reported to the
Board of Directors on a monthly basis.  Management of the Bank believes that its
relatively  centralized  approach to approving loan applications  ensures strict
adherence to the Bank's underwriting guidelines while still allowing the Bank to
approve loan applications on a timely basis.



                                       12
<PAGE>

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

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

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

         The policies must address certain lending  considerations  set forth in
the Lending Guidelines, including supervisory loan-to-value ("LTV") limits, loan
portfolio management, loan administration procedures and underwriting standards.
These policies must also be appropriate to the size of the  institution  and the
nature and scope of its  operations,  and must be reviewed  and  approved by the
institution's board of directors at least annually.  The LTV ratio, which is the
total  amount of credit to be  extended  divided by the  appraised  value of the
property  at the time the credit is  originated,  must be  established  for each
category of real estate loans.  If not a first lien, the lender must include all
senior liens when calculating this ratio.  The Lending  Guidelines,  among other
things,  establish the following  supervisory LTV limits:  raw land (65%);  land
development (75%);  construction  (commercial,  multi-family and nonresidential)
(80%);  improved  property (85%);  and  one-to-four  family  residential  (owner
occupied)  (no  maximum  ratio;  however  any LTV ratio in excess of 90%  should
require  appropriate  credit  enhancement  in the form of mortgage  insurance or
readily marketable  collateral).  In most cases, the Company's loan underwriting
guidelines  with  respect  to LTV  ratios are more  stringent  than the  Lending
Guidelines set forth above.

         Single-Family  Residential  Real Estate Loans.  As part of management's
efforts  to  reposition  the Bank along the lines of a more  traditional  thrift
institution, the Bank has increased its emphasis on loans secured by first liens
on single-family  residential real estate.  At December 31, 1998, $152.9 million
or 78.6% of the  Company's  total loans held for  investment  consisted  of such
loans.

         In recent  years,  the Company has been  emphasizing  for its portfolio
single-family  residential  mortgage  adjustable-rate  loans  which  provide for
periodic  adjustments to the interest rate. These loans have up to 30-year terms
and interest rates which adjust annually in accordance  with a designated  index
after a specified period has elapsed.  Depending on the loan product selected by
the borrower, this period can range from one year to seven years. In order to be


                                       13
<PAGE>

competitive and generate production, the ARMs offered by the Company provide for
initial  rates of interest  below the rates which would  prevail  when the index
used for repricing is applied.  However,  the Company  underwrites certain loans
(i.e.,  ARMs  with  95%  LTV) on a basis  that is no  less  stringent  than  the
underwriting  guidelines  of the Fannie Mae.  The Company has not engaged in the
practice of using a cap on the  payments  that could  allow the loan  balance to
increase rather than decrease, resulting in negative amortization. Approximately
48.3% of the permanent  single-family  residential  loans in the Company's  loan
portfolio  held for  investment  at December  31, 1998 had  adjustable  interest
rates.

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

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

         The Company continues to originate long-term, fixed-rate loans in order
to provide a full range of products to its  customers,  but generally only under
terms,  conditions  and  documentation  which permit their sale in the secondary
market.  Currently,  fixed-rate  single-family  residential  loans with terms to
maturity  of  seven  years  or less  are  generally  retained  in the  Company's
portfolio  while  fixed-rate  single-family  residential  loans  with  terms  to
maturity  of over seven  years are  generally  sold in the  secondary  market as
market  conditions  permit.  At December  31, 1998,  approximately  51.7% of the
permanent  single-family  residential  loans held by the Company for  investment
consisted  of loans which  provide for fixed rates of interest.  Although  these
loans provide for repayments of principal over a fixed period of up to 30 years,
it is  the  Company's  experience  that  such  loans  remain  outstanding  for a
substantially shorter period of time.

         The Company is generally  permitted to lend up to 100% of the appraised
value of the real property  securing a residential  loan (referred to as the LTV
ratio);  however,  if the amount of a residential  loan originated or refinanced
exceeds  90%  of the  appraised  value,  the  Company  is  required  by  federal
regulations  to  obtain  appropriate  credit  enhancement  in the form of either


                                       14
<PAGE>

mortgage  insurance or readily marketable  collateral.  Pursuant to underwriting
guidelines adopted by the Board of Directors, the Company will lend up to 95% of
the appraised  value of the property  securing an  owner-occupied  single-family
residential  loan, and generally  requires  borrowers to obtain private mortgage
insurance  on loans  which  have a  principal  amount  that  exceeds  80% of the
appraised  value of the security  property.  The extent of coverage is dependent
upon the LTV ratio at the time of origination.

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

         Home  equity  line of credit  loans have a maximum  commitment  of five
years,  which may be extended  within the sole  discretion of the Bank,  and the
interest  rate is set at the Bank's  prime rate plus a margin.  The Company will
lend  up to a 90%  LTV  ratio  and the  loan  can be  secured  by a  primary  or
subordinate  mortgage on the property.  The Company will originate the loan even
if another institution holds the first mortgage.

         Construction  Loans.  Construction  lending  activities  generally  are
limited to the Company's primary market, with particular emphasis in the greater
Richmond,  Virginia  market,  the  Tidewater,  Virginia  area  and  counties  in
northeastern  North  Carolina.  More  recently,  the  Company has  expanded  its
construction  lending  presence  into  the  Raleigh,  North  Carolina,  Northern
Virginia and Maryland markets. At December 31, 1998, construction loans amounted
to $19.4 million or 10.0% of the Company's total loans held for  investment.  As
of such date, the Company's entire portfolio of construction  loans consisted of
loans for the construction of single-family residences.

         The Company offers  construction loans to individual  borrowers as well
as to local real estate builders,  contractors and developers for the purpose of
constructing  single-family  residences.  Substantially  all  of  the  Company's
construction  lending to individuals is originated on a C/P mortgage loan basis.
C/P loan  originations  are made by Essex  First loan  officers  or through  the
wholesale C/P lending program,  which is a network of 72 approved  brokers.  C/P
loans  are made to  individuals  who hold a  contract  with a  licensed  general
contractor to construct their personal residence.  The construction phase of the
loan  currently  provides  for monthly  payments on an interest  only basis at a
designated  prime  rate  (plus  100 basis  points)  for up to six  months.  Upon
completion of  construction,  the loan converts to a permanent loan at either an
adjustable or fixed interest rate,  consistent with the Company's  policies with
respect to residential real estate  financing.  Essex First's  construction loan
department approves the proposed contractors and administers the loan during the
construction  phase.  The Company's C/P loan program has been  successful due to
its  ability to offer  borrowers a single  closing  and,  consequently,  reduced
costs.  At December 31, 1998, the Company's C/P portfolio  included 65 C/P loans
with an aggregate  principal  balance of $9.3 million (and an  additional  $10.1
million was subject to legally binding  commitments but had not been advanced as
of such date).

         The Company  also offers  construction  loans to real estate  builders,
contractors and developers for the construction of  single-family  residences on
both a presold and speculative  basis.  Construction loans to builders generally
have a three-year note with annual  renewals  throughout the term, with payments
being made monthly on an interest only basis  (generally,  at 75 basis points to
200 basis points over a designated prime rate). Upon application,  credit review
and analysis of personal and corporate  financial  statements,  the Company will
grant  builders  lines of credit up to  designated  amounts.  The  Company  will
generally limit the number of homes that may be built by any individual  builder
or  developer  on a  speculative  basis  depending  on the  builder's  financial
strength and total exposure to other lenders.  In 1998, the Company expanded its
builder construction loan portfolio to include participations,  which allows the
Bank to leverage its capital in markets where Essex First does not have a mature
builder construction  presence. The Company intends to pursue more participation
arrangements  in the future.  Although at December 31, 1998, the Company did not
have any real estate  acquisition  and development  loans in its portfolio,  the
Company may in the future,  on a case-by-case  basis,  grant a limited amount of
real estate acquisition and development loans.



                                       15
<PAGE>

         At December 31, 1998, the Company's builder construction loan portfolio
included 110 loans to 41 different builders with an aggregate  principal balance
of $8.2 million (and an additional  $37.9 million was subject to legally binding
commitments  but had not been advanced as of such date). Of this $8.2 million of
builder loans,  approximately  $7.0 million consisted of construction  loans for
which there were no contracts for sale at the time of origination.  In addition,
the builder construction loan portfolio included one participation totaling $1.3
million at December 31, 1998.

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

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

         Commercial Real Estate Loans. The Company has also originated  mortgage
loans  secured by  multi-family  residential  and  commercial  real  estate.  At
December 31, 1998,  $6.5 million or 3.3% of the  Company's  total loans held for
investment consisted of such loans.

         Commercial  real estate loans  originated  by the Company are primarily
secured by office  buildings,  retail  stores,  warehouses  and general  purpose
industrial  space.  Commercial  real  estate  loans  also  include  multi-family
residential  loans,  substantially  all of which are secured by small  apartment
buildings.  At December 31, 1998,  $1.2 million or 19.3% of the Company's  total
commercial real estate loans were comprised of multi-family residential loans.

         Although  terms  vary,  commercial  real  estate  loans  generally  are
amortized over a period of up to 20 years and mature in seven years or less. The
Company  will  originate  these loans either with fixed  interest  rates or with
interest  rates  which  adjust in  accordance  with a  designated  index,  which
generally is negotiated at the time of origination.  LTV ratios on the Company's
commercial  real estate loans are currently  limited to 80% or lower. As part of
the  criteria  for  underwriting  commercial  real  estate  loans,  the  Company
generally  imposes a specified  debt coverage  ratio (the ratio of net cash from
operations  before  payment  of debt  service to debt  service).  It is also the
Company's  general  policy  to  seek  additional   protection  to  mitigate  any
weaknesses  identified in the  underwriting  process,  which may be provided via
mortgage  insurance,  secondary  collateral and/or personal  guarantees from the
principals of the borrower.



                                       16
<PAGE>

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

         Commercial  Business  Loans.  From time to time, and in connection with
its community bank activities,  the Company has originated  secured or unsecured
loans for commercial, corporate, business and agricultural purposes. At December
31, 1998,  $1.6 million or .8% of the Company's  total loans held for investment
consisted of commercial business loans. The Company's  commercial business loans
consist  primarily  of loans and lines of credit  secured by various  equipment,
machinery and other corporate assets.

         Consumer Loans. Subject to restrictions contained in applicable federal
laws and regulations, the Company is authorized to make loans for a wide variety
of  personal or  consumer  purposes.  The Company  continues  to  emphasize  the
origination  and purchase of consumer  loans in order to provide a full range of
financial  services to its  customers  and  because  such loans  generally  have
shorter  terms and higher  interest  rates than  mortgage  loans.  At this time,
however,  opportunities  for consumer loan origination are limited in the Bank's
markets.  Therefore,  the Bank  continues to review  consumer  portfolios in the
secondary market that have acceptable  credit risks and yields.  At December 31,
1998,  $6.6  million or 3.4% of the  Company's  total loans held for  investment
consisted of consumer  loans.  The consumer loans offered by the Company include
automobile loans, boat and recreational  vehicle loans, mobile home loans, loans
secured by deposit accounts and unsecured personal loans.

         The Company currently offers loans secured by deposit  accounts,  which
amounted to $621,000 at December 31, 1998.  Such loans are  originated for up to
90% of the account  balance,  with a hold placed on the account  restricting the
withdrawal of the account  balance.  At December 31, 1998,  the  Company's  loan
portfolio  also included $1.3 million of  automobile  loans,  $329,000 of mobile
home loans and $32,000 of boat and recreational vehicle loans.

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

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

         In connection with its loan origination  activities,  the Company often
charges loan  origination fees that are calculated as a percentage of the amount
borrowed.  The Company generally charges a borrower on a single-family home loan
a loan  origination  fee based on the  principal  amount  of the loan,  with the
actual amount being  dependent upon,  among other things,  the interest rate and
market  conditions at the time the loan application is taken.  These fees are in
addition to appraisal  and other fees paid by the borrower to the Company at the


                                       17
<PAGE>

time of the  application.  The Company's policy is to defer all loan origination
fees  net  of  direct  origination  costs  and  amortize  those  fees  over  the
contractual lives of the related loans. Amortization of loan fees is included in
interest income.  Nevertheless,  the predominant  portion of the Company's loans
are  originated  for  resale  and,  consequently,  related  net  loan  fees  are
recognized as mortgage banking income upon consummation of the loan sales.

         When loans are sold with servicing  rights  released to the buyer,  the
Company also recognizes current income from receipt of servicing release fees in
addition  to  receiving a premium or  deducting  a discount  based on the market
value of the loan,  which is dependent  upon,  among other things,  the interest
rate and market  conditions  at the time the sales price is  locked-in  with the
buyer. Sales prices for loans originated for resale are generally locked-in with
a buyer at the time of origination  in order to minimize the Company's  interest
rate risk. When loans are sold with servicing  retained,  the Company recognizes
additional  gains based on the estimated  fair value of the servicing  retained.
Recognition of such gains creates originated mortgage servicing rights ("OMSRs")
for the Company,  which are capitalized and amortized in proportion to, and over
the  period  of,  the  estimated  future  net  servicing  income  stream  of the
underlying mortgage loans. OMSRs amounted to $484,000, $782,000 and $1.1 million
at December 31, 1998, 1997 and 1996,  respectively.  For additional  information
regarding  the  Company's   servicing  assets,  see  Note  2  of  the  Notes  to
Consolidated  Financial  Statements  on pages 33 through  36 of the 1998  Annual
Report to Stockholders,  which is attached hereto as Exhibit 13 and incorporated
herein by reference.

         Through Essex Home,  the Company  services  loans that are owned by the
Bank and other investors. At December 31, 1998,  approximately 15,100 loans with
principal balances of $1.2 billion were serviced or subserviced by Essex Home as
compared to approximately  8,400 loans with principal balances of $482.7 million
as of  December  31,  1997.  Notwithstanding  the  cancellation  of its  largest
subservicing  client (with  approximately 7,000 loans totaling $858.9 million as
of December  31,  1996)  effective  May 1997,  Essex Home more than  doubled its
mortgage loan subservicing portfolio during 1998. The Company intends to further
increase  its  servicing  volume  through the  negotiation  of new  subservicing
contracts  (generally  for two year  terms)  and the  acquisition  of  servicing
rights.  Purchased mortgage servicing rights amounted to $347,000,  $387,000 and
$207,000 at December 31,  1998,  1997 and 1996,  respectively.  There are risks,
however, associated with the acquisition of servicing rights because their value
(i.e.,  future servicing  revenues) is dependent upon the underlying loans being
serviced.  The Company amortizes its mortgage servicing rights in proportion to,
and over the period of, the  estimated  future  net  servicing  revenues  of the
underlying  mortgage loans,  taking into consideration  market-based  prepayment
estimates.  However,  there can be no  assurance  that  impairments  will not be
required in future periods if the lower interest rate environment results in the
acceleration of prepayment activity in excess of current expectations.

Asset Quality

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


                                       18
<PAGE>

         The following  table sets forth  information  concerning  the principal
balances and percent of the total loan portfolio held for investment represented
by delinquent loans at the dates indicated:
<TABLE>
<CAPTION>
                                                                     December 31,                          
                                          -----------------------------------------------------------------
                                                  1998                   1997                   1996       
                                          -------------------    -------------------   --------------------
                                            Amount   Percent       Amount    Percent      Amount    Percent
                                                                (dollars in thousands)
         <S>                               <C>         <C>        <C>         <C>         <C>        <C> 
         30-59 days.....................   $   662     .34%       $   645     .38%        $1,156     .78%
         60-89 days.....................        46     .02            295     .17            335     .23
         90 or more days (1)............     1,166     .60          1,577     .93          2,938    1.98
                                             -----     ---          -----    ----          -----    ----
                                            $1,874     .96%        $2,517    1.48%        $4,429    2.99%
                                             =====     ===          =====    ====          =====    ====
</TABLE>

          (1)  Includes $21,000 and $30,000 of loans that were accruing interest
               at December 31, 1997 and 1996, respectively.  There were no loans
               90 days or more past due accruing interest at December 31, 1998.

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

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

         If a foreclosure action is instituted with respect to a particular loan
and the loan is not reinstated, paid in full or refinanced, the property is sold
at a foreclosure  sale in which the Company may participate as a bidder.  If the
Company is the  successful  bidder,  the  acquired  property  is  classified  as
foreclosed property until it is sold. Properties acquired in settlement of loans
are initially  recorded at fair value less estimated  costs to sell.  Valuations
are  periodically  performed  by  management,  and an  allowance  for  losses is
established  by a charge  to  operations  if the  carrying  value of a  property
exceeds its fair market value less the estimated  costs to sell.  Costs incurred
in  connection  with  ownership of the  property,  including  interest on senior
indebtedness,  are  expensed  to  the  extent  not  previously  allowed  for  in
calculating  fair value less  estimated  costs to sell.  Costs  relating  to the
development or  improvement of the property are  capitalized to the extent these
costs  increase  fair value less  estimated  costs to sell.  Sales of foreclosed
properties  are  recorded  under the accrual  method of  accounting.  Under this
method,  a sale is not  recognized  unless the buyer has  assumed  the risks and
rewards  of  ownership,  including  an  adequate  cash down  payment.  Until the
contract qualifies as a sale, all collections are recorded as deposits.


                                       19
<PAGE>

         The  following  table sets forth  information  regarding  nonperforming
assets held by the Company at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,                            
                                               --------------------------------------------------------------------
                                                        1998                   1997                     1996
                                                        ----                   ----                     ----
                                                             % of                    % of                    % of
                                                             Total                   Total                   Total
                                                 Amount      Loans       Amount      Loans       Amount      Loans
                                                 ------      -----       ------      -----       ------      -----
<S>                                             <C>           <C>         <C>         <C>         <C>        <C>  
Nonaccrual loans, net:
   Single-family residential................    $   697       .36%        $1,203      .71%        $2,513     1.70%
   Construction.............................          -        -             133      .08            220      .15
   Commercial...............................        328       .17            132      .08             22      .01
   Consumer.................................        141       .07             88      .05            153      .10
                                                -------       ---         ------     ----         ------     ----
     Total nonaccrual loans.................      1,166       .60          1,556      .92          2,908     1.96

Accruing loans 90 days or more past due.....          -        -              21      .01             30      .02

Troubled debt restructurings................         98       .05            209      .12            223      .15
                                                -------       ---         ------     ----         ------     ----
     Total nonperforming loans..............      1,264       .65          1,786     1.05          3,161     2.13

Foreclosed properties, net..................        571       .29          1,512      .89          2,054     1.39
                                                -------       ---         ------     ----         ------     ----

     Total nonperforming assets.............     $1,835       .94%        $3,298     1.94%        $5,215     3.52%
                                                  =====       ===          =====     ====          =====     ====

Nonperforming loans to total loans..........                  .65%                   1.05%                   2.13%
Nonperforming assets to total assets........                  .79                    1.69                    2.99
Allowance for loan losses to total loans....                  .95                    1.40                    1.73
Allowance for loan losses to nonaccrual
   loans....................................               158.23                  153.09                   87.90
Allowance for loan losses to nonperforming
   loans....................................               145.97                  133.37                   80.86

<CAPTION>
                                                        1995                   1994
                                                        ----                   ----
                                                             % of                    % of
                                                             Total                   Total
                                                 Amount      Loans       Amount      Loans
                                                 ------      -----       ------      -----
Nonaccrual loans, net:
   Single-family residential................   $  2,959      1.09%      $  3,158     1.31%
   Construction.............................        378       .14          1,253      .52
   Commercial...............................      2,636       .97          2,306      .96
   Consumer.................................        108       .04             57      .02
                                                -------      ----        -------     ----
     Total nonaccrual loans.................      6,081      2.24          6,774     2.81

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

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

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

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

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

</TABLE>
                                       20
<PAGE>

         The decrease in nonperforming assets consisted of a $522,000 decline in
nonperforming  loans  and a  $941,000  decline  in  foreclosed  properties.  The
decrease  in  nonaccrual  loans was  attributable  to the  improvement  in asset
quality evidenced by the decline in delinquencies  from $940,000 at December 31,
1997 to $708,000 at December 31,  1998.  Gross  interest  income that would have
been recorded  during the years ended  December 31, 1998,  1997, and 1996 if the
Company's  nonaccrual  loans at the end of such periods had been  performing  in
accordance  with their terms  during such  periods was  $115,000,  $171,000  and
$291,000, respectively.

         The Company's decrease in foreclosed properties reflected the impact of
the continuing decline in nonperforming and delinquent loans during 1998 and the
sale of 12 of the 13 properties held at December 31, 1997.

         For additional  information about the Company's  nonperforming  assets,
see "Management's  Discussion and Analysis of Financial Condition and Results of
Operations - Financial  Condition -  Nonperforming  Assets" on pages 7 and 8 and
Notes 8 and 9 of the  Notes to  Consolidated  Financial  Statements  on pages 38
through 40 of the 1998 Annual Report to  Stockholders,  which is attached hereto
as Exhibit 13 and incorporated herein by reference.

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

         In addition to the  nonperforming  assets  discussed above, at December
31, 1998, the Company had  classified  for  regulatory and internal  purposes an
additional  $2.0  million of  assets,  $1.5  million  of which  were  classified
substandard,  $152,000 of which were  classified  doubtful and $336,000 of which
were classified loss.

         Allowance for Losses on Loans and Foreclosed  Properties.  An allowance
for loan losses is maintained at a level that management  considers  adequate to
provide for potential  losses based upon an evaluation of the inherent  risks in
the loan portfolio.  Management's determination of the adequacy of the allowance
is based on an  evaluation  of the  portfolio,  past  loss  experience,  current
economic conditions,  volume, growth and composition of the portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses which
are charged against income. While management uses the best information available
to make such evaluations,  future  adjustments to the allowance may be necessary


                                       21
<PAGE>

if economic conditions differ  substantially from the assumptions used in making
the evaluations.  For additional information,  see Notes 8 and 9 of the Notes to
Consolidated  Financial  Statements  on pages 38 through  40 of the 1998  Annual
Report to Stockholders,  which is attached hereto as Exhibit 13 and incorporated
herein by reference.

         The following table sets forth  information  concerning the activity in
the Company's allowance for loan losses during the years indicated:
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,                   
                                                 -----------------------------------------------------------------
                                                     1998         1997           1996        1995        1994
                                                     ----         ----           ----        ----        ----
                                                                    (dollars in thousands)
<S>                                                 <C>          <C>           <C>         <C>         <C>     
Loans, net of unearned fees and discounts:
     Year-end..................................     $194,513     $169,823      $148,107    $271,883    $240,821
     Average outstanding during period.........      172,760      156,217       216,803     251,108     218,806

Allowance for loan losses:
     Balance, beginning of year................       $2,382       $2,556        $5,251      $3,429      $3,039
     Allowance transferred in connection
         with the Home Acquisition.............            -            -             -         500           -
     Provision for loan losses.................           13          113         1,411       2,477       1,604
                                                     -------       ------         -----       -----       -----
                                                       2,395        2,669         6,662       6,406       4,643
     Charge-offs, net of recoveries (1):
         Commercial (2)........................           40         (366)        2,892         644           -
         Real estate - mortgage................          288          535           894         494       1,255
         Real estate - land....................          133            -             -           -           -
         Consumer .............................           89          118           320          17         (41)
                                                     -------       ------         -----       -----       -----
              Total (2)........................          550          287         4,106       1,155       1,214
                                                     -------       ------         -----       -----       -----
     Balance, end of year......................       $1,845       $2,382        $2,556      $5,251      $3,429
                                                       =====        =====         =====       =====       =====

Ratio of net charge-offs to average
  outstanding loans (2)........................         .32%          .18%         1.89%        .46%        .55%
Allowance for loan losses to year-end
  total nonperforming loans....................      145.97%       133.37%        80.86%      82.03%      41.01%
Allowance for loan losses to year-end
  loans, net of unearned fees and discounts....         .95%         1.40%         1.73%       1.93%       1.42%

          (1)  Except  as  noted  in  (2)  below,   recoveries   of  prior  loan
               charge-offs were not significant for the periods presented.

          (2)  Charge-offs  during  1997  include a $329,000  recovery on a loan
               guarantee  associated  with the  Richmond  Apartments  loan and a
               $39,000  recovery  associated with claims against the estate of a
               deceased borrower.  Excluding the impact of these recoveries, the
               ratio of net  charge-offs to average  outstanding  loans for 1997
               was  .42%.  Charge-offs  during  1996  include  the $2.8  million
               write-off of the Richmond  Apartments loan.  Excluding the impact
               of this  charge-off,  the  ratio of net  charge-offs  to  average
               outstanding loans for 1996 was .59%.

         The following table sets forth information concerning the allocation of
the  Company's  allowance  for  loan  losses  by loan  categories  at the  dates
indicated.
<CAPTION>
                                                              December 31,
                      --------------------------------------------------------------------------------------------
                               1998            1997              1996                1995              1994    
                      ----------------    ---------------   ----------------    ----------------  ----------------
                       Amount  Percent    Amount  Percent   Amount   Percent    Amount   Percent  Amount   Percent
                       ------  -------    ------  -------   ------   -------    ------   -------  ------   -------
                                                        (dollars in thousands)

Residential mortgage  $   855    92.5%    $1,139   91.7%    $1,636    89.9%     $2,607    92.5%    2,068    91.9%
Commercial (1)            560     4.1        545    4.6        505     5.6       1,530     4.7       861     5.6
Consumer                  285     3.4        254    3.7        299     4.5         323     2.8       467     2.5
Unallocated               145      -         444      -        116      -          791      -         33       -
                       ------   ----      ------  -----     ------   -----      ------   -----     -----   -----   
                       $1,845   100.0%    $2,382  100.0%    $2,556   100.0%     $5,251   100.0%   $3,429   100.0%
                        =====   =====      =====  =====      =====   =====       =====   =====     =====   =====
</TABLE>

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



                                       22
<PAGE>

         The  Company  also  maintains  an  allowance  for losses on  foreclosed
properties.  The following table sets forth information  concerning the activity
in the  Company's  allowance  for  losses on  foreclosed  properties  during the
periods indicated:
<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                   -----------------------------------------
                                                                    1998              1997              1996
                                                                    ----              ----              ----
                                                                            (dollars in thousands)
         <S>                                                       <C>               <C>                <C> 
         Balance at beginning of year.....................         $ 155             $ 179              $199
         Provision for losses on
           foreclosed properties..........................           126               159               (21)
                                                                    ----              ----              ----
                                                                     281               338               178
         Charge-offs, net of recoveries...................          (167)             (183)                1
                                                                    ----              ----             -----
         Balance at end of year...........................         $ 114             $ 155              $179
                                                                    ====              ====               ===
</TABLE>

Investment Activities

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

         Freddie Mac is a public  corporation  chartered by the U.S.  Government
and  owned by the 12  Federal  Home  Loan  Banks  and  federally-insured  member
institutions  of  the  Federal  Home  Loan  Bank  system.   Freddie  Mac  issues
participation  certificates  backed principally by conventional  mortgage loans.
Freddie Mac guarantees the timely payment of interest and the ultimate return of
principal.  Fannie Mae is a private  corporation  chartered by the U.S. Congress
with a mandate to establish a secondary market for conventional  mortgage loans.
Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae
securities.  Freddie  Mac and Fannie Mae  securities  are not backed by the full
faith and credit of the United  States,  but because  Freddie Mac and Fannie Mae
are quasi-Government and U.S.  Government-sponsored  enterprises,  respectively,
these securities are considered to be among the highest quality investments with
minimal credit risks. Ginnie Mae is a government agency within the Department of
Housing   and   Urban   Development   which   is   intended   to  help   finance
government-assisted  housing  programs.  Ginnie  Mae  securities  are  backed by
FHA-insured  and  VA-guaranteed  loans,  and the timely payment of principal and
interest on Ginnie Mae securities are guaranteed by Ginnie Mae and backed by the
full faith and credit of the U.S.  Government.  Because  Freddie Mac, Fannie Mae
and Ginnie Mae were  established to provide  support for low- and  middle-income
housing,  there are limits to the maximum  size of loans that  qualify for these
programs. To accommodate  larger-sized loans, and loans that, for other reasons,
do not conform to the agency  programs,  a number of independent  companies have
established their own home-loan origination and securitization programs.

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



                                       23
<PAGE>

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

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

         The   following   table  sets  forth  the  activity  in  the  Company's
mortgage-backed securities portfolio during the periods indicated:
<TABLE>
<CAPTION>
                                                          At or For the Year Ended December 31, 
                                                          ------------------------------------- 
                                                         1998               1997            1996
                                                         ----               ----            ----
                                                                  (dollars in thousands)
         <S>                                            <C>                <C>            <C>    
         Balance at beginning of year............       $1,905             $1,905         $15,650
         Sales...................................            -                  -          (9,915) (1)
         Repayments..............................         (448)                 -          (3,668) (2)
         Amortization............................           (1)                 -              (8)
         Valuation adjustments...................            -                  -            (154)
                                                      --------           --------         -------
         Balance at end of year..................       $1,456             $1,905         $ 1,905
                                                         =====              =====          ======

         Weighted average coupon at end
            of year..............................         5.90%             6.65%            6.40%
                                                          ====              ====             ====
</TABLE>
          (1)  Represents sale of mortgage-backed  securities in connection with
               the sale of branches during 1996.
          (2)  Includes the termination and reclassification of a Company-issued
               second mortgage REMIC totaling $2.7 million from  mortgage-backed
               securities to loans.

         The Company's investment in mortgage-backed  securities at December 31,
1998 consists  solely of a $1.5 million  Fannie Mae guaranteed  adjustable  rate
REMIC. The Company's  mortgage-backed  securities are carried in accordance with
generally  accepted  accounting   principles.   See  Note  7  of  the  Notes  to
Consolidated  Financial  Statements  on page 38 of the  1998  Annual  Report  to
Stockholders,  which is attached hereto as Exhibit 13 and incorporated herein by
reference.

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

                                       24
<PAGE>

         The Bank's investment  securities portfolio is managed by the Treasurer
of the Bank in accordance with a comprehensive investment policy which addresses
strategies,  types and levels of allowable investments and which is reviewed and
approved  by the  Board of  Directors  on an  annual  basis and by the Asset and
Liability  Management  Committee as  circumstances  warrant.  The Bank currently
emphasizes lending activities in order to increase the weighted average yield on
the Bank's interest-earning assets. The Bank's investment securities are carried
in accordance with generally accepted accounting  principles.  See Note 6 of the
Notes to Consolidated  Financial Statements on page 37 of the 1998 Annual Report
to Stockholders,  which is attached hereto as Exhibit 13 and incorporated herein
by reference.

         The  following  table sets forth  certain  information  relating to the
Company's investment securities held for investment at the dates indicated:
<TABLE>
<CAPTION>
                                                                      December 31,                                
                                                1998                      1997                       1996         
                                      -----------------------   -----------------------   ------------------------
                                       Carrying      Market       Carrying      Market      Carrying      Market
                                         Value        Value         Value        Value        Value        Value
                                                                 (dollars in thousands)
<S>                                      <C>          <C>          <C>          <C>          <C>          <C>   
     U.S. Government securities......    $    -       $    -       $    -       $    -       $1,003       $1,003
     U.S. Government agency
        securities (1)...............     2,750        2,704        2,299        2,217        5,000        4,887
     FHLB stock......................     1,549        1,549        1,431        1,431        2,540        2,540
                                          -----        -----        -----        -----        -----        -----
         Total (2)...................    $4,299       $4,253       $3,730       $3,648       $8,543       $8,430
                                          =====        =====        =====        =====        =====        =====

     (1)  The  $2.8  million  of U.S.  Government  agency  securities  held  for
          investment  at December  31, 1998  consists of two notes issued by the
          FHLB.  A $2.0 million  FHLB note  adjusts  semi-annually  based on the
          yield of three-year  constant  maturity  treasury notes and matures in
          the year 2000.  A $750,000  fixed-rate  FHLB note  matures in the year
          2002  provided  the one-time  call option is not  exercised in October
          1999.

     (2)  Does not include  investment  securities  classified  as available for
          sale which consisted of an $18,000, $17,000 and $9,000 investment in a
          money  market  mutual  fund at  December  31,  1998,  1997  and  1996,
          respectively.

         Information regarding the carrying values,  contractual  maturities and
weighted  average  yield  of  the  Company's  investment   securities  held  for
investment  (excluding FHLB stock) at December 31, 1998 is presented below. FHLB
stock  is  neither  a debt nor an  equity  security  because  its  ownership  is
restricted and it lacks a market.  FHLB stock can be sold at its par of $100 per
share only to the FHLBs or to another member institution.
<CAPTION>
                                                  One Year     After One to    After Five to   Over 10
                                                   or Less      Five Years       10 Years       Years      Total
                                                   -------      ----------       --------       -----      -----
                                                                          (dollars in thousands)
     U.S. Government agency securities......          $750        $2,000        $     -     $      -      $2,750
                                                       ===         =====         ======      =======       =====

     Weighted average yield.................         5.03%          4.21%             -%           -%       4.43%
                                                     ====         ======         =======     =======       =====
</TABLE>

Sources of Funds

         General.  Deposits are the primary  source of the  Company's  funds for
lending and other  investment  purposes.  In addition to  deposits,  the Company
derives funds from loan  principal  repayments,  prepayments,  advances from the
FHLB and other  borrowings.  Loan  repayments are a relatively  stable source of
funds,  while  deposits  inflows and outflows are  significantly  influenced  by


                                       25
<PAGE>

general interest rates and money market conditions.  Borrowings may be used on a
short-term  basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes, including market risk management.

         Deposits.  Deposits obtained through bank branch offices of the Company
have  traditionally  been the principal source of the Company's funds for use in
lending and for other general business  purposes.  The Company's current deposit
products include regular  passbook and statement  savings  accounts,  negotiable
order  of  withdrawal  ("NOW")  accounts,  money  market  accounts,  fixed-rate,
fixed-maturity  retail  certificates of deposit ranging in terms from 90 days to
60 months,  mini-jumbo  (generally $25,000 - $99,999) and jumbo (generally equal
to or greater than $100,000)  certificates of deposit and individual  retirement
accounts.

         The Bank's deposits are currently  obtained primarily from residents in
its primary market area. The principal  methods currently used by the Company to
attract  deposit  accounts  include  offering  a wide  variety of  services  and
accounts  and  competitive  interest  rates.  The Company  utilizes  traditional
marketing methods to attract new customers and savings deposits, including print
media advertising. Currently, the Company does not advertise for retail deposits
outside of its local  market  area or utilize the  services of deposit  brokers.
Management  estimates that as of December 31, 1998,  deposit  accounts  totaling
$4.0 million or 2.1% of the Bank's total deposits were held by  nonresidents  of
Virginia  or  North  Carolina.   These  out-of-market   deposits  include  jumbo
certificates of deposits owned largely by financial  institutions  which totaled
$1.2  million at December  31,  1998,  and  represented  a decline from the $1.9
million of such  certificates at December 31, 1997. These jumbo  certificates of
deposit  were  obtained  through  the  posting  of  deposit  rates  on  national
computerized  bulletin  boards at no cost to the Company  and were not  obtained
through deposit brokers.

         The  following  table sets forth the average  balances and rates of the
Company's deposits for the periods indicated:
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,                      
                                          ----------------------------------------------------------------------
                                                 1998                        1997                    1996   
                                          -------------------        ------------------      ------------------
                                          Average                    Average                 Average
                                          Balance       Rate         Balance       Rate      Balance       Rate
                                          -------       ----         -------       ----      -------       ----
                             (dollars in thousands)

     <S>                                <C>                        <C>                     <C>             <C>
     Noninterest-bearing deposits...    $    9,504          -%     $    3,143         -%   $    1,433         -%
     Passbook savings...............         4,225       3.49           3,839      3.48         6,782      3.33
     NOW accounts...................         4,361       2.81           4,344      2.83         5,332      2.80
     Money market accounts..........        26,845       4.91          21,401      4.87        21,104      4.50
     Certificates of deposit:
         Consumer...................        51,747       5.68          53,256      5.78        92,771      5.83
         Mini-jumbo.................        55,524       5.65          44,932      5.65        71,269      5.69
         Jumbo......................        14,481       5.73          13,206      5.78        19,670      5.86
                                          --------                   --------                --------
                                          $166,687                   $144,121                $218,361
                                           =======                    =======                 =======


                                       26
<PAGE>

         The following  table shows the interest  rate and maturity  information
for the Company's time deposits at December 31, 1998:
<CAPTION>

                                                                      Maturity Date          
                                    --------------------------------------------------------------------------                     
                                    One Year                                               Over
                                     or Less          1-2 Years          2-3 Years        3 Years        Total
                                     -------          ---------          ---------        -------        -----
                                                                 (dollars in thousands)
4.01% to 5.00%.............          $12,728          $    462          $     58         $     -       $ 13,248
5.01% to 6.00%.............           75,572            13,912             5,790           4,881        100,155
6.01% to 7.00%.............            5,573             6,347               628           4,854         17,402
7.01% to 8.00%.............              266             2,709                 -               -          2,975
8.01% to 9.00%.............                -                 6                 -               -              6
                                     -------          --------           -------          ------       --------
                                     $94,139           $23,436            $6,476          $9,735       $133,786
                                      ======            ======             =====           =====        =======

         The  following  table shows the  Company's  certificates  of deposit of
$100,000 or more outstanding at the dates indicated:
<CAPTION>
                                                                             December 31,                  
                                                        ---------------------------------------------------
                                                            1998                 1997               1996
                                                            ----                 ----               ----
                                                                        (dollars in thousands)

         3 months or less........................         $  3,914            $  4,624            $  2,709
         Over 3 through 6 months.................            5,002               4,785               3,505
         Over 6 through 12 months................            7,698               3,747               2,625
         Over 12 months .........................            6,072               5,365               5,919
                                                            ------              ------              ------
                  Total..........................          $22,686             $18,521             $14,758
                                                            ======              ======              ======

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

         Borrowings.  The Bank is a member of the FHLB System, which consists of
12 regional FHLBs subject to supervision  and regulation by the Federal  Housing
Finance Board. The FHLBs provide a central credit facility  primarily for member
institutions.  The Bank, as a member of the FHLB of Atlanta, is required to hold
shares  of common  stock in that  FHLB in an amount at least  equal to 1% of the
aggregate  principal  amount  of  its  unpaid  residential  mortgage  loans  and
mortgage-backed  securities,  3/10  of 1% of  total  assets  at  the  end of the
calendar year, or 5% of its advances  (borrowings)  from the FHLB,  whichever is
greater. The Bank had a $1.5 million investment in stock of the FHLB at December
31, 1998, which was in compliance with this  requirement.  At December 31, 1998,
the Bank had $24.9 million of advances outstanding from the FHLB.

         The  following  table  presents  certain   information   regarding  the
Company's FHLB advances at the dates and for the periods indicated:
<CAPTION>
                                                                At or For the Year Ended December 31,       
                                                         -------------------------------------------------
                                                          1998                  1997                 1996
                                                          ----                  ----                 ----
                                                                      (dollars in thousands)
         Balance at end of period..................      $24,908               $23,547             $25,690
         Weighted average interest rate
              at end of period.....................         5.89%                 5.75%              6.14%
         Maximum amount outstanding
              at any month's end...................      $30,975               $28,118             $29,833
         Average amount outstanding
              during the period....................      $21,553               $24,885             $27,137
         Weighted average interest rate
              during the period....................         5.71%                 5.92%               5.99%
</TABLE>



                                       27
<PAGE>

         The  outstanding  FHLB  advances at December 31, 1998 mature as follows
(in thousands):

                  1999....................................      $17,308
                  2000....................................        7,600
                                                                -------
                                                                $24,908

         The Company's notes payable amounted to $72,000 and $96,000 at December
31, 1997 and 1996,  respectively.  Notes payable on these dates consisted solely
of a note payable to the former president of an acquired savings institution and
its holding company.  The note accrued interest at 9.50% per annum.  Originally,
the  note was due in five  equal  annual  installments,  plus  accrued  interest
thereon.  However,  in conjunction  with a severance  settlement with the former
employee, the Company repaid this note in its entirety in February 1998.

         During  1989 and  1990,  the Bank  sold $3.3  million  of  subordinated
capital  notes  with a  ten-year  maturity.  The notes  were  issued in  minimum
denominations  of $2,500 at interest rates ranging  between 11.5% and 12.0%.  In
July 1993, the Bank redeemed $2.8 million of the subordinated capital notes. The
Company's  subordinated capital notes amounted to $628,000 at December 31, 1995.
In August 1996,  the Bank redeemed the remaining  subordinated  capital notes at
par in their entirety

         Other Liabilities.  As of December 31, 1998 and 1997, other liabilities
of the Company  included a $703,000  obligation to the Company's Chief Executive
Officer resulting from the exercise of his stock appreciation rights in November
1997. A determination has not yet been made as to the date and method of payment
to satisfy this obligation.  See Note 19 of the Notes to Consolidated  Financial
Statements on pages 46 and 47 of the 1998 Annual Report to  Stockholders,  which
is attached hereto as Exhibit 13 and incorporated herein by reference.

Year 2000 Readiness

         For information  about the Company's Year 2000 readiness and associated
costs,  see  "Management's  Discussion  and Analysis of Financial  Condition and
Results  of  Operations  - Year 2000  Readiness"  on pages 21 and 22 of the 1998
Annual  Report to  Stockholders,  which is  attached  hereto as  Exhibit  13 and
incorporated herein by reference.

Competition

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

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


                                       28
<PAGE>

Employees
         As of December 31, 1998, the Company  employed 108 full-time  employees
and 11 part-time employees.

Regulation of the Company

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

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

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

         In addition,  Sections  22(h) and (g) of the Federal  Reserve Act place
restrictions   on  loans  to  executive   officers,   directors   and  principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a  greater  than  10%  stockholder  of a  savings  association,  and  certain
affiliated  interests  of  either,  may not  exceed,  together  with  all  other
outstanding  loans to such person and affiliated  interests,  the  association's


                                       29
<PAGE>

loans  to one  borrower  limit  (generally  equal  to  15% of the  institution's
unimpaired  capital and  surplus).  Section  22(h) also  requires  that loans to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as offered in comparable  transactions  to other persons
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely  available  to  employees  of the  institution  and (ii) does not give
preference  to any  director,  executive  officer or principal  stockholder,  or
certain  affiliated  interests  of either,  over other  employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In  addition,  the  aggregate  amount  of  extensions  of  credit  by a  savings
association to all insiders cannot exceed the association's  unimpaired  capital
and surplus. Furthermore,  Section 22(g) places additional restrictions on loans
to executive officers. At December 31, 1998, the Bank was in compliance with the
above restrictions.

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

Regulation of the Bank

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

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

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

         Insurance  of  Accounts.  The  deposits  of the Bank are  insured up to
$100,000  per  insured  member (as  defined by law and  regulation)  by the SAIF
administered  by the FDIC and are  backed by the full  faith  and  credit of the
United  States  Government.  As  insurer,  the  FDIC is  authorized  to  conduct
examinations of, and to require reporting by, FDIC-insured institutions. It also


                                       30
<PAGE>

may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the FDIC. The FDIC
also  has  the  authority  to  initiate   enforcement  actions  against  savings
associations, after giving the OTS an opportunity to take such action.

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

         Under  FDIC  regulations,  institutions  are  assigned  to one of three
capital groups for insurance premium purposes - "well capitalized,"  "adequately
capitalized"  and  "undercapitalized"  - which are defined in the same manner as
the regulations  establishing the prompt  corrective action system under Section
38 of the Federal  Deposit  Insurance Act ("FDIA"),  as discussed under "-Prompt
Corrective  Action"  below.  These three groups are then divided into  subgroups
which are based on supervisory  evaluations by the institution's primary federal
regulator,  resulting in nine assessment  classifications.  Effective January 1,
1998, assessment rates for SAIF-insured  institutions range (except as described
below) from 0 basis points of insured deposits for well-capitalized institutions
with minor  supervisory  concerns  to 27 basis  points of insured  deposits  for
undercapitalized   institutions  with  substantial   supervisory   concerns.  In
addition,  an additional  assessment  approximating 6.1 basis points is added to
the regular  SAIF-assessment until December 31, 1999 in order to cover Financing
Corporation ("FICO") debt service payments.

         Both  the  SAIF  and the  Bank  Insurance  Fund  ("BIF"),  the  deposit
insurance  fund that covers  most  commercial  bank  deposits,  are  statutorily
required to be  recapitalized  to a ratio of 1.25% of insured reserve  deposits.
The BIF previously  achieved the required  reserve ratio,  and as a result,  the
FDIC reduced the average deposit  insurance premium paid by BIF-insured banks to
a level  substantially  below the average premium paid by savings  institutions.
Banking  legislation  was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation   provided   that   all   insured   depository   institutions   with
SAIF-assessable  deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF.  Pursuant to this legislation,  the FDIC promulgated a
rule that established the special assessment  necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable  deposits held by affected  institutions
as of March 31, 1995. However, as a result of the Bank's financial condition, on
November 8, 1996,  the Bank was  notified by the FDIC that its  application  for
exemption had been  approved.  As a result,  the Bank was exempt from paying the
special  one-time  assessment  (which  would  have  amounted  to $1.8  million).
Instead,  the Bank is continuing to pay future  assessments  through 1999 at the
assessment  rate  schedule  in  effect  as of June 30,  1995.  Therefore,  as of
December 31, 1998,  the Bank's annual  assessment  for deposit  insurance was 26
basis  points of insured  deposits as opposed to three  basis  points of insured
deposits (the assessment rate otherwise  charged to "well  capitalized"  savings
institutions such as the Bank).

         Another  component of the SAIF  recapitalization  plan provided for the
merger  of the  SAIF  and  the BIF on  January  1,  1999,  provided  no  insured
depository  institution is a savings association on that date. The merger of the
SAIF and the BIF did not  occur on such  date as there  continue  to be  savings
associations.  Such a merger of the SAIF and the BIF may occur in the  future if
legislation  containing  such a provision is enacted.  If legislation is enacted
which required the Bank to convert to a bank charter, the Company would become a
bank holding company subject to the more restrictive  activity limits imposed on


                                       31
<PAGE>

bank holding companies unless special grandfather provisions are included in the
legislation.  The  Company  does  not  believe  that  its  activities  would  be
materially  affected in the event that it was  required to become a bank holding
company.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings  institutions to satisfy minimum capital  standards:  risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions  must  meet  each of  these  standards  in order  to be  deemed  in
compliance  with OTS capital  requirements.  In addition,  the OTS may require a
savings institution to maintain capital above the minimum capital levels.

         All savings  institutions  are  required  to meet a minimum  risk-based
capital  requirement of total capital (core capital plus supplementary  capital)
equal to 8% of risk-weighted  assets (which includes the credit risk equivalents
of certain  off-balance  sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of core
capital.  Under the leverage  requirement,  a savings institution is required to
maintain  core capital equal to a minimum of 3% of adjusted  total  assets.  (In
addition,  under the prompt corrective action provisions of the OTS regulations,
all but the most  highly-rated  institutions  must  maintain a minimum  leverage
ratio of 4% in  order  to be  adequately  capitalized.  See " Prompt  Corrective
Action.") A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.

         At December 31, 1998,  the Bank's actual capital ratios and the minimum
requirements under FIRREA were as follows (dollars in thousands):
<TABLE>
<CAPTION>
                                                                             Minimum
                                                   Actual                  Requirement           Excess
                                                   ------                  -----------           ------
     <S>                                     <C>         <C>            <C>        <C>           <C>    
     Tangible capital                        $16,071     6.97%          $3,459     1.5%          $12,612
     Core capital                             16,071     6.97            6,917     3.0             9,154
     Risk-based capital                       17,364    13.09           10,609     8.0             6,755
</TABLE>

         For further information  regarding the Bank's actual capital ratios and
minimum  requirements  under  FDICIA,  see Note 21 of the Notes to  Consolidated
Financial  Statements  on  pages  49  and  50  of  the  1998  Annual  Report  to
Stockholders,  which is attached hereto as Exhibit 13 and incorporated herein by
reference.  At  December  31,  1998,  the  Bank  exceeded  all  of  its  capital
requirements under FDICIA.

         The foregoing  capital  requirements are viewed as minimum standards by
the OTS,  and most  institutions  are expected to maintain  capital  levels well
above the minimum. In addition, the OTS regulations provide that minimum capital
levels higher than those provided in the  regulations  may be established by the
OTS for individual savings  institutions,  upon a determination that the savings
institution's  capital is or may become inadequate in view of its circumstances.
The OTS regulations  provide that higher individual  minimum  regulatory capital
requirements  may be appropriate in  circumstances  where,  among others:  (i) a
savings  institution  has a high  degree of  exposure  to  interest  rate  risk,
prepayment  risk,  credit  risk,  concentration  of credit risk,  certain  risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk, (ii) a savings institution is growing, either internally
or through acquisitions,  at such a rate that supervisory problems are presented
that are not  dealt  with  adequately  by OTS  regulations  and  (iii) a savings
institution may be adversely  affected by activities or condition of its holding
company, affiliates,  subsidiaries or other persons or savings institutions with
which it has significant business relationships.  The Bank is not subject to any
such individual minimum regulatory capital requirement.



                                       32
<PAGE>

         In March 1999, the federal banking  agencies  amended their  risk-based
and leverage capital standards to make uniform their regulations. In particular,
the agencies  made  risk-based  capital  treatments  for  construction  loans on
presold  residential  properties,  real estate loans  secured by junior liens on
1-to-4 family residential properties, and investments in mutual funds consistent
among the  agencies,  and  simplified  and made  uniform  the  agencies'  Tier 1
leverage capital standards.  The most highly-rated  institutions must maintain a
minimum  Tier 1 leverage  ratio of 3%, with all other  institutions  required to
maintain  a minimum  leverage  ratio of 4%. The OTS  regulations  now state that
higher-than-minimum  capital  levels  may be  required  if  warranted,  and that
institutions   should  maintain  capital  levels   consistent  with  their  risk
exposures.

         Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA,  each federal banking agency is required to implement a system of prompt
corrective  action for  institutions  which it  regulates.  The federal  banking
agencies,  including  the OTS,  adopted  substantially  similar  regulations  to
implement  Section 38 of the FDIA,  effective as of December 19, 1992. Under the
regulations,  an  institution is deemed to be (i) "well  capitalized"  if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage  capital ratio of 5.0% or more and is not
subject to any order or final capital  directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total  risk-based  capital  ratio of 8.0% or more, a Tier I  risk-based  capital
ratio of 4.0% or more and a Tier I leverage  capital ratio of 4.0% or more (3.0%
under  certain  circumstances)  and  does  not  meet  the  definition  of  "well
capitalized,"  (iii)  "undercapitalized"  if it has a total  risk-based  capital
ratio that is less than 8.0%,  a Tier I  risk-based  capital  ratio that is less
than 4.0% or a Tier I leverage  capital ratio that is less than 4.0% (3.0% under
certain circumstances),  (iv) "significantly undercapitalized" if it has a total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio  that is less than 3.0% or a Tier I  leverage  capital  ratio that is less
than 3.0% and does not meet the definition of "critically undercapitalized," and
(v) "critically  undercapitalized" if it has a ratio of tangible equity to total
assets  that is  equal  to or less  than  2.0%.  Section  38 of the FDIA and the
regulations  promulgated  thereunder  also specify  circumstances  under which a
federal  banking  agency  may  reclassify  a  well  capitalized  institution  as
adequately capitalized and may require an adequately capitalized  institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the  next  lower  category  (except  that  the  FDIC  may  not  reclassify  a
significantly  undercapitalized institution as critically undercapitalized).  At
December 31, 1998,  the Bank was  considered  a "well  capitalized"  institution
under the prompt correction action provisions of FDIA.

         Liquidity  Requirements.  All  savings  associations  are  required  to
maintain an average daily balance of liquid assets (including cash, certain time
deposits  and  savings  accounts,   bankers'  acceptances,   certain  government
obligations and certain other  investments) equal to a certain percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At the present time,  the required  minimum
liquid asset ratio is 4%. The Bank has  consistently  exceeded  such  regulatory
liquidity  requirement  and,  at December  31,  1998,  had a liquidity  ratio of
12.74%.

         Qualified Thrift Lender Test. All savings  associations are required to
meet a QTL test set forth in Section  10(m) of HOLA and  regulations  of the OTS
thereunder in order to avoid certain restrictions on their operations. A savings
association  that  does  not  meet  the QTL  test  set  forth  in the  HOLA  and
implementing  regulations  must either  convert to a bank charter or comply with
the following restrictions on its operations: (i) the association may not engage
in any new activity or make any new investment,  directly or indirectly,  unless
such  activity  or  investment  is  permissible  for a national  bank,  (ii) the


                                       33
<PAGE>

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

         Under applicable  regulations,  any savings institution is a QTL if (i)
it  qualifies  as  a  domestic  building  and  loan  association  under  Section
7701(a)(19)  of the Code  (which  generally  requires  that at least  60% of the
institution's assets constitute  housing-related and other qualifying assets) or
(ii) at least 65% of the institution's  "portfolio  assets" (as defined) consist
of certain housing and consumer-related  assets on a monthly average basis in at
least  nine  out of every 12  months.  At  December  31,  1998,  the Bank was in
compliance with the QTL test.

         Restrictions on Capital  Distributions.  OTS regulations govern capital
distributions  by savings  associations,  which  include cash  dividends,  stock
redemptions  or  repurchases,  cash-out  mergers,  interest  payments on certain
convertible  debt and other  transactions  charged to the  capital  account of a
savings association to make capital distributions.

         In January 1999, the OTS amended its capital distribution regulation to
bring such  regulations  into greater  conformity with the other bank regulatory
agencies.  Under  the  regulation,  certain  savings  associations  would not be
required to file with the OTS. Specifically,  savings associations that would be
well capitalized  following a capital  distribution  would not be subject to any
requirement  for notice or  application  unless the total  amount of all capital
distributions,  including any proposed capital distribution,  for the applicable
calendar  year would  exceed an amount  equal to the savings  association's  net
income for that year to date plus the savings association's  retained net income
for the  preceding  two years.  Because the Bank is a subsidiary of the Company,
the regulation,  however, would require the Bank to provide notice to the OTS of
its intent to make a capital  distribution,  unless an  application is otherwise
required.

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

         As a member, the Bank is required to purchase and maintain stock in the
FHLB in an  amount  equal  to at least 1% of its  aggregate  unpaid  residential
mortgage loans, home purchase contracts or similar  obligations at the beginning
of each year.  At December  31,  1998,  the Bank had $1.5 million in FHLB stock,
which was in compliance with this requirement.

         Federal Reserve System. The FRB requires all depository institutions to
maintain  reserves against their transaction  accounts  (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. At December 31, 1998, the
Bank was in compliance with applicable  requirements.  However, because required
reserves must be  maintained in the form of vault cash or a  noninterest-bearing
account at a Federal Reserve Bank, the effect of this reserve  requirement is to
reduce an institution's earning assets.

         Safety and Soundness.  Effective  August 9, 1995,  the federal  banking
regulatory  agencies jointly  implemented  Interagency  Guidelines  Establishing
Standards for Safety and  Soundness  ("Guidelines")  for all insured  depository
institutions  relating to internal  controls,  information  systems and internal
audit  systems,  loan  documentation,  credit  underwriting,  interest rate risk
exposure,  asset  growth,  compensation,   fees  and  benefits,  and  employment
contracts and other compensation arrangements of executive officers,  employees,
directors and principal  stockholders of insured  depository  institutions  that


                                       34
<PAGE>

would prohibit  compensation and benefits and arrangements that are excessive or
that could lead to a material  financial loss for the  institution.  The federal
banking  regulatory  agencies also adopted asset quality and earnings  standards
within the Guidelines,  which became effective  October 1, 1996. The Interagency
Guidelines Establishing Year 2000 Standards for Safety and Soundness ("Year 2000
Guidelines")  were  implemented  in 1998  and set  forth  safety  and  soundness
standards  to  ensure  that  insured  depository  institutions  will  be able to
successfully  continue  business  operating after January 1, 2000. If an insured
depository  institution  fails  to  meet  any of  its  prescribed  standards  as
described above, it may be required to submit to the appropriate federal banking
agency a  compliance  plan  specifying  the steps that will be taken to cure the
deficiency  and  the  time  within  which  these  steps  will  be  taken.  If an
institution  fails to submit an acceptable  plan or fails to implement the plan,
the  appropriate  federal banking agency will require the institution or holding
company to correct the deficiency and until corrected,  may impose  restrictions
on the  institution  or  holding  company,  including  any  of the  restrictions
applicable under the prompt  corrective action provisions of FDICIA. At December
31,  1998,  the Bank was in  compliance  with the  Guidelines  and the Year 2000
Guidelines.

Taxation

         Federal Taxation. The Company and its subsidiaries are subject to those
rules of federal income taxation generally  applicable to corporations under the
Code.  The  Company and its  principal  subsidiary,  the Bank,  as members of an
affiliated group of corporations within the meaning of Section 1504 of the Code,
file a  consolidated  federal  income  tax  return,  which  has  the  effect  of
eliminating or deferring the tax  consequences of intercompany  transactions and
distributions,  including dividends,  in the computation of consolidated taxable
income.

         In addition to regular  corporate income tax,  corporations are subject
to an  alternative  minimum tax which  generally is equal to 20% of  alternative
minimum  taxable  income  (taxable  income,  increased by certain tax preference
items and  determined  with  adjustments  to certain  regular  tax  items).  The
adjustments  which  are  generally  applicable  include  an  amount  equal  to a
percentage  of the amount by which a financial  institution's  adjusted  current
earnings  (generally  alternative minimum taxable income computed without regard
to this  adjustment  and prior to reduction  for  alternative  tax net operating
losses)  exceeds its  alternative  minimum taxable income without regard to this
adjustment. Alternative minimum tax paid can be credited against regular tax due
in later years. See Note 14 of the Notes to Consolidated Financial Statements on
pages 43 and 44 of the 1998  Annual  Report to  Stockholders,  which is attached
hereto as Exhibit 13 and incorporated herein by reference.

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

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



                                       35
<PAGE>

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


Item 2.           Properties

         The following table sets forth  information  with respect to offices of
the Company and its subsidiaries as of December 31, 1998.
<TABLE>
<CAPTION>
                                                       Lease           Date           Total      Net Book
                                   Owned/         Expiration Date    Acquired/       Office      Value at
Location                           Leased        Including Options    Leased       Square Ft.(1) 12/31/98 (2)
--------                           ------        -----------------    ------     --------------  ----------
<S>                                <C>                 <C>              <C>           <C>       <C>      
The Company
Executive Office:
The Koger Center                   Leased              01/31/02         10/96         7,328     $  20,772
Building 9, Suite 200
Norfolk, VA  23502

The Bank
Main Office:
400 W. Ehringhaus Street            Owned                  -            11/78         3,805       189,805
Elizabeth City, NC  27906

Branch Offices:
520 South Main Street               Owned                 -             05/86         6,517       670,855
Emporia, VA  23847

1401 Gaskins Road                  Owned (3)              -             09/98         6,782       663,374
Richmond, VA  23233

2825 Godwin Boulevard              Owned (4)              -             04/98         3,245       762,819
Suffolk, VA  23434

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

1401 Gaskins Road               Leased (3), (5)           -             09/98         3,078             -
Richmond, VA  23233

2430 Southland Drive, 3rd Floor    Leased             05/31/99          06/93         2,000             -
Chester, VA  23831

400 W. Ehringhaus Street          Leased (5)               -            07/94           750             -
Elizabeth City, NC  27906

Essex Home
2420 Virginia Beach Blvd.          Leased             12/31/01          12/91        11,950         5,770
Virginia Beach, VA  23454
</TABLE>

(1)  Total office square feet excludes leased common area.
(2)  Consists of the net book value of land and buildings if owned, or leasehold
     improvements if leased.
(3)  In   September   1998,   the   Bank   completed   the   purchase   of  this
     previously-leased facility (since May 1995).
(4)  The Bank's Suffolk,  Virginia branch was relocated from a facility that had
     been leased since September 1995 to a newly-constructed,  Bank-owned branch
     in April 1998.
(5)  Leased from the Bank.

         The Bank has  acquired  land  with a  carrying  value  of  $146,516  at
December 31, 1998 for the construction of a new branch in Ashland, Virginia. The
Bank anticipates completion of construction in September 1999.


                                       36
<PAGE>

Item 3.           Legal Proceedings

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


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

         No matters were submitted to a vote of the  stockholders of the Company
through the solicitation of proxies, or otherwise,  during the fourth quarter of
the year ended December 31, 1998.


                                     PART II


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

         The Common Stock is currently  traded on the  American  Stock  Exchange
("AMEX")  under the symbol  "ESX." The  information  contained on page 54 of the
1998 Annual  Report to  Stockholders,  which is  attached  hereto as Exhibit 13,
under  the  caption  "Stock  Price   Information,"  is  incorporated  herein  by
reference.  As a company  listed on the AMEX, the Company is subject to the AMEX
rules regarding  continued  listing,  and does not fully satisfy those continued
listing guidelines.  Accordingly,  there can be no assurance that the listing of
the Common Stock on the AMEX will be  continued.  In this regard,  however,  the
Company  believes that its recently  improved  operating  results will favorably
impact the AMEX's evaluation.

         As of March 31,  1999,  there  were  1,060,642  shares of Common  Stock
outstanding,  which  were held by  approximately  2,000  persons.  The number of
persons  holding  shares of Common  Stock  reflects an estimate of the number of
persons or entities  holding  their stock in nominee or  "street"  name  through
various brokerage firms or other entities.

Dividends

         Neither the Company nor its predecessor (the  Partnership) has declared
any capital distributions since the fourth quarter of 1991. The Company does not
anticipate  the  payment of  dividends  on the Common  Stock in the  foreseeable
future.

         The Company's  ability to pay dividends on the Common Stock will depend
primarily on the receipt of dividends  from the Bank.  While the Company and the
Bank are not operating  under any supervisory  agreements,  the Bank must seek a
letter of  nonobjection  from the OTS prior to making  dividend  payments to the
Company.

         In connection with the Home  Acquisition,  the Company issued 2,250,000
shares of nonvoting perpetual  preferred stock with an aggregate  redemption and
liquidation  value of $15.0 million in exchange for all of the outstanding stock
of Home Bancorp. The preferred stock is redeemable at the option of the Company.
The  2,125,000  shares of Series B  preferred  stock  bear a  cumulative  annual
dividend  rate of 9.5% (based on  redemption  value) and the  125,000  shares of
Series C preferred  stock bear a cumulative  annual dividend rate of 8.0% (based
on  redemption  value).  The  Series C  preferred  stock is  senior  to Series B
preferred stock with respect to the payment of dividends, and the holders of the


                                       37
<PAGE>

Series C preferred stock may, in their discretion, from time to time in whole or
in part,  elect to convert  such shares of Series C preferred  stock into a like
amount of Series B preferred stock. At December 31, 1998,  dividends and accrued
interest  thereon in arrears on the Series B and Series C  preferred  stock were
$4,997,493 and $242,613, respectively.

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


Item 6.           Selected Financial Data

         The selected financial data for the five years ended December 31, 1998,
which  appears  on page 4 of the 1998  Annual  Report to  Stockholders  attached
hereto as Exhibit  13, is  incorporated  by  reference  in this Form 10-K Annual
Report.


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

         The  information  contained  on pages 5 through  23 of the 1998  Annual
Report to  Stockholders,  which is  attached  hereto as  Exhibit  13,  under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" is incorporated herein by reference.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         The  information  contained  on pages 16 through 19 of the 1998  Annual
Report to  Stockholders,  which is  attached  hereto as  Exhibit  13,  under the
caption "Market Risk Management" is incorporated herein by reference.


Item 8.           Financial Statements and Supplementary Data

         The consolidated  balance sheets of the Company as of December 31, 1998
and 1997 and the related  consolidated  statements of operations,  shareholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,  1998,  along with the  related  notes to  consolidated  financial
statements   and  the   report  of   PricewaterhouseCoopers   LLP,   independent
accountants,  are  incorporated  herein by reference from pages 24 through 53 of
the Company's 1998 Annual Report to  Stockholders,  which is attached  hereto as
Exhibit 13.


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

         Not applicable.



                                       38
<PAGE>


                                    PART III


Item 10. Directors and Executive Officers of the Registrant

         Information  regarding  the directors of the Company is included in the
Company's  Proxy  Statement  for the Annual  Meeting to be held on May 27,  1999
under the heading  "Information  with Respect to Continuing  Directors," and the
information included therein is incorporated herein by reference.

         Set forth below is information  with respect to the executive  officers
of the  Company  and its  subsidiaries  who do not  serve  as  directors  of the
Company.
<TABLE>
<CAPTION>
             Name                   Age                              Title
             ----                   ---                              -----
   <S>                              <C>           <C>
   Earl C. McPherson                45            President of Essex First and Executive
                                                  Vice President of Loan Production and
                                                  Secondary Marketing of the Bank

   Roy H. Rechkemmer, Jr.           36            Senior Vice President of Finance and Treasurer
                                                  of the Company and the Bank

   Mary-Jo Rawson                   45            Vice President and Chief Accounting
                                                  Officer of the Company and the Bank
</TABLE>

         Earl C. McPherson. Mr. McPherson presently serves as President of Essex
First and as Executive Vice President of Loan Production and Secondary Marketing
of the Bank. Mr.  McPherson  served as director,  President and Chief  Executive
Officer of Essex First  Mortgage  Corporation  until its merger with the Bank on
December 31, 1998. Mr.  McPherson  served as President of Essex  Industrial Loan
Association/Virginia Beach from January 1992 through May 1992. From January 1990
through December 1991, Mr.  McPherson  served as President of Mortgage  Centers,
Inc.  ("MCI").  Prior to his  employment  with  MCI,  Mr.  McPherson  served  as
Divisional,  Regional,  and Training  Director for  Security  Pacific  Financial
Services,  Inc.  Mr.  McPherson  has a Bachelor of Arts from the  University  of
Richmond.   Mr.  McPherson  also  attended  the  American   Financial   Services
Association  Management  program at the  University of North  Carolina at Chapel
Hill.

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

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

         Information  regarding  compliance with Section 16(a) of the Securities
Exchange Act is included in the Company's Proxy Statement for the Annual Meeting


                                       39
<PAGE>

to be held on May 27, 1999 under the heading  "Compliance  with Section 16(a) of
the Exchange Act," and the information  included therein is incorporated  herein
by reference.


Item 11. Executive Compensation

         Information regarding  compensation of executive officers and directors
is  incorporated  herein by reference to the Company's  Proxy  Statement for the
Annual  Meeting to be held on May 27, 1999 under the headings  "Directors  Fees"
and "Executive Compensation."


Item 12. Security Ownership of Certain Beneficial Owners and Management

         Information  regarding  security ownership of certain beneficial owners
and  management  is included in the  Company's  Proxy  Statement  for the Annual
Meeting to be held on May 27, 1999 under the headings  "Securities  Ownership of
Certain   Beneficial   Owners"  and  "Information  with  Respect  to  Continuing
Directors,"  and the  information  included  therein is  incorporated  herein by
reference.


Item 13. Certain Relationships and Related Transactions

         Information regarding certain relationships and related transactions is
included in the Company's  Proxy  Statement for the Annual Meeting to be held on
May 27, 1999 under the heading  "Transactions with Certain Related Persons," and
the information included therein is incorporated herein by reference.

                                       40
<PAGE>

                                     PART IV


Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
(a)              1.     Financial Statements:
<CAPTION>
                                                                                              Page in
                                                                                              Annual
                                                                                              Report*
                                                                                              -------
                  The  following  documents  are  filed as part of this report:
<S> <C>
                  Report of Independent Accountants  ...............................             24

                  Consolidated Balance Sheets at December 31, 1998
                     and 1997.........................................................           25

                  Consolidated Statements of Operations for the three
                     years ended December 31, 1998....................................           27

                  Consolidated Statements of Shareholders' Equity for
                     the three years ended December 31, 1998..........................           29

                  Consolidated Statements of Cash Flows for the three
                     years ended December 31, 1998....................................           30

                  Notes to Consolidated Financial Statements..........................           33
</TABLE>
                  *Incorporated  by reference  from the  indicated  pages of the
                   1998 Annual Report to Stockholders.

                  The  financial  statements,  together with the report
                  thereon of PricewaterhouseCoopers  LLP dated February
                  19,  1999,  appearing  on pages 24  through 53 of the
                  accompanying  1998 Annual Report to Stockholders  are
                  incorporated  by  reference  in this Form 10-K Annual
                  Report.  With  the  exception  of the  aforementioned
                  information and the information incorporated in Items
                  1,  6,  7,  7A and  8,  the  1998  Annual  Report  to
                  Stockholders  is not to be  deemed  filed  as part of
                  this Form 10-K Annual Report.

                  2.     Financial Statement Schedules:

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


                                       41
<PAGE>


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


                  3.     Exhibits:

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

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

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

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

          3.3       Certificate of Amendment to the Certificate of Incorporation
                    of Essex Bancorp,  Inc., dated November 5, 1998. Filed as an
                    exhibit to this report.

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

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

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

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

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

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

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


                                       42
<PAGE>




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

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

          10.1*     Essex Savings Bank, F.S.B. Supplemental Executive Retirement
                    Plan dated  August 26,  1993.  Filed as exhibit  10.1 to the
                    Registrant's  Annual  Report on Form 10-K for the year ended
                    December 31, 1997.

          10.2*     First   Amendment  to  the  Essex   Savings   Bank,   F.S.B.
                    Supplemental  Executive  Retirement Plan dated June 5, 1997.
                    Filed as exhibit 10.2 to the  Registrant's  Annual Report on
                    Form 10-K for the year ended December 31, 1997.

          10.3*     Second   Amendment  to  the  Essex  Savings   Bank,   F.S.B.
                    Supplemental  Executive  Retirement  Plan dated  November 1,
                    1997.  Filed  as  exhibit  10.3 to the  Registrant's  Annual
                    Report on Form 10-K for the year ended December 31, 1997.

          10.4      Third   Amendment  to  the  Essex   Savings   Bank,   F.S.B.
                    Supplemental  Executive  Retirement  Plan dated  December 1,
                    1998. Filed as an exhibit to this report.

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

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

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

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

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


                                       43
<PAGE>

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

          10.10*    Second  Amendment to the Essex  Bancorp,  Inc.  Stock Option
                    Plan dated as of May 23, 1996.  Filed as Exhibit 10.6 to the
                    Registrant's  Annual  Report on Form 10-K for the year ended
                    December 31, 1996.

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

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

          10.13     Second Amendment to the Essex Bancorp,  Inc.  Employee Stock
                    Purchase  Plan  dated as of  October  1,  1998.  Filed as an
                    exhibit to this report.

          10.14*    Restated Employment Agreement dated as of January 1, 1998 by
                    and among Essex Bancorp,  Inc., Essex Savings Bank,  F.S.B.,
                    Essex  Mortgage  Corporation  and  Gene D.  Ross.  Filed  as
                    exhibit 10.12 to the Registrant's Annual Report on Form 10-K
                    for the year ended December 31, 1997.

          10.15     First Amendment to the Restated Executive Services Agreement
                    dated as of  January  1,  1998 by and among  Essex  Bancorp,
                    Inc., Essex Savings Bank, F.S.B., Essex Mortgage Corporation
                    and Gene D. Ross. Filed as an exhibit to this report.

          10.16     Change in Control  Agreement  dated as of January 1, 1998 by
                    and among Essex Bancorp,  Inc. and Gene D. Ross. Filed as an
                    exhibit to this report.

          10.17*    Restated Executive Services Agreement dated as of January 1,
                    1998 by and among Essex  Savings Bank,  F.S.B.,  Essex First
                    Mortgage Corporation and Earl C. McPherson. Filed as exhibit
                    10.13 to the Registrant's Annual Report on Form 10-K for the
                    year ended December 31, 1997.

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


                                       44
<PAGE>

          10.18     First Amendment to the Restated Executive Services Agreement
                    dated as of January 1, 1998 by and among Essex Savings Bank,
                    F.S.B.,   Essex  First  Mortgage  Corporation  and  Earl  C.
                    McPherson. Filed as an exhibit to this report.

          10.19     Second   Amendment  to  the  Restated   Executive   Services
                    Agreement  dated as of  January  1, 1999 by and among  Essex
                    Savings Bank, F.S.B.,  Essex First Mortgage  Corporation and
                    Earl C. McPherson. Filed as an exhibit to this report.

          10.20     Change in Control  Agreement  dated as of January 1, 1998 by
                    and among Essex Bancorp,  Inc. and Earl C. McPherson.  Filed
                    as an exhibit to this report.

          10.21     First  Amendment to Change in Control  Agreement dated as of
                    January 1, 1999 by and among Essex Bancorp, Inc. and Earl C.
                    McPherson. Filed as an exhibit to this report.

          10.22     Subservicing Agreement between Essex Home Mortgage Servicing
                    Corporation and Continental  Capital Corp. dated as of April
                    15, 1998. Filed as an exhibit to this report.

          13        The 1998 Annual  Report is attached as Exhibit 13.  Portions
                    of the 1997 Annual Report are incorporated by reference into
                    this Form 10-K.

          21        Subsidiaries of the Registrant.  Filed as an exhibit to this
                    report.

          27        Financial Data Schedule.

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


                                       45
<PAGE>

(b)               Reports on Form 8-K Filed in the Fourth Quarter of 1998

                  Not applicable.

(c)               Exhibits

                  See Exhibit Index contained herein.

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

                  Not applicable.









                              [intentionally blank]


                                       46
<PAGE>

                                   SIGNATURES


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

                                            Essex Bancorp, Inc.


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

                                                     March 30, 1999 
                                                     -------------- 
                                                         (Date)

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


By: /s/ Gene D. Ross                                              March 30, 1999
   -------------------------                                      --------------
       Gene D. Ross                                                    (Date)
       Chairman, President, Chief
       Executive Officer and
       Principal Financial Officer


By: /s/ Mary-Jo Rawson                                            March 30, 1999
   -------------------------                                      --------------
       Mary-Jo Rawson                                                  (Date)
       Chief Accounting Officer


By: /s/ Robert G. Hecht                                           March 30, 1999
   -------------------------                                      --------------
       Robert G. Hecht                                                 (Date)
       Director


By: /s/ Roscoe D. Lacy, Jr.                                       March 30, 1999
   -------------------------                                      --------------
       Roscoe D. Lacy, Jr.                                             (Date)
       Director


By: /s/ Harry F. Radcliffe                                        March 30, 1999
   -------------------------                                      --------------
       Harry F. Radcliffe                                              (Date)
       Director


                                       47
<PAGE>

                                  Exhibit Index

                         Exhibit No.             Description

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

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

          3.3       Certificate of Amendment to the Certificate of Incorporation
                    of Essex Bancorp, Inc., dated November 5, 1998.

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

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

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

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

          4.4*      Form of Common Stock Purchase Warrant Certificate

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

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

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

          10.1*     Essex Savings Bank, F.S.B. Supplemental Executive Retirement
                    Plan.

          10.2*     First  Amendment to the Savings  Bank,  F.S.B.  Supplemental
                    Executive Retirement Plan.

          10.3*     Second  Amendment to the Savings Bank,  F.S.B.  Supplemental
                    Executive Retirement Plan.

          10.4      Third   Amendment  to  the  Essex   Savings   Bank,   F.S.B.
                    Supplemental  Executive  Retirement  Plan dated  December 1,
                    1998.

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


<PAGE>



          10.5*     Fannie Mae/Freddie  Mac/Private  Investor Mortgage Servicing
                    Purchase and Sale  Agreement by and between  Essex  Mortgage
                    Corporation and Chase Home Mortgage  Corporation  dated June
                    8, 1993.

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

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

          10.8*     Essex Bancorp, Inc. Stock Option Plan.

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

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

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

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

          10.13     Second Amendment to the Essex Bancorp,  Inc.  Employee Stock
                    Purchase Plan dated as of October 1, 1998.

          10.14*    Restated  Employment  Agreement  dated January 1, 1998 by an
                    among Essex Bancorp, Inc., Essex Savings Bank, F.S.B., Essex
                    Mortgage Corporation and Gene D. Ross.

          10.15     First Amendment to the Restated Executive Services Agreement
                    dated as of  January  1,  1998 by and among  Essex  Bancorp,
                    Inc., Essex Savings Bank, F.S.B., Essex Mortgage Corporation
                    and Gene D. Ross.

          10.16     Change in Control  Agreement  dated as of January 1, 1998 by
                    and among Essex Bancorp, Inc. and Gene D. Ross.

          10.17*    Restated  Executive Services Agreement dated January 1, 1998
                    by  and  among  Essex  Savings  Bank,  F.S.B.,  Essex  First
                    Mortgage Corporation and Earl C. McPherson.

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

<PAGE>



          10.18     First Amendment to the Restated Executive Services Agreement
                    dated as of January 1, 1998 by and among Essex Savings Bank,
                    F.S.B.,   Essex  First  Mortgage  Corporation  and  Earl  C.
                    McPherson.

          10.19     Second   Amendment  to  the  Restated   Executive   Services
                    Agreement  dated as of  January  1, 1999 by and among  Essex
                    Savings Bank, F.S.B.,  Essex First Mortgage  Corporation and
                    Earl C. McPherson.

          10.20     Change in Control  Agreement  dated as of January 1, 1998 by
                    and among Essex Bancorp, Inc. and Earl C. McPherson.

          10.21     First  Amendment to Change in Control  Agreement dated as of
                    January 1, 1999 by and among Essex Bancorp, Inc. and Earl C.
                    McPherson.

          10.22     Subservicing Agreement between Essex Home Mortgage Servicing
                    Corporation and Continental  Capital Corp. dated as of April
                    15, 1998.

          13        The 1998 Annual  Report is attached as Exhibit 13.  Portions
                    of the 1998 Annual Report are incorporated by reference into
                    this Form 10-K.

          21        Subsidiaries of the Registrant, as updated.

          27        Financial Data Schedule.

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