EXHIBIT 13















                              ESSEX BANCORP, INC.



                               1997 ANNUAL REPORT


<PAGE>





                               ESSEX BANCORP, INC.

                                Table of Contents


                                                                   Page
                                                                   ----

        Report to Our Stockholders                                    1

        Five Year Financial Summary                                   3

        Management's Discussion and Analysis                          4

        Report of Independent Accountants                            23

        Consolidated Financial Statements                            24

        Notes to Consolidated Financial Statements                   32

        Investor Information                                         56

        Directors and Officers                                       57

        Corporate Information                                        58



<PAGE>
                                     [LOGO]

                                  BANCORP, INC.

                           MESSAGE TO OUR STOCKHOLDERS



To Our Stockholders:

In our past  reports to our  stockholders  we have  extensively  chronicled  the
problems of Essex  Bancorp,  Inc.  (the  "Company")  and the many  restructuring
activities  that we have  undergone.  All of these  efforts were  undertaken  to
better  position  the  Company  for growth and  profitability.  During  1997 our
investor  base  changed  dramatically  as a  result  of  the  volatility  in the
Company's  common stock.  We surmise that such investors are more  interested in
the potential of their investment rather than the history of the Company,  which
is reflected in our current and previous public filings. It is important for you
to know that we are singularly  focused on achieving  profitability  and looking
forward.

Following a material  downsizing of the Company  during 1996 through the sale of
nine non-strategic branches in three separate  transactions,  1997 was a year of
improving our financial fundamentals,  leveraging our capital with 17.5% deposit
growth in our retail branch banking franchise,  reducing nonperforming assets by
36.8%,  and  increasing  total  assets  by  11.9%,  thereby  better  positioning
ourselves to be profitable in 1998.

In 1997 we began to execute many of the  strategies  that were  developed out of
prior year strategic planning sessions and the work of the Strategic  Evaluation
Committee.  The fundamentals of the Company have changed dramatically since 1992
when combined losses from operations at Essex

                                        1

<PAGE>


Bancorp, Inc. for the five years through 1996 following the change in management
in 1992 amounted to $45.5 million.  Our 1997 loss of $297,000 represents a major
improvement; however, we recognize that nothing short of profitability above and
beyond the amounts we must earn to cover the accruing dividends on our preferred
stock will be satisfactory.  I encourage you to read the Management's Discussion
and  Analysis  of  Financial  Condition  and Results of  Operations  in order to
enhance your perspective of the Company's performance during 1997.

1998 is a critical year in which we must achieve  profitability  and demonstrate
that we do have the ability to leverage our capital through growth,  and achieve
sufficient returns for common and preferred shareholders. The outlook appears to
present  many  favorable  market  opportunities  for us. We believe our mortgage
company can succeed in a lower rate  environment in which  mortgage  production,
both residential and construction,  should be active.  Our servicing company has
the capacity to expand by attracting new subservicing contracts,  and we believe
our costs are low and our pricing very competitive. Finally, with the April 1998
relocation  of  our  Suffolk,   Virginia  branch  into  its  newly   constructed
full-service  branch,  we will have four excellent  retail bank branch locations
that have growing market share in expanding markets.  In view of the significant
consolidation  of financial  institutions  in Virginia  through  merger,  we are
reviewing opportunities to expand our banking franchise.

In summary, we believe Essex has accomplished a great deal and we have employees
who are capable and  motivated to achieve much  greater  successes in 1998.  The
management  of the Company and the Board of Directors are committed to expanding
the business and achieving profitability. We appreciate your support and welcome
hearing from you.



                                             /s/ Gene D. Ross

                                             Gene D. Ross
                                             President and CEO
                                             Essex Bancorp, Inc.
                                             March 31, 1998

                                        2

<PAGE>
<TABLE>

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

                                                              At or For the Year Ended December 31,
                                                  1997         1996           1995         1994           1993
                                                  ----         ----           ----         ----           ----
<S> <C>
     BALANCE SHEET DATA:
       Total assets.........................    $195,088      $174,267      $338,724     $296,231       $390,958
       Net loans ...........................     167,441       145,551       266,632      237,392        206,781
       Deposits  ...........................     153,927       131,033       283,497      222,462        328,781
       Federal Home Loan Bank advances......      23,547        25,690        29,833       58,952         41,661
       Notes payable........................          72            96           120        2,691         21,891
       Shareholders' equity and total
         partners' capital (deficit)........      14,817        15,106        22,630        8,140         (4,950)
       Nonperforming assets.................       3,298         5,215        11,257       13,652         18,090
       Allowance for loan losses............       2,382         2,556         5,251        3,429          3,039

     OPERATIONS DATA:
       Interest income......................    $ 14,547      $ 19,872      $ 22,547     $ 22,966       $ 27,727
       Interest expense.....................       9,230        13,764        16,627       15,956         19,027
       Net interest income..................       5,317         6,108         5,920        7,010          8,700
       Provision for loan losses............         113         1,411         2,477        1,604          1,085
       Noninterest income...................       2,463         4,282         3,172        4,068          7,372
       Noninterest expense:
         Amortization.......................         531         7,011           956        1,360          6,420
         Other..............................       7,433         9,345         9,814       15,619         17,048
       Income (loss) before cumulative
         effect of change in accounting
         principle, extraordinary items,
         and income taxes...................        (297)       (7,377)       (4,155)      (7,505)        (8,481)
       Cumulative effect of change in
         accounting principle...............           -             -             -          179              -
       Extraordinary items, net of tax......           -             -         2,945 (1)   20,416 (2)          -
       Net income (loss)....................        (297)       (7,377)       (1,210)      13,090         (8,481)
       Net income (loss) available to common
         stockholders.......................      (1,932)       (8,824)       (1,578)      13,090         (8,481)
       Basic and diluted net loss per
         common share (3)...................       (1.83)        (8.39)        (1.50)           -              -
       Pro forma basic and diluted net
         income (loss) per common
         share (3)..........................           -             -             -        12.47          (8.08)

     OTHER DATA:
       Return on average assets.............        (.16)%       (2.73)%        (.39)% (1)   3.88% (2)     (2.12)%
       Return on average capital............       (1.96)%      (39.51)%      (10.59)%             (4)            (4)
       Average capital to average assets....        8.13%         6.92%         3.67%              (5)            (5)
       Net interest spread..................        2.69%         2.20%         2.00%        2.46%          2.73%
       Net interest margin..................        3.01%         2.41%         2.01%        2.20%          2.34%
       Nonperforming assets as a percent
         of total assets at end of year.....        1.69%         2.99%         3.32%        4.61%          4.63%
       Allowance for loan losses as a
         percent of total loans at end
         of year ...........................        1.40%         1.73%         1.93%        1.42%          1.45%
       Net charge-offs as a percent of
         average total loans................        .18%          1.89%          .46%         .55%           .95%
       Retail banking offices...............          4              4            12            8             11
</TABLE>
     (1) The Company recognized a $2.9 million  extraordinary credit to earnings
         related to the  forgiveness  of debt during 1995. The return on average
         assets excluding the impact of this  extraordinary item was (1.33)% for
         the year ended December 31, 1995.
     (2) The Company  recognized a $20.4  million  extraordinary  credit (net of
         income  taxes) to earnings  related to a litigation  settlement  during
         1994.  The  return  on  average  assets  excluding  the  impact of this
         extraordinary item was (2.17)% for the year ended December 31, 1994.
     (3) The Company adopted Statement of Financial Accounting Standards No. 128
         -  Earnings  Per Share  during  1997 and has  restated  per share  data
         accordingly for all periods presented.
     (4) Ratio exceeds (100.00)%.
     (5) Ratio is less than 0.00%.

                                       3
<PAGE>


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


         Essex Bancorp,  Inc. (the "Company") is a Delaware corporation that was
formed in 1994 to be the single thrift  holding  company for Essex Savings Bank,
F.S.B.  (the "Bank"),  a  federally-chartered  savings bank which  operates four
branches in North Carolina and Virginia.  The Company is the successor by merger
to Essex  Financial  Partners,  L.P.  (the  "Partnership"),  a Delaware  limited
partnership  which was  formed in 1988 in order to acquire  the  former  holding
company of the Bank. The  Partnership and the Bank's former holding company were
merged into the Company in January 1995. The Company is engaged primarily in the
operation of the Bank as a wholly-owned  subsidiary.  In addition, the Company's
other  principal  operating  subsidiaries  are Essex First Mortgage  Corporation
("Essex First"), a wholly-owned subsidiary of the Bank that is engaged primarily
in the  origination  and sale of  residential  mortgage  loans,  and Essex  Home
Mortgage  Servicing  Corporation  ("Essex Home"), an indirect  subsidiary of the
Company  and the Bank that is engaged  primarily  in the  servicing  of mortgage
loans owned by the Bank, various governmental  agencies, and various third party
investors. Essex Mortgage Corporation ("EMC") is also a direct subsidiary of the
Company that was formerly engaged in various mortgage banking activities and, at
December  31,  1997,  held  loans  and  other  assets  as a  result  of its past
activities.

         In January  1996,  the  Company's  Board of Directors  formed a special
committee of the Board, the Strategic  Evaluation  Committee (the  "Committee").
Although the Bank exceeded all regulatory capital  requirements after the Bank's
acquisition  of  Home  Bancorp,  Inc.  ("Home  Bancorp")  and  its  wholly-owned
subsidiary Home Savings Bank, F.S.B. ("Home Savings") on September 15, 1995 (the
"Home  Acquisition"),  the  core  operations  of  the  Company  since  the  Home
Acquisition  had not been  profitable and the retail banking  branches  acquired
from  Home  Savings  required  additional  capital  in  order  to be  successful
full-service  facilities.  In early 1996,  the  Committee  began  exploring  the
possible  benefits of further  expansion or contraction by branch sales.  In May
1996, an  independent  consultant  retained by the Company  issued a report that
validated the Committee's  conclusions that selling  non-strategic bank branches
and effectively  shrinking the size of the asset base by approximately 50% was a
strategy that  ultimately  would be in the best  interests of the common and the
preferred  shareholders of the Company.  Accordingly,  in addition to completing
the already-negotiated  sales of the Bank's Charlotte,  Raleigh,  Greensboro and
Wilmington, North Carolina branches, the Company proceeded to negotiate the sale
of the Bank's Norfolk,  Portsmouth,  Hampton, Newport News and Grafton, Virginia
branches,   which  were  completed   during  the  last  two  quarters  of  1996.
Collectively,  the  nine  branches  sold  during  1996  are  referred  to as the
"Branches."  The  outcome of the  strategy  to  downsize is that the Company has
retained the most strategic branches with the greatest potential for significant
market share growth,  has achieved a "well  capitalized"  status for  regulatory
capital purposes and has removed  goodwill  associated with the Home Acquisition
from its balance sheet. In addition,  the Company's  operating  expenses in 1997
were  reduced due to the  elimination  of the  amortization  of goodwill and the
operating expenses associated with the Branches.

         As part of the  Home  Acquisition,  the  stockholders  of Home  Bancorp
received 2,250,000 shares of nonvoting  perpetual preferred stock of the Company
with an aggregate redemption and liquidation value of $15.0 million, and bearing
cumulative annual dividend rates of either 8% or 9.5%. Cumulative but undeclared
dividends and accrued  interest  thereon for the Series B and Series C preferred
stock  approximated  $3.5  million at  December  31,  1997.  The Bank's core and
risk-based  regulatory  capital ratios were 7.86% and 14.33%,  respectively,  at
December  31, 1997  resulting  in excess core capital of $7.5 million and excess
risk-based  capital of $7.4  million over the minimum  regulatory  requirements.
While  management is of the opinion that capital  compliance  will be maintained


                                       4
<PAGE>

throughout 1998, until the Company's core profitability is restored,  management
cannot  provide   assurances  that   compliance  with  all  regulatory   capital
requirements  can be sustained  beyond that  horizon.  Moreover,  the  Company's
losses and  continuing  inability  to generate  income  sufficient  to cover the
cumulative  dividends  on the Series B and C  preferred  stock will  continue to
affect the equity of the holders of the Company's  common and  preferred  stock.
The  Committee  will  continue to  evaluate  strategic  alternatives  to enhance
shareholder value.

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


Financial Condition

         General.  Total  assets of the Company at December 31, 1997 were $195.1
million as  compared  to $174.3  million at December  31,  1996,  an increase of
approximately  $20.8  million or 11.9%.  The  increase  in assets was  primarily
attributable  to a $21.9 million  increase in loans held for  investment,  which
reflected 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.

         Cash and Cash  Equivalents.  Cash and cash  equivalents  (consisting of
cash,   interest-bearing  deposits  in  other  banks,  federal  funds  sold  and
securities  purchased under  agreements to resell)  increased by $4.8 million or
78.1% during 1997 due to the excess liquidity maintained at December 31, 1997 in
order to fund upcoming deposit  maturities.  In addition,  the level of cash and
cash  equivalents was lower at December 31, 1996 because a portion of the Bank's
excess liquidity had been used to complete the sale of the Branches during 1996.

         Investment  Securities.  As a matter of policy,  the Company  generally
emphasizes lending  activities (as opposed to investing  activities) in order to
enhance the weighted average yield on its interest-earning assets and, thus, its
results of operations. Investment securities (including securities classified as
available for sale) consist of U.S. Government and agency  obligations,  Federal
Home Loan Bank  ("FHLB")  stock,  and mutual fund  investments.  During the year
ended  December  31,  1997,  investment  securities  declined by $4.8 million or
56.2%.  The decrease during 1997 was  attributable to (i) the redemption of $1.2
million of FHLB stock resulting from the FHLB's policy  regarding stock holdings
in excess of  membership  requirements,  which limits any FHLB  member's  excess
stock to no more than  $500,000  and (ii) the  maturity of $4.0  million in U.S.
Treasury and U.S. government agency securities.  Funds obtained from the decline
in investment  securities  were used to fund the  acquisition of higher yielding
loans.

         Mortgage-Backed  Securities.  Mortgage-backed  securities  increase the
credit quality of the Company's  assets by virtue of the insurance or guarantees
of federal  agencies  that back  them,  generally  require  less  capital  under
risk-based  regulatory  capital  requirements than non-insured or non-guaranteed
mortgage loans, are more liquid than individual  mortgage loans, and may be used
to  collateralize  borrowings or other  obligations of the Company.  Because the
Company is  emphasizing  lending and the  investment  of the  proceeds  from the
maturities  of  securities  into  higher  yielding  loans,  there  were  no  new
investments in mortgage-backed securities in 1997.

         Loans.  Net  loans  (including  loans  classified  as  held  for  sale)
increased by $21.6  million or 14.6%  during 1997  resulting  from  purchases of
adjustable-rate  first  mortgage  loan  portfolios  totaling  $22.2  million and
mortgage loan originations by Essex First. The Company relied on acquisitions of
adjustable-rate portfolios during 1997 because customer demand during the period
of low interest rates has emphasized  fixed rate loans,  which the Company sells
in the secondary market.



                                       5
<PAGE>

         Nonperforming  Assets.  The  Company's  nonperforming  assets,  net  of
specific  reserves for  collateral-dependent  real estate loans  ("CDRELs")  and
foreclosed properties,  decreased from $5.2 million at December 31, 1996 to $3.3
million at  December  31,  1997,  and  consisted  of the  following  (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
                                                          1997                   1996
                                                          ----                   ----
                                                              % of                   % of
                                                              Total                  Total
                                                     Amount   Loans           Amount Loans
                                                     ------   -----           ------ -----
     Nonaccrual loans, net:
       First and second mortgages................     $1,203   .71%           $2,513  1.70%
       Construction and development..............        133   .08               220   .15
       Commercial................................        132   .08                22   .01
       Consumer..................................         88   .05               153   .10
     Accruing loans 90 days or more past due.....         21   .01                30   .02
     Troubled debt restructurings................        209   .12               223   .15
                                                      ------   ---            ------   ---
         Total nonperforming loans...............      1,786  1.05             3,161  2.13
     Foreclosed properties, net..................      1,512   .89             2,054  1.39
                                                       ----- -----             -----  ----
         Total nonperforming assets..............     $3,298  1.94%           $5,215  3.52%
                                                       =====  ====             =====  ====

     Nonperforming assets to total assets........             1.69%                   2.99%
     Nonperforming loans to total loans..........             1.05                    2.13
     Allowance for loan losses to
       total loans...............................             1.40                    1.73
     Allowance for loan losses to
       nonaccrual loans..........................           153.09                   87.90
     Allowance for loan losses to
       nonperforming loans.......................           133.37                   80.86
</TABLE>

         The  decrease  in  nonperforming  assets  consisted  of a $1.4  million
decline in nonperforming loans and a $542,000 decline in foreclosed  properties.
The decrease in nonaccrual  loans was  attributable  to the improvement in asset
quality evidenced by the decline in delinquencies  from $1.5 million at December
31, 1996 to $940,000 at December 31, 1997.  The decline in delinquent  loans was
attributable to a decline in the number of delinquent residential mortgage loans
and the  restructuring  of a $288,000  loan secured by an  apartment  complex in
Suffolk, Virginia, which had been delinquent at December 31, 1996.

         Gross  interest  income that would have been  recognized  for the years
ended  December 31, 1997,  1996 and 1995 if nonaccrual  loans at the  respective
dates had been performing in accordance  with their original terms  approximated
$171,000, $291,000 and $678,000,  respectively.  The Company's future results of
operations  will  be  favorably  affected  if it is able to  achieve  a  further
reduction in nonperforming assets without incurring additional material losses.

         The Company's decrease in foreclosed properties reflected the impact of
the decline in  nonperforming  and delinquent loans during 1997 and prior years.
In addition,  during 1997 the Company  completed  the sale of  residential  lots
located in the Outer  Banks of North  Carolina,  which had a  carrying  value of
$164,000  at  December  31,  1996.  The $1.5  million of  foreclosed  properties
included in nonperforming assets at December 31, 1997 is reported net of related
reserves totaling $155,000.  In addition,  approximately  $334,000 of losses and
write-downs  have been  previously  recognized on foreclosed  properties held at
December 31, 1997.





                                       6
<PAGE>




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

                                                      1997              1996
                                                      ----              ----
  Residential real estate development
     projects                                        $   485          $   390
  Single-family residential real estate                  770            1,300
  Land and subdivisions                                  257              364
                                                      ------           ------
                                                      $1,512           $2,054
                                                       =====            =====

         In addition to the $3.3 million of nonperforming assets at December 31,
1997,  as of such date the Company had  classified  for  regulatory  purposes an
additional $1.8 million of assets  (including  accrued interest and advances and
net of specific loss reserves)  based on a rating system adopted by the Company,
as  compared  to $5.2  million  of  nonperforming  assets  and $2.3  million  of
classified  assets at December 31, 1996.  These classified loans evidence one or
more weaknesses or potential  weaknesses and,  depending on the regional economy
and other factors, may become nonperforming assets in future periods.  There can
be no assurance  that the  regulatory  examiners  would agree with the Company's
classification of its assets.

         Mortgage  Servicing  Rights and Loan Premiums.  As of December 31, 1997
and 1996, the Company reported $1.2 million and $1.3 million,  respectively,  of
purchased and originated  mortgage servicing rights  (collectively,  "MSRs") and
$668,000 and $565,000, respectively, of capitalized loan premiums. The increases
in MSRs and loan premiums were attributable to purchases of servicing rights and
adjustable-rate loan portfolios during 1997. The carrying value of the Company's
MSRs and loan  premiums are  dependent  upon the cash flows from the  underlying
mortgage loans and their  carrying value may be impaired if prepayment  activity
exceeds  expectations.  At December  31,  1997,  no  assurance  can be made that
further significant amortization or impairment adjustments will not be necessary
with respect to the  Company's  MSRs or  capitalized  loan premiums if the lower
interest rate environment  results in the acceleration of prepayment activity in
excess of expectations.

         Deposits.   Deposits,  the  primary  source  of  the  Company's  funds,
increased by $22.9 million or 17.5% during the year ended December 31, 1997. The
increase in deposits was  attributable to increases in money market accounts and
certificates of deposit. While deposits grew at each of the Bank's branches, the
most significant growth occurred at the Suffolk and Richmond, Virginia branches,
which experienced deposit growth of 49.4% and 35.8%, respectively.  In addition,
because of the improvement in the Bank's overall financial condition, Essex Home
transferred a portion of its  servicing  escrow  accounts  from a  nonaffiliated
financial  institution to the Bank.  This transfer was reflected in the increase
in noninterest-bearing deposits.

         Borrowings.  The Company's borrowings consist of advances from the FHLB
and notes  payable.  FHLB advances  decreased by $2.1 million or 8.3% during the
year ended  December 31, 1997 as a result of scheduled  maturities.  At December
31, 1997, the unused lendable  collateral value for additional FHLB advances was
$20.9  million.  The  Company's  notes  payable  totaled  $72,000 and $96,000 at
December 31, 1997 and 1996, respectively, and consisted solely of a note payable
to the former president of Home Bancorp and Home Savings.  In conjunction with a
severance  settlement with the former employee,  the Company repaid this note in
its entirety in February 1998.

         Other Liabilities.  As of December 31, 1997, other liabilities 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.  For additional  information about the Company's stock option plans,
see Note 19 of the Notes to Consolidated Financial Statements.



                                       7
<PAGE>

         Shareholders'  Equity.  Total shareholders' equity at December 31, 1997
was $14.8  million,  a decrease of $289,000 from  shareholders'  equity of $15.1
million at December 31, 1996.  This change  reflects the  Company's  net loss of
$297,000 for the year ended December 31, 1997, which is further described below.
As previously mentioned, the Series B and Series C preferred stock issued by the
Company  in  connection  with  the  Home  Acquisition  has a  stated  value  and
liquidation preference of $15.0 million,  exclusive of cumulative but undeclared
dividends and accrued  interest thereon of $3.5 million at December 31, 1997. To
the extent that the Company's  income is not  sufficient to cover the cumulative
dividends and accrued interest on the Series B and C preferred stock, the equity
of the Company's common shareholders will continue to decline.  Accordingly, the
Company's   Board  of  Directors   and  the   Committee   continue  to  evaluate
profitability enhancements and possibilities for corporate restructurings.


Results of Operations

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

         The  Company's  major  business  segments  consist  of  (i)  attracting
deposits  from the  general  public  and  using  such  deposits,  together  with
borrowings in the form of advances from the FHLB and other sources of funds, for
reinvestment   in  real  estate   mortgages,   other  loans,   investments   and
mortgage-backed   securities  (the  "Retail  Banking  Segment"),  and  (ii)  the
origination  by Essex  First of real  estate  mortgage  loans  for sale to third
parties with Essex Home providing  servicing in certain instances (the "Mortgage
Banking Segment").  The Retail Banking Segment depends on the difference between
interest  earned on loans and  investments  over  interest  paid on deposits and
borrowings to fund operating activities and generate a profit. Historically, the
Company's branch activities resulted in less reliance on deposit service charges
and other  ancillary  income.  However,  this  strategy is in  transition as the
Company moves to more traditional  banking,  albeit through a smaller  community
branch network.

         The Mortgage Banking Segment depends on gains from the sale of loans in
the  secondary  market and loan  servicing  income to fund  operating  expenses.
During the years ended  December  31,  1997,  1996,  and 1995,  the  predominant
percentage  of  loans  originated  for  resale  by the  Company  were  sold on a
servicing  released  basis in order to recognize  gains to  supplement  the core
capital of the Bank.  The  Mortgage  Banking  Segment  also  depends on the fees
generated  by  Essex  Home  in  connection  with  its  mortgage  loan  servicing
activities.  As of December 31, 1997, the Company serviced  approximately  5,500
loans totaling $354.2 million for nonaffiliated servicing clients.

         See Note 23 of the Notes to Consolidated  Financial  Statements for the
mix of the major  business  segments  based on the  allocation of total revenue,
loss  before  income  taxes,  depreciation  and  amortization  of  premises  and
equipment,  and  identifiable  assets between the Retail Banking Segment and the
Mortgage  Banking Segment.  The segment  information in Note 23 indicates a loss
before income taxes for the Mortgage Banking Segment for the year ended December


                                       8
<PAGE>

31, 1997. However,  intersegment income received from the Retail Banking Segment
for loan servicing and loan  originations  has been eliminated from the Mortgage
Banking  Segment's loss before income taxes and total  revenue.  If the Mortgage
Banking Segment did not perform these servicing and loan  origination  functions
for the Retail Banking  Segment,  the Company would incur costs  associated with
third party processors and capitalized loan premiums.

         General.  The Company's  net loss for the year ended  December 31, 1997
totaled  $297,000,  compared  to a net loss of $7.4  million  for the year ended
December 31, 1996 and a net loss of $1.2 million for the year ended December 31,
1995. The Home Acquisition,  which occurred on September 15, 1995, was accounted
for using the purchase  method of accounting.  Therefore,  results of operations
for the year ended  December 31, 1995 have not been restated to reflect the Home
Acquisition.

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

         During 1996,  the Company's  operating  results  benefited  from a $3.9
million  total  premium on deposits sold and a $216,000 gain on sale of premises
and equipment in connection with the sale of the Branches described in Note 5 of
the Notes to Consolidated Financial Statements.  In addition,  operating results
were favorably impacted by a $153,000 gain on sale of mortgage-backed securities
available for sale related to the sale of the Branches.  However,  the Company's
operating results were adversely  impacted by a $1.0 million loss on the sale of
loans in  connection  with  funding the sale of the  Branches and a $7.8 million
write down in goodwill  associated  with the  Branches.  Excluding the impact of
these nonrecurring transactions, the Company incurred a net loss of $2.8 million
during  1996,  which was a $1.4 million  improvement  over the $4.2 million loss
from  continuing   operations  for  the  year  ended  December  31,  1995.  This
improvement  in 1996 was the  result of a $1.1  million  reduction  in loan loss
provisions,  a $188,000 increase in net interest income and a $294,000 reduction
in  noninterest  expense as a result of gains realized on the sale of foreclosed
properties.

         During  1995,  the  Company's  operating  results  benefited  from  the
recognition of income from  extraordinary  items attributable to $2.9 million of
debt  forgiveness.  Refer  to  Note 3 of the  Notes  to  Consolidated  Financial
Statements  for a description of the  components of these  extraordinary  items.
Exclusive of the nonrecurring  income from extraordinary  items during 1995, the
Company incurred a loss from continuing  operations of $4.2 million for the year
ended December 31, 1995.  Operating results benefited from a $500,000 settlement
with the  Resolution  Trust  Corporation  ("RTC") to satisfy the RTC's  recourse
obligations as servicer of record for a balloon  second  mortgage loan portfolio
for which the Bank had previously  established  reserves in 1995.  However,  the
Company's  operating results were adversely  impacted by loan loss provisions of
$2.5  million  and lower  levels of net  interest  income and  mortgage  banking
income.

         Net Interest  Income.  Net interest  income totaled $5.3 million,  $6.1
million and $5.9 million for the years ended December 31, 1997,  1996, and 1995,
respectively.  In addition,  the net interest margin was 3.01%,  2.41% and 2.01%
for the years  ended  December  31,  1997,  1996,  and 1995,  respectively.  The
decrease  from  1996 to 1997 in net  interest  income  reflects  the loss of net
interest income  associated with assets and deposits sold in connection with the
sale  of  the  Branches  during  1996.  However,  the  net  interest  margin  on


                                       9
<PAGE>

interest-earning  assets  increased  60 basis  points from 2.41%  during 1996 to
3.01%  during 1997 as a result of an  increase in the ratio of  interest-earning
assets to  interest-bearing  liabilities  from  103.98%  during  1996 to 106.13%
during 1997, along with an increase in the yield on loans from 8.08% during 1996
to 8.53% during 1997,  which  reflected  the Bank's  emphasis on  investment  in
adjustable-rate  single-family residential loans. The net interest margin during
1997 also benefited from a decline in the Company's cost of funds resulting from
the generally lower interest rate  environment  during 1997 as compared to 1996.
Typically,  declining interest rates favorably impact the Company's earnings due
to  the   repricing  of  deposits   with  shorter   maturities  as  compared  to
interest-earning  assets,  predominantly loans, which have either fixed interest
rates or interest rates that adjust over longer periods. However, in an extended
period of lower interest rates,  the Company can also expect pressure on the net
interest  margin  resulting  from an increase in the volume of  refinancings  to
lower fixed rate loans.

         The  increase  from  1995 to 1996 in net  interest  income  and the net
interest margin on interest-earning assets reflects the impact of improvement in
the ratio of  interest-earning  assets to  interest-bearing  liabilities,  which
increased from 100.24% during 1995 to 103.98% during 1996. The most  significant
factors  impacting the  improvement in net interest income were (i) the improved
yield on loans  resulting  from  repricing of  adjustable-rate  mortgages  while
interest  rates paid on deposits  remained  constant  and (ii) the  reduction in
higher-costing  FHLB advances and notes payable.  Offsetting  such  improvements
were  the  impact  of  selling   higher-yielding   first   mortgage   loans  and
mortgage-backed  securities and maintaining  excess liquidity in  lower-yielding
interest earning assets in anticipation of funding the sales of the Branches.

         The following table presents for the periods indicated the total dollar
amount of  interest  from  average  interest-earning  assets  and the  resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates,  and the net interest  margin.  All average
balances are based on month-end  balances adjusted for branch sales occurring at
or near the end of a month.







                              [intentionally blank]




                                       10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
                                                   1997                                  1996
                                      --------------------------------     -------------------------------
                                      Average                   Yield/     Average                  Yield/
                                      Balance      Interest      Rate      Balance      Interest     Rate
                                      -------      --------      ----      -------      --------     ----
                                                                                 (dollars in thousands)
Interest-earning assets:
   Loans (1)......................    $159,370     $13,588    8.53%        $221,215     $17,882    8.08%
   Investment securities..........       6,457         354    5.48           11,012         615    5.59
   Mortgage-backed securities (2).       1,905         124    6.54            6,320         498    7.95
   Federal funds sold and securities
     purchased under agreements
     to resell....................       2,757         151    5.48            6,094         319    5.24
   Other..........................       6,024         330(3)
5.48           10,094         558(3) 5.38
                                      --------    --------                 --------    --------
      Total interest-earning assets    176,513      14,547(3) 8.24          254,735      19,872(3) 7.80
Cash..............................       2,065                                3,083
Other, less allowance for loan losses                7,831                               11,944
                                                  --------                             --------
   Total assets...................    $186,409                             $269,762
                                       =======                              =======

Interest-bearing liabilities:
   Time deposits..................    $111,394       6,381   5.73%         $183,710      10,620    5.78%
   Other deposits.................      29,584       1,298    4.39           33,218       1,325    3.99
                                      --------     -------                 --------     -------
      Total deposits..............     140,978       7,679    5.45          216,928      11,945    5.51
   Notes payable..................          96           9    9.50              113          11    9.50
   FHLB advances..................      24,885       1,474    5.92           27,137       1,626    5.99
   Subordinated capital notes.....           -           -       -              399          52   13.15
   Other..........................         360          68(4)18.29              405         130(4)18.32
                                     ---------    --------               ----------    --------               -
      Total interest-bearing
         liabilities..............     166,319       9,230(4) 5.55          244,982      13,764(4) 5.60
                                                   -------                               ------
Demand deposits...................       3,143                                1,433
Other.............................       1,795                                4,675
                                     ---------                            ---------
   Total liabilities..............     171,257                              251,090

Redeemable preferred stock........           -                                    -
Shareholders' equity..............      15,152                               18,672
                                      --------                             --------
   Total liabilities and
      shareholders' equity........    $186,409                             $269,762
                                       =======                              =======

Net interest earnings.............                $  5,317                             $  6,108
                                                   =======                              =======
Net interest spread (2)(3)(4).....                            2.69%                                2.20%
                                                              ====                                 ====
Net interest margin (2)(3)(4)(5)..                            3.01%                                2.41%
                                                              ====                                 ====
Average interest-earning assets
   to average interest-bearing
   liabilities....................                          106.13%                              103.98%
                                                            ======                               ======

                                                     1995
                                      ---------------------------------
                                       Average                   Yield/
                                       Balance      Interest      Rate
                                       -------      --------      ----

Interest-earning assets:
   Loans (1)......................     $254,548    $19,779    7.77%
   Investment securities..........       14,694        836    5.69
   Mortgage-backed securities (2).       16,991      1,286    7.57
   Federal funds sold and securities
     purchased under agreements
     to resell....................        4,011        280    6.98
   Other..........................        5,210        366(3) 6.69
                                      ---------   --------
      Total interest-earning assets     295,454     22,547(3) 7.63
Cash..............................        2,739
Other, less allowance for loan losses               13,242
                                                  --------
   Total assets...................     $311,435
                                        =======

Interest-bearing liabilities:
   Time deposits..................     $213,605     12,284    5.75%
   Other deposits.................       32,084      1,221    3.81
                                       --------    -------
      Total deposits..............      245,689     13,505    5.50
   Notes payable..................        1,360        131    9.61
   FHLB advances..................       46,617      2,798    6.00
   Subordinated capital notes.....          621         73   11.78
   Other..........................          459        120(4)17.94
                                     ----------   --------
      Total interest-bearing
         liabilities..............      294,746     16,627(4) 5.63
                                                    ------
Demand deposits...................        1,285
Other.............................        3,365
                                     ----------
   Total liabilities..............      299,396

Redeemable preferred stock........          615
Shareholders' equity..............       11,424
                                       --------
   Total liabilities and
      shareholders' equity........     $311,435
                                        =======

Net interest earnings.............                $  5,920
                                                   =======
Net interest spread (2)(3)(4).....                            2.00%
                                                              ====
Net interest margin (2)(3)(4)(5)..                            2.01%
                                                              ====
Average interest-earning assets
   to average interest-bearing
   liabilities....................                          100.24%
                                                            ======

</TABLE>

(1)   Nonaccrual loans and loans classified as held for sale are included in the
      average balance of loans.
(2)   Calculation  is based  on  historical  cost  balances  of  mortgage-backed
      securities  available for sale and does not give effect to changes in fair
      value that are reflected as a component of shareholders' equity.
(3)   Yield  calculation  in 1997,  1996, and 1995 includes the accretion of net
      deferred  loan fees and  excludes  $15,140  and  $17,378 in 1996 and 1995,
      respectively,  which  consists  primarily of interest  earned on custodial
      accounts maintained for servicing investors.
(4)   Rate  calculation  in 1997,  1996, and 1995 excludes  $1,873,  $56,004 and
      $37,995, respectively, which consists primarily of interest paid on escrow
      accounts.
(5)   Net   interest   margin  is  net  interest   income   divided  by  average
      interest-earning assets.




                                       11
<PAGE>



         The  following  table  presents the extent to which changes in interest
rates and  changes in volume of  interest-related  assets and  liabilities  have
affected the Company's interest income and expense during the periods indicated.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume  multiplied by prior year rate),  (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined  effect  of  changes  in  both  rate  and  volume  has  been  allocated
proportionately to the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
<S> <C>
                                                Increase (Decrease) From           Increase (Decrease) From
                                                   1996 to 1997 Due to               1995 to 1996 Due to
                                           -------------------------------      -------------------------------
                                              Rate      Volume        Net         Rate      Volume       Net
                                              ----      ------        ---         ----      ------       ---
                                                                      (dollars in thousands)
     Interest income on:
       Loans (1)                               $934    $(5,228)   $(4,294)          $773    $(2,670)   $(1,897)
       Investment securities                    (11)      (250)      (261)           (15)      (206)      (221)
       Mortgage-backed securities               (77)      (297)      (374)            62       (850)      (788)
       Federal funds sold and securities
         purchased under agreements
         to resell                               14       (182)      (168)           (82)       121         39
       Other interest-earning assets              9       (237)      (228)           (82)       274        192
                                               ----    -------   --------           ----   --------  ---------
               Total interest income (2)        869     (6,194)    (5,325)           656     (3,331)    (2,675)
                                               ----    -------   --------           ----   --------  ---------


     Interest expense on:
       Time deposits                            (96)    (4,143)    (4,239)            64     (1,728)    (1,664)
       Other deposits                           126       (153)       (27)            60         44        104
       Notes payable                              -         (2)        (2)            (2)      (118)      (120)
       FHLB advances                            (18)      (134)      (152)            (5)    (1,167)    (1,172)
       Subordinated capital notes               (26)       (26)       (52)             8        (29)       (21)
       Other interest-bearing
         liabilities                              -        (62)       (62)            20        (10)        10
                                               ----    -------   --------           ----   --------  ---------
               Total interest expense           (14)    (4,520)    (4,534)           145     (3,008)    (2,863)
                                               ----    -------   --------           ----   --------  ---------

               Net interest income             $883    $(1,674)  $   (791)          $511   $   (323) $     188
                                               ====    =======   ========           ====   ========  =========

</TABLE>

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

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

         For the years ended December 31, 1997,  1996, and 1995,  provisions for
loan losses amounted to $113,000,  $1.4 million and $2.5 million,  respectively.
The lower  provision  for loan losses  during 1997  reflected  the impact of the
improvement  in asset  quality.  In  addition,  a  $329,000  recovery  on a loan
guarantee during 1997 was used to increase the loan loss allowance. The level of
the provision for loan losses during 1996 and 1995 was necessary to maintain the
allowance  for loan  losses at an  adequate  level  after it was  reduced by net
charge-offs  of $4.1 million and $1.2  million,  respectively.  Net  charge-offs
during 1997  totaled  $288,000.  The ratio of the  allowance  for loan losses to


                                       12
<PAGE>

total  nonperforming  loans was 133% at December 31,  1997,  81% at December 31,
1996 and 82% at December 31, 1995.  In addition,  the ratio of the allowance for
loan losses to total loans held for  investment  was 1.4% at December  31, 1997,
1.7% at December 31, 1996 and 1.9% at December 31, 1995.

         Although  management  utilizes  its  best  judgment  in  providing  for
possible  losses,  there can be no  assurance  that the Company will not have to
increase its  provision  for loan losses in the future as a result of unforeseen
changes in the portfolio. Any such increase could adversely affect the Company's
results of operations. In addition, the Office of Thrift Supervision ("OTS"), as
an integral part of its regulatory examination process, periodically reviews the
Company's  allowance  for  loan  losses  and the  carrying  value  of its  other
nonperforming  assets. The OTS may require the Company to recognize additions to
its  allowance  for  losses  on loans and  allowance  for  losses on  foreclosed
properties based on the OTS's judgment about information  available to it at the
time of its examination.

         Noninterest   Income.   The  following  table  sets  forth  information
regarding noninterest income for the years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
                                                           1997             1996              1995
                                                           ----             ----              ----
         Loan servicing fees.........................   $1,312,476        $1,665,768       $1,765,617
         Mortgage banking income.....................      458,520           577,130          504,715
         Other service charges and fees..............      368,671           497,316          428,811
         Net gain (loss) on sales of:
              Securities.............................            -           153,188                -
              Loans..................................       (1,458)       (1,018,185)         115,538
              Deposits...............................            -         1,940,010                -
         Other.......................................      324,596           466,519          357,309
                                                        ----------        ----------       ----------
                                                        $2,462,805        $4,281,746       $3,171,990
                                                         =========         =========        =========
</TABLE>

         Total noninterest income amounted to $2.5 million during the year ended
December  31,  1997,  a $1.8  million or 42.5%  decrease  from the $4.3  million
recognized  during the year ended December 31, 1996.  Noninterest  income during
1997 included (i) an aggregate  gain of $97,000 on the sale of the Bank's former
Newport News and Portsmouth,  Virginia branch facilities,  which had been vacant
since the sale of related  deposits in September 1996 and (ii)  termination fees
approximating  $113,000  received in connection  with the  cancellation of Essex
Home's  largest   subservicing   client's  contract   effective  May  31,  1997.
Noninterest income in 1996 included the gains on sales of securities,  deposits,
and premises and equipment, which totaled $2.3 million, associated with the sale
of the  Branches,  which were  partially  offset by a $1.0 million loss on loans
sold to  partially  fund the sale of the  Branches.  Exclusive of the impacts of
these  transactions  during 1997 and 1996, the effective  decline in noninterest
income during the year ended  December 31, 1997 was  $738,000.  This decline was
primarily   attributable  to  (i)  lower  loan  servicing  fees  resulting  from
fluctuations in loan servicing  volume  including the impact of the subservicing
contract cancellation effective May 31, 1997, (ii) lower mortgage banking income
resulting from fewer loans  originated for sale in the secondary market as Essex
First focused on expanding  its  construction  lending  programs and (iii) lower
service  charges  and  fees  resulting  primarily  from the  Bank's  sale of the
Branches during 1996.

         Total noninterest income amounted to $4.3 million during the year ended
December  31,  1996,  a $1.1  million or 35.0%  increase  from the $3.2  million
recognized  during the year ended December 31, 1995. The increase  resulted from
the gains on sales of  securities,  deposits and premises and  equipment,  which
totaled $2.3 million, associated with the sale of the Branches described in Note
5 of the Notes to Consolidated Financial Statements, which were partially offset
by a $1.0 million loss on loans sold to partially fund the sale of the Branches.
Exclusive of these transactions related to the sale of the Branches, noninterest


                                       13
<PAGE>

income  decreased  $181,000  during  the year ended  December  31,  1996,  which
resulted from a $107,000  decrease in other  noninterest  income during 1996 and
the  nonrecurrence of the $115,000 gain on sale of loans recognized  during 1995
as a result of a loan sale required to ensure  compliance with regulatory growth
restrictions in effect prior to the Home Acquisition.

         Noninterest   Expense.  The  following  table  sets  forth  information
regarding noninterest expense for the years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
                                                           1997             1996              1995
                                                           ----             ----              ----
         Salaries and employee benefits..............   $3,788,695        $4,554,540     $  4,387,760
         Net occupancy and equipment.................    1,084,593         1,470,284        1,671,352
         Deposit insurance premiums..................      478,684           674,730          722,106
         Amortization of intangible assets...........      530,707         7,011,288          956,257
         Service bureau fees.........................      461,217           599,207          523,526
         Professional fees...........................      349,218           507,031          476,224
         Foreclosed properties, net..................      182,880          (175,055)         187,715
         Other.......................................    1,087,362         1,713,958        1,845,102
                                                         ---------       -----------      -----------
                                                        $7,963,356       $16,355,983      $10,770,042
                                                         =========        ==========       ==========
</TABLE>
         Total  noninterest  expense  amounted to $8.0  million  during the year
ended  December  31,  1997,  a decrease of $8.4  million or 51.3% from the $16.4
million  recognized  during the year ended  December 31,  1996.  The sale of the
Branches during 1996 had a pervasive impact on noninterest  expense. In addition
to the $5.9  million  write  down in the net asset  value of certain of the sold
Branches, total noninterest expense associated with the sold Branches, including
normal amortization of goodwill, approximated $1.7 million during the year ended
December 31, 1996.  Noninterest  expense as a percent of average assets was 4.3%
for the year ended  December 31, 1997, as compared to 3.9%  (excluding  the $5.9
million write down of goodwill) for the year ended December 31, 1996.

         Salaries and employee  benefits declined $766,000 or 16.8% during 1997.
This decrease  resulted  primarily from nonrecurring  personnel  expenses during
1996 totaling  $367,000  associated with the sold Branches and the impact of the
Company's  downsizing efforts,  which resulted in a decline in the number of the
Company's  full-time and part-time employees from 114 as of December 31, 1996 to
99 as of December 31, 1997.  These decreases were partially offset by an $82,000
increase in compensation  expense associated with certain of the Company's stock
options and a $136,500  severance  settlement with the former  president of Home
Bancorp and Home Savings.

         Net occupancy and equipment  expense declined  $386,000 or 26.2% during
1997. This decrease resulted primarily from nonrecurring occupancy and equipment
expenses during 1996 totaling $227,000 associated with the sold Branches and the
relocation of the Company's corporate  headquarters to a smaller more economical
facility.  These  decreases were partially  offset by a $28,000  estimated lease
termination  penalty in connection  with the  relocation of the Bank's  Suffolk,
Virginia retail bank branch.

         Deposit insurance premiums declined $196,000 or 29.1% during 1997. This
decrease  reflects the reduction in the deposit  assessment  base resulting from
the  sale of the  Branches,  as  well  as the  improvement  in the  Bank's  risk
classification for assessment purposes.  Refer to "Regulatory Matters" below for
a discussion  of matters  impacting  the  Company's  deposit  assessment  in the
future.  Likewise,  service bureau fees declined  $138,000 or 23.0% during 1997.
This decrease was  primarily  attributable  to the  reduction in deposits  which
occurred in connection with the sale of the Branches.

         Amortization of intangible assets declined $6.5 million or 92.4% during
1997. This decrease was attributable to nonrecurring expense during 1996 arising
from the $541,000  amortization  of goodwill and the $5.9 million  write down of
goodwill associated with certain of the sold Branches.



                                       14
<PAGE>

         Professional fees declined $158,000 or 31.1% during 1997. This decrease
was  attributable  to the  cancellation  of a consulting  contract that had been
entered into in connection with the Home Acquisition.

         Foreclosed properties expense increased $358,000 during 1997, which was
attributable  to  nonrecurring  gains  recognized in 1996 in connection with the
sale of the Bank's largest foreclosed  property  consisting  originally of 2,554
acres of farmland located in Currituck,  North Carolina and the sale of lots and
townhouse pads associated with a townhouse development in Richmond.

         The significant  components of other miscellaneous  noninterest expense
for the years ended December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
<S> <C>
                                                                                            Change
                                                   1997               1996            Amount      Percent
                                                   ----               ----            ------      -------
         Loan expense.......................   $   150,457       $   280,041         $(129,584)    (46.3)%
         Telephone..........................       175,474           225,599           (50,125)    (22.2)
         Postage and courier................       153,349           200,300           (46,951)    (23.4)
         Stationery and supplies............        99,545           131,572           (32,027)    (24.3)
         Advertising and marketing..........       155,654           185,191           (29,537)    (15.9)
         Corporate insurance................       116,882           182,009           (65,127)    (35.8)
         Travel.............................        47,453            76,301           (28,848)    (37.8)
         Provision for servicing losses.....        24,000            26,000            (2,000)     (7.7)
         Other..............................       164,548           406,945          (242,397)    (59.6)
                                                ----------        ----------          --------
                                                $1,087,362        $1,713,958         $(626,596)    (36.6)
                                                 =========         =========          ========
</TABLE>
         Total  noninterest  expense  amounted to $16.4 million  during the year
ended  December  31,  1996,  an increase of $5.6 million or 51.9% from the $10.8
million  recognized during the year ended December 31, 1995. The largest portion
of the  increase in  noninterest  expense was  attributable  to the $6.1 million
increase in the amortization of intangible assets. The Company recorded goodwill
of approximately $8.6 million in connection with the Home Acquisition, which was
being  amortized  on an  accelerated  basis  over 15 years.  For the year  ended
December 31, 1996, normal  amortization of this goodwill totaled $541,000.  As a
result of the Bank's  decision to sell certain of the  branches  acquired in the
Home Acquisition,  the Bank recognized  additional  amortization of $5.9 million
during the  second  quarter of 1996.  Exclusive  of the write down of  goodwill,
noninterest  expense declined  $294,000 during the year ended December 31, 1996.
The  decline  was  primarily  attributable  to (i) a  $201,000  decrease  in net
occupancy and equipment  expense  resulting from the downsizing of the Company's
leased  corporate  facilities  and the closure of Essex First's loan  production
offices in  Chesapeake  and Manassas,  Virginia and (ii) a $363,000  decrease in
foreclosed  properties  expense  resulting  from gains on the sale of foreclosed
properties.  These  declines  were  partially  offset by a $167,000  increase in
salaries  and  employee  benefits  resulting  from an increase  in  compensation
expense associated with certain of the Company's stock options.





                                       15
<PAGE>




         The significant  components of other miscellaneous  noninterest expense
for the years ended December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
<S> <C>
                                                                                            Change
                                                   1996               1995            Amount      Percent
                                                   ----               ----            ------      -------
         Loan expense.......................   $   280,041       $   208,747           $71,294     34.2%
         Telephone..........................       225,599           279,228           (53,629)   (19.2)
         Postage and courier................       200,300           198,993             1,307       .7
         Stationery and supplies............       131,572           198,086           (66,514)   (33.6)
         Advertising and marketing..........       185,191           237,628           (52,437)   (22.1)
         Corporate insurance................       182,009           157,364            24,645     15.7
         Travel.............................        76,301            80,682            (4,381)    (5.4)
         Provision for servicing losses.....        26,000             9,000            17,000    188.9
         Other..............................       406,945           475,374           (68,429)   (14.4)
                                                ----------        ----------         ---------
                                                $1,713,958        $1,845,102         $(131,144)    (7.1)
                                                 =========         =========          ========
</TABLE>
         Provision  For  Income  Taxes.   There  was  no  income  tax  provision
recognized for financial  reporting purposes during the years ended December 31,
1997,  1996, or 1995 because the Company has  significant net tax operating loss
carryforwards,  which  approximated  $19.9  million at December 31, 1997.  Also,
until  consistent  profitability  is  demonstrated,  deferred  income tax assets
related to the  Company's  net tax operating  loss  carryforwards  and temporary
differences will not be recognized.  For additional information,  see Note 14 of
the Notes to Consolidated Financial Statements.


Market Risk Management

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

         The Bank has  established an Asset and Liability  Management  Committee
that meets quarterly to structure and price the Bank's assets and liabilities in
order to maintain an acceptable  interest rate spread while reducing the effects
of changes in interest rates.

         The Bank's Asset and  Liability  Management  Committee,  following  its
formation in 1992,  implemented asset and liability management policies designed
to  better   match  the   maturities   and   repricing   terms  of  the   Bank's
interest-earning  assets and  interest-bearing  liabilities in order to minimize
the adverse effects of material and prolonged increases in interest rates on the
Bank's results of operations. The Bank has undertaken a variety of strategies to
reduce its exposure to interest rate  fluctuations,  including  (i)  emphasizing
investment  in  adjustable-rate  single-family  residential  loans  ("ARMs")  or
shorter-term (seven years or less), fixed-rate single-family  residential loans;
(ii)  selling   longer-term   (over  seven  years),   fixed-rate   single-family
residential  loans in the secondary  market;  (iii)  purchasing  adjustable-rate


                                       16
<PAGE>

mortgage-backed   securities;  (iv)  maintaining  higher  liquidity  by  holding
short-term  investments  and cash  equivalents;  and (v)  increasing the average
maturity  of the Bank's  interest-bearing  liabilities  by  utilizing  long-term
advances and attempting to attract longer-term retail deposits.

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

         The  following  table  presents  the  difference   between  the  Bank's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at December 31, 1997.  Data for this table was obtained from the FHLB
Interest  Rate Risk  Service  Sensitivity  Report,  adjusted in some cases where
management was able to use more detailed  information  than was available to the
FHLB. Using the Bank's Thrift Financial Report, which details scheduled maturity
and  interest  rates,  the FHLB  applies  asset  prepayment  rates  and  deposit
retention  rates which  management  believes to be reasonable in determining the
interest rate  sensitivity  gaps. This table does not  necessarily  indicate the
impact of general  interest  rate  movements on the Bank's net  interest  income
because  the  repricing  of  certain  assets  and   liabilities  is  subject  to
competition and other limitations.  As a result,  certain assets and liabilities
indicated as maturing or otherwise  repricing within a stated period may in fact
mature or reprice at different times and at different volumes. In addition,  the
following  table  presents  information  as of  December  31,  1997  and  is not
necessarily  indicative  of the Bank's  interest rate  sensitivity  at any other
time.




                              [intentionally blank]

                                       17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>

                                                   Anticipated Period Until Maturity or Repricing
                                ---------------------------------------------------------------------------------
                                    0 to       7 months      1-3         3-5        Over 5        Total     % of
                                  6 months     to 1 year    years       years        years       Balance    Total
                                  --------     ---------    -----       -----        -----       -------    -----
                                                              (dollars in thousands)
Interest-earning assets:
Loans receivable and
  mortgage-backed securities:
    First mortgage:
      Adjustable-rate             $ 32,586    $ 25,954    $  8,088    $ 15,393 $         -       $ 82,021 44.9%
      Fixed-rate                     5,638       5,069      15,857      16,854      21,698         65,116  35.6
    Second mortgage                  4,427         606       1,886       1,231         337          8,487   4.6
    All other                        7,046       1,303       5,153          21         339         13,862   7.6
Investments                         12,947           -         299           -           -         13,246   7.3
                                    ------ -----------   --------- -----------  ----------       -------- -----

    Total                           62,644      32,932      31,283      33,499      22,374       $182,732 100.0%
                                                                                                  ======= =====

Interest-bearing liabilities:
    Deposits                        66,980      33,183      36,512      10,992       5,345       $153,012  86.5
    Fixed-rate borrowings           12,582       6,567       2,625         100           -         21,874  12.4
    Variable-rate borrowings         2,000           -           -           -           -          2,000   1.1
                                   ------- ----------- ----------- -----------  ----------      ---------  ----

    Total                           81,562      39,750      39,137      11,092       5,345       $176,886 100.0%
                                                                                                  ======= =====

Effect of off-balance sheet
    items (1)                       (7,782)      4,398         779         605       1,991
                                  --------    --------   ---------   ---------     -------

Maturity gap                      $(26,700)  $  (2,420)  $  (7,075)   $ 23,012     $19,020
                                   =======    ========    ========     =======      ======

Cumulative gap                    $(26,700)   $(29,120)   $(36,195)   $(13,183)   $  5,837
                                   =======     =======     =======     =======     =======

Cumulative gap as a percent
    of total assets                  (13.7)%     (14.9)%     (18.6)%      (6.8)%       3.0%
                                     =====       =====       =====        ====         ===

Cumulative ratio of interest-
    earning assets to interest-
    bearing liabilities               76.8%       78.8%       79.1%       93.5%      103.3%
                                      ====        ====        ====        ====       =====
</TABLE>
(1)  Reflects  the effect of entering  into  commitments  with third  parties to
originate and sell loans.

         The  Bank's  one-year  interest  rate  sensitivity  gap  amounted  to a
negative  14.9% at December 31, 1997,  which  reflects the impact of  shortening
deposit  maturities as the Bank's deposit  customers are reluctant to enter into
extended  maturities in the current low interest rate environment.  The negative
gap also reflects near-term maturities of higher-rate FHLB advances. The Company
will benefit from the lower cost of funds as these FHLB advances  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.

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





                                       18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>

                                       Net Portfolio Value                      NPV as % of PV of Assets
     Change in             ----------------------------------------           --------------------------
  Interest Rates           $ Amount          $ Change         % Change           NPV Ratio          Change
  --------------           --------          --------         --------           ---------          ------
      +400bp               $  7,069          $(10,816)         (60.48)%           3.86%             (519)bp
      +300bp                 10,322            (7,563)         (42.29)             5.51             (353)bp
      +200bp                 13,407            (4,477)         (25.04)             7.01             (204)bp
      +100bp                 16,039            (1,846)         (10.32)             8.23              (81)bp
   Base Scenario             17,885                                                9.05
      -100bp                 18,779               894            5.00              9.41               36bp
      -200bp                 18,957             1,073            5.99              9.43               38bp
      -300bp                 19,395             1,510            8.44              9.57               52bp
      -400bp                 20,234             2,349           13.13              9.88               83bp
</TABLE>
         The Bank's Asset and Liability  Management  Committee  has  established
limits for the impact of changes in interest  rates on NPV.  As of December  31,
1997,  the  Bank  is more at risk to  rising  interest  rate  environments  than
declining    interest   rate    environments,    which   reflects   the   Bank's
liability-sensitive  position.  As of December 31, 1997, the Bank is outside its
NPV policy limits for  increases in interest  rates of 200 basis points or more.
However,  computation  of  prospective  effects of  hypothetical  interest  rate
changes  are  based on many  assumptions,  including  relative  levels of market
interest rates,  loan prepayments and deposits decay.  They should not be relied
upon  as  indicative  of  actual  results.  Further,  the  computations  do  not
contemplate  certain actions management could undertake in response to change in
interest rates.

Liquidity and Commitments

         Liquidity refers to the Company's  ability to generate  sufficient cash
to meet the funding needs of current loan demand,  deposit  withdrawals,  and to
pay  operating  expenses.  The Company  generally has no  significant  source of
income other than  dividends  from its  subsidiaries.  While the Company and the
Bank are no longer  operating  under any supervisory  agreements,  the Bank must
seek a letter of nonobjection  from the OTS prior to making dividend payments to
the holding company.

         All savings  associations  are  required  to maintain an average  daily
balance of liquid  assets  (including  cash,  certain time  deposits and savings
accounts, bankers' acceptances, certain government obligations and certain other
investments)  equal to a  certain  percentage  of the sum of its  average  daily
balance of net withdrawable  deposit accounts and borrowings payable in one year
or less.  The liquidity  requirement  may vary from time to time (between 4% and
10%)  depending  upon  economic  conditions  and  savings  flows of all  savings
associations.  At the present time,  the required  minimum liquid asset ratio is
4%. The Bank has  consistently  exceeded such regulatory  liquidity  requirement
and, at December 31, 1997, had a liquidity ratio of 8.72%.

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

         The Bank's liquidity  management is both a daily and long-term function
of funds management.  Liquidity is generally invested in short-term  investments
such as federal funds sold,  certificates of deposit,  and in U.S.  Treasury and
U.S.  Government  agency  securities of maturities of five years or less. If the


                                       19
<PAGE>

Bank requires funds which cannot be generated  internally,  borrowings  from the
FHLB may provide an additional  source of funds.  At December 31, 1997, the Bank
had $23.5  million in  outstanding  borrowings  from the FHLB.  The Bank has not
relied  upon  brokered  deposits  as a  source  of new  liquidity,  and does not
anticipate a change in this practice in the foreseeable future.

         The Bank  anticipates  that it will have sufficient  funds available to
meet  its  current  loan  commitments.  At  December  31,  1997,  the  Bank  had
outstanding  commitments  (including unused lines of credit) to originate and/or
purchase  mortgage and non-mortgage  loans of $404,000.  Certificates of deposit
which are  scheduled to mature within one year totaled $76.7 million at December
31, 1997, and  borrowings  from the FHLB that are scheduled to mature within the
same period amounted to $21.1 million. The undisbursed portions of Essex First's
construction builder loans and  construction/permanent  loans in process totaled
$2.9 million and $7.5 million, respectively, as of December 31, 1997.


Regulatory Capital

         The Bank is required  pursuant to the  Financial  Institutions  Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and OTS regulations  promulgated
thereunder to have (i) tangible  capital equal to 1.5% of adjusted total assets,
(ii) core  capital  equal to 3.0% of  adjusted  total  assets,  and (iii)  total
capital  equal to 8.0% of  risk-weighted  assets.  As of December 31, 1997,  the
Bank's tangible and core capital  amounted to 7.86% of adjusted total assets and
the  Bank's  total  capital  amounted  to 14.33% of  risk-weighted  assets  and,
consequently,  the Bank was in compliance  with its core and risk-based  capital
requirements as of such date.

         Furthermore,   the  federal   regulations  under  the  Federal  Deposit
Insurance   Corporation  ("FDIC")  Improvement  Act  of  1991  classify  savings
institutions  based on four  separate  requirements  of  specified  capital as a
percent of the appropriate  asset base:  tangible  equity,  Tier I core capital,
Tier I risk-based  capital,  and total risk-based capital. At December 31, 1997,
the Bank's Tier I core, Tier I risk-based,  and total risk-based  capital ratios
were 7.86%,  13.08%, and 14.33%,  respectively,  compared to the minimum capital
standards  to be  "well  capitalized"  under  the FDIC  Improvement  Act of 1991
("FDICIA")  of =>5%,  =>6%,  and =>10%,  respectively.  As a result,  the dollar
amount  of the  excess  in  the  Bank's  Tier I  core,  Tier I  risk-based,  and
risk-based  regulatory capital under FDICIA totaled $5.6 million,  $8.3 million,
and $5.1 million, respectively, at December 31, 1997.

         Deposits of the Bank are currently  insured by the Savings  Association
Insurance Fund ("SAIF").  Both the SAIF and the Bank Insurance Fund ("BIF"), the
deposit   insurance  fund  that  covers  most  commercial  bank  deposits,   are
statutorily  required to be recapitalized to a ratio of 1.25% of insured reserve
deposits.  The BIF has achieved the required reserve ratio, and as a result, the
FDIC reduced the average deposit  insurance premium paid by BIF-insured banks to
a level  substantially  below the average premium paid by savings  institutions.
Banking  legislation  was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation   provided   that   all   insured   depository   institutions   with
SAIF-assessable  deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF.  Pursuant to this legislation,  the FDIC promulgated a


                                       20
<PAGE>

rule that established the special assessment  necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable  deposits held by affected  institutions
as of March 31, 1995. However, as a result of the Bank's financial condition, on
November 8, 1996,  the Bank was  notified by the FDIC that its  application  for
exemption had been  approved.  As a result,  the Bank was exempt from paying the
special  one-time  assessment  (which  would  have  amounted  to $1.8  million).
Instead,  the  Bank  will  continue  to  pay  assessments  through  1999  at the
assessment  rate  schedule  in  effect  as of June 30,  1995.  Therefore,  as of
December 31, 1997,  the Bank's annual  assessment  for deposit  insurance was 26
basis  points of insured  deposits as opposed to three  basis  points of insured
deposits (the assessment rate otherwise in effect for "well capitalized" savings
institutions).

         Another  component of the SAIF  recapitalization  plan provides for the
merger  of the  SAIF  and  the BIF on  January  1,  1999,  provided  no  insured
depository  institution is a savings association on that date. If legislation is
enacted which requires the Bank to convert to a bank charter,  the Company would
become a bank holding  company subject to the more  restrictive  activity limits
imposed on bank holding  companies  unless  special  grandfather  provisions are
included in the  legislation.  The Company does not believe that its  activities
would be materially  affected in the event that it was required to become a bank
holding company. In addition,  although a merger of the insurance funds will not
become effective until 1999,  insured  depository  institutions  began paying in
1997 a  portion  of the  interest  due  annually  on the  Financing  Corporation
("FICO") bonds issued in the 1980s to provide funding for the SAIF. Accordingly,
an additional assessment  approximating 6.4 basis points is added to the regular
SAIF-assessment  until  December  31,  1999 in order to cover FICO debt  service
payments.


Year 2000 Costs

         As the  millennium  approaches,  a  company-wide  task  force  has been
assembled to assess business risks  associated  with the Year 2000.  These risks
arise  primarily  from the  inability  of older  computer  software  systems  to
properly  recognize  the year 2000 because of a  predominant  convention  within
computer  programs  to  shorten  dates  to the  last  two  digits  of any  year.
Accordingly,  the Company will review all internal  systems and  operations,  as
well as strategic  relationships with others (i.e.,  service bureaus for deposit
processing and loan servicing,  forms vendors,  commercial borrowers), to ensure
that any malfunction as a result of the Year 2000 will not critically impair the
Company's ability to deliver products and services to its business partners.  As
a result of this  assessment,  the Company  expects to both replace some systems
and upgrade some others.  The Company is  utilizing  both  internal and external
resources to identify,  correct or reprogram  and test the systems for Year 2000
compliance.  It is anticipated that all  reprogramming  and replacement  efforts
will be complete by December 31, 1998,  allowing  adequate  time for testing and
contingency  plan  implementation  as needed.  The total cost of the  project is
estimated  to be $350,000  and is being  funded  through  operating  cash flows.
Maintenance or modification costs will be expensed as incurred,  while the costs
of new hardware and software will be capitalized and amortized over their useful
lives.  Management  believes that most of the  capitalized  costs are associated
with  technology  changes  that will enable the  Company to provide  competitive
services. The expenses incurred during the year ended December 31, 1997 were not
material.  Management  believes  the  Company  can  incur  these  costs  without
adversely affecting future operating results. However, because of the complexity
of the issue and  possible  unidentified  risks,  actual costs may vary from the
estimate.  Management  has discussed its  assessment and plans with the Board of
Directors.  In addition,  the OTS will periodically  perform  evaluations of the
Company's Year 2000 readiness.


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

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



                                       21
<PAGE>




Quarterly Results of Operations

         Quarterly  unaudited  financial  data for the years ended  December 31,
1997 and 1996 is presented below (dollars in thousands, except per unit data).
<TABLE>
<CAPTION>
<S> <C>

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

         Net interest income                        $1,212             $1,367           $1,353          $1,385
         Provision for loan losses                     (22)               107               30              (1)
                                                   -------             ------           ------         -------
         Net interest income after
           provision for loan losses                 1,234              1,260            1,323           1,386
         Noninterest income                            603                806              521             532
         Noninterest expenses                        1,819              1,676            2,335           2,131
                                                     -----              -----            -----           -----
         Net income (loss)                        $     18            $   390           $ (491)         $ (213)
                                                   =======             ======            =====           =====

         Net loss available to common
           stockholders                           $   (378)           $   (14)          $ (903)         $ (638)
                                                    ======            =======            =====           =====

         Basic and diluted net loss per
           common share                           $   (.36)           $  (.01)          $ (.85)         $ (.60)
                                                    ======            =======            =====           =====

<CAPTION>

                                                                         Year Ended December 31, 1996
                                                  -------------------------------------------------------------
                                                    1st                 2nd             3rd               4th
                                                  Quarter             Quarter         Quarter           Quarter
                                                  -------             -------         -------           -------

         Net interest income                        $1,767            $ 1,651           $1,477          $1,213
         Provision for loan losses                       -                803              575              33
                                                 ---------            -------           ------         -------
         Net interest income after
           provision for loan losses                 1,767                848              902           1,180
         Noninterest income                          2,007                682              833             760
         Noninterest expenses                        3,178              9,047            2,488           1,643
                                                     -----             ------            -----           -----
         Net income (loss)                         $   596            $(7,517)         $  (753)        $   297
                                                    ======             ======           ======          ======

         Net income (loss) available to
           common stockholders                     $   243            $(7,870)         $(1,107)       $    (90)
                                                    ======             ======           ======         =======

         Basic net income (loss) per
           common share                            $   .23            $  (7.49)        $ (1.05)       $   (.09)
                                                   =======             =======          ======         =======

         Diluted net income (loss) per
           common share equivalent                 $   .04            $  (7.49)        $ (1.05)       $   (.09)
                                                   =======             =======          ======         =======
</TABLE>





                                       22
<PAGE>










                        Report of Independent Accountants

February 18, 1998

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

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  of  shareholders'  equity,  and of cash
flows present fairly, in all material respects,  the financial position of Essex
Bancorp,  Inc.  and its  subsidiaries  at December  31,  1997 and 1996,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP





                                       23
<PAGE>
<TABLE>


                                        ESSEX BANCORP, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                            December 31, 1997 and 1996
<CAPTION>

                                                                                    1997            1996
                                                                                    ----            ----
<S> <C>
ASSETS
    Cash..................................................................... $    2,023,197  $    1,824,160
    Interest-bearing deposits................................................      6,261,686       1,727,091
    Federal funds sold and securities purchased under agreements to resell...      2,748,000       2,644,000
                                                                                ------------    ------------
             Cash and cash equivalents.......................................     11,032,883       6,195,251
    Federal Home Loan Bank stock.............................................      1,431,000       2,540,000
    Securities available for sale - cost approximates market.................         17,451           9,162
    Securities held for investment - market value of $2,217,000 in 1997
      and $5,890,000 in 1996.................................................      2,299,120       6,003,219
    Mortgage-backed securities held for investment - market value of
      $1,886,000 in 1997 and $1,869,000 in 1996..............................      1,904,989       1,905,327
    Loans, net of allowance for loan losses of $2,382,000 in 1997 and
      $2,556,000 in 1996.....................................................    167,440,733     145,550,845
    Loans held for sale......................................................      2,165,074       2,462,525
    Mortgage servicing rights................................................      1,169,766       1,349,160
    Foreclosed properties, net...............................................      1,511,629       2,054,213
    Accrued interest receivable..............................................      1,196,980       1,147,933
    Excess of cost over net assets acquired, less accumulated
      amortization of $2,078,000 in 1997 and $2,016,000 in 1996..............        159,754         221,815
    Advances for taxes, insurance, and other.................................        633,053         790,928
    Premises and equipment, net..............................................      1,926,729       2,485,122
    Other assets.............................................................      2,198,598       1,551,352
                                                                                ------------    ------------
             Total Assets....................................................   $195,087,759    $174,266,852
                                                                                ============    ============



                                                     (Continued)






                                       24
<PAGE>


                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                      CONSOLIDATED BALANCE SHEETS (continued)
                                            December 31, 1997 and 1996
<CAPTION>

                                                                                    1997            1996
                                                                                    ----            ----
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
    Deposits:
      Noninterest-bearing.................................................... $    5,055,545  $    1,070,037
      Interest-bearing.......................................................    148,871,154     129,963,341
                                                                                ------------    ------------
             Total deposits..................................................    153,926,699     131,033,378
    Federal Home Loan Bank advances..........................................     23,546,667      25,690,000
    Notes payable............................................................         72,102          96,142
    Capital lease obligations................................................        331,970         385,251
    Mortgages payable on foreclosed properties...............................              -          10,391
    Other liabilities........................................................      2,393,814       1,945,988
                                                                               -------------   -------------
             Total Liabilities...............................................    180,271,252     159,161,150

    Commitments and contingencies

SHAREHOLDERS' EQUITY
    Series B preferred stock, $6.67 stated value (Note 18):
      Authorized shares - 2,250,000
      Issued and outstanding shares - 2,125,000 in 1997 and 1996.............     14,173,750      14,173,750
    Series C preferred stock, $6.67 stated value (Note 18):
      Authorized shares - 125,000
      Issued and outstanding shares - 125,000 in 1997 and 1996...............        833,750         833,750
    Common stock, $.01 par value:
      Authorized shares - 10,000,000
      Issued and outstanding shares - 1,058,136 in 1997 and 1,053,379
         in 1996.............................................................         10,581          10,534
    Additional paid-in capital...............................................      8,681,739       8,674,333
    Accumulated deficit......................................................     (8,883,313)     (8,586,665)
                                                                                ------------    ------------
             Total Shareholders' Equity......................................     14,816,507      15,105,702
                                                                                ------------    ------------
             Total Liabilities and Shareholders' Equity......................   $195,087,759    $174,266,852
                                                                                ============    ============







                            See notes to consolidated financial statements.

                                       25
<PAGE>


                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                For the years ended December 31, 1997, 1996 and 1995
<CAPTION>

                                                                1997                1996             1995
                                                                ----                ----             ----
INTEREST INCOME
    Loans, including fees............................         $13,588,215        $17,881,529     $19,778,781
    Federal funds sold and securities purchased
      under agreements to resell.....................             150,972            319,298         279,909
    Investment securities, including dividend
      income.........................................             353,957            615,429         836,637
    Mortgage-backed securities.......................             124,515            497,879       1,285,889
    Other............................................             329,846            558,139         365,821
                                                               ----------         ----------      ----------
             Total Interest Income...................          14,547,505         19,872,274      22,547,037
                                                               ----------         ----------      ----------

INTEREST EXPENSE
    Deposits ........................................           7,679,314         11,945,273      13,504,940
    Federal Home Loan Bank advances..................           1,473,949          1,625,574       2,797,688
    Notes payable....................................               9,079             10,750         130,705
    Subordinated capital notes.......................                   -             52,444          73,183
    Other............................................              67,793            130,297         120,284
                                                               ----------         ----------      ----------
             Total Interest Expense..................           9,230,135         13,764,338      16,626,800
                                                               ----------         ----------      ----------

             Net Interest Income.....................           5,317,370          6,107,936       5,920,237
PROVISION FOR LOAN LOSSES............................             113,467          1,410,710       2,476,903
                                                               ----------         ----------      ----------

             Net Interest Income After
             Provision for Loan Losses...............           5,203,903          4,697,226       3,443,334

NONINTEREST INCOME
    Loan servicing fees..............................           1,312,476          1,665,768       1,765,617
    Mortgage banking income, including
      gain on sale of loans..........................             458,520            577,130         504,715
    Other service charges and fees...................             368,671            497,316         428,811
    Net gain (loss) on sale of:
      Securities.....................................                   -            153,188               -
      Loans..........................................              (1,458)        (1,018,185)        115,538
      Deposits.......................................                   -          1,940,010               -
    Other............................................             324,596            466,519         357,309
                                                               ----------         ----------      ----------
             Total Noninterest Income................           2,462,805          4,281,746       3,171,990
                                                               ----------         ----------      ----------



                                                     (Continued)



                                       26
<PAGE>


                                       ESSEX BANCORP, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
                                For the years ended December 31, 1997, 1996 and 1995
<CAPTION>

                                                                1997                1996             1995
                                                                ----                ----             ----
NONINTEREST  EXPENSE
    Salaries and employee benefits...................           3,788,695          4,554,540       4,387,760
    Net occupancy and equipment......................           1,084,593          1,470,284       1,671,352
    Deposit insurance premiums.......................             478,684            674,730         722,106
    Amortization of intangible assets................             530,707          7,011,288         956,257
    Service bureau fees..............................             461,217            599,207         523,526
    Professional fees................................             349,218            507,031         476,224
    Foreclosed properties, net.......................             182,880           (175,055)        187,715
    Other............................................           1,087,362          1,713,958       1,845,102
                                                              -----------        -----------     -----------
             Total Noninterest Expense...............           7,963,356         16,355,983      10,770,042
                                                              -----------         ----------      ----------

             Loss Before Extraordinary
             Items and Income Taxes..................            (296,648)        (7,377,011)     (4,154,718)

PROVISION FOR INCOME TAXES...........................                   -                  -               -

EXTRAORDINARY ITEMS - FORGIVENESS
    OF DEBT  ........................................                   -                  -       2,945,064
                                                              -----------        -----------     -----------

             Net Loss................................        $   (296,648)       $(7,377,011)    $(1,209,654)
                                                              ===========         ==========      ==========


    Loss before extraordinary items available
       to common shareholders (Note 2)...............         $(1,932,136)       $(8,823,879)    $(4,522,740)
    Extraordinary items..............................                   -                  -       2,945,064
                                                              -----------        -----------     -----------
    Net loss available to common shareholders........         $(1,932,136)       $(8,823,879)    $(1,577,676)
                                                              ===========        ===========     ===========

    Basic and diluted income (loss) per common share (Note 2):
       Loss before extraordinary item................              $(1.83)            $(8.39)         $(4.31)
       Extraordinary items...........................                   -                  -            2.81
                                                              -----------        -----------     -----------
       Net loss......................................              $(1.83)            $(8.39)         $(1.50)
                                                              ===========        ===========     ===========




                 See notes to consolidated financial statements.

                                       27
<PAGE>


                      ESSEX BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              For the years ended December 31, 1997, 1996 and 1995
<CAPTION>


                                                          Series B       Series C
                                            Common        Preferred      Preferred       Additional
                                          Stock, $.01   Stock, $6.67   Stock, $6.67        Paid-in       Accumulated
                                           Par Value    Stated Value   Stated Value        Capital         Deficit
                                           ---------    ------------   ------------        -------         -------
Transfer of partners' capital in
   connection  with the merger of
   Essex Financial Partners, L.P.
   into Essex Bancorp, Inc................  $10,497     $         -      $       -       $8,129,135      $         -
Issuance of preferred stock in connection
   with the merger of Home Bancorp, Inc.
   and Essex Bancorp, Inc.................        -      14,173,750        833,750          538,000                -
Net increase in holding gain on
   securities available for sale..........        -               -              -                -                -
Net loss..................................        -               -              -                -       (1,209,654)
                                            -------     -----------      ---------       ----------      -----------

Balance, December 31, 1995................   10,497      14,173,750        833,750        8,667,135       (1,209,654)
Common stock issued under the
   Employee Stock Purchase Plan...........       37               -              -            7,198                -
Net decrease in holding gain on
   securities available for sale..........        -               -              -                -                -
Net loss..................................        -               -              -                -       (7,377,011)
                                            -------     -----------      ---------       ----------      -----------

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

Balance, December 31, 1997................  $10,581     $14,173,750       $833,750       $8,681,739      $(8,883,313)
                                            =======     ===========       ========       ==========      ===========

                                               Holding Gain
                                               on Securities
                                                 Available
                                                 for Sale          Total
                                                 --------          -----
Transfer of partners' capital in
   connection  with the merger of
   Essex Financial Partners, L.P.
   into Essex Bancorp, Inc................     $        -       $ 8,139,632
Issuance of preferred stock in connection
   with the merger of Home Bancorp, Inc.
   and Essex Bancorp, Inc.................              -        15,545,500
Net increase in holding gain on
   securities available for sale..........        154,174           154,174
Net loss..................................              -        (1,209,654)
                                               ----------       -----------

Balance, December 31, 1995................        154,174        22,629,652
Common stock issued under the
   Employee Stock Purchase Plan...........              -             7,235
Net decrease in holding gain on
   securities available for sale..........       (154,174)         (154,174)
Net loss..................................              -        (7,377,011)
                                               ----------       -----------

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

Balance, December 31, 1997................     $        -       $14,816,507
                                               ==========       ===========





                 See notes to onsolidated financial statements.





                                       28
<PAGE>



                      ESSEX BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995
<CAPTION>

                                                                       1997               1996           1995
                                                                       ----               ----           ----
OPERATING ACTIVITIES
    Net loss..................................................  $     (296,648)     $  (7,377,011) $  (1,209,654)
    Adjustments to reconcile net loss to cash
      provided by (used in) operating activities:
      Forgiveness of debt before income taxes.................               -                  -     (2,945,064)
      Provision for:
           Losses on loans, foreclosed properties, and
               servicing......................................         296,808          1,415,365      2,565,297
           Depreciation and amortization of premises
               and equipment..................................         419,829            538,561        490,249
           Amortization (accretion) of:
               Premiums and discounts on loans, investments
                 and mortgage-backed securities...............          77,038            211,642        376,334
               Mortgage servicing rights......................         468,647            528,444        580,295
               Excess of costs over net assets acquired.......          62,061          6,482,843        375,962
               Other..........................................               -            (94,399)       (27,576)
        Mortgage banking activities:
           Proceeds from loan sales...........................      40,717,559         56,311,191     50,828,101
           Loan originations and purchases....................     (39,725,806)       (54,961,912)   (52,881,403)
           Realized gains from sale of loans..................        (414,902)          (548,744)      (492,493)
        Realized (gains) and losses from sales of:
           Mortgage-backed securities available for sale......               -           (153,188)             -
           Loans..............................................           1,458          1,018,185       (115,538)
           Deposits...........................................               -         (1,940,011)             -
           Other..............................................        (185,283)          (599,062)       (64,021)
        Changes in operating assets and liabilities
           exclusive of business acquisitions:
               Accrued interest receivable....................         (49,047)         1,000,846        200,354
               Other assets...................................        (513,371)           325,152        372,536
               Other liabilities..............................         453,828            483,325       (771,319)
                                                                  ------------       ------------    -----------
    Net cash provided by (used in) operating activities.......       1,312,171          2,641,227     (2,717,940)
                                                                  ------------       ------------    -----------



                                   (Continued)




                                       29
<PAGE>




                      ESSEX BANCORP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
              For the years ended December 31, 1997, 1996 and 1995
<CAPTION>

                                                                       1997              1996             1995
                                                                       ----              ----             ----
INVESTING ACTIVITIES
    Purchase of certificates of deposit in other
        financial institutions................................      (5,000,000)       (17,000,000)             -
    Proceeds from maturities of certificates of deposit
        in other financial institutions.......................       5,000,000         17,000,000              -
    Purchase of Federal Home Loan Bank stock..................         (95,800)                 -              -
    Redemption of Federal Home Loan Bank stock................       1,204,800          1,062,800      1,823,100
    Purchase of securities held to maturity...................        (298,406)        (1,020,625)             -
    Proceeds from maturities of securities held to maturity...       4,000,000          3,000,000      3,000,000
    Purchase of securities available for sale.................      (2,508,289)        (5,165,516)    (9,240,201)
    Proceeds from sale of securities available for sale.......       2,500,000          6,650,000      8,575,000
    Principal remittances on mortgage-backed securities.......               -                  -      2,723,925
    Principal remittances on mortgage-backed securities
        available for sale....................................               -            990,065              -
    Proceeds from sales of mortgage-backed securities
        available for sale....................................               -         10,068,189              -
    Purchases of loans........................................     (22,224,143)                 -              -
    Proceeds from sales of loans..............................               -        117,509,060      8,215,597
    Net (increase) decrease in net loans......................      (1,428,880)         1,834,572      8,095,445
    Proceeds from sales of foreclosed properties..............       2,146,555          5,270,509      3,797,022
    Additions to foreclosed properties........................        (358,419)          (174,753)      (318,471)
    Increase in mortgage servicing rights.....................        (289,253)          (243,297)             -
    Purchase of premises and equipment........................        (388,145)          (197,281)    (1,489,856)
    Proceeds from sales of premises and equipment.............         601,714          1,414,705          1,984
    Cash and cash equivalents of Home Bancorp
       at date of acquisition.................................               -                  -      7,459,288
                                                                   -----------        -----------    -----------
    Net cash provided by (used in) investing activities.......     (17,138,266)       140,998,428     32,642,833
                                                                   -----------        -----------    -----------

FINANCING ACTIVITIES
    Decrease in deposits attributable to branch sales:
       NOW and savings deposits...............................               -        (18,937,078)             -
       Certificates of deposit................................               -       (144,669,198)             -
    Net increase (decrease) in NOW and savings deposits.......      13,305,806          4,898,050     (9,592,820)
    Net increase in certificates of deposit...................       9,587,515         10,211,469     18,831,588
    Proceeds from Federal Home Loan Bank advances.............      25,500,000          4,000,000     14,500,000
    Repayment of Federal Home Loan Bank advances..............     (27,643,333)        (8,143,333)   (43,618,334)
    Proceeds from notes payable...............................               -                  -      1,003,893
    Payments on credit facility...............................               -                  -       (894,377)
    Payments on notes payable.................................         (24,040)           (24,061)             -
    Redemptions of subordinated notes.........................               -           (627,858)             -
    Payments on capital lease obligation......................         (53,281)           (39,705)       (56,030)
    Repayments of mortgages payable on foreclosed
       properties.............................................         (10,391)           (25,258)      (164,743)
    Redemption of Settlement Preferred Stock..................          (6,002)          (103,385)      (831,511)
    Common stock issued under the Employee Stock
       Purchase Plan..........................................           7,453              7,235              -
                                                                   -----------       ------------    -----------
    Net cash provided by (used in) financing activities.......      20,663,727       (153,453,122)   (20,822,334)
                                                                   -----------       ------------    -----------

       Increase (decrease) in cash and cash equivalents.......       4,837,632         (9,813,467)     9,102,559
       Cash and cash equivalents at beginning of period.......       6,195,251         16,008,718      6,906,159
                                                                   -----------       ------------    -----------

       Cash and cash equivalents at end of period.............    $ 11,032,883    $     6,195,251   $ 16,008,718
                                                                  ============    ===============   ============



                                                     (Continued)




                                       30
<PAGE>




                      ESSEX BANCORP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
              For the years ended December 31, 1997, 1996 and 1995
<CAPTION>

                                                                       1997              1996             1995
                                                                       ----              ----             ----
NONCASH INVESTING AND FINANCING ACTIVITIES
    Transfer from loans to foreclosed properties..............    $  1,294,615      $   1,865,227  $   2,929,567
    Termination of Essex Mortgage Trust I REMIC...............               -          2,678,222              -
    Transfer of investment securities and mortgage-backed
        securities held for investment to available for sale..               -                  -     13,590,296
    Increase (decrease) in mortgages payable on
        foreclosed properties.................................               -             10,391         (7,630)
    Acquisition of Home Bancorp:
        Increase in assets:
           Net loans..........................................               -                  -     50,498,727
           Excess of cost over net assets acquired............               -                  -      8,607,098
           Other..............................................               -                  -      2,100,783
        Increase in liabilities:
           Deposits...........................................               -                  -     51,826,331
           Other..............................................               -                  -        814,909

SUPPLEMENTAL CASH FLOW INFORMATION
    Cash paid (received) during the year for:
        Interest..............................................    $  9,199,677       $ 13,814,733   $ 16,628,737
        Income taxes, net of refunds..........................               -           (109,244)        (6,252)

</TABLE>




                 See notes to consolidated financial statements.





                                       31
<PAGE>

                      ESSEX BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 1997, 1996 and 1995


NOTE 1 - ORGANIZATION

Essex Bancorp, Inc. ("EBI") is a Delaware corporation that was formed in 1994 to
be the single  thrift  holding  company  for Essex  Savings  Bank,  F.S.B.  (the
"Bank"), a federally-chartered  savings bank which at December 31, 1997 operates
four branches in North Carolina and Virginia.  EBI is the successor by merger to
Essex  Financial  Partners,   L.P.  (the  "Partnership"),   a  Delaware  limited
partnership  which was formed in 1988 to acquire the former  holding  company of
the Bank.  The  Partnership  and Essex Bancorp.  ("Bancorp"),  the Bank's former
holding company,  were merged into EBI in January 1995. In addition to the Bank,
EBI's  other  principal   operating   subsidiaries   are  Essex  First  Mortgage
Corporation  ("Essex  First"),  a  wholly-owned  subsidiary  of the Bank that is
engaged primarily in the origination and sale of residential mortgage loans, and
Essex Home Mortgage Servicing Corporation ("Essex Home"), an indirect subsidiary
of the  Company  and the Bank that is  engaged  primarily  in the  servicing  of
mortgage loans owned by the Bank,  various  governmental  agencies,  and various
third  party  investors.  Essex  Mortgage  Corporation  ("EMC") is also a direct
subsidiary  of EBI  that  was  formerly  engaged  in  various  mortgage  banking
activities and, at December 31, 1997, held loans and other assets as a result of
its past activities.

Pursuant to approvals received from the Office of Thrift Supervision  ("OTS") on
August  25,  1994 and the  Partnership's  unitholders  at a special  meeting  on
January 17, 1995,  the  Partnership  and Bancorp were merged into EBI on January
18, 1995 and January 31, 1995,  respectively.  The Merger was accounted for in a
manner  similar  to a  pooling  of  interests.  As a result of the  Merger,  the
Partnership's  unitholders and the general  partner became  stockholders of EBI,
whose  common  stock is  listed  on the  American  Stock  Exchange.  Partnership
unitholders  received  one share of EBI common  stock in exchange  for every two
limited  partnership units ("LPUs").  In addition,  the general partner received
shares of EBI common stock equivalent to one percent of total shares outstanding
after the exchange.


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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

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

Cash and Cash Equivalents:  Cash equivalents include interest-bearing  deposits,
federal  funds  sold  and  securities  purchased  under  agreements  to  resell.
Generally,  federal  funds sold and  securities  purchased  under  agreements to
resell are purchased for one-day periods.  Securities purchased under agreements
to  resell  are  purchased  from  a  commercial  bank  and   collateralized   by


                                       32
<PAGE>

mortgage-backed   securities   issued  by  the  Government   National   Mortgage
Association ("Ginnie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie
Mac"), or the Federal National Mortgage Association ("Fannie Mae").

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

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

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

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

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

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

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


                                       33
<PAGE>

addition, the OTS, as an integral part of its examination process,  periodically
reviews the Bank's allowances for losses on loans and foreclosed properties, and
may require the Bank to recognize additions to the allowances.

Loan  Income:  Income on loans is derived from  interest,  the sale of loans and
various  fees.  Interest  on  loans,  including  amortization  of  premiums  and
accretion of discounts,  is computed using methods that result in level rates of
return on principal amounts  outstanding.  Loan origination fees and direct loan
origination  costs are deferred and amortized over the contractual  lives of the
related  loans  using  methods  that  result in a  constant  effective  yield on
principal amounts outstanding.

The accrual of interest on loans is discontinued based on delinquency status, an
evaluation of the related collateral, and on the borrower's ability to repay the
loan.  Generally,  loans  past due more than 90 days are  placed  in  nonaccrual
status;  however, in instances where the borrower has demonstrated an ability to
make  timely  payments,  loans past due more than 90 days may be  returned to an
accruing  status  provided two criteria are met: (1) all  principal and interest
amounts  contractually  due (including  arrearages)  are  reasonably  assured of
repayment  within a reasonable  period,  and (2) there is a sustained  period of
repayment performance  (generally a minimum of six months) by the borrower.  The
receipt of interest  payments from an impaired  loan is generally  recognized as
interest income when received, except in cases where impairment adjustments have
been  material,  in which case the  interest  payments  are treated as principal
reductions.

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

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

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

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

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

Income Taxes:  Consolidated  corporate  income tax returns are filed for EBI and
its  subsidiaries.  In February 1992, the Financial  Accounting  Standards Board
issued  Statement  No. 109 - Accounting  for Income Taxes  ("SFAS  109"),  which


                                       34
<PAGE>

requires an asset and liability  approach for determining  income taxes. The new
standard was adopted during 1993, but will not have a significant  effect on the
Company's   operating  results  unless  the  Company   demonstrates   consistent
profitability.

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

Earnings Per Share:  The Company  calculates its basic and diluted  earnings per
share ("EPS") in accordance with Statement of Financial Accounting Standards No.
128 - Earnings  Per Share  ("SFAS  128").  Accordingly,  the  components  of the
Company's EPS calculations for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                1997               1996                1995
                                                                ----               ----                ----
     Loss before extraordinary items                       $   (296,648)       $(7,377,011)        $(4,154,718)
     Preferred stock dividends (Note 18)                     (1,635,488)        (1,446,868)           (368,022)
                                                             ----------         ----------         -----------
     Loss before extraordinary items
       available to common shareholders                      (1,932,136)        (8,823,879)         (4,522,740)
     Extraordinary items                                              -                  -           2,945,064
                                                             ----------         ----------          ----------
     Net loss available to common shareholders              $(1,932,136)       $(8,823,879)        $(1,577,676)
                                                             ==========         ==========          ==========

     Weighted average common shares
       outstanding                                            1,055,776          1,051,180           1,049,684
                                                              =========          =========           =========
</TABLE>
The Company's  common stock  equivalents are  antidilutive  with respect to loss
available to common  shareholders  for each of the years  presented;  therefore,
basic and diluted EPS are the same.

Reclassification:  Certain  1996 and 1995  amounts  have  been  reclassified  to
conform to 1997 presentations.



NOTE 3 - EXTRAORDINARY ITEMS

Extraordinary  items for the year  ended  December  31,  1995  consisted  of the
following transactions:

o    EBI issued $1.0 million in nonvoting,  noncumulative  preferred  stock (the
     "Settlement  Preferred  Stock")  in  January  1995  in  accordance  with  a
     stipulation of settlement (the "Settlement") related to litigation in which
     the Partnership was a settling  defendant in 1994 (the  "Litigation").  The
     Settlement Preferred Stock was distributed on January 9, 1995 to qualifying
     members  of  the  settlement  class  who  suffered  trading  losses  in the
     Partnership's LPUs prior to July 27, 1994, the date on which the Settlement
     was announced.  Contemporaneously with the acquisition described in Note 4,
     PaineWebber  Capital  Inc.  ("PWC")  and  PaineWebber  Inc.  ("PWI"),  also


                                       35
<PAGE>

     settling  defendants in the Litigation,  agreed to loan the funds necessary
     to enable EBI to redeem the  Redeemable  Preferred  Stock for $1.0  million
     (the "Redemption Loan") plus accrued dividends.  The effective date of this
     redemption  was September 18, 1995,  and the  Redemption  Loan was forgiven
     effective that date. The Company  recognized an extraordinary  gain of $1.0
     million during the third quarter of 1995 in connection with the forgiveness
     of this debt.

o    EBI  contributed  $1.3  million to a  settlement  fund  established  by the
     defendants  in the  Litigation.  The court  provided  for a portion of this
     settlement  fund to be  distributed  in cash to the same class  members who
     were to receive the Settlement  Preferred Stock, and the remaining  portion
     of the fund was to be used to pay fees and expenses of plaintiffs'  counsel
     and to make certain payments to named  plaintiffs.  Neither the Partnership
     nor  EBI  had  sufficient  liquidity  to  fund  this  contribution  to  the
     Settlement.  Accordingly,  PWC made a $1.3  million  loan (the  "Settlement
     Note") to EBI in order to facilitate the completion of the  Settlement.  In
     addition,  PWC made a $39,000 loan (the "Litigation  Note") to EBI in order
     for  EBI  to  pay   legal   expenses   associated   with  the   Settlement.
     Contemporaneously with the acquisition described in Note 4, PWC forgave the
     Settlement Note and the Litigation Note, plus accrued interest thereon. The
     Company  recognized an extraordinary  gain of $1.5 million during the third
     quarter of 1995 in connection with the forgiveness of this debt.

o    PWC made a $200,000  loan (the "Merger  Note") to EBI in order to fund the
     expenses associated with the Merger because neither the Partnership nor EBI
     had sufficient liquidity to fund such expenses.  Contemporaneously with the
     acquisition  described  in Note 4,  PWC  forgave  the  Merger  Note and the
     accrued interest thereon.  EBI recognized an extraordinary gain of $217,000
     during the third quarter of 1995 in connection with the forgiveness of this
     debt.


NOTE 4 - ACQUISITION

On September 15, 1995,  EBI and the Bank merged 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   (the  "Home
Acquisition").  The  transaction  was accounted for using the purchase method of
accounting and the purchase price was allocated among the assets and liabilities
of Home  Bancorp and Home Savings at their fair value,  which was $60.1  million
and $52.6  million,  respectively,  as of September 15, 1995. The excess of cost
over net assets acquired  ("goodwill") of  approximately  $8.6 million was being
amortized using an accelerated method over a period of 15 years.  However,  as a
result  of the 1996  sale of four of the five Home  Savings  branches  acquired,
goodwill associated with the Home Acquisition was written off in 1996.

In exchange for all of the outstanding  stock of Home Bancorp,  the stockholders
of Home Bancorp received 2,250,000 shares of nonvoting perpetual preferred stock
of EBI with an aggregate  redemption and liquidation  value of $15.0 million and
warrants to purchase  7,949,000 shares of EBI common stock at a price of $0.9375
per share,  which was the price of EBI  common  stock as of June 30,  1995.  The
warrants are  exercisable  beginning in September 1998. The fair market value of
the preferred stock and the warrants was estimated in a third party valuation to
approximate  $15.5 million at the time of issuance.  Following the completion of
the transaction, two representatives designated by Home Bancorp joined the Board
of Directors of EBI, and two joined the Board of Directors of the Bank,  filling
existing vacancies on those Boards.





                                       36
<PAGE>




The  following  unaudited  pro forma  financial  information  for the year ended
December 31, 1995 assumes the acquisition was consummated on January 1, 1995 (in
thousands, except per share data):

         Total interest income                                      $25,859
         Net interest income                                          7,568
         Provision for loan losses                                    2,477
         Noninterest income                                           3,195
         Noninterest expense                                         13,218
         Loss before extraordinary items                             (4,932)
         Net loss                                                    (2,096)
         Basic and diluted loss per common share
            before extraordinary items                                (6.04)
         Basic and diluted net loss per common
            share                                                     (3.34)


NOTE 5 - SALES OF BRANCHES

In January  1996,  the Company  formed a  Strategic  Evaluation  Committee  (the
"Committee")  to  explore  the  possible   benefits  of  further   expansion  or
contraction  by  branch  sales.   It  was  concluded  with  assistance  from  an
independent consultant, that selling non-strategic bank branches and effectively
shrinking  the size of the asset base by  approximately  50% was a strategy that
ultimately  would be in the  best  interests  of the  common  and the  preferred
shareholders  of  the  Company.  Accordingly,  in  addition  to  completing  the
already-negotiated  sales  of the  Bank's  Charlotte,  Raleigh,  Greensboro  and
Wilmington, North Carolina branches, the Company proceeded to negotiate the sale
of the Bank's Norfolk,  Portsmouth,  Hampton, Newport News and Grafton, Virginia
branches,   which  were  completed   during  the  last  two  quarters  of  1996.
Collectively,  the  nine  branches  sold  during  1996  are  referred  to as the
"Branches" and each sale is detailed below.

Effective  March  15,  1996,  the Bank sold the  deposits  and  related  accrued
interest of its  Charlotte,  North  Carolina  retail bank branch,  which totaled
$28.1 million,  along with loans and related accrued interest  totaling $64,000,
premises and equipment totaling $586,000,  and other assets totaling $69,000. In
connection  with the sale of the Charlotte  branch,  the Bank  recognized a $1.1
million  net  gain on the sale of  deposits  and a  $64,000  gain on the sale of
premises and equipment.  The sale of the Charlotte branch required cash of $26.3
million,  which  was  funded  by the sale of  fixed-rate  first  mortgage  loans
totaling $7.3 million and mortgage-backed securities available for sale totaling
$9.9  million,  as well as the  utilization  of a portion of the  Bank's  excess
liquidity.  The Bank  recognized a gain of $1,000 and $153,000  from the sale of
loans and mortgage-backed securities,  respectively.  In the aggregate, the Bank
recognized a net gain of $1.3 million on the sale of the Charlotte branch.

Effective July 25, 1996, the Bank sold the deposits and related accrued interest
of its Raleigh, Wilmington and Greensboro,  North Carolina retail bank branches,
which  totaled  $71.2  million,  along with  deposit  loans and related  accrued
interest totaling $72,000. In connection with the sale of the Branches, the Bank
recognized  a  $701,000  net  gain on the  sale of  deposits.  The sale of these
branches  required  cash of  $70.3  million,  which  was  funded  by the sale of
fixed-rate and  adjustable-rate  first mortgage loans totaling $60.9 million, as
well as the  utilization of a portion of the Bank's excess  liquidity.  The Bank
recognized a loss of $186,000 on the sale of loans.  In the aggregate,  the Bank
recognized  a net gain of $516,000 on the sale of the  Raleigh,  Wilmington  and
Greensboro branches.



                                       37
<PAGE>

Effective  September  26, 1996,  the Bank sold the deposits and related  accrued
interest of its Norfolk,  Portsmouth,  Hampton and Newport News, Virginia retail
bank branches, which totaled $62.9 million, along with deposit loans and related
accrued interest totaling $68,000 and premises and equipment  totaling $600,000.
The Bank  concluded  its branch  sales on  November 7, 1996 with the sale of its
Grafton,  Virginia retail bank branch with deposits and related accrued interest
totaling $5.3 million.  In connection  with these sales,  the Bank  recognized a
$174,000  net gain on the sale of  deposits  and a $152,000  gain on the sale of
premises and equipment.  In addition to transaction  costs, the gain on the sale
of deposits was reduced by a $1.9 million  write-off of the  remaining  goodwill
associated  with the branches.  Prior to the  consummation  of the sale of these
branches,  the Company  recognized  a $5.9  million  write down in the net asset
value of certain of these branches.  The sale of these branches required cash of
$65.4 million,  which was funded by the sale of fixed-rate  and  adjustable-rate
first mortgage loans  totaling  $50.1 million,  as well as the  utilization of a
portion of the Bank's excess  liquidity.  The Bank recognized a loss of $833,000
on the  sale of  loans.  In the  aggregate,  the Bank  recognized  a net loss of
$507,000 on the sale of the Norfolk,  Portsmouth,  Hampton,  Newport  News,  and
Grafton branches.


NOTE 6 - INVESTMENT SECURITIES

The amortized cost and fair value of securities  held for investment at December
31 were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
                                                 1997                                        1996
                             ------------------------------------------  ------------------------------------------
                                           Gross Unrealized                            Gross Unrealized
                               Amortized   ----------------      Fair     Amortized    ----------------      Fair
                                 Cost      Gains     Losses      Value      Cost       Gains     Losses      Value
                                 ----      -----     ------      -----      ----       -----     ------      -----
U.S. Treasury securities        $    -  $       -   $      -     $    -     $1,003  $       -    $     -     $1,003
Securities of other U.S.
   government agencies           2,299          -         82      2,217      5,000          -        113      4,887
                                 -----   --------    -------      -----      -----   --------     ------      -----
                                $2,299  $       -   $     82     $2,217     $6,003  $       -    $   113     $5,890
                                 =====   ========    =======      =====      =====   ========     ======      =====
</TABLE>

The $2.3 million of U.S.  government  agency  securities  held for investment at
December  31, 1997  consisted  of a $2.0 million note issued by the Federal Home
Loan Bank ("FHLB")  which matures in the year 2000 and a $299,000 note issued by
the FNMA which matures in the year 1999. No securities  held for investment were
sold prior to maturity  in 1997,  1996,  and 1995.  The U.S.  government  agency
security  with a book value of $299,000  and a fair value of $298,000 is pledged
as collateral for public depository accounts over $100,000 at December 31, 1997.

Securities  available  for sale at  December  31, 1997 and 1996  consisted  of a
mutual  fund  investment  that  is  designed  for  use  as an  overnight  liquid
investment.  The  mutual  fund  portfolio  is  invested  in  federal  funds  and
repurchase agreements,  which are fully collateralized by U.S. Government and/or
agency  obligations.  The fund is managed to have an average  maturity of one to
seven days, and to maintain a stable net asset value of $1.00 per share.

Proceeds  from the sale of  securities  available  for sale totaled  $2,500,000,
$6,650,000  and  $8,575,000 in 1997,  1996 and 1995,  respectively.  No gains or
losses were realized on these sales.






                                       38
<PAGE>


NOTE 7 - MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of mortgage-backed securities ("MBS") held for
investment,  which consisted solely of the Company's  interests in a real estate
mortgage  investment  conduit  ("REMIC"),  at  December  31 were as follows  (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
                                                 1997                                        1996
                             ------------------------------------------  ----------------------------------------
                                           Gross Unrealized                            Gross Unrealized
                               Amortized   ----------------      Fair     Amortized    ----------------      Fair
                                 Cost      Gains     Losses      Value      Cost       Gains     Losses      Value
                                 ----      -----     ------      -----      ----       -----     ------      -----
U.S. government agencies:
    Floating-rate REMIC         $1,905  $       -   $     19     $1,886     $1,905  $       -   $     36     $1,869
                                 =====   ========    =======      =====      =====   ========    =======      =====
</TABLE>

There were no sales of MBS held for investment in 1997, 1996 and 1995.

Effective November 15, 1995, the Financial  Accounting  Standards Board ("FASB")
provided a one-time opportunity for institutions to reassess the appropriateness
of the designations of all securities held upon initial  application of the FASB
Special Report,  "A Guide to  Implementation  of Statement 115 on Accounting for
Certain  Investments in Debt and Equity Securities" (the "Special Report").  Any
resulting  redesignations were required to occur no later than December 31, 1995
and such  redesignations  were  required  to be  accounted  for at fair value in
accordance  with  SFAS  115.  Accordingly,   on  December  31,  1995,  the  Bank
transferred  MBS with a total  amortized  cost of $13.6 million and a total fair
value of $13.7 million from the "held to maturity" designation to the "available
for sale"  designation.  In accordance with SFAS 115, the transfer was accounted
for at fair value and the  Company  recorded  a holding  gain of  $154,000  as a
separate component of its shareholders'  equity.  These MBS were sold in 1996 to
partially fund the sale of the Branches. Accordingly, the holding gain component
of  shareholders'  equity  was  reversed  in  1996.  No MBS were  classified  as
available for sale at December 31, 1997 and 1996.

During 1996, the Essex Mortgage Trust I REMIC, a Company-issued  second mortgage
REMIC, was terminated, at which time $2.7 million of mortgage-backed  securities
were  reclassified  to loans.  Proceeds  from the sale of MBS available for sale
totaled $10,068,189 in 1996. Gross gains of $196,525 and gross losses of $43,337
were realized in 1996.


NOTE 8 - LOANS

Net loans at December 31 include (in thousands):

                                                     1997                 1996
                                                     ----                 ----
    Real estate:
        First mortgages                            $130,486             $103,643
        Second mortgages                              8,699               12,384
        Construction and development                 16,583               17,190
        Commercial                                    5,970                6,313
    Consumer                                          5,426                5,828
    Commercial - other                                1,883                1,915
    Secured by deposits                                 805                  842
                                                  ---------            ---------
           Total Loans                              169,852              148,115

    Less:
        Unearned loan fees and discounts                 29                    8
        Allowance for loan losses                     2,382                2,556
                                                   --------             --------
           Net Loans                               $167,441             $145,551
                                                    =======              =======



                                       39
<PAGE>

Included in total loans at December 31, 1997 and 1996 are  unamortized  premiums
of $668,000 and $565,000, respectively.

At December  31, net loans  included  the  following  collateral-dependent  real
estate loans (in thousands):

                                                          1997          1996
                                                          ----          ----
    First mortgages                                       $611          $539
    Second mortgages                                        79           122
    Construction and development                             -            17
                                                          ----          ----
           Total collateral-dependent real estate loans    690           678

    Less:
        Allowance for loan losses                          130            69
                                                           ---          ----
           Net collateral-dependent real estate loans     $560          $609
                                                           ===           ===

As of  December  31,  1997,  the Bank  had  outstanding  commitments  (including
unfunded  portions of lines of credit and construction loan commitments) to fund
approximately $13.9 million in mortgage loans and $222,000 in nonmortgage loans.
In  addition,   the  Bank's   construction  loan  portfolio  includes  loans  to
individuals   that  will  convert  to  permanent   loans  upon   completion   of
construction.  As of December 31, 1997, such commitments aggregated $2.6 million
of fixed rate  mortgage  loans and $15.4  million of  adjustable  rate  mortgage
loans. Commitments to extend credit are agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee.  Because it is possible that the  commitments
can  expire  without  being  drawn  upon,  the total  commitment  amounts do not
necessarily  represent  future cash  requirements.  The Company  evaluates  each
customer's  creditworthiness  on a case-by-case  basis. The amount of collateral
obtained,  if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held generally
consists of real estate.

The Bank  originates  first and second  mortgage and consumer loans primarily in
North  Carolina and Virginia.  The Bank will also acquire  residential  mortgage
loans from third parties. Loans previously acquired comprised  approximately 42%
and 43% of total loans at December  31,  1997 and 1996,  respectively.  The Bank
requires  collateral  on all  residential  mortgage  loans and, at  origination,
generally  requires  that  loan-to-value  ratios be no greater than 80%,  unless
private mortgage insurance has been obtained, in which case higher loan-to-value
ratios may be maintained.

At December 31, 1997 and 1996,  the Company had $1.6  million and $2.9  million,
respectively,  in  nonaccrual  loans.  Interest  income  which  would  have been
recorded in accordance with the original terms of the nonaccrual  loans amounted
to  approximately  $171,000,  $291,000 and $678,000 for the years ended December
31, 1997, 1996 and 1995, respectively.





                                       40
<PAGE>




Changes in the allowance for loan losses for the years ended  December 31 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                1997               1996             1995
                                                                ----               ----             ----
         Balance at beginning of period                       $2,555,688       $ 5,251,295       $ 3,429,365
         Allowance transferred in connection
            with the Home Acquisition                                  -                 -           500,000
         Provision for loan losses                               113,467         1,410,710         2,476,904
                                                              ----------        ----------        ----------
                                                               2,669,155         6,662,005         6,406,269
         Loans charged-off, net of recoveries                   (287,516)       (4,106,317)       (1,154,974)
                                                              ----------        ----------        ----------
         Balance at end of period                             $2,381,639       $ 2,555,688        $5,251,295
                                                               =========        ==========         =========

Loans held for sale at December 31, 1997 and 1996  consisted  of first  mortgage
loans  originated  by Essex  First.  As of December  31,  1997,  Essex First had
outstanding  commitments to fund mortgage loans totaling approximately $944,000,
which were committed for sale to unaffiliated third parties.


NOTE 9 - FORECLOSED PROPERTIES

Foreclosed properties at December 31 consist of the following:
<CAPTION>

                                                                                1997                1996
                                                                                ----                ----
             Properties acquired through foreclosure                        $1,666,381           $2,233,150
             Less allowance for losses                                         154,752              178,937
                                                                            ----------           ----------
                                                                            $1,511,629           $2,054,213
                                                                             =========            =========

Changes in the allowance for losses on foreclosed  properties for the year ended
December 31 are as follows:
<CAPTION>

                                                                          1997             1996           1995
                                                                          ----             ----           ----
             Balance at beginning of year                              $ 178,937         $199,145      $ 417,805
             Provision for losses on
               foreclosed properties                                     159,341          (21,345)        79,393
                                                                        --------         --------      ---------
                                                                         338,278          177,800        497,198
             Charge-offs, net of recoveries                             (183,526)           1,137       (298,053)
                                                                        --------         --------      ---------
             Balance at end of year                                    $ 154,752         $178,937      $ 199,145
                                                                        ========          =======       ========

NOTE 10 - PREMISES AND EQUIPMENT

Premises and equipment at December 31 include:
<CAPTION>
                                                                                1997                  1996
                                                                                ----                  ----
                  Land                                                      $   573,675          $   591,766
                  Buildings                                                   1,046,570            1,230,819
                  Furniture and equipment                                     2,681,370            2,675,397
                  Leasehold improvements                                        192,556              183,497
                  Property under capitalized lease                              537,737              537,737
                                                                             ----------           ----------
                                                                              5,031,908            5,219,216
                  Less accumulated depreciation
                    and amortization                                          3,105,179            2,734,094
                                                                              ---------            ---------
                                                                             $1,926,729           $2,485,122
                                                                              =========            =========
</TABLE>

                                       41
<PAGE>

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

Future  minimum lease  commitments  with terms in excess of one year at December
31, 1997, including cost escalation provisions, are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                                 Capital            Noncancelable
                                                                                  Lease            Operating Leases
                                                                                  -----            ----------------
       1998                                                                      $119,201             $236,033
       1999                                                                       119,201              243,762
       2000                                                                       119,201              239,356
       2001                                                                       119,201              214,754
       2002                                                                             -                    -
       Later years                                                                      -                    -
                                                                                  -------              -------
         Total minimum lease payments                                             476,804             $933,905
                                                                                                       =======
         Amount representing interest                                             144,834
                                                                                  -------
         Present value of net minimum capitalized
           payments                                                              $331,970
                                                                                  =======
Rent expense for the years ended  December 31, 1997,  1996, and 1995 amounted to
$435,147, $602,190 and $903,922, respectively.


NOTE 11 - DEPOSITS

Deposits at December 31 include (dollars in thousands):
<CAPTION>

                                                         1997                                1996
                                               ------------------------            -----------------------
                                               Amount           Percent            Amount          Percent
                                               ------           -------            ------          -------
         NOW accounts -
           noninterest-bearing                 $  5,056           3.28%              $  1,070          .82%
         Passbook and Christmas
           Club                                   3,948           2.57                  3,765         2.87
         NOW accounts                             3,965           2.58                  4,175         3.19
         Money market                            25,698          16.69                 16,350        12.48
         Certificate accounts -
           4.01% to 6.00%                        87,378          56.77                 80,203        61.20
           6.01% to 8.00%                        27,844          18.09                 25,433        19.41
           8.01% to 10.00%                           38            .02                     37          .03
                                                -------         ------               --------       ------
                                               $153,927         100.00%              $131,033       100.00%
                                                =======         ======                =======       ======
</TABLE>

A summary of certificate  accounts by scheduled maturity at December 31, 1997 is
as follows (in thousands):

                        1998                           $  76,720
                        1999                              18,304
                        2000                              12,126
                        2001                               2,750
                        2002 and thereafter                5,360
                                                        --------
                                                        $115,260



                                       42
<PAGE>

Certificate  accounts of $100,000 or more at December 31, 1997 and 1996 amounted
to $18.5 million and $14.8 million, respectively.

Interest and weighted average rates on  interest-bearing  deposits for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                      1997                       1996                         1995
                            ----------------------      ----------------------      ---------------------
                               Interest    Rate             Interest    Rate           Interest    Rate
                               --------    ----             --------    ----           --------    ----
   Passbook and
     Christmas Club          $   133,737   3.48%         $    225,525   3.33%       $    181,926   3.33%
   NOW accounts                  122,773   2.83               149,324   2.80             138,251   2.85
   Money Market
     accounts                  1,041,566   4.87               949,835   4.50             900,719   4.14
   Certificate accounts        6,381,238   5.73            10,620,589   5.78          12,284,044   5.75
                              ----------                  -----------                -----------
                              $7,679,314   5.45           $11,945,273   5.51         $13,504,940   5.50
                              ==========                  ===========                ===========


NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES

Borrowings  from the Federal  Home Loan Bank  ("FHLB") at December 31 consist of
the following (in thousands):
<CAPTION>

Maturity                            Interest Rate                           1997                   1996
--------                            -------------                       -----------             ----------
1997                                4.01% to 8.00%                         $     -                $16,144
1998                                4.01% to 7.00%                          21,139                  7,138
1999                                5.01% to 6.00%                           1,808                  1,808
2000                                5.01% to 6.00%                             600                    600
                                                                          --------               --------
                                                                           $23,547                $25,690
                                                                            ======                 ======

Weighted average rate at end of period                                        5.75%                  6.14%
                                                                              ====                   ====
</TABLE>

With the exception of $2.0 million and $3.0 million of FHLB advances outstanding
at December 31, 1997 and 1996,  respectively,  all FHLB advances  outstanding at
December  31, 1997 and 1996 carried  fixed rates of  interest.  The $2.0 million
adjustable  rate FHLB advances  outstanding  at December 31, 1997 will mature in
1998 and the applicable rate is indexed to the FHLB overnight  deposit rate. The
$3.0 million adjustable rate FHLB advance at December 31, 1996 matured in 1997.

Advances from the FHLB at December 31, 1997 are collateralized by mortgage loans
with a total  principal  balance  of  approximately  $53.8  million.  The unused
lendable collateral value was $20.9 million at December 31, 1997.


NOTE 13 - SUBORDINATED CAPITAL NOTES

During 1989 and January 1990, the Bank sold $3.3 million of subordinated capital
notes with a ten-year maturity.  The notes were issued in minimum  denominations
of $2,500 at interest rates of 11.5% to 12%, the rates prevailing at the time of
issuance.  In July 1993,  the Bank  redeemed  $2.8  million of the  subordinated
capital  notes.  In August 1996,  the Bank redeemed the  remaining  subordinated
capital notes at par in their entirety.




                                       43
<PAGE>

NOTE 14 - INCOME TAXES

The Company is subject to federal income taxes, and files a consolidated federal
income tax return with its  subsidiaries.  The  Company's  provision  for income
taxes for  financial  reporting  purposes  differs  from the amount  computed by
applying the statutory federal tax rate to loss before  extraordinary  items and
income taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                     1997                       1996                    1995
                                           ------------------------  ----------------------- ----------------------
                                             Amount           %          Amount        %        Amount         %
                                             ------           -          ------        -        ------         -
Provision for income taxes at
  statutory federal tax rate                  $(100,860)  (34.0)%      $(2,508,184) (34.0)%   $(1,412,604)  (34.0)%
Increase (decrease) resulting from:
   Unrecognized tax benefits                     91,443    30.8            991,196   13.4       1,407,828    33.9
   Amortization of excess of cost
     over net assets acquired                    21,101     7.1          1,507,950   20.5          76,717     1.8
   Other                                        (11,684)   (3.9)             9,038    0.1         (71,941)   (1.7)
                                              ---------   -----        -----------  -----     -----------   -----
                                             $        -       -%       $         -      -%    $         -       -%
                                              =========   =====        ===========  =====     ===========   =====

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

                                                                              1997                    1996
                                                                              ----                    ----
Deferred tax liabilities
           FHLB stock                                                    $     92,297            $     231,880
           Basis in acquired loans                                          2,114,303                2,430,234
           Premises and equipment                                              32,331                   67,610
           Other                                                               26,362                        -
                                                                         ------------            -------------
                  Total deferred liabilities                                2,265,293                2,729,724

Deferred tax assets
           Federal net operating loss ("NOL") carryforwards                 7,562,091                8,007,145
           Alternative minimum tax ("AMT")
             credit carryover                                                 330,000                  330,000
           MSRs                                                                78,280                   97,849
           Allowance for losses on loans and
             foreclosed properties                                            596,417                  659,128
           Core deposit intangible                                          1,049,306                1,130,022
           Other                                                              383,524                  137,941
                                                                         ------------            -------------
                  Total deferred assets                                     9,999,618               10,362,085
                                                                         ------------            -------------
                  Net deferred tax assets before valuation
                    allowance                                               7,734,325                7,632,361
                  Valuation allowance for net deferred tax
                     assets                                                (7,734,325)              (7,632,361)
                                                                         ------------            -------------
                  Net deferred tax assets                                $          -            $           -
                                                                         ============            =============
</TABLE>

The Company applies an asset and liability approach for determining income taxes
as required  by SFAS 109. A valuation  allowance  has been  established  for the
Company's  deferred tax assets and  liabilities  because,  based on management's
assessment, their ultimate realization cannot be assured.

The Bank and its  subsidiaries  qualify under provisions of the Internal Revenue
Code that permit  federal  income  taxes to be  computed  after  deductions  for
additions to bad debt  reserves.  These  deductions may be computed using either
actual  charge-offs or additions to its reserves based on the Bank's  historical
experience.  If  the  amounts  which  have  qualified  as  bad  debt  deductions
(approximately  $525,000 at December 31, 1997) are used for purposes  other than
to absorb bad debt  losses,  they will be  subject to federal  income tax at the
then applicable rates.



                                       44
<PAGE>

At December 31, 1997, the Company had NOL  carryforwards for income tax purposes
of  approximately  $19.9 million  expiring in the years 2007 through  2011.  The
utilization  of such NOL  carryforwards  may be limited by the Internal  Revenue
Code in certain circumstances,  including a change in ownership of the Company's
stock.  In  addition,  the  Company had an AMT credit  carryover  of $330,000 at
December 31, 1997, which can be carried forward indefinitely.


NOTE 15 - MORTGAGE LOAN SERVICING

At December 31, 1997, 1996, and 1995, EBI through its  subsidiaries  serviced or
subserviced approximately 8,400, 13,300 and 12,400 loans, respectively, with the
following  outstanding  principal  balances  (in  thousands)  at December 31 and
related servicing fee income during the respective years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
                                       1997                           1996                        1995
                            --------------------------      -------------------------    ------------------------
                                Loan           Loan             Loan          Loan          Loan          Loan
                             Principal      Servicing        Principal     Servicing     Principal     Servicing
                             Balances       Fee Income       Balances      Fee Income    Balances      Fee Income
                             --------       ----------       --------      ----------    --------      ----------
Loans owned by the
   Company                    $128,430      $        -     $   126,373     $        -    $194,736      $        -
Servicing and sub-
  servicing rights owned/
  participated in by the
  Company                      354,245       1,312,476         997,279      1,665,768     796,103       1,765,617
                              --------      ----------      ----------     ----------    --------      ----------
                              $482,675      $1,312,476      $1,123,652     $1,665,768    $990,839      $1,765,617
                              ========      ==========      ==========     ==========    ========      ==========
</TABLE>

Servicing  fee  income  is net of  $858,992  in  1997,  $1,878,725  in 1996  and
$1,459,570 in 1995 paid to unaffiliated subservicing clients.

On February  28,  1997,  the Company  was  notified by its largest  subservicing
client of its intention not to renew its contract beyond June 1, 1997. Servicing
fee income  for 1997 and 1996  included  approximately  $196,000  and  $409,000,
respectively, attributable to servicing activities performed for this client. In
addition,  the Company received  termination  fees of approximately  $113,000 in
1997 related to this contract.

As agent for investors for whom loans are serviced, the Company maintains escrow
and custodial accounts in which borrower payments for principal, interest, taxes
and insurance are deposited. At December 31, 1997, approximately $1.8 million of
such  accounts were on deposit at  unaffiliated  banks and $4.2 of such accounts
were on deposit at the Bank.





                                       45
<PAGE>




The fair value of MSRs was $1.2  million and $1.7  million at December  31, 1997
and 1996,  respectively.  There were no valuation  allowances  for impairment of
MSRs at December  31, 1997 and 1996.  Following is an analysis of the changes in
the Company's MSRs for the years ended December 31:

                  Balance at January 1, 1995                  $2,214,602
                  Amortization                                  (580,295)
                                                              ----------
                  Balance at December 31, 1995                 1,634,307
                  Purchases                                      243,297
                  Amortization                                  (528,444)
                                                              ----------
                  Balance at December 31, 1996                 1,349,160
                  Purchases                                      289,253
                  Amortization                                  (468,647)
                                                              ----------
                  Balance at December 31, 1997                $1,169,766
                                                               =========


NOTE 16 - NOTES PAYABLE

Notes payable at December 31, 1997 and 1996  consisted  solely of a note payable
to the former  president  of Home  Bancorp and Home  Savings.  The note  accrues
interest at 9.50% per annum. The note is due in five equal annual  installments,
plus  accrued  interest  thereon.  However,  in  conjunction  with  a  severance
settlement  with the  former  employee,  EBI  agreed  to repay  this note in its
entirety in February 1998.


NOTE 17 - EMPLOYEE BENEFIT PLANS

Employees  of  EBI's  subsidiaries  participate  in  a  401(k)  retirement  plan
administered  by EBI. Annual  contributions  to the plan are  discretionary,  as
authorized by the boards of directors of EBI and its  subsidiaries.  The Company
made "qualified non-elective"  contributions of $38,379 and $17,635 for the plan
years ended December 31, 1997 and 1995,  respectively,  in order to maintain the
plan's qualified tax status. The Company did not make a contribution to the plan
for 1996.

Certain employees of EBI's subsidiaries  participate in a Supplemental Executive
Retirement  Plan  ("SERP").  An expense of  $37,808,  $38,836  and  $28,738  was
recognized in 1997,  1996 and 1995,  respectively,  in connection  with employee
vesting in the SERP. The SERP provides  deferred  compensation of 5% to 10% of a
covered  employee's salary and vests at a rate of 20% per year.  Participants in
the SERP as of  December  31, 1997 are 100%  vested.  Deferred  compensation  in
excess of 5% is  discretionary  and subject to the  approval of EBI's  Executive
Compensation Committee.


NOTE 18 - PREFERRED STOCK

As described in Note 4, on September 15, 1995, EBI merged with Home Bancorp.  In
exchange for all of the outstanding  stock of Home Bancorp,  the stockholders of
Home Bancorp received 2,250,000 shares of nonvoting perpetual preferred stock of
EBI with a redemption  and  liquidation  value of $14.2 million for the Series B
preferred  stock and $834,000 for the Series C preferred  stock.  The  preferred
stock is redeemable at the option of the Company. The 2,125,000 shares of Series
B preferred  stock bear a cumulative  annual dividend rate of 9.5% (based on the
redemption  value) and the  125,000  shares of Series C  preferred  stock bear a
cumulative  annual  dividend rate of 8.0% (based on the redemption  value).  The
Series C preferred  stock is senior to Series B preferred  stock with respect to
the payment of dividends,  and the holders of the Series C preferred  stock may,
in their  discretion,  from time to time in whole or in part,  elect to  convert


                                       46
<PAGE>

such shares of Series C preferred stock into a like amount of Series B Preferred
Stock.  Cumulative but undeclared dividends and accrued interest thereon for the
Series  B  and  Series  C  preferred   stock  were   $3,289,386   and  $160,992,
respectively, as of December 31, 1997.


NOTE 19 - COMMON STOCK

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

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

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





                                       47
<PAGE>


The following table  summarizes  activity under the option plans for years ended
December 31, 1997, 1996 and 1995 and the status at December 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
                                                            Option Plan              Directors Option Plan
                                                       ---------------------        -----------------------
                                                       Number of      Option        Number of        Option
                                                        Options        Price         Options          Price
                                                        -------        -----         -------          -----
    Options granted, June 30, 1995                     498,233        $0.9375        2,000           $0.9375
    Granted                                                  -              -          900            3.8750
    Canceled                                           (56,692)        0.9375            -                 -
                                                      --------                      ------
    Options outstanding, December 31, 1995             441,541         0.9375        2,900         0.9375-3.8750
    Granted                                             40,398         3.2500        1,350            2.0625
    Exercised                                         (210,955)        0.9375       (1,000)           0.9375
    Canceled                                           (10,000)        3.2500            -                 -
    Canceled                                           (46,294)        0.9375            -                 -
                                                      --------                      ------
    Options outstanding, December 31, 1996             214,690     0.9375-3.2500     3,250         0.9375-3.8750
    Granted                                            110,200         1.3750        1,350            5.6250
    Exercised                                         (184,292)        0.9375            -
    Canceled                                            (8,000)        1.3750            -
    Rescinded for replacement                          (30,398)        3.2500            -
                                                      --------                      ------
    Options outstanding as of December 31, 1997        102,200         1.3750        4,600         0.9375-5.6250
                                                      ========                     =======

    Options exercisable as of December 31, 1997              -                       3,250         0.9375-3.8750
                                                      ========                      ======
    Options available for future grant
       as of December 31, 1997                         432,553                      14,400
                                                      ========                      ======
</TABLE>

The Company  recognized  $498,051,  $412,743 and $37,631  during the years ended
December 31, 1997, 1996 and 1995, respectively, for the options granted June 30,
1995 under the Option Plan, which were exercised in their entirety under the SAR
provisions of the options.  As of December 31, 1997,  the Company had recognized
an  obligation of $703,000 to its Chief  Executive  Officer  resulting  from the
exercise of his SARs in November 1997. A determination  has not yet been made as
to the date and method of payment to satisfy this obligation.

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

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


NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement  of Financial  Accounting  Standards  No. 107 - Disclosure  About Fair
Value  of  Financial  Instruments  ("SFAS  107"),  requires  the  disclosure  of
estimated  fair values for  financial  instruments.  Quoted  market  prices,  if
available,  are  utilized  as  an  estimate  of  the  fair  value  of  financial
instruments. Because no quoted market prices exist for a significant part of the
Company's  financial  instruments,  the fair value of such  instruments has been
based on assumptions,  which management believes to be reasonable,  with respect
to future  economic  conditions,  the amount and timing of future cash flows and


                                       48
<PAGE>

estimated discount rates. Different assumptions could significantly affect these
estimates. Because these estimates do not necessarily represent actual purchases
or sales  of  financial  instruments,  the  market  value  could  be  materially
different from the estimates  presented  below.  In addition,  the estimates are
only  indicative of individual  financial  instruments'  value and should not be
considered an indication of the fair value of the Company taken as a whole.

The  following  summary  presents  the  methodologies  and  assumptions  used to
estimate  the fair value of the  Company's  financial  instruments.  Much of the
information used to determine fair value is highly  subjective and judgmental in
nature,  and therefore,  the results may not be precise.  The subjective factors
utilized   include,   among  other  things,   estimates  of  cash  flows,   risk
characteristics, credit quality, and interest rates, all of which are subject to
change. In addition, the calculation of estimated fair values is based on market
conditions at December 31, 1997 and 1996 and may not be reflective of current or
future fair values.

Financial  Assets.  The carrying amounts reported for cash and cash equivalents,
FHLB stock,  loans held for sale, and securities  available for sale approximate
those  assets'  fair  values.  Fair values for  securities  and  mortgage-backed
securities  held for  investment  are  based on quoted  market  prices or dealer
quotes.  The fair value of residential and consumer loans held for investment is
based on the  Sensitivity  Report  produced  for the Bank by the FHLB.  The fair
values in this Sensitivity  Report are determined by discounted cash flows based
upon yield, maturity,  repricing,  and current rate data reported by the Bank to
the OTS.  Commercial  real estate and  construction  and  development  loans are
valued based upon discounted cash flows with discount rates  approximating rates
that would be offered those  individual  borrowers to extend their credits as of
December 31, 1997 and 1996. For nonperforming loans, the estimated fair value is
not greater than the estimated fair value of the underlying collateral.

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

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





                                       49
<PAGE>
<TABLE>
<CAPTION>
<S> <C>

                                                             December 31, 1997              December 31, 1996
                                                      ----------------------------     --------------------------
                                                                        Estimated                       Estimated
                                                         Carrying         Fair            Carrying        Fair
                                                           Value          Value             Value         Value
                                                           -----          -----             -----         -----
                                                                            (in thousands)
Financial Assets
     Cash and cash equivalents.....................      $  11,033       $  11,033       $    6,195    $   6,195
     FHLB stock....................................          1,431           1,431            2,540        2,540
     Securities available for sale.................             17              17                9            9
     Securities held for investment................          2,299           2,217            6,003        5,890
     Mortgage-backed securities held for
        investment.................................          1,905           1,886            1,905        1,869
     Loans held for sale...........................          2,165           2,165            2,463        2,463
     Loans held for investment, net................        167,441         169,843          145,551      147,123

Financial Liabilities
     Deposits with no stated maturity..............       $ 38,667        $ 38,667        $  25,360    $  25,361
     Time deposits.................................        115,260         115,624          105,673      105,977
     FHLB advances.................................         23,547          23,558           25,690       25,767
     Notes payable.................................             72              72               96           96
     Capital lease obligations.....................            332             332              385          386
     Off-balance sheet commitments
        and recourse obligations...................              -              62                -           89
</TABLE>


NOTE 21 - REGULATORY MATTERS

Regulatory Capital. The Bank is required pursuant to the Financial  Institutions
Reform,  Recovery and  Enforcement  Act of 1989  ("FIRREA") and OTS  regulations
promulgated  thereunder  to satisfy  three  separate  requirements  of specified
capital  as a  percent  of  the  appropriate  asset  base:  a  tangible  capital
requirement,  a core capital requirement,  and a risk-based capital requirement.
At December 31, 1997, the Bank was in compliance  with the capital  requirements
established by FIRREA.

Section  38 of  the  Federal  Deposit  Insurance  Act,  as  added  by  the  FDIC
Improvement Act ("FDICIA"),  requires each  appropriate  agency and the FDIC to,
among  other  things,  take  prompt  corrective  action  ("PCA") to resolve  the
problems of insured  depository  institutions  that fall below  certain  capital
ratios.  Federal regulations under FDICIA classify savings institutions based on
four separate  requirements of specified capital as a percent of the appropriate
asset base: tangible equity, Tier I core capital, Tier I risk-based capital, and
total risk-based  capital.  As of December 31, 1997 and 1996, the Bank was "well
capitalized" for PCA purposes.





                                       50
<PAGE>


The Bank's  capital  amounts  and ratios as of  December  31,  1997 and 1996 are
presented in the following tables (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
                                                                                              To Be Well
                                                                   For Capital             Capitalized Under
                                          Actual                Adequacy Purposes           PCA Provisions
                                     ------------------        --------------------       --------------------
                                     Amount       Ratio        Amount         Ratio       Amount         Ratio
                                     ------       -----        ------         -----       ------         -----

As of December 31, 1997
   Total capital (to
     risk-weighted assets)           $16,762      14.33%         $9,354         8.0%      $11,692       =>10.0%
   Tier I capital (to
     risk-weighted assets)            15,298      13.08%          4,677         4.0%        7,015        =>6.0%
   Tier I capital (to
     total assets)                    15,298       7.86%          7,790         4.0%        9,738        =>5.0%
   Tangible capital (to
     total assets)                    15,298       7.86%          2,921         1.5%            -            -
<CAPTION>
                                                                                           To Be Adequately
                                                                   For Capital             Capitalized Under
                                          Actual                Adequacy Purposes           PCA Provisions
                                          ------                -----------------           --------------

As of December 31, 1996
   Total capital (to
     risk-weighted assets)           $16,495      14.73%         $8,959         8.0%      $11,198       =>10.0%
   Tier I capital (to
     risk-weighted assets)            15,090      13.48%          4,480         4.0%        6,719        =>6.0%
   Tier I capital (to
     total assets)                    15,090       8.66%          6,969         4.0%        8,711        =>5.0%
   Tangible capital (to
     total assets)                    15,090       8.66%          2,613         1.5%            -            -
</TABLE>

Regulatory  Compliance.  During the third quarter of 1997, the OTS completed its
safety  and  soundness  examination  of EBI and the Bank and  concluded  that no
adjustments to loss  allowances were required.  Moreover,  the Bank is no longer
considered to be an institution requiring  more-than-normal  supervision and EBI
and the Bank are no longer operating under any supervisory agreements.



                                       51
<PAGE>


NOTE 22 - PARENT COMPANY ONLY FINANCIAL INFORMATION

Condensed  financial  information of EBI is presented  below.  While EBI and the
Bank are no longer operating under any supervisory  agreements with the OTS, the
Bank must seek a letter of  nonobjection  from the OTS prior to making  dividend
payments to EBI.
<TABLE>

                                 Balance Sheets
                           December 31, 1997 and 1996
                                 (in thousands)
<CAPTION>
<S> <C>
                                                                               1997                1996
                                                                               ----                ----
ASSETS
  Cash                                                                        $   190              $   117
  Investment in subsidiaries                                                   15,638               15,458
  Other                                                                           257                    1
                                                                              -------              -------
                                                                              $16,085              $15,576
                                                                              =======              =======

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Notes payable                                                               $    72              $    96
  Redeemable Preferred Stock redemption proceeds payable                           85                   90
  Other                                                                         1,111                  284
                                                                              -------              -------
    Total Liabilities                                                           1,268                  470

SHAREHOLDERS' EQUITY                                                           14,817               15,106
                                                                              -------              -------
                                                                              $16,085              $15,576
                                                                              =======              =======

                            Statements of Operations
              For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)
<CAPTION>

                                                              1997               1996               1995
                                                              ----               ----               ----

Interest expense on notes payable                           $   (9)            $    (11)          $   (113)
Stock option compensation                                     (601)                   -                  -
Net operating income (expenses)                                 25                   60                686
                                                             -----              -------            -------
  Net income (loss) before undistributed loss
    of subsidiaries and extraordinary items                   (585)                  49                573
Undistributed income (loss) of subsidiaries                    288               (7,426)            (4,466)
                                                             -----              -------            -------
  Loss before extraordinary items                             (297)              (7,377)            (3,893)
Extraordinary items                                              -                    -              2,683
                                                             -----              -------            -------
  Net loss                                                   $(297)            $ (7,377)           $(1,210)
                                                             =====             ========            =======
</TABLE>





                                       52
<PAGE>


<TABLE>

                            Statements of Cash Flows
              For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)
<CAPTION>
<S> <C>
                                                                   1997               1996              1995
                                                                   ----               ----              ----
OPERATING ACTIVITIES
  Net loss                                                          $(297)          $(7,377)         $ (1,210)
  Adjustments to reconcile net loss to
    cash provided by operating activities:
      Extraordinary items - forgiveness of debt                         -                 -            (2,683)
      Equity in (income) loss of subsidiaries                        (288)            7,426             4,466
      Dividends from subsidiaries                                     108                 -                 -
      Decrease (increase) in other assets                            (256)                1              (432)
      Increase (decrease) in other liabilities                        827                (7)             (118)
                                                                   ------           -------          --------
        NET CASH PROVIDED BY
         OPERATING ACTIVITIES                                          94                43                23
                                                                   ------           -------          --------

FINANCING ACTIVITIES
  Proceeds from notes payable                                           -                 -             1,004
  Payments on notes payable                                           (24)              (24)                -
  Redemption of Settlement Preferred Stock                             (5)             (104)             (832)
  Common stock issued under the Employee Stock
    Purchase Plan                                                       8                 7                 -
                                                                   ------           -------          --------
       NET CASH (USED IN) PROVIDED BY
       FINANCING ACTIVITIES                                           (21)             (121)              172
                                                                   ------           -------          --------

        NET INCREASE (DECREASE) IN CASH                                73               (78)              195
        CASH AT BEGINNING OF PERIOD                                   117               195                 -
                                                                   ------           -------          --------

        CASH AT END OF PERIOD                                       $ 190            $  117          $    195
                                                                    =====            ======          ========

NONCASH FINANCING ACTIVITIES
  Valuation of preferred stock and warrants issued
     in connection with the Home Acquisition                     $      -          $      -           $15,545

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

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




                                       53
<PAGE>

NOTE 23 - SEGMENT DATA

The Company's major business  segments  consist of (i) attracting  deposits from
the general public and using such deposits, together with borrowings in the form
of advances from the FHLB and other sources of funds,  for  reinvestment in real
estate mortgages, other loans, investments,  and mortgage-backed securities (the
"Retail  Banking  Segment"),  and (ii) the  origination of real estate  mortgage
loans for sale to third  parties with  servicing  retained in certain  instances
(the "Mortgage  Banking  Segment").  The Retail Banking  Segment  depends on the
difference  between  interest earned on loans and investments over interest paid
on deposits and other  borrowings to fund  operating  activities  and generate a
profit. Historically,  the nature of the Company's branch activities resulted in
less reliance on deposit service charges and other  ancillary  income.  However,
this strategy is in transition as the Company moves to more traditional banking.

The  Mortgage  Banking  Segment  depends  on gains from the sale of loans in the
secondary  market and loan servicing income to fund operating  expenses.  During
the years ended  December  31, 1997,  1996,  and 1995,  predominantly  all loans
originated for resale by the Company were sold on a servicing  released basis in
order to supplement the regulatory capital of the Bank.

The  following  table  summarizes  the mix of the major  business  segments  (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
                                                                   Retail            Mortgage
                                                                   Banking            Banking
                                                                   Segment            Segment          Consolidated
                                                                   -------            -------          ------------
     1997
         Total revenue                                            $   5,559           $   2,221           $   7,780
         Income (loss) before income taxes                              798              (1,095)               (297)
         Depreciation and amortization of
            premises and equipment                                      238                 182                 420
         Identifiable assets                                        188,962               6,126             195,088

     1996
         Total revenue                                            $   7,652           $   2,738            $ 10,390
         Loss before income taxes                                    (6,187)             (1,190)             (7,377)
         Depreciation and amortization of
            premises and equipment                                      313                 226                 539
         Identifiable assets                                        169,457               4,810             174,267

     1995
         Total revenue                                            $   6,402           $   2,690           $   9,092
         Loss before extraordinary items
            and income taxes                                         (2,452)             (1,703)             (4,155)
         Depreciation and amortization of
            premises and equipment                                      262                 228                 490
         Identifiable assets                                        332,454               6,270             338,724
</TABLE>

Revenue is defined as net  interest  income  before  loan loss  provisions  plus
noninterest  income.  Revenue by major business segment  represents revenue from
unaffiliated customers.

The Mortgage  Banking  Segment  consists of the  operations  of Essex  First,  a
wholly-owned  subsidiary of the Bank engaged  primarily in the  origination  and
sale of residential  mortgage  loans;  Essex Home and its  subsidiary,  indirect
subsidiaries of EBI and the Bank that are engaged  primarily in the servicing of
mortgage loans owned by the Bank,  various  governmental  agencies,  and various
third party investors; and EMC, a direct subsidiary of EBI that has been engaged


                                       54
<PAGE>

in various  mortgage  banking  activities.  Furthermore,  the  Mortgage  Banking
Segment  includes the MSRs held by the Bank,  in addition to income and expenses
associated with these servicing  assets,  such as the Bank's loan servicing fees
and related amortization of the MSRs.

The  Retail   Banking   Segment   consists  of  all   interest-earning   assets,
interest-bearing  liabilities,  and related net interest  income after provision
for loan losses of EBI and its  subsidiaries,  in addition to the  operations of
EBI, the Bank  (excluding the impact of servicing  assets and related income and
expenses), and Essex Capital Corporation.





                              [intentionally blank]


                                       55
<PAGE>
                              INVESTOR INFORMATION

Annual Meeting of Stockholders

     The Annual Meeting of Stockholders  of Essex Bancorp,  Inc. will be held at
The Koger Center, Building 5, First Floor Conference Room, Norfolk,  Virginia on
May 28, 1998 at 1:00 p.m.

Stock Price Information

     Essex Bancorp, Inc.'s common stock is listed on the American Stock Exchange
("AMEX")  under the symbol  "ESX."  The table  below sets forth the high and low
sales prices of the common stock, as reported by the AMEX during 1997 and 1996.

                       1997                 1996
               -------------------   -----------------
Quarter           High       Low       High      Low
-------           ----       ---       ----      ---
First          $ 2.1875    $1.0000   $5.0000   $2.0000
Second           1.8750     1.0000    3.2500    2.0000
Third           10.0000     1.0000    2.8125    1.5000
Fourth           7.3750     3.5000    2.3750    1.7500

Stock Transfer Agent

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

Service Data Corporation
2424 South 130th Circle
Omaha, Nebraska  68144
Telephone (800) 223-3464

Annual Report on Form 10-K and Additional Information

A copy of Form 10-K as filed with the  Securities  and  Exchange  Commission  is
available without charge to stockholders upon written request. Requests for this
or other financial information about Essex Bancorp, Inc. should be directed to:

Jennifer L. DeAngelo, Corporate Secretary
Essex Bancorp, Inc.
The Koger Center, Building 9, Suite 200
Norfolk, Virginia  23502
Telephone (757) 893-1326

Independent Accountants

Price Waterhouse LLP
700 World Trade Center
Norfolk, Virginia  23510-9916
Telephone (757) 622-5005


                                       56
<PAGE>
                             DIRECTORS AND OFFICERS

EXECUTIVE OFFICERS

Gene D. Ross
Chairman, President and Chief Executive Officer
Essex Bancorp, Inc.,
Essex Savings Bank, F.S.B. and
Essex Home Mortgage Servicing
   Corporation

Roy H. Rechkemmer, Jr.
Senior Vice President-Finance/Treasurer
Essex Bancorp, Inc. and
Essex Savings Bank, F.S.B.

Mary-Jo Rawson
Vice President/Chief Accounting Officer
Essex Bancorp, Inc. and
Essex Savings Bank, F.S.B.

Earl C. McPherson
President and Chief Executive Officer
Essex First Mortgage Corporation

DIRECTORS

Gene D. Ross
Chairman, President and Chief Executive  Officer
Essex Bancorp, Inc.

Roscoe D. Lacy, Jr.
Vice President and General Manager
Miles Jennings, Inc.
Elizabeth City, North Carolina
(industrial supply company)

Robert G. Hecht
Chief Executive Officer
Trumbull Corporation
Pittsburgh, Pennsylvania
(highway construction company)

Harry F. Radcliffe
President and Chief Executive Officer
Fort Pitt Capital Management
Pittsburgh, Pennsylvania
(investment management company)


                                       57
<PAGE>
                              CORPORATE INFORMATION

Executive Offices

The Koger Center
Building 9, Suite 200
Norfolk, Virginia  23502
Telephone (757) 893-1300

Subsidiaries of Essex Bancorp, Inc.

Essex Savings Bank, F.S.B.
The Koger Center
Building 9, Suite 200
Norfolk, Virginia  23502
Telephone (757) 893-1300

Essex Home Mortgage Servicing    Corporation
2420 Virginia Beach Boulevard, Suite 109
Virginia Beach, Virginia  23454
Telephone (757) 631-4240

Subsidiary of Essex Savings Bank, F.S.B.

Essex First Mortgage Corporation
The Koger Center
Building 9, Suite 200
Norfolk, Virginia  23502
Telephone (757) 893-1300



Essex Savings Bank, F.S.B.
Retail Banking Offices

Virginia
     520 South Main Street
     Emporia, Virginia  23847

     1401 Gaskins Road
     Richmond, Virginia  23233

     1455 N. Main Street
     Suffolk, Virginia  23434

North Carolina
     400 W. Ehringhaus Street
     Elizabeth City, North Carolina 27909

Essex First Mortgage Corporation
Mortgage Loan Production Offices

Virginia
     1401 Gaskins Road
     Richmond, Virginia  23233

     2430 Southland Drive, 3rd Floor
     Chester, Virginia  23831

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

North Carolina
     400 W. Ehringhaus Street
     Elizabeth City, North Carolina  27909


                                       58