<PAGE>

                                                                      EXHIBIT 13

                                     ESSEX
                                 BANCORP, INC.


                              2000 ANNUAL REPORT
<PAGE>

                                     ESSEX
                                 BANCORP, INC.

                               Table of Contents

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Management's Discussion and Analysis                                          1

Independent Auditors' Report                                                 14

Report of Independent Accountants                                            15

Consolidated Financial Statements                                            16

Notes to Consolidated Financial Statements                                   21

Investor Information                                                         42

Directors and Officers                                                       43

Corporate Information                                                        44
</TABLE>
<PAGE>

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


     Essex Bancorp, Inc. (the "Company") is a Delaware corporation that was
formed in 1994 to be the single thrift holding company for Essex Savings Bank,
F.S.B. (the "Bank"), a federally-chartered savings bank which operates (i) five
retail banking branches in North Carolina and Virginia and (ii) Essex First
Mortgage ("Essex First"), a division of the Bank, that engages in the
origination and sale of residential mortgage loans, the origination of
residential construction loans to individuals and builders and the participation
in residential construction, acquisition and development and lot loans. The
Company's other principal operating subsidiary is Essex Home Mortgage Servicing
Corporation ("Essex Home"), a wholly-owned subsidiary of the Bank that is
engaged primarily in the servicing of mortgage loans owned by the Bank,
governmental agencies, and third party investors.

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


Financial Condition

     General.  Total assets of the Company at December 31, 2000 were $307.7
million as compared to $277.7 million at December 31, 1999, an increase of
approximately $30.0 million or 10.8%. The predominant factor contributing to the
increase in total assets was the growth in loans held for investment, which
increased $27.0 million or 11.3%. This growth resulted from secondary market
purchases of residential loans, consumer loans and construction, acquisition and
development and lot loan participations.

     Cash and Cash Equivalents.  Cash and cash equivalents (consisting of cash,
interest-bearing deposits in other banks and federal funds sold) decreased by
$1.2 million or 6.2% during 2000 as a result of the Company's Year 2000
liquidity management plan in 1999, which provided for excess liquidity on
December 31, 1999 in anticipation of stronger customer demand for cash during
the Year 2000 rollover.

     Investment Securities.  As a matter of policy, the Company generally
emphasizes lending activities (as opposed to investing activities) in order to
enhance the weighted average yield on its interest-earning assets and, thus, its
results of operations.  Investment securities (including securities classified
as available for sale) consist of U.S. government agency obligations, Federal
Home Loan Bank ("FHLB") stock and mutual fund investments.  During the year
ended December 31, 2000, investment securities decreased $453,000 or 9.1%.  The
decrease during 2000 was attributable to the scheduled maturity of a $2.0
million FHLB note, the impact of which was partially offset by the purchase of a
$1.0 million FHLB fixed-rate note and a $535,000 increase in FHLB stock in order
to satisfy the Bank's minimum investment requirements for FHLB membership.

     Loans.  Net loans (including loans classified as held for sale) increased
by $27.2 million or 11.3% during 2000. This growth resulted from residential
loan purchases of $19.1 million, consumer loan purchases of $2.3 million and net
participation purchases of $17.6 million of residential construction,
acquisition and development, and lot loans. These purchases were undertaken in
order to (i) replenish the residential loan segment of the portfolio, which was
being impacted by the slowdown in loan originations in conjunction with rising
mortgage interest rates

                                       1
<PAGE>

beginning in January 1999 and (ii) to improve the Company's net interest margin
over the long-term partially through higher-yielding and adjustable-rate
construction loans and participations. Acquisition of the participations is
strategically designed to draw upon the construction lending expertise at the
Bank.

     Nonperforming Assets.  The Company's nonperforming assets, net of specific
reserves for collateral-dependent real estate loans ("CDRELs") and foreclosed
properties, decreased from $1.3 million at December 31, 1999 to $749,000 at
December 31, 2000, and consisted of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                2000            1999
                                                ----            ----
                                                     % of            % of
                                                     Total           Total
                                             Amount  Loans   Amount  Loans
                                             ------  -----   ------  -----
  <S>                                        <C>     <C>     <C>     <C>
  Nonaccrual loans, net:
   First and second mortgages..............    $316    .12%  $  350    .14%
   Commercial..............................      61    .02      377    .16
   Consumer................................     184    .07      157    .07
  Accruing loans 90 days or more past due..       -      -        -      -
  Troubled debt restructurings.............       -      -        -      -
                                               ----    ---   ------    ---
     Total nonperforming loans.............     561    .21      884    .37
  Foreclosed properties, net...............     188    .07      446    .19
                                               ----    ---   ------    ---
     Total nonperforming assets............    $749    .28%  $1,330    .56%
                                               ====    ===   ======    ===

  Nonperforming assets to total assets.....            .24%            .48%
  Nonperforming loans to total loans.......            .21             .37
  Allowance for loan losses to
   total loans.............................            .65             .71
  Allowance for loan losses to
   nonaccrual loans........................         301.56          182.88
  Allowance for loan losses to
   nonperforming loans.....................         301.56          182.88
</TABLE>

     The decrease in nonperforming loans included the impact of a $247,000
charge-off for one borrower resulting from a default on floor plan loans made to
a used car dealer ("dealer loans"). The decrease in foreclosed properties
resulted from the sale of eight properties in 2000, coupled with the partial
write-down in one property secured by undeveloped lots.

     In addition to the $749,000 and $1.3 million of nonperforming assets at
December 31, 2000 and 1999, respectively, the Company had classified for
regulatory purposes an additional $1.4 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 $1.4 million of classified assets
at December 31, 1999.  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.

     Mortgage Servicing Rights and Loan Premiums.  As of December 31, 2000 and
1999, the Company reported $2.1 million and $2.0 million, respectively, of
purchased and originated mortgage servicing rights (collectively, "MSRs") and
$482,000 and $742,000, respectively, of capitalized loan premiums.  In addition
to periodic amortization of the net loan premiums, the impact of secondary
market purchases during 2000 reduced net loan premiums because of discounts on
purchases of residential loan portfolios where the note rates were less than the
required market yield.  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, 2000, no assurance can be made that significant
amortization or impairment adjustments will not be necessary in the future with
respect to the Company's MSRs or capitalized loan premiums.

                                       2
<PAGE>

     Deposits.  Deposits, the primary source of the Company's funds, increased
by $30.4 million or 14.3% during the year ended December 31, 2000. A $29.7
million increase in interest-bearing deposits occurred primarily in certificates
of deposit at all of the Bank's retail banking branches. In addition to its
usual competitive interest rates, the Bank offered interest rate specials as a
means of growing deposits in 2000 in order to fund loan growth, coupled with the
impact of the downward corrections in the stock market during the last quarter
of 2000 on investors' decisions to seek alternative investment options.

     Borrowings.  The Company's borrowings consist primarily of advances from
the FHLB. FHLB advances decreased by $3.6 million or 8.1% during the year ended
December 31, 2000. At December 31, 2000, the unused lendable collateral value
for additional FHLB advances was $40.9 million.

     Shareholders' Equity.  Total shareholders' equity at December 31, 2000 was
$21.9 million, an increase of $3.9 million from shareholders' equity of $18.0
million at December 31, 1999.  This change reflects the Company's net income of
$3.9 million for the year ended December 31, 2000, which is further described
under Results of Operations.

     As part of the Bank's acquisition of Home Bancorp, Inc. ("Home Bancorp")
and its wholly-owned subsidiary Home Savings Bank, F.S.B. on September 15, 1995
(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 $9.3 million at December 31, 2000. As the Company has previously
disclosed, the accumulating dividends on the classes of preferred stock are such
that the book value per common share at Bancorp is likely to remain negative,
and even increase, for the foreseeable future.

     On February 1, 2001, the Company announced that its Board of Directors
unanimously decided to pursue a going-private transaction, which would be
subject to the recommendation and approval of a Special Committee.  If such a
transaction goes forward, it will also be subject to shareholder approval.  In a
going-private transaction, the Company would merge with a newly-formed
subsidiary and the Company's common shareholders would receive a cash payment
for their shares that would represent a premium over the current and recent
market prices for the shares.  The subsidiary, Essex Acquisition Corporation
("EAC"), was incorporated in March 2001.  The Board of Directors believes that
such a going-private transaction may be the best way to provide liquidity and a
return to Bancorp's common shareholders.

     Accordingly, the Board of Directors has formed a Special Committee and has
authorized it to, among other things, (i) retain a financial adviser to render
an opinion as to the fairness of the cash consideration to be received by common
shareholders from a financial point of view and (ii) retain securities counsel
to ensure compliance with securities regulations and special counsel to assist
in the decision-making process.  The results of these activities will ultimately
be the basis for a recommendation by the Special Committee to the Board of
Directors with regard to the structure, fairness and advisability of the going-
private transaction.  Although there can be no assurances that the going-private
transaction will take place, the Board of Directors currently anticipates that
it may submit a proposal to the Company's shareholders for their approval at the
Company's annual meeting.  If the going-private transaction is approved, EAC
will become the surviving holding company.

                                       3
<PAGE>

Results of Operations

     The Company's net income for the year ended December 31, 2000 totaled $3.9
million, compared to net income of $2.2 million for the year ended December 31,
1999.  The Company's net income for 2000 included a $2.7 million tax benefit, as
compared to a $1.4 million tax benefit in 1999, reflecting the recognition of
the tax benefits associated with $3.3 million in 2000 and $1.85 million in 1999
of the Company's net operating tax loss ("NOL") carryforwards.  On a pre-tax
basis, the Company had consolidated earnings of $1.2 million for the year ended
December 31, 2000 as compared to $771,000 for the year ended December 31, 1999.
The Company's overall results reflected increases in (i) net interest income,
resulting from an increase in average interest-earning assets, coupled with an
increase in the net yield on interest earning assets and (ii) the provision for
loan losses based on management's assessment of the allowance for loan losses in
relation to growth in the loan portfolio and (iii) loan servicing fees resulting
from an increase in Essex Home's mortgage loan servicing portfolio since the
beginning of 1999.  In addition, the Company's mortgage banking income declined
during 2000 because of a slowdown in permanent residential loan originations in
conjunction with rising interest rates.

     Net Interest Income.  Net interest income totaled $7.6 million and $6.3
million for the years ended December 31, 2000 and 1999, respectively.  In
addition, the net interest margin was 2.81% and 2.71% for the years ended
December 31, 2000 and 1999, respectively.



                             [intentionally blank]

                                       4
<PAGE>

     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.

<TABLE>
<CAPTION>
                                                       2000                         1999
                                         --------------------------   --------------------------
                                         Average             Yield/             Average   Yield/
                                         Balance   Interest   Rate    Balance   Interest   Rate
                                         --------  --------  -----    --------  --------  -----
                                                          (dollars in thousands)
<S>                                      <C>       <C>       <C>      <C>       <C>       <C>
Interest-earning assets:
 Loans (1).............................  $258,119   $21,131    8.19%  $215,897   $16,645    7.71%
 Investment securities.................     4,408       301    6.82      4,523       259    5.74
 Mortgage-backed securities............       480        35    7.32        798        46    5.77
 Federal funds sold....................     1,157        72    6.20      1,365        67    4.90
 Other.................................     7,660       664    8.66      8,888       441    4.96
                                         --------   -------           --------   -------
   Total interest-earning assets.......   271,824    22,203    8.16    231,471    17,458    7.54
Cash...................................     5,895                        5,850
Other, less allowance for loan losses..    14,818                       11,041
                                         --------                     --------
   Total assets........................  $292,537                     $248,362
                                         ========                     ========

Interest-bearing liabilities:
 Time deposits.........................  $162,487     9,498    5.85%  $140,648     7,651    5.44%
 Other deposits........................    42,147     1,902    4.51     43,731     1,907    4.36
                                         --------   -------           --------   -------
  Total deposits.......................   204,634    11,400    5.57    184,379     9,558    5.18
 FHLB advances.........................    48,723     3,132    6.43     29,233     1,583    5.42
 Other.................................       147        28   18.66        231        43   18.46
                                         --------   -------           --------   -------
   Total interest-bearing
    liabilities........................   253,504    14,560    5.74    213,843    11,184    5.25
                                                    -------                      -------
Demand deposits........................    16,618                       16,691
Other..................................     3,718                        1,566
                                         --------                     --------
   Total liabilities...................   273,840                      232,100

Shareholders' equity...................    18,697                       16,262
                                         --------                     --------
   Total liabilities and
    shareholders' equity...............  $292,537                     $248,362
                                         ========                     ========

Net interest earnings..................             $ 7,643                      $ 6,274
                                                    =======                      =======
Net interest spread....................                        2.42%                        2.29%
                                                            =======                      =======
Net interest margin (2)................                        2.81%                        2.71%
                                                            =======                      =======
Average interest-earning assets
 to average interest-bearing
 liabilities...........................                      107.23%                      108.24%
                                                            =======                      =======
</TABLE>

(1) Nonaccrual loans and loans classified as held for sale are included in the
    average balance of loans.
(2) Net interest margin is net interest income divided by average interest-
    earning assets.

     The increase in net interest income from 1999 to 2000 reflected the
favorable impact of a 19.6% increase in average loans, coupled with a 48 basis
point increase in the average yield on loans.  The increasing mortgage interest
rates beginning in January 1999 resulted in a slowdown in refinancings, which
stabilized prepayments in the loan portfolio, and the Company has been
diversifying its loan portfolio by investing in higher-yielding, adjustable-rate
products, including construction loans to residential builders and
participations in such loans.  However, net interest margin compression occurred
throughout 2000 because of the inverted yield curve that existed through most of
the year, coupled with the impact of competition for deposits as a funding
source for growth.

     The Company expects that if interest rates continue to decline as they have
since the end of 2000, the repricing of deposits and borrowings to lower
interest rates will favorably impact the net interest margin.  However, lower
interest rates can also stimulate an increase in the volume of

                                       5
<PAGE>

refinancings to lower fixed-rate loans. While the Company will continue to
emphasize investment in adjustable-rate loan portfolios, borrowers' demands for
fixed-rate loans may result in a higher origination of balloon payment and
adjustable-rate loans with longer initial adjustment terms. While the Company
will continue to emphasize the origination and secondary market purchase of
residential first mortgage loans, it will also continue to expand its loan
growth focus to construction, development and consumer loans, which are
generally higher yielding and more interest rate sensitive than residential
loans.

     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.

                                      Increase (Decrease) From
                                        1999 to 2000 Due to
                                     --------------------------
                                      Rate     Volume     Net
                                     -------  --------  -------
                                       (dollars in thousands)
  Interest income on:
   Loans (1)                          $1,078   $3,408   $4,486
   Investment securities                  48       (6)      42
   Mortgage-backed securities             10      (21)     (11)
   Federal funds sold                     16      (11)       5
   Other interest-earning assets         291      (68)     223
                                      ------   ------   ------
        Total interest income (2)      1,443    3,302    4,745
                                      ------   ------   ------

  Interest expense on:
   Time deposits                         604    1,243    1,847
   Other deposits                         65      (70)      (5)
   FHLB advances                         339    1,210    1,549
   Other interest-bearing
     liabilities                           -      (15)     (15)
                                      ------   ------   ------
         Total interest expense        1,008    2,368    3,376
                                      ------   ------   ------

        Net interest income           $  435   $  934   $1,369
                                      ======   ======   ======

  (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 incorporates charge-off history and loan
classification status into a loss migration analysis in order to arrive at an
estimate of the required allowance for loan losses.  The Company also considers,
among other things, present and prospective industry trends, regional and
national economic conditions and potential problems with sizable 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, 2000 and 1999, provisions for loan losses
amounted to $740,000 and $149,000, respectively.  At December 31, 2000,
nonperforming assets of $749,000 were .24% of total assets as compared to
nonperforming assets at December 31, 1999 of $1.3 million, which was .48% of
total assets.  The Company's loan loss coverage, expressed as the

                                       6
<PAGE>

ratio of the allowance for loan losses to nonperforming loans, improved from
182.88% as of December 31, 1999 to 301.56% as of December 31, 2000. Further
credit quality improvements were evidenced by a decline in loans past due 30-89
days from $1.1 million at December 31, 1999 to $680,000 at December 31, 2000.

     Although management utilizes its best judgment in providing for probable
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.

     Noninterest Income.  Noninterest income for the year ended December 31,
2000 totaled $2.6 million, a $226,000 or 8.1% decrease from the $2.8 million
during the year ended December 31, 1999.  This decrease was primarily
attributable to (i) a $283,000 decline in mortgage banking income resulting from
a slowdown in mortgage loan originations in conjunction with rising interest
rates and (ii) a $192,000 decline in other noninterest income resulting from
nonrecurring adjustments to servicing-related receivables in 1999.  These
decreases were partially offset by a $161,000 increase in loan servicing fees
and an $88,000 increase in other service charges and fees resulting from an
increase in Essex Home's average mortgage loan servicing portfolio for the
comparable periods.  The Company intends to pursue opportunities to increase its
loan servicing revenues in order to mitigate the impact of the decline in
mortgage banking income.

     Noninterest Expense.  Total noninterest expense increased $154,000 or 1.9%
from $8.2 million during the year ended December 31, 1999 to $8.3 million during
the year ended December 31, 2000.  This increase was primarily attributable to
(i) a $538,000 increase in salaries and employee benefits resulting from an
increase in the number of full-time equivalent employees, coupled with a lower
deferral of fixed loan origination costs, such as personnel costs for loan
processors, underwriters and closers, because of the decline in loan origination
volume in 2000 and (ii) a $117,000 increase in foreclosed properties expense
resulting from net gains on disposals in 1999 that did not recur in 2000,
coupled with the partial write-down of one foreclosed property secured by
undeveloped lots.  These increases were partially offset by a $486,000 decrease
in deposit insurance premiums resulting from a lower deposit insurance
assessment rate in 2000.

     Benefit from Income Taxes.  The Company recognized a $2.7 million tax
benefit in the year ended December 31, 2000, as compared to a $1.4 million tax
benefit in the comparable period of 1999.  The benefits resulted from the
recognition of the tax benefits associated with $3.3 million in 2000 and $1.9
million in 1999 of the Company's NOL carryforwards and was predicated upon the
Company's favorable trends in actual and projected core profitability.  The
benefit recognized in 1999 was based on taxable income projections through 2002.
During 2000, however, management determined that it is more likely than not that
the Company will sustain profitability through the expiration dates of the NOLs
and recognized the benefits associated with the remainder of the NOLs based on
projected taxable income through such dates.  Future adjustments will be
required if it is determined that the Company's deferred tax asset for the NOLs
has been impaired or if performance materially exceeds projections.  For
additional information, refer to Note 13 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

                                       7
<PAGE>

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

     The Bank has an Asset and Liability Management Committee ("ALCO") that
meets quarterly to structure and price the Bank's assets and liabilities in
order to maintain an acceptable interest rate spread while reducing the effects
of changes in interest rates.  The ALCO implements and maintains asset and
liability management policies designed to better match the maturities and
repricing terms of the Bank's interest-earning assets and interest-bearing
liabilities in order to minimize the adverse effects of material and prolonged
increases in interest rates on the Bank's results of operations.  The Bank may
undertake a variety of strategies to reduce its exposure to interest rate
fluctuations, including (i) emphasizing investment in adjustable-rate single-
family residential loans ("ARMs") or shorter-term, fixed-rate single-family
residential loans (loans with initial fixed rate terms of up to seven years),
(ii) selling long-term, fixed-rate single-family residential loans in the
secondary market, (iii) originating and purchasing adjustable or short-term
construction and development loans, (iv) purchasing adjustable-rate mortgage-
backed securities, (v) maintaining higher liquidity by holding short-term
investments and cash equivalents and (vi) 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, 2000.  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 maturities 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, 2000 and is not necessarily indicative
of the Bank's interest rate sensitivity at any other time.

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                  Anticipated Period Until Maturity or Repricing
-------------------------------------------------------------------------------------------------------------------
                                    0 to     7 Months     1-3        3-5        Over 5     Total   % of      Fair
                                  6 Months   to 1 Year   Years      Years       Years     Balance  Total    Value
                                  --------   ---------  --------   --------    -------   --------  -----   --------
                                                                 (dollars in thousands)
<S>                               <C>        <C>        <C>        <C>         <C>       <C>       <C>     <C>
Interest-earning assets:
Loans receivable:
 First mortgage:
  Adjustable-rate                 $ 68,658   $ 56,018   $ 16,575   $ 32,103    $     -   $173,354   61.5%  $172,829
  Fixed-rate                         7,172      6,337     20,389     12,419     29,350     75,667   26.9     76,353
 Second mortgage                     2,122        227        471        104          -      2,924    1.0      2,902
 All other                           3,286      1,387      5,131      2,699      3,028     15,531    5.5     16,275
Investments                         12,557          -      1,760          -          -     14,317    5.1     14,337
                                  --------   --------   --------   --------    -------   -------- ------   --------
 Total                              93,795     63,969     44,326     47,325     32,378   $281,793  100.0%  $282,696
                                  --------   --------   --------   --------    -------   ======== ======   ========

Interest-bearing liabilities:
 Deposits                           89,012     63,735     69,921      8,346     11,585   $242,599   85.5%  $243,992
 Capitalized lease                      26         74          -          -          -        100    0.0        107
 Variable-rate borrowings           41,000          -          -          -          -     41,000   14.5     41,051
                                  --------   --------   --------   --------    -------   -------- ------   --------
 Total                             130,038     63,809     69,921      8,346     11,585   $283,699  100.0%  $285,150
                                  --------   --------   --------   --------    -------   ======== ======   ========

Effect of off-balance sheet
 items (1)                          (4,873)       701      1,321        867      1,985
                                  --------   --------   --------   --------    -------

Maturity gap                      $(41,116)  $    861   $(24,274)  $ 39,846    $22,778
                                  ========   ========   ========   ========    =======

Cumulative gap:
 December 31, 2000                $(41,116)  $(40,255)  $(64,529)  $(24,683)   $(1,905)
                                  ========   ========   ========   ========    =======
 December 31, 1999                $(50,632)  $(52,827)  $(76,219)  $(47,026)   $ 1,169
                                  ========   ========   ========   ========    =======

Cumulative gap as a percent
 of total assets:
 December 31, 2000                   (13.3)%    (13.1)%    (20.9)%     (8.0)%     (0.6)%
                                  ========   ========   ========   ========    =======
 December 31, 1999                   (18.2)%    (19.0)%    (27.5)%    (16.9)%      0.4%
                                   =======    =======    =======    =======     ======

Cumulative ratio of interest-
 earning assets to interest-
 bearing liabilities                  72.1%      81.4%      76.6%      91.7%      99.3%
                                   =======    =======    =======    =======     ======
</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
13.1% at December 31, 2000, down from negative 19.0% at December 31, 1999. The
decrease in the negative gap measure resulted from increases in (i) adjustable
rate assets, which include construction and development loans and
participations, (ii) prepayment expectations on mortgage loans resulting from
lower interest rates at 2000 year-end and (iii) short-term and adjustable rate
borrowings from the FHLB. The Company will consider extending FHLB advance
maturities in order to mitigate the impact of an increase in interest rates in
the future. While the Company continues to emphasize investment in adjustable-
rate loans, customer demand for such loans is not strong. Within the spectrum of
loan products offered by the Bank, balloon payment and adjustable-rate loans
with longer initial adjustment terms predominate.

     In addition to monitoring its interest rate sensitivity gap, the Bank
utilizes interest rate sensitivity analyses as developed by the OTS to measure
the changes in net portfolio value ("NPV"), expressed as a percentage of the
Bank's market value of assets, assuming certain percentage changes in interest
rates. NPV is the difference between incoming and outgoing discounted cash flows
from assets, liabilities, and off-balance sheet contracts. The following tables
present the Bank's NPV at December 31, 2000 and 1999.

                                       9
<PAGE>

<TABLE>
<CAPTION>
As of December 31, 2000
-------------------------
     Change in                       Net Portfolio Value              NPV as % of PV of Assets
                           ----------------------------------------   -------------------------
   Interest Rates          $ Amount       $ Change         % Change    NPV Ratio       Change
   --------------          --------       --------         --------    ---------       ------
   <S>                     <C>            <C>              <C>         <C>             <C>
        +300bp              $20,244        $(7,472)          (27.0)       6.70%        (213)bp
        +200bp               23,629         (4,087)          (14.7)       7.70         (113)bp
        +100bp               26,242         (1,474)           (5.3)       8.44          (39)bp
     Base Scenario           27,716                                       8.83
        -100bp               27,715             (1)           (0.0)       8.79           (4)bp
        -200bp               27,701            (15)           (0.1)       8.74           (9)bp
        -300bp               28,822          1,106             4.0        9.02           19 bp

As of December 31, 1999
-------------------------

     Change in                       Net Portfolio Value              NPV as % of PV of Assets
                           ----------------------------------------   -------------------------
   Interest Rates          $ Amount       $ Change         % Change    NPV Ratio       Change
   --------------          --------       --------         --------    ---------       ------
        +300bp              $12,938        $(9,720)         (42.90)       4.80%        (323)bp
        +200bp               16,812         (5,846)         (25.80)       6.13         (190)bp
        +100bp               20,160         (2,498)         (11.03)       7.23          (80)bp
     Base Scenario           22,658                                       8.03
        -100bp               24,046          1,388            6.13        8.44           41 bp
        -200bp               24,509          1,851            8.17        8.55           52 bp
        -300bp               25,013          2,355           10.39        8.66           63 bp
</TABLE>

     The ALCO has established limits for the impact of changes in interest rates
on NPV.  As of December 31, 2000, 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, 2000, the Bank's
sensitivity of NPV was within internal policy limits.  However, computations of
prospective effects of hypothetical interest rate changes are based on many
assumptions, including relative levels of market interest rates, loan
prepayments and deposits decay.  They should not be relied upon as indicative of
actual results.  Further, the computations do not contemplate certain actions
management could undertake in response to changes in interest rates.


Liquidity and Commitments

     Liquidity refers to the Company's ability to generate sufficient cash to
meet the funding needs of current loan demand, deposit withdrawals, and to pay
operating expenses. The Company generally has no significant source of income
other than dividends from the Bank.

     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, 2000, had a liquidity ratio of 8.23%.

     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 demands 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.

                                       10
<PAGE>

Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits and advances from the FHLB.

     The Bank's liquidity management is both a daily and long-term function of
funds management.  Liquidity is generally invested in short-term investments
such as federal funds sold, certificates of deposit, and in U.S. Treasury and
U.S. Government agency securities.  If the Bank requires funds, which cannot be
generated internally, borrowings from the FHLB provide an additional source of
funds.  At December 31, 2000, the Bank had $41.0 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.  However, the Bank independently solicits deposits by
posting its deposit rates on national computerized bulletin boards.

     The Bank anticipates that it will have sufficient funds available to meet
its current loan commitments.  At December 31, 2000, the Bank had outstanding
commitments (including unused lines of credit) to originate and/or purchase
mortgage and non-mortgage loans of $2.2 million.  The undisbursed portions of
construction builder loans and construction/permanent loans in process totaled
$19.6 million and $5.3 million, respectively, as of December 31, 2000.
Certificates of deposit which are scheduled to mature within one year totaled
$120.5 million at December 31, 2000 and borrowings from the FHLB that are
scheduled to mature within the same period amounted to $41.0 million.  In
addition to the excess liquidity held on December 31, 2000, the Bank had $26
million of unused available credit with the FHLB.


Regulatory Capital

     The Bank is required pursuant to the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and OTS regulations promulgated
there under to have (i) tangible capital equal to 1.5% of adjusted total assets,
(ii) core or leverage capital equal to 4.0% of adjusted total assets, and (iii)
total capital equal to 8.0% of risk-weighted assets.  As of December 31, 2000,
the Bank's tangible and core capital amounted to 6.07% of adjusted total assets
and the Bank's total capital amounted to 10.34% of risk-weighted assets and,
consequently, the Bank was in compliance with its core and risk-based capital
requirements as of such date.

     Furthermore, the federal regulations under the Federal Deposit Insurance
Corporation ("FDIC") Improvement Act of 1991 classify savings institutions based
on four separate requirements of specified capital as a percent of the
appropriate asset base:  tangible equity, Tier I or leverage capital, Tier I
risk-based capital, and total risk-based capital.  At December 31, 2000, the
Bank's Tier I, Tier I risk-based, and total risk-based capital ratios were
6.07%, 9.74%, and 10.34%, respectively, compared to the minimum capital
standards to be "well capitalized" under the FDIC Improvement Act of 1991
("FDICIA") of 5%, 6%, and 10%, respectively.  As a result, the dollar amount of
the excess in the Bank's Tier I, Tier I risk-based, and risk-based regulatory
capital under FDICIA totaled $3.3 million, $7.1 million, and $641,000,
respectively, at December 31, 2000.

     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

                                       11
<PAGE>

institutions with SAIF-assessable deposits as of March 31, 1995 pay a special
one-time assessment to recapitalize the SAIF. Pursuant to this legislation, the
FDIC promulgated a rule that established the special assessment necessary to
recapitalize the SAIF at 65.7 basis points of SAIF-assessable deposits held by
affected institutions as of March 31, 1995. However, as a result of the Bank's
financial condition, on November 8, 1996, the FDIC notified the Bank 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) and continued to pay assessments through 1999 at the assessment rate
schedule in effect as of June 30, 1995. Therefore, through December 31, 1999,
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), which became effective for the Bank on January 1, 2000. In
addition, insured depository institutions began paying in 1997 a portion of the
interest due annually on the Financing Corporation ("FICO") bonds issued in the
1980s to provide funding for the SAIF. Accordingly, an additional assessment
approximating 5.9 basis points was added to the regular SAIF-assessment during
1999. Effective January 1, 2000, the FICO assessment rate for the SAIF is
assessed at the same rate as the BIF, effectively reducing the Bank's annual
FICO assessment to approximately two basis points.

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


New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 - Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133").  SFAS 133 became
effective for fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company).  SFAS 133 established accounting and reporting standards for
derivative financial instruments and other similar financial instruments and for
hedging activities.  In 2000, the FASB amended SFAS 133 with SFAS No. 138 -
Accounting for Certain Derivative Instruments and Certain Hedging Activities
("SFAS 138").  SFAS 138 addresses a limited number of issues causing
implementation difficulties for entities that apply SFAS 133.  The Company's
management anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS 133 will not have a significant effect on its results of
operations or its financial position.

     In December 2000, the FASB issued SFAS No. 140 - Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
140").  SFAS 140 replaces SFAS 125.  It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration.  SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001.  The Company's management anticipates that the new provisions of SFAS 140
will not have any impact on its results of operation or its financial position
because the Company does not securitize financial assets.

                                       12
<PAGE>

     The Emerging Issues Task Force ("EITF") has issued EITF No. 00-19 -
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock ("EITF 00-19"), which applies to freestanding
derivative financial instruments, such as the Company's warrants.  EITF 00-19
addresses how freestanding contracts that are indexed to, and potentially
settled in, an entity's own stock should be classified and measured by the
entity.  For contracts that existed on September 20, 2000, such as the Company's
warrants, the concensuses of EITF 00-19 should be applied on June 30, 2001 to
those contracts that remain outstanding at June 30, 2001, based on the contract
terms then in place.  If the Company's going-private transaction proceeds, EITF
00-19 will have no impact on the Company because its warrants will be exchanged
for common stock of EAC.  If the going-private transaction does not proceed, the
Company's warrants would be considered permanent equity and will initially be
measured at fair value.


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

     The above discussion contains certain forward-looking statements (as
defined in the Private Securities Litigation Reform Act of 1995) involving
potential risks and uncertainties that could cause the Company's actual results
and experience to differ materially from those discussed herein.  Some of the
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include but are not limited to the
following:

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

  Readers should not place undue reliance on these forward-looking statements,
which are applicable only as of the date hereof.



                             [intentionally blank]

                                       13
<PAGE>

                         Independent Auditors' Report
                         ----------------------------


The Board of Directors
Essex Bancorp, Inc.:

We have audited the accompanying consolidated balance sheet of Essex Bancorp,
Inc. and subsidiaries (Company) as of December 31, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Essex Bancorp, Inc.
and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.



KPMG LLP


Norfolk, Virginia


February 1, 2001

                                       14
<PAGE>

Report of Independent Accountants



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


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement 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, 1999 and the results of their
operations and their cash flows for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.  These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit.  We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America 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
audit provides a reasonable basis for the opinion expressed above.  We have not
audited the consolidated financial statements of Essex Bancorp, Inc. for any
period subsequent to December 31, 1999.



PricewaterhouseCoopers LLP


Virginia Beach, Virginia



February 18, 2000

                                       15
<PAGE>

                     ESSEX BANCORP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                          December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                           2000           1999
                                                                           ----           ----
<S>                                                                    <C>            <C>
ASSETS
  Cash...............................................................  $  5,729,199   $  6,902,398
  Interest-bearing deposits..........................................    10,985,110      9,820,129
  Federal funds sold.................................................     1,068,776      2,228,596
                                                                        -----------    -----------
       Cash and cash equivalents.....................................    17,783,085     18,951,123
  Federal Home Loan Bank stock.......................................     2,765,000      2,230,000
  Securities available for sale at fair value........................        20,557         19,331
  Securities held to maturity - fair value of $1,781,000 in 2000
   and $2,713,000 in 1999............................................     1,760,472      2,750,116
  Mortgage-backed securities held to maturity - fair value of
   $481,000 in 2000 and $479,000 in 1999.............................       479,738        479,861
  Loans, net of allowance for loan losses of $1,740,000 in 2000 and
   $1,697,000 in 1999................................................   265,854,916    238,881,926
  Loans held for sale................................................     1,095,447        916,753
  Mortgage servicing rights..........................................     2,115,389      1,985,462
  Foreclosed properties, net.........................................       188,148        445,577
  Accrued interest receivable........................................     1,954,166      1,544,665
  Advances for taxes, insurance, and other...........................       904,507        981,365
  Premises and equipment, net........................................     3,971,540      3,399,745
  Deferred tax asset, net............................................     4,662,558      1,936,062
Other assets.........................................................     4,166,180      3,216,924
                                                                        -----------    -----------
       Total Assets..................................................  $307,721,703   $277,738,910
                                                                        ===========    ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Deposits:
   Noninterest-bearing...............................................  $ 20,355,364   $ 19,630,014
   Interest-bearing..................................................   222,240,222    192,579,360
                                                                        -----------    -----------
       Total deposits................................................   242,595,586    212,209,374
  Federal Home Loan Bank advances....................................    41,000,000     44,600,000
  Capital lease obligations..........................................        99,931        191,613
  Other liabilities..................................................     2,158,934      2,742,741
                                                                        -----------    -----------
       Total Liabilities.............................................   285,854,451    259,743,728

COMMITMENTS AND CONTINGENCIES (Notes 8, 10 and 14)

SHAREHOLDERS' EQUITY
  Series B preferred stock, $6.67 stated value:
   Authorized shares - 2,250,000
   Issued and outstanding shares - 2,125,000 in 2000 and 1999........    14,173,750     14,173,750
  Series C preferred stock, $6.67 stated value:
   Authorized shares - 125,000
   Issued and outstanding shares - 125,000 in 2000 and 1999..........       833,750        833,750
  Common stock, $.01 par value:
   Authorized shares - 20,000,000
   Issued and outstanding shares - 1,060,642 in 2000 and 1999........        10,606         10,606
  Additional paid-in capital.........................................     8,687,761      8,687,770
  Accumulated deficit................................................    (1,838,615)    (5,710,694)
                                                                        -----------    -----------
       Total Shareholders' Equity....................................    21,867,252     17,995,182
                                                                        -----------    -----------
       Total Liabilities and Shareholders' Equity....................  $307,721,703   $277,738,910
                                                                        ===========    ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       16
<PAGE>

                     ESSEX BANCORP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                For the years ended December 31, 2000 and 1999

                                                      2000         1999
                                                      ----         ----
INTEREST INCOME
  Loans, including fees.........................  $21,131,231  $16,645,322
  Federal funds sold............................       71,737       66,864
  Investment securities, including dividend
   income.......................................      300,676      259,399
  Mortgage-backed securities....................       35,117       46,035
  Other.........................................      663,659      440,755
                                                   ----------   ----------
       Total Interest Income....................   22,202,420   17,458,375
                                                   ----------   ----------

INTEREST EXPENSE
  Deposits......................................   11,400,296    9,558,224
  Federal Home Loan Bank advances...............    3,131,550    1,583,360
  Other.........................................       27,519       42,692
                                                   ----------   ----------
       Total Interest Expense...................   14,559,365   11,184,276
                                                   ----------   ----------

       Net Interest Income......................    7,643,055    6,274,099
PROVISION FOR LOAN LOSSES.......................      740,000      148,728
                                                   ----------   ----------
       Net Interest Income After
       Provision for Loan Losses................    6,903,055    6,125,371

NONINTEREST INCOME
  Loan servicing fees, net......................    1,257,716    1,096,387
  Mortgage banking income, including
   gain on sale of loans........................      216,708      499,886
  Other service charges and fees................      699,690      611,621
  Other.........................................      406,072      598,399
                                                   ----------   ----------
       Total Noninterest Income.................    2,580,186    2,806,293
                                                   ----------   ----------

NONINTEREST EXPENSE
  Salaries and employee benefits................    4,613,146    4,075,559
  Net occupancy and equipment...................      967,371      898,410
  Deposit insurance premiums....................      105,495      591,983
  Amortization of intangible assets.............       35,632       62,061
  Service bureau fees...........................      630,031      584,563
  Professional fees.............................      266,093      262,997
  Foreclosed properties, net....................      133,725       17,139
  Telecommunications expense....................      306,984      379,800
  Other.........................................    1,256,623    1,288,118
                                                   ----------   ----------
       Total Noninterest Expense................    8,315,100    8,160,630
                                                   ----------   ----------

       Income Before Benefit from Income Taxes..    1,168,141      771,034

NET BENEFIT FROM INCOME TAXES...................    2,703,938    1,389,062
                                                   ----------   ----------

       Net Income...............................  $ 3,872,079  $ 2,160,096
                                                   ==========   ==========

  Basic Income Per Common Share.................  $      1.63  $       .19
                                                   ==========   ==========
  Diluted Income Per Common Share...............  $      1.08  $       .07
                                                   ==========   ==========

         See accompanying notes to consolidated financial statements.

                                       17
<PAGE>

                     ESSEX BANCORP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                For the years ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                        Series B      Series C
                                       Preferred     Preferred      Common     Additional
                                      Stock, $6.67  Stock, $6.67  Stock, $.01   Paid-in     Accumulated
                                      Stated Value  Stated Value   Par Value    Capital       Deficit        Total
                                      ------------  ------------  -----------  ----------   -----------   -----------
<S>                                   <C>           <C>           <C>          <C>          <C>           <C>
Balance, January 1, 1999............   $14,173,750      $833,750      $10,606  $8,687,772   $(7,870,790)  $15,835,088
Fractional share payouts under the
 Employee Stock Purchase Plan.......             -             -            -          (2)            -            (2)
Net income..........................             -             -            -           -     2,160,096     2,160,096
                                      ------------  ------------  -----------  ----------   -----------   -----------

Balance, December 31, 1999..........    14,173,750       833,750       10,606   8,687,770    (5,710,694)   17,995,182
Fractional share payouts under the
 Employee Stock Purchase Plan.......             -             -            -          (9)            -            (9)
Net income..........................             -             -            -           -     3,872,079     3,872,079
                                      ------------  ------------  -----------  ----------   -----------   -----------

Balance December 31, 2000...........   $14,173,750      $833,750      $10,606  $8,687,761   $(1,838,615)  $21,867,252
                                      ============  ============  ===========  ==========   ===========   ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       18
<PAGE>

                     ESSEX BANCORP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the years ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                             2000           1999
                                                                             ----           ----
<S>                                                                      <C>            <C>
OPERATING ACTIVITIES
  Net income...........................................................  $  3,872,079   $  2,160,096
  Adjustments to reconcile net income to cash provided by
   operating activities:
   Provision for losses on loans, foreclosed properties and servicing..       896,417        236,012
   Depreciation and amortization of premises and equipment.............       379,160        344,744
   Amortization (accretion) of:
    Premiums and discounts on loans, investments
     and mortgage-backed securities....................................      (103,203)       236,755
    Mortgage servicing rights..........................................       534,571        524,532
    Goodwill...........................................................        35,631         62,061
   Mortgage banking activities:
    Proceeds from loan sales...........................................    17,658,678     59,710,175
    Loan originations and purchases....................................   (17,648,913)   (55,701,070)
    Realized gains from sale of loans..................................      (188,459)      (439,587)
   Realized (gains) and losses from sales of:
    Foreclosed properties..............................................         6,951        (63,129)
    Premises and equipment.............................................        (1,065)             -
   Changes in operating assets and liabilities:
    Accrued interest receivable........................................      (409,501)      (294,316)
    Advances for taxes, insurance and other............................        16,858        517,843
    Deferred tax asset, net............................................    (2,726,496)    (1,386,062)
    Other assets.......................................................      (984,887)    (1,069,806)
    Other liabilities..................................................      (599,039)       351,884
                                                                         ------------   ------------
  Net cash provided by operating activities............................       738,782      5,190,132
                                                                         ------------   ------------

INVESTING ACTIVITIES
  Purchase of Federal Home Loan Bank stock.............................      (535,000)      (681,200)
  Purchase of securities held to maturity..............................    (1,011,903)           (27)
  Proceeds from maturities of securities held to maturity..............     2,000,000              -
  Purchase of securities available for sale............................        (1,226)          (925)
  Principal remittances on mortgage-backed securities..................             -        974,119
  Purchases of loans and participations................................   (38,992,419)   (59,287,144)
  Net decrease in net loans............................................    11,338,447     12,380,966
  Proceeds from sales of foreclosed properties.........................       355,612        514,990
  Additions to foreclosed properties...................................      (155,696)       (32,121)
  Purchases of mortgage servicing rights...............................      (664,498)    (1,678,797)
  Purchases of premises and equipment..................................      (932,708)      (560,912)
  Proceeds from sales of premises and equipment........................         1,065              -
                                                                         ------------   ------------
  Net cash used in investing activities................................   (28,598,326)   (48,371,051)
                                                                         ------------   ------------
</TABLE>

                                  (Continued)

                                       19
<PAGE>

                     ESSEX BANCORP, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                For the years ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                             2000            1999
                                                             ----            ----
<S>                                                      <C>             <C>
FINANCING ACTIVITIES
  Net (decrease) increase in NOW and savings deposits..     (5,115,177)    10,259,059
  Net increase in certificates of deposit..............     35,501,389     14,318,059
  Proceeds from Federal Home Loan Bank advances........    216,000,000     93,000,000
  Repayment of Federal Home Loan Bank advances.........   (219,600,000)   (73,308,333)
  Payments on capital lease obligation.................        (91,682)       (76,510)
  Redemption of Settlement Preferred Stock.............         (3,015)        (4,911)
  Common stock issued under the Employee Stock
   Purchase Plan, net of fractional share pay-outs.....             (9)            (2)
                                                         -------------   ------------
  Net cash provided by financing activities............     26,691,506     44,187,362
                                                         -------------   ------------

   (Decrease) increase in cash and cash equivalents....     (1,168,038)     1,006,443
   Cash and cash equivalents at beginning of year......     18,951,123     17,944,680
                                                         -------------   ------------

   Cash and cash equivalents at end of year............  $  17,783,085   $ 18,951,123
                                                         =============   ============

NONCASH INVESTING AND FINANCING ACTIVITIES
  Transfer from loans to foreclosed properties.........  $      45,855   $    308,290
  Capitalized accruals for premises and equipment......         18,247              -

SUPPLEMENTAL CASH FLOW INFORMATION
  Cash paid during the year for:
   Interest............................................  $  14,500,557   $ 11,182,532
   Income taxes, net of refunds........................         17,558              -
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       20
<PAGE>

                     ESSEX BANCORP, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    Years ended December 31, 2000 and 1999


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, 2000 operates
(i) five retail banking branches located in North Carolina and Virginia and (ii)
Essex First Mortgage ("Essex First"), a division of the Bank, that engages in
the origination and sale of residential mortgage loans, the origination of
residential construction loans to individuals and builders and the participation
in residential construction, acquisition and development and lot loans. EBI's
other principal operating subsidiary is Essex Home Mortgage Servicing
Corporation ("Essex Home"), a wholly-owned subsidiary of the Bank that is
engaged primarily in the servicing of mortgage loans owned by the Bank,
governmental agencies, and third party investors.


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 accounting
principles generally accepted in the United States of America 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
-------------------------
and federal funds sold.  Generally, federal funds sold are purchased for one-day
periods.

Federal Home Loan Bank ("FHLB") Stock:  FHLB stock is stated at cost. No ready
-------------------------------------
market exists for this stock and it has no quoted market value.  FHLB stock is
assumed to have market value which is equal to cost.  In addition, FHLB stock is
not considered debt or an equity security.

Investments and Mortgage-Backed Securities:  Investment securities and mortgage-
------------------------------------------
backed securities are classified upon acquisition as held to maturity or
available for sale.  Those securities designated as held to maturity are carried
at cost adjusted for amortization of premiums and accretion of discounts.
Interest income, including amortization of premiums and accretion of discounts,
is recognized by the interest method, adjusted for effects of changes in
prepayments and other assumptions.  Those securities designated as available for
sale are carried at fair value, and unrealized gains and losses are reported as
a component of other comprehensive income within shareholders' equity.  If
securities are sold, the adjusted cost of the specific security sold is used to
compute the gain or loss on the sale.  The market value of securities is based
upon valuations obtained from brokers and their market analyses and management
estimates.

                                       21
<PAGE>

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 probable 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.

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.

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

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

Loan Income:  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. Cash
receipts from an impaired loan, whether designated as principal or interest, are
applied to reduce the carrying value of the loan. When future collection of the
loan balance is expected, interest income may be recognized on a cash basis.

                                       22
<PAGE>

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

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

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

Premises and Equipment:  Premises and equipment are stated at cost, less
----------------------
accumulated depreciation and amortization.  A capital lease is included in
premises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization are computed using the straight-line method.
Estimated useful lives range from 32 to 40 years for buildings, from three to
seven years for furniture and equipment and up to the lease term for leasehold
improvements.  The capitalized leased asset is amortized on a straight-line
basis over the life of the respective lease.

Income Taxes:  Consolidated corporate income tax returns are filed for EBI and
------------
its subsidiaries. The Company applies an asset and liability approach for
determining income taxes.  Deferred income taxes are recognized for the
estimated tax effects of differences between the basis of assets and liabilities
for financial reporting and income tax purposes.  Deferred tax assets are only
recognized when, in the judgment of management, it is more likely than not that
they will be realized.

Stock-Based Compensation Plans:  Statement of Financial Accounting Standards No.
------------------------------
123 - Accounting for Stock Based Compensation ("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
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 2000 or 1999.

Comprehensive Income:  Because there were no items of other comprehensive income
--------------------
for the years ended December 31, 2000 and 1999, the Company is not providing a
report of comprehensive income for those periods.

Reclassification:  Certain 1999 amounts have been restated to conform to current
----------------
year presentation.  These adjustments had no effect on net income or
shareholders' equity.

                                       23
<PAGE>

NOTE 3 - SUBSEQUENT EVENT

On February 1, 2001, EBI announced that its Board of Directors unanimously
decided to pursue a going-private transaction, which would be subject to the
recommendation and approval of a special committee designated by the Board of
Directors.  If such a transaction is recommended, it will also be subject to
shareholder approval.  In a going-private transaction, EBI would merge with a
newly-formed subsidiary and EBI's common shareholders would receive a cash
payment for their shares.  The subsidiary, Essex Acquisition Corporation
("EAC"), was incorporated in March 2001.  Although there can be no assurances
that the going-private transaction will take place, the Board of Directors
currently anticipates that it may submit a proposal to EBI's shareholders for
their approval at EBI's annual meeting.  If the going-private transaction is
approved, EAC will become the surviving holding company.


NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS

Federal Reserve Board regulations require reserve balances on deposits to be
maintained by the Bank in the form of vault cash or a noninterest-bearing
account at a Federal Reserve Bank.  In addition, the Bank is required to
maintain an average daily balance of liquid assets, including but not limited to
cash and cash equivalents, equal to a certain percentage of the sum of its
average daily balances of net withdrawable deposit accounts and borrowings
payable in one year or less.  At December 31, 2000 and 1999, the required
minimum liquid asset ratio was 4.0%.


NOTE 5 - EARNINGS PER SHARE

The components of the Company's earnings per share calculations for the years
ended December 31 are as follows:



                                             2000          1999
                                             ----          ----
  Net income                             $ 3,872,079   $ 2,160,096
  Preferred stock dividends (Note 16)     (2,143,264)   (1,958,527)
                                           ---------     ---------
  Net income available to
   common shareholders                  $ 1,728,815   $   201,569
                                           =========     =========

  Weighted average common shares
   outstanding:
   Basic                                   1,060,642     1,060,642
                                           =========     =========
   Diluted                                 1,604,358     2,835,973
                                           =========     =========


Basic income per share is computed based on net income available to common
shareholders divided by the average number of common shares outstanding for each
period. A portion of the Company's outstanding options and warrants (Note 17)
are dilutive with respect to income available to common shareholders for the
years ended December 31, 2000 and 1999 and diluted income per share is computed
under the treasury stock method. Options on 99,800 and 11,450 shares were not
included in computing diluted earnings per share for the years ended December
31, 2000 and 1999, respectively, because their effects were antidilutive.

                                       24
<PAGE>

NOTE 6 - INVESTMENT SECURITIES

The amortized cost and fair value of securities held to maturity at December 31
were as follows (in thousands):

<TABLE>
<CAPTION>

                                               2000                                  1999
                              ----------------------------------      ----------------------------------
                              Amortized  Gross Unrealized   Fair      Amortized  Gross Unrealized   Fair
                                         ----------------                        ----------------
                                Cost      Gains   Losses   Value        Cost      Gains   Losses   Value
                                ----      -----   ------   -----        ----      -----   ------   -----
<S>                           <C>        <C>      <C>      <C>        <C>        <C>      <C>      <C>
Securities of U.S. govern-
 ment agencies                   $1,760  $    27  $     6  $1,781     $  2,750   $    -   $    37  $2,713
                                 ======  =======  =======  ======     ========   ======   =======  ======
</TABLE>

The $1.8 million of U.S. government agency securities held to maturity at
December 31, 2000 consisted of a $750,000 note issued by the Federal Home Loan
Bank ("FHLB") that matures in 2002 and a $1.0 million FHLB note that matures in
2003. The FHLB note with a book value of $750,000 and a fair value of $744,000
is pledged as collateral for public depository accounts over $100,000 at
December 31, 2000. No securities held to maturity were sold in 2000 or 1999.
Accrued interest on investment securities was $77,000 and $91,000 at December
31, 2000 and 1999, respectively.

Securities available for sale at December 31, 2000 consisted of a mutual fund
investment that is designed for use as an overnight liquid investment. The
mutual fund portfolio is invested in federal funds and repurchase agreements,
which are fully collateralized by U.S. Government and/or agency obligations. The
fund is managed to have an average maturity of one to seven days, and to
maintain a stable net asset value of $1.00 per share. There were no sales of
securities available for sale in 2000 or 1999.


NOTE 7 - MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of mortgage-backed securities ("MBS") held to
maturity, 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>


                                              2000                                  1999
                             ---------------------------------        ---------------------------------
                             Amortized  Gross Unrealized  Fair        Amortized  Gross Unrealized  Fair
                                        ----------------                         ----------------
                               Cost      Gains   Losses   Value         Cost      Gains   Losses   Value
                               ----      -----   ------   -----         ----      -----   ------   -----
<S>                          <C>        <C>      <C>      <C>         <C>        <C>      <C>      <C>
U.S. government agencies:
 Floating-rate REMIC            $  480  $     1  $     -  $ 481       $     480  $     -  $     1  $ 479
                                ======  =======  =======  =====       =========  =======  =======  =====
</TABLE>

The REMIC is pledged as collateral for FHLB advances at December 31, 2000. There
were no sales of MBS held for investment in 2000 or 1999.

                                       25
<PAGE>

NOTE 8 - LOANS

Net loans at December 31 include (in thousands):



                                                    2000          1999
                                                  --------      --------
      Real estate:
       First mortgages                            $189,302      $173,372
       Second mortgages                              3,004         4,268
       Construction and development                 55,436        42,477
       Commercial                                    3,987         4,645
      Consumer                                      13,252        13,464
      Commercial - other                             1,942         1,626
      Secured by deposits                              674           731
                                                  --------      --------
         Total Loans                               267,597       240,583
      Less:
       Unearned loan fees and discounts                  2             4
       Allowance for loan losses                     1,740         1,697
                                                  --------      --------
         Net Loans                                $265,855      $238,882
                                                  ========      ========


Included in total loans at December 31, 2000 and 1999 are unamortized premiums
of $482,000 and $742,000, respectively.  Accrued interest on loans was $2.0
million and $1.5 million at December 31, 2000 and 1999, respectively.

At December 31, net loans included the following impaired residential real
estate loans (in thousands):



                                                           2000        1999
                                                          -----       -----
      First mortgages                                     $ 133       $ 115
      Second mortgages                                        -          36
                                                          -----       -----
         Total impaired residential real estate loans       133         151
      Less:
       Allowance for loan losses                             16          43
                                                          -----       -----
         Net impaired residential real estate loans       $ 117       $ 108
                                                          =====       =====

The Company's average net investment in impaired residential real estate loans
was $117,000 and $179,000 during the years ended December 31, 2000 and 1999,
respectively. In addition, these loans were in a nonaccrual status as of
December 31, 2000 and 1999.

Commercial real estate loans include two impaired loans to one borrower with
balances at December 31, 2000 and 1999 of (i) $896,000 and $916,000,
respectively, which was originated in October 1987 in the amount of $1.0 million
for the purpose of refinancing a mini-storage/office facility (76 mini-storage
units and 38 office units) located in Virginia Beach, Virginia and (ii) $413,000
and $422,000, respectively, against a $600,000 line of credit. The Company
occupies approximately 12,000 square feet of the office facility. The lease
payments largely service the principal and interest on the two loans. The term
of the lease coincides with the maturity of the loans, which are scheduled to
mature on December 31, 2001. The Company has advised the borrower that the
Company will not renew the lease for the office facility beyond December 31,
2001. Therefore, the Company, with the borrower's consent, is currently
facilitating marketing the property to prospective tenants. In addition, as of
December 31, 2000 and 1999, the Company and its affiliates leased nine of the
mini-storage units. As of December 31, 2000 and 1999, the loans were performing
in accordance with their terms; however, the Company is maintaining a specific
reserve of $300,000 with respect to the loans. The Company recognized interest
income on these two loans totaling $127,772 and $120,243 in the years ended
December 31, 2000 and 1999, respectively.

                                       26
<PAGE>

As of December 31, 2000, the Bank had outstanding commitments (including
unfunded portions of lines of credit and construction loan and participation
commitments) to fund approximately $26.5 million in mortgage loans and $590,000
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, 2000, such commitments aggregated
$4.7 million of fixed rate mortgage loans and $4.1 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 counter party. 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, consumer loans and construction and development loan participations from
third parties. Acquired loans comprised approximately 50% and 48% of total loans
at December 31, 2000 and 1999, 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, 2000 and 1999, the Company had $577,000 and $928,000,
respectively, in nonaccrual loans. Interest income that would have been recorded
in accordance with the original terms of the nonaccrual loans amounted to
approximately $41,000 and $70,000 for the years ended December 31, 2000 and
1999, respectively. No interest income was recognized while loans were in a
nonaccrual status.

Changes in the allowance for loan losses for the years ended December 31 are as
follows:


                                                 2000                1999
                                                 ----                ----
      Balance at beginning of period          $1,696,866          $1,845,295
      Provision for loan losses                  740,000             148,728
                                              ----------          ----------
                                               2,436,866           1,994,023
      Loans charged-off, net of recoveries      (697,073)           (297,157)
                                              ----------          ----------
      Balance at end of period                $1,739,793          $1,696,866
                                              ==========          ==========

Loans held for sale at December 31, 2000 and 1999 consisted of first mortgage
loans originated by Essex First. As of December 31, 2000 and 1999, Essex First
had outstanding commitments to fund mortgage loans totaling approximately
$501,000 and $215,000, respectively, which were committed for sale to
unaffiliated third parties.

Essex First sells substantially all conventional loans without recourse so that
losses incurred as a result of nonperformance with respect to the loans sold
become the responsibility of the purchaser of the loan as of the date of the
closing. On occasion, however, Essex First will sell conventional loans in the
secondary market with recourse. As of December 31, 2000, there was $1.7 million
of loans outstanding that were previously originated and sold by Essex First in
the secondary market with recourse.

                                       27
<PAGE>

NOTE 9 - FORECLOSED PROPERTIES

Foreclosed properties at December 31 consist of the following:


                                                              2000       1999
                                                              ----       ----
      Properties acquired through foreclosure              $ 193,245   $479,767
      Less allowance for losses                                5,097     34,190
                                                           ---------   --------
                                                           $ 188,148   $445,577
                                                           =========   ========

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


                                                             2000       1999
                                                             ----       ----
      Balance at beginning of year                        $  34,190   $113,606
      Provision for losses on foreclosed properties          96,417     14,267
                                                          ---------   --------
                                                            130,607    127,873
      Charge-offs, net of recoveries                       (125,510)   (93,683)
                                                          ---------   --------
      Balance at end of year                              $   5,097   $ 34,190
                                                          =========   ========

NOTE 10 - PREMISES AND EQUIPMENT

Premises and equipment at December 31 include:

                                                           2000         1999
                                                       ----------   ----------
      Land                                             $  837,575   $  842,080
      Buildings                                         2,758,256    2,324,052
      Furniture and equipment                           3,811,658    3,306,719
      Leasehold improvements                              194,254      194,254
      Property under capitalized lease                    537,737      537,737
                                                       ----------   ----------
                                                        8,139,480    7,204,842
      Less accumulated depreciation
       and amortization                                 4,167,940    3,805,097
                                                       ----------   ----------
                                                       $3,971,540   $3,399,745
                                                       ==========   ==========

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, 2000, including cost escalation provisions, are as follows:


                                                    Capital    Noncancelable
                                                     Lease    Operating Leases
                                                     -----    ----------------
      2001                                          $109,268      $217,374
      2002                                                 -        37,550
      2003                                                 -        18,765
      2004                                                 -        18,765
      2005                                                 -         2,858
       Later years                                         -             -
                                                    --------      --------
         Total minimum lease payments                109,268      $295,312
      Amount representing interest                     9,337      ========
                                                    --------
      Present value of net minimum capitalized
       payments                                     $ 99,931
                                                    ========

                                       28
<PAGE>

Rent expense for the years ended December 31, 2000 and 1999 amounted to $304,994
and $302,828, respectively.


NOTE 11 - DEPOSITS

Deposits at December 31 include (dollars in thousands):



                                            2000                   1999
                                     -------------------    -------------------
                                     Amount      Percent    Amount      Percent
                                     ------      -------    ------     --------
     NOW accounts -
      noninterest-bearing            $ 20,355       8.39%   $ 19,630      9.25%
     Passbook and Holiday
      Club                              5,090       2.10       4,819      2.27
     NOW accounts                       6,329       2.61       5,359      2.53
     Money market                      27,215      11.22      34,297     16.16
     Certificate accounts             183,607      75.68     148,104     69.79
                                     --------     ------    --------    ------
                                     $242,596     100.00%   $212,209    100.00%
                                     ========     ======    ========    ======

A summary of certificate accounts by scheduled maturity at December 31, 2000 is
as follows (in thousands):

                          2001                 $120,548
                          2002                   47,252
                          2003                   12,669
                          2004                    2,166
                          2005 and thereafter       972
                                               --------
                                               $183,607
                                               ========

Certificate accounts of $100,000 or more at December 31, 2000 and 1999 amounted
to $33.2 million and $28.3 million, respectively.

Interest expense on interest-bearing deposits for the years ended December 31 is
as follows:


                           2000            1999
                       -----------      ----------
Passbook and Holiday
 Club                  $   172,726      $  166,090
NOW accounts               161,075         145,473
Money market
 accounts                1,568,653       1,595,513
Certificate accounts     9,497,842       7,651,148
                       -----------      ----------
                       $11,400,296      $9,558,224
                       ===========      ==========


                                       29
<PAGE>

NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES

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


Maturity         Interest Rate             2000         1999
--------         -------------             ----         ----
2000             4.01% to 6.00%        $       -      $   7,600
2001             4.50% to 6.75%           41,000         37,000
                                        --------       --------
                                       $  41,000      $  44,600
                                        ========       ========

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

                                           At or For the Year Ended December 31,
                                           -------------------------------------
                                               2000                  1999
                                               ----                  ----
                                                 (dollars in thousands)
     Balance at end of period                  $41,000             $44,600
     Weighted average interest rate
          at end of period                        6.55%               4.72% (1)
     Maximum amount outstanding
          at any month's end                   $55,300             $44,600
     Average amount outstanding
          during the period                    $48,723             $29,233
     Weighted average interest rate
          during the period                       6.43%               5.42%

     (1) The average rate on adjustable-rate FHLB borrowings was abnormally low
         on December 31, 1999 due to annually high levels of market liquidity
         and is not representative of the average rate on any other day during
         1999.

The $41.0 million of FHLB advances at December 31, 2000 were adjustable rate
advances, $16.0 million of which is indexed to the FHLB overnight deposit rate
and reprices daily and $25.0 million of which is indexed to the one month LIBOR
and reprices quarterly.

Advances from the FHLB at December 31, 2000 are collateralized by (i) mortgage
loans with a total principal balance of approximately $101.1 million and (ii)
MBS with a book value of $480,000. The unused lendable collateral value was
$40.9 million at December 31, 2000. Advances are subject to application approval
by the FHLB.


NOTE 13 - INCOME TAXES

The components of the benefit from (provision for) income taxes for the years
ended December 31 are summarized as follows:


                                                    2000           1999
                                                    ----           ----
          Current                              $  (22,558)    $    3,000
          Deferred tax benefit                    325,625        206,519
          Utilization of net operating loss
            ("NOL") carryforwards                (747,171)      (498,629)
          Decrease in valuation allowance       3,148,042      1,678,172
                                               ----------     ----------
                                               $2,703,938     $1,389,062
                                               ==========     ==========

                                       30
<PAGE>

The Company is subject to federal and state income taxes, and files a
consolidated federal income tax return with its subsidiaries.  The Company's
provision for (benefit from) income taxes for financial reporting purposes
differs from the amount computed by applying the statutory federal tax rate to
income before income taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
                                                                                           2000                        1999
                                                                                 ----------------------   ------------------------
                                                                                    Amount         %          Amount           %
                                                                                    ------         -          -------          -
<S>                                                                            <C>               <C>     <C>                <C>
Provision for income taxes at statutory
   federal tax rate                                                              $   397,168       34.0%  $   262,152         34.0%
Increase (decrease) resulting from:
   Tax benefits previously recognized                                                208,052       17.8       188,169         24.4
   Future benefit of net deferred tax assets
      not previously recognized                                                   (3,290,000)    (281.7)   (1,850,000)      (239.9)
   State income taxes                                                                (23,830)      (2.0)       (3,000)         (.4)
   Amortization of goodwill                                                           12,115        1.0        21,101          2.7
   Other                                                                              (7,443)       (.6)       (7,484)        (1.0)
                                                                                 -----------   --------   -----------   -----------
                                                                                 $(2,703,938)    (231.5)% $(1,389,062)      (180.2)%
                                                                                 ===========   ========   ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                              2000          1999
                                                                                                              ----          ----
<S>                                                                                                     <C>            <C>
Deferred tax assets
         NOL carryforwards                                                                                $ 6,007,173   $ 6,754,344
         Alternative minimum tax ("AMT")
             credit carryover                                                                                 358,240       330,000
         MSRs                                                                                                 172,847        60,566
         Allowance for losses on loans and
             foreclosed properties                                                                            366,042       343,401
         Core deposit intangible                                                                              807,159       887,875
         Premises and equipment                                                                                 9,924        23,703
         Other                                                                                                400,765       350,583
                                                                                                          -----------   -----------
                  Total deferred assets                                                                     8,122,150     8,750,472
         Valuation allowance for net deferred tax assets                                                   (2,153,259)   (5,301,301)
                                                                                                          -----------   -----------
                  Net deferred tax assets                                                                   5,968,891     3,449,171
Deferred tax liabilities
          FHLB stock                                                                                          (92,297)      (92,297)
          Basis in acquired loans                                                                          (1,214,036)   (1,420,812)
                                                                                                          -----------   -----------
                  Total deferred liabilities                                                               (1,306,333)   (1,513,109)
                                                                                                          -----------   -----------
                  Net deferred tax asset                                                                  $ 4,662,558   $ 1,936,062
                                                                                                          ===========   ===========
</TABLE>

The Company applies an asset and liability approach for determining income taxes
as required by SFAS 109. A valuation allowance has been established for a
significant portion of the Company's deferred tax assets and liabilities
because, based on management's assessment, their ultimate realization cannot be
assured. In 2000 and 1999, the Company recorded a net deferred tax asset of $4.7
million and $1.9 million, respectively, on the basis of improvements in
profitability and management's expectation that it is more likely than not that
sufficient taxable income will be generated to utilize a portion of the
Company's NOLs and reversing temporary differences.

                                       31
<PAGE>

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, 2000) are used for purposes other than
to absorb bad debt losses, they will be subject to federal income tax at the
then applicable rates.

At December 31, 2000, the Company had NOL carryforwards for income tax purposes
of approximately $15.8 million expiring in the years 2008 through 2011.  The
utilization of such NOL carryforwards may be limited by the Internal Revenue
Code in certain circumstances, including a change in ownership of the Company's
common stock.  In addition, the Company had an AMT credit carryover of $358,240
at December 31, 2000, which can be carried forward indefinitely.


NOTE 14 - MORTGAGE LOAN SERVICING

At December 31, 2000 and 1999, the Company serviced or subserviced approximately
19,900 and 18,200 loans, respectively, with the following outstanding principal
balances (in thousands) at December 31 and related servicing fee income before
amortization of MSRs during the respective years ended December 31:

                                      2000                     1999
                             ----------------------   ----------------------
                                Loan        Loan         Loan        Loan
                             Principal   Servicing    Principal   Servicing
                             Balances    Fee Income   Balances    Fee Income
                             ----------  ----------   ----------  ----------
Loans owned by the
  Company                    $  152,287  $        -   $  146,621  $        -
Servicing and sub-
  servicing rights owned/
  participated in by the
  Company                     1,699,468   1,792,287    1,509,113   1,620,919
                             ----------  ----------   ----------  ----------
                             $1,851,755  $1,792,287   $1,655,734  $1,620,919
                             ==========  ==========   ==========  ==========

As an 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, 2000,
approximately $11.9 million of such accounts were on deposit at unaffiliated
banks and $18.4 million of such accounts were on deposit at the Bank.

The fair value of MSRs was $2.12 million and $1.99 million at December 31, 2000
and 1999, respectively.  As a result of fluctuations in mortgage loan prepayment
activity, the Company maintains a valuation allowance in order to reduce the
carrying value of its MSRs to the estimated fair value at December 31, 2000 and
1999.

                                       32
<PAGE>

Following is an analysis of the changes in the Company's MSRs for the years
ended December 31:

                                               Carrying   Valuation
                                                Value     Allowance
                                             -----------  ----------
          Balance at January 1, 1999         $  884,739    $(53,542)
          Purchases                           1,678,797           -
          Amortization                         (521,631)          -
          Valuation adjustments:
             Impairment                               -     (31,456)
             Recapture                                -      28,555
                                             ----------    --------
          Balance at December 31, 1999        2,041,905     (56,443)
          Purchases                             664,498           -
          Amortization                         (554,174)          -
          Valuation adjustments:
             Impairment                               -     (12,204)
             Recapture                                -      31,807
                                             ----------    --------
          Balance at December 31, 2000       $2,152,229    $(36,840)
                                             ==========    ========

Advances for taxes, insurance and other disbursements consist of advances on
behalf of investors and advances on behalf of certain investors that have
requested the Company to perform special collection and administrative services.
In addition, certain investors have recourse against the Company in the event of
default on loans that are serviced under a regular servicing option.  A
valuation allowance has been established for advances for taxes, insurance and
other disbursements and for the Company's $1.2 million of loans subject to
recourse obligations to provide for future losses related to the Company's
servicing portfolio.


NOTE 15 - EMPLOYEE BENEFIT PLANS

Employees of EBI's subsidiaries participate in a 401(k) retirement plan
administered by EBI.  Annual contributions to the plan are discretionary, as
authorized by the boards of directors of EBI and its subsidiaries.  In 2000 and
1999, the Company matched 30% of employee contributions of up to six percent of
compensation as defined by the plan, which resulted in a $41,553 and $39,213
matching contribution by the Company for the plan years ended December 31, 2000
and 1999, respectively.

Certain employees of EBI's subsidiaries participate in a Supplemental Executive
Retirement Plan ("SERP").  An expense of $37,326 and $33,291 was recognized in
2000 and 1999, respectively, in connection with employee vesting in the SERP.
The SERP provides deferred compensation of 5% to 10% of a covered employee's
salary.  Deferred compensation in excess of 5% is discretionary and subject to
the approval of EBI's Executive Compensation Committee.  Participants in the
SERP as of December 31, 2000 are 100% vested with respect to cumulative pension
credits through December 31, 1998.  Vesting periods for post-1998 pension
credits vary among the participants and range from immediate vesting to full
vesting as of December 31, 2001.


NOTE 16 - PREFERRED STOCK

On September 15, 1995, EBI merged with Home Bancorp, Inc. ("Home Bancorp") and
its wholly-owned subsidiary Home Savings Bank, F.S.B., a Norfolk, Virginia-based
savings institution (the "Home Acquisition").  In exchange for all of the
outstanding stock of Home Bancorp, the stockholders of Home Bancorp received
2,250,000 shares of nonvoting perpetual

                                       33
<PAGE>

preferred stock of EBI with a redemption and liquidation value of $14.2 million
for the Series B preferred stock and $834,000 for the Series C preferred stock.
The preferred stock is redeemable at the option of the Company. The 2,125,000
shares of Series B preferred stock bear a cumulative annual dividend rate of
9.5% (based on the redemption value) and the 125,000 shares of Series C
preferred stock bear a cumulative annual dividend rate of 8.0% (based on the
redemption value). The Series C preferred stock is senior to Series B preferred
stock with respect to the payment of dividends, and the holders of the Series C
preferred stock may, in their discretion, from time to time in whole or in part,
elect to convert such shares of Series C preferred stock into a like amount of
Series B Preferred Stock. Cumulative but undeclared dividends and accrued
interest thereon for the Series B and Series C preferred stock were $8,915,932
and $425,964, respectively, as of December 31, 2000. If the going-private
transaction discussed in Note 3 proceeds, the preferred stock and accrued
dividends will be exchanged for common stock of EAC, and no further dividends
will accrue.


NOTE 17 - COMMON STOCK

Warrants:  In connection with the Home Acquisition, the stockholders of Home
--------
Bancorp received warrants to purchase 7,949,000 shares of EBI common stock at a
price of $0.9375 per share, which was the price of EBI common stock as of June
30, 1995.  The warrants became exercisable in September 1998 and will expire in
September 2005.  If the going-private transaction discussed in Note 3 proceeds,
the warrants will be exchanged for common stock of EAC.

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 that 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.

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 that 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.

If the going-private transaction discussed in Note 3 proceeds, the holders of
options granted under the Option Plan and the Directors Option Plan will each be
entitled to an amount in cash computed by multiplying (i) any positive
difference obtained by subtracting from the per share amount of the going-
private transaction consideration and the per share exercise price applicable to
each option by (ii) the number of shares of the Company's common stock subject
to such option.

                                       34
<PAGE>

The following table summarizes activity under the option plans for years ended
December 31, 2000 and 1999 and the status at December 31, 2000.

<TABLE>
<CAPTION>
                                                          Option Plan               Directors Option Plan
                                                  ----------------------------   ---------------------------
                                                   Number of        Option       Number of        Option
                                                    Options         Price         Options         Price
                                                  ------------  --------------   ----------   --------------
<S>                                               <C>           <C>              <C>          <C>
   Options outstanding as of January 1, 1999            128,200    1.3750-5.8750      5,950    0.9375-5.5625
   Granted                                                5,000           2.2500      1,350           1.7500
   Granted                                                1,500           2.1250          -                -
   Granted                                               80,000           1.2500          -                -
   Canceled                                             (50,200)          1.3750          -                -
   Rescinded                                             (6,000)          5.8750          -                -
   Rescinded                                            (20,000)          4.8750     (1,350)          5.5625
                                                        -------                      ------
   Options outstanding as of December 31, 1999          138,500     1.250-2.2500      5,950    0.9375-3.8750
   Granted                                                5,000           1.5000      1,350           1.4375
   Granted                                               30,000           1.7500          -                -
                                                        -------                      ------
   Options outstanding as of December 31, 2000          173,500     1.250-2.2500      7,300    0.9375-3.8750
                                                        =======                      ======

   Weighted average exercise price as of
    December 31, 2000                                             $         1.42              $         1.99
                                                                  ==============              ==============

   Options available for future grant
    as of December 31, 2000                             361,253                      11,700
                                                        =======                      ======
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 2000:

                                                                 Remaining
       Exercise             Options                              Contractual
        Price             Outstanding      Exercisable          Life (Months)
       --------           -----------      -----------          -------------
       $0.9375               1,000            1,000                  54
        1.2500              80,000                -                 116
        1.3750              52,000           52,000                  77
        1.4375               1,350                -                 116
        1.5000               5,000                -                 132
        1.7500              31,350            1,350                 109
        2.0625               1,350            1,350                  68
        2.1250               1,500                -                 114
        2.2500               6,350            1,350                 109
        3.8750                 900              900                  56
                           -------           ------
                           180,800           57,950                 103
                           =======           ======

As of December 31, 2000, the Company had an obligation of $703,000 to its Chief
Executive Officer resulting from the exercise of his SARs in November 1997,
which amount is included in other liabilities.  A determination has not yet been
made as to the date and method of payment to satisfy this obligation.

Had compensation cost of the Option Plan been determined based on the fair value
at the grant date for awards made under the plan, consistent with the method of
SFAS 123, the Company's net income and income per share would have been $3.83
million and $1.59 (basic EPS) and $1.05 (diluted EPS) in 2000 and $2.12 million
and $.15 (basic EPS) and $0.06 (diluted EPS) in 1999.  The weighted average fair
value of the options granted during 2000 and 1999 would have been $1.22 per
share and $0.68 per share, respectively.  The fair value of each option granted
under the Option Plan during 2000 and 1999 was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free rates of return of 6.49% in 2000 and 5.94% in 1999, a dividend yield
of zero, expected life of five years and volatility of 85% in 2000 and 50% in
1999.

                                       35
<PAGE>

Stock Purchase Plan:  In 1995, the Company adopted the Essex Bancorp, Inc.
-------------------
Employee Stock Purchase Plan (the "Stock Purchase Plan"), which was submitted to
and approved by the shareholders of EBI in May 1995.  The Stock Purchase Plan
permits all eligible employees of the Company to purchase through after-tax
payroll deductions, at a 15% discount, shares of the Company's common stock.
Effective October 1998, the Company suspended purchases of the Company's common
stock under the Stock Purchase Plan.


NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments.  Much of the
information used to determine fair value is highly subjective and judgmental in
nature, and therefore, the results may not be precise.  The subjective factors
utilized include, among other things, estimates of cash flows, risk
characteristics, credit quality, and interest rates, all of which are subject to
change.  In addition, the calculation of estimated fair values is based on
market conditions at December 31, 2000 and 1999 and may not be reflective of
current or future fair values.

Financial Assets.  The carrying amounts reported for cash and cash equivalents,
FHLB stock, securities available for sale and accrued interest receivable
approximate those assets' fair values.  Fair values for securities and mortgage-
backed securities held to maturity are based on quoted market prices or dealer
quotes.  The fair value of loans held for sale is estimated based on commitments
into which individual loans will be delivered.  The fair value of 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.  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
capitalized lease obligations 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 accrued interest
payable approximates fair value.

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.

                                       36
<PAGE>

                                         December 31, 2000    December 31, 1999
                                        -------------------  -------------------
                                                  Estimated            Estimated
                                        Carrying    Fair     Carrying    Fair
                                         Value      Value     Value      Value
                                        --------  ---------  --------  ---------
                                                     (in thousands)
Financial Assets
  Cash and cash equivalents...........  $ 17,783   $ 17,783  $ 18,951   $ 18,951
  FHLB stock..........................     2,765      2,765     2,230      2,230
  Securities available for sale.......        21         21        19         19
  Securities held to maturity.........     1,760      1,781     2,750      2,713
  Mortgage-backed securities held to
    maturity..........................       480        481       480        479
  Loans held for sale.................     1,095      1,118       917        917
  Loans held for investment, net......   265,855    266,715   238,882    237,505
  Accrued interest receivable.........     1,954      1,954     1,545      1,545

Financial Liabilities
  Deposits with no stated maturity....  $ 58,989   $ 58,990  $ 64,105   $ 64,105
  Time deposits.......................   183,607    185,002   148,104    146,992
  FHLB advances.......................    41,000     41,051    44,600     44,239
  Capital lease obligation............       100        107       192        191
  Accrued interest payable............       252        252       178        178
  Off-balance sheet commitments
    and recourse obligations..........        12         12        17         17


NOTE 19 - REGULATORY MATTERS

The Bank is required pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Office of Thrift Supervision ("OTS")
regulations promulgated there under to satisfy three separate requirements of
specified capital as a percent of the appropriate asset base:  a tangible
capital requirement, a core or leverage capital requirement, and a risk-based
capital requirement.  At December 31, 2000 and 1999, the Bank was in compliance
with the capital requirements established by FIRREA.

Section 38 of the Federal Deposit Insurance Act, as added by the FDIC
Improvement Act ("FDICIA"), requires each appropriate agency and the FDIC to,
among other things, take prompt corrective action ("PCA") to resolve the
problems of insured depository institutions that fall below certain capital
ratios.  Federal regulations under FDICIA classify savings institutions based on
four separate requirements of specified capital as a percent of the appropriate
asset base:  tangible equity, Tier I or leverage capital, Tier I risk-based
capital, and total risk-based capital.  As of December 31, 2000 and 1999, the
Bank was "well capitalized" for PCA purposes.

                                       37
<PAGE>

The Bank's capital amounts and ratios as of December 31, 2000 and 1999 are
presented in the following tables (dollars in thousands):
<TABLE>
<CAPTION>
                                                   To Be Adequately       To Be Well
                                                     Capitalized          Capitalized
                                  Actual             Under FDICIA        Under FDICIA
                             ----------------      -----------------  -----------------
                             Amount     Ratio      Amount     Ratio     Amount      Ratio
                             ------     -----      ------     -----     ------      -----
<S>                          <C>       <C>       <C>          <C>      <C>       <C>
As of December 31, 2000
---------------------------
 Total risk-based capital    $19,561     10.34%    $15,136      8.0%    $18,920      10.0%
 Tier I risk-based capital    18,425      9.74%      7,568      4.0%     11,352       6.0%
 Tier I (leverage) capital    18,425      6.07%     12,132      4.0%     15,165       5.0%
 Tangible equity              18,425      6.07%      6,066      2.0%          -         -

As of December 31, 1999
---------------------------
 Total risk-based capital    $18,273     11.44%    $12,782      8.0%    $15,978      10.0%
 Tier I risk-based capital    17,353     10.86%      6,391      4.0%      9,587       6.0%
 Tier I (leverage) capital    17,353      6.25%     11,109      4.0%     13,886       5.0%
 Tangible equity              17,353      6.25%      5,554      2.0%          -         -
</TABLE>

NOTE 20 - PARENT COMPANY ONLY FINANCIAL INFORMATION

                                Balance Sheets
                                --------------
                          December 31, 2000 and 1999
                          --------------------------
                                (in thousands)

                                                             2000     1999
                                                             ----     ----
ASSETS
  Cash                                                      $    79  $    81
  Investment in subsidiaries                                 22,669   18,891
  Other                                                         248      260
                                                            -------  -------
                                                            $22,996  $19,232
                                                            =======  =======

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Redeemable Preferred Stock redemption proceeds payable    $    76  $    79
  Other                                                       1,053    1,158
                                                            -------  -------
    Total Liabilities                                         1,129    1,237

SHAREHOLDERS' EQUITY                                         21,867   17,995
                                                            -------  -------
                                                            $22,996  $19,232
                                                            =======  =======

                                       38
<PAGE>

                           Statements of Operations
                           ------------------------
                For the years ended December 31, 2000 and 1999
                ----------------------------------------------
                                (in thousands)
<TABLE>
<CAPTION>

<S>                                     <C>      <C>
                                                 2000    1999
                                                ------  -------

Net operating expense                           $   51  $    85
                                                ------  -------
  Net (loss) before undistributed
   income of subsidiaries                          (51)     (85)
Undistributed income of subsidiaries             3,923    2,245
                                                ------  -------
  Net income                                    $3,872  $ 2,160
                                                ======  ========
</TABLE>
                            Statements of Cash Flows
                            ------------------------
                 For the years ended December 31, 2000 and 1999
                 ----------------------------------------------
                                 (in thousands)

                                                2000      1999
                                                ----      ----
OPERATING ACTIVITIES
 Net income                                    $ 3,872  $ 2,160
 Adjustments to reconcile net income
  to cash provided by (used in) operating
  activities:
   Equity in income of subsidiaries             (3,923)  (2,245)
   Dividends from subsidiaries                     145        -
   Decrease in other assets                         12        -
   (Decrease) increase in other liabilities       (105)      79
                                               -------  -------
    NET CASH PROVIDED BY (USED IN)
     OPERATING ACTIVITIES                            1       (6)
                                               -------  -------

FINANCING ACTIVITIES
  Redemption of Settlement Preferred Stock          (3)      (5)
                                               -------  -------
   NET CASH USED IN FINANCING
   ACTIVITIES                                       (3)      (5)
                                               -------  -------

        NET DECREASE IN CASH                        (2)     (11)
        CASH AT BEGINNING OF YEAR                   81       92
                                               -------  -------

        CASH AT END OF YEAR                    $    79  $    81
                                               =======  =======

NOTE 21 - SEGMENT INFORMATION

The Company operates through three primary business segments: retail community
banking, mortgage banking and mortgage loan servicing.  These segments are
evaluated based primarily on revenues from customers and pre-tax profit
contribution to the total Company.  Segment revenues from customers consist of
(i) net interest income, which represents the difference between interest earned
on loans and investments and interest paid on deposits and other borrowings and
(ii) noninterest income, which consists primarily of mortgage loan servicing
fees, mortgage banking income (primarily gains on the sale of loans) and service
charges and fees (primarily on deposits and the loan servicing portfolio).  All
inter-segment transactions are eliminated to arrive at the total Company revenue
and pre-tax income (loss).  Segment revenues and pre-tax income (loss) are
determined using accounting policies consistent with those applied in the
preparation of the consolidated financial statements.

                                       39
<PAGE>

<TABLE>
<CAPTION>
                                  Retail              Mortgage
                                 Community  Mortgage    Loan      Corporate/
                                  Banking   Banking   Servicing  Eliminations    Total
                                 ---------  --------  ---------  -------------  --------
                                                     (in thousands)
<S>                              <C>        <C>       <C>        <C>            <C>
2000 Segment Information
Customer revenues                 $  5,401   $ 2,470    $ 2,352      $     -    $ 10,223
Affiliate revenues                      15       336        496         (847)          -
Depreciation and amortization          141        58         95           85         379
Pre-tax income                       2,622     1,073        430       (2,957)      1,168
Total assets                       244,630    58,733     10,855       (6,496)    307,722

1999 Segment Information
Customer revenues                 $  5,216   $ 1,650    $ 2,212      $     2    $  9,080
Affiliate revenues                       -       456        475         (931)          -
Depreciation and amortization          113        56         80           96         345
Pre-tax income                       2,235       316        586       (2,366)        771
Total assets                       229,848    43,696      7,579       (3,384)    277,739
</TABLE>

Retail Community Banking.  The Company provides retail community banking
services through the Bank, which operates five retail banking branches located
in North Carolina and Virginia.  The Bank is a savings association that attracts
deposits from the general public in its primary market area, which, together
with borrowings from the FHLB, fund the Bank's investment predominately in real
estate mortgage loans.  Revenues and pre-tax income for the retail community
banking segment include a cost of funds allocation to its mortgage banking
division.

Mortgage Banking.  The Company engages in mortgage banking activities through
Essex First, which conducts its operations out of five offices located in North
Carolina and Virginia.  Essex First was established primarily to originate loans
for sale to private investors in the secondary market in order to generate fee
income while avoiding the interest rate and credit risk associated with holding
long-term fixed-rate mortgage loans in its portfolio.  In addition, Essex First
currently originates the majority of the Bank's loan product.  A majority of all
residential mortgage loans originated by Essex First for sale in the secondary
market are sold with servicing released to third party investors in order to
enhance fee income.  Substantially all of the loans originated by Essex First
and not sold with servicing released to third party investors are sold to the
Bank on a whole loan basis.  In addition to its secondary marketing activities,
Essex First derives interest revenue from its residential construction loan
programs for individuals and builders, as well as builder loan participations
acquired from nonaffiliated financial institutions.  Construction lending
activities generally are limited to Essex First's primary market, with
particular emphasis in the greater Richmond, Virginia market, the Tidewater,
Virginia area and counties in northeastern North Carolina.  More recently, Essex
First has expanded its construction lending into the Raleigh, North Carolina,
Northern Virginia and Maryland markets and through its builder loan
participations it has expanded indirectly into South Carolina, Alabama, Florida,
Georgia, Nevada and Texas.  Revenues and pre-tax income for the mortgage banking
segment have been reduced by a cost of funds allocation based on the average
cost of the Bank's interest-bearing deposits.

Mortgage Loan Servicing.  The Company provides mortgage loan servicing through
Essex Home, which conducts its operations out of a leased operations facility in
Virginia Beach, Virginia.  Revenues generated by Essex Home consist primarily of
loan servicing fees, late charges and other ancillary fees.  In addition to
servicing loans for the Bank and Essex First and being licensed by Fannie Mae,
Freddie Mac and Ginnie Mae, Essex Home services and subservices loans for
approximately five private investors and 72 subservicing clients.  While Essex
Home services mortgage loans secured by residential real estate throughout the
United States, approximately 82% of its mortgage loan servicing portfolio is
concentrated among New York, Florida, New Jersey, Virginia, Texas, California
and North Carolina.  As of December 31,

                                       40
<PAGE>

2000, Essex Home serviced for affiliates and nonaffiliates in the aggregate
approximately 19,900 loans totaling $1.9 billion.


NOTE 22 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly unaudited results of operations for the years ended December 31, 2000
and 1999 are presented below.  The most significant factor impacting operating
results for the fourth quarters of 2000 and 1999 was the recognition of a $3.2
million and a $1.4 million income tax benefit, respectively, for the partial
reversal of the deferred tax valuation allowance based on favorable trends in
the Company's actual and projected core profitability.

<TABLE>
<CAPTION>
                                              Year Ended December 31, 2000
                                    --------------------------------------------------
                                       First       Second        Third       Fourth
                                      Quarter      Quarter      Quarter     Quarter
                                      -------      -------      -------     -------
<S>                               <C>          <C>          <C>          <C>
   Interest income                   $5,107,201   $5,474,212   $5,742,721   $5,878,286
   Net interest income                1,809,125    1,961,219    1,956,638    1,916,073
   Provision for loan losses            100,000      140,000      150,000      350,000
   Income before income taxes           303,304      372,590      374,751      117,496
   Net income                           179,266      286,849      304,667    3,101,297
   Net (loss) income per share:
    Basic                                  (.32)        (.23)        (.22)        2.40
    Diluted                                (.32)        (.23)        (.22)         .79

                                              Year Ended December 31, 1999
                                    -------------------------------------------------
                                       First        Second       Third        Fourth
                                      Quarter      Quarter      Quarter      Quarter
                                     ----------   ----------   ----------   ----------
   Interest income                   $4,002,638   $4,092,740   $4,571,008   $4,791,989
   Net interest income                1,438,923    1,435,177    1,653,008    1,746,991
   Provision for loan losses                  -            -            -      148,728
   Income before income taxes             3,480      110,859      275,136      381,559
   Net income                            29,676      106,457      607,757    1,416,206
   Net (loss) income per share:
    Basic                                  (.42)        (.35)         .11          .85
    Diluted                                (.42)        (.35)         .02          .22
</TABLE>

                                       41
<PAGE>

                              ESSEX BANCORP, INC.

                             INVESTOR INFORMATION


Annual Meeting of Stockholders

     The Annual Meeting of Stockholders of Essex Bancorp, Inc. will be held at
Interstate Corporate Center, Building #11, First Floor Conference Room, Norfolk,
Virginia. That meeting was originally scheduled to be held on June 21, 2001 at
1:00 p.m., but will be postponed to a date during the summer of 2001 that will
be announced at a later date.

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 2000 and 1999.

                 2000               1999
               --------           --------
Quarter     High      Low      High      Low
-------     ----      ---      ----      ---
First       3.000    1.1250  $3.7500    $1.3750
Second      2.125    1.1250   3.0000     2.0625
Third       1.750    1.1250   2.1250     1.2500
Fourth      2.125     .8750   2.0625     1.1250

Stock Transfer Agent

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

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

Annual Report on Form 10-KSB and Additional Information

     A copy of Form 10-KSB 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.
Interstate Corporate Center
Building #9, Suite 200
Norfolk, Virginia  23502
Telephone (757) 893-1326

Independent Accountants

KPMG LLP
2100 Dominion Tower
999 Waterside Drive
Norfolk, Virginia 23510
Telephone (757) 616-7000

Web Site

     For additional information about Essex Bancorp, Inc.'s financial
performance, products and services, please visit our web site at
www.essexbancorp.com.

                                       42
<PAGE>

                               ESSEX BANCORP,INC.

                            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
Senior Vice President/Chief Accounting
 Officer
Essex Bancorp, Inc. and
Essex Savings Bank, F.S.B.

Earl C. McPherson
President
Essex First Mortgage, a Division of
Essex Savings Bank, F.S.B.


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
General Partner
Fort Pitt Funds
Pittsburgh, Pennsylvania
(financial institution investment fund)

                                       43
<PAGE>

                              ESSEX BANCORP, INC.

                             CORPORATE INFORMATION


Executive Offices

Interstate Corporate Center
Building #9, Suite 200
Norfolk, Virginia 23502
Telephone (757) 893-1300

Subsidiaries of Essex Bancorp, Inc.

Essex Savings Bank, F.S.B.
Interstate Corporate 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

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

Virginia
  520 South Main Street
  Emporia, Virginia 23847

  1401 Gaskins Road
  Richmond, Virginia 23233

  9695 Sliding Hill Road
  Ashland, Virginia 23005

  2825 Godwin Boulevard
  Suffolk, Virginia 23434

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

Essex First Mortgage, a Division of Essex
Savings Bank, F.S.B.
Mortgage Loan Production Offices

Virginia
  1401 Gaskins Road
  Richmond, Virginia 23233

  9695 Sliding Hill Road
  Ashland, Virginia 23005

  2430 Southland Drive, 3rd Floor
  Chester, Virginia 23831

  Interstate Corporate Center
  Building #9, Suite 100
  Norfolk, Virginia 23502

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

                                       44