SECURITIES AND EXCHANGE COMMISSION
                             450 Fifth Street, N.W.
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 For the  Fiscal  Year  Ended  June 30,  1998
                                       OR
[ ]  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

     For the transition period from _______________ to  ______________________

                           Commission File No. 0-23645

                         LEEDS FEDERAL BANKSHARES, INC.
                         ------------------------------
             (Exact name of registrant as specified in its charter)

        United States                                         52-2062351
        -------------                                         ----------
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                          Identification Number)

1101 Maiden Choice Lane, Baltimore, Maryland                            21229
--------------------------------------------                            -----
  (Address of Principal Executive Offices)                            Zip Code

                                 (410) 242-1234
                         (Registrant's telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:       None
                                                                  ----
Securities Registered Pursuant to Section 12(g) of the Act:  Common Stock, par
                                                           value $1.00 per share
                                                           ---------------------
                                                             (Title of Class)

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

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

         The issuer's  revenues  for the fiscal year ended June 30,  1998,  were
$20.7 million.

         The aggregate  market value of the voting stock held by  non-affiliates
of the  Registrant,  computed by  reference  to the  closing  sales price of the
Registrant's  stock,  as reported on the Nasdaq  National Market on September 1,
1998, was approximately  $27.3 million.  This amount includes shares held by the
Registrant's ESOP, and excludes shares held by Leeds Federal Bankshares, M.H.C.,
and the  Registrant's  directors and senior  officers.  As of September 1, 1998,
there were issued and outstanding  5,138,158 shares of the  Registrant's  Common
Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1. Sections of Annual Report to Stockholders  for the fiscal year ended June 30,
1998 (Parts II and III).

2. Proxy  Statement  for the 1998 Annual  Meeting of  Stockholders  (Parts I and
III).


<PAGE>


                                     PART I

ITEM 1. Description of Business

General

         Leeds Federal Bankshares, Inc.

         Leeds Federal Bankshares, Inc. (the "Company") is a federal corporation
which was  organized  on November 21, 1997.  The only  significant  asset of the
Company is its  investment  in Leeds  Federal  Savings  Bank (the  "Bank").  The
Company   is   majority-owned   by   Leeds   Federal   Bankshares,   M.H.C.,   a
federally-chartered  mutual holding company (the "Mutual Holding  Company").  On
January 21, 1998, the Company acquired all of the issued and outstanding  common
stock  of the  Bank in  connection  with  the  Bank's  reorganization  into  the
"two-tier" form of mutual holding company ownership. At that time, each share of
the Bank's common stock was  automatically  converted  into one share of Company
common stock, par value $1.00 per share (the "Common Stock").  At June 30, 1998,
the Company had total assets of $302.7 million and stockholders' equity of $49.3
million.

         The Company's  principal  office is located at 1101 Maiden Choice Lane,
Baltimore,  Maryland  21229,  and its telephone  number at that address is (410)
242-1234.

         Leeds Federal Savings Bank

         The  Bank  is  a  federally-chartered  savings  bank  headquartered  in
Baltimore,  Maryland.  The Bank's  deposits  are insured by the Federal  Deposit
Insurance  Corporation  ("FDIC")  under the Savings  Association  Insurance Fund
("SAIF").  The Bank has been a member of the  Federal  Home  Loan Bank  ("FHLB")
since 1938.

         The Bank is a community-oriented  savings institution that is primarily
engaged in the business of attracting  deposits  from the general  public in the
Bank's  market  area,  and  investing  such  deposits  in  fixed-rate   one-  to
four-family  residential  real estate  mortgages and adjustable rate home equity
loans and, to a lesser extent,  commercial real estate loans and consumer loans.
To the extent  available funds exceed local mortgage loan demand,  the Bank also
invests in mortgage-backed  securities issued or guaranteed by the United States
Government or agencies  thereof,  secured  short-term loans to commercial banks,
interest-earning   deposits  in  other   institutions,   and  other  short-  and
medium-term investments.

         The Bank's  executive  offices are located at 1101 Maiden  Choice Lane,
Baltimore,  Maryland  21229,  and its telephone  number at that address is (410)
242-1234.

Market Area/Local Economy

         The Bank's  market area  comprises  parts of the  Maryland  counties of
Baltimore, Howard, Harford, Anne Arundel, and Carroll, and Baltimore City, which
are  part  of  the  Baltimore  metropolitan  area.  Baltimore  City  is  located
approximately   30   miles   from   Washington,   D.C.,   and  is  part  of  the
Washington-Baltimore  Standard Metropolitan  Statistical Area. The Bank's market
area has a diverse base, although it is significantly  influenced by the federal
government and the defense industry. The federal government is one of the area's
largest employers.  Headquartered  within the Bank's market area are a number of
federal government  agencies,  including the Social Security  Administration and
the Health Care Financing  Administration.  Other major employers and industries
within  the Bank's  market  area  include  General  Motors  Truck and Bus Group,
Pepsi-Cola Company, Black and Decker Corporation,  Johns Hopkins University, the
University of Maryland--Baltimore County, the University of Maryland--Baltimore,
McCormick and Company,  Inc.,  Bethlehem  Steel Corp.,  Northrup  Grumman,  Fort
Meade,  Proctor and Gamble Cosmetic and Fragrance  Products,  The Baltimore Sun,
Baltimore Gas and Electric Company, Giant Food, Inc., Bell Atlantic,  Blue Cross
and Blue Shield of Maryland,  USF&G Corporation,  Crown Central  Petroleum,  St.
Agnes Hospital,  and The Ryland Group, Inc. The Baltimore metropolitan area also
has  an  active  tourism  industry,   and  is  home  to  the  Baltimore  Orioles
professional baseball team, the Baltimore Ravens professional football team, the
Inner  Harbor,  and the National  Aquarium.  As of 1990,  the  population of the
Baltimore


<PAGE>


metropolitan area was approximately two million. The Baltimore metropolitan area
experienced  significant  economic  growth during the 1970's and 1980's.  In the
early 1990s the real estate market had suffered a recession;  however,  the area
has been slowly recovering from this recession.

Lending Activities

         Loan  and  Mortgage-Backed   Securities  Portfolio   Composition.   The
principal  components of the Bank's loan portfolio are  fixed-rate  conventional
first  mortgage loans secured by one- to  four-family  residential  real estate,
home equity  loans,  and, to a much lesser  extent,  commercial  real estate and
consumer loans. At June 30, 1998, the Bank's net loans receivable totaled $191.0
million, of which $172.2 million, or 90.2%, were one- to four-family residential
real estate mortgage loans, $12.8 million, or 6.7%, were home equity loans, $5.1
million,  or 2.7%,  were  consumer  loans,  and  $3.7  million,  or  1.9%,  were
commercial real estate loans.

         The  Bank  also  invests  in   mortgage-backed   securities   including
pass-through certificates and, to a much lesser extent,  collateralized mortgage
obligations ("CMOs"). At June 30, 1998, mortgage-backed securities totaled $16.5
million,  or  5.5%,  of total  assets.  At June 30,  1998,  46.2% of the  Bank's
mortgage-backed  securities  were secured by adjustable  rate  mortgage  ("ARM")
loans,  and 13.0% were  secured  by loans  with  terms of less than five  years.
Pass-through  certificates  totaled $14.6 million, or 88.7%, of the Bank's total
mortgage-backed  securities  portfolio  at  June  30,  1998.  All of the  Bank's
pass-through  certificates  are insured or guaranteed by Freddie Mac, Ginnie Mae
("GNMA"),  or Fannie Mae ("FNMA").  CMOs totaled $1.8 million,  or 10.7%, of the
Bank's total mortgage-backed securities portfolio on June 30, 1998, all of which
were  backed  by  federal  agency  collateral.  The  Bank's  policy  is to  hold
mortgage-backed securities to maturity.


                                       -2-

<PAGE>


         Analysis of Loan Portfolio.  Set forth below are selected data relating
to the  composition of the Bank's loan portfolio by type of loan as of the dates
indicated.

<TABLE>
<CAPTION>
                                                                                    At June 30,
                                 ---------------------------------------------------------------------------------------------------
                                       1998                1997                  1996                1995                1994
                                 ----------------    -----------------    ----------------    -----------------    -----------------
                                 Amount   Percent    Amount    Percent    Amount   Percent    Amount    Percent    Amount    Percent
                                 ------   -------    ------    -------    ------   -------    ------    -------    -------   -------
                                                                      (Dollars in Thousands)
<S>                              <C>      <C>       <C>         <C>     <C>        <C>        <C>         <C>      <C>         <C>
Real estate loans:
  One- to four-family
   residential and construction $172,152     90.1%   $155,233     88.8%  $137,700   90.1%    $ 127,511    90.4%   $ 131,751    92.0%
  Home equity..................   12,769      6.7      13,024      7.4     11,692    7.7        10,108     7.2       10,055     7.0
  Commercial...................    3,738      2.0       3,763      2.2      1,548    1.0         1,494     1.0        1,672     1.2
                                 -------   ------     -------   ------  ---------  -----     ---------   -----    ---------  ------
    Total real estate loans....  188,659     98.8     172,020     98.4    150,940   98.8       139,113    98.6      143,478   100.2
Consumer loans.................    5,072      2.7       5,069      2.9      3,295    2.2         2,324     1.6          773      .5
Accrued interest receivable....      784       .4         783       .4        679     .4           616      .4          620      .4
                                 -------   ------     -------   ------  ---------  -----     ---------   -----    ---------  ------
    Total loans receivable.....  194,515    101.9     177,872    101.7    154,914  101.4       142,053   100.6      144,871   101.1

Less:
 Undisbursed portion of
  loans in process.............    2,025     (1.1)      1,668     (1.0)     1,196    (.8)          121     (.1)         625     (.4)
 Unearned loan fees............      802      (.4)        790      (.4)       588    (.4)          498     (.3)         677     (.5)
 Allowance for loan losses.....      722      (.4)        536      (.3)       375    (.2)          341     (.2)         318     (.2)
                                 -------   ------      ------   ------  ---------  -----      --------   -----     --------  ------
    Total loans receivable, net $190,966    100.0%   $174,878    100.0%  $152,755  100.0%     $141,093   100.0%    $143,251   100.0%
                                 =======    =====     =======    =====   ========  =====      ========   =====     ========  ======

Mortgage-backed securities..... $ 16,514             $ 22,294            $ 29,095             $ 34,957             $ 38,149
                                 =======              =======            ========             ========             ========
</TABLE>


                                       -3-

<PAGE>



         Loan and Mortgage-Backed  Securities  Maturity Schedule.  The following
table sets forth the  maturity  or period of  repricing  of the Bank's  loan and
mortgage-backed  securities  portfolio at June 30,  1998.  Demand  loans,  loans
having no stated schedule of repayments and no stated  maturity,  and overdrafts
are reported as due in one year or less.  Adjustable and floating rate loans are
included  in the period in which  interest  rates are next  scheduled  to adjust
rather  than in which  they  contractually  mature,  and  fixed  rate  loans and
mortgage-backed  securities  are  included  in the  period  in which  the  final
contractual repayment is due.

<TABLE>
<CAPTION>
                                                                                          Beyond
                                     Within      1-3        3-5      5-10       10-20       20
                                     1 Year     Years      Years     Years      Years      Years      Total
                                     ------     -----      -----     -----      -----      -----      -----
                                                                  (In Thousands)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>        <C>
Real estate loans:
 One- to four-family residential
  and construction .............   $  5,526   $  5,136   $ 13,606   $ 38,821   $ 62,395   $ 46,668   $172,152
 Home equity ...................      8,516        365        622      3,208         58         --     12,769
 Commercial ....................      2,500      1,238         --         --         --         --      3,738
Consumer loans .................        522      1,345      3,071        134         --         --      5,072
Accrued interest receivable ....        784         --         --         --         --         --        784
                                   --------   --------   --------   --------   --------   --------   --------
     Total loans ...............     17,848      8,084     17,299     42,163     62,453     46,668    194,515
                                   --------   --------   --------   --------   --------   --------   --------
Mortgage-backed securities(1) ..     10,612        421        584      3,134        569      1,234     16,554
                                   --------   --------   --------   --------   --------   --------   --------
 Total loans and
  mortgage-backed securities ...   $ 28,460   $  8,505   $ 17,883   $ 45,297   $ 63,022   $ 47,902   $211,069
                                   ========   ========   ========   ========   ========   ========   ========
</TABLE>
-------------

(1)  Does not include discounts and premiums.


         Fixed-  and  Adjustable-Rate   Loan  and   Mortgage-Backed   Securities
Schedule.  The following table sets forth at June 30, 1998, the dollar amount of
fixed rate loans and mortgage-backed securities that mature after June 30, 1999,
and all  adjustable  rate loans and  mortgage-backed  securities  that mature or
reprice after June 30, 1999.

                                               Fixed      Adjustable      Total
                                               -----      ----------      -----
                                                        (In Thousands)
Real estate loans:
  One- to four-family residential
    and construction ....................     $153,736     $ 12,890     $166,626
  Home equity ...........................        4,253           --        4,253
  Commercial ............................           --        1,238        1,238
  Consumer loans ........................        4,550           --        4,550
                                              --------     --------     --------
    Total ...............................     $162,539     $ 14,128     $176,667
                                              ========     ========     ========
Mortgage-backed securities ..............     $  5,942     $     --     $  5,942
                                              ========     ========     ========


          One- to Four-Family  Residential and  Construction  Real Estate Loans.
The Bank's primary  lending  activity  currently  consists of the origination of
fixed  rate  one- to  four-family  owner-occupied  residential  mortgage  loans,
virtually all of which are  collateralized  by properties  located in the Bank's
market area. The Bank also  originates  fixed/adjustable  first mortgage  loans,
which have fixed rates for the first five or seven years,  then adjust  annually
thereafter. The Bank also originates one- to four-family construction loans that
convert to permanent loans after the initial construction period which generally
does not exceed nine  months.  The Bank is a portfolio  lender.  It has not sold
loans  in  the  secondary  mortgage  market;  however,  it may  conduct  limited
secondary  market  sales  in  the  future.  t  One-  to  four-family  loans  are
underwritten  and  originated  according  to  policies  approved by the board of
directors.


         The Bank currently  offers fixed rate one- to  four-family  residential
mortgage  loans  with  terms  ranging  from 5 to 30 years.  One- to  four-family
residential real estate loans often remain outstanding for significantly shorter

                                       -4-

<PAGE>


periods than their  contractual  terms because borrowers may refinance or prepay
loans at their  option.  The  average  length  of time that the  Bank's  one- to
four-family  residential  mortgage loans remain outstanding varies significantly
depending  upon trends in market  interest  rates and other  factors.  In recent
years,  the  average  maturity  of  the  Bank's  mortgage  loans  has  decreased
significantly due to unprecedented volume of refinancing activity.  Accordingly,
estimates  of the  average  length  of one- to  four-family  loans  that  remain
outstanding cannot be made with any degree of accuracy.

         Originations  of fixed rate mortgage  loans are monitored on an ongoing
basis and are affected  significantly by the level of market interest rates, the
Bank's  interest rate risk  position,  and loan  products  offered by the Bank's
competitors.  The Bank's fixed rate mortgage  loans  amortize on a monthly basis
with  principal and interest due each month.  To make the Bank's loan  portfolio
more interest rate sensitive,  the Bank currently  emphasizes the origination of
fixed rate loans with terms of 15 years or less and fixed/adjustable rate loans.

         The  Bank's   one-to-four   family  residential  first  mortgage  loans
customarily include due-on-sale clauses,  which provides the Bank with the right
to declare a loan immediately due and payable in the event,  among other things,
that the borrower sells or otherwise  disposes of the  underlying  real property
serving as security for the loan.  Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed rate mortgage  loan  portfolio,  and the
Bank has generally exercised its rights under these clauses.

         Regulations  limit  the  amount  that a  savings  association  may lend
relative  to the  appraised  value of the real  estate  securing  the  loan,  as
determined  by an appraisal at the time of loan  origination.  Such  regulations
permit a maximum  loan-to-value  ratio of 100% for residential  property and 90%
for all other real estate loans.  The Bank's lending  policies limit the maximum
loan-to-value  ratio on fixed rate loans without private  mortgage  insurance to
80% of the lesser of the appraised  value or the purchase  price of the property
to serve as collateral for the loan.

         The Bank makes one-to-four  family real estate loans with loan-to-value
ratios of up to 95%;  however,  for one- to  four-family  real estate loans with
loan-to-value  ratios of between 80% and 95%, the Bank requires the first 20% of
the loan amount to be covered by private mortgage  insurance.  The Bank requires
fire  and  casualty  insurance,  as well as a title  policy,  on all  properties
securing real estate loans made by the Bank.

         Commercial  Real Estate  Loans.  The Bank  originates  commercial  real
estate loans on a limited  basis.  At June 30, 1998, the Bank had two such loans
which represented 2.0% of the Bank's loan portfolio. The Bank generally does not
solicit such loans, and originates such loans  selectively and on a case-by-case
basis.  Because of the increased  credit risk associated with such loans and the
low level of demand for such loans in the Bank's  primary  market area, the Bank
does not expect  commercial real estate lending to constitute a significant part
of loan  originations  in the foreseeable  future.  At June 30, 1998, the Bank's
commercial real estate loan portfolio totaled $3.7 million.  The largest loan at
June 30,  1998 was a $2.5  million,  18 month  loan on a PUD  property  which is
planned to be developed into a retirement facility.

         Home Equity  Loans.  The Bank also  originates  variable and fixed rate
home equity loans. As of June 30, 1998,  variable rate home equity loans totaled
$8.5 million, or 4.4%, of the Bank's total loan portfolio. The interest rates of
the Bank's  variable  rate home equity loans adjust based on the prime  interest
rate and are generally for terms of up to 15 years. At June 30, 1998, fixed rate
home equity loans totaled $4.3 million. The Bank's home equity loans are secured
by the  borrower's  principal  residence  with a  maximum  loan-to-value  ratio,
including the principal balances of both the first and second mortgage loans, of
75% or less.

         Consumer  Loans.  To a much  lesser  extent,  the Bank also  originates
consumer loans collateralized by automobiles,  mobile homes, boats, recreational
vehicles,  deposit accounts and other personal  property.  Consumer loans entail
greater credit risk than do residential mortgage loans, particularly in the case
of consumer loans that are secured by assets that  depreciate  rapidly,  such as
automobiles, mobile homes, boats, and recreational vehicles.

         Loan  Originations,  Solicitation,  Processing,  and Commitments.  Loan
originations are derived from a number of sources such as mortgage brokers, real
estate agent referrals, existing customers, borrowers, builders, attorneys,

                                       -5-

<PAGE>



and walk-in  customers.  Upon receiving a loan  application,  the Bank obtains a
credit  report  and  employment  verification  to  verify  specific  information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan,  an  appraiser  approved by the Bank  appraises  the real
estate intended to collateralize the proposed loan. An underwriter in the Bank's
loan department  checks the loan application file for accuracy and completeness,
and  verifies  the  information  provided.  Pursuant to the Bank's  written loan
policies, all loans are approved by the board of directors,  which meets weekly.
After the loan is approved,  a loan commitment  letter is promptly issued to the
borrower.

         If the loan is approved,  the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral,  and required
insurance  coverage.  Commitments are typically issued for 60-day periods in the
case of loans to  refinance,  90-day  periods  in the case of loans to  purchase
existing real estate,  and 120-day periods for construction  loans. The borrower
must  provide  proof of fire and casualty  insurance on the property  serving as
collateral, which insurance must be maintained during the full term of the loan.
Title  insurance,  based on a title search of the  property,  is required on all
loans secured by real property.  At June 30, 1998, the Bank had outstanding loan
commitments  of $1.0  million.  This amount does not  include  $15.2  million of
undisbursed  lines of credit on home equity loans,  and the unfunded  portion of
loans in process.

         Origination,  Purchase  and Sale of Loans.  The table  below  shows the
Bank's originations of loans for the periods indicated.


                                               1998         1997         1996
                                               ----         ----         ----
                                                      (In Thousands)
Loans receivable at beginning of period .   $ 175,422    $ 153,039    $ 141,316
Originations:
 Real estate:
  One- to four-family residential .......      41,205       35,919       32,514
   Home equity (1) ......................       7,571        7,657       10,355
   Commercial ...........................          --        2,500          100
 Consumer passbook loans (2) ............          81          (39)          14
 Consumer loans, other ..................       1,785        2,699        1,892
                                            ---------    ---------    ---------
    Total originations ..................      50,642       48,736       44,875
                                            ---------    ---------    ---------
 Transfer of mortgage loans
  to foreclosed real estate .............          --           --           --
Repayments ..............................     (34,353)     (26,364)     (33,152)
Loan charge-off/transfer provision ......          (5)          11           --
                                            ---------    ---------    ---------
Net loan activity .......................      16,284       22,383       11,723
                                            ---------    ---------    ---------
    Total loans receivable at
     end of period ......................   $ 191,706    $ 175,422    $ 153,039
                                            =========    =========    =========

--------
(1)  Includes disbursements from existing home equity loans.
(2)  Represents net changes in ending balances.

         Loan Origination Fees and Other Income.  In addition to interest earned
on loans, the Bank generally receives fees in connection with loan originations.
Such  loan  origination  fees,  net of  costs to  originate,  are  deferred  and
amortized using an interest  method over the contractual  life of the loan. Fees
deferred are recognized into income  immediately  upon prepayment of the related
loan. At June 30, 1998, the Bank had $802,000 of deferred loan origination fees.
Such fees  vary  with the  volume  and type of loans  and  commitments  made and
purchased,  principal  repayments,  and  competitive  conditions in the mortgage
markets,  which in turn  respond  to the demand and  availability  of money.  In
addition to loan  origination  fees, the Bank also receives other fees,  service
charges,  and other income that consist primarily of deposit transaction account
service charges and late charges. The Bank recognized fees and

                                       -6-

<PAGE>



service charges of $137,000,  $130,000 and $116,000,  for the fiscal years ended
June 30, 1998, 1997, and 1996, respectively.

Mortgage-Backed Securities

         A  significant  part of the Bank's  business  involves  investments  in
mortgage-backed  securities, all of which are issued or guaranteed by the United
States  Government  or an agency  thereof.  At June 30, 1998,  all of the Bank's
mortgage-backed  securities  were  insured  or  guaranteed  by a  United  States
Government  agency  or  sponsored   corporation.   The  Bank's   mortgage-backed
securities  portfolio  includes  primarily  pass-through  certificates and, to a
lesser  extent,  CMOs.  The  Bank  invests  in  mortgage-backed   securities  to
supplement  local  loan  originations  as well as to reduce  interest  rate risk
exposure.

         The Bank's pass-through certificates represent a participation interest
in a pool of  single-family  mortgages,  the principal and interest  payments on
which  are  passed  from  the  mortgage  originators,   through   intermediaries
(generally   quasi-governmental   agencies)   that   pool  and   repackage   the
participation interest in the form of securities, to investors such as the Bank.
Such  quasi-governmental  agencies  that  guarantee the payment of principal and
interest to investors,  include  Freddie Mac,  GNMA,  or the FNMA.  Pass-through
certificates  typically  are  issued  with  stated  principal  amounts,  and the
securities  are backed by pools of mortgages that have loans with interest rates
and  maturities  that are  within a  specified  range.  The  underlying  pool of
mortgages can be composed of either fixed rate mortgage loans or ARM loans.  The
interest rate risk  characteristics  of the underlying pool of mortgages,  i.e.,
fixed rate or adjustable rate, are passed on to the certificate holder.

         CMOs are securities  created by segregating or partitioning  cash flows
from  mortgage  pass-through  securities or from pools of mortgage  loans.  CMOs
provide a broad range of mortgage  investment  vehicles by tailoring  cash flows
from  mortgages  to meet the varied risk and return  preferences  of  investors.
These  securities  enable  the  issuer  to  "carve  up" the cash  flow  from the
underlying  securities and thereby create  multiple  classes of securities  with
different  maturity and risk  characteristics.  CMOs are  typically  issued by a
special-purpose  entity (the  "issuer")  that may be  organized  in a variety of
legal forms, such as a trust, a corporation,  or a partnership.  Accordingly,  a
CMO instrument may be purchased in equity form (e.g., trust interests, stock and
partnership interests) or non-equity form (e.g., participating debt securities).
All of the Bank's CMOs are  non-equity  interests.  CMOs are  collateralized  by
mortgage loans or  mortgage-backed  securities  that are  transferred to the CMO
trust or pool by a sponsor.  The issuey is structured so that  collections  from
the  underlying  collateral  provide a cash flow to make  principal and interest
payments on the obligations, or "tranches," of the issuer.

         Set forth below is information relating to the Bank's purchases,  sales
and repayments of mortgage-backed securities for the periods indicated.

                                                  Years Ended June 30,
                                        ----------------------------------------
                                          1998           1997            1996
                                          ----           ----            ----
                                                    (In Thousands)
Mortgage-backed securities at
 beginning of period ..............     $  22,294      $  29,095        434,957
Purchases .........................            --             --             --
Repayments ........................        (5,769)        (6,791)        (5,878)
Other  (1) ........................           (11)           (10)            16
                                        ---------      ---------      ---------
Mortgage-backed securities at
 end of period ....................     $  16,514      $  22,294      $  29,095
                                        =========      =========      =========
------------
(1)  Includes discount (premium) amortization and accrued interest receivable.


                                       -7-

<PAGE>


         The  following   table  sets  forth   selected  data  relating  to  the
composition of the Bank's mortgage-backed securities as of the dates indicated.

<TABLE>
<CAPTION>
                                                                         At June 30,
                                        ----------------------------------------------------------
                                              1998                 1997                1996
                                        ----------------    ------------------    ----------------
                                        Amount   Percent    Amount     Percent    Amount   Percent
                                        ------   -------    ------     -------    ------   -------
                                                                  (Dollars in Thousands)
Pass-through certificates:
<S>                                    <C>          <C>     <C>          <C>     <C>          <C>  
 Adjustable ........................   $ 7,624      46.2%   $ 9,970      44.7%   $11,704      40.2%
 Fixed .............................     7,068      42.8     10,375      46.6     15,431      53.0
                                       -------     -----    -------     -----    -------     -----
     Total pass-through certificates    14,692      89.0     20,345      91.3     27,135      93.2
                                       -------     -----    -------     -----    -------     -----
CMOs:                                                                           
 Adjustable ........................     1,759      10.7      1,876       8.4      1,876       6.5
                                       -------     -----    -------     -----    -------     -----
     Total CMOs ....................     1,759      10.7      1,876       8.4      1,876       6.5
                                       -------     -----    -------     -----    -------     -----
 Other(1) ..........................        63       0.3         73       0.3         84        .3
                                       -------     -----    -------     -----    -------     -----
    Total mortgage-backed securities   $16,514     100.0%   $22,294     100.0%   $29,095     100.0%
                                       =======     =====    =======     =====    =======     =====
</TABLE>
---------
(1)  Includes discount (premium) amortization and accrued interest receivable.


         At June 30, 1998,  mortgage-backed securities totaled $16.5 million, or
5.5%,  of  total  assets.   ARM  loans   collateralized   46.2%  of  the  Bank's
mortgage-backed  securities  portfolio,  and loans  with terms of less than five
years collateralized 13.0% of the Bank's  mortgage-backed  securities portfolio.
Pass-through  certificates  totaled $14.6 million, or 88.7%, of the Bank's total
mortgage-backed  securities  portfolio at June 30, 1998. All of the Bank's pass-
through  certificates are insured or guaranteed by the Freddie Mac, the GNMA, or
the  FNMA.   CMOs  totaled  $1.8  million,   or  10.7%,   of  the  Bank's  total
mortgage-backed securities portfolio on that same date, all of which were backed
by federal agency collateral.  At June 30, 1998, all the Bank's  mortgage-backed
securities   were  held  for   investment.   At  June  30,   1998,   the  Bank's
mortgage-backed securities portfolio had a fair market value of $16.9 million.

         Effective  February  1992,  the  Office of Thrift  Supervision  ("OTS")
adopted  Thrift  Bulletin  52 ("TB 52").  Among other  things,  TB 52 sets forth
certain  guidelines  with  respect to  depository  institutions'  investment  in
certain "high risk mortgage  securities."  "High-risk  mortgage  securities" are
defined as any mortgage  derivative product that at the time of purchase,  or at
any  subsequent  date,  meets  any of three  tests  that are set forth in TB 52.
High-risk  mortgage  securities may be purchased only in limited  circumstances,
and if held in a portfolio,  must be reported as trading assets at market value,
or as  available-for-sale  assets at the lower of cost or market value. Mortgage
securities  that were not high risk  securities  when  originally  acquired that
subsequently  became high risk may be reported as held to  maturity.  In certain
circumstances,  OTS  examiners  may seek the orderly  divestiture  of  high-risk
mortgage securities,  in which case the securities must be reported as available
for sale.  As of June 30, 1998,  the Bank did not hold any  "high-risk  mortgage
securities" in its portfolio.

Delinquencies and Classified Assets

         Delinquencies.  The Bank's  collection  procedures  provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment,  plus a late charge. If delinquency  continues,  on
the first day of the second  month,  a delinquent  notice is mailed along with a
letter  advising  that the  mortgagors  are in  violation  of the terms of their
mortgage contract.  If a loan becomes 60 days past due, the loan becomes subject
to possible legal action.  The Bank's  attorney has been authorized by the Board
of  Directors  to send a letter on the first day of the third month  advising of
pending  legal action.  This letter  grants  mortgagors an additional 15 days to
bring  the  account  to date  prior to start of any legal  action.  If not paid,
foreclosure proceedings are initiated.


                                       -8-

<PAGE>


         It is sometimes  necessary and desirable to arrange  special  repayment
schedules with mortgagors to prevent  foreclosure or filing for bankruptcy.  The
mortgagors are required to submit a written repayment  schedule which is closely
monitored  for  compliance.  Under these terms,  the account is brought to date,
usually within a few months.

         Nonperforming  Assets.  Loans are  reviewed on a regular  basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of  additional  interest is doubtful.  Mortgage  loans are placed on  nonaccrual
status  generally  when either  principal  or interest is more than 90 days past
due.  Interest  accrued  and  unpaid at the time a loan is placed on  nonaccrual
status is charged against interest income.

         Real estate  acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold.  When REO is
acquired,  it is  recorded at the lower of the unpaid  principal  balance of the
related loan or its  estimated  fair value,  less  estimated  selling  expenses.
Valuations are periodically performed by management,  and any subsequent decline
in fair value is charged to operations. At June 30, 1993, the Bank held $116,000
of REO,  which was sold during the three months ended  September 30, 1993.  This
was the only REO held by the Bank in the past several years.

         Delinquent  Loans and  Nonperforming  Assets.  The following table sets
forth information  regarding loans delinquent 90 days or more, real estate owned
by the Bank and other  nonperforming  assets at the dates  indicated.  As of the
dates indicated,  the Bank did not have any material  restructured  loans within
the meaning of SFAS 15. At June 30, 1998,  the Bank had two loans on  nonaccrual
status,  totaling  $2.5 million.  The increase in delinquent  loans was due to a
$2.5 million  commercial loan that became  nonperforming  during the fiscal year
ended June 30, 1998.  The  nonperforming  loan  matured in June 1998.  In August
1998,  the borrower paid all interest due on the loan through  October 31, 1998,
although the principal  was not repaid and the loan  continued to be in default.
The borrower has informed the Bank that it has received a lender's commitment to
refinance the loan,  although  there can be no assurance  that such  refinancing
will be obtained.  Management  also  obtained an  appraisal in August 1998,  and
based in part on such appraisal,  management  believes the Bank will not incur a
material  loss on this  loan.  See  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations--Results of  Operations--Provision
for Losses."

<TABLE>
<CAPTION>
                                                                        At June 30,
                                                 -----------------------------------------------------
                                                   1998      1997         1996       1995         1994
                                                   ----      ----         ----       ----         ----
                                                                (Dollars in Thousands)
Delinquent loans:
<S>                                              <C>         <C>         <C>         <C>         <C>  
    One- to four-family residential.........     $    19     $   88      $  100      $ 104       $  20
    Consumer loans..........................          --         --          --          7          --
    Commercial loans........................       2,500         --          --         --          --
                                                 -------     ------      ------      -----       -----
        Total delinquent loans..............     $ 2,519     $   88      $  100      $ 111       $  20
                                                 =======     ======      ======      =====       =====
Total real estate owned (1).................          --         --      $   --      $  --       $  --
 Other nonperforming assets.................          --         --          90        150          --
                                                 -------     ------      ------      -----       -----
        Total nonperforming assets..........          --         --      $   90      $ 150       $  --
                                                 =======     ======      ======      =====       =====
Total loans delinquent 90 days or more to
    net loans receivable....................        1.32%       .05%        .07%       .08%        .01%
Total loans delinquent 90 days or more to
    total assets............................         .83%       .03%        .04%       .04%         --%
Total nonperforming loans and nonperforming
    assets to total assets..................         .83%       .03%        .07%       .10%         --%
</TABLE>

--------

(1)  Represents  the net book value of  property  acquired  by the Bank  through
     foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
     was recorded at the lower of its fair value or the principal balance of the
     related loan.

         During  the  year  ended  June  30,  1998,  gross  interest  income  of
approximately   $281,000   would  have  been  recorded  on   nonperforming   and
restructured  loans,  under their original  terms, if the loans had been current
throughout the period. $211,000 was actually recorded on these assets during the
year ended June 30, 1998.

                                       -9-

<PAGE>

         The  following  table  sets  forth  information  with  respect to loans
delinquent  60-89 days and 90 days or more in the Bank's  portfolio at the dates
indicated.

                                                           At June 30,
                                                  ------------------------------
                                                   1998        1997        1996
                                                   ----        ----        ----
                                                          (In Thousands)
Loans delinquent 60-89 days ................      $  169      $   32      $   14
                                                                          ------
Loans delinquent 90 days or more ...........      $2,519          88         102
                                                  ------      ------      ------
  Total delinquent 60 days or more .........      $2,688      $  120      $  116
                                                  ======      ======      ======


         The following table sets forth  information  with respect to the Bank's
delinquent loans and other problem assets at June 30, 1998.

                                                     At June 30, 1998
                                                   ---------------------
                                                   Balance        Number
                                                   -------        ------
                                                      (In Thousands)
Residential real estate:
  Loans 60 to 89 days delinquent ..................$  169           1
  Loans 90 days or more delinquent ................    19           1
Commercial real estate:
  Loans 60 to 89 days delinquent ..................    --          --
  Loans 90 days or more delinquent ................ 2,500           1
Consumer loans 90 days or more delinquent .........    --          --
Foreclosed real estate and repossessions ..........    --          --
Other nonperforming assets ........................    --          --
Restructured loans within the meaning of
 Statement of Financial Accounting
 Standards No. 15 (not included in other
 nonperforming categories above) ..................    --          --
Loans to facilitate sale of real
 estate owned .....................................    --          --


         Classification  of  Assets.   Federal   regulations   provide  for  the
classification  of loans and other  assets  such as debt and  equity  securities
considered by the OTS to be of lesser quality as  "substandard,"  "doubtful," or
"loss"  assets.  An  asset is  considered  "substandard"  if it is  inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected.  Assets classified as "doubtful" have all
of the weaknesses  inherent in those  classified  "substandard,"  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets  classified as "loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
that do not  expose  the  savings  institution  to risk  sufficient  to  warrant
classification in one of the aforementioned  categories,  but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated  as special  mention  are  generally  loans  that,  while  current in
required  payments,  have  exhibited  some  potential  weaknesses  that,  if not
corrected, could increase the level of risk in the future. At June 30, 1998, the
Bank had 1 loan totaling $169,000 classified as special mention, secured by one-
to four family residence.


                                      -10-

<PAGE>

         The  following  table  sets  forth the  aggregate  amount of the Bank's
classified assets at the dates indicated.

                                                    At June 30,
                                       -----------------------------------
                                          1998           1997         1996
                                                  (In Thousands)
Substandard assets (1) ............    $   2,519      $       --      $90
Doubtful assets ...................           --              --       --
Loss assets .......................           --              --       --
                                       ---------      ----------      ---
   Total classified assets ........    $   2,519      $       --      $90
                                       =========      ==========      ===
--------------
(1)  Includes REO and other nonperforming assets.


         Allowance  for Loan  Losses.  Management's  policy  is to  provide  for
estimated  losses on the Bank's loan portfolio based on management's  evaluation
of the estimated  losses that may be incurred.  The Bank  regularly  reviews its
loan portfolio,  including problem loans, to determine whether any loans require
classification  or the  establishment of appropriate  reserves or allowances for
losses.  Such  evaluation,  which  includes  a review of all loans of which full
collectability  of  interest  and  principal  may  not  be  reasonably  assured,
considers,  among other  matters,  the  estimated  fair value of the  underlying
collateral.  During the years ended June 30, 1998, 1997 and 1996, the Bank added
$192,000, $151,000 and $34,000,  respectively, to the provision for loan losses.
The Bank's allowance for loan losses totaled $723,000, $536,000 and $375,000, at
June 30, 1998, 1997, and 1996, respectively.

         Management  believes  that the  allowances  for  losses  on  loans  and
investments  in real  estate  are  adequate.  While  management  uses  available
information to recognize losses on loans and investments in real estate,  future
additions  to the  allowances  may be  necessary  based on changes  in  economic
conditions.  In addition,  various regulatory  agencies,  as an integral part of
their examination process,  periodically review the Bank's allowances for losses
on loans and  investments in real estate.  Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.

         Analysis of the  Allowance For Loan Losses.  The  following  table sets
forth the analysis of the allowance  for loan losses for the periods  indicated.
Of the total  allowance  for loan  losses,  35.2% has been  allocated to one- to
four- family residential real estate loans.

<TABLE>
<CAPTION>
                                                                         At June 30,
                                                -------------------------------------------------------------
                                                1998          1997          1996          1995        1994
                                                ----          ----          ----          ----        ----
                                                                    (Dollars in Thousands)
<S>                                           <C>           <C>           <C>          <C>          <C>      
Total loans outstanding ...................   $ 190,966     $ 174,878     $ 152,755    $ 141,093    $ 143,252
Average loans outstanding .................     182,882       164,321       143,126      143,829      140,624
Allowance balances (at beginning of period)         536           375           341          317          254
Provision for losses on real estate loans .         192           151            34           24           63
Transfer from provision for other assets ..          --            30            --           --           --
Charge-offs ...............................          (5)          (20)           --           --           --
                                              ---------     ---------     ---------    ---------    ---------
Allowance balance (at end
 of period) ...............................   $     723     $     536     $     375    $     341    $     317
                                              =========     =========     =========    =========    =========
Allowance for loan losses as a
 percentage of net loans receivable
 at end of period .........................         .38%          .31%          .25%         .24%         .22%
</TABLE>


Investment Activities

         The  Bank's  investment  portfolio  comprises  investment   securities,
securities  purchased under  agreements to resell,  secured  short-term loans to
commercial banks, Federal Home Loan Bank stock, and interest-earning deposits

                                      -11-

<PAGE>


in other  institutions.  The Bank has no  investments  in  corporate  or unrated
securities.  At June 30, 1998, $44.0 million, or 51.0%, of the Bank's investment
portfolio  was scheduled to mature in one year or less,  $3.8 million,  or 4.4%,
was  scheduled  to  mature in from one to five  years,  and  $38.4  million  was
scheduled to mature in over five years.

         The Bank is required  under federal  regulations  to maintain a minimum
amount of liquid assets that may be invested in specified  short term securities
and certain other investments.  See  "Regulation--Federal  Regulation of Savings
Institutions--Liquidity."  The Bank  generally  has  maintained  a portfolio  of
liquid assets that exceeds regulatory requirements. Management believes that the
higher levels are prudent  because of the  possibility  that interest  rates may
increase. By maintaining high levels of liquidity,  the Bank is able to reinvest
its assets more quickly in response to changes in market interest rates, thereby
reducing  its  exposure to interest  rate  volatility.  Liquidity  levels may be
increased or decreased depending upon the yields on investment  alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other  opportunities  and its  expectation  of the level of yield
that will be available in the future, as well as management's  projections as to
the short term  demand for funds to be used in the Bank's loan  origination  and
other activities. Currently, due to lower demand for loans, the Bank's liquidity
levels are higher than they have been in recent periods.

         Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment portfolio at the dates indicated.

                                                             At June 30,
                                                     ---------------------------
                                                      1998      1997      1996
                                                      ----      ----      ----
                                                             (In Thousands)
Investment securities:
  U.S. Government and agency obligations .........   $49,393   $45,499   $57,269
  Freddie Mac preferred stock ....................     1,456     2,384     3,205
                                                     -------   -------   -------
    Total investment securities ..................   $58,725   $51,777   $48,704
Securities purchased under agreements                                        
  to resell ......................................        --     5,518     2,467
Short-term investments/money market
  accounts .......................................     4,777     2,722        --
Secured short-term loans to commercial
   banks(1) ......................................    18,405     9,736    11,360
FHLB stock .......................................     2,377     2,377     2,377
Interest-earning deposits in other institutions ..    11,906    11,172    10,450
                                                     -------   -------   -------
    Total investments ............................   $86,169   $83,302   $85,379
                                                     =======   =======   =======

----------
(1)  Includes Federal Funds sold and other deposits.


                                      -12-

<PAGE>


         Investment  Portfolio  Maturities.  The following  table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Bank's investment portfolio at June 30, 1998.

<TABLE>
<CAPTION>
                                                      At June 30, 1998
                            ----------------------------------------------------------------------------------------
                              One Year or Less     One to Five Years      Five to Ten Years     More than Ten Years
                            -------------------   -------------------   --------------------   --------------------
                                     Annualized            Annualized             Annualized             Annualized 
                                      Weighted              Weighted               Weighted               Weighted  
                            Carrying   Average    Carrying   Average    Carrying    Average    Carrying    Average  
                             Value     Yield       Value      Yield      Value       Yield      Value       Yield   
                             -----     -----       -----      -----      -----       -----      -----       -----   
                                                    (Dollars in Thousands)
<S>                         <C>       <C>         <C>        <C>        <C>         <C>        <C>         <C>
Investment securities:
 U.S. Government
  agency securities ....... $ 2,809     5.35%     $ 2,800      5.84%     $ 7,882      6.90%     $30,511      7.10%  
 U.S. Government                                                                             
  treasury securities .....     497     5.37        1,000      7.50           --        --           --        --   
 Freddie Mac preferred                                                                       
  stock ...................   3,205     0.01           --        --           --        --           --        --   
                            -------   ------      -------   -------      -------   -------      -------   -------   
    Total investment                                                                         
     securities............ $ 6,511     2.10%     $ 3,800      6.28%     $ 7,882      6.90%     $30,511      7.10%  
Securities purchased                                                                         
 under agreements to                                                                         
 resell ...................      --       --           --        --           --        --           --        --   
Short-term investments/                                                                      
money market accounts .....   4,777     6.16           --        --           --        --           --        --   
Secured short-term                                                                           
 loans to commercial                                                                         
 banks ....................  18,405     5.76           --        --           --        --           --        --   
FHLB stock ................   2,377     7.31           --        --           --        --           --        --   
Interest earning                                                                             
 deposits in other                                                                           
 institutions .............  11,906     5.80           --        --           --        --           --        --   
                            -------   ------      -------   -------      -------   -------      -------   -------   
   Total investments ...... $43,976     5.36%     $ 3,800      6.28%     $ 7,882      6.90%     $30,511      7.10%  
                            =======   ======      =======   =======      =======   =======      =======   =======   
</TABLE>


                                  At June 30, 1998
                            ---------------------------
                                      Total
                            ---------------------------
                                            Annualized 
                                             Weighted  
                            Carrying  Market  Average  
                             Value    Value    Yield   
                             -----    -----    -----   
                              (Dollars in Thousands)
Investment securities:     
 U.S. Government           
  agency securities ....... $44,002   $43,914   6.87% 
 U.S. Government                                      
  treasury securities .....   1,497     1,497   6.79  
 Freddie Mac preferred                                
  stock ...................   3,205     3,205   0.01  
                            -------   -------   ----  
    Total investment                                  
     securities............ $48,704   $48,616   6.42% 
Securities purchased                                  
 under agreements to                                  
 resell ...................      --        --     --  
Short-term investments/                               
money market accounts .....   4,777     4,777   6.16  
Secured short-term                                    
 loans to commercial                                  
 banks ....................  18,405    18,405   5.76  
FHLB stock ................   2,377     2,377   7.31  
Interest earning                                      
 deposits in other                                    
 institutions .............  11,906    11,906   5.80  
                            -------   -------   ----  
   Total investments ...... $86,169   $86,081   6.20% 
                            =======   =======   ====  

                                      -13-

<PAGE>


Sources of Funds

         General.   The  Bank's   deposit-gathering   activities  are  currently
conducted from the Bank's facility in Arbutus, Maryland.  Deposits are the major
source  of the  Bank's  funds for  lending  and other  investment  purposes.  In
addition  to  deposits,  the  Bank  derives  funds  from  the  amortization  and
prepayment of loans and mortgage-backed securities, n the maturity of investment
securities, and operations. Scheduled loan principal repayments are a relatively
stable source of funds,  while deposit inflows and outflows and loan prepayments
are influenced  significantly by general  interest rates and market  conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability  of funds from other  sources or on a longer term basis for general
business  purposes.  Historically,  the  Bank  has  maintained  a high  level of
liquidity, and only rarely uses borrowed funds.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from within the Bank's market area through the offering of a broad  selection of
deposit  instruments  including  NOW accounts,  passbook and  statement  savings
accounts,  money market  deposits,  term  certificate  accounts  and  individual
retirement accounts. Deposit account terms vary according to the minimum balance
required,  the period of time during which the funds must remain on deposit, and
the interest rate,  among other factors.  The maximum rate of interest which the
Bank must pay is not  established  by regulatory  authority.  The Bank regularly
evaluates  its  internal  cost of funds,  surveys  rates  offered  by  competing
institutions,  reviews  the  Bank's  cash  flow  requirements  for  lending  and
liquidity,  and  executes  rate changes  when deemed  appropriate.  The Bank has
sought to  decrease  the risk  associated  with  changes  in  interest  rates by
offering  competitive  rates on deposit accounts and by pricing  certificates of
deposit to provide customers with incentives to choose  certificates of deposit.
The Bank does not obtain funds through brokers,  through a solicitation of funds
outside its market area, nor by offering  negotiated  rates on  certificates  of
deposit in excess of $100,000.

         Savings  Portfolio.  Savings  in the  Bank as of  June  30,  1998  were
represented by the various types of deposit programs described below.

<TABLE>
<CAPTION>

  Weighted                                                                                                  Percentage
   Average                                                                  Minimum                          of Total
Interest Rate        Minimum Term        Checking and Savings Deposits       Amount        Balances           Savings
-------------        ------------        -----------------------------      --------      ----------          --------
                                                                                        (In Thousands)
<S>                 <C>                 <C>                                <C>            <C>                <C>
      --%                None             Noninterest-bearing demand        $   500        $   550           0.22%
    2.04                 None             NOW Accounts                          300          5,738           2.34
    3.35                 None             Passbooks and Statement Savings        50         18,213           7.43
    4.77                 None             Money Market Accounts                 100         63,792          26.01
    3.33                 None             Anniversary Bonus Account             100          5,107           2.08
    3.35                 None             Club Accounts                           5            139           0.06

                                         Certificates of Deposit
                                         -----------------------------
    4.25            3 months              Fixed term, fixed rate              1,000            365           0.15
    5.22            6 months              Fixed term, fixed rate              1,000          6,304           2.56
    5.42            12 months             Fixed term, fixed rate              1,000         22,493           9.17
    5.45            13 months             Fixed term, fixed rate             10,000            976           0.40
    5.56            18 months             Fixed term, fixed rate              1,000          9,195           3.75
    5.54            24 months             Fixed term, fixed rate              1,000         20,211           8.24
    5.70            36 months             Fixed term, fixed rate              1,000         18,220           7.43
    6.04            48 months             Fixed term, fixed rate              1,000          1,073           0.44
    6.35            60 months             Fixed term, fixed rate              1,000         21,725           8.86
    5.59            Various (15-20)       Fixed term, fixed rate              5,000         41,498          16.92
    5.51            Various (14-25)       Fixed term, variable rate           1,000          9,307           3.79
    7.50            Various ( 3-60)       Fixed term, fixed rate             90,000            364           0.15
                                                                                           -------         ------
                                                                                          $245,270         100.00%
                                                                                           =======         ======
</TABLE>


                                      -14-

<PAGE>


         The  following  table sets forth the change in dollar amount of savings
deposits in the various  types of savings  accounts  offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
                                                                           At June 30,
                        ------------------------------------------------------------------------------------------------------------
                                     1998                        1997                              1996                 1995
                        -----------------------------  ----------------------------  ---------------------------- ------------------
                        Balance  Percent(1) Change(2)  Balance Percent(1) Change(2)  Balance Percent(1) Change(2) Balance Percent(1)
                        -------  ---------  ---------  ------- ---------  ---------  ------- ---------- --------- ------- ----------
                                                                      (Dollars in Thousands)
<S>                    <C>          <C>     <C>      <C>        <C>      <C>       <C>          <C>     <C>      <C>          <C> 
Anniversary bonus
 account...............$  5,107     2.08%   $(1,384) $  6,491   2.79%    $(1,289)  $  7,780     3.5%    $(4,800) $ 12,580     6.0%
NOW and demand accounts   6,288     2.56      1,173     5,115    2.20        892      4,223     1.9         958     3,265     1.5
Passbooks, statements
 and clubs.............  18,352     7.49       (506)   18,858    8.11        436     18,422     8.3      (1,027)   19,449     9.2
Money market deposit
 accounts..............  63,792    26.01    (11,231)   75,023   32.26      6,936     68,087    30.6       6,106    61,981    29.3

Time deposits that
 mature:
    within 12 months...  91,166    37.17     14,544    76,622   32.94      6,505     70,117    31.6      (1,131)   71,248    33.7
    within 13-36 months  54,413    22.18     10,589    43,824   18.84      2,716     41,108    18.5       9,275    31,833    15.1
    beyond 36 months...   6,152     2.51       (505)    6,657    2.86     (5,752)    12,409     5.6       1,351    11,058     5.2
                       --------  -------    -------  --------  ------    -------   --------  ------     -------  --------  ------
        Total deposits.$245,270    100.0%   $12,680  $232,590   100.0%   $10,444   $222,146   100.0%    $10,732  $211,414   100.0%
                       ========  =======    =======  ========  ======    =======   ========  ======     =======  ========   ======
</TABLE>


--------
(1)  Represents percentage of total deposits.
(2)  Represents increase (decrease) in balance from end of prior period.


                                      -15-

<PAGE>



         Time Deposit Rates. The following table sets forth the time deposits in
the Bank classified by rates as of the dates indicated:

                                                    At June 30,
                                      ------------------------------------------
                                       1998              1997             1996
                                       ----              ----             ----
                                                     (In Thousands)
     Rate
     ----
4.00 - 5.99% ................         $132,687         $ 96,982         $ 75,296
6.00 - 7.99% ................           19,044           30,121           48,338
                                      --------         --------         --------
                                      $151,731         $127,103         $123,634
                                      ========         ========         ========

         Time Deposit Maturities.  The following table sets forth the amount and
maturities of time deposit at June 30, 1998.

                                           Amount Due
                   -------------------------------------------------------------
                   Less Than1-2     2-3        After
                    One Year       Years       Years      3 Years       Total
                    --------       -----       -----      -------       -----
                                            (In Thousands)
4.00 - 5.99%......  $84,424      $35,056     $  7,155     $ 6,052     $132,687
6.00 - 7.99%......     6,742        9,310       2,892         100       19,044
                    --------     --------    --------     -------     --------
                    $ 91,166     $ 44,366    $ 10,047     $ 6,152     $151,731
                    ========     ========    ========     =======     ========

         Large Certificates of Deposit Maturities. The following table indicates
the amount of the Bank's  certificates  of deposit of  $100,000  or more by time
remaining  until  maturity at June 30, 1998.  This amount does not include other
savings account deposits of $100,000 or more, which totaled  approximately $22.0
million at June 30, 1998.

                                                                Certificates
         Maturity Period                                         of Deposit
         ---------------                                         ----------
                                                                (In Thousands)
         Three months or less..............................       $ 2,916
         Three through six months..........................         2,864
         Six through twelve months.........................        10,634
         Over twelve months................................        10,243
                                                                  -------
              Total........................................       $26,657
                                                                  =======

         Change in Deposits.  The  following  table sets forth  changes in total
deposits of the Bank for the periods indicated:

                                                    At June 30,
                                         --------------------------------------
                                           1998          1997            1996
                                           ----          ----            ----
                                                      (In Thousands)
        Rate
        ----
Balance at beginning of period .....     $ 232,590     $ 222,146      $ 211,414
                                                                      ---------
Net (withdrawals)/deposits .........           566        (1,105)          (424)
Interest credited ..................        12,114        11,549         11,156
                                                       ---------      ---------
  Ending balance ...................     $ 245,270     $ 232,590        222,146
                                         =========     ---------      ---------
Net increase (decrease)
  in deposits ......................     $  12,680     $  10,444      $  10,732
                                         =========     =========      =========


Borrowings

         Deposits  are the  Bank's  primary  source of funds.  The Bank may also
obtain  funds from the FHLB and  through  reverse  repurchase  agreements.  FHLB
advances are  collateralized  by selected  assets of the Bank. Such advances are
made pursuant to several  different credit  programs,  each of which has its own
interest  rate and range of  maturities.  The maximum  amount that the FHLB will
advance to member institutions, including the Bank, for

                                      -16-

<PAGE>


purposes  other  than  meeting  withdrawals,  fluctuates  from  time  to time in
accordance with the policies of the OTS and the FHLB. The maximum amount of FHLB
advances to a member  institution  generally is reduced by  borrowings  from any
other source. As part of the  Reorganization,  the Employee Stock Ownership Plan
and Trust (ESOP)  borrowed funds from an unrelated third party lender to finance
the  purchase  of 144,000  shares of the  Common  Stock  issued in the  offering
(adjusted  for the  Bank's  three-for-two  stock  split  in the  form of a stock
dividend which was paid November 1997). The loan will be repaid principally from
the Bank's  contributions  to the ESOP over a period of up to ten years. At June
30,  1998,  the  balance on the ESOP loan was  $552,000  and was  reported as an
obligation of the Bank.

         Although the Bank has rarely done so, it may also sell securities under
agreements to repurchase with selected dealers (reverse  repurchase  agreements)
as a means of  obtaining  short-term  funds as market  conditions  permit.  In a
reverse repurchase agreement,  a fixed dollar amount of securities would be sold
to a dealer under an agreement to repurchase  the securities at a specific price
within a  specific  period of time,  typically  not more than 180 days.  Reverse
repurchase  agreements are treated as financings of the Bank and the obligations
to  repurchase  securities  sold are  reflected as a liability of the Bank.  The
dollar amount of securities  underlying  the  agreements  remain an asset of the
Bank. There were no securities sold under  agreements to repurchase  outstanding
at June 30, 1998.

Competition

         As  of  June  30,  1998,  the  Bank  was  the  fourth  largest  savings
institution  headquartered in the Bank's market area. The Bank encounters strong
competition both in attracting deposits and in originating real estate and other
loans.  Its most direct  competition  for  deposits has  historically  come from
commercial and savings banks, other savings  associations,  and credit unions in
its market area. Competition for loans comes from such financial institutions as
well  as  mortgage  banking   companies.   The  Bank  expects  continued  strong
competition in the foreseeable  future,  including  increased  competition  from
"super-regional" banks entering the market by purchasing large banks and savings
banks. Many such  institutions  have greater  financial and marketing  resources
available to them than does the Bank. The Bank competes for savings  deposits by
offering  depositors  a high  level  of  personal  service  and a wide  range of
competitively  priced financial  services.  In recent years,  additional  strong
competition has come from stock and bond dealers and brokers.  The Bank competes
for real estate  loans  primarily  through the  interest  rates and loan fees it
charges and advertising.

Personnel

         As of  June  30,  1998,  the  Bank  had 25  full-time  and 8  part-time
employees.  None  of  the  Bank's  employees  is  represented  by  a  collective
bargaining  group. The Bank believes its  relationship  with its employees to be
good.

Regulation

         As a federally chartered SAIF-insured savings association,  the Bank is
subject to examination,  supervision and extensive regulation by the OTS and the
FDIC.  The Bank is a member of and owns stock in the FHLB of  Atlanta,  which is
one of the twelve  regional  banks in the Federal  Home Loan Bank  System.  This
regulation and supervision  establishes a comprehensive  framework of activities
in which an institution can engage and is intended  primarily for the protection
of the insurance fund and depositors.  The Bank also is subject to regulation by
the Board of  Governors  of the Federal  Reserve  System (the  "Federal  Reserve
Board") governing  reserves to be maintained  against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's  Board of  Directors  on any  deficiencies  that they may find in the
Bank's  operations.  The  FDIC  also  examines  the  Bank  in  its  role  as the
administrator  of the SAIF.  The Bank's  relationship  with its  depositors  and
borrowers  also is  regulated  to a great  extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC,  OTS,  or  Congress,  could have a material  adverse  impact on the
Company, the Mutual Holding Company and the Bank and their operations.


                                      -17-

<PAGE>



Federal Regulation of Savings Institutions

         Business  Activities.   The  activities  of  savings  institutions  are
governed by the Home  Owners'  Loan act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes,  as  amended  by  the  Financial  Institutions  Reform,  Recovery  and
Enforcement  Act of 1989 ("FIRREA") and Federal  Deposit  Insurance  Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition  of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential  real estate property to 400% of capital, (4) permit savings and
loan  holding   companies  to  acquire  up  to  5%  of  the  voting   shares  of
non-subsidiary  savings  institutions  or  savings  and loan  holding  companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings  institutions.  The description of statutory  provisions and regulations
applicable  to savings  associations  set forth  herein does not purport to be a
complete  description of such statutes and  regulations  and their effect on the
Bank.

         Loans  to One  Borrower.  Under  the  HOLA,  savings  institutions  are
generally  subject  to the  national  bank  limits  on  loans  to one  borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired  capital
and surplus on an unsecured  basis. An additional  amount may be lent,  equal to
10% of  unimpaired  capital  and  surplus,  if such loan is secured by  readily-
marketable  collateral,  which is  defined  to include  certain  securities  and
bullion, but generally does not include real estate. The Bank's maximum loans to
one borrower  limit was $7.4 million at June 30, 1998. As of June 30, 1998,  the
Bank was in compliance with its loans-to-one-borrower limitations.

         Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified  thrift  lender  ("QTL")  test.  Under the QTL test,  a savings
association  is  required to  maintain  at least 65% of its  "portfolio  assets"
(total assets less (i) specified  liquid assets up to 20% of total assets,  (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business)  in certain  "qualified  thrift  investments,"  primarily  residential
mortgages and related investments, including certain mortgage-backed and related
securities  on a monthly  average  basis in 9 out of every 12 months.  A savings
association  that fails the QTL test must  either  convert to a bank  charter or
operate under certain  restrictions.  As of June 30, 1998,  the Bank  maintained
87.5% of its portfolio  assets in qualified thrift  investments and,  therefore,
met the QTL test.

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

         In addition,  OTS  regulations  require the Mutual  Holding  Company to
notify the OTS of any proposed waiver of its right to receive  dividends.  It is
the OTS' recent  practice to review  dividend  waiver  notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for

                                      -18-

<PAGE>



as long as the  savings  association  subsidiary  is  controlled  by the  mutual
holding  company,  the dollar amount of dividends  waived by the mutual  holding
company are considered as a restriction on the retained  earnings of the savings
association,  which  restriction,  if  material,  is  disclosed  in  the  public
financial  statements  of the  savings  association  as a note to the  financial
statements;  (iii) the  amount of any  dividend  waived  by the  mutual  holding
company is available for  declaration as a dividend solely to the mutual holding
company,  and,  in  accordance  with  SFAS  5,  where  the  savings  association
determines  that the payment of such dividend to the mutual  holding  company is
probable,  an  appropriate  dollar  amount is recorded as a liability;  (iv) the
amount of any waived  dividend is  considered as having been paid by the savings
association (and the savings  association's capital ratios adjusted accordingly)
in evaluating any proposed dividend under OTS capital distribution  regulations;
and (v) in the event the mutual  holding  company  converts to stock  form,  the
appraisal  submitted to the OTS in connection  with the  conversion  application
takes into account the aggregate  amount of the  dividends  waived by the mutual
holding company.

         The OTS has proposed  regulations that would revise the current capital
distribution restrictions.  The proposal eliminates the current tiered structure
and the  safe-harbor  percentage  limitations.  Under  the  proposal  a  savings
institution may make a capital distribution without notice to the OTS (unless it
is a  subsidiary  of a  holding  company)  provided  that  it has a CAMEL 1 or 2
rating, is not in troubled condition and would remain adequately capitalized (as
defined by regulation) following the proposed distribution. Savings institutions
that would remain adequately capitalized following the proposed distribution but
do not meet the other  noted  requirements  must notify the OTS 30 days prior to
declaring a capital  distribution.  The OTS stated it will  generally  regard as
permissible that amount of capital  distributions  that do not exceed 50% of the
institution's  excess  regulatory  capital  plus net  income to date  during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a  distribution.  A savings  institution  will be  considered in
troubled  condition  if it  has a  CAMEL  rating  of 4 or 5,  is  subject  to an
enforcement  action relating to its safety and soundness or financial  viability
or has been informed in writing by the OTS that it is in troubled condition.  As
under the current rule, the OTS may object to a capital distribution if it would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

         Liquidity.  The Bank is required to maintain  minimum  levels of liquid
assets as defined by OTS regulations.  This requirement,  which varies from time
to time  depending upon economic  conditions and deposit flows,  is based upon a
percentage of deposits and short-term  borrowings.  The required ratio currently
is 4.0%.  Monetary  penalties may be imposed for failure to meet these liquidity
requirements.  The Bank's average liquidity ratio for the quarter ended June 30,
1998 was 40.6%, which exceeded the then applicable requirements.

         Assessments. Savings institutions are required by OTS regulation to pay
assessments  to  the  OTS  to  fund  the  operations  of the  OTS.  The  general
assessment,   paid  on  a  semi-annual  basis,  is  computed  upon  the  savings
institution's consolidated total assets, as reported in the institution's latest
quarterly  thrift financial  report.  Based on assets at June 30, 1998, the Bank
has a semi-annual assessment of approximately $39,000.

         Community  Reinvestment.  Under  the  Community  Reinvestment  Act (the
"CRA"),  as  implemented  by  OTS  regulations,  a  savings  institution  has  a
continuing  and  affirmative  obligation,  consistent  with its  safe and  sound
operation, to help meet the credit needs of its entire community,  including low
and moderate income  neighborhoods.  The CRA does not establish specific lending
requirements  or  programs  for  financial  institutions,  nor  does it limit an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular  community,  consistent with the CRA.
The CRA  requires  the OTS,  in  connection  with its  examination  of a savings
institution,  to assess the institution's  record of meeting the credit needs of
its community and to take such record into account in its  evaluation of certain
applications by such  institution.  The CRA rating system identifies four levels
of performance  that may describe an institution's  record of meeting  community
needs:   outstanding,   satisfactory,   needs   to   improve   and   substantial
non-compliance. The CRA also requires all institutions to make public disclosure
of their  CRA  ratings.  The CRA  regulations  were  recently  revised.  The OTS
assesses the CRA performance of a savings institution under lending, service and
investment  tests, and based on such  assessment,  will assign an institution in
one of the four above-referenced ratings. The Bank received a "satisfactory" CRA
rating under the current CRA regulations in its most recent federal  examination
by the OTS.

                                      -19-

<PAGE>



         Transactions  with Related  Parties.  The Bank's authority to engage in
transactions  with  related  parties or  "affiliates"  (i.e.,  any company  that
controls or is under common control with an  institution,  including the Company
and its  non-savings  institution  subsidiaries)  or to make  loans  to  certain
insiders, is limited by Sections 23A and 23B of the Federal reserve Act ("FRA").
Section 23A limits the  aggregate  amount of  transactions  with any  individual
affiliate to 10% of the capital and surplus of the savings  institution and also
limits the aggregate  amount of  transactions  with all affiliates to 20% of the
savings institution's capital and surplus.  Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from  affiliates is generally
prohibited.  Section 23B provides  that certain  transactions  with  affiliates,
including loans and asset purchases,  must be on terms and under  circumstances,
including  credit  standards,  that  are  substantially  the same or at least as
favorable to the  institution  as those  prevailing  at the time for  comparable
transactions with non-affiliated  companies.  In addition,  savings institutions
are prohibited  from lending to any affiliate that is engaged in activities that
are not  permissible for bank holding  companies and no savings  institution may
purchase the securities of any affiliate other than a subsidiary.

         The Bank's authority to extend credit to executive officers,  directors
and 10%  stockholders,  as well  as  entities  controlled  by such  persons,  is
currently  governed by Sections  22(g) and 22(h) of the FRA,  and  Regulation  O
thereunder.  Among other things, these regulations  generally require such loans
to be made on terms  substantially  the same as those  offered  to  unaffiliated
individuals  and  do not  involve  more  than  the  normal  risk  of  repayment.
Regulation O also places  individual and aggregate limits on the amount of loans
the  Bank  may make to such  persons  based,  in  part,  on the  Bank's  capital
position,  and requires certain approval procedures to be followed.  At June 30,
1998, the Bank was in compliance with the regulations.

         Enforcement.  Under  the  FDI  Act,  the OTS  has  primary  enforcement
responsibility  over  savings  institutions  and  has  the  authority  to  bring
enforcement  action  against  all   "institution-related   parties,"   including
stockholders,  and any attorneys,  appraisers and  accountants  who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital  directive  or cease and  desist  order to removal  of  officers  and/or
directors of the institutions, receivership,  conservatorship or the termination
of deposit  insurance.  Civil  penalties  cover a wide range of  violations  and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day.  Criminal
penalties  for  most  financial  institution  crimes  include  fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that  enforcement  action be taken
with respect to a particular savings institution.  If action is not taken by the
Director,   the  FDIC  has   authority  to  take  such  action   under   certain
circumstances.

         The federal banking  agencies  recently  adopted a final regulation and
Interagency   Guidelines   Prescribing   Standards   for  Safety  and  Soundness
("Guidelines")  to implement the safety and soundness  standards  required under
the FDI Act. The  Guidelines  set forth the safety and soundness  standards that
the federal  banking  agencies use to identify  and address  problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines  address internal controls and information  systems;  internal
audit  system;  credit  underwriting;  loan  documentation;  interest  rate risk
exposure;  asset growth; and compensation,  fees and benefits. The agencies also
adopted  final rules which  require  institutions  to examine  asset quality and
earnings standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines,  the agency
may  require  the  institution  to submit to the  agency an  acceptable  plan to
achieve  compliance  with the  standard,  as required by the FDI Act.  The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.

         Capital  Requirements.  The OTS  capital  regulations  require  savings
institutions to meet three capital standards:  a 1.5% tangible capital standard,
a 3.0% leverage  ratio (or core capital  ratio) and an 8.0%  risk-based  capital
standard.  Core  capital is defined as common  stockholders'  equity  (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles  other than  certain  qualifying  supervisory  goodwill  and certain
purchased  mortgage  servicing rights ("PMSRs").  Tangible capital is defined as
core capital less all intangible assets (including  supervisory goodwill) plus a
specified

                                      -20-

<PAGE>



amount of PMSRs.  The OTS regulations also require that, in meeting the tangible
ratio,  leverage and  risk-based  capital  standards,  institutions  must deduct
investments in and loans to  subsidiaries  engaged in activities not permissible
for a national bank, and unrealized gains (losses) on certain available for sale
securities.

         The risk-based capital standard for savings  institutions  requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and   supplementary   capital)  to  risk  weighted  assets  of  4.0%  and  8.0%,
respectively.  In determining the amount of  risk-weighted  assets,  all assets,
including certain  off-balance sheet assets,  are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes  are  inherent in the type of asset.  The  components  of Tier 1 (core)
capital are equivalent to those discussed  earlier under the 3.0% leverage ratio
standard.  The components of supplementary  capital currently include cumulative
preferred stock,  long-term  perpetual  preferred stock,  mandatory  convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and  lease  losses.  Allowance  for loan and  lease  losses  includable  in
supplementary  capital is limited to a maximum of 1.25%.  Overall, the amount of
supplementary  capital  included as part of total capital  cannot exceed 100% of
core capital.

         At June 30,  1998,  the Bank  exceeded  each of the three  OTS  capital
requirements  on a fully  phased-in  basis.  Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of June 30, 1998.

<TABLE>
<CAPTION>
                                                                                          To Be Well Capitalized
                                                                      For Capital         Under Prompt Corrective
                                              Actual               Adequacy Purposes         Action Provisions
                                        ------------------        ------------------        --------------------
                                        Amount    Ratio(1)        Amount    Ratio(1)        Amount      Ratio(1)
                                        ------    --------        ------    --------        ------      --------
As of June 30, 1998:
<S>                                     <C>        <C>            <C>          <C>          <C>             <C>
  Tier I core capital...............    $47,346    15.80%         $11,985      4.00%        $14,982        >5%
  Tier I risk-based capital.........     47,346    32.76            5,781      4.00           8,672        >6%
  Total risk-based capital..........     48,069    33.26           11,563      8.00          14,453       >10%
</TABLE>
---------------
(1)  Core capital is calculated  on the basis of a percentage of total  adjusted
     assets;  risk-based  capital  levels  are  calculated  on  the  basis  of a
     percentage of risk-weighted assets.


Prompt Corrective Regulatory Action

         Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized  institutions,  the
severity  of which  depends  upon the  institution's  degree of  capitalization.
Generally,  a savings institution that has total risk-based capital of less than
8.0% or a leverage  ratio or a Tier 1 core capital  ratio that is less than 4.0%
is considered to be  undercapitalized.  A savings institution that has the total
risk- based  capital less than 6.0%, a Tier 1 core  risk-based  capital ratio of
less than 3.0% or a leverage  ratio that is less than 3.0% is  considered  to be
"significantly  undercapitalized"  and a savings institution that has a tangible
capital to assets  ratio equal to or less than 2.0% is deemed to be  "critically
undercapitalized."  Subject to a narrow  exception,  the  banking  regulator  is
required  to  appoint a  receiver  or  conservator  for an  institution  that is
"critically  undercapitalized."  The  regulation  also  provides  that a capital
restoration  plan  must be  filed  with  the OTS  within  45 days of the date an
institution  receives  notice  that  it  is  "undercapitalized,"  "significantly
undercapitalized"  or  "critically   undercapitalized."  In  addition,  numerous
mandatory supervisory actions become immediately  applicable to the institution,
including,  but not limited to, restrictions on growth,  investment  activities,
capital distributions,  and affiliate transactions.  The OTS could also take any
one of a number of discretionary supervisory actions,  including the issuance of
a capital  directive  and the  replacement  of  senior  executive  officers  and
directors.

Insurance of Deposit Accounts

         The Bank is a member of the SAIF,  which is  administered  by the FDIC.
Deposits are insured up to applicable  limits by the FDIC and such  insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct  examinations of
and to require reporting by FDIC-insured institutions.  It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC

                                      -21-

<PAGE>



determines by  regulation or order to pose a serious risk to the FDIC.  The FDIC
also has the authority to initiate  enforcement  actions  against savings banks,
after giving the OTS an opportunity  to take such action,  and may terminate the
deposit  insurance  if it  determines  that the  institution  has  engaged or is
engaging  in  unsafe  or  unsound  practices,  or  is in an  unsafe  or  unsound
condition.

         The minimum annual deposit insurance premiums are currently assessed at
the rate of .065% of deposits for all SAIF-insured  members.  The FDIC, however,
is authorized to raise premiums in certain  circumstances related to fund losses
and severe economic  circumstances and has exercise this authority several times
with respect to premium paid to the Bank  Insurance  Fund ("BIF") by  commercial
banks and BIF-member savings association.

         In September 1996,  Congress  enacted  legislation to recapitalize  the
SAIF by a one-time assessment on all SAIF-insured  deposits held as of March 31,
1995.  The  assessment  was 65.7 basis points per $100 in  deposits,  payable on
November 30, 1996.  For the Bank,  the  assessment  amounted to $1.4 million (or
$849,000  when  adjusted for taxes),  based on the Bank's  deposits on March 31,
1995. In addition, pursuant to the legislation,  interest payments on FICO bonds
issued in the late 1980's by the Financing  Corporation to recapitalize  the now
defunct  Federal  Savings and Loan  Insurance  Corporation  are paid  jointly by
BIF-insured institutions and SAIF-insured institutions.  The FICO assessment was
1.29 basis points per $100 in BIF deposits and 6.1 basis points per $100 in SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid pro
rata by banks and thrifts based on deposits  (approximately 2.4 basis points per
$100 in deposits).

         The  legislation  further  provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings  associations  as of that date. The
Bank cannot determine  whether,  or in what form such legislation may eventually
be enacted and there can be no assurance  that any  legislation  that is enacted
would not adversely affect the Bank or the Company.

         While the legislation has reduced the disparity  between  premiums paid
on BIF deposits  and SAIF  deposits,  and has relieved the thrift  industry of a
portion of the contingent  liability  represented by the FICO bonds, the premium
disparity between SAIF-insured  institutions,  such as the Bank, and BIF-insured
institutions  will  continue  until at least  January 1, 1999.  The Bank's  SAIF
premium for the fiscal year ended June 30, 1998 was $222,000.

Federal Home Loan Bank System

         The Bank is a member of the FHLB System,  which consists of 12 regional
FHLBs.  The FHLB  provides  a  central  credit  facility  primarily  for  member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of  capital  stock in that FHLB in an amount at least  equal to 1% of the
aggregate principal amount of its unpaid residential  mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances  (borrowings)
from the  FHLB,  whichever  is  greater.  The Bank was in  compliance  with this
requirement with an investment in FHLB-Atlanta  stock, at June 30, 1998, of $2.4
million.

         The FHLBs are required to provide funds for the resolution of insolvent
thrifts  and  to  contribute  funds  for  affordable  housing  programs.   These
requirements  could reduce the amount of  dividends  that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Over the past five years such dividends have averaged
6.84%, and were 7.31% for the fiscal year ended June 30, 1998.

Federal Reserve System

         The Federal Reserve Board regulations  require savings  institutions to
maintain   non-interest-earning  reserves  against  their  transaction  accounts
(primarily  NOW and  regular  checking  accounts).  The  Federal  Reserve  Board
regulations  generally  require that  reserves be maintained  against  aggregate
transaction  accounts as follows: for accounts aggregating $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve  requirement is
3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal  Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of

                                      -22-

<PAGE>


$52.0 million.  The first $4.2 million of otherwise reservable balances (subject
to  adjustments  by the Federal  Reserve  Board) are  exempted  from the reserve
requirements.  The Bank is in compliance  with the foregoing  requirements.  The
balances maintained to meet the reserve  requirements  imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS.

Holding Company Regulation

         General. The Company and the Mutual Holding Company are non-diversified
savings and loan holding  companies  within the meaning of the HOLA, as amended.
As such, the Company and the Mutual Holding  Company are registered with the OTS
and are subject to OTS  regulations,  examinations,  supervision  and  reporting
requirements.  In addition,  the OTS has enforcement  authority over the Company
and the Mutual Holding  Company and any non- savings  institution  subsidiaries.
Among  other  things,  this  authority  permits  the OTS to restrict or prohibit
activities  that are determined to be a serious risk to the  subsidiary  savings
institution.

         Restrictions  Applicable  to  Mutual  Holding  Companies.  Pursuant  to
Section  10(o) of the HOLA and OTS  regulations,  a mutual  holding  company may
engage in the  following  activities:  (i)  investing  in the stock of a savings
association;  (ii)  acquiring  a mutual  association  through the merger of such
association into a savings association  subsidiary of such holding company or an
interim savings  association  subsidiary of such holding company;  (iii) merging
with or  acquiring  another  holding  company;  one of whose  subsidiaries  is a
savings association; (iv) investing in a corporation, the capital stock of which
is available  for purchase by a savings  association  under federal law or under
the law of any state where the subsidiary  savings  association or  associations
share their home offices; (v) furnishing or performing management services for a
savings  association  subsidiary  of such  company;  (vi)  holding,  managing or
liquidating  assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing  properties used or occupied by a savings  association
subsidiary of such company properties used or occupied by a savings  association
subsidiary of such company;  (viii) acting as trustee under deeds of trust; (ix)
any other  activity  (A) that the Federal  Reserve  Board,  by  regulation,  has
determined to be permissible  for bank holding  companies  under Section 4(c) of
the Bank  Holding  Company  Act of 1956,  unless the  Director,  by  regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple  savings and loan holding  companies  were  authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan  holding  company is approved by
the  Director.  If a mutual  holding  company  acquires or merges  with  another
holding company,  the holding company acquired or the holding company  resulting
from such  merger  or  acquisition  may only  invest  in  assets  and  engage in
activities  listed in (i)  through  (x) above,  and has a period of two years to
cease  any  non-  conforming   activities  and  divest  of  any   non-conforming
investments.

         The HOLA  prohibits a savings  and loan  holding  company,  directly or
indirectly, or through one or more subsidiaries,  from acquiring another savings
institution or holding company  thereof,  without prior written  approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary  savings institution,  a non-subsidiary holding
company,  or a  non-subsidiary  company  engaged in activities  other that those
permitted by the HOLA; or acquiring or retaining  control of an institution that
is not federally  insured.  In evaluating  applications by holding  companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources,  future prospects of the company and institution involved, the effect
of the  acquisition on the risk to the insurance fun, the  convenience and needs
of the community and competitive factors.

         Restrictions Applicable to Federally-Chartered  Stock Holding Companies
he OTS recently  adopted new  regulations  governing the two-tier mutual holding
company form of  organization  and mid-tier  stock  holding  companies  that are
controlled by mutual holding companies.  A stock holding company subsidiary of a
mutual holding  company is permitted to engage in activities  that are permitted
for its mutual holding company parent and to have the same  indemnification  and
employment contract  restrictions imposed that are on the mutual holding company
parent.


                                      -23-

<PAGE>


Federal and State Taxation

         Federal  Taxation.  The Bank and the  Company  are  subject  to federal
income taxation in the same manner as other  corporations,  with some exceptions
discussed below.  The following  discussion of federal taxation is intended only
to  summarize  certain  pertinent  federal  income  tax  matters  and  is  not a
comprehensive description of the tax rules applicable to the Company.

         In  February  1992,  the FASB issued  SFAS 109  "Accounting  for Income
Taxes." The Company  currently is accounting for income taxes in accordance with
SFAS No. 109. The asset and liability  method accounts for deferred income taxes
by applying the enacted  statutory  rates in effect at the balance sheet date to
differences  between  the book cost and the tax cost of assets and  liabilities.
The  resulting  deferred  tax  liabilities  and assets are  adjusted  to reflect
changes in tax laws.  SFAS 109 was  implemented  by the Bank  effective  July 1,
1992.

         The Bank was audited by the Internal  Revenue  Service for the tax year
ended June 30, 1995.  There were no adjustments  made as a result of that audit.
The State of Maryland  has not audited the Bank within the past five years.  See
Notes 1 and 9 to the Financial Statements.

         State Taxation. The State of Maryland generally imposes a franchise tax
on thrift institutions computed at a rate of 7% of net earnings. For the purpose
of the 7%  franchise  tax,  net  earnings  are  defined as the net income of the
thrift institution as determined for federal corporate income tax purposes, plus
(i)  interest  income  from  obligations  of the  United  States,  of any state,
including Maryland and of any county, municipal or public corporation authority,
special district or political subdivision of any state, including Maryland, (ii)
any profit  realized  from the sale or exchange of bonds  issued by the State of
Maryland or any of its political subdivisions, and (iii) any deduction for state
income taxes.

Executive Officers of the Registrant

         Listed  below is  information,  as of June  30,  1998,  concerning  the
Registrant's  executive  officers.  All of the executive  officers have held the
positions  listed below since the time the  registrant was organized in November
1997. In addition,  all of the executive officers of the Registrant are officers
of the Bank holding the same position as listed below. There are no arrangements
or  understandings  between the  Registrant  and any of persons named below with
respect to which he or she was or is to be selected as an officer.

Name                   Age      Position
----                   ---      --------
John F. Amer           72       Chairman of the Board
Gordon E. Clark        56       President, Chief Executive Officer and Director
Marguerite F. Wolf     71       Vice Chairman and Director
Joan H. McCleary       64       Director and Secretary to the Board
Dale R. Douglas        56       Senior Vice President
Kathleen G. Trumpler   60       Treasurer


ITEM 2. Description of Property

         (a) The Company conducts its business through a single facility located
in Arbutus,  Baltimore County,  Maryland. The facility opened and has been owned
by the Bank since 1960.  At June 30, 1998,  the net book value of the  Company's
property and equipment was $851,000.

                                      -24-

<PAGE>



         (b) Investment  Policies.  For a description of the Company's  policies
(all of which may be changed without a vote of the Company's  security  holders)
and the limitations on the percentage of assets which may be invested in any one
investment,  or type of  investment  with  respect to: (1)  investments  in real
estate or interests in real estate;  (2)  investments in real estate  mortgages;
and (3) securities of or interests in persons  primarily  engaged in real estate
activities, reference is made hereunder to the information presented above under
"Item 1. Description of Business."

         (c) Description of Real Estate and Operating Data. Not Applicable;  the
book value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at June 30, 1998.

ITEM 3. Legal Proceedings

         The Company is  periodically  involved in claims and lawsuits  that are
incident  to the  Company's  business.  At June 30,  1998,  the  Company was not
involved in any such claim or lawsuit.

ITEM 4. Submission of Matters to a Vote of Security-Holders

         During the fourth  quarter of the fiscal year  covered by this  report,
the Registrant did not submit any matters to the vote of security holders.


                                     PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters

         The "Common Stock and Related  Matters" and  "Stockholder  Information"
sections of the  Registrant's  annual report to stockholders for the fiscal year
ended June 30, 1998 (the "1998 Annual Report to Stockholders")  are incorporated
herein by reference. No other sections of the 1998 Annual Report to Stockholders
are incorporated herein by this reference.

ITEM 6. Management's Discussion and Analysis or Plan of Operations

         The  "Management's  Discussion and Analysis of Financial  Condition and
Results  of  Operations"  section  of the  Registrant's  1998  Annual  Report to
Stockholders is incorporated herein by reference.  No other sections of the 1998
Annual Report to Stockholders are incorporated herein by this reference.

ITEM 7. Financial Statements

         The material  identified in Item 13(a)(1) hereof is incorporated herein
by reference.

ITEM  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure

         Not Applicable


                                    PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act

         The "Proposal  I--Election  of Directors"  section of the  Registrant's
definitive  proxy  statement for its 1998 annual  meeting of  stockholders  (the
"Proxy Statement") is incorporated herein by reference. In addition, see Item 1.
"Executive  Officers of the Registrant"  for  information  concerning the Bank's
executive officers.


                                      -25-

<PAGE>


ITEM 10. Executive Compensation

         The "Proposal  I--Election  of Directors"  section of the  Registrant's
Proxy Statement is incorporated herein by reference.

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

         The "Proposal  I--Election  of Directors"  section of the  Registrant's
Proxy Statement is incorporated herein by reference.

ITEM 12. Certain Relationships and Related Transactions

         The "Proposal  I--Election  of Directors"  section of the  Registrant's
Proxy Statement is incorporated herein by reference.

                                     PART IV

ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

         ()(1) Financial Statements

         The following  documents  appear in sections of the  Registrant's  1998
Annual Report to  Stockholders  under the same  captions,  and are  incorporated
herein by reference. No other sections of the 1998 Annual Report to Stockholders
are incorporated herein by this reference.

           (i) Selected Financial and Other Data;

          (ii) Management's  Discussion and Analysis of Financial  Condition and
               Results of Operations;

         (iii) Independent Auditors' Report;

          (iv) Statements of Financial Condition;

           (v) Statements of Income;

          (vi) Statements of Stockholders' Equity;

         (vii) Statements of Cash Flows; and

        (viii) Notes to Financial Statements.



                                      -26-

<PAGE>


         With the exception of the  aforementioned  sections,  the  Registrant's
1998 Annual  Report to  Stockholders  is not deemed filed as part of this Annual
Report  on Form  10-KSB,  and no other  sections  of the 1998  Annual  Report to
Stockholders are incorporated herein by this reference.

         (a)(2) Financial Statement Schedules

         All  financial  statement  schedules  have been omitted as the required
information  is  inapplicable  or has been  included  in the Notes to  Financial
Statements.

         (a)(3) Exhibits

<TABLE>
<CAPTION>
                                                        Sequential Page
                                                       Reference to Prior       Number Where
                                                       Filing or Exhibit     Attached Exhibits
  Regulation S-K                                        Number Attached     Are Located in This
  Exhibit Number               Document                     Hereto         Form 10-KSB Report
  --------------               --------                     ------         ------------------
<S>                   <C>                              <C>                <C>
        3              Articles of Incorporation              *              Not Applicable

        3                       Bylaws                        *              Not Applicable

        4              Instruments defining the               *              Not Applicable
                      rights of security holders,
                         including debentures

        9               Voting trust agreement              None             Not Applicable

       10.1         Leeds Federal Savings Bank and           **              Not Applicable
                   Leeds Federal Bankshares, M.H.C.
                  1994 Recognition and Retention Plan

       10.2         Leeds Federal Savings Bank and           **              Not Applicable
                   Leeds Federal Bankshares, M.H.C.
                        1994 Stock Option Plan

       10.3           Employment Agreement with             10.3              Exhibit 10.3
                         Gordon E. Clark, Jr.

       11              Statement re: computation             Not             Not Applicable
                         of per share earnings            Required

       13              Form of Annual Report to              13                Exhibit 13
                           Security Holders

       16           Letter re: change in certifying         None             Not Applicable
                              accountants

       18           Letter re: change in accounting         None             Not Applicable
                              principles

       21             Subsidiaries of Registrant            None             Not Applicable

       22             Published report regarding            None             Not Applicable
                     matters submitted to vote of
                           security holders
</TABLE>


                                      -27-

<PAGE>

<TABLE>
<CAPTION>
                                                        Sequential Page
                                                       Reference to Prior       Number Where
                                                       Filing or Exhibit     Attached Exhibits
  Regulation S-K                                        Number Attached     Are Located in This
  Exhibit Number               Document                     Hereto         Form 10-KSB Report
  --------------               --------                     ------         ------------------
<S>                   <C>                              <C>                <C>
       28            Information from reports               None             Not Applicable
                       furnished to state
                      insurance regulatory
                          authorities

       99               Additional Exhibits                 None             Not Applicable
</TABLE>

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

*    Filed as exhibits to the Company's Registration Statement on Form S-8 (File
     No.  333-44899) filed with the SEC on January 26, 1998. All such previously
     filed  documents are  incorporated by reference in accordance with Item 601
     of Regulation S-B.

**   Filed as  exhibits  to the  Company's  Current  Report  Form 8-K  (File No.
     0-23645) filed with the SEC on January 21, 1998. All such previously  filed
     documents  are  incorporated  by reference in  accordance  with Item 601 of
     Regulation S-B.

    (b)  Reports on Form 8-K:

         Not applicable.





                                      -28-

<PAGE>




                                   SIGNATURES

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


                                             LEEDS FEDERAL BANKSHARES, INC.


Date: September 25, 1998                     By: /s/ Gordon E. Clark
                                                 -------------------------------
                                                 Gordon E. Clark, President and
                                                 Chief Executive Officer



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



By: /s/ Gordon E. Clark                      By: /s/ Kathleen G. Trumpler
    ---------------------------------            -------------------------------
    Gordon E. Clark, President, Chief            Kathleen G. Trumpler, Treasurer
    Executive Officer and Director               (Principal Financial/Accounting
    Principal Executive Officer)                 Officer)

Date:  September 25, 1998                               Date: September 25, 1998



By: /s/ John F. Amer                        By:  /s/ Marguerite E. Wolf
    ---------------------------------            -------------------------------
    John F. Amer, Chairman                       Marguerite E. Wolf,
                                                 Vice Chairman


Date: September 25, 1998                                Date: September 25, 1998




By: /s/ Joan H. McCleary                    By:  /s/ Raymond J. Hartman
    ----------------------------------           -------------------------------
    Joan H. McCleary, Director                   Raymond J. Hartman, Director


Date: September 25, 1998                                Date: September 25, 1998



By: /s/ John F. Doyle
    ----------------------------------
    John F. Doyle, Director

Date: September 25, 1998

                                      -29-