EXHIBIT 13

                       1998 ANNUAL REPORT TO STOCKHOLDERS




<PAGE>



                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
Message to Our Stockholders..............................................     1
Selected Consolidated Financial and Other Data...........................     2
Management's Discussion and Analysis of
  Financial Condition and Results of Operations..........................     4
Selected Quarterly Financial Data (Unaudited)............................    15
Common Stock and Related Matters.........................................    15
Independent Auditors' Report.............................................   F-1
Statements of Consolidated Financial Condition...........................   F-2
Statements of Consolidated Income........................................   F-3
Statements of Consolidated Stockholders' Equity..........................   F-4
Statements of Consolidated Cash Flows....................................   F-5
Notes to Consolidated Financial Statements...............................   F-7




<PAGE>



                 [LETTERHEAD OF LEEDS FEDERAL BANKSHARES, INC.]




                                                              September 16, 1998

To Our Shareholders:

We are pleased to report to you the results of our year ended June 30, 1998.  In
January 1998, Leeds Federal Savings Bank was reorganized with the  establishment
of Leeds Federal  Bankshares,  Inc., as the new stock holding  company parent of
the Bank.  This will allow the Company  many of the  opportunities  available to
stock holding companies while still retaining the benefits of the mutual holding
company  structure.  An  opportunity  we have already  implemented  is a plan to
repurchase  up to  275,000  shares of the  Company's  common  stock.  This is an
important  means  for  us  to  enhance  stockholder  value  and  invest  capital
resources.

The  Company's  net  income for the fiscal  year ended June 30,  1998,  was $3.3
million, or $.64 per diluted share of common stock, compared to $3.2 million, or
$.63 per diluted share, before the one-time SAIF assessment imposed by the FDIC,
for the year ended June 30, 1997. After  considering the after-tax effect of the
SAIF assessment,  net income for the year ended June 30, 1997, was $2.4 million.
During the year, we continued to emphasize residential real estate financing, as
evidenced by an increase of $16.1 million in loans receivable. We have continued
to  maintain a low level of  noninterest  expense;  our  noninterest  expense to
average  assets ratio was 1.06% and 1.05% (before the SAIF  assessment)  for the
fiscal years ended June 30, 1998 and 1997,  respectively.  The  enclosed  annual
report discusses in more detail Leeds Federal's  operating  results through June
30, 1998.

The board, management and staff are dedicated to providing the quality financial
services our customers have come to expect from an independent  community  bank.
Our deposits are received from within our community and  reinvested in mortgages
within our community.  Our shareholders have shared in the success and growth of
their  community  bank,  reflected in the value of our shared  investment in the
stock of Leeds Federal.

Thank  you for the  confidence  you have  placed  in Leeds  Federal.  We hope to
justify  that  confidence  by  continuing  to be  the  leading  community  based
financial institution we have been for the past 75 years.



Sincerely,

/s/John F. Amer                            /s/Gordon E. Clark

John F. Amer                               Gordon E. Clark
Chairman                                   President and Chief Executive Officer




<PAGE>

                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

         The  following  table sets forth  certain  financial  and other data of
Leeds Federal Bankshares,  Inc. (the "Company"),  or, prior to January 21, 1998,
Leeds  Federal  Savings  Bank (the  "Bank")  at the  dates  and for the  periods
indicated.  For additional  information about the Company,  reference is made to
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.

<TABLE>
<CAPTION>
                                                                             At June 30,
                                                   -----------------------------------------------------------
                                                     1998          1997         1996         1995         1994
                                                   ---------    ---------    ---------    ---------     ------
                                                                             (In Thousands)
Selected Consolidated Financial Condition Data
<S>                                                <C>          <C>          <C>          <C>           <C>     
Total assets....................................   $ 302,737    $ 286,999    $ 273,278    $ 260,145     $255,221
Loans receivable, net...........................     190,966      174,878      152,755      141,093      143,252
Investments(1)..................................      86,169       83,302       85,379       78,645       69,064
Mortgage-backed securities......................      16,514       22,294       29,095       34,957       38,149
Deposits........................................     245,270      232,590      222,146      211,414      210,472
Borrowed funds..................................         552          648          744          840          930
Stockholders' equity, substantially restricted..      49,308       46,741       44,192       41,738       38,281
</TABLE>
-----------------

(1)  Includes  investment  securities,   interest-bearing  deposits,  and  other
     investments.

<TABLE>
<CAPTION>
                                                                         Year Ended June 30,
                                                   -------------------------------------------------------------
                                                     1998          1997         1996         1995         1994
                                                   ---------    ---------    ---------     --------      -------
                                                               (In Thousands Except Per Share Data)
Selected Consolidated Operating Data:
<S>                                                <C>          <C>          <C>          <C>           <C>     
Interest income................................    $  20,309    $  19,606    $  18,567    $  17,602     $ 16,870
Interest expense...............................       12,171       11,613       11,232        9,945        9,360
                                                   ---------    ---------    ---------    ---------     --------
  Net interest income before provision for losses      8,138        7,993        7,335        7,657        7,510
Provision for loan losses......................          192          151           33           24           63
Provision for losses on deposit................           --           --           --           30           --
                                                   ---------    ---------    ---------    ---------     --------
  Net interest income after provision for losses       7,946        7,842        7,302        7,603        7,447
                                                   ---------    ---------    ---------    ---------     --------

Noninterest income:
  Service fees and charges.....................          137          130          116           74           66
  Other income ................................          213          140          168          160          165
                                                   ---------    ---------    ---------    ---------     --------
    Total noninterest income...................          350          270          284          234          231
                                                   ---------    ---------    ---------    ---------     --------

Noninterest expense:
  Compensation and employee benefits...........        1,770        1,528        1,516        1,440          822
  Occupancy....................................          195          197          192          182          175
  SAIF deposit insurance premiums..............          222        1,755          558          558          560
  Advertising..................................          208          172          216          179          147
  Other   .....................................          700          637          580          629          469
                                                   ---------    ---------    ---------    ---------     --------
    Total noninterest expenses.................        3,095        4,289        3,062        2,988        2,173
                                                   ---------    ---------    ---------    ---------     --------
Income before provision for income taxes.......        5,201        3,823        4,524        4,849        5,505
Provision for income tax . . . ................        1,895        1,458        1,737        1,922        2,090
                                                   ---------    ---------    ---------    ---------     --------
      Net income...............................    $   3,306    $   2,365    $   2,787    $   2,927     $  3,415
                                                   =========    =========    =========    =========     ========
Net income per common share (1)
  Basic........................................    $    0.65    $    0.46    $    0.55    $    0.59     $   0.12(2)
  Diluted......................................    $    0.64    $    0.46    $    0.55    $    0.59     $   0.12(2)
Dividends declared per common share............    $    0.55    $    0.48    $    0.44    $    0.31     $   0.03
</TABLE>
----------
(1)  Information has been restated to reflect November 1997 three-for-two  stock
     split.
(2)  Information provided for period from April 29, 1994, the date of the Bank's
     mutual  holding  company  reorganization,  through June 30, 1994.  On a pro
     forma  annualized  basis,  basic and diluted  earnings per share would have
     been $0.76 and $0.76, respectively.

                                        2

<PAGE>

                                OPERATING RESULTS

<TABLE>
<CAPTION>

                                                                  At or For the Year Ended June 30,
                                                          ---------------------------------------------
                                                          1998       1997      1996      1995      1994
                                                          ----       ----      ----      ----      ----
<S>                                                     <C>        <C>       <C>       <C>       <C>   
Key Operating Ratios and Other Data:

Return on average assets (net income divided
  by average total assets)* .......................        1.13%      .85%     1.06%     1.17%     1.37%
Return on average equity (net income divided
  by average equity)* .............................        6.86      5.26      6.50      7.30     12.12
Net interest rate spread (difference between
  average yield on interest-earning assets
  and average cost of interest-bearing liabilities)        2.03      2.12      2.00      2.34      2.58
Net interest margin (net interest income as a
  percentage of average interest-earning assets)  .        2.85      2.94      2.85      3.11      3.08
Net interest income to noninterest expense* .......      262.94    186.36    239.54    256.26    345.61
Net interest income after provision for
  losses, to total noninterest expense* ...........      256.74    182.84    238.44    254.45    342.68
Noninterest income to average assets ..............         .12       .10       .11       .09       .09
Noninterest expense to average assets* ............        1.06      1.54      1.17      1.19       .87
Nonperforming loans to total loans ................        1.32       .05       .06       .07        --
Nonperforming assets to total assets ..............         .83       .03       .07       .10        --
Average interest-earning assets to average
  interest-bearing liabilities ....................      119.46    119.15    119.50    118.97    112.91
Allowance for losses to nonperforming assets ......       28.70    609.09    213.67    146.15        --
Retained earnings to average assets ratio
  (average retained earnings divided by
  average total assets) ...........................       16.49     16.18     16.36     15.96     11.34
Equity to assets at period end ....................       16.28     16.29     16.17     16.04     15.00
Number of full-service offices ....................           1         1         1         1         1
</TABLE>
----------

*    Excluding the one-time  assessment to  recapitalize  the SAIF, for the year
     ended June 30, 1997, return on average assets was 1.16%,  return on average
     equity was 7.14%,  noninterest  expense  to average  assets was 1.05%,  net
     interest income to noninterest  expense was 275.05% and net interest income
     after provision for loan losses to total  noninterest  expense was 269.86%.
     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
     Results of Operations--Results of Operations--Deposit Insurance Premiums."



                                        3

<PAGE>



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

General

         The earnings of the Company  depend  primarily on the earnings of Leeds
Federal Savings Bank (the "Bank"),  which is discussed  herein on a consolidated
basis.  The  Company's  earnings  depend  primarily on its level of net interest
income,  which  is the  difference  between  interest  earned  on the  Company's
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
securities,   interest-earning   deposits  at  other  institutions,   investment
securities  and other  investments,  and the interest  paid on  interest-bearing
liabilities.  Net interest  income is a function of the Company's  interest rate
spread,  which is the difference  between the average yield on  interest-earning
assets and the average rate paid on interest-bearing  liabilities,  as well as a
function  of the  average  balance of  interest-earning  assets as  compared  to
interest-bearing  liabilities.  The Company's  earnings also are affected by its
level of noninterest  income including  primarily service fees and charges,  and
noninterest expense, including primarily compensation and employee benefits, and
Savings Association Insurance Fund ("SAIF") deposit insurance premiums. Earnings
of  the  Company  also  are  affected  significantly  by  general  economic  and
competitive   conditions,   particularly   changes  in  market  interest  rates,
government  policies  and actions of  regulatory  authorities,  which events are
beyond the control of the Company.

Business Strategy

         The  Company's  current  business  strategy is to operate the Bank as a
well-capitalized,  profitable and  independent  community-oriented  savings bank
dedicated to providing  quality  customer  service.  Generally,  the Company has
sought to implement this strategy by using only retail deposits as its source of
funds and maintaining a substantial  part of its assets in loans secured by one-
to four-family  residential  real estate  located in the Company's  market area,
home equity  loans,  consumer  loans,  mortgage-backed  securities  and in other
liquid  investment  securities.  Specifically,  the Company's  business strategy
incorporates  the  following  elements:  (1)  operating as a  community-oriented
financial  institution,  maintaining  a strong core  customer  base by providing
quality  service and  offering  customers  the access to senior  management  and
services that a  community-based  institution can offer;  (2)  maintaining  high
asset  quality  by  emphasizing   investment  in  residential   mortgage  loans,
mortgage-backed  securities  and other  securities  issued or  guaranteed by the
United States Government or agencies thereof;  (3) maintaining capital in excess
of regulatory  requirements and growing only to the extent that adequate capital
levels can be  maintained;  and (4) managing  interest rate risk exposure  while
achieving desirable levels of profitability.

Results of Operations

         The  earnings  of the  Company  depend  primarily  on its  level of net
interest  income,  which  is  the  difference  between  interest  earned  on the
Company's  interest-earning  assets,  consisting  primarily  of mortgage  loans,
mortgage-backed  securities,  interest-earning  deposits at other  institutions,
investment   securities  and  other  investments,   and  the  interest  paid  on
interest-bearing  liabilities,  which  since 1989 have  consisted  primarily  of
savings deposits.  The Company had net income of $3.3 million for the year ended
June 30, 1998.  Net income totaled $2.4 million and $2.8 million for fiscal 1997
and 1996, respectively.

         Interest Income. Total interest income increased by $703,000,  or 3.6%,
to $20.3  million for the year ended June 30, 1998,  from $19.6  million for the
year ended June 30, 1997. The increase in interest income


                                        4

<PAGE>



was primarily due to an increase in balance of average  interest  earning assets
to $285.4 million for the year ended June 30, 1998,  from $272.3 million for the
prior year,  partially offset by a decrease in yield on average interest earning
assets to 7.1%,  from 7.2%.  The  increase in average  interest  earning  assets
during the year ended June 30,  1998,  resulted  primarily  from an  increase in
average loans, offset by decreases in mortgage-backed securities.

         Interest on mortgage  loans  increased by $1.3  million,  or 10.2%,  to
$13.4 million for the year ended June 30, 1998,  from $12.1 million for the year
ended June 30, 1997,  primarily because of an increase in average mortgage loans
to $177.8 million for the year ended June 30, 1998,  from $159.9 million for the
year ended June 30,  1997,  partially  offset by a decrease in average  yield on
mortgage  loans to 7.5% from  7.6%.  The  increase  in  average  mortgage  loans
resulted from increased loan demand in the Bank's community and from an increase
in the volume of loan  originations  from  brokers.  The lower yield on mortgage
loans reflected the  reinvestment  of the proceeds of loan  prepayments at lower
yielding mortgage loans than those in the portfolio. Interest income on consumer
loans  increased by $52,000 to $359,000  for the year ended June 30, 1998,  from
$307,000  for the prior  year.  The  increase  was due to an increase in average
balance in consumer loans to $5.1 million,  from $4.4 million. The average yield
on consumer loans for the year ended June 30, 1998 increased to 7.1%,  from 6.9%
for the prior year.  Interest  income on  mortgage-backed  securities  decreased
$439,000,  or 23.6%, to $1.4 million for the year ended June 30, 1998, from $1.9
million for the prior year. The decrease was  principally  due to a $6.2 million
decrease in average balance in  mortgage-backed  securities to $19.6 million for
the year ended June 30, 1998,  from $25.8  million for the prior year.  Interest
income on investment  securities decreased by $599,000,  to $3.1 million for the
year ended June 30, 1998,  from $3.7 million for the prior year.  Such  decrease
was the  result of a decrease  in yield on  investment  securities  to 6.7% from
6.9%, and a $7.7 million decrease in average balance of investment securities to
$46.3 million for the year ended June 30, 1998,  from $54.0 million for the year
ended June 30, 1997. The decrease in average  balances of investment  securities
was the result of increased  mortgage loan  originations.  Interest  income from
interest  earning  deposits  increased  by $332,000 to $1.5 million for the year
ended June 30,  1998,  from $1.2  million for the prior year.  Yield on interest
earning  deposits  increased  to 5.7%  from 5.5% for the same  period.  Interest
income on other investments increased by $115,000 to $502,000 for the year ended
June 30, 1998, from $387,000 for the prior year. Such increase was the result of
an increase in average balance of other  investments of $3.4 million,  partially
offset by a decrease in the average yield on other investments to 5.3% from 6.5%
for the same periods.

         Total  interest  income  increased by $1.0  million,  or 5.4%, to $19.6
million for the year ended June 30, 1997,  from $18.6 million for the year ended
June 30, 1996. The increase in interest  income was primarily due to an increase
in balance of average  interest  earning  assets to $272.3  million for the year
ended June 30, 1997, from $257.1 million for the prior year,  while the yield on
average  interest  earning  assets  remained  relatively  unchanged at 7.2%. The
increase in average interest earning assets during the year ended June 30, 1997,
resulted  primarily  from an increase in average  loans,  offset by decreases in
investment securities and mortgage-backed securities.

         Interest on mortgage  loans  increased by $1.2  million,  or 11.0%,  to
$12.1 million for the year ended June 30, 1997,  from $10.9 million for the year
ended June 30, 1996,  primarily because of an increase in average mortgage loans
to $159.9 million for the year ended June 30, 1997,  from $140.5 million for the
year ended June 30,  1996,  partially  offset by a decrease in average  yield on
mortgage  loans to 7.6% from  7.8%.  The  increase  in  average  mortgage  loans
resulted  from  increased  loan demand in the  Company's  community  and from an
increase in the volume of loan  originations  from  brokers.  The lower yield on
mortgage  loans  reflected the  reinvestment  of the proceeds of  prepayments at
lower yielding mortgage loans than those in the


                                        5

<PAGE>



portfolio.  Interest  income on consumer loans increased by $123,000 to $307,000
for the year ended June 30, 1997, from $184,000 for the prior year. The increase
was due to an increase in average  balance on  consumer  loans to $4.4  million,
from $2.7 million,  reflecting the Company's  continuing  marketing  efforts for
consumer loans during the year.  Interest income on  mortgage-backed  securities
decreased $455,000,  or 19.8%, to $1.9 million for the year ended June 30, 1997,
from $2.3 million for the prior year. The decrease was principally due to a $6.4
million  decrease  in average  balance in  mortgage-backed  securities  to $25.8
million for the year ended June 30, 1997, from $32.2 million for the prior year.
Interest income on investment  securities  decreased by $51,000, to $3.7 million
for the year ended June 30,  1997,  from $3.8  million for the prior year.  Such
decrease  was the  result of a $3.2  million  decrease  in  average  balance  of
investment  securities to $54.0  million for the year ended June 30, 1997,  from
$57.2 million, partially offset by an increase in yield on investment securities
to 6.9% from 6.5%,  for the year ended June 30,  1996.  The  decrease in average
balance of  investment  securities  was the result of  increased  mortgage  loan
originations. Interest income from interest earning deposits remained relatively
unchanged at $1.2  million for the years ended June 30, 1997 and 1996.  Yield on
interest  earning  deposits  decreased  to 5.5% from 5.6% for the same  periods.
Interest income on other investments increased $178,000 to $387,000 for the year
ended June 30, 1997,  from  $209,000 for the prior year.  Such  increase was the
result of an increase in average  balance of other  investments of $2.5 million,
and increase in the average yield on other investments to 6.5% from 6.0% for the
same periods.

         Interest  Expense.  Total interest  expense  increased by $558,000,  or
4.8%, to $12.2 million for the year ended June 30, 1998,  from $11.6 million for
the year ended June 30,  1997.  Such  increase  was the result of an increase in
average  balance of  interest  bearing  liabilities  of $10.4  million to $238.9
million  for the year ended June 30,  1998,  from  $228.5  million for the prior
period.

         Total interest expense increased by $381,000, or 3.4%, to $11.6 million
for the year ended June 30, 1997, from $11.2 million for the year ended June 30,
1996.  Such  increase  was the  result of an  increase  in  average  balance  of
interest-bearing  liabilities  of $13.3  million to $228.5  million for the year
ended June 30, 1997, from $215.2 million for the prior period,  partially offset
by a decrease in cost of average interest-bearing liabilities to 5.1% from 5.2%.

         Net Interest  Income.  Net interest  income  increased by $145,000,  or
1.8%,  to $8.1 million for the year ended June 30,  1998,  from $8.0 million for
the year ended June 30, 1997.  This increase was due  principally to an increase
in the ratio of average  interest  earning  assets to average  interest  bearing
liabilities,  partially  offset by the  decrease  in yield on  interest  earning
assets. See "--Management of Market Risk."

         Net interest income increased by $657,000, or 9.0%, to $8.0 million for
the year  ended June 30,  1997,  from $7.3  million  for the year ended June 30,
1996.  This increase was due  principally to a decrease in the Company's cost of
interest-bearing liabilities.

         Provision  for Losses.  The Company  maintains  an  allowance  for loan
losses based upon  management's  evaluation of risks in the loan portfolio,  the
Company's  past loan loss  experience,  current  and  expected  future  economic
conditions,  and other relevant factors. The Company's provision for loan losses
increased to $192,000 for the year ended June 30,  1998,  from  $151,000 for the
same period in 1997. The Company's  allowance for loan losses as a percentage of
nonperforming  loans  was  28.70%  and  609.09%  at  June  30,  1998  and  1997,
respectively,  and the  Company's  nonperforming  loans as a percentage of total
loans was 1.32% and .05% at June 30, 1998 and 1997,  respectively.  The increase
in  nonperforming  loans was due to a $2.5 million  commercial  loan that became
nonperforming during the fiscal year ended June 30, 1998.


                                        6

<PAGE>



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 Company 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 Company  will not incur a material  loss on
this loan. The Company's provision for loan losses increased to $151,000 for the
year ended June 30, 1997,  from $33,000 for the same period in 1996.  Management
believes that it has  maintained  the  Company's  allowance for loan losses at a
level that is  adequate  to provide for loan  losses,  although  there can be no
assurance that such losses will not exceed estimated amounts.  See Notes 1 and 6
of Notes to the Consolidated  Financial Statements for additional information on
the allowance for loan losses.

         Noninterest Income. Noninterest income increased by $80,000 to $350,000
for the year ended June 30, 1998, from $270,000 for the prior year. The increase
was due  principally  to increases  in cash  surrender  value of life  insurance
investments.

         Noninterest income decreased by $14,000 to $270,000 for year ended June
30, 1997,  from $284,000 for the prior year. The decrease was due principally to
decreases in dividends received on life insurance investments,  partially offset
by an increase in loan processing fees collected during the year.

         Noninterest Expense.  Noninterest expense increased by $189,000 to $3.1
million, for the year ended June 30, 1998, from $2.9 million for the prior year,
before  considering the one-time SAIF  assessment of $1.4 million.  Compensation
and employee  benefits  increased by $242,000 to $1.8 million for the year ended
June 30,  1998,  from $1.5  million for the prior  year.  The  increase  was due
principally to an increase of $148,000 in ESOP contribution  expense as a result
of  increases  in the market  price of ESOP  shares,  the basis of the charge to
expense.  Other increases in compensation and employee  benefits were the result
of  additional   staffing  and  normal   increases  in  salaries  and  benefits.
Advertising and other expenses increased due to additional  marketing and normal
increases in other expenses.

         Before considering the one-time SAIF assessment of $1.4 million, offset
by the  reduction in the SAIF  premiums for periods  beginning  January 1, 1997,
noninterest expense remained  relatively  unchanged at $2.9 million for the year
ended June 30,  1997,  compared  to the prior  year.  There were no  significant
changes in the major expense categories.

         Before   considering  the  one-time  SAIF  assessment,   the  ratio  of
noninterest  expenses to average assets was 1.06%, 1.05% and 1.17% for the years
ending  June 30,  1998,  1997 and 1996,  respectively.  After the one- time SAIF
assessment, such ratio was 1.54% for the year ended June 30, 1997.

         Provisions  for income taxes  increased by $437,000 to $1.9 million for
the year  ended  June 30,  1998,  from $1.5  million  for the prior  year.  This
reflects an increase of $1.4  million in income  before  income  taxes in fiscal
year 1998. The Company's  effective tax rates were 36.4% and 38.1% for the years
ending June 30, 1998 and 1997,  respectively.  The decrease was due to increased
state tax-free investments.

         Provision  for income  taxes  decreased by $279,000 to $1.5 million for
the year  ended  June 30,  1997,  from $1.7  million  for the prior  year.  This
reflects a reduction  of $700,000 in income  before  income taxes in fiscal year
1997.



                                        7

<PAGE>



         Deposit Insurance  Premiums.  The deposits of the Company are presently
insured by the SAIF,  which along with the Bank Insurance  Fund (the "BIF"),  is
one of the two insurance  funds  administered  by the FDIC.  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
Company,  the assessment amounted to $1.4 million (or $849,000 when adjusted for
taxes),  based on the  Company's  SAIF-insured  deposits of $210.5  million.  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  now  paid  jointly  by
BIF-insured institutions and SAIF-insured  institutions.  The FICO assessment is
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 BIF and SAIF  will be merged on  January  1,  1999,
provided the bank and saving  association  charters are merged by that date.  In
that event, pro-rata FICO sharing will begin on January 1, 1999.




                                        8

<PAGE>



Average Balance Sheet

         The  following  table sets forth  certain  information  relating to the
Company's  average  balance  sheet and reflects the average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. Average balances are derived from daily balances.

<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                        -----------------------------------------------------------------------------------------
                                                   1998                           1997                             1996
                                        --------------------------     -------------------------       --------------------------
                                                           Average                       Average                          Average
                                        Average             Yield/     Average            Yield/       Average             Yield/
                                        Balance   Interest   Cost      Balance   Interest  Cost        Balance    Interest  Cost
                                        -------   --------   ----      -------   --------  ----        -------    --------  ----
                                                                          (Dollars in Thousands)
Interest-earning assets:
<S>              <C>                    <C>       <C>        <C>      <C>         <C>       <C>        <C>        <C>        <C>  
  Mortgage loans (1)................    $177,817  $13,376    7.52%    $159,899    $12,134   7.59%      $140,472   $ 10,911   7.77%
  Consumer loans and other loans....       5,065      359    7.09        4,422        307   6.94          2,654        184   6.93
  Mortgage-backed securities........      19,604    1,423    7.26       25,829      1,862   7.21         32,206      2,317   7.19
  Investment securities.............      46,311    3,111    6.72       54,006      3,710   6.87         57,191      3,761   6.58
  Interest-earning deposits (2).....      27,161    1,538    5.66       22,100      1,206   5.46         21,143      1,185   5.60
  Other investments (3).............       9,424      502    5.33        5,995        387   6.46          3,465        209   6.03
                                        --------   ------    ----      -------   --------   ----       --------   --------   ----
    Total interest-earning assets...     285,382   20,309    7.12      272,252     19,606   7.20        257,131     18,567   7.22
                                                                                 --------                         --------  
Noninterest-earning assets..........       7,046                         5,807                            5,031             
                                        --------                       -------                         --------             
    Total assets....................    $292,428                      $278,059                         $262,162             
                                        ========                      ========                         ========             
Interest-bearing liabilities:                                                                                               
  Savings deposits..................    $238,272   12,114    5.09     $227,785     11,549   5.07       $214,382     11,164   5.21
  Other borrowed funds..............         616       57    8.28          713         64   8.98            792         68   8.59
                                        --------   ------    ----      -------   --------   ----       --------   --------   ----
    Total interest-bearing liabilities   238,888   12,171    5.09      228,498     11,613   5.08        215,174     11,232   5.22
                                                                                 --------   ----                  --------   ----
Noninterest-bearing liabilities.....       5,331                         4,572                            4,088             
                                        --------                       -------                         --------             
    Total liabilities...............     244,219                       233,070                          219,262             
Retained earnings...................      48,209                        44,989                           42,900             
                                        --------                       -------                         --------             
    Total liabilities and retained                                                                                          
      earnings......................    $292,428                      $278,059                         $262,162              
                                        ========                      ========                         ========              
Net interest income.................               $8,138                        $  7,993                         $  7,335  
                                                   ======                        ========                         ========  
Net interest rate spread (4)........                         2.03%                          2.12%                            2.00%
                                                             ====                           ====                             ====
Net interest margin (5).............                         2.85%                          2.94%                            2.85%
                                                             ====                           ====                             ====
Ratio of average interest-earning                                                                                           
 assets to average interest-bearing                                                                                         
 liabilities........................                       119.46%                        119.15%                          119.50%
                                                           ======                         ======                           ======
</TABLE>
----------
(1)  Includes one- to  four-family  residential  real estate loans,  home equity
     loans, and commercial real estate loans.
(2)  Includes secured short term loans to commercial banks and  interest-earning
     deposits in other institutions.
(3)  Includes securities purchased under agreement to resell,  Federal Home Loan
     Bank stock, and mutual funds.
(4)  Net interest  rate spread  represents  the  difference  between the average
     yield on  interest-earning  assets and the average cost of interest-bearing
     liabilities.
(5)  Net  interest  margin  represents  net interest  income as a percentage  of
     average interest-earning assets.

                                        9

<PAGE>

Rate/Volume Analysis

         The table below sets forth  certain  information  regarding  changes in
interest income and interest  expense of the Company for the periods  indicated.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes  in  average  volume  multiplied  by old rate);  (ii)  changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume);  and (iv) the net
change.

<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                               --------------------------------------------------------------------------------------
                                              1998 vs. 1997                               1997 vs. 1996
                               ------------------------------------------  ------------------------------------------
                                      Increase/(Decrease)                        Increase/(Decrease)
                                           Due to                                      Due to
                               -----------------------------     Total     -----------------------------     Total
                                                       Rate/    Increase                           Rate/    Increase
                                 Volume      Rate     Volume   (Decrease)   Volume       Rate     Volume   (Decrease)
                                 ------      ----     ------   ----------   ------       ----     ------   ----------
                                                                   (In Thousands)
Interest income:
<S>              <C>           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>   
  Mortgage loans (1).......... $ 1,360    $  (112)   $    (6)   $ 1,242    $ 1,509    $  (253)   $   (34)   $1,222
  Consumer and other loans....      45          6          1         52        122         --          1       123
  Mortgage-backed securities..    (449)        13         (3)      (439)      (459)         6         (2)     (455)
  Investment securities.......    (529)       (81)        11       (599)      (210)       166         (7)      (51)
  Interest earning deposits (2)    276         44         12        332         54        (30)        (3)       21
  Other investments (3).......     222        (68)       (39)       115        153         15         10       178
                               -------    -------    -------    -------    -------    -------    -------    ------

  Total interest-earning
    assets....................     925       (198)       (24)       703      1,169        (96)       (35)    1,038
                               -------    -------    -------    -------    -------    -------    -------    ------
Interest expense..............     528         23          7        558        696       (301)       (14)      381
                               -------    -------    -------    -------    -------    -------    -------    ------

Change in net interest income. $   397    $  (221)   $   (31)   $   145    $   473    $   205    $   (21)   $  657
                               =======    =======    =======    =======    =======    =======    =======    ======
</TABLE>
-----------
(1)  Includes one- to  four-family  residential  real estate loans,  home equity
     loans, and commercial real estate loans.
(2)  Includes secured short term loans to commercial banks and  interest-earning
     deposits in other institutions.
(3)  Includes securities purchased under agreement to resell,  Federal Home Loan
     Bank stock, and mutual funds.

Management of Market Risk

         Like other financial institution holding companies,  the Company's most
significant form of market risk is interest rate risk. The Company is subject to
interest  rate risk because its  liabilities  generally  have  shorter  terms or
maturities than its assets.  As a result,  its liabilities are more sensitive to
changes  in market  interest  rates.  The  general  objective  of the  Company's
interest  rate risk  management is to determine  the  appropriate  level of risk
given the  Company's  business  strategy,  and then manage that risk in a manner
that is consistent with the Company's policy to reduce exposure of the Company's
net interest income to changes in market interest rates.

         The Company's policy in recent years has been to reduce its exposure to
interest  rate risk  generally by better  matching the  maturities  and interest
rates of its interest  rate  sensitive  assets and  liabilities  by  emphasizing
fixed-rate  one- to  four-family  mortgage loans with terms of 15 years or less,
adjustable  rate  first  mortgages  and  home  equity  loans,   and  maintaining
relatively high levels of liquidity.  By maintaining a significant percentage of
its assets in cash and other liquid investments, the Company is able to reinvest
a higher  percentage of its assets more quickly in response to changes in market
interest rates,  thereby reducing its exposure to interest rate  volatility.  In
addition,  the Company offers  competitive  rates on deposit accounts and prices
certificates  of  deposit  to  provide   customers  with  incentives  to  choose
certificates of deposit with


                                       10

<PAGE>


longer terms. The Company does not utilize  derivative  instruments or engage in
other hedging activities to manage interest rate risk.

         The  Company  has an  Asset-Liability  Management  Committee  which  is
responsible  for  reviewing  the Company's  asset and  liability  policies.  The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratios and requirements.

         The Company measures  interest rate risk in terms of the sensitivity of
the Company's net portfolio value ("NPV") to changes in interest  rates.  NPV is
the difference between incoming and outgoing  discounted cash flows from assets,
liabilities,  and off-balance sheet contracts.  The following table presents the
pro forma computations of the Company's NPV as of June 30, 1998.

<TABLE>
<CAPTION>
                                                                                 NPV as Percentage of
       Change in                                                               Present Value of Assets
     Interest Rates                    Net Portfolio Value                  ----------------------------
     in Basis Points     -------------------------------------------                         Basis Point
     (Rate Shock)         Amount           $ Change         % Change        NPV Ratio           Change
     ------------         ------           --------         --------        ---------           ------
                                            (Dollars in Thousands)
    <S>                 <C>              <C>                 <C>             <C>                <C>  
        400              29,788           (29,585)            (50%)           10.72%             (822)
        300              36,831           (22,542)            (38%)           12.86%             (608)
        200              44,324           (15,049)            (25%)           15.01%             (394)
        100              52,049            (7,324)            (12%)           17.09%             (185)
     Static              59,373                --              --             18.94%               --
       (100)             66,026             6,653              11%            20.53%              158
       (200)             71,728            12,355              21%            21.80%              286
       (300)             78,229            18,856              32%            23.20%              426
       (400)             85,855            26,482              45%            24.78%              583
</TABLE>


         The above  table  indicates  that at June 30,  1998,  in the event of a
sudden and  sustained  increase in prevailing  market  rates,  the Company's NPV
would be expected to decrease,  and that in the event of a sudden and  sustained
decrease  in  prevailing  market  interest  rates,  the  Company's  NPV would be
expected to increase. The Company's Board of Directors reviews the Company's NPV
position quarterly,  and, if estimated changes in NPV are not within the targets
established  by the Board,  the Board may direct  management to adjust its asset
and liability mix to bring interest rate risk within Board approved targets.

         Certain  shortcomings are inherent in the methodology used in the above
interest rate risk measurements.  Modeling changes in NPV require making certain
assumptions  that may or may not reflect the manner in which  actual  yields and
costs respond to changes in market interest rates. The NPV table presented above
assumes that the  composition  of the Company's  interest  sensitive  assets and
liabilities  existing at the  beginning of a period  remains  constant  over the
period being  measured.  It also  assumes  that a particular  change in interest
rates is reflected  uniformly  across the yield curve regardless of the duration
to maturity or repricing  characteristics  of specific  assets and  liabilities.
Accordingly,  although the NPV table  provides an  indication  of the  Company's
interest rate risk exposure at a particular point in time, such measurements are
not  intended to and do not provide a precise  forecast of the effect of changes
in market  interest  rates on the Company's net interest  income and will differ
from actual results.


                                       11

<PAGE>



Liquidity and Capital Resources

         The Company 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%. The
Company's  liquidity  ratio  averaged  40.56%  during the quarter ended June 30,
1998. The Company adjusts its liquidity levels in order to meet funding needs of
deposit outflows,  payment of real estate taxes on mortgage loans,  repayment of
borrowings  and  loan  commitments.   The  Company  also  adjusts  liquidity  as
appropriate to meet its asset and liability management objectives.

         The Company's  primary sources of funds are deposits,  amortization and
prepayment  of loans and  mortgage-backed  securities,  maturities of investment
securities  and  other  investments,   and  earnings  and  funds  provided  from
operations.  While scheduled  principal  repayments on loans and mortgage-backed
securities are a relatively  predictable source of funds, deposit flows and loan
prepayments  are  greatly   influenced  by  general  interest  rates,   economic
conditions, and competition.  The Company manages the pricing of its deposits to
maintain  a desired  deposit  balance.  In  addition,  the  Company  invests  in
short-term  interest-earning  assets,  which  provide  liquidity to meet lending
requirements.  Assets  qualifying  for liquidity  outstanding  at June 30, 1998,
amounted to $97.2 million. For additional  information about cash flows from the
Company's  operating,  financing,  and investing  activities,  see  Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements.

         A major  portion of the Company's  liquidity  consists of cash and cash
equivalents,  which are a product of its  operating,  investing,  and  financing
activities.  The primary sources of cash are net income, principal repayments on
loans  and  mortgage-backed  securities,  and  increases  in  deposit  accounts.
Liquidity  management  is  both a  daily  and  long-term  function  of  business
management.  If the Company  requires  funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds; however, the Company has never borrowed funds from the FHLB.

         At June 30, 1998, the Company had outstanding  loan commitments of $1.0
million.  This amount does not include  $13.2  million of  undisbursed  lines of
credit on home  equity  loans,  and the  unfunded  portion of loans in  process.
Certificates  of deposit  scheduled  to mature in less than one year at June 30,
1998, totaled $91.2 million. Based on prior experience, management believes that
a significant portion of such deposits will remain with the Company.



                                       12

<PAGE>



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

Impact of Inflation and Changing Prices

         The financial  statements of the Company and notes  thereto,  presented
elsewhere  herein,  have been prepared in  accordance  with  generally  accepted
accounting  principles,  which require the measurement of financial position and
operating results in terms of historical dollars without  considering the change
in the relative  purchasing  power of money over time and due to inflation.  The
impact  of  inflation  is  reflected  in the  increased  cost  of the  Company's
operations.  Unlike  most  industrial  companies,  nearly  all  the  assets  and
liabilities  of the Company are  monetary.  As a result,  interest  rates have a
greater  impact on the  Company's  performance  than do the  effects  of general
levels  of  inflation.  Interest  rates  do not  necessarily  move  in the  same
direction or to the same extent as the price of goods and services.

Impact of New Accounting Standards

         In June 1997, the FASB issued No. 131, Disclosures about Segments of an
Enterprise and Related  Information  ("SFAS No. 131").  SFAS No. 131 establishes
standards  for the way public  business  enterprises  are to report  information
about  operating  segments in annual  financial  statements  and requires  those
enterprises to report selected  information about operating  segments in interim
financial  reports  issued  to  shareholders.  SFAS  No.  131 is  effective  for
financial  statements for periods  beginning  after  December 15, 1997.  Earlier
application is encouraged. Management believes that adoption of the provision of
SFAS No. 131 will not have a material effect on the Company's financial position
or results of operations.

         In June 1998, the FASB issued SFAS No. 133  "Accounting  for Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  SFAS No. 133 requires that an entity
reorganize  all  derivatives as either assets or liabilities in the statement of
financial  position and measure those instruments at fair value. It is effective
for all fiscal quarters or fiscal years  beginning after June 15, 1999.  Initial
application  of this  Statement  should be as of the  beginning  of an  entity's
fiscal quarter on that date,  hedging  relationships must be designated anew and
documented  pursuant to the provisions of SFAS No. 133.  Earlier  application is
encouraged, but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS No. 133. It should not be applied retroactively to
financial statements of prior periods. Management has


                                       13

<PAGE>



not  determined  when it will adopt the  provisions of SFAS No. 133 but believes
that it will not have a material effect on the Company's  financial  position or
results of operations.

Capability of the Company's Data Processing Software and Hardware to Accommodate
the Year 2000

         The Company relies upon computers for the daily conduct of its business
and for data processing generally.  There is concern among industry experts that
commencing on January 1, 2000,  computers  will be unable to "read" the new year
and there may be widespread  computer  malfunctions.  The Year 2000 issue is the
result of computer  programs  being written using two digits rather than four to
define the applicable  year. Any of the Company's  computer  programs that would
have date  sensitive  software may recognize a date during "00" as the year 1900
rather  than  the  year  2000.  This  could  result  in  a  systems  failure  or
miscalculations  causing disruptions of operations.  Management has assessed its
electronic systems, programs,  applications and other electronic components used
in the operation of the Company.  The Company  contracts with service bureaus to
provide the  majority of its data  processing  and is dependent  upon  purchased
application  software.  Management  believes  that  it  has  implemented  a plan
pursuant to which the progress  toward full compliance of its service bureau and
other software  vendors will be tracked and tested well in advance of January 1,
2000.  Beginning  in the third  quarter of 1998,  the  Company  will  coordinate
end-to-end  tests with  primary  servicers,  which allow the Company to simulate
daily processing on sensitive century dates. The Company expects to complete the
Year 2000 project by December 31,  1998.  The Company is currently  developing a
contingency  plan in the event that the Company's  testing  discloses  potential
failures by either  service  bureaus or internal  systems upon which the Company
relies, or in the event that unforseeable external factors disrupt the Company's
normal  operations as the year 2000  approaches.  There can be no assurance that
the Company's contingency plan will fully mitigate the effects of such potential
failures.  The Company has not  incurred  any  material  costs,  and  management
believes that the Company will not incur material  costs in connection  with the
year 2000 issue, although there can be no assurances in this regard.

Reorganization into the Two-Tier Mutual Holding Company Structure

         Effective January 21, 1998, the Bank completed its reorganization  into
a two-tier  mutual holding  company  structure (the  "Reorganization")  with the
establishment of the Company as the stock holding company parent of the Bank. As
a result of the  Reorganization,  Leeds Federal  Bankshares,  M.H.C., the Bank's
mutual  holding  company,  owns a majority of the common  stock of the  Company,
which owns 100% of the common stock of the Bank.  Management  believes  that the
two-tier holding company structure allows the new Company to retain the benefits
of the mutual holding company structure,  and at the same time gives the Company
many of the  opportunities  available to stock  holding  companies  that are not
currently  available  in  a  mutual  holding  company  structure.  The  mid-tier
structure  offers the Company  greater  flexibility  to  structure  and complete
mergers and acquisitions, to diversity operations, and to repurchase outstanding
shares of common stock.

Stock Repurchase Plan to Repurchase Up to 275,000 Shares of Common Stock

         On April 15, 1998,  the Company  authorized a plan to  repurchase up to
275,000  shares,  or  approximately  5.3% of its common stock,  as a part of its
capital  management  strategy.  As of June 30, 1998, the Company had repurchased
39,205  shares of its common stock.  The Company has and will utilize  available
cash over a period of approximately a year to effect any further repurchases.



                                       14

<PAGE>

                  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

         A summary of selected quarterly financial data for the years ended June
30, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                          First            Second             Third           Fourth
                                         Quarter           Quarter           Quarter          Quarter
                                         -------           -------           -------          -------
                                                       (In Thousands Except Per Share Data)
Fiscal 1998
-----------
<S>                                     <C>               <C>              <C>               <C>     
Interest income..................       $   5,030         $  5,074         $   5,091         $  5,114
Net interest income..............           2,041            2,047             2,056            1,994
Provision for losses.............               3                8                --              181
Income before provision
  for income taxes...............           1,366            1,292             1,359            1,184
Net income.......................             864              819               864              759

Net income per common share:
  Basic..........................             .17              .16               .17              .15
  Diluted........................             .16              .16               .17              .15

Fiscal 1997
-----------
Interest income..................       $   4,793         $  4,856         $   4,911         $  5,046
Net interest income..............           1,891            1,945             2,050            2,107
Provision for losses.............              21               82                30               18
Income before provision
  for income taxes...............            (186)           1,193             1,402            1,414
Net income.......................            (108)             728               861              884

Net income per common share:
  Basic..........................            (.02)             .14               .17              .17
  Diluted........................            (.02)             .14               .17              .17
</TABLE>


                        COMMON STOCK AND RELATED MATTERS

         The  Company's  common  stock is listed on the Nasdaq  National  Market
under the symbol  "LFED." As of July 31,  1998,  the  Company  had 5  registered
market makers,  528  stockholders of record  (excluding the number of persons or
entities  holding stock in street name through  various  brokerage  firms),  and
5,151,392 shares outstanding. As of such date, Leeds Federal Bankshares,  M.H.C.
(the "Mutual  Holding  Company"),  the Company's  mutual holding  company,  held
3,300,000 shares of common stock and stockholders  other than the Mutual Holding
Company held 1,851,392 shares.


                                       15

<PAGE>



         The  following  table sets forth market price and dividend  information
for the common stock or, prior to the  completion  of the Bank's  reorganization
into the two-tier  mutual  holding  company  structure,  which was  completed on
January 21, 1998,  the Bank's  common stock.  Information  is presented for each
quarter of the previous two calendar years.  All information has been revised to
reflect the Company's November 1997 three-for-two stock split.

    Fiscal Year Ended                                        Cash Dividends
      June 30, 1997             High           Low               Declared
      -------------             ----           ---               --------
 First quarter             $    9.34      $    8.67          $    .11
 Second quarter                11.17          10.01               .11
 Third quarter                 12.67          10.34               .13
 Fourth quarter                13.34          11.84               .13


    Fiscal Year Ended                                        Cash Dividends
      June 30, 1998             High           Low               Declared
      -------------             ----           ---               --------
 First quarter             $   21.51      $   12.76          $    .13
 Second quarter                23.50          20.18               .14
 Third quarter                 23.00          21.00               .14
 Fourth quarter                22.50          18.75               .14


         Payment  of  dividends  on the  Company's  common  stock is  subject to
determination  and  declaration by the Board of Directors and will depend upon a
number of factors, including capital requirements, regulatory limitations on the
payment  of  dividends,  the  Company's  results  of  operations  and  financial
condition, tax considerations and general economic conditions.  No assurance can
be given that  dividends  will be declared or, if  declared,  what the amount of
dividends will be, or whether such dividends, once declared, will continue.

         OTS regulations impose limitations upon all "capital  distributions" by
savings   institutions,   including  cash  dividends,   payments  by  a  savings
institution  to  repurchase  or  otherwise   acquire  its  stock,   payments  to
stockholders  of another  savings  institution in a cash-out  merger,  and other
distributions  charged against capital. The regulations establish a three-tiered
system  of  regulation,   with  the  greatest   flexibility  being  afforded  to
well-capitalized or Tier 1 savings associations. As of the date hereof, the Bank
was a Tier 1  institution.  Accordingly,  under  the  OTS  capital  distribution
regulations,  the Bank would be permitted to pay  dividends  during any calendar
year up to 100 percent of its net income  during that  calendar  year,  plus the
amount that would reduce by one-half its surplus  capital ratio at the beginning
of the calendar year.

         In addition to the foregoing,  earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the  then-current  tax rate by the Bank on the  amount  of  earnings
removed from the reserves for such distributions.  The Bank intends to make full
use of this favorable tax treatment and does not contemplate any distribution by
the Bank in a manner  that would limit the Bank's bad debt  deduction  or create
federal tax liability.



                                       16

<PAGE>



         The  Mutual  Holding  Company  has  waived  the  right to  receive  all
dividends  paid by the  Company.  OTS  regulations  require  the Mutual  Holding
Company  to  notify  the OTS of any  proposed  waiver  of the  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 a waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for 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 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.



                                       17
<PAGE>


Independent Auditors' Report



The Board of Directors
Leeds Federal Bankshares, Inc.
Baltimore, Maryland:


We have audited the accompanying  consolidated statements of financial condition
of Leeds Federal  Bankshares,  Inc. and subsidiary  (the Company) as of June 30,
1998 and 1997, and the related consolidated statements of income,  stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1998. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.


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


In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Leeds  Federal
Bankshares, Inc. and subsidiary as of June 30, 1998 and 1997, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended June 30, 1998 in  conformity  with  generally  accepted  accounting
principles.


/s/KPMG Peat Marwick LLP


Baltimore, Maryland
August 7, 1998



<PAGE>

LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
--------------------------------------------------------------------------------
                                                       1998             1997
--------------------------------------------------------------------------------
Assets
Cash, including interest-bearing deposits of
 $11,906,061 in 1998 and $11,172,475 in 1997 ...   $  13,675,554    13,330,928
Short-term investments .........................       4,776,681     2,722,336
Secured short-term loans to commercial banks ...      18,405,234     9,735,532
Securities purchased under agreements to resell
 (fair value of $5,541,565 in 1997) (note 2) ...              --     5,517,903
Securities available for sale, amortized cost
 of $4,860,269 and $5,862,754,
 respectively (note 3) .........................       8,034,695     8,162,419
Investment securities held to maturity (fair
 value of $40,581,752 in 1998 and $43,360,574 in
 1997) (note 4) ................................      40,669,525    43,614,562
Mortgage-backed securities held to maturity
 (fair value of $16,923,543 in 1998
 and $22,777,192 in 1997) (note 5) .............      16,514,383    22,294,337
Loans receivable, net (note 6) .................     190,965,595   174,877,796
Investment in Federal Home Loan Bank of
 Atlanta stock, at cost (note 10) ..............       2,377,200     2,377,200
Property and equipment, net (note 7) ...........         851,265       863,823
Cash surrender value of life insurance (note 11)       6,132,929     3,153,193
Prepaid expenses and other assets ..............         333,630       309,808
Ground rents owned, at cost ....................              --        39,500
--------------------------------------------------------------------------------
                                                   $ 302,736,691   286,999,337
================================================================================

Liabilities and Stockholders' Equity
Liabilities:
    Savings accounts (note 8) ..................   $ 245,269,602   232,590,009
    Borrowed funds - Employee Stock
     Ownership Plan (note 12) ..................         552,000       648,000
    Advance payments by borrowers for
     taxes, insurance and ground rents .........       5,006,020     4,804,060
    Federal and state income taxes (note 9):
         Currently payable .....................         133,676       335,841
         Deferred ..............................       1,296,001     1,062,219
    Accrued expenses and other liabilities
     (notes 11 and 13) .........................       1,171,882       817,871
--------------------------------------------------------------------------------
Total liabilities ..............................     253,429,181   240,258,000

Stockholders' equity (notes 10, 12,
 16 and 18):
    Common stock, $1 par value; 20,000,000
     shares authorized; issued and
     outstanding 5,195,597 shares in 1998
     and 5,182,097 in 1997 .....................       5,195,597     5,182,097
    Additional paid-in-capital .................       9,258,917     8,948,119
    Employee stock ownership plan ..............        (487,891)     (591,300)
    Management recognition plan ................         (11,907)      (60,141)
    Treasury stock, at cost; 39,205 shares
     at June 30, 1998 ..........................        (772,430)           --
    Retained income, substantially restricted ..      34,162,743    31,854,434
    Accumulated other comprehensive income .....       1,962,481     1,408,128
--------------------------------------------------------------------------------
Total stockholders' equity .....................      49,307,510    46,741,337
--------------------------------------------------------------------------------
Commitments (notes 6, 11 and 12)
--------------------------------------------------------------------------------
                                                   $ 302,736,691   286,999,337
================================================================================


See accompanying notes to consolidated financial statements.

                                      F-2

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                   1998         1997            1996
------------------------------------------------------------------------------------------------------
Interest income:
<S>                                                            <C>            <C>           <C>       
      First mortgage and other loans .......................   $13,734,747    12,440,362    11,094,708
      Mortgage-backed securities ...........................     1,423,221     1,862,074     2,316,785
      Investment securities and short-term investments .....     5,150,921     5,303,280     5,156,029
------------------------------------------------------------------------------------------------------
Total interest income ......................................    20,308,889    19,605,716    18,567,522
------------------------------------------------------------------------------------------------------
Interest expense:
      Savings accounts (note 8) ............................    12,114,148    11,548,634    11,156,258
      Other ................................................        56,971        64,473        75,929
------------------------------------------------------------------------------------------------------
Total interest expense .....................................    12,171,119    11,613,107    11,232,187
------------------------------------------------------------------------------------------------------
Net interest income ........................................     8,137,770     7,992,609     7,335,335
Provision for loan losses (note 6) .........................       191,705       151,240        33,581
------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ........     7,946,065     7,841,369     7,301,754
------------------------------------------------------------------------------------------------------
Noninterest income:
      Service fees and charges .............................       137,190       130,202       115,797
      Other ................................................       212,889       140,288       168,142
------------------------------------------------------------------------------------------------------
                                                                   350,079       270,490       283,939
------------------------------------------------------------------------------------------------------
Noninterest expense:
      Compensation and employee benefits ...................     1,769,715     1,528,280     1,516,477
      Occupancy expense ....................................       195,151       197,067       191,947
      SAIF deposit insurance premiums ......................       222,147     1,755,113       557,535
      Advertising ..........................................       208,165       171,385       216,051
      Other ................................................       699,885       636,941       580,277
------------------------------------------------------------------------------------------------------
                                                                 3,095,063     4,288,786     3,062,287
------------------------------------------------------------------------------------------------------
Income before provision for income taxes ...................     5,201,081     3,823,073     4,523,406
Provision for income taxes (note 9) ........................     1,895,072     1,457,942     1,736,762
------------------------------------------------------------------------------------------------------
Net income .................................................     3,306,009     2,365,131     2,786,644
Changes in accumulated other comprehensive income:
      Unrealized gains on securities available-for-sale, net       554,353       671,458        29,024
      Amortization of net unrealized holding loss ..........            --        15,996         1,439
------------------------------------------------------------------------------------------------------
Total comprehensive income .................................   $ 3,860,362     3,052,585     2,817,107
======================================================================================================
Net income per share of common stock (note 17):
      Basic ................................................   $      0.65          0.46          0.55
------------------------------------------------------------------------------------------------------
      Diluted ..............................................   $      0.64          0.46          0.55
======================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                     Employee                                  Retained       Accumu-      Total
                                      Additional      stock       Management      Treasury     income,      lated other    stock-
                           Common      paid-in      ownership    recognition       stock,   substantially   comprehen-    holders'
                           stock       capital        plan           plan         at cost    restricted     sive income    equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>         <C>           <C>           <C>              <C>       <C>             <C>            <C>      
Balance at June 30,
 1995 as previously
 reported ...........   $ 3,448,000    10,484,713    (814,340)     (350,521)          --     28,279,665       690,211    41,737,728
Three-for-two common
 stock split ........     1,723,993    (1,723,993)         --            --           --             --            --            --
------------------------------------------------------------------------------------------------------------------------------------

Balances at June 30,
 1995 as adjusted ...     5,171,993     8,760,720    (814,340)     (350,521)          --     28,279,665       690,211    41,737,728
Compensation expense-
 ESOP ...............            --        50,294     113,960            --           --             --            --       164,254
Compensation expense-
 MRP ................            --            --          --       198,093           --             --            --       198,093
Amortization of net
 unrealized holding
 loss ...............            --            --          --            --           --         (1,439)        1,439            --
Other comprehensive
 income .............            --            --          --            --           --             --        29,024        29,024
Dividends ($.64 per
 share) .............            --            --          --            --           --       (723,563)           --      (723,563)
Net income ..........            --            --          --            --           --      2,786,644            --     2,786,644
------------------------------------------------------------------------------------------------------------------------------------

Balance at June 30,
 1996 ...............     5,171,993     8,811,014    (700,380)     (152,428)          --     30,341,307       720,674    44,192,180
Compensation expense-
 ESOP ...............            --        63,663     109,080            --           --             --            --       172,743
Compensation expense-
 MRP ................            --            --          --        92,287           --             --            --        92,287
Amortization of net
 unrealized holding
 loss ...............            --            --          --            --           --        (15,996)       15,996            --
Other comprehensive
 income .............            --            --          --            --           --             --       671,458       671,458
Exercise of stock
 options ............        10,104        73,442          --            --           --             --            --        83,546
Dividends ($.72 per
 share) .............            --            --          --            --           --       (836,008)           --      (836,008)
Net income ..........            --            --          --            --           --      2,365,131            --     2,365,131
------------------------------------------------------------------------------------------------------------------------------------

Balance at June 30,
 1997 ...............     5,182,097     8,948,119    (591,300)      (60,141)          --     31,854,434     1,408,128    46,741,337
Compensation expense-
 ESOP ...............            --       217,378     103,409            --           --             --            --       320,787
Compensation expense-
 MRP ................            --            --          --        48,234           --             --            --        48,234
Other comprehensive
 income .............            --            --          --            --           --             --       554,353       554,353
Exercise of stock
 options ............        13,500        93,420          --            --           --             --            --       106,920
Dividends ($.55 per
 share) .............            --            --          --            --           --       (997,700)           --      (997,700)
Net income ..........            --            --          --            --           --      3,306,009            --     3,306,009
Purchase of treasury
 stock ..............            --            --          --            --     (772,430)            --            --      (772,430)
------------------------------------------------------------------------------------------------------------------------------------

Balance at June 30,
 1998 ...............   $ 5,195,597     9,258,917    (487,891)      (11,907)    (772,430)    34,162,743     1,962,481    49,307,510
====================================================================================================================================
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                           1998            1997             1996
--------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>             <C>
Cash flows from operating activities:
    Net income ....................................   $  3,306,009       2,365,131       2,786,644
    Adjustments to reconcile net income to net
      cash provided by operating activities:
        Amortization of loan fees .................        (98,772)        (80,728)       (157,068)
        Provision for loan losses .................        191,705         151,240          33,581
        Accretion of premiums (discounts) on
           investment securities and mortgage-
           backed securities ......................        (18,835)        (54,991)        (53,764)
        Loss (gain) on sale of assets, net ........         (1,806)             --          17,025
        Depreciation ..............................        125,639         121,209         105,666
        Non-cash compensation under stock-based
           benefit plans ..........................        369,021         265,030         362,347
        Deferred income tax benefit ...............        (86,626)       (134,722)       (166,981)
        Decrease (increase) in accrued interest
           receivable on securities and loans
           receivable .............................        (35,219)          6,225        (284,232)
        Increase (decrease) in income taxes
           currently payable ......................       (202,165)        207,601          15,185
        Increase in accrued expenses and other
           liabilities ............................        354,011          69,472         211,897
        Increase in unearned loan fees, net .......        110,922         282,353         247,297
        Decrease (increase) in prepaid expenses and
           other assets ...........................        (23,822)         84,617         (44,120)
        Amortization of net unrealized holding loss             --         (15,996)         (1,439)
---------------------------------------------------------------------------------------------------
Net cash provided by operating activities .........      3,990,062       3,266,441       3,072,038
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Purchases of securities available for sale ....     (1,175,000)       (300,000)    (11,000,000)
    Maturities of securities available for sale ...      2,200,000              --              --
    Purchase of investment securities held
      to maturity .................................    (35,903,264)     (6,399,906)    (32,155,000)
    Maturity of investment securities held
      to maturity .................................     38,888,255      14,728,283      36,895,410
    Loan disbursements, net of repayments .........    (16,289,600)    (22,372,160)    (11,723,086)
</TABLE>


                                                                     (Continued)

                                      F-5

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.
Consolidated Statements of Cash Flows, continued
--------------------------------------------------------------------------------
                                       1998             1997             1996
--------------------------------------------------------------------------------

Cash flows from investing
 activities, continued:
  Mortgage-backed securities
   held to maturity principal
   repayments .................... $  5,769,485       6,790,616       5,877,674
  Purchases of property and
   equipment .....................     (117,276)        (34,267)       (385,488)
  Sale of property and equipment .        6,001              --              --
  Investment in life insurance
   policies ......................   (2,979,736)       (134,662)       (156,214)
  Sale of ground rents owned .....       39,500           1,600              --
--------------------------------------------------------------------------------
Net cash used in investing
 activities ......................   (9,561,635)     (7,720,496)    (12,646,704)
--------------------------------------------------------------------------------
Cash flows from financing
 activities:
  Payment of dividends ...........     (997,700)       (836,008)       (723,563)
  Repayment of borrowed funds ....      (96,000)        (96,000)        (96,000)
  Net increase in savings accounts   12,679,593      10,443,991      10,731,778
  Increase (decrease) in advance
   payments by borrowers for
   taxes, insurance and ground
   rents .........................      201,960         243,568         (47,211)
  Purchase of treasury stock .....     (772,430)
  Exercise of stock options ......      106,920          83,546              --
--------------------------------------------------------------------------------
Net cash provided by financing
 activities ......................   11,122,343       9,839,097       9,865,004

Net increase in cash and cash
 equivalents .....................    5,550,770       5,385,042         290,338

Cash and cash equivalents at
 beginning of year ...............   31,306,699      25,921,657      25,631,319
--------------------------------------------------------------------------------
Cash and cash equivalents at
 end of year ..................... $ 36,857,469      31,306,699      25,921,657
================================================================================
Noncash investing activities:
  Retirement of property
   and equipment ................. $     13,941           1,363         109,693
================================================================================


See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>



LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements

June 30, 1998, 1997 and 1996


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

   (1)   Description of Business, Summary of Significant Accounting Policies and
         Other Matters

         Description of Business and Reorganization

         Leeds Federal Savings Bank (the Bank) is a federally-chartered  savings
         bank that conducts its  operations  from a single  facility  located in
         Arbutus,  Baltimore County, Maryland. The Bank was originally chartered
         in 1923 as a state  mutual  savings  and loan  association  and in 1935
         became a federally-chartered mutual savings association operating under
         the name Leeds  Federal  Savings  and Loan  Association  (Association).
         Effective  April 29, 1994, the  Association's  ownership  structure was
         reorganized  and  it  became  a  wholly  owned  capital  stock  savings
         association  subsidiary of Leeds Federal  Bankshares,  M.H.C.  (MHC), a
         federal mutual holding company.  Under the terms of the reorganization,
         the membership  rights of the  Association's  members became membership
         rights in the mutual holding company.  The reorganization was accounted
         for in a manner similar to that of a pooling of interests. Effective in
         January  1994,  the Office of Thrift  Supervision  (OTS)  approved  the
         Association's  application  to change its  charter to that of a federal
         savings bank and to change its name to Leeds Federal Savings Bank.

         Effective  January 21,  1998,  the Bank  completed  its  reorganization
         (Reorganization)  into a two-tier mutual holding company structure with
         the  establishment  of a federally  chartered  corporation as the stock
         holding company parent of the Bank. As a result of the  Reorganization,
         MHC, the Bank's existing mutual holding company, owns a majority of the
         common  stock  of  the  new  stock  holding   company,   Leeds  Federal
         Bankshares,  Inc., which owns 100% of the common stock of the Bank. The
         Reorganization  was implemented  pursuant to the Plan of Reorganization
         which was adopted by the  stockholders at its 1997 annual  stockholders
         meeting.  Pursuant  to the  Reorganization,  each share of Bank  common
         stock held by existing  stockholders  of the Bank was  exchanged  for a
         share of common stock of the stock holding company.  The reorganization
         of the  Bank  was  structured  as a  tax-free  reorganization  and  was
         accounted for similar to that of a pooling of interests.

         The  primary  business  of Leeds  Federal  Savings  Bank is  attracting
         deposits  from  individuals  and corporate  customers  and  originating
         mortgage loans secured by residential real estate properties.  The Bank
         is  subject  to  competition  from  other  financial   institutions  in
         attracting and retaining deposits and in making loans. The Bank is also
         subject  to  the  regulations  of  certain   agencies  of  the  federal
         government and undergoes periodic examinations by those agencies.

                                                                     (Continued)

                                       F-7


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

(1)      Continued

         Basis of Presentation

         The  consolidated  financial  statements  include the accounts of Leeds
         Federal Bankshares, Inc. (the Company) and its wholly owned subsidiary,
         Leeds  Federal  Savings  Bank.   Leeds   Investment   Corporation  (the
         Subsidiary), is a wholly owned subsidiary of Leeds Federal Savings Bank
         (collectively,  the Bank).  The Subsidiary was incorporated in Delaware
         in April  1997,  for the  purpose  of  holding  investment  securities,
         interest-earning  deposits  and  other  investments.   All  significant
         intercompany   accounts  and  transactions   have  been  eliminated  in
         consolidation.

         In preparing  the  consolidated  financial  statements,  management  is
         required to make  estimates  and  assumptions  that affect the reported
         amounts of assets and  liabilities  as of the date of the statements of
         financial  condition  and income and  expenses  for the period.  Actual
         results  could  differ  significantly  from those  estimates.  Material
         estimates that are  particularly  susceptible to significant  change in
         the near term relate to the  determination  of the  allowance  for loan
         losses.  In  connection  with this  determination,  management  obtains
         independent  appraisals  for  significant  properties and prepares fair
         value analyses as appropriate.

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

         Short-Term Investments

         Short-term  investments,  which consist of money market  accounts,  are
         stated at the lower of cost or market.

         Secured Short-Term Loans to Commercial Banks

         Secured  short-term  loans to commercial banks consist of Federal funds
         sold which are carried at cost and approximate  fair value.  Generally,
         Federal funds are purchased and sold for one-day periods.

                                                                     (Continued)

                                       F-8


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

(1)      Continued

         Property and Equipment

         Property   and   equipment   are  carried  at  cost  less   accumulated
         depreciation.  Depreciation is computed on a straight-line  method over
         the estimated useful lives of the assets. Additions and betterments are
         capitalized,  and charges for repairs and maintenance are expensed when
         incurred. The related cost and accumulated  depreciation are eliminated
         from the  accounts  when an asset is sold or retired and the  resultant
         gain or loss is credited or charged to income.

         Loan Fees

         Loan  origination  and  commitment  fees  are  deferred  initially  and
         amortized into income over the  contractual  life of the loan using the
         interest  method.  Under  certain  circumstances,  commitment  fees are
         recognized  over the  commitment  period or upon the  expiration of the
         commitment.  In addition,  certain  incremental direct loan origination
         costs are deferred and recognized over the contractual life of the loan
         using the interest  method as a reduction of the yield.  Deferred  fees
         and  costs  are  combined  where  applicable  and  the  net  amount  is
         amortized.

         Real Estate Owned

         Real estate owned consists of real estate acquired through  foreclosure
         and in-substance  foreclosure and is initially recorded at the lower of
         cost or fair value and subsequently at the lower of cost or fair value,
         less estimated  selling  expenses.  Costs relating to holding such real
         estate are charged  against income in the current  period,  while costs
         relating to improving such real estate are capitalized  until a salable
         condition is reached.

         Income Taxes

         Under  the  asset  and  liability  method,  deferred  income  taxes are
         recognized,  with certain exceptions, for temporary differences between
         the  financial  reporting  basis and  income  tax  basis of assets  and
         liabilities  based on enacted  tax rates  expected to be in effect when
         such  amounts  are  realized  or  settled.   Deferred  tax  assets  are
         recognized only to the extent that it is more likely than not that such
         amounts will be realized based on consideration of available  evidence,
         including tax planning strategies and other factors.

                                                                     (Continued)

                                       F-9


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (1)   Continued

         SFAS No. 109 allows for a continuing  exception of providing a deferred
         tax  liability  for bad debt  reserves  for tax  purposes of  qualified
         thrift lenders,  such as the Bank, that arose in fiscal years beginning
         before  December 31, 1987.  Such bad debt reserve for the Bank amounted
         to approximately  $7,100,000 with an income tax effect of approximately
         $2,700,000 at June 30, 1998. This bad debt reserve would become taxable
         if certain conditions are met by the Bank.

         The effects of changes in tax laws or rates on deferred  tax assets and
         liabilities  are  recognized  in the period that includes the enactment
         date.

         Provision for Losses on Loans

         The provision for losses on loans is determined  based on  management's
         review of the loan portfolio and analyses of borrowers' ability to pay,
         past collection experience, risk characteristics of individual loans or
         groups  of  similar  loans  and  underlying  collateral,   current  and
         prospective  economic conditions and the status of nonperforming loans.
         Loans or  portions  thereof are  charged  off when  considered,  in the
         opinion of management, uncollectible.

         Certain  impaired  loans are measured on the present  value of expected
         future cash flows discounted at the loan's effective  interest rate, or
         at the  loan's  observable  market  price  or  the  fair  value  of the
         collateral  if the loan is collateral  dependent.  A loan is considered
         impaired when, based on current  information and events, it is probable
         that a creditor  will be unable to collect all amounts due according to
         the  contractual  terms of the loan agreement.  An allocated  valuation
         allowance  for  impaired  loans,  if any,  is  included  in the  Bank's
         allowance for credit losses.  An impaired loan is charged-off  when the
         loan, or a portion thereof, is considered  uncollectible or transferred
         to real estate owned.

         Impaired loans are generally placed in nonaccrual status on the earlier
         of the date that management determines that the collection of principal
         and/or  interest is in doubt or the date that  principal or interest is
         90 days or more past due.

         Interest on potential problem loans is not accrued when, in the opinion
         of management, full collection of principal or interest is in doubt, or
         payment of  principal  or  interest  has  become 90 days past due.  Any
         interest  ultimately  collected  on such loans is recorded in income in
         the period of recovery.

                                                                     (Continued)

                                       F-10


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (1)   Continued

         The Bank recognizes  interest income for impaired loans consistent with
         its  method  for  nonaccrual  loans.  Specifically,  interest  payments
         received  are  recognized  as  interest  income  or,  if  the  ultimate
         collectibility of principal is in doubt, are applied to principal.

         Investment Securities and Mortgage-Backed Securities

         Debt  securities  that the Bank has the positive  intent and ability to
         hold to maturity  are  classified  as held to maturity  and recorded at
         amortized  cost.  Debt and equity  securities not classified as held to
         maturity and equity  securities with readily  determinable  fair values
         are classified as trading securities if bought and held principally for
         the purpose of selling them in the near term.  Trading  securities  are
         reported at fair value,  with  unrealized  gains and losses included in
         earnings. Investments not classified as held to maturity or trading are
         considered  available  for sale and are  reported at fair  value,  with
         unrealized  gains and losses  excluded  from earnings and reported as a
         separate component of stockholders'  equity,  net of tax effects.  Fair
         value  is  determined  based  on  bid  prices  published  in  financial
         newspapers or bid  quotations  received from  securities  dealers.  For
         purposes  of  computing  realized  gains  or  losses  on the  sales  of
         investments,  cost is determined  by using the specific  identification
         method.  Gains and losses on sales of securities  are recognized at the
         time of sale.  Premiums and discounts on investment and mortgage-backed
         securities  are amortized  over the term of the security  using methods
         that approximate the interest method.

         Stock-Based Compensation

         The Bank adopted the  provisions  of Statement of Financial  Accounting
         Standards No. 123 Accounting for Awards of Stock-Based  Compensation to
         Employees  (SFAS  No.  123) as of  July 1,  1996  using  the  intrinsic
         value-based  method.  SFAS No. 123 defines a fair value based method of
         accounting for an employee  stock option or similar equity  instrument,
         and  encourages all entities to adopt that method of accounting for all
         of their employee stock compensation plans.  However, it also allows an
         entity to continue to measure  compensation  cost for those plans using
         the  intrinsic  value  based  method of  accounting  prescribed  by APB
         Opinion No. 25, Accounting for Stock Issued to Employees  (Opinion 25).
         Under the fair value based method, compensation cost is measured at the
         grant date based on the value of the award and is  recognized  over the
         service  period,  which  is  usually  the  vesting  period.  Under  the
         intrinsic value based method,  compensation cost is the excess, if any,
         of the  quoted  market  price of the stock at the  grant  date or other
         measurement  date over the amount an  employee  must pay to acquire the
         stock.  Most fixed stock  option plans -- the most common type of stock
         compensation  plan -- have no intrinsic  value at grant date, and under
         Opinion 25 no  compensation  cost is recognized for them.  Compensation
         cost is recognized  for other types of stock based  compensation  plans
         under Opinion 25, including

                                                                     (Continued)

                                       F-11


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (1)   Continued

         plans with variable, usually performance-based,  features. SFAS No. 123
         requires  that  an  employer's  financial  statements  include  certain
         disclosures  about  stock-based  employee   compensation   arrangements
         regardless of the method used to account for them. The adoption of SFAS
         No.  123  did  not  have a  material  impact  on the  Bank's  financial
         statements.  The Bank  made no grants of stock  options  during  fiscal
         years  1998,   1997  or  1996  and  therefore  there  are  no  required
         disclosures about stock-based employee compensation.

         Comprehensive Income

         Effective  January 1, 1998, the Company adopted  Statement of Financial
         Accounting Standards No. 130, Reporting  Comprehensive Income (SFAS No.
         130). SFAS No. 130 establishes  standards for the reporting and display
         of   comprehensive   income  and  its  components  in  a  full  set  of
         general-purpose financial statements.  All items that are rquired to be
         recognized  under  accounting  standards as components of comprehensive
         income are to be  reported  in an annual  financial  statement  that is
         displayed with the same prominence as other financial statements.  This
         statement  stipulates that  comprehensive  income reflect the change in
         equity  of an  enterprise  during a period  of  transactions  and other
         events and circumstances  from nonowner sources.  Comprehensive  income
         will  thus  represent  the  sum of net  income  and  other  accumulated
         comprehensive  income.  The  accumulated  balance of other  accumulated
         comprehensive  income  is  required  to  be  displyed  separately  from
         retained  earnings and additional  paid-in  capital in the statement of
         financial position.  The adoption of SFAS No. 130 resulted primarily in
         the Company reporting unrealized gains and losses on available-for-sale
         securities in other comprehensive income.

         Statement of Cash Flows

         Cash  equivalents  include  interest  bearing  deposits,  money  market
         accounts,  secured short-term loans to commercial banks, and securities
         purchased under agreements to resell.  For purposes of the consolidated
         statement  of  cash  flows,   the  Bank  considers  all  highly  liquid
         investments with original maturities of three months or less to be cash
         equivalents.

         The Company  made  income tax  payments  of  approximately  $2,184,000,
         $1,375,000 and  $1,815,000 in 1998,  1997 and 1996,  respectively.  The
         Company paid approximately $12,159,000,  $11,613,000 and $11,232,000 in
         interest  on  deposits  and other  borrowings  in 1998,  1997 and 1996,
         respectively.

                                                                     (Continued)

                                       F-12


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (2)   Securities Purchased Under Agreements to Resell

         The Bank purchases  securities under  agreements to resell  (repurchase
         agreements).  The  amounts  advanced  under  the  agreements  represent
         short-term  loans and are  reflected as short-term  investments  in the
         consolidated statements of financial condition.

         Securities  purchased  under  agreements  to  resell  at  June  30  are
         summarized as follows:

                                                             1998         1997
         -----------------------------------------------------------------------
         Mortgage-backed securities, fair value of
           $0 and $5,541,565 at June 30, 1998
           and 1997, respectively........................  $     --    5,517,903
         =======================================================================

         The securities  underlying  the  agreements  are book entry  securities
         which  were  delivered  by  appropriate  entry  in the  Bank's  account
         maintained at Signet Bank, Richmond, Virginia under a written custodial
         agreement  that  explicitly  recognizes  the  Bank's  interest  in  the
         securities.  Agreements  outstanding  at June 30,  1997  have  original
         maturities  of  three  months  or  less.  The  agreements  relating  to
         mortgage-backed   securities   are   agreements   to  resell  the  same
         securities.  Securities  purchased under  agreements to resell averaged
         $3,412,000,  $3,654,000  and  $2,285,000  during  1998,  1997 and 1996,
         respectively.  The maximum  amounts  outstanding  at any month-end were
         $7,036,728,  $5,517,903  and  $2,467,214  during  1998,  1997 and 1996,
         respectively.


   (3)   Securities Available for Sale

         The amortized cost and fair value of securities  available for sale are
         summarized as follows at June 30:

                                                            1998
                                       -----------------------------------------
                                                      Gross      Gross
                                       Amoritized  unrealized  unrealized  Fair
                                           cost      gains       losses    value
         -----------------------------------------------------------------------
         U.S. government and agency
           obligations due:
              Beyond 5 years but
              within 10 years.......... $2,800,000     16,917     --   2,816,917
              Beyond 10 years..........  1,875,000      8,748     --   1,883,748
         Federal Home Loan Mortgage
           Corporation preferred stock.     56,760  3,148,761     --   3,205,521
         -----------------------------------------------------------------------
                                         4,731,760  3,174,426     --   7,906,186
         Accrued interest receivable...    128,509       --       --     128,509
         -----------------------------------------------------------------------
                                        $4,860,269  3,174,426     --   8,034,695
         =======================================================================

                                                                     (Continued)

                                       F-13


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (3)   Continued

                                                            1997
                                       -----------------------------------------
                                                      Gross      Gross
                                       Amoritized  unrealized  unrealized  Fair
                                           cost      gains       losses    value
         -----------------------------------------------------------------------
         U.S. government and agency
           obligations due:
              Beyond 5 years but
              within 10 years.......... $4,700,000       --   (22,671) 4,677,329
              Beyond 10 years..........  1,000,000       --    (4,824)   995,176
         Federal Home Loan Mortgage
           Corporation preferred stock.     56,760  2,327,160     --   2,383,920
         -----------------------------------------------------------------------
                                         5,756,760  2,327,160 (27,495) 8,056,425
         Accrued interest receivable...    105,994       --       --     105,994
         -----------------------------------------------------------------------
                                        $5,862,754  2,327,160 (27,495) 8,162,419
         =======================================================================


   (4)   Investment Securities Held to Maturity

         The  amortized  cost  and  fair  value  of  investment  securities  are
         summarized as follows at June 30:

                                                          1998
                                     -------------------------------------------
                                                    Gross      Gross
                                     Amoritized  unrealized  unrealized  Fair
                                         cost      gains       losses    value
         -----------------------------------------------------------------------
         U.S. government and
           agency obligations.....  $39,984,056   122,160   (209,933) 39,896,283
         Accrued interest
           receivable.............      685,469      --         --       685,469
         -----------------------------------------------------------------------
                                    $40,669,525   122,160   (209,933) 40,581,752
         =======================================================================

                                                          1997
                                     -------------------------------------------
                                                    Gross      Gross
                                     Amoritized  unrealized  unrealized  Fair
                                         cost      gains       losses    value
         -----------------------------------------------------------------------
         U.S. government and
           agency obligations.....  $42,971,175   122,014   (376,002) 41,717,187
         Accrued interest
           receivable.............      643,387      --         --       643,387
         -----------------------------------------------------------------------
                                    $43,614,562   122,014   (376,002) 43,360,574
         =======================================================================

                                                                     (Continued)

                                       F-14


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (4)   Continued

         Investment securities mature as follows at June 30:

                                          1998                     1997
                                -----------------------  -----------------------
                                 Amoritized     Fair       Amoritized     Fair
                                    cost       value          cost       value
         -----------------------------------------------------------------------
         Due with 12 months.... $ 2,491,898   2,488,368      491,437     491,437
         Due beyond 12 months
           but within 5 years..   3,800,000   3,850,700   14,500,000  14,527,148
         Due beyond 5 years
           but within 10 years.   5,065,000   5,044,285   18,151,359  17,992,813
         Due beyond 10 years...  28,627,158  28,511,930    9,828,379   9,705,789
         -----------------------------------------------------------------------
                                $39,984,056  39,896,283   42,971,175  42,717,187
         =======================================================================


   (5)   Mortgage-Backed Securities Held to Maturity

         The amortized  cost and fair value of  mortgage-backed  securities  are
         summarized as follows at June 30:


                                                            1998
                                       -----------------------------------------
                                                      Gross      Gross
                                       Amoritized  unrealized  unrealized  Fair
                                           cost      gains       losses    value
         -----------------------------------------------------------------------
         Government National Mortgage
           Association................ $ 9,572,963   321,723      --   9,894,686
         Federal National Mortgage
           Association................   2,597,401    43,028      --   2,640,429
         Federal Home Loan
           Mortgage Corporation.......   2,481,929    35,557      --   2,517,486
         Collateralized Mortgage
           Obligation--FNMA  REMIC....   1,759,520     8,852      --   1,768,372
         -----------------------------------------------------------------------
                                        16,411,813   409,160      --  16,820,973
         Accrued interest receivable..     102,570       --       --     102,570
         -----------------------------------------------------------------------
                                       $16,514,383   409,160      --  16,923,543
         =======================================================================


                                                                     (Continued)

                                       F-15


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (5)   Continued

                                                           1997
                                       -----------------------------------------
                                                      Gross      Gross
                                       Amoritized  unrealized  unrealized  Fair
                                           cost      gains       losses    value
         -----------------------------------------------------------------------
         Government National Mortgage
           Association................ $12,636,297   434,087      --  13,070,384
         Federal National Mortgage
           Association................   3,738,027    23,042    (510)  3,760,559
         Federal Home Loan
           Mortgage Corporation.......   3,910,141    36,846      --   3,946,987
         Collateralized Mortgage
           Obligation--FNMA  REMIC....   1,875,870       --  (10,610)  1,865,260
         -----------------------------------------------------------------------
                                        22,160,335   493,975 (11,120) 22,643,190
         Accrued interest receivable..     134,002       --       --     134,002
         -----------------------------------------------------------------------
                                       $22,294,337   493,975 (11,120) 22,777,192
         =======================================================================

         A summary of contractual  maturities of  mortgage-backed  securities at
         June 30:

                                          1998                     1997
                                -----------------------  -----------------------
                                 Amoritized     Fair       Amoritized     Fair
                                    cost       value          cost       value
         -----------------------------------------------------------------------
         Due with 12 months.... $ 1,124,638   1,127,061      832,307     839,180
         Due beyond 12 months
           but within 5 years..   1,007,709   1,028,060    3,156,477   3,199,376
         Due beyond 5 years
           but within 10 years.   3,417,449   3,487,855    4,314,490   4,347,676
         Due beyond 10 years...  10,862,017  11,177,997   13,857,061  14,256,958
         -----------------------------------------------------------------------
                                $16,411,813  16,820,973   22,160,335  22,643,190
         =======================================================================


                                                                     (Continued)

                                       F-16


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (6)   Loans Receivable

         Loans  receivable and accrued  interest thereon were as follows at June
         30:

                                                           1998         1997
         -----------------------------------------------------------------------
         First mortgage loans:
           One-to-four family residential...........  $167,421,983   152,462,834
           Commercial...............................     3,738,433     3,763,211
           Construction.............................     4,730,199     2,770,243
         -----------------------------------------------------------------------
                                                       175,890,615   158,996,288

         Home equity loans..........................    12,768,944    13,024,084
         Loans secured by savings accounts..........       438,831       358,065
         Consumer loans.............................     4,632,750     4,711,033
         Accrued interest receivable................       784,348       782,294
         -----------------------------------------------------------------------
                                                       194,515,488   177,871,764

         Less:
           Allowance for loan losses................       722,860       536,280
           Unearned loan fees.......................       802,171       790,021
           Undisbursed portion of loans in process..     2,024,862     1,667,667
         -----------------------------------------------------------------------
         Loans receivable, net......................  $190,965,595   174,877,796
         =======================================================================

         Substantially  all of the Bank's loans  receivable  are mortgage  loans
         secured by residential real estate  properties  located in the state of
         Maryland.  Loans are extended  only after  evaluation  by management of
         customers' creditworthiness, the loan to value ratio and other relevant
         factors.  The  Bank  generally  does  not  lend  more  than  80% of the
         appraised value of a property and requires private  mortgage  insurance
         on residential mortgages with loan-to-value ratios in excess of 80%. In
         addition,  the Bank generally obtains personal  guarantees of repayment
         from  borrowers   and/or  others  for   construction,   commercial  and
         multifamily   residential   loans  and   disburses   the   proceeds  of
         construction  and similar loans only as work  progresses on the related
         property.

         Residential  lending is generally  considered to involve less risk than
         other forms of lending,  although payment  experience on these loans is
         dependent  to some  extent on  economic  and market  conditions  in the
         Bank's lending area.

         Nonaccrual loans totaled  approximately  $2,519,000 and $88,000 at June
         30, 1998 and 1997,  respectively.  For the years  ended June 30,  1998,
         1997 and 1996,  the  amount of  interest  income  that  would have been
         recorded  on  loans in  nonaccrual  status  at year end had such  loans
         performed in accordance  with their terms was  approximately  $281,000,
         $7,000 and $9,000, respectively. The actual interest income recorded on
         these  loans  for the  years  ended  June 30,  1998,  1997 and 1996 was
         approximately $211,000, $4,000 and $7,000, respectively.  No loans were
         impaired, as defined, during 1998, 1997 and 1996.

                                                                     (Continued)

                                       F-17


<PAGE>


LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements



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

   (6)   Continued

         Activity in the allowance for loan losses is summarized as follows:

                                                   1998        1997        1996
         -----------------------------------------------------------------------
         Beginning balance.....................   $536,280    374,797    341,216
         Provision for loan losses.............    191,705    151,240     33,581
         Charge-offs...........................     (5,125)   (19,757)       --
         Transfer from provision for losses
           on deposit..........................        --      30,000        --
         -----------------------------------------------------------------------
         Ending balance........................   $722,860    536,280    374,797
         =======================================================================


   (7)   Property and Equipment

         Property and equipment are summarized as follows at June 30:

                                                                         Useful
                                                                         life in
                                                   1998        1997       years
         -----------------------------------------------------------------------
         Land................................. $   68,449     68,449         -- 
         Building and improvements............    864,388    817,112    50 years
         Furniture, fixtures and equipment....    948,766    896,902  3-10 years
         -----------------------------------------------------------  ==========
         Total, at cost........................  1,881,603  1,782,463

         Less accumulated depreciation.........  1,030,338    918,640
         ------------------------------------------------------------
         Ending balance........................ $  851,265    863,823
         ============================================================


                                                                     (Continued)

                                       F-18


<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(8)  Savings Accounts

     Savings accounts are summarized as follows at June 30:

                                Weighted
                              average rate        1998               1997
                              ------------ ------------------ ------------------
Type of Account               1998   1997     Amount      %      Amount      %
--------------------------------------------------------------------------------
Certificates ...............  5.66%  5.70% $151,731,316   62% $127,102,568   55%
--------------------------------------------------------------------------------
Anniversary bonus account ..  3.33%  3.37%    5,106,781    2     6,491,093    3
Money Market Deposit .......  4.78%  4.77%   63,792,586   26    75,023,364   32
Passbook ...................  3.35%  3.35%   18,352,118    7    18,857,971    8
NOW and demand deposits ....  1.86%  1.80%    6,286,801    3     5,115,013    2
--------------------------------------------------------------------------------
                                             93,538,286   38   105,487,441   45
--------------------------------------------------------------------------------
                                           $245,269,602  100% $232,590,009  100%
================================================================================
Certificate accounts mature as follows:
  Within 12 months ......................  $ 91,165,891   60% $ 76,622,105   60%
  12 to 24 months .......................    44,366,567   29    29,458,472   23
  24 to 36 months .......................    10,046,627    7    14,365,437   12
  36 to 48 months .......................     3,118,966    2     4,185,933    3
  48 to 60 months .......................     3,033,265    2     2,470,621    2
--------------------------------------------------------------------------------
                                           $151,731,316  100% $127,102,568  100%
================================================================================

     At June 30,  1998 and  1997,  the Bank had  customer  deposits  in  savings
     accounts of $100,000 or more of approximately  $48,655,000 and $39,141,000,
     respectively.

     Interest  expense on savings  deposits  consists of the  following  for the
     years ended June 30:

                                           1998           1997           1996
     ---------------------------------------------------------------------------
     Time deposits ..................  $ 7,905,150      7,212,849      7,059,387
     Checking and money market ......    3,607,568      3,734,784      3,493,648
     Passbook and other .............      601,430        601,001        603,223
     ---------------------------------------------------------------------------
                                       $12,114,148     11,548,634     11,156,258
     ===========================================================================

                                                                     (Continued)

                                      F-19

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(9)  Income Taxes

     The  provision for income taxes is comprised of the following for the years
     ended June 30:

                                            1998           1997          1996
     ---------------------------------------------------------------------------
     Current:
       Federal ........................  $1,767,197     1,326,458     1,558,683
       State ..........................     214,501       266,206       345,060
     ---------------------------------------------------------------------------
                                          1,981,698     1,592,664     1,903,743
     ---------------------------------------------------------------------------
     Deferred:
       Federal ........................     (70,925)     (110,303)     (136,715)
       State ..........................     (15,701)      (24,419)      (30,266)
     ---------------------------------------------------------------------------
                                            (86,626)     (134,722)     (166,981)
     ---------------------------------------------------------------------------
                                         $1,895,072     1,457,942     1,736,762
     ===========================================================================

     The net deferred tax  liability at June 30, 1998 and 1997 consists of total
     deferred tax assets of $793,358 and $728,389, respectively and deferred tax
     liabilities of $2,089,359 and $1,790,608,  respectively. The tax effects of
     temporary  differences between the financial reporting and income tax basis
     of assets and liabilities relate to the following:

                                                                June 30
                                                       -------------------------
                                                           1998         1997
     ---------------------------------------------------------------------------
     Interest and fees on loans ...................... $        --      122,406
     Tax bad debt reserve in excess of base year .....    (399,863)    (499,829)
     Allowance for losses on loans ...................     279,169      207,111
     Federal Home Loan Bank stock dividends ..........    (373,687)    (373,687)
     Deferred compensation ...........................     203,886      127,157
     Management Recognition Plan .....................     116,776      129,276
     Unrealized gains on securities available
       for sale, net .................................  (1,211,945)    (891,537)
     Other, net ......................................      89,663      116,884
     ---------------------------------------------------------------------------
                                                       $(1,296,001)  (1,062,219)
     ===========================================================================

                                                                     (Continued)

                                      F-20

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(9)  Continued

     A  reconciliation  between the  provision  for income  taxes and the amount
     computed by multiplying income before income taxes by the statutory Federal
     income tax rate (34%) is as follows for the years ended June 30:

                                                  1998        1997       1996
     ---------------------------------------------------------------------------
     Federal income taxes at statutory rate .. $1,768,368  1,299,845  1,537,958
     State income taxes, net of Federal
       income tax benefit ....................    131,208    159,579    207,764
     Other, net ..............................     (4,504)    (1,482)    (8,960)
     ---------------------------------------------------------------------------
                                               $1,895,072  1,457,942  1,736,762
     ===========================================================================

(10) Regulatory Matters

     The Federal Deposit Insurance Corporation,  through the Savings Association
     Insurance Fund (SAIF),  insures deposits of  accountholders up to $100,000.
     The Bank pays an annual premium to provide for this insurance.  The Bank is
     also a member of the  Federal  Home Loan Bank  System  and is  required  to
     maintain  an  investment  in the  stock of the  Federal  Home  Loan Bank of
     Atlanta  equal to at  least  1% of the  unpaid  principal  balances  of its
     residential  mortgage  loans,  .3%  of  its  total  assets  or  5%  of  its
     outstanding  advances  from the Bank,  whichever is greater.  Purchases and
     sales of stock are made directly with the Bank at par value.

     During 1997, the Bank paid a special assessment of approximately $1,383,000
     as a result of the  federally-mandated  recapitalization  of the SAIF.  The
     assessment  was  required  of  substantially  all  SAIF-insured  depository
     institutions and was charged to noninterest expense.

     The Bank is subject to various regulatory capital requirements administered
     by  the  federal  banking   agencies.   Failure  to  meet  minimum  capital
     requirements  can  initiate  certain  mandatory - and  possibly  additional
     discretionary  - actions by regulators  that, if  undertaken,  could have a
     direct material effect on the Bank's  financial  statements.  Under capital
     adequacy  guidelines  and the  regulatory  framework for prompt  corrective
     action,  the Bank  must  meet  specific  capital  guidelines  that  involve
     quantitative  measures  of the  Bank's  assets,  liabilities,  and  certain
     off-balance-sheet   items  as  calculated   under   regulatory   accounting
     practices.  The Bank's capital amounts and  classification are also subject
     to  qualitative   judgments  by  the  regulators  about  components,   risk
     weightings, and other factors.

                                                                     (Continued)

                                      F-21

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(10) Continued

     Quantitative  measures established by regulation to ensure capital adequacy
     require the Bank to maintain  minimum amounts and ratios (as defined in the
     regulations  and as set forth in the table below,  as defined).  Management
     believes,  as of June 30,  1998,  that the Bank meets all capital  adequacy
     requirements to which it is subject.

     As of June 30, 1998, the most recent notification from the Office of Thrift
     Supervision  (OTS)  categorized  the  Bank as well  capitalized  under  the
     regulatory  framework for prompt corrective action. There are no conditions
     or events since that notification that management believes have changed the
     institution's category.

     Regulatory  capital  amounts  and ratios  for the Bank are as  follows  (in
     thousands):

<TABLE>
<CAPTION>
                                                                              To Be Well
                                                                          Capitalized Under
                                                     For Capital          Prompt Corrective
                                       Actual      Adequacy Purposes      Action Provisions
                                   --------------  -----------------  -------------------------
                                    Amount  Ratio    Amount   Ratio    Amount        Ratio
-----------------------------------------------------------------------------------------------
<S>                                <C>      <C>     <C>       <C>     <C>      <C>
As of June 30, 1998:
  Tier I core capital(a) ........  $47,346  15.80%  $11,985   4.00%   $14,982  greater than  5%
  Tier I risk-based capital(b) ..   47,346  32.76%    5,781   4.00%     8,672  greater than  6%
  Total risk-based capital(b) ...   48,069  33.26%   11,563   8.00%    14,453  greater than 10%

As of June 30, 1997:
  Tier I core capital(a) ........  $45,333  15.92%  $11,389   4.00%   $14,235  greater than  5%
  Tier I risk-based capital(b) ..   45,333  34.98%    5,185   4.00%     7,777  greater than  6%
  Total risk-based capital(b) ...   45,869  35.39%   10,369   8.00%    12,962  greater than 10%
===============================================================================================
</TABLE>
(a)  Percentage of capital to ending assets
(b)  Percentage of risk-based capital to ending risk-weighted assets


                                                                     (Continued)

                                      F-22

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(11) Retirement Benefit and Deferred Compensation Plans

     The Bank has a 401(k) Employee  Investment Plan covering  substantially all
     employees.  Participation is voluntary and employee contributions are based
     on a percentage of compensation,  ranging from a minimum of 1% to a maximum
     of 10%. The Bank matches the  employee's  contribution  not to exceed 6% of
     compensation or a maximum of $2,400 annually.  The Bank contributed a total
     of $34,432, $29,565 and $29,466 for the years ended June 30, 1998, 1997 and
     1996, respectively.

     During 1993,  the Bank  implemented a supplemental  retirement  income plan
     (SERP) for  executive  officers.  The SERP  supplements  the 401(k) plan to
     bring officer  retirement  benefits up to targeted levels (2% for each year
     of  service,  not to exceed 70% of final  salary).  In  addition,  the SERP
     provides death benefit protection for officers' beneficiaries.  The cost of
     each participant's  retirement benefits are being expensed and accrued over
     the  participant's  active employment so as to result in a liability at the
     retirement  date equal to the present value of the benefits  expected to be
     provided.

     The accrued  liability  under the SERP amounted to $184,723 and $158,850 as
     of June 30, 1998 and 1997, respectively.  The accrued liability is included
     in accrued  expenses and other  liabilities.  The Bank  expensed  $116,468,
     $103,877  and  $118,403  under the SERP for the years ended June 30,  1998,
     1997 and 1996, respectively.

     During 1993,  the Bank  implemented  a plan for the deferral of  Directors'
     fees, which is non-qualified for income tax purposes. The plan is optional,
     and fees  deferred are recorded as an expense and an unfunded  liability of
     the Bank. The accrued liability for these benefits amounted to $348,367 and
     $256,487  at June 30,  1998 and  1997,  respectively,  and is  included  in
     accrued expenses and other liabilities.  The Bank expensed $94,692, $78,842
     and  $66,834  for  the  years  ended  June  30,  1998,   1997,   and  1996,
     respectively.

     The Bank also has deferred compensation agreements with one current officer
     to provide certain death and retirement benefits.  The benefits payable are
     accrued annually by charges to income amounting to $1,383 in 1998, 1997 and
     1996.  The accrued  liability  for these  benefits  amounted to $28,210 and
     $26,827 at June 30, 1998 and 1997, respectively, and is included in accrued
     expenses and other liabilities.

     During 1997, the Bank  established a Directors  Retirement Plan, which is a
     non-qualified  plan for income tax purposes that  guarantees  each Director
     will be paid 75% of their  current  fees for 10 years or until  death after
     they retire. The benefits payable are accrued annually and are based on the
     retirement  age  selected  by each  director  and an assumed 4% increase in
     salaries until retirement.  The accrued liability for these benefits amount
     to $151,352 and $45,938 at June 30, 1998 and June 1997,  respectively,  and
     is included in accrued  expenses and other  liabilities.  The Bank expensed
     $105,414 and $45,938 for the years ended June 30, 1998 and 1997.


                                                                     (Continued)

                                      F-23

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(11) Continued

     The Bank has invested in whole-life  insurance policies on the lives of the
     individual  participants for purposes of providing income and assets in the
     future to offset the costs of the officers and directors'  plans.  The life
     insurance companies and related investments are as follows at June 30:

                                                           1998           1997
     ---------------------------------------------------------------------------
     Transamerica ...................................   $3,218,642     2,185,807
     American General ...............................    1,885,608            --
     Massachusetts Mutual ...........................      578,777       548,928
     Pacific Mutual .................................      449,902       418,458
     ---------------------------------------------------------------------------
                                                        $6,132,929     3,153,193
     ===========================================================================

(12) Stock Based Benefit Plans

     The Bank has  established an Employee  Stock  Ownership Plan (ESOP) for its
     employees.  All employees of the Bank who attain the age of 21 and complete
     one year of service  with the Bank will be eligible to  participate  in the
     ESOP.  Participants  will become 100% vested in their  accounts  after five
     years of service with the Bank or, if earlier,  upon death,  disability  or
     attainment of normal  retirement age.  Participants will receive credit for
     service with the Bank prior to the  establishment of the ESOP. On April 29,
     1994 the ESOP borrowed  $960,000 from an unrelated third party lender under
     a ten year term bearing interest at Federal funds rate plus 2.5% per annum,
     with payments of principal  and interest due  quarterly.  Annual  principal
     payments amount to $96,000.  The proceeds of the loan were used by the ESOP
     to acquire  144,000 shares of the Bank's common stock upon  conversion to a
     capital  stock form of  organization.  The ESOP holds the common stock in a
     trust for allocation  among  participating  employees,  which occurs as the
     ESOP  repays the loan.  The ESOP's  sources  of  repayment  of the loan are
     dividends on the common stock, if any, either held in trust or allocated to
     the participants'  accounts,  and quarterly  contributions from the Bank to
     the ESOP and earnings thereon.  For the years ended June 30, 1998, 1997 and
     1996 the Bank made  contributions  to the ESOP of  $146,944,  $153,895  and
     $160,789, respectively.

     The Bank recognizes the cost of the ESOP in accordance with AICPA Statement
     of Position 93-6 Employers'  Accounting for Employee Stock Ownership Plans.
     Accordingly,  the  debt of the  ESOP is  recorded  as debt  and the  shares
     pledged as collateral are reported as unearned ESOP shares in the statement
     of financial  condition.  As shares are released from collateral,  the Bank
     reports  compensation  expense  equal to the  current  market  price of the
     shares   and  the  shares   become   outstanding   for   earnings-per-share
     computations.  Dividends on allocated shares are recorded as a reduction of
     retained  earnings;  dividends  on  unallocated  shares are  recorded  as a
     reduction  of debt  and  accrued  interest.  The Bank  recognized  interest
     expense of $50,944, $57,895 and $64,789 and compensation expense of


                                                                     (Continued)

                                      F-24

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(12) Continued

     $320,787, $172,743 and $164,254, respectively,  related to the ESOP for the
     years ended June 30, 1998,  1997 and 1996.  The amount of dividends on ESOP
     shares used for debt  service by the ESOP for the years ended June 30, 1998
     and 1997 was $48,380 and $50,204, respectively. The related tax benefits to
     the Bank for dividends paid to the ESOP were not material.  The ESOP shares
     as of June 30 were as follows:

                                                           1998           1997
     ---------------------------------------------------------------------------
     Allocated shares ...............................       63,286        47,337
     Shares earned, but unallocated .................        7,587         8,133
     Unearned shares ................................       73,127        88,530
     ---------------------------------------------------------------------------
                                                           144,000       144,000
     ---------------------------------------------------------------------------
     Fair value of unearned shares at June 30 .......   $1,334,568     1,128,758
     ===========================================================================

     Effective  October 28, 1994 the Bank  established a Management  Recognition
     Plan (MRP) to retain  personnel of experience  and ability in key positions
     of responsibility.  Members of the Board of Directors and certain executive
     officers of the Bank will receive a total of 72,000 shares of stock.  These
     shares were issued at the time the MRP was adopted. Participants in the MRP
     generally become one-fifth vested in the shares that they are awarded under
     the MRP on each anniversary of the effective date of the MRP.

     In accordance with generally accepted accounting  principles,  common stock
     purchased by the MRP represents unearned compensation and, accordingly,  is
     reflected as a reduction of capital and recognized as expense and additions
     to capital as the awards are earned.  Compensation expense in the amount of
     the fair  market  value  of the  common  stock at the date of the  grant is
     recognized  on a pro-rata  basis over the years during which the shares are
     earned.  If a  participant  terminates  employment  for reasons  other than
     death, retirement or disability,  he or she forfeits all rights to unvested
     shares. The Bank recognized compensation expense of $48,234 and $92,287 for
     fiscal years ended June 30, 1998 and 1997 related to MRP awards.

(13) Postretirement Benefits Other Than Pensions

     Postretirement benefits other than pensions generally require a calculation
     of the actuarial  present value of anticipated  benefits to be provided and
     an accrual and allocation of those  benefits  through a charge to operating
     expense in the  periods in which  employees  must  render the  services  to
     receive such benefits. The Bank offers a postretirement health care benefit
     plan to certain employees and Directors. Such postretirement benefits costs
     were $46,000 for 1998 and 1997 and $45,000 for 1996.

                                                                     (Continued)

                                      F-25

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(13) Continued

     Net costs included the following components for the years ended June 30:

                                                       1998      1997      1996
     ---------------------------------------------------------------------------
     Service cost .................................  $ 9,000     9,000     9,000
     Interest cost ................................   22,000    22,000    21,000
     Amortization of transition obligation ........   15,000    15,000    15,000
     ---------------------------------------------------------------------------
     Net cost .....................................  $46,000    46,000    45,000
     ===========================================================================

     A summary of the unfunded plan's status and the Bank's  recorded  liability
     recognized in the balance sheet at June 30 follows:

                                                            1998         1997
     ---------------------------------------------------------------------------
     Accumulated postretirement benefit obligation:
       Retirees .......................................  $(193,000)    (181,000)
       Fully eligible active employees ................    (26,000)     (24,000)
       Other active participants ......................   (140,000)    (132,000)
     ---------------------------------------------------------------------------
                                                          (359,000)    (337,000)
     Unrecognized transition obligation ...............    247,000      262,000
     ---------------------------------------------------------------------------
     Recorded liability ...............................  $(112,000)     (75,000)
     ===========================================================================

     The assumed  health care cost trend rate used to measure the expected  cost
     of benefits covered by the plan for 1998 is 8.0%, and decreases by .5% each
     year until 2004,  when a 5% rate is used as the  ultimate  trend  rate.  An
     increase of 1% in the  assumed  health care cost trend rate for each future
     year will  increase  service and  interest  cost by $5,000 and increase the
     accumulated  postretirement  benefit obligation for health care benefits by
     $46,000.  A  weighted  average  assumed  discount  rate  of 7.5% is used to
     measure the accumulated postretirement benefit obligation.

                                                                     (Continued)

                                      F-26

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(14) Financial Instruments

     The Bank's  exposure to credit loss in the event of  nonperformance  by the
     other party to the  financial  instrument  is  represented  by the contract
     amount of the financial instrument.  The Bank uses the same credit policies
     in making  commitments for  off-balance-sheet  financial  instruments as it
     does for on-balance-sheet financial instruments. Financial instruments with
     off-balance-sheet risk are as follows at June 30, 1998:

                                                                       Contract
                                                                        amount
     ---------------------------------------------------------------------------
     Undisbursed lines of credit on home equity loans .............  $13,182,000
     Residential mortgage loans to be funded ......................    1,023,000
     ---------------------------------------------------------------------------
                                                                     $14,205,000
     ===========================================================================

     The  Bank had  outstanding  mortgage  loan  commitments,  exclusive  of the
     undisbursed  portion of loans in process,  of approximately  $1,023,000 for
     fixed rate loans at June 30, 1998. There were no outstanding  mortgage loan
     commitments  for floating  rate loans at June 30, 1998.  The interest  rate
     range on fixed rate  mortgage loan  commitments  was 6.50% to 7.88% and all
     commitments expire within one year.

     Commitments  to extend credit are  agreements to lend to a customer as long
     as there is no  violation of any  condition  established  in the  contract.
     Commitments  generally  have fixed  expiration  dates or other  termination
     clauses.   The  Bank  evaluates  each  customer's   creditworthiness  on  a
     case-by-case basis.

     The Bank has an  unsecured  line of  credit  with  First  National  Bank of
     Maryland for $2 million. There were no borrowings as of June 30, 1998.


(15) Disclosures About Fair Value of Financial Instruments

     All entities are required to disclose the  estimated  fair value of certain
     on- and off-balance sheet financial  instruments.  Fair value estimates and
     the method and  assumptions  used to determine them are set forth below for
     financial instruments outstanding at June 30, 1998 and 1997.

                                                                     (Continued)

                                      F-27

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(15) Continued

     The carrying  value and estimated  fair value of financial  instruments  is
     summarized as follows at June 30:

                                          1998                     1997
                                ------------------------  ----------------------
                                  Carrying       Fair      Carrying      Fair
                                   amount        value      amount       value
--------------------------------------------------------------------------------
Assets:
  Cash and interest-bearing
    deposits .................. $ 13,675,554  13,676,000  13,330,928  13,331,000
  Short-term investments ......    4,776,681   4,777,000   2,722,336   2,722,000
  Short-term loans to
    commerical banks ..........   18,405,234  18,405,000   9,735,532   9,736,000
  Securities purchased under
    agreements to resell ......           --          --   5,517,903   5,542,000
  Securities available for sale    8,034,695   8,035,000   8,162,419   8,162,000
  Investment securities .......   40,669,525  40,582,000  43,614,562  43,361,000
  Mortgage-backed securities ..   16,514,383  16,924,000  22,294,337  22,777,000
  Loans receivable ............  190,965,595 194,222,000 174,877,796 175,303,000

Liabilities:
  Savings accounts ............  245,269,602 245,777,000 232,590,009 232,979,000
  Borrowed funds ..............      552,000     552,000     648,000     648,000
  Advances payments by
    borrowers for taxes,
    insurance and ground rents  $  5,006,020   5,006,000   4,804,060   4,804,000
================================================================================

     Cash, Cash Equivalents, Investments and Mortgage-Backed Securities

     For cash and cash equivalents,  the carrying value  approximates fair value
     due to the short  maturity  of these  instruments.  The fair  value of U.S.
     Government and agency  obligations,  equity securities and  mortgage-backed
     securities  is  estimated  based  on  bid  prices  published  in  financial
     newspapers or bid quotations  received from  securities  dealers.  The fair
     value of  Federal  Home Loan  Bank  stock is  estimated  to be equal to its
     carrying amount since it is not a publicly traded equity  security,  it has
     an adjustable dividend rate, and all transactions in the stock are executed
     at the stated par value.

     Loans Receivable

     The fair value of loans receivable is estimated by discounting  future cash
     flows  using  current  rates  for  which  similar  loans  would  be made to
     borrowers with similar credit history and maturities.

                                                                     (Continued)

                                      F-28

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(15) Continued

     Savings Accounts, Borrowed Funds and Advance Payments by Borrowers for
     Taxes, Insurance and Ground Rents

     The fair value of savings accounts,  other than certificate  accounts,  and
     advance payments by borrowers for taxes,  insurance and ground rents is the
     amount payable on demand at June 30. The fair value of certificate accounts
     is based on the lower of redemption (net of penalty) or discounted value of
     contractual  cash flows.  Discount  rates for  certificates  of deposit are
     estimated using the rates  currently  offered by the Bank for accounts with
     similar remaining  maturities.  Borrowed funds are considered to be at fair
     value due to their adjustable rate nature.

     Commitments to Extend Credit

     The fair value of commitments to extend credit is estimated  using the fees
     currently charged to enter into similar agreements, taking into account the
     remaining terms of the agreements and the present  creditworthiness  of the
     counterparties.  For fixed-rate loan commitments, fair value also considers
     the difference  between  current levels of interest rates and the committed
     rates. The fair value of unrecognized financial instruments is estimated to
     equal  the  carrying  value.  See  note  14 to the  consolidated  financial
     statements for the contract amounts of unrecognized financial instruments.

(16) Plan of Reorganization, Stock Issue and Stockholders' Equity

     In March 1994, the Association's  members approved a plan of reorganization
     from a mutual savings association to a mutual holding company.  Pursuant to
     the plan of reorganization the Association transferred substantially all of
     its assets and all of its  liabilities to a new  federally-chartered  stock
     savings association which became a wholly owned subsidiary of Leeds Federal
     Bankshares,   M.H.C.   (MHC),  a  federal  mutual  holding   company.   The
     reorganization was consummated on April 29, 1994.

     The  principal  purpose  of  the   reorganization  was  to  reorganize  the
     Association into a corporate form that provides it with more flexibility to
     raise capital, diversify operations and establish employee incentive plans.
     Under  the  terms  of  the  reorganization  the  membership  rights  of the
     Association's  members  became rights in the mutual  holding  company.  The
     reorganization  was accounted for in a manner  similar to that of a pooling
     of interests.

     As discussed in note 1 to the financial  statements,  the Association  also
     adopted  a federal  savings  bank  charter  and  changed  its name to Leeds
     Federal Savings Bank.

                                                                     (Continued)

                                      F-29

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(16) Continued

     Under the  corporate  form of  organization,  the Bank has the authority to
     issue  shares of  capital  stock to  persons  other than MHC up to 49.9% (a
     minority  ownership  interest) of the shares  issued and  outstanding.  The
     reorganization  was  consummated  on April 29, 1994,  with the issuance and
     sale of 1.2 million  shares of common stock at $10.00 per share in a public
     offering and the  issuance of 2.2 million  shares of common stock to MHC by
     the Bank.

     OTS regulations impose limitations on all capital  distributions by savings
     institutions.  Capital  distributions  include cash dividends,  payments to
     repurchase or otherwise acquire the savings  association's share,  payments
     to  shareholders  of another  institution in a cash-out  merger,  and other
     distributions  charged against capital. The rule establishes three tiers of
     institutions.  An  institution  that  exceeds all fully  phased-in  capital
     requirements  before and after a  proposed  capital  distribution  ("Tier 1
     institution")  may, after prior notice but without the approval of the OTS,
     make  capital  distributions  during a year up to 100% of its net income to
     date  during the 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  year;  or 75% of its net
     income over the most recent  four-quarter  period.  Any additional  capital
     distributed requires prior regulatory approval.

     An institution that meets its regulatory capital  requirement,  but not its
     fully   phased-in   capital   requirement   before  or  after  its  capital
     distribution ("Tier 2 institution") may, after prior notice but without the
     approval of the OTS,  make capital  distributions  of: up to 75% of its net
     income  over the most  recent  four  quarter  period  if it  satisfies  the
     risk-based capital requirement that would be applicable to it on January 1,
     1993, computed based on its current portfolio;  up to 50% of its net income
     over the most recent four  quarter  period if it  satisfies  the risk based
     capital  standard that was  applicable  to it on January 1, 1991,  computed
     based on its  current  portfolio;  and up to 25% of its net income over the
     most recent  four-quarter  period if it  satisfies  its current  risk based
     capital requirement.  In computing the institution's permissible percentage
     of capital distributions, previous distributions made during the prior four
     quarter period must be included.

     A savings  institution  that does not meet its current  regulatory  capital
     requirement  before or after  payment  of a proposed  capital  distribution
     ("Tier 3 institution") may not make any capital  distributions  without the
     prior approval of the OTS.

     In addition,  the OTS would 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, FDICIA provides that, as a general rule, a financial
     institution   may  not  make  a  capital   distribution   if  it  would  be
     undercapitalized   after  making  the  capital   distribution.   Also,   an
     institution  meeting the Tier 1 capital  criteria  which has been  notified
     that it needs more than normal  supervision  will be treated as a Tier 2 or
     Tier 3 institution unless the OTS deems otherwise.

                                                                     (Continued)

                                      F-30

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(16) Continued

     MHC waived receipt of its quarterly dividends,  thereby reducing the actual
     dividend  payout.  The  dollar  amount  of  dividends  waived  by  MHC  are
     considered  as a  restriction  on the  retained  earnings of the Bank.  The
     amount of any dividend  waived by MHC shall be available for declaration as
     a dividend  solely to MHC. At June 30, 1998, the cumulative  amount of such
     waived dividends was $5,933,400.

(17) Net Income Per Share of Common Stock

     On October 22, 1997, the Board of Directors declared a three-for-two  split
     of the  Company's  common stock,  effected in the form of a stock  dividend
     paid on November  19, 1997 to  shareholders  of record on November 5, 1997.
     All agreements  concerning stock options and other  commitments  payable in
     shares of the Company's common stock provide for the issuance of additional
     shares due to the  declaration  of the stock split.  An amount equal to the
     par value of the common  shares issued plus cash paid in lieu of fractional
     shares was transferred  from additional paid in capital to the common stock
     account. This transfer has been reflected in the Consolidated Statements of
     Stockholders'  Equity at June 30, 1995. All references to number of shares,
     except shares authorized,  and to per share information in the consolidated
     financial  statements  have been  adjusted  to reflect the stock split on a
     retroactive basis.

     The Company  adopted  Statement of Financial  Accounting  Standards No. 128
     Earnings per Share (SFAS No. 128) in 1998. SFAS No. 128 establishes revised
     standards  for computing  and  presenting  earning per share (EPS) data. It
     requires dual  presentation of "basic" and "diluted" EPS on the face of the
     statements of income and  reconciliation of the numerators and denominators
     used in the basic and diluted EPS calculations. As required by SFAS No.128,
     EPS data for prior periods  presented  have been restated to conform to the
     new standard.

     Basic EPS is  calculated  by dividing  net income by the  weighted  average
     number of common shares outstanding for the applicable period.  Diluted EPS
     is calculated  after  adjusting the  numerator and the  denominator  of the
     basic EPS  calculation  for the  effect of all  dilutive  potential  common
     shares  outstanding  during the period. The dilutive effects of options and
     unvested  restricted  stock awards are computed during the "treasury stock"
     method.

                                                                     (Continued)

                                      F-31

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(17) Continued

     Unearned ESOP shares are not included in  outstanding  shares.  Information
     related  to the  calculation  of net  income  per share of common  stock is
     summarized as follows for the years ended June 30:

<TABLE>
<CAPTION>
                                       1998                  1997                  1996
                              ---------------------  --------------------  --------------------
                                 Basic     Diluted     Basic     Diluted     Basic     Diluted
-----------------------------------------------------------------------------------------------
<S>                           <C>         <C>        <C>        <C>        <C>        <C>      
Net income .................. $3,306,000  3,306,009  2,365,131  2,365,131  2,786,644  2,786,644
Dividends on unvested
  common stock awards--MRP ..     (7,872)    (3,107)   (13,824)   (10,250)   (18,153)   (13,452)
-----------------------------------------------------------------------------------------------
Adjusted net income used
  in EPS calculations ....... $3,298,137  3,302,902  2,351,307  2,354,881  2,768,491  2,773,192
===============================================================================================
Weighted average shares
  outstanding ...............  5,091,918  5,091,918  5,062,986  5,062,986  5,023,822  5,023,822
Dilutive securities:
  Options ...................         --     89,885         --     41,888         --     32,761
  Unvested common stock
    awards--MRP .............         --      8,716         --      7,447         --      7,818
-----------------------------------------------------------------------------------------------
Adjusted weighted average
  shares used in EPS
  calculations ..............  5,091,918  5,190,519  5,062,986  5,112,321  5,023,822  5,064,401
===============================================================================================
</TABLE>

(18) Stock Option Plan

     In October  1994,  the Bank  approved the Stock Option Plan (Option  Plan),
     whereby  180,000  shares of common  stock  were  granted  to  officers  and
     directors  of the  Bank.  Options  granted  under  the  Option  Plan may be
     Incentive  Stock Options  within the meaning of Section 422 of the Internal
     Revenue Code of 1986,  as amended,  or  nonqualifying  stock  options.  The
     72,000 shares for directors  vested at grant date, while the 108,000 shares
     for the  officers  vest at a rate  of 20  percent  per  year.  Options  are
     exercisable  at the market  price of the common  stock on the date of grant
     which was $7.91 per share.  The options must be  exercised  within 10 years
     from the date of grant.

     A summary of changes in shares under option and options exercisable for the
     years ended June 30 is presented below:

                                                       1998      1997      1996
     ---------------------------------------------------------------------------
     Outstanding at beginning of year .............  162,000   180,000   180,000
     Granted ......................................       --        --        --
     Canceled .....................................       --    (7,896)       --
     Exercised ....................................  (13,500)  (10,104)       --
     ---------------------------------------------------------------------------
     Outstanding at end of year ...................  148,500   162,000   180,000
     ---------------------------------------------------------------------------
     Exercisable at end of year ...................  133,200   126,000   115,200
     ===========================================================================

                                                                     (Continued)

                                      F-32

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(19) Condensed Financial Information (Parent Company Only)

     Summarized  financial  information  for the Company is as follows as of and
     for the year ended June 30, 1998:

     Statement of Financial Condition

     Cash ......................................................... $    25,663
     Dividend receivable from Bank ................................     375,000
     Investment in Bank ...........................................  49,165,472
     ---------------------------------------------------------------------------
                                                                    $49,566,135
     ===========================================================================
     Accrued expenses and other liabilities ....................... $   258,625
     Stockholders' equity .........................................  49,307,510
     ---------------------------------------------------------------------------
                                                                    $49,566,135
     ===========================================================================
     Statement of Income

     Distributed income ........................................... $ 1,225,000
     Interest income ..............................................       1,903
     ---------------------------------------------------------------------------
     Income before provision for income taxes .....................   1,226,903
     Provision for income taxes ...................................          --
     ---------------------------------------------------------------------------
     Income before equity in undistributed net income of subsidiary   1,226,903
     Equity in undistributed net income of subsidiary .............   2,079,106
     ---------------------------------------------------------------------------
     Net income ................................................... $ 3,306,009
     ===========================================================================
     Statement of Cash Flows

     Cash flows from operating activities:
       Net income ................................................. $ 3,306,009
       Adjustments to reconcile net income to net cash provided
         by operating activities:
           Equity in undistributed net income of subsidiary .......  (2,079,106)
           Increase in dividends receivable .......................    (375,000)
     ---------------------------------------------------------------------------
     Net cash provided by operating activities .................... $   851,903
     ---------------------------------------------------------------------------

                                                                     (Continued)

                                      F-33

<PAGE>

LEEDS FEDERAL BANKSHARES, INC.

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

(19) Continued

     Statement of Cash Flows (continued)

     Cash flows from financing activities:
       Payment of dividends ....................................... $  (260,730)
       Purchase of treasury stock .................................    (772,430)
       Exercise of stock options ..................................     106,920
       Net proceeds from stock exchanged ..........................     100,000
     ---------------------------------------------------------------------------
                                                                       (826,240)
     ---------------------------------------------------------------------------
     Net income in cash and cash equivalents ......................      25,663
     Cash and cash equivalents at beginning of year ...............          --
     ---------------------------------------------------------------------------
     Cash and cash equivalents at end of year ..................... $    25,663
     ===========================================================================






                                      F-34

<PAGE>

                             STOCKHOLDER INFORMATION

Annual Meeting
--------------

The Annual  Meeting of  Stockholders  will be held at 4:00 p.m.,  on October 21,
1998, at the Company's office at 1101 Maiden Choice Lane, Baltimore, Maryland.


Stock Listing
-------------

The Company's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol "LFED."


Special Counsel
---------------

Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Washington, D.C.  20015




Independent Auditors
--------------------

KPMG Peat Marwick LLP
111 South Calvert Street
Baltimore, Maryland  21202


Transfer Agent
--------------

American Stock Transfer and Trust Company
40 Wall Street
New York, New York  10005


Annual Report on Form 10-KSB
----------------------------

A copy of the  Company's  Form 10-KSB for the fiscal  year ended June 30,  1998,
will be furnished  without charge to  stockholders  as of August 31, 1998,  upon
written request to the Secretary,  Leeds Federal  Bankshares,  Inc., 1101 Maiden
Choice Lane, Baltimore, Maryland 21229.


                                       18