U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 1999

                         Commission File No.: 000-24933

                             HERITAGE BANCORP, INC.
                 (Name of Small Business Issuer in its charter)

          VIRGINIA                                  54-1914902

(State or other jurisdiction of          (I.R.S. Employer Identification No.)
incorporation or organization)

                1313 DOLLEY MADISON BLVD., MCLEAN, VIRGINIA 22101
                    (Address of principal executive offices)
                                 (703) 356-6610
                (Issuer's Telephone Number, Including Area Code)

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

                                  COMMON STOCK
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

     The  revenues  for the  issuer's  fiscal year ended  December  31, 1999 are
$4,603,158.

     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was sold,  as of a specified  date within the last 60 days.  On March 20,
2000: $6,103,394.38.

     State the number of shares  outstanding of each of the issuer's  classes of
common  equity,  as of the latest  practicable  date.  The Company had 2,294,617
shares outstanding as of March 24, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

     None.

Transitional Small Business Disclosure Format (check one):
Yes        No   X
    ----       ---


<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          PAGE
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<S>    <C>                                                               <C>
PART I

       ITEM 1.  BUSINESS.................................................... 3
       ITEM 2.  PROPERTIES..................................................16
       ITEM 3.  LEGAL PROCEEDINGS...........................................16
       ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........17

PART II

       ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS.........................................17
       ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS........................18
       ITEM 7.  FINANCIAL STATEMENTS........................................35
       ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE.........................35

PART III

       ITEM 9.  DIRECTORS,  EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL
                PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
                AND PRINCIPAL OFFICERS OF THE COMPANY.......................35
       ITEM 10. EXECUTIVE COMPENSATION......................................37
       ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT..................................................42
       ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............43
       ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K......................43

       AUDITED FINANCIAL STATEMENTS........................................F-1
</TABLE>

FORWARD LOOKING STATEMENTS

     This  Annual  Report  on  Form  10-KSB  contains  certain  forward  looking
statements  consisting  of estimates  with respect to the  financial  condition,
results of  operations  and  business of the Company that are subject to various
factors  which  could  cause  actual  results  to differ  materially  from these
estimates.  These  factors  include:  changes in  general,  economic  and market
conditions;  the  development  of an  adverse  interest  rate  environment  that
adversely affects the interest rate spread or other income  anticipated from the
Company's operations and investments; and depositor and borrower preferences.



                                        2
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Heritage  Bancorp,  Inc. (the "Company"),  a Virginia  corporation,  is the
holding  company  for The  Heritage  Bank (the  "Bank"),  a  Virginia  chartered
commercial  bank.  On October 1, 1998,  the Company  acquired all of the capital
stock of the Bank and the  shareholders  of the Bank became  shareholders of the
Company in a share for share exchange under a plan of reorganization approved by
the  Bank's  shareholders  on August  26,  1998,  whereby  the Bank  became  the
wholly-owned  subsidiary  of the Company (the  "Reorganization").  The Company's
sole  business  activity is ownership of the Bank.  The  Company's  common stock
trades on the Nasdaq  SmallCap  Market under the symbol  "HBVA." At December 31,
1999,  the Company had total assets of $59.9  million,  total  deposits of $48.0
million and total stockholders'  equity of $8.6 million. Net income for the year
ended December 31, 1999 was $182,000,  an increase of $49,000 from net income of
$133,000 for the  comparable  period in 1998.  Basic  earnings per share for the
year ended December 31, 1999 were $0.08 ($0.08 per share, assuming dilution), up
from $0.07 per share  ($0.07 per share,  assuming  dilution)  for the year ended
December 31, 1998. Unless otherwise disclosed, the information presented in this
Annual Report on Form 10-KSB  represents the activity of the Bank for the period
prior  to  October  1,  1998  and  the  activity  of  the  Company  consolidated
thereafter. Unless the context otherwise requires, all references to the Bank or
the Company include the Company and the Bank on a consolidated basis.

     The Bank is the only  independent  financial  institution  headquartered in
McLean,  Virginia.  Established  in 1987,  the Bank  operated as a  wholly-owned
subsidiary of Heritage Bankshares, Inc. (formerly Independent Banks of Virginia,
Inc.),   until  1992  when  it  became  an  independent  bank.  The  Bank  is  a
well-capitalized,   profitable  community  bank  dedicated  to  financing  small
business  and  consumer  needs in its  market  area and  providing  personalized
"hometown"  quality  service to its  customers  by  tailoring  its  products and
services  to  appeal  to  a  local  market.  The  Bank  currently  operates  two
full-service  offices in McLean and  Sterling,  Virginia  and engages in a broad
range of  lending  and  deposit  services  aimed at  individual  and  commercial
customers in Fairfax and Loudoun  Counties,  Virginia.  A third branch in Tysons
Corner, Virginia is projected to open May 2000, subject to regulatory approvals.
The Bank closed its secondary offering of common stock (the "Offering") in which
it sold  805,000  shares of common  stock to the public at a per share  price of
$5.50,  resulting the raising of net proceeds to the Bank of approximately  $4.1
million in May, 1998.

     The business of the Bank consists of  attracting  deposits from the general
public and using  these  funds to  originate  various  types of  individual  and
commercial loans primarily in the McLean area, as well as in Fairfax and Loudoun
counties.  The Bank's commercial activities include providing checking accounts,
money market  accounts  and  certificates  of deposit to small and  medium-sized
businesses.  The Bank also provides  credit  services,  such as lines of credit,
term loans,  construction  loans, and letters of credit,  as well as real estate
loans and other forms of collateralized  financing. The Bank's personal services
include  checking  accounts,  NOW accounts,  savings  accounts,  certificates of
deposit,   installment  loans,  construction  and  other  personal  loans,  home
improvement loans, automobile and other consumer financing.

     The Bank's profitability  depends primarily on its net interest income, the
difference  between  the  interest  income it earns on its loans and  investment
portfolio  and its cost of funds,  which  consists  mainly of  interest  paid on
deposits.   Net  interest  income  is  affected  by  the  relative   amounts  of
interest-earning assets and interest-bearing  liabilities and the interest rates
earned or paid on these balances.  When  interest-earning  assets approximate or
exceed  interest-bearing  liabilities,  any positive  interest  rate spread will
generate net interest income.



                                        3
<PAGE>


     The  Bank's   profitability   is  also  affected  by  the  level  of  other
non-interest income and operating  expenses.  Other income consists primarily of
service  fees,  loan  servicing  and  other  loan  fees  and  gains  on sales of
investment  securities.  Operating  expenses  consist of salaries and  benefits,
occupancy-related expenses, and other general operating expenses.

     The  operations  of the Bank,  and banking  institutions  in  general,  are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial  institutions'  regulatory agencies.  Deposit flows
and the cost of funds are influenced by interest rates on competing  investments
and general  market rates of interest.  Lending  activities  are affected by the
demand for  financing  real estate and other  types of loans,  which in turn are
affected by the interest rates at which such financing may be offered,  strength
of the economy and other factors  affecting loan demand and the  availability of
funds.

ASSET/LIABILITY MANAGEMENT

     A principal  operating  objective of the Bank is to produce stable earnings
by  achieving a favorable  interest  rate  spread that can be  sustained  during
fluctuations  in  prevailing   interest  rates.   Since  the  Bank's   principal
interest-earning assets have longer terms to maturity than its primary source of
funds,  i.e.,  deposit  liabilities,  increases in general  interest  rates will
generally  result in an increase in the Bank's cost of funds before the yield on
its asset portfolio  adjusts upward.  The Bank has sought to reduce its exposure
to adverse  changes in interest  rates by  attempting  to achieve a closer match
between   the   periods   in  which   its   interest-bearing   liabilities   and
interest-earning  assets can be expected to reprice  through the  origination of
adjustable-rate mortgages and loans with shorter terms and the purchase of other
shorter term interest-earning assets.

     The term "interest rate sensitivity" refers to those assets and liabilities
which  mature and reprice  periodically  in response to  fluctuations  in market
rates and  yields.  As noted  above,  one of the  principal  goals of the Bank's
asset/liability  program is to maintain and match the interest rate  sensitivity
characteristics of the asset and liability portfolios.

     In order to  properly  manage  interest  rate  risk,  the  Bank's  Board of
Directors has established an Asset/Liability  Management Committee ("ALCO") made
up of members of  management  and outside  directors  to monitor the  difference
between the Bank's maturing and repricing  assets and liabilities and to develop
and implement  strategies  to decrease the  "negative  gap" between the two. The
primary   responsibilities   of  the   committee   are  to  assess   the  Bank's
asset/liability  mix, recommend strategies to the Board that will enhance income
while managing the Bank's  vulnerability to changes in interest rates and report
to the Board the results of the strategies used.

CREDIT POLICIES

     The Bank utilizes written policies and procedures to enhance  management of
credit risk. The loan portfolio is managed under a  specifically-defined  credit
process.  This process includes  formulation of portfolio  management  strategy,
guidelines  for  underwriting  standards  and risk  assessment,  procedures  for
ongoing  identification  and  management  of credit  deterioration,  and regular
portfolio  reviews to estimate loss exposure and ascertain  compliance  with the
Bank's  policies.  Lending  authority is granted to individual  lending officers
with the  current  highest  limit  being  $150,000  for  secured and $25,000 for
unsecured  loans.  Any two officers acting together may approve a loan up to the
amount of the lower  lending  authority of the two officers.  An Officers'  Loan
Committee  comprised of six officers is  authorized  to approve  credit of up to
$400,000 for secured  loans and $200,000 for unsecured  loans.  Approval of such
credits requires a majority vote of the Officers' Loan Committee. The Directors'
Loan  Committee is  authorized to approve loans up to the legal lending limit of
the Bank.

     The  Bank's  management  generally  requires  that  secured  loans  have  a
loan-to-value ratio of 80% or less. Management believes that when a borrower has
significant  equity in the assets securing the loan, the borrower is less likely
to default on the outstanding loan balance.



                                        4
<PAGE>


     A major element of credit risk  management is  diversification.  The Bank's
objective is to maintain a diverse loan  portfolio to minimize the impact of any
single  event or set of  circumstances.  Concentration  parameters  are based on
factors of individual risk, policy constraints,  economic conditions, collateral
and product type.

     Lending  activities  include  a  variety  of  consumer,   real  estate  and
commercial loans with a strong emphasis on serving the needs of customers within
the Bank's  market  territory.  Consumer  loans are made  primarily on a secured
basis in the form of installment  obligations  or personal lines of credit.  The
focus of real estate  lending is  commercial  mortgages,  but also includes home
improvement  loans,  construction  lending  and home  equity  lines  of  credit.
Commercial  lending is provided to businesses seeking credit for working capital
and the purchase of equipment and facilities.  The principal lending activity of
the Bank is  concentrated  in mortgage loans secured by commercial  real estate,
usually  consisting of commercial and warehouse  facilities in the Bank's market
area.

MARKET AREA

     The Bank  currently  has one  office  serving  the  McLean  area of Fairfax
County,  Virginia,  as well as a branch  office  in  Sterling,  Virginia,  which
primarily serves Loudoun County, Virginia ("Sterling Branch"). From this office,
the Bank  serves its  customers,  many of whom own  businesses  or reside in the
McLean/Great Falls area of Northern Virginia,  which is located eight miles west
of Washington,  DC. The remainder of the Bank's  customers  reside  primarily in
other communities in Fairfax, Arlington and Loudoun counties.

     McLean resides in the  northernmost  part of Fairfax County,  Virginia,  by
most measures,  the wealthiest county in Virginia.  Fairfax County's labor force
of 523,863  ranks  eleventh out of the twenty  largest U.S.  cities and ninth in
number of residents  that can be employed.  The employment  industries  with the
largest  share of the Fairfax  County market are Services with 40% of the market
and Trade with 23% of that market.  Both of these areas contain  customers  that
fit well into the small to medium  sized  businesses  the Bank  serves.  Fairfax
County is also home to many  information  technology  firms  including UUNet and
PSINet.  It is  estimated  that nearly  one-half of all  international  Internet
traffic flows through one of the Fairfax-based access providers.

     McLean  is  home  to the  Central  Intelligence  Agency,  McLean's  largest
employer,  and the Federal Home Loan  Mortgage  Corporation.  The Bank  provides
financial  services to the many professional  service firms,  including lawyers,
accountants,  consultants and engineers. Fairfax County also includes the Tysons
Corner area,  an office and  commercial  district  that is home to a significant
number of  high-technology  employers.  Major employers in Tysons Corner include
INOVA Health  Systems,  EDS,  SAIC and AT&T.  Tysons  Corner is also home to two
major shopping centers and several major hotels. The Bank's projected new branch
will service this area.

     With the opening of the Sterling  branch,  the Bank has expanded its market
area to include a  significant  portion of Loudoun  County,  one of the  fastest
growing counties in the United States.  According to Loudoun county's Department
of  Economic  Development  in January  2000,  the county has one of the  fastest
growing  populations and employment bases in the country with the average income
per household of $93,769. This area is experiencing  significant economic growth
as a result of the  expansion  of the Dulles  International  Airport  technology
corridor  and the influx of  "high-tech"  companies  from  Fairfax  County.  The
Loudoun County market is predominately residential with a healthy mix of retail,
service activities and light industry.

     The Sterling branch is located in the CountrySide Shopping and Professional
Center,  a  350,000  square  foot  retail/professional/medical  campus  near the
entrance to the 2,500 unit  CountrySide  residential  community  that is home to
over 12,000 persons.  The Bank believes that  development now taking place along
the Route 7 and Route 28 corridors,  coupled with the rapid population growth in
eastern Loudoun County, will provide the Bank with the opportunity to expand its
consumer and small business services.


                                        5
<PAGE>


COMPETITION

     The Bank operates in the highly competitive  environment of Fairfax County,
as well as in Loudoun County,  Virginia. It competes for deposits and loans with
commercial  banks,   savings  and  loans,  credit  unions  and  other  financial
institutions,  including non-bank competitors such as loan companies,  insurance
companies  and  large  securities  firms.  Many of these  organizations  possess
substantially greater financial and technical resources than the Bank.

     In Fairfax County, the Bank commands 0.39% of the market,  according to the
most recent  survey of deposits by the  Federal  Deposit  Insurance  Corporation
("FDIC").  Seventeen  banks with 31 branches  operate in the greater McLean area
and 17 of these  branches  are  located in  proximity  to the Bank in the McLean
Central Business District.

     The market is mature and the growth of deposits  and loan demand has slowed
in recent years. While it can produce stable earnings from its operations in the
McLean  office,  the Bank  believes  the  future  growth  of the Bank will be in
expansion to other parts of Northern Virginia.

     There are numerous  commercial banks located in Loudoun County. A number of
mortgage  companies  along with several  non-bank  financial  institutions  also
compete in the area. All are full-service banks and provide a wide array of bank
products and services  like The Heritage  Bank.  The Bank  believes that it will
enjoy a competitive  advantage due to its local  community bank  orientation and
reputation for providing personalized service to its customers.

     With the opening of the Sterling branch in April 1999, the Bank expected to
increase its deposit base, which in turn increased the funds available for loans
and other profitable opportunities for the Bank. While the Bank will continue to
experience a  competitive  environment  in Fairfax and Loudoun  counties,  there
still  exist  opportunities  to  establish  new  branches  in those  areas where
significant population increases and economic growth are occurring. One of those
opportunities  is the planned  opening in May 2000 of the Tysons Corner  branch,
pending  regulatory  approvals,  and the  deposit  and loan base is  expected to
continue to grow.

EMPLOYEES

     At December 31, 1999, the Bank had thirty full-time  equivalent  employees.
None of its employees is represented by any collective bargaining unit. The Bank
considers relations with its employees to be good.

FEDERAL TAXATION

     General. The following is intended only as a discussion of material federal
income tax matters and does not purport to be a comprehensive description of the
federal  income tax rules  applicable  to the Bank or the  Company.  For federal
income tax purposes, the Company and the Bank, as members of the same affiliated
group, file  consolidated  income tax returns on a December 31 fiscal year basis
using the  accrual  method of  accounting  and are  subject  to  federal  income
taxation in the same manner as other corporations.

     Distributions.   To  the   extent   that  the  Bank   makes   "non-dividend
distributions"  to the Company,  such  distributions  will be considered to have
been  made  from the  Bank's  "base  year  reserve",  and then  from the  Bank's
supplemental  reserve for losses on loans, to the extent thereof,  and an amount
based  on the  amount  distributed  (but not in  excess  of the  amount  of such
reserves)  will be included  in the Bank's  income.  Non-dividend  distributions
include  distributions in excess of the Bank's current and accumulated  earnings
and profits,  as calculated  for federal income tax purposes,  distributions  in
redemption  of stock,  and  distributions  in partial or  complete  liquidation.
Dividends  paid out of the Bank's  current or  accumulated  earnings and profits
will not be so included in the Bank's income.


                                        6
<PAGE>


     The  amount  of  additional  taxable  income  created  from a  non-dividend
distribution  is an amount  that,  when reduced by the tax  attributable  to the
income,  is equal to the amount of the  distribution.  Thus, if the Bank makes a
non-dividend  distribution to the Company,  approximately one and one-half times
the  amount  of such  distribution  (but not in  excess  of the  amount  of such
reserves) would be includible in income, assuming a 34% federal corporate income
tax rate.  The Bank does not  intend to pay  dividends  that  would  result in a
recapture of any portion of its bad debt reserves.

     Corporate  Alternative  Minimum  Tax.  The Code  imposes a tax  ("AMT")  on
alternative  minimum  taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating  loss  carryovers of which the Bank currently has
none. AMTI is also adjusted by determining the tax treatment of certain items in
a manner that  negates the  deferral  of income  resulting  from the regular tax
treatment of those items.  The Company and the Bank have not been subject to the
AMT during the past five years.

     Elimination of Dividends;  Dividends  Received  Deduction.  The Company may
exclude from its income 100% of dividends  received from the Bank as a member of
the same affiliated group of corporations.

STATE TAXATION

     The Bank is exempt  from paying  state  income tax to the  Commonwealth  of
Virginia.  Under  Virginia law,  however,  banks must pay a franchise tax at the
rate of $1 on each $100 of net  capital  as  defined  under  Virginia  law.  For
additional  information regarding taxation, see Note 8 of the Notes to Financial
Statements.

REGULATION AND SUPERVISION

     The Bank is  extensively  regulated  under both  federal and state law. The
following  is a  brief  summary  of  certain  statutes,  rules  and  regulations
affecting the Company and the Bank. This summary is qualified in its entirety by
reference to the  particular  statutory and  regulatory  provisions  referred to
below and is not  intended to be an  exhaustive  description  of the statutes or
regulations applicable to the Bank's business.

FINANCIAL SERVICES MODERNIZATION LEGISLATION

     On   November   12,   1999,   President   Clinton   signed   into  law  the
Gramm-Leach-Bliley  Financial  Services  Modernization  Act of 1999 (the "Act"),
federal  legislation  intended to modernize the financial  services  industry by
establishing a comprehensive  framework to permit  affiliations among commercial
banks,  insurance  companies,  securities  firms  and  other  financial  service
providers. Generally, the Act:

o    repeals the historical  restrictions  and eliminates many federal and state
     law barriers to  affiliations  among  banks,  securities  firms,  insurance
     companies and other financial service providers;

o    provides  a  uniform  framework  for  the  functional   regulation  of  the
     activities of banks, savings institutions and their holding companies;

o    broadens the activities  that may be conducted by national  banks,  banking
     subsidiaries of bank holding companies and their financial subsidiaries;

o    provides  an  enhanced  framework  for  protecting  the privacy of consumer
     information;

o    adopts a number of provisions  related to the  capitalization,  membership,
     corporate  governance and other measures  designed to modernize the Federal
     Home Loan Bank system;

o    modifies  the  laws   governing   the   implementation   of  the  Community
     Reinvestment Act; and

o    addresses a variety of other legal and  regulatory  issues  affecting  both
     day-to-day operations and long-term activities of financial institutions.



                                        7
<PAGE>

     Bank holding  companies  will be permitted to engage in a wider  variety of
financial  activities than permitted under prior law,  particularly with respect
to insurance and securities activities. In addition, in a change from prior law,
bank holding companies will be in a position to be owned, controlled or acquired
by any company engaged in financially-related activities.

     We do not believe that the Act will have a material  adverse  effect on our
operations  in the  near-term.  However,  to the extent  that it permits  banks,
securities firms and insurance  companies to affiliate,  the financial  services
industry may experience  further  consolidation.  This could result in a growing
number of larger financial  institutions that offer a wider variety of financial
services  than we  currently  offer  and that can  aggressively  compete  in the
markets we currently serve.

REGULATION OF THE BANK

     The Bank is organized as a  Virginia-chartered  banking  corporation and is
regulated and supervised by the Virginia State Corporation  Commission  ("SCC").
In addition, as a state member bank, the Bank is regulated and supervised by the
FRB, which serves as its primary  federal  regulator,  and is subject to certain
regulations  promulgated  by the  FDIC.  The SCC and  the  FRB  conduct  regular
examinations of the Bank, reviewing the adequacy of its loan loss reserves,  the
quality of its loans and  investments,  the propriety of  management  practices,
compliance  with  laws  and  regulations,   and  other  aspects  of  the  Bank's
operations. In addition to these regular examinations,  the Bank must furnish to
the  FRB  semi-annual  reports  containing  detailed  financial  statements  and
schedules.

     Federal and Virginia  banking laws and regulations  govern all areas of the
operations of the Bank, including reserves, loans, mortgages,  capital, issuance
of securities,  payment of dividends and establishment of branches.  Federal and
state bank  regulatory  agencies  also have the general  authority  to limit the
dividends paid by insured banks. See "--Limits on Dividends and Other Payments."
As its primary  federal  regulator,  the FRB has authority to impose  penalties,
initiate  civil and  administrative  actions  and take other  steps  intended to
prevent the Bank from engaging in unsafe or unsound  practices.  In this regard,
the Federal  Reserve has adopted  capital  adequacy  requirements  applicable to
state member banks such as the Bank. See "--Capital Requirements."

     Transactions with Affiliates and Insiders of the Bank. Transactions between
an insured bank,  such as the Bank,  and any of its  affiliates  are governed by
Sections  23A and 23B of the Federal  Reserve Act. An affiliate of a bank is any
company or entity which  controls,  is controlled by or is under common  control
with the bank. Generally, Sections 23A and 23B (i) limit the extent to which the
bank or its  subsidiaries  may  engage in  "covered  transactions"  with any one
affiliate  to an amount  equal to 10% of such  institution's  capital  stock and
surplus,  and limit all such transactions with all affiliates to an amount equal
to 20% of such  capital  stock  and  surplus  and  (ii)  require  that  all such
transactions  be on terms  that are  consistent  with  safe  and  sound  banking
practices.  In  addition,  any  purchase of assets or services by a bank from an
affiliate  must be on terms  that are  substantially  the  same,  or at least as
favorable,   to  the   institution   as  those  that  would  be  provided  to  a
non-affiliate.  The term  "covered  transaction"  includes  the making of loans,
purchase  of  assets,   issuance  of  guarantees  and  similar  other  types  of
transactions.  Further,  most loans by a bank to its affiliate must be supported
by collateral in amounts ranging from 100 to 130 percent of the loan amounts.

     Banks are also subject to the  restrictions  contained in Section  22(h) of
the Federal Reserve Act and the Federal Reserve Board's  Regulation O thereunder
on loans to executive  officers,  directors  and principal  stockholders.  Under
Section 22(h),  loans to a director,  an executive officer or a greater than 10%
stockholder  of a bank as well as  certain  affiliated  interests  of any of the
foregoing,  may not exceed,  together with all other  outstanding  loans to such
person and affiliated interests, the  loans-to-one-borrower  limit applicable to
national  banks  (generally  15% of the  institution's  unimpaired  capital  and
surplus),  and all loans to all such persons in the aggregate may not exceed the
institution's  unimpaired  capital and  unimpaired  surplus.  Regulation  O also
prohibits  the  making  of loans in an amount  greater  than  $25,000,  or 5% of
capital and  surplus but in any event over  $500,000,  to  directors,  executive
officers and greater than 10% stockholders of a bank, and their


                                        8
<PAGE>


respective affiliate, unless such loans are approved in advance by a majority of
the  Board  of  Directors  of  the  bank  with  any  "interested"  director  not
participating  in the  voting.  Further,  Regulation  O  requires  that loans to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as those that are offered in comparable  transactions to
other persons.  Regulation O also prohibits a depository institution from paying
the overdrafts over $1,000 of any of its executive  officers or directors unless
they are paid pursuant to written pre-authorized extension of credit or transfer
of funds plans.

     Community  Reinvestment.  Under the Community Reinvestment Act, any insured
depository  institution,  including the Bank, has a continuing  and  affirmative
obligation  consistent with its safe and sound operation to help meet the credit
needs of its entire community,  including low and moderate income neighborhoods.
The Community  Reinvestment Act does not establish specific lending requirements
or  programs  for  financial  institutions,  nor does it limit an  institution's
discretion  to develop the types of products and  services  that it believes are
best suited to its particular community. The Community Reinvestment Act requires
the FRB, in connection  with its  examination  of a state member bank, to assess
the depository institution's record of meeting the credit needs of its community
and to take such record into account in its  evaluation of certain  applications
by  such  institution,   including  applications  for  additional  branches  and
acquisitions.

     Among other things,  the current  Community  Reinvestment  Act  regulations
replace the prior process-based  assessment factors with a new evaluation system
that rates an institution  based on its actual  performance in meeting community
needs. In particular, the current evaluation system focuses on three tests:

o    a lending test, to evaluate the institution's record of making loans in its
     service areas;

o    an investment  test, to evaluate the  institution's  record of investing in
     community   development   projects,   affordable   housing,   and  programs
     benefitting low or moderate income individuals and businesses; and

o    a service test, to evaluate the institution's  delivery of services through
     its branches, ATMs and other offices.

     The  Community  Reinvestment  Act  requires  the FRB to  provide  a written
evaluation of an institution's  Community Reinvestment Act performance utilizing
a four-tiered  descriptive  rating system and requires  public  disclosure of an
institution's   Community   Reinvestment   Act  rating.   The  Bank  received  a
"satisfactory"  rating  in  its  last  Community  Reinvestment  Act  examination
conducted by the FRB.

     Safety  and  Soundness  Standards.  Pursuant  to the  requirements  of FDIC
Improvement Act, as amended by the Riegle  Community  Development and Regulatory
Improvement Act of 1994,  each federal  banking  agency,  including the FRB, has
adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and  benefits.  In general,  the  guidelines  require,  among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines.  The guidelines prohibit excessive  compensation as
an unsafe and unsound  practice and describe  compensation as excessive when the
amounts paid are unreasonable or  disproportionate  to the services performed by
an executive officer, employee, director, or principal stockholder.


                                        9
<PAGE>


     Uniform Real Estate Lending Standards.  Under the FDIC Improvement Act, the
federal banking agencies adopted uniform regulations  prescribing  standards for
extensions  of credit that are secured by liens on  interests  in real estate or
made for the  purpose of  financing  the  construction  of a  building  or other
improvements to real estate.  Under the joint regulations adopted by the federal
banking agencies,  all insured  depository  institutions must adopt and maintain
written policies that establish  appropriate limits and standards for extensions
of credit that are secured by liens or  interests in real estate or are made for
the purpose of financing permanent  improvements to real estate.  These policies
must establish loan portfolio  diversification  standards,  prudent underwriting
standards,  including loan-to-value limits, that are clear and measurable,  loan
administration   procedures,   and   documentation,   approval   and   reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency  Guidelines for Real Estate Lending  Policies that have been adopted
by the federal bank regulators.

     The  Interagency  Guidelines,  among  other  things,  require a  depository
institution  to establish  internal  loan-to-value  limits for real estate loans
that are not in excess of the following supervisory limits:

o    for loans secured by raw land, the supervisory  loan-to-value  limit is 65%
     of the value of the collateral;

o    for  land  development  loans,  or  loans  for  the  purpose  of  improving
     unimproved  property prior to the erection of structures,  the  supervisory
     limit is 75%;

o    for  loans  for the  construction  of  commercial,  multi-family  or  other
     non-residential property, the supervisory limit is 80%;

o    for loans  for the  construction  of one- to  four-family  properties,  the
     supervisory limit is 85%; and

o    for loans  secured  by other  improved  property,  for  example,  farmland,
     completed commercial property and other income-producing property including
     non-owner occupied, one- to four-family property, the limit is 85%.

     Although  no  supervisory  loan-to-value  limit  has been  established  for
owner-occupied,  one to  four-family  and home  equity  loans,  the  Interagency
Guidelines  state that for any such loan with a loan-to-value  ratio that equals
or exceeds 90% at origination,  an institution should require appropriate credit
enhancement  in the form of either  mortgage  insurance  or  readily  marketable
collateral.

     Deposit Insurance. Pursuant to FDIC Improvement Act, the FDIC established a
system for setting deposit insurance  premiums based upon the risks a particular
bank or savings  association  posed to its deposit  insurance  funds.  Under the
risk-based deposit insurance  assessment system, the FDIC assigns an institution
to one  of  three  capital  categories  based  on  the  institution's  financial
information,  as of the reporting period ending six months before the assessment
period.  The three capital  categories are (1) well capitalized,  (2) adequately
capitalized  and (3)  undercapitalized.  The FDIC also assigns an institution to
one of three supervisory  subcategories  within each capital group. With respect
to  the  capital  ratios,  institutions  are  classified  as  well  capitalized,
adequately  capitalized or undercapitalized  using ratios that are substantially
similar to the prompt corrective action capital ratios discussed below. The FDIC
also assigns an  institution  to  supervisory  subgroup  based on a  supervisory
evaluation  provided to the FDIC by the institution's  primary federal regulator
and  information  that the FDIC  determines to be relevant to the  institution's
financial condition and the risk posed to the deposit insurance funds, which may
include information provided by the institution's state supervisor.

     An  institution's  assessment  rate  depends on the  capital  category  and
supervisory  category  to which  it is  assigned.  Under  the  final  risk-based
assessment  system,   there  are  nine  assessment  risk   classifications,   or
combinations  of capital groups and  supervisory  subgroups,  to which different
assessment rates are applied.  Assessment rates for deposit insurance  currently
range  from 0 basis  points to 27 basis  points.  The  capital  and  supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed.


                                       10
<PAGE>


A bank's rate of deposit insurance assessments will depend upon the category and
subcategory to which the bank is assigned by the FDIC. Any increase in insurance
assessments   could  have  an  adverse   effect  on  the   earnings  of  insured
institutions, including the Bank.

     Under the Deposit  Insurance  Funds Act of 1996 the assessment base for the
payments on the bonds issued in the late 1980's by the Financing  Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance  Corporation was
expanded to include,  beginning  January 1, 1997,  the deposits of  institutions
insured by the Bank Insurance Fund, such as  Cambridgeport  Bank. Until December
31, 1999, or such earlier date on which the last savings  association  ceases to
exist, the rate of assessment for Bank Insurance  Fund-assessable  deposits will
be one-fifth of the rate imposed on deposits insured by the Savings  Association
Insurance Fund. The annual rate of assessments for the payments on the Financing
Corporation  bonds for the  quarterly  period  beginning  on January 1, 1999 was
0.0122%  for Bank  Insurance  Fund-assessable  deposits  and 0.0610% for Savings
Association Insurance Fund-assessable deposits.

     Under  the  Federal  Deposit  Insurance  Act,  the FDIC may  terminate  the
insurance of an  institution's  deposits upon a finding that the institution has
engaged in unsafe or unsound practices,  is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation,  rule, order
or condition  imposed by the FDIC.  The  management of the Bank does not know of
any practice,  condition or violation  that might lead to termination of deposit
insurance.

CAPITAL REQUIREMENTS

     The Federal Deposit Insurance  Corporation Act of 1991 ("FDICIA")  requires
the Federal  Reserve to take  "prompt  corrective  action"  with  respect to any
insured  depository  institution  which does not meet specified  minimum capital
requirements.  The applicable regulations establish five capital levels, ranging
from "well-capitalized" to "critically  undercapitalized," and require or permit
the Federal Reserve to take supervisory action in certain  circumstances.  Under
these   regulations,   an   insured   depository   institution   is   considered
well-capitalized if it has a Total Risk-based Capital ratio of 10.0% or greater,
a Tier 1 Risk-based  Capital ratio of 6.0% or greater,  and a Leverage  ratio of
5.0% or greater, and it is not subject to an order,  written agreement,  capital
directive or prompt  corrective action directive to meet and maintain a specific
capital level for any capital  measure.  An insured  depository  institution  is
considered adequately  capitalized if it has a Total Risk-based Capital ratio of
8.0% or greater, a Tier I Risk-based Capital ratio and Leverage ratio of 4.0% or
greater  (or a Leverage  ratio of 3.0% or greater  if the  institution  is rated
composite 1 in its most recent  report of  examination,  subject to  appropriate
federal  banking  agency  guidelines),  and the  institution  does  not meet the
definition of an undercapitalized institution. An insured depository institution
is considered  undercapitalized  if it has a Total Risk-based Capital ratio that
is less than 8.0%, a Tier 1 Risk-based  Capital ratio that is less than 4.0%, or
a  Leverage  ratio  that is less than  4.0%.  A  significantly  undercapitalized
institution is one which has a Total Risk-based  Capital ratio that is less than
6.0%, a Tier 1 Risk-based  Capital  ratio that is less than 3.0%,  or a Leverage
ratio that is less than 3.0%. A critically  undercapitalized  institution is one
which has a ratio of  tangible  equity to total  assets that is equal to or less
than 2.0%. As of December 31, 1999, the Bank was classified as well-capitalized.
The Bank's Tier 1 and Total  Risk-based  Capital  ratios as of December 31, 1999
were 23.3% and 24.4%, respectively.

     The  severity of action  authorized  or  required to be taken under  prompt
corrective action regulations  increases as a bank's capital deteriorates within
the three  undercapitalized  categories.  All banks are  prohibited  from paying
dividends  or other  capital  distributions  or  paying  management  fees to any
controlling   person,  if,  following  such  distribution,   the  bank  will  be
undercapitalized.  The Federal  Reserve is  authorized by this  legislation  and
under  Regulation  H  (which  regulates  state  member  banks)  to take  various
enforcement actions against any undercapitalized  insured depository institution
and any  insured  depository  institution  that  fails to submit  an  acceptable
capital  restoration  plan or fails to implement a plan  accepted by the Federal
Reserve. These powers include, among other things,  requiring the institution to
be  recapitalized,  prohibiting asset growth,  restricting  interest rates paid,
requiring  prior approval of capital  distributions  by any bank holding company
which controls the institution,  requiring divestiture by the institution of its
subsidiaries or by the


                                       11
<PAGE>


holding company of the institution itself,  requiring new election of directors,
and requiring the dismissal of directors and officers.

     With certain exceptions, insured depository institutions will be prohibited
from making capital  distributions  or paying  management fees if the payment of
such  distributions  or  fees  will  cause  them  to  become   undercapitalized.
Furthermore,  undercapitalized  insured depository institutions will be required
to file capital  restoration  plans with the Federal  Reserve.  Undercapitalized
insured depository  institutions also will be subject to restrictions on growth,
acquisitions,  branching and engaging in new lines of business  unless they have
an approved capital plan that permits  otherwise.  The Federal Reserve also may,
among other things,  require an undercapitalized  insured depository institution
to issue shares or obligations, which could be voting stock, to recapitalize the
institution or, under certain circumstances, to divest itself of any subsidiary.

     Significantly   and   critically    undercapitalized   insured   depository
institutions  may be subject to more  extensive  control  and  supervision.  The
Federal  Reserve may prohibit any such  institutions  from,  among other things,
entering into any material  transaction  not in the ordinary course of business,
amending  their  Articles  of  Incorporation  or bylaws,  or engaging in certain
transactions   with  affiliates.   In  addition,   critically   undercapitalized
institutions  generally will be prohibited  from making payments of principal or
interest  on  outstanding  subordinated  debt.  Within  90  days  of an  insured
depository institution becoming critically undercapitalized, the Federal Reserve
must appoint a receiver or  conservator  unless  certain  findings are made with
respect  to  the  prospect  for  the  institution's  continued  viability.   See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Analysis of Financial Condition -- Capital  Requirements" for more
information about the Bank's capital ratios and applicable minimum ratios.

BRANCHING

     Under the Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of
1994 (the "Riegle Act"),  the Federal  Reserve may approve bank holding  company
acquisitions  of banks in other  states,  subject to certain  aging and  deposit
concentration  limits.  As of June 1,  1997,  banks in one state may merge  with
banks in another state,  unless the other state has chosen not to implement this
section of the Riegle Act.  These  mergers are also subject to similar aging and
deposit concentration limits.

     Virginia  "opted-in"  to the  provisions  of the Riegle Act.  Since July 1,
1995, an  out-of-state  bank that did not already  maintain a branch in Virginia
was permitted to establish and maintain a de novo branch in Virginia, or acquire
a branch in  Virginia,  if the laws of the home state of the  out-of-state  bank
permit  Virginia  banks to engage in the same  activities  in that  state  under
substantially the same terms as permitted by Virginia.  Also, Virginia banks may
merge with  out-of-state  banks, and an out-of-state bank resulting from such an
interstate merger  transaction may maintain and operate the branches in Virginia
of a merged  Virginia  bank,  if the laws of the home state of the  out-of-state
bank involved in the interstate merger transaction permit interstate merger.

FEDERAL RESERVE SYSTEM

     Under Federal Reserve Board  regulations,  the Bank is required to maintain
non-interest-earning  reserves  against its  transaction  accounts.  The Federal
Reserve  Board  regulations  generally  require  that  reserves  of 3%  must  be
maintained  against  aggregate  transaction  accounts of $44.3  million or less,
subject to adjustment by the Federal  Reserve Board,  and an initial  reserve of
$1.3  million  plus 10%,  subject to  adjustment  by the Federal  Reserve  Board
between 8% and 14%, against that portion of total transaction accounts in excess
of $44.3  million.  The first $5.0  million of  otherwise  reservable  balances,
subject to  adjustments  by the Federal  Reserve  Board,  are exempted  from the
reserve requirements. The Bank is in compliance with these requirements. Because
required  reserves  must be  maintained  in the form of  either  vault  cash,  a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve  requirement
is to reduce the Bank's interest-earning assets.



                                       12
<PAGE>

EFFECT OF ECONOMIC ENVIRONMENT

     The policies of regulatory  authorities,  including the monetary  policy of
the Federal Reserve, have a significant effect on the operating results of banks
and their  subsidiaries.  Among the means  available  to the Federal  Reserve to
affect  the  money  supply  are  open  market  operations  in  U.S.   government
securities,  changes in the discount rate on member bank borrowings, and changes
in reserve  requirements  against member bank deposits.  These means are used in
varying combinations to influence overall growth and distribution of bank loans,
investments  and deposits,  and their use may affect  interest  rates charged on
loans or paid for deposits.

     Federal Reserve  monetary  policies have materially  affected the operating
results of commercial banks in the past and are expected to continue to do so in
the  future.  The  nature of future  monetary  policies  and the  effect of such
policies on the business and income of the Bank cannot be predicted.

LIMITS ON DIVIDENDS AND OTHER PAYMENTS

     As a state member bank subject to the  regulations of the Federal  Reserve,
the Bank must obtain the approval of the Federal Reserve for any dividend if the
total of all  dividends  declared in any calendar year would exceed the total of
its net profits, as defined by the Federal Reserve, for that year, combined with
its retained net profits for the preceding two years. In addition,  the Bank may
not pay a dividend in an amount greater than its undivided  profits then on hand
after  deducting  its  losses  and bad debts.  For this  purpose,  bad debts are
generally  defined to include the principal amount of loans which are in arrears
with  respect  to  interest  by six  months  or  more,  unless  such  loans  are
fully-secured and in the process of collection.  Moreover,  for purposes of this
limitation,  the Bank is not  permitted to add the balance in its  allowance for
loan losses account to its undivided profits then on hand;  however,  it may net
the sum of its bad debts,  as so defined,  against the balance in its  allowance
for loan losses account and deduct from undivided  profits only bad debts, as so
defined, in excess of that account.

     In addition,  the Federal  Reserve is authorized to determine under certain
circumstances  relating to the financial  condition of a state member bank, that
the payment of dividends would be an unsafe or unsound  practice and to prohibit
payment  thereof.  The payment of dividends  that would deplete a bank's capital
base  could be deemed to  constitute  such an unsafe or  unsound  practice.  The
Federal Reserve has indicated that banking  organizations  should  generally pay
dividends only out of current operating earnings.

     FDICIA provides that no insured depository institution may make any capital
distribution,  including a cash dividend if, after making the distribution,  the
institution would not satisfy one or more of its minimum capital requirements.

     In addition,  Virginia law imposes restrictions on the ability of all banks
chartered  under Virginia law to pay dividends.  Under Virginia law, no dividend
may be declared or paid that would impair a  Virginia-chartered  bank's  paid-in
capital.  The SCC also has  authority  to limit the  payment of  dividends  by a
Virginia bank if it determines the  limitation is in the public  interest and is
necessary to ensure the bank's financial soundness.

REGULATION OF HOLDING COMPANY

     Federal Regulation.  The Company is as a bank holding company. Bank holding
companies are subject to  examination,  regulation and periodic  reporting under
the Bank Holding Company Act, as administered by the Federal Reserve Board.  The
Federal Reserve Board has adopted capital  adequacy  guidelines for bank holding
companies on a consolidated  basis. As of December 31, 1999, the Company's Total
capital and Tier 1 capital ratios exceeded these minimum capital requirements.

     Regulations  of the  Federal  Reserve  Board  provide  that a bank  holding
company  must serve as a source of strength to any of its  subsidiary  banks and
must not conduct its activities in an unsafe or unsound manner. Under the prompt
corrective  action  provisions of FDIC  Improvement  Act, a bank holding company
parent of


                                       13
<PAGE>


an  undercapitalized  subsidiary  bank would be  directed to  guarantee,  within
limitations,   the  capital  restoration  plan  that  is  required  of  such  an
undercapitalized  bank. See "- Federal  Banking  Regulation - Prompt  Corrective
Action" above. If the undercapitalized  bank fails to file an acceptable capital
restoration  plan or fails to implement an accepted  plan,  the Federal  Reserve
Board may prohibit the bank holding company parent of the undercapitalized  bank
from  paying any  dividend  or making  any other  form of  capital  distribution
without the prior approval of the Federal Reserve Board.

     As a bank  holding  company,  the  Company is  required to obtain the prior
approval of the Federal Reserve Board to acquire all, or  substantially  all, of
the assets of any bank or bank holding  company.  Prior  Federal  Reserve  Board
approval  will be  required  for the  Company  to  acquire  direct  or  indirect
ownership  or  control  of any  voting  securities  of any bank or bank  holding
company if,  after  giving  effect to such  acquisition,  it would,  directly or
indirectly,  own or control  more than 5% of any class of voting  shares of such
bank or bank holding company.

     A bank holding  company is required to give the Federal Reserve Board prior
written  notice  of  any  purchase  or  redemption  of  its  outstanding  equity
securities  if the gross  consideration  for the  purchase or  redemption,  when
combined with the net  consideration  paid for all such purchases or redemptions
during the  preceding 12 months,  will be equal to 10% or more of the  company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would  constitute an unsafe and
unsound practice,  or would violate any law,  regulation,  Federal Reserve Board
order or directive,  or any condition imposed by, or written agreement with, the
Federal  Reserve  Board.  Such notice and  approval is not  required  for a bank
holding  company that would be treated as "well  capitalized"  under  applicable
regulations of the Federal  Reserve Board,  that has received a composite "1" or
"2" rating at its most recent bank  holding  company  inspection  by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory issues.

     In addition,  a bank holding  company which does not qualify as a financial
holding  company  under the Act is  generally  prohibited  from  engaging in, or
acquiring  direct or  indirect  control of any  company  engaged in  non-banking
activities.  One  of  the  principal  exceptions  to  this  prohibition  is  for
activities  found by the  Federal  Reserve  Board to be so  closely  related  to
banking or  managing  or  controlling  banks as to be  permissible.  Some of the
principal activities that the Federal Reserve Board has determined by regulation
to be so closely related to banking as to be permissible are:

o    making or servicing loans;

o    performing certain data processing services;

o    providing discount brokerage services;

o    acting as fiduciary, investment or financial advisor;

o    leasing personal or real property;

o    making  investments  in  corporations  or projects  designed  primarily  to
     promote community welfare; and

o    acquiring a savings and loan association.


                                       14
<PAGE>



     Bank holding  companies that do qualify as a financial  holding company may
engage in  activities  that are  financial  in nature or incident to  activities
which are  financial in nature.  Bank holding  companies may qualify to become a
financial holding company if:

o    each of its depository institution subsidiaries is "well capitalized";

o    each of its depository institution subsidiaries is "well managed";

o    each  of  its   depository   institution   subsidiaries   has  at  least  a
     "satisfactory"  Community  Reinvestment  Act  rating  at  its  most  recent
     examination; and

o    the bank holding company has filed a certification with the Federal Reserve
     Board that it elects to become a financial holding company.

     Under the Federal Deposit Insurance Act, depository institutions are liable
to the FDIC for losses  suffered or anticipated  by the FDIC in connection  with
the default of a commonly  controlled  depository  institution or any assistance
provided by the FDIC to such an institution in danger of default. This law would
potentially  be  applicable  to the  Company if it ever  acquired  as a separate
subsidiary a depository institution in addition to the Bank.

FEDERAL SECURITIES LAWS

     The Company's  Common Stock is registered  with the SEC under Section 12(g)
of the  Securities  Exchange Act of 1934 (the  "Exchange  Act").  The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.

ITEM 2.    PROPERTIES

     The  principal  office  of the  Bank  is  located  at 1313  Dolley  Madison
Boulevard,  McLean,  Virginia where the Bank leases  approximately 11,182 square
feet in an  office  building.  All of the  Bank's  administrative  and  customer
service  facilities are at this  location.  The lease was for an initial term of
ten years, beginning July 1988, with three 5 year renewal options and expires in
2008. The current monthly rent is $21,101.

     The Bank also  entered  into a lease for its  Sterling  Branch in Sterling,
Virginia at 46005 Regal Plaza Dr. #180. The lease is for ten years with one five
year renewal option.

     On March 16, 2000, the Bank entered into a long-term  lease for its Tyson's
branch pending regulatory approval. If all approvals are received as anticipated
the lease will expire in 2006.

     The Bank also owns a parcel of land in Great Falls,  Virginia,  which it is
holding for future bank use.

ITEM 3.    LEGAL PROCEEDINGS

     In the normal course of its operations,  the Company and the Bank from time
to time are party to various legal proceedings. Based upon information currently
available,  and after  consultation with its counsel,  management  believes that
such legal  proceedings,  in the  aggregate,  will not have a  material  adverse
effect on Company's  or the Bank's  business,  financial  position or results of
operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.


                                       15
<PAGE>

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  common  stock is traded on the Nasdaq  SmallCap  Market and
quoted  under the symbol  "HBVA."  Prior to its  secondary  offering  of 805,000
shares on May 18,  1998 (the  "Offering")  and  commencement  of  trading on the
Nasdaq SmallCap Market,  the common stock of The Heritage Bank traded on the OTC
Bulletin  Board on a limited  basis.  The Bank's  common stock traded as Company
common stock when the Reorganization  became effective in October 1998, prior to
the end of the Company's 1998 fiscal year.

     At December 31, 1999,  the last trading date in the Company's  fiscal year,
the  Company's common  stock closed at $3 11/16.  At March 24, 2000,  there were
2,294,617 shares of the Company's common stock  outstanding,  which were held of
record by approximately 2,000 stockholders.

     The  Board  of  Directors   has  not  paid  a  cash   dividend   since  its
incorporation. The Board of Directors may consider the payment of cash dividends
dependant on the results of operations  and financial  condition of the Company,
tax  considerations,   industry  standards,   economic  conditions,   regulatory
restrictions and other factors.  There are significant regulatory limitations on
the Company's  ability to pay  dividends  depending on the dividends it receives
from its  subsidiary,  the Bank,  which is subject to regulations and the Bank's
continued  compliance with all regulatory  capital  requirements and the overall
health  of the  institution.  See  Note  16 to  the  Notes  to the  consolidated
financial  statements  for  a  discussion  of  the  regulatory  restrictions  on
dividends.

     The table  below shows the high and low sales price as quoted on the Nasdaq
SmallCapMarket during the periods indicated.

<TABLE>
<CAPTION>
                                                              Price Range ($)
                                                              ---------------
                         Quarter Ended                        High       Low
                         -------------                        ----       ----
<S>                                                           <C>       <C>
Fiscal Year ended December 31, 1999:
   First Quarter ended March 31, 1999 .................       3 3/4       3 1/2
   Second Quarter ended June 30, 1999 .................       4 9/6       3
   Third Quarter ended September 30, 1999 .............       4           3
   Fourth Quarter ended December 31, 1999 .............       4           3
Fiscal year ended December 31, 1998:
   Second Quarter ended June 30, 1998 .................       6 3/4       4 3/4
   Third Quarter ended September 30, 1998 .............       5 1/2       3 3/4
   Fourth Quarter ended December 31, 1998 .............       4 3/4       3 1/2
</TABLE>

     Based on information available to the Bank from a limited number of sellers
and  purchasers  of the Bank's  common  stock  prior to the  Offering,  the Bank
believes  that the selling  price for the Bank common stock ranged from $4.00 to
$4.625 from January 1, 1998 through March 31, 1998.



                                       16
<PAGE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

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

     The following discussion is intended to assist readers in understanding and
evaluating the financial  condition and results of operations of the Company and
the Bank. This review should be read in conjunction  with the audited  financial
statements and  accompanying  notes.  This analysis  provides an overview of the
significant changes that occurred during the periods presented.

RESULTS OF OPERATIONS

     The Bank's operating results depend primarily upon its net interest income,
the difference between the interest earned on its interest-bearing assets (loans
and investment securities) and the interest paid on interest-bearing liabilities
(deposits and securities sold under agreement to repurchase).  Operating results
are  significantly  affected by  provisions  for loan  losses,  other income and
operating expenses.  Each of these factors is significantly affected not only by
the Bank's policies,  to varying  degrees,  but general economic and competitive
conditions and by policies of state and federal regulatory authorities.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND 1998

     As of December 31, 1999, the Company's total assets were $59.9 million,  as
compared to $64.8 million at December 31, 1998,  which  represents a decrease of
$4.9 million, or 7.5%. The 1999 decline in total assets was primarily due to the
loss of funds provided by a one time $8.0 million deposit into attorneys  escrow
accounts at the end of fiscal 1998. These funds were withdrawn the first week of
January 1999 in the normal course of business,  decreasing total deposits. Total
deposits  decreased  by $5.4 million to $48.0  million at December 31, 1999,  as
compared to $53.4  million at December 31, 1998.  Adjusting for the $8.0 million
in escrow  deposits,  total assets at December 31, 1999  increased  $3.1 million
over December 31, 1998 and total deposits increased $2.6 at December 31, 1999 as
compared to December 31, 1998.

     Securities  Sold under  Agreements  to Repurchase at December 31, 1999 were
$3.0  million  or 31.2%  greater  than the  December  31,  1998  balance of $2.3
million. The Bank increased the offering of repurchase  agreements for customers
with larger short term funds in fiscal 1999. Federal funds sold and cash and due
from banks represent the Company's cash and cash equivalents. Federal funds sold
and cash and cash due from banks at December  31,  1999  totaled  $2.7  million,
compared to $14.4 million at December 31,1998,  representing a decrease of $11.7
million,  or 81.4%.  Federal funds sold represented $8.6 million of the decrease
with cash and due from banks decreasing $3.2 million.  Increased loan production
and the  decrease  of deposits  in January  1999 was the  primary  cause for the
decrease in federal funds sold.

     Securities  available for sale increased $4.2 million,  or 21.3%,  to $24.1
million at December  31,  1999 from $19.8  million at December  31,  1998.  This
investment  in  securities  was made to increase the yield on earning  assets as
compared to the lower yield of federal funds sold.

     Net loans were $31.3  million at  December  31,  1999 as  compared to $29.2
million at December 31, 1998.  This net increase of $2.1 million,  or 7.2%,  was
primarily  due to the change in lending  officers  prior to year end and the new
customer relationships developed by the new lending officers.

     Stockholders'  equity at December 31, 1999 was $8.6 million, as compared to
$8.9 million at December 31, 1998, representing a decrease of $330,000, or 3.7%.
This  decline was  primarily  due to an increase in the  unrealized  loss net of
income  taxes  on the  available  for  sale  security  portfolio  due to  market
declines.



                                       17
<PAGE>


     The Company's  return on average assets was 0.30% and its return on average
equity was 2.06% in fiscal year 1999.  The Bank's  return on average  assets was
0.26% and its return on average equity was 1.79% in fiscal year 1998.

     The Bank is required to meet certain capital requirements as established by
the  Federal  Reserve  Board.  At December  31, 1999 and 1998,  the Bank met all
capital adequacy requirements to which it was subject.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

     Net Income.  Net income for the year ended  December 31, 1999 was $182,000,
an increase of 36.4% from  $133,000 for the same period of 1998.  Net income per
basic and diluted share increased 14.3% to $.08 from $.07 for the same period of
1998.  The  increase  in net  income  for the year ended  December  31,  1999 as
compared to the same period of 1998 was primarily the result of increases in net
interest,  which were partially offset by increases in non-interest expenses. In
addition,  the  allowance  for  loan  losses  was  considered  adequate  without
additional  provision  expense for 1999, due to an improvement in the quality of
the loan portfolio as compared to year end 1998. In 1998, the net operating loss
carryforward  was fully  utilized.  This change in tax status created a $133,000
variance in tax expense. Net income before taxes for the year ended December 31,
1999 increased  195.7% to $275,000 as compared to $93,000 for the same period of
1998.

     Interest  Income.  Interest  income totaled $4.4 million for the year ended
December 31, 1999, an increase of $615,000,  or 16.3%, from $3.8 million for the
year ended December 31, 1998. The increase in interest  income was primarily due
to a $304,000 increase in interest on increased loan balances and an increase of
$296,000 on securities available for sale.

     Interest Expense. Total interest expense increased $167,000, or 13.1%, from
$1.3  million for the year ended  December 31, 1998 to $1.4 million for the year
ended  December 31,  1999.  Increased  interest  expense was due to a shift from
balances in non-interest  deposits to interest  bearing  deposits and securities
sold under agreements to repurchase.

     Net Interest Income. Net interest income is the difference between interest
earned on loans,  investment  securities  and short  term  investments,  and the
interest  paid on deposits and  repurchase  agreements.  Factors  affecting  net
interest income include interest rates earned on loans and investments and those
paid on deposits and repurchase agreements, the mix and volume of earning assets
and  interest  bearing  liabilities  and the  level of  non-earning  assets  and
non-interest  bearing  liabilities.  Net  interest  income  for the  year  ended
December 31, 1999 increased  $448,000,  or 18.0%, from $2.5 million for the year
ended  December 31, 1998 to $2.9  million for the year ended  December 31, 1999.
The increase in net interest  income is primarily  due to the growth in the loan
portfolio.

     Non-interest income. During the year ended December 31, 1999,  non-interest
income  increased  $85,000 over the same period in 1998. This increase  resulted
from increased  overdraft and return check charges,  loan service fees and other
commission fees such as ATM fees and merchant discount fees. The Bank also had a
gain on the sale of other real estate of $57,000 in fiscal 1999, a  nonrecurring
item.

     Non-interest Expense. During the year ended December 31, 1999, non-interest
expenses  increased  $468,000,  or 19.3%,  over the same  period  of 1998.  This
increase was partially due to increased  operational  and facility  costs of the
Sterling  branch  that  opened in April  1999 and  additional  space  rented for
operational  expansion at the main office  address in McLean during 1999.  These
increased leases raised occupancy and equipment expense by $196,000 for the year
ended  December  31,  1999,  as compared to fiscal  1998.  Salaries and employee
benefits  expense  increased by  $398,000,  from $1.1 million for the year ended
December  31, 1998 to $1.5 million for the year ended  December  31, 1999.  This
increase is due, in part,  to the increase in employees at the Sterling  branch.
Incentive bonuses of $52,000 were also paid to employees during the year


                                       18
<PAGE>


ended  December 31,  1999.  Salaries and  benefits  increased  partially  due to
$15,000 in severance pay to Bank employees during 1999. Other expenses decreased
by $126,000, or 11.8%, from $1.1 million for the year ended December 31, 1998 to
$943,000 for the year ended December 31, 1999. This decrease is due primarily to
a decrease in professional  fees,  which was partially  offset by an increase in
business  development fees paid in connection with a possible branch location in
Great Falls, Virginia.  Other expenses were also affected by $42,000 of non-loan
charge-offs,  of which a large  part was the  payment  due  under the terms of a
lawsuit settled in March 1999.

     Provision for Loan Losses.  In view of the loan balances for 1999,  and the
improvement in the Bank's loan portfolio,  no provision was made for loan losses
in the year ended  December  31, 1999. A provision of $117,000 was made for loan
losses in the year ended December 31, 1998 to return the reserve for loan losses
to an acceptable  level.  The reserve had been reduced due to a charge resulting
from the settlement of a lawsuit.  The allowance for loan losses at December 31,
1999 was 1.33% of  outstanding  loans.  At December 31, 1998,  the allowance for
loan losses was 1.45% of outstanding  loans. The level of the allowance for loan
losses is based upon management's  review of the loan portfolio and includes the
present and  prospective  financial  condition of  borrowers,  consideration  of
actual loan loss experience and projected economic conditions in general and for
the Bank's service areas in particular.  Management  believes that the provision
for loan losses and the allowance for loan losses are reasonable and adequate to
cover any known losses and any losses  reasonably  expected in the existing loan
portfolio.  While  management  estimates  loan losses  using the best  available
information,  such as independent appraisals on collateral,  no assurance can be
given that future  additions to the allowance  will not be necessary.  Additions
may be necessary based on changes in economic and real estate market  condition,
further  information  obtained regarding known problem loans,  identification of
additional problem loans and other factors, both within and outside management's
control.

     Income  Taxes.  The Company  recognized a net income tax expense of $93,000
for the year ended  December 31,  1999,  as compared to a tax benefit of $41,000
for the year ended  December 31, 1998.  This  increase in income tax expense for
the year  ended  December  31,  1999 is  primarily  due to the  fact  that a net
operating  loss  carryforward  of the Company  became  completely  utilized  for
accounting purposes by January 1, 1999.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

     Net  Income.  Net income for the year ended  December  31,  1998  decreased
$437,000  to  $133,000,  or $0.07  basic  earnings  per share  ($0.07 per share,
assuming  dilution),  from net income of $570,000,  or $0.45 basic  earnings per
share ($0.44 per share, assuming dilution) for the year ended December 31, 1997.
The  decrease  in net income was  primarily  due to loan loss from a  bankruptcy
during the third quarter totaling $141,456,  an increase in stockholder expenses
of $89,944 incurred in connection with the formation of the holding company,  an
increase  in legal fees of  $175,000  incurred  in  defending  lawsuits  and the
$25,000  settlement  of a lawsuit  plus a  $25,000  loss due to a  robbery.  The
expenses  associated with the formation of the holding  company,  the opening of
the  Sterling  branch in  Sterling,  Virginia,  and the legal fees  incurred  in
connection with the settlement of a lawsuit are  nonrecurring  items and are not
expected to have an impact on the long-term profitability of the Bank.

     Interest  Income.  The major  component  of the Bank's net  earnings is net
interest  income,  which is the excess of  interest  income on  interest-earning
assets over the interest expense on interest-bearing  liabilities.  Net interest
income is affected by changes in volume resulting from growth and alterations of
the  balance  sheet  composition  as  well as  fluctuations  in  interest  rates
("interest rate spread") and maturities of sources and uses of funds. The Bank's
management  seeks to maximize net interest  income by managing the balance sheet
and  determining  the optimal  product mix with  respect to yields on assets and
costs of funds in light of projected economic  conditions,  while maintaining an
acceptable level of risk.



                                       19
<PAGE>


     Interest  income totaled $3.7 million for the year ended December 31, 1998,
an increase of $509,000 or 15.6% from $3.2 million from the year ended  December
31,  1997.  The  increase in interest  income was due to a $108,000  increase in
interest  on federal  funds  sold and an  increase  of  $302,000  on  securities
available for sale. Loan interest income also increased by $99,000. The increase
in  interest  on  securities  available  for  sale  was the  result  of the Bank
investing  the  funds  received  from  the  sale of  stock  in the  Offering  in
investment  bonds. The increase in federal funds sold interest was the result of
the  increase in  deposits.  The  increase  in interest  income on loans was the
result of an increase in the loan  portfolio,  due to the ability of the Bank to
increase  its  legal  lending  limit as a result  of  proceeds  received  in the
Offering and favorable interest rates in fiscal 1998.

     Interest Expense. Total interest expense increased $162,000, or 14.6%, from
$1.1  million for the year ended  December 31, 1997 to $1.3 million for the year
ended  December 31, 1998.  This  increase was  primarily due to the $3.1 million
increase  in the  average  balance of  interest-bearing  liabilities  from $30.2
million for the year ended December 31, 1997 to $33.3 million for the year ended
December 31, 1998.

     Net Interest Income.  Net interest income increased by $349,000,  or 16.3%,
from $2.1  million for the year ended  December 31, 1997 to $2.5 million for the
year ended December 31, 1998.

     The  Bank's  net  interest  margin  (net  interest  income  expressed  as a
percentage of total average  interest-earning assets) decreased to 5.09% for the
year ended  December 31, 1998 compared to 5.25% for the year ended  December 31,
1997. The Bank's interest  spread (the average yield earned on  interest-earning
assets less the average rate incurred on interest-bearing liabilities) was 3.87%
and 4.29% for the years ended December 31, 1998 and 1997, respectively.

     Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1998 was $117,000 as compared to $3,825 for the year ended December
31, 1997. This increase was necessary due to a loss on a loan in connection with
a bankruptcy and the need to replenish some of the reserves used.

     Management  believes  that the  provision for loan losses and the allowance
for loan losses are  reasonable  and  adequate to cover any known losses and any
losses  reasonably  expected in the loan portfolio.  While management  estimates
loan losses using the best available information,  no assurance can be made that
future additions to the allowance will not be necessary.

     Non-interest  Income.  Non-interest  income  consists  primarily of service
charges and fees associated with the Bank's loan and savings  accounts and gains
on the sale of securities.  Non-interest  income for the year ended December 31,
1998 was  $137,000,  representing  a decrease of $44,000  from the  non-interest
income of $181,000  for the year ended  December  31,  1997.  This  decrease was
caused  primarily  by a  $47,000  decrease  in gains  on the sale of  government
securities.

     Non-interest Expense.  Non-interest expense consists primarily of operating
expenses for compensation and related  benefits,  occupancy,  federal  insurance
premiums and operating assessments, and equipment expenses.

     Non-interest  expense increased  $585,000,  or 31.9%, from $1.8 million for
the year ended December 31, 1997 to $2.4 million for the year ended December 31,
1998.  This  increase  was due in part to an increase in salaries  and  employee
benefits  expense of $121,000 or 12.7% from $953,000 for the year ended December
31, 1997 to $1,074,000  for the year ended  December 31, 1998.  Other  operating
expenses  increased  by $489,000 or 84.3% from  $580,000 to  $1,069,000  for the
years ended December 31, 1997 and 1998,  respectively.  This increase was due to
settlement  of a lawsuit of $108,800,  loss on a bankruptcy  of $141,456,  legal
fees of $175,732 incurred in defending a lawsuit,  expenses  associated with the
formation of the holding company of $89,944 and the $25,000 loss in a robbery.



                                       20
<PAGE>


     Income  Taxes.  The Bank had an income tax  benefit of $41,000 for the year
ended  December 31, 1998  compared to a benefit of $85,000 in 1997.  At December
31, 1998, the Bank had effectively used all of its operating loss carryforwards.
The Bank expects to have tax expense for the fiscal year 1999.

PERFORMANCE RATIOS AND PER SHARE DATA

     The table below presents per share data regarding the Company and the Bank,
as well as performance and asset quality ratios for the time periods indicated.


                             SELECTED FINANCIAL DATA
                    As of and for the Year Ended December 31,
                (Dollars in thousands, except for per share data)

<TABLE>
<CAPTION>
                                       1999             1998            1997           1996            1995
                                    ---------        ---------       ---------     ----------      ----------
<S>                                 <C>              <C>             <C>           <C>             <C>
PER SHARE DATA
   Net income, basic                $    0.08        $    0.07       $    0.45     $     0.32      $     0.15
   Net income, diluted                   0.08             0.07            0.44           0.32            0.15
   Cash dividends                          --               --              --             --              --
   Dividend Payout ratio                   --               --              --             --              --
   Book value at period end              3.75             3.89            3.18           2.84            2.52
   Common shares outstanding        2,294,617        2,294,617       1,489,636      1,249,634       1,249,634
PERFORMANCE AND ASSET
QUALITY RATIOS
   Return on average assets              0.30%            0.26%           1.33%          0.87%           0.46%
   Return on average equity              2.06%            1.79%          15.24%         12.05%           5.89%
   Average stockholders'
    equity to average total assets      14.49%           14.47%           8.74%          7.19%           7.74%
   Non-accrual and past due
    loans to total loans                 0.00%            1.35%           0.98%          1.85%           2.93%
   Allowance for loan losses
    to total loans                       1.33%            1.45%           2.71%          2.45%           2.81%
   Net yield                             4.07%            3.87%           4.29%          3.69%           3.96%
   Net interest margin                   5.16%            5.09%           5.25%          4.54%           4.93%
</TABLE>

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

     The following table sets forth  information  relating to the Bank'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 for the  periods  indicated.  Such yields and costs are derived by dividing
income or expense  by the  average  daily  balances  of assets and  liabilities,
respectively, for the periods presented.



                                       21
<PAGE>



   AVERAGE BALANCES, INTEREST INCOME AND EXPENSES AND AVERAGE YIELDS AND RATES
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        Years ended December 31,


                                                1999                            1998                            1997
                                   ---------------------------------   ------------------------------  ----------------------------
                                                 INTEREST    AVERAGE               INTEREST   AVERAGE             INTEREST  AVERAGE
                                   AVERAGE       INCOME/      YIELD/    AVERAGE     INCOME/    YIELD/    AVERAGE   INCOME/   YIELD/
                                   BALANCE       EXPENSE      RATE      BALANCE     EXPENSE    RATE      BALANCE   EXPENSE    RATE
                                   -------       -------    --------   ---------   ---------  -------    -------  --------  -------
<S>                                <C>          <C>        <C>        <C>         <C>        <C>        <C>       <C>       <C>
EARNING ASSETS:
Loans receivable(1)                $ 29,383      $2,690         9.15%  $ 25,978     $ 2,386      9.18%   $24,533   $ 2,286     9.32%
Investment securities, taxable       22,583       1,414         6.26     18,208       1,118      6.14     13,432       816     6.08
Federal funds sold                    5,523         277         5.02      4,830         262      5.42      2,867       154     5.37
                                    -------     -------                --------    --------             --------     -----
Total earning assets                 57,489       4,381         7.62     49,016       3,766      7.68     40,832     3,256     7.97
--------------------                -------     -------                --------    --------             --------     -----

NON-EARNING ASSETS:
Cash and due from banks               2,141                               1,691                            1,649
Other assets                          1,329                                 802                              414
                                   --------                           ---------                         --------
Total non-earning assets              3,470                               2,493                            2,063
                                   --------                           ---------                         --------
Total assets                       $ 60,959                            $ 51,509                         $ 42,895
                                   ========                           =========                         ========

INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand (NOW)
 deposits                            $7,387     $  130          1.76%  $ 5,696      $  133       2.33%  $  5,073      $113     2.23%
Money market deposits                11,808        350          2.96    10,875         363       3.34     10,377       330     3.19
Savings deposits                      3,250         90          2.77     3,298          97       2.94      3,369        99     2.94
Time deposits                        15,373        772          5.02    12,424         640       5.15     11,196       561     5.01
Repurchase agreements                 2,675         97          3.63     1,069          39       3.65        159         7     4.40
                                    -------     ------                 -------      ------               -------      ----
Total interest-bearing
 liabilities                         40,493      1,439          3.55    33,362       1,272       3.81     30,174      1,111    3.68
                                    -------     ------                 -------      ------               -------      -----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits                      11,522                             10,546                             8,829
Other liabilities                       114                                149                               145
                                    -------                             ------                             -----
Total non-interest-bearing
 liabilities                         11,636                             10,695                             8,974
                                    -------                             ------                             -----
Stockholders' equity                  8,830                              7,452                             3,747
                                    -------                             ------                             -----
Total liabilities and
 stockholders' equity              $ 60,959                           $ 51,509                          $ 42,895
                                   ========                           ========                          ========
Interest spread                                                 4.07%                           3.87%                         4.29%
Net interest margin                            $ 2,942          5.12%             $ 2,494       5.09%              $ 2,145    5.25%
                                               =======                            =======                          =======
</TABLE>
----------------------
(1)  Non-accrual  loan  balances  are  included  in the  calculation  of average
     balances.



                                       22
<PAGE>

RATE/VOLUME ANALYSIS

     The following  table sets forth certain  information  regarding  changes in
interest income and interest expense of the Bank for the periods indicated.  For
each  category  of  interest-earning   asset  and  interest-bearing   liability,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate  multiplied  by old  volume).  Changes  in  rate-volume  (changes  in  rate
multiplied by the changes in volume) are allocated  between  changes in rate and
changes in volume.

                            RATE AND VOLUME ANALYSIS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                       Year Ended                         Year Ended
                                                    December 31, 1999                  December 31, 1998
                                                       Compared To                       Compared To
                                                    December 31, 1998                  December 31, 1997
                                                Increase (Decrease) Due to          Increase (Decrease) Due to
                                              -----------------------------     -------------------------------
                                               Rate      Volume      Total       Rate       Volume      Total
                                              ------   ---------   --------     --------   ---------  --------
<S>                                           <C>       <C>         <C>          <C>       <C>          <C>
INTEREST EARNED ON:
Loans receivable, net......................    $  29      $  275     $  304      $  (34)      $  134     $ 100
Investment securities, taxable.............       22         274        296           8          294       302
Federal funds sold.........................      (16)         31         15           1          107       108
                                              ------   ---------   --------     --------   ---------  --------
  Total interest income....................       35         580        615         (25)         535       510
                                              ------   ---------   --------     --------   ---------  --------

INTEREST PAID ON:
Interest-bearing (NOW) deposits............       14         (17)        (3)          5           15        20
Money market deposits......................      (53)         40        (13)         16           17        33
Savings deposits...........................       (6)         (1)        (7)         --           (2)       (2)
Time deposits..............................      (16)        148        132          15           63        78
Securities sold under agreement to
  repurchase...............................       --          58         58          --           32        32
                                              ------   ---------   --------     --------   ---------  --------
  Total interest expense...................      (61)        228        167          36          125       161
                                              ------   ---------   --------     --------   ---------  --------
        Net interest income..............      $  96  $    352    $    448    $    (61)   $    410    $    349
                                              ======   =========   ========     ========    ========  ========
</TABLE>

INTEREST RATE SENSITIVITY

     An  important  element  of  both  earnings  performance  and  liquidity  is
management of interest rate sensitivity.  Interest rate sensitivity reflects the
potential  effect on net interest  income of a movement in interest  rates.  The
difference between the Bank's  interest-sensitive  assets and interest-sensitive
liabilities  for a  specified  time frame is  referred  to as "gap." A financial
institution is considered to be asset-sensitive,  or having a positive gap, when
the amount of its  earning  assets  maturing  or  repricing  within a given time
period exceeds the amount of its  interest-bearing  liabilities also maturing or
repricing  within  that time  period.  Conversely,  a financial  institution  is
considered to be liability-sensitive, or have a negative gap, when the amount of
its  interest-bearing  liabilities  maturing or repricing  within a given period
exceeds the amount of earning assets also maturing or repricing within that time
period.  During a period of rising  interest rates, a positive gap would tend to
increase net interest income, while a negative gap would tend to have an adverse
effect on net interest  income.  During a period of falling  interest  rates,  a
positive gap would tend to have an adverse effect on net interest income,  while
a negative gap would tend to increase net interest  income.


                                       23
<PAGE>


     The Bank evaluates interest sensitivity risk and then formulates guidelines
regarding  asset  generation  and  pricing,  funding  sources and  pricing,  and
off-balance  sheet  commitments  in order to decrease  sensitivity  risk.  These
guidelines are based upon  management's  outlook  regarding future interest rate
movements,  the state of the regional and national  economy and other  financial
and  business  risk  factors.  The Bank uses a static  gap model and a  computer
simulation to measure the effect on net interest income of various interest rate
scenarios over selected time periods. The gap can be managed by repricing assets
or liabilities,  selling investments  available for sale,  replacing an asset or
liability prior to maturity or adjusting the interest rate during the life of an
asset or  liability.  Matching  the amount of assets and  liabilities  repricing
during the same time  interval  helps to reduce the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.

     As of December 31, 1999, the Bank's static one-year cumulative gap to total
interest-sensitive  assets  position  was a  negative  23.8%  and the Bank  was,
therefore, in an asset-sensitive  position. It is the Bank's goal to control the
mix and rate  sensitivity of assets and liabilities  such that the revolving gap
(the gap is less than one year) will not exceed 10%  (positive  or  negative) of
assets.

     The following table  illustrates  the interest  sensitivity gap position of
the Bank as of December  31, 1999  (focusing  only on repricing  schedules,  not
fixed versus variable rates).  This table presents a position as of a particular
day, which position changes continually and is not necessarily indicative of the
Bank's position at any other time.

                          INTEREST SENSITIVITY ANALYSIS
                                December 31, 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                    MATURING OR REPRICING IN:
                                                                    -------------------------
                                                     3 MONTHS        4-12    1 TO 5        MORE THAN
                                                      OR LESS       MONTHS    YEARS         5 YEARS       TOTAL
                                                    ---------    ---------   -------       ---------     -------
<S>                                                  <C>         <C>         <C>            <C>          <C>
INTEREST-SENSITIVE ASSETS:
   Federal funds sold .........................      $     --    $      --   $    --        $    --      $    --
   Loans (1)...................................        12,732        4,611    11,367          2,979       31,689
   Securities..................................            --          508    21,962          1,585       24,055
                                                    ---------    ---------   -------        -------      -------
         Total interest-sensitive assets.......        12,732        5,119    33,329          4,564       55,744
                                                    =========    =========   =======        =======      =======
INTEREST-SENSITIVE LIABILITIES:

   Certificates of deposit > $100,000..........        1,395         1,831     1,513             --        4,739
   Certificates of deposit < $100,000...........       1,715         4,272     4,671             --       10,658
   Super NOW accounts/Money Market deposit            18,888            --        --             --       18,888
   Securities sold under agreement to repurchase       3,001            --        --             --        3,001
                                                    --------     ---------   -------        -------      -------
         Total interest-sensitive liabilities....     24,999         6,103     6,184             --       37,286
                                                    ========     =========   =======        =======      =======

Period gap.......................................   $(12,267)    $   (984)   $27,145        $ 4,564      $18,458

Cumulative gap...................................   $(12,267)    $(13,251)   $13,894        $18,458
Ratio of cumulative interest-
     sensitive liabilities to interest-sensitive
     asset                                             196.3%       174.2%      72.9%          66.9%
                                                       ======       ======      =====          =====
</TABLE>

(1)   Excludes non-accrual loans.
(2)   Non-certificate deposit accounts are shown as repricing within the 3 month
      or less  time  frame,  although  the Bank  believes,  based on  historical
      experience, that such deposits are less interest sensitive.


                                       24
<PAGE>

                         ANALYSIS OF FINANCIAL CONDITION

Loan Portfolio

     The loan portfolio is the largest category of the Bank's earning assets and
is comprised of commercial  real estate  loans,  commercial  loans,  home equity
loans,  construction  loans,  consumer loans and participation  loans with other
financial  institutions.  The  primary  markets  in which the Bank  makes  loans
include Fairfax and Loudoun Counties, Virginia. The mix of the loan portfolio is
weighted  toward  loans  secured  by  real  estate  and  commercial   loans.  In
management's  opinion,  there are no significant  concentrations  of credit with
particular borrowers engaged in similar activities.

     Net loans  consist of total  loans  minus the  allowance  for loan  losses,
unearned discount. The Bank's net loans at December 31, 1999 were $31.3 million,
representing  a 7.1%  increase  over net loans of $29.2  million at December 31,
1998.  Loan volume  increased  in 1999 due to the Bank's  ability to make larger
loans as a result of the  increase in the Bank's  legal  lending  limit from the
Offering. Gross loans increased 23.8% in 1998 from a balance of $23.4 million at
December 31,1997.  The average balance of total loans as a percentage of average
earning  assets was 51.1% for December  31,  1999,  down from 53.0% for December
31,1998.  The average balance of total loans as a percentage of average earnings
assets was 60.1% for 1997.

     In the normal  course of business,  the Bank makes various  commitments  to
meet  the  financing  needs  of its  customers  and  incurs  certain  contingent
liabilities  , including  standby  letters of credit and  commitments  to extend
credit. At December 31, 1999,  commitments for standby letters of credit totaled
$92,300 and commitments to extend credit totaled $10.6 million.  Commitments for
standby  letters of credit  totaled  $182,000  and  $191,000 for the years ended
December 31, 1998 and 1997,  respectively.  Commitments to extend credit totaled
$8.7 million and $6.7 million for the years ended December 31, 1998 and 1997.

     The following table summarizes the composition of the Bank's loan portfolio
at the periods indicated:

                                 LOAN PORTFOLIO
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                            December 31,
                           ------------------------------------------------------------------------------------------

                            1999               1998              1997                1996              1995
                           ------             ------            ------              ------            ------
                           Amount   Percent   Amount  Percent   Amount   Percent    Amount  Percent   Amount  Percent
                           ------   -------   ------  -------   ------    =-----    ------  -------   ------  -------
<S>                       <C>         <C>    <C>      <C>      <C>         <C>     <C>        <C>     <C>       <C>
Real estate:
   Mortgage.............  $24,653      77.8% $24,077   81.3%   $17,532      75.0%  $19,524     77.5%  $18,735     76.9%
   Constructition.......    1,157       3.6      441    1.5        448       1.9       633      2.5       147      0.6
Commercial..............    4,372      13.8    3,789   12.8      4,191      17.9     4,210     16.7     4,526     18.6
Consumer................    1,507       4.8    1,306    4.4      1,219       5.2       835      3.3      938       3.9
                          -------            -------           -------             -------           -------
Loan, gross.............   31,689     100.0%  29,610  100.0%    23,390     100.0%   25,202    100.0%   24,346    100.0%
                          -------            -------           -------             -------           -------
Less: allowance for
   loan losses..........     (421)              (429)             (634)               (617)             (685)
                          -------            -------           -------             -------           -------
Loans, net..............  $31,268            $29,181           $22,756             $24,585           $23,661
                          =======            ========          =======             =======           =======
</TABLE>

                                       25

<PAGE>

     The  following  table sets forth  certain  information  with respect to the
Bank's  non-accrual,  restructured  and past due  loans,  as well as  foreclosed
assets, for the periods indicated.

                              NON-PERFORMING ASSETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                   -----------------------------------------------------------------
                                                        1999        1998         1997         1996         1995
                                                   -----------------------------------------------------------------
<S>                                                      <C>        <C>          <C>          <C>          <C>
Non-accrual loans..................................      --         $395         $222         $465         $445
Real estate owned..................................      --          263          263          263          300
                                                                     ---         ----         ----          ---
  Total non-performing loans......................       --          658         485          728           745
                                                                     ===         ====         ====          ===
Loans past due 90 or more days accuring interest..       --          --          7            --            268
Non-performing loans to total loans, at period end       0.0%        1.3%        0.9%         1.8%          1.8%
Non-performing assets to period end asses..........      0.0%        1.0%        1.1%         1.6%          1.6%
Non-performing assets: total loans
    and other real estate owned....................      0.0%        2.2%        2.1%         2.9%          3.0%
</TABLE>

     The amount of interest on non-accrual  loans which would have been recorded
as income under the original terms of such loans was  approximately  $0, $26,800
and $34,300 for the years ended December 31, 1999, 1998 and 1997,  respectively.
Loans are placed on  non-accrual  when a loan is  specifically  determined to be
impaired or when principal or interest is delinquent for 90 days or more.

     In addition to the nonaccrual  loans, past due loans, and other real estate
owned  listed  above,  loans  totaling  $1.7  million or 5.4% of total  loans at
December 31, 1999 were either  internally  classified  or  specially  mentioned,
require more than normal  attention,  and are  potential  problem  loans.  These
potential  problem  loans  represent a decrease  from $2.5  million of potential
problem  loans,  or 8.4% of total loans,  at December 31, 1998.  The decrease is
related primarily to the Bank's efforts to improve loan quality.

LOAN MATURITY

     The following  table shows the  contractual  maturity at December 31, 1999.
The table reflects the entire unpaid  principal  balance in the maturity  period
that includes the final loan payment date and, accordingly, does not give effect
to periodic principal repayments or possible prepayments.

                     MATURITY AND RATE SENSITIVITY OF LOANS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                 At December 31, 1999

                               One Year                Over One Year
                                Or less              Through Five Years                     over Five Years

                                               Fixed Rate        Floating Rate      Fixed Rate      Floating Rate
                                               ----------        -------------      ----------      -------------
<S>                             <C>              <C>                 <C>               <C>               <C>
Commercial                      $1,271           $1,858              $398              $--               $138
Real Estate-construction        $1,157               --                --               --                 --
</TABLE>


                                       26

<PAGE>

ALLOWANCE FOR LOAN LOSSES

     In  originating  loans,  the Bank  recognizes  that  credit  losses will be
experienced  and the risk of loss will vary with,  among other  things,  general
economic  conditions,  the type of loan being made, the  creditworthiness of the
borrower  over the term of the loan and, in the case of a  collateralized  loan,
the quality of the collateral for such loan. The Bank maintains an allowance for
loan losses  based  upon,  among other  things,  such  factors as changes in the
character  and size of the loan  portfolio and related loan loss  experience,  a
review and  examination of overall loan quality which includes the assessment of
problem  loans,  the  amount  of  non-performing  assets,  regulatory  policies,
generally accepted accounting principles, general economic conditions, and other
factors  related to the  collectibility  of loans in the Bank's  portfolios.  In
addition  to  unallocated  allowances,  specific  allowances  are  provided  for
individual  loans  when  ultimate  collection  is  considered   questionable  by
management  after reviewing the current status of loans which are  contractually
past due and after  considering  the net realizable  value of any collateral for
the loan.

     Management  actively  monitors  the Bank's  asset  quality in a  continuing
effort to identify  potential  loans that would be charged against the allowance
for loan losses and to provide specific loss allowances when necessary. Although
management   believes   it  uses  the  best   information   available   to  make
determinations with respect to the allowance for loan losses, future adjustments
may be  necessary if economic  conditions  differ from the  assumptions  used in
making the  initial  determinations.  The Bank's  allowance  for loan losses was
$421,000,  or 1.33% of total  loans,  as of December 31, 1999 and  $429,000,  or
1.45% of total loans, as of December 31, 1998.

     Management  believes the allowance is adequate to absorb losses inherent in
the loan portfolio.  The Bank expects to grow its loan portfolio and believes it
will add to thee  reserves in the allowance for loan losses to mirror the growth
in the loan portfolio.

     In view of the  Bank's  plans  for  expansion  and  possible  loan  growth,
management will continue to closely monitor the performance of its portfolio and
make additional provisions as necessary.  The Bank does not presently anticipate
that such provisions  will have a material  adverse impact on the Bank's results
of operations in future periods.


                                       27
<PAGE>

     An  analysis  of  the  allowance  for  loan  losses,  including  charge-off
activity, is presented below:

                            ALLOWANCE FOR LOAN LOSSES
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                         ---------------------------------------------------------------------------
                                              1999           1998            1997          1996           1995
<S>                                          <C>            <C>             <C>           <C>            <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year..........       $ 429          $ 634           $ 617         $ 685          $1,164

CHARGE-OFFS:
Commercial............................          20            332               8            70             360
Real estate...........................          --             --              50            34             158
Consumer..............................          --              7               3             5               2
                                             -----          -----           -----          ----          ------
Total loans charged off...............          20            339              61           109             520
                                             -----          -----           -----          ----          ------
RECOVERIES:
Commercial............................           6             13              60            15              32
Real estate...........................           3             --              14            26              96
Consumer..............................           3              4              --            --              --
                                             -----          -----           -----          ----          ------
Total recoveries......................          12             17              74            41             128
                                             -----          -----           -----          ----          ------
Net charge-offs (recoveries)..........           8            322             (13)           68             392
                                             -----          -----           -----          ----          ------
Provision for (recovery of)
loan losses...........................          --            117               4            --             (87)
                                             -----          -----           -----          ----          ------
Balance at end of year................       $ 421          $ 429           $ 634          $617          $  685
                                             =====          =====           =====          ====          ======
Ratio of net charge-offs
(recoveries to average loans
outstanding...........................        0.03%          1.24%           (.05)%         .28%           1.49%
Ratio of allowance for loan
losses to loans at year-end...........        1.33%          1.45%           2.71%          2.45%          2.81%
</TABLE>


                                       28
<PAGE>

     A breakdown of the  allowance  for loan losses is provided in the following
table.  However,  the Bank's  management does not believe that the allowance for
loan losses can be allocated by category  with a degree of precision  that would
be useful to investors.  Because all of these factors are subject to change, the
allocation of loan losses in the following table is not  necessarily  predictive
of future loan losses in the  indicated  categories.  See Note 1 of the notes to
the financial statements for further information regarding the classification of
loan losses.

                     ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                               December 31,
                        -------------------------------------------------------------------------------------------------
                               1999                1998              1997               1996               1995
                               ----                ----              ----              -----               ----
                         Amount   Percent(1) Amount   Percent(1) Amount  Percent(1) Amount   Percent(1) Amount   Percent(1)
<S>                       <C>      <C>       <C>       <C>        <C>       <C>      <C>      <C>        <C>        <C>
Commercial............    $ 60     14.3%     $ 82      12.8%      $109      17.9%    $105     16.7%      $ 88       18.6%
Real Estate
Mortgage and
Contruction...........     351     83.3%      334      82.8%       502      76.9%     492     80.0%       560       77.5%
Consumer..............      10      2.4%       13       4.4%        23       5.2%      20      3.3%        37        3.9%
                          ----               ----                 ----               ----                ----
Total Allowance for
Loan Losses...........    $421               $429                 $634               $617                $685
                          ====               ====                 ====               ====                ====
</TABLE>

-----
(1) Represents percentage of loans in each category to total loans.

INVESTMENT ACTIVITIES

     The Bank is required to maintain an amount of liquid assets  appropriate to
its level of net savings  withdrawals and current  borrowings.  It has generally
been the Bank's policy to maintain a liquidity portfolio in excess of regulatory
requirements.  At December  31,  1999,  the Bank's  liquidity  ratio was 52.05%.
Liquidity  levels may be  increased or  decreased  depending  upon the yields on
investment  alternatives,  management's judgment as to the attractiveness of the
yields  then  available  in  relation  to  other   opportunities,   management's
expectations  of the level of yield  that will be  available  in the  future and
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities.

     Interest income from investments in various types of liquid assets provides
a significant  source of revenue for the Bank. The Bank invests in U.S. Treasury
and Federal Agency securities, bank certificates of deposits, equity securities,
corporate debt securities,  taxable  municipals and overnight federal funds. The
balance of investment  securities maintained by the Bank in excess of regulatory
requirements reflects management's historical objective of maintaining liquidity
at a level that assures the availability of adequate funds,  taking into account
anticipated cash flows and available sources of credit,  for meeting  withdrawal
requests and loan commitments and making other  investments.  See "Liquidity and
Capital Resources."

         The  Bank  purchases  securities  through  a  primary  dealer  of  U.S.
Government  obligations or such other securities dealers authorized by the Board
of Directors  and requires  that the  securities  be delivered to a  safekeeping
agent  before  the funds are  transferred  to the  broker  or  dealer.  The Bank
purchases investment  securities pursuant to an investment policy established by
the Board of Directors.

     Investment  securities  are recorded on the books of the Bank in accordance
with  GAAP.  The Bank  does not  purchase  investment  securities  for  trading.
Effective  January  1,  1994,  the Bank  implemented  SFAS No.  115.  Available-
for-sale  securities are reported at fair value with unrealized  gains or losses
reported as a


                                       29
<PAGE>

separate component of net worth, net of tax effects. Held-to-maturity securities
are  carried at  amortized  cost.  Substantially  all  purchases  of  investment
securities conform to the Bank's interest rate risk policy.

     The following  table  summarizes  the carrying  value of securities for the
dates indicated:

                              SECURITIES PORTFOLIO
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                   ------------------------------
                                                                   1999         1998        1997
<S>                                                               <C>         <C>         <C>
AVAILABLE FOR SALE:

    U.S. treasury and other government agencies..............     $22,273     $17,333     $ 9,828
    State, county and municipal..............................       1,007       1,685       1,854
    Other....................................................         755         806         112
                                                                  -------     -------     -------
    Total available for sale.................................      24,055      19,824      11,794
                                                                  -------     -------     -------
HELD TO MATURITY:
  U.S. treasury and other government agencies................          --          --         250
                                                                  -------     -------     -------
    Total held to maturity...................................          --          --         250
                                                                  -------     -------     -------
  Total securities...........................................     $24,055     $19,824     $12,044
                                                                  ========    =======     =======
</TABLE>

     The  following  table sets forth the  maturity  distribution  and  weighted
average  yields of the  investment  portfolio at December 31, 1999. The weighted
average  yields are calculated on the basis of the book value of' the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount.

                   INVESTMENT PORTFOLIO - MATURITY AND YIELDS
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                      1 Year          5 Years           After
                                                 1 Year or less     To 5 Years      To 10 Years        10 Years
<S>                                                 <C>              <C>              <C>               <C>
MATURITY DISTRIBUTION:
U.S. Agency Issues............................      $   --           $20,983          $ 945             $ 375
Municipal Issues..............................         509               498             --                --
Other Corp Securities.........................          --               510             --                --
Federal Reserve Bank Stock....................          --                --             --               265
                                                    ------           -------          -----             -----
  Total Maturity Distribution.................      $  509           $21,961          $ 945             $ 640
                                                    ------           -------          -----             -----
WEIGHTED AVERAGE YIELD:
U.S. Agency Isses.............................          --              6.45%          6.18%             9.23%
Municipal Issues..............................       10.43%             6.69%            --                --
Other Crop Securities.........................          --              6.37%            --                --
Federal Reserve Bank Stock....................          --                --             --              6.00%
  Total.......................................       10.43%             6.45%          6.18%             7.89%
                                                    ======           =======          =====             =====
Total Portfolio Weighted Average Yield........        6.56%
</TABLE>


                                       30
<PAGE>

DEPOSITS

     The  Bank  primarily  uses  deposits  to  fund  its  loans  and  investment
portfolio.  The Bank  offers a variety of deposit  accounts to  individuals  and
small to medium-sized  businesses.  Deposit accounts include checking,  savings,
escrow  accounts,  money market and  certificates  of deposit.  Certificates  of
deposit in amounts of  $100,000 or more  totaled  $4.7  million at December  31,
1999. Many of these deposits are from  long-standing  customers and,  therefore,
are believed by the Bank's  management to be as stable as, and for all practical
purposes, no more rate sensitive than, core deposits.

     The  following  table  details the average  amount of, and the average rate
paid on, the following primary deposit categories for the periods indicated:

                     AVERAGE DEPOSITS AND AVERAGE RATES PAID
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                  ------------------------------------------------------------------
                                                         1999                    1998                   1997
                                                  -------------------   --------------------     -------------------
                                                  Average     Average     Average    Average     Average     Average
Interest-bearing deposits:                        Balance      Rate       Balance      Rate      Balance      Rate
<S>                                               <C>          <C>      <C>            <C>       <C>          <C>
  NOW accounts..............................      $ 7,387      1.76%    $ 5,696        2.33$     $ 5,073      2.23%
  Money market savings......................       11,808      2.96      10,875        3.34       10,377      3.19
  Regular savings...........................        3,250      2.77       3,298        2.94        3,369      2.94
  Certificates of deposit...................       15,373      5.02      12,424        5.14       11,196      5.01
                                                  -------               -------                  -------
  Total interest-bearing deposiuts..........      $37,818      3.55%    $32,293        3.82%     $30,015      3.68%
Non-interest-bearing deposits...............       11,522                10,546                    8,829
                                                  -------               -------                  -------
Total deposits..............................      $49,340               $42,839                  $38,844
                                                  =======               =======                  =======
</TABLE>

     The following is a summary of the maturity  distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1999:

            MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                       Maturity Period                    Amount     Percent
                       ---------------                    ------     -------
<S>                                                       <C>         <C>
         3 months or less.....................            $1,395       29.44%
         Over 3 months to 6 months............               852       17.98
         Over 6 months to 12 months...........               979       20.66
         Over 12 months.......................             1,513       31.93
                                                          ------       -----
         Total................................            $4,739      100.00%
                                                          ======      ======
</TABLE>

SHORT-TERM BORROWINGS

     The Bank occasionally  finds it necessary to purchase funds on a short-term
basis due to  fluctuations  in loan and  deposit  levels.  The Bank has  several
arrangements under which it may purchase funds. For the


                                       31
<PAGE>

periods  ended  December  31,  1999 and 1998,  the  expense  for  federal  funds
purchased totaled approximately $0 and $7,000, respectively.

CAPITAL REQUIREMENTS

     The  determination  of capital  adequacy  depends upon a number of factors,
such  as  asset  quality,  liquidity,   earnings,  growth  trends  and  economic
conditions.  The Bank seeks to  maintain a strong  capital  base to support  its
growth and expansion plans,  provide stability to current operations and promote
public confidence in the Bank.

     Management  believes that the Bank's capital  position,  as of December 31,
1999,  exceeds all regulatory  minimums.  The federal  banking  regulators  have
defined three tests for  assessing  the capital  strength and adequacy of banks,
based  on  two  definitions  of  capital.  "Tier  1  Capital"  is  defined  as a
combination  of  common  and  qualifying  preferred  stockholders'  equity  less
goodwill.  "Tier 2 Capital"  is defined as  qualifying  subordinated  debt and a
portion of the allowance for loan losses.  "Total  Capital" is defined as Tier 1
Capital plus Tier 2 Capital.  Three risk-based capital ratios are computed using
the above capital  definitions,  total assets and  risk-weighted  assets and are
measured  against  regulatory  minimums to  ascertain  adequacy.  All assets and
off-balance sheet risk items are grouped into categories  according to degree of
risk and  assigned a risk  weighing  and the  resulting  total is  risk-weighted
assets.  "Tier 1 Risk-based  Capital" is Tier 1 Capital divided by risk-weighted
assets.  "Total  Risk-based  Capital" is Total Capital divided by  risk-weighted
assets.  The Leverage Ratio is Tier 1 Capital  divided by total average  assets.
See "Supervision and Regulation--Capital Requirements."

     The following  table shows the Bank's capital ratios and the minimum ratios
currently required by the Federal Reserve to be well-capitalized:

                                 CAPITAL RATIOS

<TABLE>
<CAPTION>
                                                           December 31,               Regulatory
                                               ----------------------------------        Minimum
                                               1999           1998          1997
<S>                                            <C>            <C>           <C>              <C>
Tier 1 Risk-based Capital................      23.3%          24.5%         17.4%            4.0%
Total Risk-based Capital.................      24.4           25.7          18.6             8.0
Leverage ratio...........................      14.7           17.2          11.0             4.0
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     Liquidity is a measure of the Bank's ability to generate sufficient cash to
meet present and future financial  obligations in a timely manner through either
the sale or maturity of existing assets or the  acquisition of additional  funds
through  liability  management.  These  obligations  include the credit needs of
customers,  funding deposit  withdrawals,  and the day-to-day  operations of the
Bank. Liquid assets include cash,  interest-bearing deposits with banks, federal
funds  sold,  and  certain  investment  securities.  As a result  of the  Bank's
management  of liquid  assets and the  ability  to  generate  liquidity  through
liability funding, management believes that the Bank maintains overall liquidity
sufficient  to satisfy  its  depositors'  requirements  and meet its  customers'
credit needs.

     As of  December  31,  1999,  cash,  federal  funds  sold,  held-to-maturity
investment securities maturing within one year and available-for-sale securities
represented  52.05% of  deposits  and other  liabilities  compared  to 61.23% at
December  31,  1998  and  52.51%  at  December   31,  1997.   See  "--  Interest
Sensitivity."  At December 31, 1999,  based upon the Bank's  investment  policy,
approximately  100% of total investment  securities were available for sale, and
were  primarily  invested  in  U.S.  Treasury  and  agency  securities.  See "--


                                       32
<PAGE>

Investment  Activities."  Asset  liquidity  is also  provided by  managing  loan
maturities.  At December 31, 1999, approximately 85.8% or $27.2 million of loans
would mature or reprice within a one-year period.

     The  following  table  summarizes  the Bank's liquid assets for the periods
indicated:

                            SUMMARY OF LIQUID ASSETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                  ---------------------------------------------
                                                                   1999               1998              1997
                                                                   ----               ----              ----
<S>                                                               <C>                <C>                <C>
Cash and due from banks...................................        $ 2,667            $ 5,824            $ 1,987
Federal funds sold........................................             --              8,550              7,600
Available-for-sale securities, at fair value..............         24,055             19,824             11,794
                                                                  -------            -------            -------
Total liquid assets.......................................        $26,722            $34,198            $21,381
                                                                  =======            =======            ========
Deposits and other liabilities............................        $51,341            $55,848            $40,719
Ratio of liquid assets to deposits and other liabilities..          52.05%             61.23%             52.51%
</TABLE>

IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES

     The financial  statements and related  financial  data  concerning the Bank
presented  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 changes in
the relative  purchasing power of money over time due to inflation.  The primary
effect of  inflation  on the  operations  of the Bank is  reflected in increased
operating costs.  Unlike industrial  companies,  virtually all of the assets and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
changes in interest rates have a more significant effect on the performance of a
financial  institution  than do the  effects of changes in the  general  rate of
inflation and changes in prices.  Interest rates do not necessarily  move in the
same  direction or in the same  magnitude  as the prices of goods and  services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Bank, including the influence of domestic and foreign economic conditions
and the  monetary  and  fiscal  policies  of the  U.S.  government  and  federal
agencies, particularly the Federal Reserve.

     The Federal Reserve  implements  national monetary policies such as seeking
to curb  inflation  and combat  recession by its open market  operations in U.S.
government  securities,  control of the discount rate applicable to borrowing by
banks, and  establishment  of reserve  requirements  against bank deposits.  The
actions of the  Federal  Reserve  in these  areas  influence  the growth of bank
loans,  investments and deposits, and affect the interest rates charged on loans
and paid on  deposits.  The nature,  timing and impact of any future  changes in
federal  monetary and fiscal  policies on the Bank and its results of operations
are not predictable.

ACCOUNTING MATTERS

     In June 1998, the FASB issued  Statement No. 133 "Accounting for Derivative
Instruments  and Hedging  Activities",  which is required to be adopted in years
beginning  after June 15, 2000.  The statement  permits early adoption as of the
beginning of any fiscal quarter after its issuance.  This Statement  establishes
accounting  and  reporting  standards  for  derivative  instruments  and hedging
activities,   including  certain  derivative   instruments   embedded  in  other
contracts,  and requires that an entity  recognize all  derivatives as assets or
liabilities  in the balance  sheet and measure  them at fair value.  Because the
Company does not use these  derivative  instruments and  strategies,  management
does not expect the adoption of this Statement to have any effect on earnings or
financial position.


                                       33
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

     Financial  Statements  are  included as pages F-1 through F-27 to this Form
10-KSB.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION  16(a) OF THE EXCHANGE  ACT AND  PRINCIPAL  OFFICERS OF THE
        COMPANY

DIRECTORS

     The following lists the Board of Directors of the Company:

<TABLE>
<CAPTION>
                                                                      Position(s) Held with the        Director
Name                               Age(1)        Term Expires                Company(1)                Since(2)
-------------------------------- ----------- --------------------- -------------------------------- ----------------
<S>                                  <C>             <C>                 <C>                             <C>
Ronald W. Kosh                       54              2000                     Director                   1998
George P. Shafran                    72              2000                   Vice Chairman                1997
Terrie G. Spiro                      43              2000                President, CEO and              1999
                                                                              Director
George K. Degnon                     59              2001                     Director                   1993
Kevin P. Tighe                       55              2001                     Director                   1994
Stanley I. Richards                  63              2002                     Director                   1996
Harold E. Lieding                    63              2002                     Chairman                   1990
Philip F. Herrick, Jr.               59              2002                     Director                   1987
</TABLE>

(1)  As of December 31, 1999.
(2)  Includes  service as a director of the Bank prior to the  formation  of the
     Company in 1998.

     Set  forth  below  is  certain  information  regarding  the  directors  and
executive officers of the Company. Unless otherwise indicated, each director and
executive officer has held his or her current position for the last five years.

     RONALD W. KOSH is Vice President and Division  Manager of AAA  MidAtlantic,
Inc., Fairfax, Virginia. Mr. Kosh was General Manager of the American Automobile
Association, Inc., Fairfax, Virginia, from 1985 to 1997.

     GEORGE P. SHAFRAN is a business  consultant to a number of varied  clients.
He is also  involved  in several  partnerships  and is the  chairman  of the AAA
MidAtlantic Advisory Board. He is president of Geo. P.


                                       34
<PAGE>

Shafran & Associates,  Inc., a consulting firm in McLean,  Virginia. Mr. Shafran
serves as Vice  Chairman of the  Company and has served as Vice  Chairman of the
Board of Directors of the Bank since August 1998.

     TERRIE G. SPIRO is President and Chief Executive Officer of the Company and
the  Bank,  positions  she  has  held  since  October 1999.  Prior to that,  she
served as a  consultant  to the Board of  Directors of the Company and the Bank.
She is the founding  President and Chief  Executive  Officer of Tysons  National
Bank and Tysons Financial Corporation,  its publicly-traded  holding company. In
March  1998,  Tysons  Financial  Corporation  was  acquired in a stock for stock
transaction by another public  company,  Mainstreet  Financial  Corporation.  In
April 1998,  Ms. Spiro  resigned  under her "change of control"  provision  then
served as a consultant for Riggs National  Bank.  Prior to 1988,  when Ms. Spiro
began the  organizational  efforts for Tysons  National Bank, she was the Senior
Vice President and Chief Lending Officer of Century National Bank in Washington,
D.C.  Ms.  Spiro  is  also  an  active   member  in  several   local   community
organizations,  including  the  United  Way and the  Fairfax  County  Chamber of
Commerce.

     GEORGE K. DEGNON is  president of Degnon  Associates,  Inc., a company that
provides organizational management services to national and international health
and medical associations, in McLean, Virginia.

     KEVIN P.  TIGHE  is a senior  partner  in the law  firm of  Tighe,  Patton,
Tabackman  and  Babbin  in  Washington,  D.C.  Mr.  Tighe is also the  owner and
Chairman  of the Board of  Directors  of the McLean  Racquet  and Health Club in
McLean, Virginia.

     STANLEY  I.  RICHARDS  is  the  Chairman  and  President  of  the  Richards
Corporation,   a  company  engaged  in  the  manufacture  and  sale  of  imagery
interpretation equipment and aircraft galley equipment in Sterling, Virginia.

     HAROLD  E.  LIEDING  is a senior  partner  in the law firm of  Lieding  and
Anderson, P.C., in McLean, Virginia, has practiced law in McLean since 1970. Mr.
Lieding  is a  member  of  the  Fairfax  Bar  Association  and  the  McLean  Bar
Association.  Mr.  Lieding is the  Chairman  of the Board of the Company and the
Bank.

     PHILIP F. HERRICK,  JR. is the owner of Herrick Holdings,  which engages in
investments and real estate management in Northern Virginia.

EXECUTIVE OFFICERS

The following table sets forth the names, ages and positions of the non-director
executive officers of the Company and/or the Bank:

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
            Name                 Age      Position(s) Held With the Company and the Bank
            ----                 ---      ----------------------------------------------
<S>                               <C>     <C>
John P. Carroll                   48      Executive Vice President and Chief Operating Officer
Janet A. Valentine                48      Executive Vice President and Chief Financial Officer
</TABLE>

     The  principal  occupation  and  business  of  the  non-director  executive
officers is set forth below:

     JOHN P.  CARROLL  joined  the  Bank in  July,  1999 as the  Executive  Vice
President  and  Chief  Operating  Officer.   Mr.  Carroll  was  previously  Vice
President/Marketing Officer of Fremont Financial Corporation. He was employed at
Tysons  National  Bank from 1993 to 1998 as the Senior Vice  President and Chief
Credit Officer. Mr. Carroll's banking career began over 20 years ago at Maryland
National Bank and has included various positions and responsibilities.

     JANET A. VALENTINE joined the Bank in September, 1999 as the Executive Vice
President and Chief Financial Officer. Ms. Valentine was previously the founding
Senior Vice  President and Chief


                                       35
<PAGE>

Financial  Officer of Alliance Bank from April 1998 to September  1999.  She was
employed at Tysons  National Bank as Senior Vice  President and Chief  Financial
Officer from February 1996 to April 1999 and at Patriot National Bank from April
1991 to February  1996. Ms.  Valentine has over 25 years banking  experience and
obtained her CPA in the District of Columbia.

     The executive officers of the Company and the Bank are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation, retirement or removal by the board of directors.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires  that the  Company's  directors,
executive  officers,  and any  person  holding  more  than  ten  percent  of the
Company's  Common Stock file with the  Securities and Exchange  Commission  (the
"SEC")  reports of  ownership  changes,  and that such  individuals  furnish the
Company with copies of the reports.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from certain reporting  persons,  the Company believes
that all of its executive officers and directors complied with all Section 16(a)
filing requirements applicable to them.

ITEM 10. EXECUTIVE COMPENSATION

MANAGEMENT COMPENSATION

     Directors' Fees.  Currently,  each outside director of the Company receives
the following fees:

     o    $250 per month; and

     o    $100 per committee  meeting  attended,  with an annual  payment cap of
          $600.

     In 2000, directors  fees increased to $500 per month and $100 per committee
meeting with an annual payment cap of $700.  Members of the executive  committee
receive $750 per month.

     Outside Directors of the Company are also eligible to receive options under
the Company'  stock option plans.  See --Stock  Ownership of Certain  Beneficial
Owners and Management" for the number of stock options granted to each director.


                                       36
<PAGE>

SUMMARY COMPENSATION TABLE

     The following table sets forth cash and noncash compensation for the fiscal
years  ended  December  31,  1999,  1998 and 1997  awarded  to or  earned by the
Company's and the Bank's Chief  Executive  Officer.  No other officers  received
total compensation in excess of $100,000 in such years.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                     Long Term
                                       Annual Compensation(1)                       Compensation
--------------------------------------------------------------------------------------------------------------
    Name and Principal                                            Other Annual         Awards         All Other
       Positions(2)           Year    Salary($)    Bonus($)     Compensation ($)    Options (#)    Compensation ($)
<S>                           <C>       <C>         <C>               <C>              <C>             <C>
Terrie G. Spiro,              1999       80,000     28,000            --               8,000(3)        10,000(5)
President and Chief
Executive Officer
John T. Rohrback,             1999        8,558         --            --                  --           15,585(6)
Former President and          1998      100,000         --            --                  --           10,228(4)
Chief Executive Officer       1997      100,000     10,000            --                  --            3,829

</TABLE>


(1)  Under Annual Compensation, the column titled "Salary" includes base salary,
     amounts   deferred   under  the  Bank's   401(k)  plan  (but  not  matching
     contributions  from the Bank) and payroll  deductions for health  insurance
     under the Bank's health insurance plan.

(2)  Effective  October 1, 1999,  Ms. Spiro has been  serving as  President  and
     Chief Executive Officer of the Bank and the Company.  Effective January 25,
     1999, Mr. Rohrback's employment with the Bank terminated.  He had served as
     the President and Chief Executive Officer of the Bank since July of 1996.

(3)  Ms. Spiro  received an option to purchase  5,000  shares of Company  common
     stock, which is fully exercisable and an option to purchase 3,000 shares of
     Company common stock,  which will vest on the first anniversary date of Ms.
     Spiro's employment with the Bank.

(4)  This amount includes (a) the use of the vehicle provided by the Bank valued
     at $8,126  and  $3,325  for the years  ended  December  31,  1998 and 1997,
     respectively;  (b) the  amount of  insurance  premiums  paid by the Bank on
     behalf Mr.  Rohrback  in the  amounts of $600 and $504 for the years  ended
     December 31, 1998 and 1997, respectively; and (c) contributions made by the
     Bank to Mr.  Rohrback's 401(k) Plan account in the amount of $1,502 in 1998
     for the  fiscal  year  ended  December  31,  1997;

(5)  Executive  expense allowance of $10,000 for the  fiscal year ended December
     31, 1999 to be used for auto, country  club dues, disability  insurance and
     other expenses.

(6)  This  amount  represents  severance  pay  received by Mr. Rohrback upon his
     resignation.


                                       37
<PAGE>

                               STOCK OPTION PLANS

     The  Company's  1998 Outside  Directors  Stock Option Plan (the  "Directors
Option Plan") and the Company's 1998 Employee  Incentive  Stock Option Plan (the
"Employee  Option Plan,"  together with the  Directors  Option Plan,  the "Stock
Option  Plans")  were adopted by the Board of Directors of the Bank and approved
by its shareholders at the 1998 Annual Meeting.  The purpose of the Stock Option
Plans is to promote the growth of the Company,  the Bank and other affiliates by
linking the incentive  compensation  of officers,  key  executives and directors
with the profitability of the Company. The Stock Option Plans are not subject to
ERISA and are not tax-qualified  plans. The Company has reserved an aggregate of
75,000  shares of Common Stock under each Plan for issuance upon the exercise of
stock options  granted  under each stock option plan.  The Company also has made
stock option grants that remain outstanding under the 1992 Employee Stock Option
Plan.

     The members of a stock option committee (the "Option Committee") administer
the Stock Option Plans. The option committee  administering  the Employee Option
Plan  consists  of not less than  three  members of the Board of  Directors.  In
contrast,  the option  committee  administering  the  Outside  Directors  Option
Committee consists of three members,  including an outside director, an employee
who is not an outside director,  and a stockholder who is neither an employee or
an outside director. Options may be granted to eligible employees and to members
of the Board who are Outside  Directors.  The Option  Committee  has  discretion
under the Stock Option Plans to establish  certain material terms of the Options
granted to employees or to Outside  Directors  provided  such grants are made in
accordance with the Stock Option Plans'  requirements.  As of December 31, 1999,
each  Outside  Director of the Company had been  granted a  non-qualified  stock
option to purchase an  aggregate  of 2,000 shares of Common Stock at an exercise
price of $4.00 per share.  Under the Employee Incentive Stock Option Plan, as of
December 31, 1999,  options for 26,107  shares of Common Stock have been granted
to eligible employees.

     All  stock  options  currently  granted  under  the  Plan  are  immediately
exercisable.  The Option  Committee has the  discretion to determine the vesting
schedule of a stock option award;  provided,  however,  that each option granted
shall automatically  become 100% vested and fully exercisable in the event of an
option holder's death, disability or retirement or upon a "change in control" of
the Company.  No option is exercisable after the tenth anniversary from the date
it was  granted.  The Company  pays all costs and  expenses of the Stock  Option
Plans. The Company has reserved the right to amend or terminate the Stock Option
Plans, in whole or in part, subject to the requirements of all applicable laws.


                                       38
<PAGE>

     The following  table  summarizes the option grants that were made to Terrie
G. Spiro during the fiscal year ended December 31, 1999.

                      OPTION/SAR GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
                                                                Individual Grants
-------------------------------------------------------------------------------------------------------------------
                                   Number of      Percent of Total
                                   Securities       Options/SARs
Name                               Underlying        Granted to       Exercise or Base
                                  Options/SARs      Employees in           Price
                                    Granted          Fiscal Year       ($ per Share)          Expiration Date
                                     (#)(1)              (%)
<S>                                  <C>                <C>                <C>                    <C>  <C>
Terrie G. Spiro
   President and
   Chief Executive Officer           8,000              32.6               4.000                  9/30/09
</TABLE>

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

(1)  All options awarded were immediately exercisable upon grant, except for the
     option to purchase  3,000  shares of Company  common  stock  awarded to Ms.
     Spiro. These options will vest on the first anniversary date of Ms. Spiro's
     employment with the Bank.

     The following table provides  information with respect to Ms. Spiro and Mr.
Rohrback  concerning the exercise of options during the last fiscal year and the
value for "in-the-money"  options held by each at year end, which represents the
positive  spread  between the exercise  price of any such existing stock options
and the year-end price of the Common Stock.  Ms. Spiro and Mr.  Rohrback did not
hold any "in-the-money" options at year end.


<TABLE>
<CAPTION>

AGGREGATED OPTION EXERCISES IN 1999 FISCAL YEAR AND 1999 FISCAL YEAR END OPTION/VALUES

                          ---------------- -------------- --------------------------------- ------------------------
                                                                Number of Securities          Value of Unexercised
                                                               Underlying Unexercised             In-the-Money
          Name                Shares           Value           Options/SARs at Fiscal        Options/SARs at Fiscal
          -----             Acquired on      Realized                 Year-end                      Year-end
                           Exercise (#)         ($)                     (#)                            ($)
                           ------------         ---          Exercisable/Unexercisable      Exercisable/Unexercisable(1)
                                                             -------------------------
<S>                             <C>             <C>                 <C>                               <C>
 Terrie G. Spiro                --              --                  8,000/3,000                       N/A
 John T. Rohrback               --              --                    2,581/0                         N/A
</TABLE>

(1)  Based upon a market  price of $3.688 per share at  December  31, 1999 minus
     the exercise price.

EMPLOYMENT AGREEMENT

     The Bank and the Company  have entered into an  employment  agreement  with
Terrie G. Spiro providing for an initial term of three years and every two years
thereafter,   the  employment  agreement  will  be  automatically   extended  an
additional  two years  unless  either  party  gives the other six  months  prior
written notice of non-renewal.  The employment agreement provides for an initial
annual  base  salary  of  $120,000,  which  will  be  reviewed  annually  by the
Compensation  Committee,  commencing with the salary for the calendar year 2002,
and  increased as the  Compensation  Committee  determines,  but at least by the
Consumer Price Index. Upon the execution of the employment agreement,  Ms. Spiro
was granted an option to purchase 5,000 shares of Company stock,  which is fully
and immediately exercisable, and an option to purchase 3,000


                                       39
<PAGE>

shares of Company stock,  which will become fully  exercisable one year from the
anniversary  date of Ms.  Spiro's  employment  with the Bank.

     The employment  agreement  provides for an annual  performance  bonus in an
amount  based on the  performance  of the Bank in  relation  to  pre-established
targets for annual net profit and asset  growth and for an annual grant of stock
options  in an  amount  based  on the  performance  of the Bank in  relation  to
pre-established  targets for earnings and asset growth. The employment agreement
also provides for certain  executive  perquisites,  such as the use of a car and
club dues.

     The  employment  agreement also provides that in the event that Ms. Spiro's
employment  is  terminated  by the Bank and the  Company  during the term of the
agreement for reasons other than just cause,  Ms. Spiro will continue to receive
the payment of her salary and coverage  under various  fringe  benefit plans for
the remaining term of the  agreement,  but in no event for a period of less than
nine months. Ms. Spiro also would be entitled to the continuation of her regular
salary  for a period of not less than nine  months  if she  resigns  during  the
agreement's  term after any of the following  occur without cure within 30 days:
(i) the  requirement  that  she move  her  personal  residence  or  perform  her
executive duties more than thirty-five (35) miles from her primary office;  (ii)
the assignment of duties and  responsibilities  not normal for the President and
Chief  Executive  Officer;  (iii)  loss  of  Board  membership;  and a  material
diminution or reduction in her responsibilities or authority.

     Within  six  months  following  a "change  in  control"  of the Bank or the
Company,  as defined in the  employment  agreement,  Ms. Spiro may resign and be
entitled to receive a severance  benefit equal to 2.99  multiplied by her annual
compensation plus bonus.

     Prior to entering into the employment  agreement,  Ms. Spiro entered into a
consulting  agreement  with the Bank and the  Company on May 3, 1999 under which
she  provided  services in an  advisory  capacity to the Bank and the Company as
requested  and directed  from time to time by the Board of  Directors  until her
appointment  as  President  and Chief  Executive  Officer  on  October  1, 1999.
The compensation Ms. Spiro received in her capacity as a  consultant to the Bank
and the Company is included in the Summary Compensation Table.


                                       40
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table sets  forth,  as of March 24,  2000,  the  beneficial
ownership of Common  Stock of the Company by: (i) each  director of the Company;
(ii) each executive officer named in the Summary  Compensation Table; (iii) each
person who owns or is known by  management  to own  beneficially  more than five
percent of the outstanding  shares of the Company's  Common Stock;  and (iv) all
executive officers and directors as a group.

<TABLE>
<CAPTION>
         Name and Address                   Number of Shares
     of Beneficial Owner (1)           Owned Beneficially (1)(2)      Percent of Class (3)
     ----------------------            ------------------------       --------------------
<S>                                            <C>                            <C>
George K. Degnon                               27,100(4)                      1.18%

Philip F. Herrick, Jr.                        136,058(5)                      5.91

Ronald W. Kosh                                 10,900(6)                       .47

Harold E. Lieding                             368,993(7)                     16.00

Stanley I. Richards                            18,102(8)                       .79

Terrie G. Spiro                                45,000(9)                      1.94

Kevin P. Tighe                                 11,000(10)                      .48

George P. Shafran                              50,269(11)                     2.10

All Directors and
Executive Officers as a
Group (10 persons)                            679,422(12)                    22.85%
                                              -------
</TABLE>

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

(1)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  by such  person  within  60 days  from  March  24,  2000.  Unless
     otherwise  indicated,  the Company  believes  that all persons named in the
     table have sole voting and  investment  power with respect to all shares of
     Common Stock  beneficially owned by them. Unless otherwise  indicated,  the
     address for the  individuals  listed above is c/o Heritage  Bancorp,  Inc.,
     1313 Dolley Madison Blvd., McLean, Virginia 22101.
(2)  Based on 2,294,617 shares of Common Stock outstanding as of March 24, 2000.
     Each beneficial owner's percentage ownership is determined by assuming that
     options  that are held by such  person  (but not  those  held by any  other
     person) and which are  exercisable  within 60 days from  December  31, 1999
     have been exercised.
(3)  Includes stock options granted to the following  outside  directors:  6,000
     shares to Messrs.  Degnon,  Herrick,  Lieding,  Richards  and Tighe;  5,000
     shares issued to Mr. Shafran and 3,500 shares issued to Mr. Kosh.
(4)  Includes 100 shares held jointly with his spouse, and 20,000 shares held in
     a profit sharing trust, of which Mr. Degnon serves as the trustee.


                                       41
<PAGE>

(5)  Includes 111,433 shares held jointly with his spouse.
(6)  Includes 4,700 shares held jointly with his spouse.
(7)  Includes 146,652 shares held in an individual retirement account.
(8)  Includes  7,000  shares  jointly held with his spouse and 2,500 held in his
     spouse's name.
(9)  Excludes an option to purchase 3,000 shares of Company common stock,  which
     is not  exercisable  nor will be  exercisable  within  60 days of March 24,
     2000. Includes 22,000 options granted which are immediately exercisable.
(10) Includes 3,000 shares held jointly with his spouse.
(11) Includes   3,634  shares  held  as  custodian  for  Mr.   Shafran's   minor
     grandchildren.
(12) Includes  additional  options to purchase 8,000 shares of Company's  common
     stock granted to executive officers.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The officers,  directors, their immediate families and affiliated companies
in which they are stockholders  maintain normal  relationships  with the Company
and the Bank. Loans made by the Bank are made in the ordinary course of business
on the same terms, including interest rates and collateral,  as those prevailing
at the time of comparable  transactions with others and do not involve more than
normal risks of collectability or present other unfavorable features. The amount
of such loans was  approximately  $306,496  and $279,384 as of December 31, 1999
and 1998, respectively. No loan to a director or any director's related interest
exceeded ten percent of capital or exceeded $300,000 at December 31, 1999.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(1) The  following  financial  statements  of  Heritage  Bancorp,  Inc.  and the
Heritage Bank are incorporated herein by reference in item 8:

     Balance Sheets - December 31, 1999 and 1998.
     Statement of operation - Years ended December 31, 1999, 1998, and 1997.
     Statement  of changes in  Stockholders'  Equity - Years ended  December 31,
     1999, 1998, and 1997.
     Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997.
     Notes to Financial statements.
     Report of independent accountants.

(2)  Exhibits:

      2.1 Agreement  and Plan of  Reorganization  by and among The Heritage Bank
          and Heritage Bancorp, Inc.*
      3.1 Articles of Incorporation of Heritage Bancorp, Inc.*
      3.2 Bylaws of Heritage Bancorp, Inc.*
      3.3 Articles of Incorporation of The Heritage Bank*
      3.4 Bylaws of The Heritage Bank*
      4.1 Stock Certificate of Heritage Bancorp, Inc.*
     10.1 The Heritage Bank 1998 Employee Incentive Stock Option Plan*
     10.2 The Heritage Bank 1998 Outside Director Stock Option Plan*
     10.3 The Heritage Bank 1992 Employee Incentive Stock Option Plan*
     10.4 Employment  Agreement  between Terrie G. Spiro,  The Heritage Bank and
          Heritage Bancorp, Inc.**
     21.1 Subsidiaries of the Registrant (see page 3 of Item 1)
     23.1 Consent of Yount, Hyde & Barbour, P.C.
     27.1 Financial Data Schedule (only filed in EDGAR format)


                                       42
<PAGE>

 *Incorporated by reference to the initial filing of the Registration  Statement
on Form S-4 (File No. 333-58515) as filed with the U.S.  Securities and Exchange
Commission on July 6, 1998, as amended,

**Incorporated  by reference  to the Form 10-QSB for the quarter  ended June 30,
1999, as filed with the SEC on August 16, 1999.

(3) Reports on Form 8-K:

     None.


                                       43
<PAGE>

                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


HERITAGE BANCORP, INC.


By: /s/ Terrie G. Spiro
    -------------------------------------
    Terrie G. Spiro
    President and Chief Executive Officer

     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
                   Name                                        Title                          Date
                   ----                                        -----                          ----
<S>                                               <C>                                    <C>
/s/ Harold E. Lieding                             Chairman of the Board                  March 30, 2000
--------------------------------
Harold E. Lieding

/s/ Terrie G. Spiro                               Director, President & Chief            March 30, 2000
---------------------------------                 Executive Officer

/s/ George K. Degnon                              Director                               March 30, 2000
---------------------------------
George  K. Degnon

                                                  Director                               March 30, 2000
---------------------------------
Kevin P. Tighe

/s/ Philip f. Herrick, Jr.                        Director                               March 30, 2000
---------------------------------
Philip F. Herrick, Jr.

                                                  Director                               March 30, 2000
---------------------------------
Ronald W. Kosh

/s/ Stanley I. Richards                           Director                               March 30, 2000
---------------------------------
Stanley I. Richards

/s/ George P. Shafran                             Director and Vice Chairman             March 30, 2000
---------------------------------
George P. Shafran

/s/ Janet A. Valentine                            Secretary                              March 30, 2000
---------------------------------
Janet A. Valentine
</TABLE>


                                       44

<PAGE>








                             HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                                MCLEAN, VIRGINIA

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 1999








<PAGE>



                                 C O N T E N T S

                                                                            PAGE

INDEPENDENT AUDITOR'S REPORT                                                 F-1

CONSOLIDATED FINANCIAL STATEMENTS

  Consolidated statements of condition                                       F-2
  Consolidated statements of operations                                      F-3
  Consolidated statements of changes in stockholders' equity                 F-4
  Consolidated statements of cash flows                              F-5 and F-6
  Notes to consolidated financial statements                          F-7 - F-27






<PAGE>



                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Heritage Bancorp, Inc. and Subsidiary
McLean, Virginia

     We have audited the  accompanying  consolidated  statements of condition of
Heritage Bancorp,  Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated  statements of operations,  changes in stockholders' equity
and cash flows for the three years then ended.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted  our audits 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 Heritage
Bancorp,  Inc. and  Subsidiary as of December 31, 1999 and 1998, and the results
of their  operations  and their cash flows for the three  years then  ended,  in
conformity with generally accepted accounting principles.

                                                 /s/ Yount, Hyde & Barbour, P.C.


Winchester, Virginia
February 4, 2000


                                      F-1

<PAGE>



                            HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CONDITION
                           December 31, 1999 and 1998


<TABLE>
<CAPTION>
         ASSETS                                                                         1999                     1998
                                                                                     ------------            ------------
<S>                                                                                  <C>                     <C>
 Cash and due from banks                                                             $  2,667,443            $  5,824,649
 Federal funds sold                                                                            --               8,550,000
                                                                                     ------------            ------------
      Total cash and cash equivalents                                                $  2,667,443            $ 14,374,649

 Securities available for sale, at approximate market value                            24,054,515              19,823,754
 Loans, net of allowance for loan losses of $420,940 in 1999
   and $429,059 in 1998                                                                31,268,232              29,181,039
 Premises and equipment, net                                                              848,995                 376,453
 Accrued interest receivable                                                              535,571                 459,340
 Other real estate owned                                                                       --                 263,199
 Other assets                                                                             564,657                 297,160
                                                                                     ------------            ------------

      Total assets                                                                   $ 59,939,413            $ 64,775,594
                                                                                     ============            ============

     LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
 Deposits:
   Noninterest-bearing deposits                                                      $ 13,707,792            $ 17,385,307
   Interest-bearing deposits                                                           34,284,891              36,056,672
                                                                                     ------------            ------------
      Total deposits                                                                 $ 47,992,683            $ 53,441,979
   Accrued interest and other liabilities                                                 347,527                 119,170
   Securities sold under agreement to repurchase                                        3,001,225               2,286,781
   Commitments and contingent liabilities                                                      --                      --
                                                                                     ------------            ------------
      Total liabilities                                                              $ 51,341,435            $ 55,847,930
                                                                                     ============            ============

STOCKHOLDERS' EQUITY

 Common stock, $1 par value; authorized 10,000,000
   shares; issued and outstanding 2,294,617 shares                                   $  2,294,617            $  2,294,617
 Capital surplus                                                                        6,529,539               6,529,539
 Retained earnings                                                                        210,534                  28,549
 Accumulated other comprehensive income (loss)                                           (436,712)                 74,959
                                                                                     ------------            ------------
      Total stockholders' equity                                                     $  8,597,978            $  8,927,664
                                                                                     ------------            ------------
      Total liabilities and stockholders' equity                                     $ 59,939,413            $ 64,775,594
                                                                                     ============            ============
</TABLE>


See Accompanying Notes to Consolidated Financial Statements.

                                       F-2

<PAGE>

                             HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                      1999                 1998                   1997
                                                                   -----------          -----------           -----------
<S>                                                                <C>                  <C>                   <C>
 INTEREST INCOME
   Loans, including fees                                           $ 2,689,853          $ 2,386,091           $ 2,285,986
   Securities                                                        1,413,942            1,117,858               816,256
   Federal funds sold                                                  277,106              262,053               154,066
                                                                   -----------          -----------           -----------
           Total interest income                                   $ 4,380,901          $ 3,766,002           $ 3,256,308
                                                                   -----------          -----------           -----------

 INTEREST EXPENSE
   Deposits                                                        $ 1,342,470          $ 1,233,550           $ 1,103,974
   Securities sold under agreement to repurchase                        96,794               38,859                 6,797
                                                                   -----------          -----------           -----------
           Total interest expense                                  $ 1,439,264          $ 1,272,409           $ 1,110,771
                                                                   -----------          -----------           -----------

           Net interest income                                     $ 2,941,637          $ 2,493,593           $ 2,145,537

 Provision for loan losses                                                  --              117,000                 3,825
                                                                   -----------          -----------           -----------

           Net interest income after
             provision for loan losses                             $ 2,941,637          $ 2,376,593           $ 2,141,712
                                                                   -----------          -----------           -----------

 OTHER INCOME
   Service charges on deposit accounts                             $   116,343          $   122,684           $   112,039
   Other operating income, net                                          47,835               15,477                21,233
   Gain (loss) on sale of securities                                     1,468                 (781)               47,261
   Gain on sale of other real estate                                    56,611                   --                    --
                                                                   -----------          -----------           -----------
           Total other income                                      $   222,257          $   137,380           $   180,533
                                                                   -----------          -----------           -----------

 OTHER EXPENSES
   Salaries and employee benefits                                  $ 1,472,136          $ 1,074,228           $   953,246
   Occupancy expense                                                   328,105              204,669               215,204
   Equipment expense                                                   146,172               73,667                88,275
   Other operating expenses                                            942,821            1,068,643               579,961
                                                                   -----------          -----------           -----------
           Total other expenses                                    $ 2,889,234          $ 2,421,207           $ 1,836,686
                                                                   -----------          -----------           -----------

           Income before income taxes                              $   274,660          $    92,766           $   485,559

   Income tax expense (benefit)                                         92,675              (40,639)              (85,297)
                                                                   -----------          -----------           -----------

           Net income                                              $   181,985          $   133,405           $   570,856
                                                                   ===========          ===========           ===========

 EARNINGS PER SHARE, BASIC                                         $      0.08          $      0.07           $      0.45
                                                                   ===========          ===========           ===========

 EARNINGS PER SHARE, ASSUMING DILUTION                             $      0.08          $      0.07           $      0.44
                                                                   ===========          ===========           ===========
</TABLE>


See Accompanying Notes to Consolidated Financial Statements.

                                       F-3

<PAGE>

                             HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                            OTHER
                                                COMMON        CAPITAL        RETAINED    COMPREHENSIVE  COMPREHENSIVE
                                                STOCK         SURPLUS        EARNINGS    INCOME (LOSS)  INCOME (LOSS)      TOTAL
                                             -----------    -----------    -----------    -----------    -----------    -----------
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
 BALANCE, DECEMBER 31, 1996                  $ 1,249,634    $ 2,967,448    $  (675,712)   $     1,464                   $ 3,542,834
   Net income                                         --             --        570,856             --    $   570,856        570,856
   Other comprehensive income,
     net of tax:
       Unrealized holding gains on
         securities available for sale
         arising during period,
         net of tax of $25,401                        --             --             --             --    $    47,845             --
       Less reclassification adjustment,
         net of tax of $16,068                        --             --             --             --        (31,192)            --
                                                                                                         -----------
       Other comprehensive income                     --             --             --         16,653    $    16,653         16,653
                                                                                                         -----------
       Comprehensive income                           --             --             --             --    $   587,509             --
                                                                                                         -----------
   Warrants exercised                            240,002        360,003             --             --                       600,005
                                             -----------    -----------    -----------    -----------                   -----------
 BALANCE, DECEMBER 31, 1997                  $ 1,489,636    $ 3,327,451    $  (104,856)   $    18,117                   $ 4,730,348
   Net income                                         --             --        133,405             --    $   133,405        133,405
                                                                                                         -----------
   Other comprehensive income,
     net of tax:
       Unrealized holding gains on
         securities available for sale
         arising during period,
         net of tax of $29,016                        --             --             --             --    $    56,327             --
       Add reclassification adjustment,
         net of tax of $266                           --             --             --             --            515             --
                                                                                                         -----------
       Other comprehensive income                     --             --             --         56,842    $    56,842         56,842
                                                                                                         -----------
       Comprehensive income                           --             --             --             --    $   190,247             --
                                                                                                         -----------
   Stock options exercised                         2,700          7,120             --             --                         9,820
   Repurchase of stock in odd lot tender          (2,719)       (12,236)            --             --                       (14,955)
   Issuance of common stock                      805,000      3,207,204             --             --                     4,012,204
                                             -----------    -----------    -----------    -----------                   -----------
 BALANCE, DECEMBER 31, 1998                  $ 2,294,617    $ 6,529,539    $    28,549    $    74,959                   $ 8,927,664

 Net income                                           --             --        181,985             --    $   181,985        181,985
                                                                                                         -----------
   Other comprehensive income,
     net of tax:
       Unrealized holding losses on
         securities available for sale
         arising during period,
         net of tax of $263,089                       --             --             --             --    $  (510,702)            --
       Less reclassification adjustment,
         net of tax of $499                           --             --             --             --           (969)            --
                                                                                                         -----------
       Other comprehensive income (loss)              --             --             --       (511,671)   $  (511,671)      (511,671)
                                                                                                         -----------
       Comprehensive income (loss)                    --             --             --             --    $  (329,686)            --
                                             -----------    -----------    -----------    -----------    -----------    -----------
 BALANCE, DECEMBER 31, 1999                  $ 2,294,617    $ 6,529,539    $   210,534    $  (436,712)                  $ 8,597,978
                                             -----------    -----------    -----------    -----------                   -----------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

                                      F-4

<PAGE>

                             HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                     1999               1998               1997
                                                                                 ------------       ------------       ------------
<S>                                                                              <C>                <C>                <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                     $    181,985       $    133,405       $    570,856
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
  Provision for loan losses                                                                --            117,000              3,825
  (Gain) loss on sale of securities                                                    (1,486)               781            (47,261)
  (Gain) on sale of fixed assets                                                         (200)                --                 --
  (Gain) on sale of other real estate                                                 (56,611)                --                 --
  Depreciation and amortization                                                        81,460             50,958             67,733
  Deferred tax (benefit) expense                                                       72,362            (45,239)           (85,297)
  Amortization of investment security premiums,
    net of discounts                                                                   22,442             37,438             13,845
  (Increase) decrease in accrued interest and other assets                           (152,502)          (319,486)            64,677
  Increase (decrease) in accrued interest and other liabilities                       228,357              5,412            (30,169)
                                                                                 ------------       ------------       ------------
      Net cash provided by (used in) operating activities                        $    375,807       $    (19,731)      $    558,209
                                                                                 ------------       ------------       ------------

 CASH FLOWS FROM INVESTING ACTIVITIES
  Maturities and calls of securities available for sale                          $  9,250,000       $  9,195,000       $  1,800,000
  Purchase of securities available for sale                                       (14,923,462)       (17,676,403)        (9,236,816)
  Maturities of securities held to maturity                                                --            250,000            250,000
  Proceeds from sale of securities available for sale                                 646,486            499,219          8,984,402
  Net (increase) decrease in loans                                                 (2,087,193)        (6,543,481)         1,825,409
  Purchase of premises and equipment                                                 (554,002)           (48,472)           (90,920)
  Proceeds from sale of equipment                                                         200                 --                 --
  Proceeds from sale of other real estate owned                                       319,810                 --                 --
                                                                                 ------------       ------------       ------------
      Net cash provided by (used in) investing activities                        $ (7,348,161)      $(14,324,137)      $  3,532,075
                                                                                 ------------       ------------       ------------

 CASH FLOWS FROM FINANCING ACTIVITIES
  Increase  (decrease) in demand deposits, NOW accounts
   and savings deposits                                                          $ (3,677,515)      $  8,639,394       $    550,791
  Increase (decrease) in certificates of deposit                                   (1,771,781)         4,198,750         (2,333,488)
  Proceeds from stock warrants exercised                                                   --                 --            600,005
  Proceeds from sale of common stock                                                       --          4,022,024                 --
  Repurchase of common stock                                                               --            (14,955)                --
  Increase in securities sold under agreement to repurchase                           714,444          2,286,781                 --
                                                                                 ------------       ------------       ------------
       Net cash provided by (used in) financing activities                       $ (4,734,852)      $ 19,131,994       $ (1,182,692)
                                                                                 ------------       ------------       ------------

       Net change in cash and cash equivalents                                   $(11,707,206)      $  4,788,126       $  2,907,592

 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                      14,374,649          9,586,523          6,678,931
                                                                                 ------------       ------------       ------------
 CASH AND CASH EQUIVALENTS, END OF YEAR                                          $  2,667,443       $ 14,374,649       $  9,586,523
                                                                                 ============       ============       ============
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

                                       F-5

<PAGE>

                             HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                 1999                 1998                  1997
                                                                             -----------         ------------        -----------
<S>                                                                          <C>                 <C>                 <C>
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Cash payments for:
      Interest                                                               $ 1,437,740         $  1,269,516        $ 1,113,620
                                                                             ===========         ============        ===========

      Income taxes                                                           $    40,500         $         --        $     9,187
                                                                             ===========         ============        ===========

 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
   unrealized gain (loss) on securities available for sale                   $  (775,258)        $     86,124        $    25,986
                                                                             ===========         ============        ===========
</TABLE>


See Accompanying Notes to Consolidated Financial Statements.



                                       F-6

<PAGE>

                             HERITAGE BANCORP, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

        GENERAL

          Heritage Bancorp,  Inc.  (Company) is a bank holding company organized
          under Virginia law in July,  1998.  During 1998, the Company  acquired
          The Heritage Bank through a share  exchange in which the  stockholders
          of The Heritage  Bank received one share of the Company for each share
          of The Heritage  Bank.  The exchange  was a tax-free  transaction  for
          federal income tax purposes.  The merger was accounted for on the same
          basis as a  pooling-of-interests.  Financial  statements for the prior
          years,  have been  retroactively  adjusted  for the  exchange as if it
          occurred on January 1, 1997.

          The Company's  wholly-owned  subsidiary,  The Heritage Bank (Bank) was
          incorporated under Virginia law in 1987. It operated as a wholly-owned
          subsidiary of Heritage Bankshares,  Inc. until September 1, 1992, when
          it became  independent.  The Bank is a state  chartered  member of the
          Federal  Reserve System with deposits  insured by the Federal  Deposit
          Insurance Corporation (FDIC) and is headquartered in McLean, Virginia.
          During  1999,  the Bank opened its first  branch  office in  Sterling,
          Virginia.

        BUSINESS

          Heritage  Bancorp,  Inc. is a bank  holding  company  that  provides a
          variety of banking services to individuals and businesses. Its primary
          deposit  products are demand and savings  deposits and certificates of
          deposit. Its primary lending products are commercial business and real
          estate mortgage  loans.  The loans are expected to be repaid from cash
          flow or proceeds from the sale of selected assets of the borrowers.

        PRINCIPLES OF CONSOLIDATION

          The accounting and reporting  policies of Heritage  Bancorp,  Inc. and
          subsidiary  conform to generally  accepted  accounting  principles and
          general  practices  within the banking  industry.  The  following is a
          description of the more significant of those policies:

             SECURITIES

               Debt  securities  that  management  has the  positive  intent and
               ability to hold to maturity are  classified as "held to maturity"
               and recorded at amortized cost. Securities not classified as held
               to   maturity,   including   equity   securities   with   readily
               determinable fair values,  are classified as "available for sale"
               and  recorded at fair  value,  with  unrealized  gains and losses
               excluded  from  earnings  and  reported  in  other  comprehensive
               income.

               Purchased  premiums  and  discounts  are  recognized  in interest
               income  using  the   interest   method  over  the  terms  of  the
               securities.  Declines in the fair value of held to  maturity  and
               available for sale securities below their cost that are deemed to
               be other than  temporary  are  reflected  in earnings as realized
               losses.  Gains and losses on the sale of securities  are recorded
               on  the  trade  date  and  are  determined   using  the  specific
               identification method.


                                       F-7

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


             LOANS

               The Company  grants  mortgage,  commercial  and consumer loans to
               customers.  A  substantial  portion  of  the  loan  portfolio  is
               represented by residential and commercial real estate loans.  The
               ability of the  Company's  debtors to honor  their  contracts  is
               dependent upon the real estate and general economic conditions of
               the Company's market area.

               Loans that  management has the intent and ability to hold for the
               foreseeable  future or until  maturity or pay-off  generally  are
               reported at their outstanding  unpaid principal balances adjusted
               for the  allowance for loan losses and any deferred fees or costs
               on  originated  loans.  Interest  income is accrued on the unpaid
               principal   balance.   Loan  origination  fees,  net  of  certain
               origination  costs,  are deferred and recognized as an adjustment
               of the related loan yield using the interest method.

               The  accrual of  interest on  mortgage  and  commercial  loans is
               discontinued  at the time the loan is 90 days  delinquent  unless
               the  credit  is  well-secured   and  in  process  of  collection.
               Installment  loans are  typically  charged  off no later than 180
               days past due. In all cases,  loans are placed on  nonaccrual  or
               charged-off  at an earlier  date if  collection  of  principal or
               interest is considered doubtful.

               All interest  accrued but not collected for loans that are placed
               on nonaccrual or charged-off is reversed against interest income.
               The interest on these loans is accounted for on the cash-basis or
               cost-recovery  method,  until  qualifying  for return to accrual.
               Loans are  returned  to accrual  status  when all  principal  and
               interest  amounts  contracturally  due are  brought  current  and
               future payments are reasonably assured.

             ALLOWANCE FOR LOAN LOSSES

               The  allowance  for loan  losses is  established  as  losses  are
               estimated to have  occurred  through a provision  for loan losses
               charged  to  earnings.   Loan  losses  are  charged  against  the
               allowance when management believes the uncollectibility of a loan
               balance is confirmed. Subsequent recoveries, if any, are credited
               to the allowance.

               The  allowance for loan losses is evaluated on a regular basis by
               management and is based upon management's  periodic review of the
               collectibility  of the loans in light of  historical  experience,
               the nature and volume of the loan portfolio,  adverse  situations
               that may affect the borrower's ability to repay,  estimated value
               of any underlying  collateral and prevailing economic conditions.
               This evaluation is inherently subjective as it requires estimates
               that are susceptible to significant  revision as more information
               becomes available.

               A loan is considered  impaired when, based on current information
               and  events,  it is probable  that the Company  will be unable to
               collect the scheduled  payments of principal or interest when due
               according  to  the  contractural  terms  of the  loan  agreement.
               Factors  considered  by  management  in  determining   impairment
               include payment status,  collateral value, and the probability of
               collecting  scheduled  principal and interest  payments when due.
               Loans that  experience  insignificant  payment delays and payment
               shortfalls  generally are not classified as impaired.  Management
               determines  the   significance  of  payment  delays  and  payment
               shortfalls


                                       F-8

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


               on a case-by-case  basis,  taking into  consideration  all of the
               circumstances  surrounding  the loan and the borrower,  including
               the  length  of  the  delay,  the  reasons  for  the  delay,  the
               borrower's prior payment record,  and the amount of the shortfall
               in relation to the  principal  and interest  owed.  Impairment is
               measured on a loan by loan basis for commercial and  construction
               loans by either the present  value of expected  future cash flows
               discounted  at the loan's  effective  interest  rate,  the loan's
               obtainable  market price,  or the fair value of the collateral if
               the loan is collateral dependent.

               Large   groups  of   smaller   balance   homogeneous   loans  are
               collectively evaluated for impairment.  Accordingly,  the Company
               does not separately  identify individual consumer and residential
               loans for impairment disclosures.

             BANK PREMISES AND EQUIPMENT

               Land is carried at cost.  Buildings  and equipment are carried at
               cost, less accumulated depreciation computed on the straight-line
               method over the estimated useful lives of the assets.

             INCOME TAXES

               Deferred income tax assets and  liabilities are determined  using
               the balance sheet method. Under this method, the net deferred tax
               asset or liability is determined  based on the tax effects of the
               temporary  differences  between  the  book  and tax  bases of the
               various  balance sheet assets and  liabilities  and gives current
               recognition to changes in tax rates and laws.

             EARNINGS PER SHARE

               Basic earnings per share  represents  income  available to common
               stockholders  divided  by the  weighted-average  number of common
               shares outstanding during the period.  Diluted earnings per share
               reflects   additional   common   shares   that  would  have  been
               outstanding if dilutive  potential common shares had been issued,
               as well as any  adjustment  to income that would  result from the
               assumed  issuance.  Potential common shares that may be issued by
               the Company relate solely to outstanding  stock options,  and are
               determined using the treasury method.

             CASH AND CASH EQUIVALENTS

               For purposes of reporting cash flows,  cash and cash  equivalents
               include cash and balances due from banks and federal funds sold.

             OTHER REAL ESTATE

               Assets acquired through, or in lieu of, loan foreclosure are held
               for sale and are initially  recorded at fair value at the date of
               foreclosure,   establishing  a  new  cost  basis.  Subsequent  to
               foreclosure,  valuations are periodically performed by management
               and the assets are  carried  at the lower of  carrying  amount or
               fair  value  less  cost  to  sell.   Revenue  and  expenses  from
               operations and changes in the valuation allowance are included in
               net expenses from foreclosed assets.


                                       F-9

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


             USE OF ESTIMATES

               In preparing consolidated financial statements in conformity with
               generally accepted accounting principles,  management is required
               to make  estimates  and  assumptions  that  affect  the  reported
               amounts of assets and  liabilities  as of the date of the balance
               sheet and the reported  amounts of revenues  and expenses  during
               the  reported  period.  Actual  results  could  differ 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, and the valuation
               of foreclosed real estate and deferred tax assets.

             ADVERTISING

               The  Company   follows  the  policy  of  charging  the  costs  of
               advertising  to expense as  incurred.  The amount of  advertising
               included  in expense for  December  31,  1999,  1998 and 1997 was
               $37,231, $31,482 and $20,394, respectively.

             RECENT ACCOUNTING PRONOUNCEMENTS

               In June 1998, the FASB issued Statement No. 133,  "Accounting for
               Derivative Instruments and Hedging Activities", which is required
               to be  adopted  in  years  beginning  after  June 15,  2000.  The
               statement  permits  early  adoption  as of the  beginning  of any
               fiscal  quarter after its issuance.  This  Statement  establishes
               accounting and reporting standards for derivative instruments and
               hedging  activities,  including  certain  derivative  instruments
               embedded  in  other  contracts,   and  requires  that  an  entity
               recognize all derivatives as assets or liabilities in the balance
               sheet and measure  them at fair value.  Because the Company  does
               not use these derivative  instruments and strategies,  management
               does not expect the adoption of this Statement to have any effect
               on earnings or financial position.

NOTE 2.   CASH AND DUE FROM BANKS

          The Bank is  required to maintain  reserve  balances  with the Federal
          Reserve Bank. For the final weekly reporting period in the years ended
          December 31, 1999 and 1998,  the  aggregate  amounts of daily  average
          required   balances   were   approximately   $469,000  and   $391,000,
          respectively.


                                      F-10

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 3.   SECURITIES

          The amortized cost, with gross unrealized gains and losses, follows:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 1999
                                        -------------------------------------------------------------------------
                                                              GROSS              GROSS
                                         AMORTIZED         UNREALIZED          UNREALIZED               FAIR
                                           COST               GAINS             (LOSSES)                VALUE
                                        -----------        ----------          ----------            -----------
<S>                                     <C>                   <C>             <C>                    <C>
Securities Available for Sale
  U.S. Government agencies              $22,916,301           $  --           $  (643,120)           $22,273,181
  Obligations of states and
    political subdivisions                1,009,856              --                (3,378)             1,006,478
  Corporate                                 525,343              --               (15,187)               510,156
  Other                                     264,700              --                    --                264,700
                                        -----------           -----           -----------            -----------
      Total                             $24,716,200           $  --           $  (661,685)           $24,054,515
                                        ===========           =====           ===========            ===========

<CAPTION>

                                                                     DECEMBER 31, 1998
                                        -------------------------------------------------------------------------
                                                                GROSS              GROSS
                                          AMORTIZED          UNREALIZED          UNREALIZED            FAIR
                                            COST                GAINS             (LOSSES)             VALUE
                                        -----------         -----------         -----------         -----------
<S>                                     <C>                 <C>                 <C>                 <C>
 Securities Available for Sale
   U.S. Treasury securities             $ 3,021,530         $    29,721         $        --         $ 3,051,251
   U.S. Government agencies              14,769,231              57,082              (2,344)         14,823,969
   Obligations of states and
     political subdivisions               1,654,720              29,114                  --           1,683,834
   Corporate
   Other                                    264,700                  --                  --             264,700
                                        -----------         -----------         -----------         -----------
      Total                             $19,710,181         $   115,917         $    (2,344)        $19,823,754
                                        ===========         ===========         ===========         ===========
</TABLE>


          The  amortized  cost and  fair  value of  securities  by  contractural
          maturity follows:

<TABLE>
<CAPTION>
                                                                                              1999
                                                                                  AMORTIZED             FAIR
                                                                                    COST               VALUE
                                                                                -----------         -----------
<S>                                                                             <C>                 <C>
 Due in one year or less                                                        $   510,000         $   508,477
 Due from one year to five years                                                 22,565,980          21,961,130
 Due from five years to ten years                                                 1,000,000             944,688
 Due after ten years                                                                375,520             375,520
 Federal Reserve stock                                                              264,700             264,700
                                                                                -----------         -----------
       Total                                                                    $24,716,200         $24,054,515
                                                                                ===========         ===========
</TABLE>


                                      F-11

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


          Proceeds from sale of securities  available for sale during 1999, 1998
          and 1997 were $646,486  $449,219 and $8,984,402.  Gross gains on those
          sales during 1999,  1998 and 1997 were $1,468,  $0 and $47,261.  Gross
          losses on those sales were $0, $781 and $0 during 1999, 1998 and 1997,
          respectively.

          Securities  having  a  book  value  of  approximately  $5,496,544  and
          $3,792,558  at  December  31,  1999 and 1998,  were  pledged to secure
          public   deposits,   letters  of  credit,   and  customer   repurchase
          agreements.

NOTE 4.   LOANS

          A summary of the balances of loans follows:

<TABLE>
<CAPTION>
                                                                  1999                        1998
                                                                --------                    --------
                                                                            (in thousands)
<S>                                                             <C>                         <C>
Real estate:
  Residential                                                   $ 10,475                    $ 11,168
  Commercial                                                      13,088                      11,791
  Farmland                                                           972                         992
  Construction                                                     1,157                         441
Commercial                                                         3,665                       3,279
Consumer                                                           1,507                       1,306
All other loans                                                      825                         633
                                                                --------                    --------
                                                                $ 31,689                    $ 29,610
Less:  allowance for loan losses                                    (421)                       (429)
                                                                --------                    --------
     Loans, net                                                 $ 31,268                    $ 29,181
                                                                ========                    ========
</TABLE>


           Analysis of the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                              1999                 1998                1997
                                              -----                -----               -----
                                                               (in thousands)
<S>                                           <C>                  <C>                 <C>
 Balance, beginning of year                   $ 429                $ 634               $ 617
 Provision for loan losses                       --                  117                   4
 Loans charged-off                              (20)                (339)                (61)
 Recoveries                                      12                   17                  74
                                              -----                -----               -----
 Balance at end of year                       $ 421                $ 429               $ 634
                                              =====                =====               =====
</TABLE>



                                      F-12

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


          Information about impaired loans is as follows:

<TABLE>
<CAPTION>
                                                                 1999                1998
                                                                -------            --------
<S>                                                             <C>                <C>
 Impaired loans for which an allowance
   has been provided                                            $    --            $ 29,370
 Impaired loans for which no allowance
    has been provided                                                --                  --
                                                                -------            --------
         Total impaired loans                                   $    --            $ 29,370
                                                                -------            --------

 Allowance provided for impaired loans,
   included in the allowance for loan
   losses                                                       $    --            $ 11,405
                                                                -------            --------

<CAPTION>

                                                                 1999                1998              1997
                                                                -------           ---------         ---------
<S>                                                             <C>               <C>               <C>
 Average balance in impaired loans                              $ 2,719           $ 176,334         $ 378,901
                                                                -------           ---------         ---------
 Interest income recognized                                     $   524           $  23,605         $  26,858
                                                                -------           ---------         ---------
</TABLE>


          There were no nonaccrual  loans excluded from impaired loan disclosure
          at December 31, 1999.  Nonaccrual  loans  excluded  from impaired loan
          disclosure  under FASB 114  amounted to $365,670 at December 31, 1998.
          If interest on these loans had been  accrued,  such income  would have
          approximated $26,836.

NOTE 5.   RELATED PARTY TRANSACTIONS

          In the ordinary  course of business,  the Company has granted loans to
          principal  officers and  directors and their  affiliates  amounting to
          $306,496 at  December  31, 1999 and  $279,384  at December  31,  1998.
          During the year ended  December 31, 1999,  total  principal  additions
          were $150,500 and total principal payments were $123,388.


                                      F-13

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 6.    PREMISES AND EQUIPMENT

          A summary of the cost and  accumulated  depreciation  of premises  and
          equipment follows:

<TABLE>
<CAPTION>
                                                                  1999                 1998
                                                               ---------            ---------
<S>                                                            <C>                  <C>
    Land                                                       $ 245,000            $ 245,000
    Land improvements                                             41,964               31,885
    Leasehold improvements                                       242,997              147,647
    Equipment, furniture and fixtures                            459,268              354,200
                                                               ---------            ---------
                                                               $ 989,229            $ 778,732
      Less accumulated depreciation
          and amortization                                      (140,234)            (402,279)
                                                               ---------            ---------
                                                               $ 848,995            $ 376,453
                                                               =========            =========
</TABLE>


          Depreciation and amortization  charged to operations  totaled $81,460,
          $50,958 and $67,733 in 1999, 1998 and 1997, respectively.

NOTE 7.   SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

          Securities sold under  agreements to repurchase,  which are classified
          as secured  borrowings,  generally mature within one to four days from
          the transaction  date.  Securities sold under agreements to repurchase
          are reflected at the amount of cash  received in  connection  with the
          transaction.  The  Company  may  be  required  to  provide  additional
          collateral based on the fair value of the underlying securities.


                                      F-14

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 8.    INCOME TAXES

           The  components  of the net  deferred  tax assets,  included in other
assets, are as follows:

<TABLE>
<CAPTION>
                                                                              1999              1998
                                                                            --------          --------
<S>                                                                         <C>               <C>
DEFERRED TAX ASSETS:
    Net operating loss carryforwards                                        $     --          $ 47,105
    Alternative minimum tax credits                                               --             6,652
    Unrealized loss on securities available for sale                         224,973                --
    Accumulated depreciation                                                  24,794            28,160
    Allowance for loan losses                                                 32,448            32,448
    Organization costs                                                        15,286            19,362
    Other                                                                         --            11,163
                                                                            --------          --------
           Gross deferred tax asset                                         $297,501          $144,890
                                                                            ========          ========
DEFERRED TAX LIABILITIES, unrealized gain
    on securities available for sale                                        $     --          $ 38,615
                                                                            --------          --------

           Net deferred tax assets                                          $297,501          $106,275
                                                                            --------          --------
</TABLE>


           Allocation  of federal  income  taxes  between  current and  deferred
portions is as follows:

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                         ------------------------------------------------
                                                           1999                1998               1997
                                                         --------            ---------          ---------
<S>                                                      <C>                 <C>                <C>
Current                                                  $ 165,498           $   4,600          $      --
Deferred                                                   (72,823)             40,058            161,717
Change in valuation allowance                                   --             (85,297)          (247,014)
                                                         ---------           ---------          ---------
                                                         $  92,675           $ (40,639)         $ (85,297)
                                                         =========           =========          =========
</TABLE>

          The reasons for the  difference  between the statutory  federal income
          tax rate and the effective tax rates are summarized as follows:

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                         ------------------------------------------------
                                                            1999               1998               1997
                                                         ---------           ---------          ---------
<S>                                                      <C>                 <C>                <C>
Tax expense at statutory rate                            $  93,384           $  31,540          $ 165,090
Change in valuation allowance                                   --             (85,297)          (247,014)
Other, net                                                    (709)             13,118             (3,373)
                                                         ---------           ---------          ---------
                                                         $  92,675           $ (40,639)         $ (85,297)
                                                         =========           =========          =========
</TABLE>


                                      F-15

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 9.   DEPOSITS

          The aggregate amount of time deposits, in denominations of $100,000 or
          more at December  31,  1999 and 1998 was  $4,738,768  and  $6,339,277,
          respectively.

          At December 31, 1999, the scheduled maturities of time deposits are as
          follows:

               2000                             $  9,095,970
               2001                                4,932,561
               2002                                1,368,049
                                                ------------
                                                $ 15,396,580
                                                ============


NOTE 10.  OTHER OPERATING EXPENSES

          The components of other operating  expenses consisted of the following
          for the years ended December 31:

<TABLE>
<CAPTION>
                                                      1999                   1998                    1997
                                                   ----------             ----------             ----------
<S>                                                <C>                    <C>                    <C>
Data processing                                    $  126,762             $   99,589             $   78,702
Professional fees                                     175,555                374,229                115,024
Stationary and supplies                                85,693                 70,172                 61,957
Postage                                                38,461                 33,235                 36,899
Stockholder expense                                    49,329                 77,524                 18,116
Bank franchise tax                                     59,556                 27,597                 27,366
Business development                                   84,533                 31,482                 20,794
Other (includes no items in excess of
     1% of total revenue)                             322,932                354,815                221,103
                                                   ----------             ----------             ----------
                                                   $  942,821             $1,068,643             $  579,961
                                                   ==========             ==========             ==========
</TABLE>


                                      F-16

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 11.  EARNINGS PER SHARE

          The  following  shows the  weighted  average  number of shares used in
          computing earnings per share and the effect on weighted average number
          of shares of diluted potential common stock. Potential dilutive common
          stock had no effect on income available to common stockholders.

<TABLE>
<CAPTION>
                                    1999                           1998                             1997
                        ----------------------------    ----------------------------    -----------------------------
                                         PER SHARE                       PER SHARE                       PER SHARE
                          SHARES           AMOUNT         SHARES           AMOUNT         SHARES           AMOUNT
                        ---------       ------------    ---------       ------------    ---------       -------------
<S>                     <C>             <C>             <C>             <C>             <C>             <C>
Basic earnings
  per share             2,294,617       $       0.08    1,890,666       $       0.07    1,271,176       $        0.45
                                        ============                    ============                    =============
Effect of dilutive
  securities:
    Stock options           6,931                           5,585                           1,307
    Warrants                   --                              --                          22,726

Diluted earnings
  per share             2,301,548       $       0.08    1,896,251       $       0.07    1,295,209       $        0.44
                                        ============                    ============                    =============
</TABLE>


NOTE 12.  COMMITMENTS AND CONTINGENCIES

          The Company leases its main office and operations center in McLean and
          its branch office in Sterling.  The McLean lease contains three,  five
          year renewal  periods and expires in 2008.  The  Sterling  lease has a
          term of ten years  with one five year  renewal  option.  The  Sterling
          lease expires in 2009.  Total rent expense was $310,910,  $191,272 and
          $194,945 for 1999,  1998 and 1997,  respectively,  and was included in
          occupancy expense.

          The following is a schedule, by year, of future minimum lease payments
          required under the long-term noncancelable lease agreements.

              2000                             $  336,892
              2001                                350,194
              2002                                364,325
              2003                                374,705
              2004                                385,959
              Due thereafter                    1,355,997
                                               ----------
                                               $3,168,072
                                               ==========

          The Company  entered into a long-term  lease for its Tyson's branch on
          March 16, 2000,  which is subject to  regulatory  approval.  The lease
          expires  March 31, 2006 and has annual  base rent of $111,078  with 3%
          yearly increases.


                                      F-17

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


          In the  normal  course  of  business  there  are  outstanding  various
          commitments and contingent liabilities, which are not reflected in the
          accompanying  consolidated  financial statements.  Management does not
          anticipate any material losses as a result of these transactions.

          See   Note   15   with   respect   to   financial   instruments   with
          off-balance-sheet risk.

NOTE 13.  STOCK-BASED COMPENSATION

          In 1998, the stockholders  approved an employee incentive stock option
          plan.  The option  price for shares  granted  under this plan shall be
          determined by a Committee of the Company's Board of Directors,  but in
          no event shall the option  price be less than the fair market value of
          the  Company's  stock at the time of  grant.  The term of each  option
          granted  under the plan is ten  years,  unless the  optionee  has been
          discharged  from his or her  employment  by the  Company  for cause in
          which  case the  option  must be  exercised  no later  than six months
          following  the date of  discharge.  The  maximum  aggregate  number of
          shares which may be optioned and sold under the plan is 75,000 shares.
          As of December 31, 1999,  29,480 options were  outstanding  under this
          plan.

          In 1992, the Company  adopted a  nonqualified  stock option plan which
          full-time  employees and part-time employees working at least 25 hours
          per week were  eligible to receive  options to acquire  Common  Stock.
          Options  expire  ten years  after the date of grant.  There are 18,125
          options outstanding under this plan as of December 31, 1999.

          Grants under the above plans are  accounted  for following APB Opinion
          No. 25 and related interpretations.  Accordingly, no compensation cost
          has been  recognized  for  grants  under the stock  option  plans.  No
          employee  stock  options  were  granted  during  1997  and  1996.  Had
          compensation cost for the employee stock-based  compensation plan been
          determined  based on the grant date fair  values of awards (the method
          described in FASB Statement No. 123), reported net income and earnings
          per  common  share  would have been  reduced to the pro forma  amounts
          shown below for 1999:

<TABLE>
<S>                                                                          <C>
                     Net income:
                       As reported                                           $     181,985
                       Pro forma                                             $     139,600

                     Basic earnings per share:
                       As reported                                           $         .08
                       Pro forma                                             $         .06

                     Diluted earnings per share:
                       As reported                                           $         .08
                       Pro forma                                             $         .06
</TABLE>

          The fair value of each grant is  estimated at the grant date using the
          Black-Scholes  option-pricing  model.  The following  weighted average
          assumptions for grants in 1999 were used:  price  volatility of 20.9%;
          risk-free  interest rate of 6.5%;  dividend rate of 0.00% and expected
          life of 10 years.

                                      F-18

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


          The  status  of the  Option  Plans  during  1999,  1998 and 1997 is as
          follows:

<TABLE>
<CAPTION>
                                      1999                             1998                             1997
                         --------------------------        -------------------------      -------------------------
                                           WEIGHTED                         WEIGHTED                       WEIGHTED
                                           AVERAGE                           AVERAGE                        AVERAGE
                           NUMBER          EXERCISE          NUMBER         EXERCISE        NUMBER         EXERCISE
                         OF SHARES          PRICE          OF SHARES         PRICE        OF SHARES         PRICE
                         ---------         --------        ---------        --------      ---------        --------
<S>                        <C>             <C>              <C>             <C>              <C>           <C>
Outstanding at
  January 1                29,550          $   3.45         27,375          $   3.43         30,675        $   3.51
    Granted                24,500              3.97          8,925              3.875            --              --
    Exercised                  --                --         (2,700)             3.64             --              --
    Canceled               (6,445)             3.96         (4,050)             4.13         (3,300)           4.20
                           ------                           ------                           ------
Outstanding at
  December 31              47,605          $   3.65         29,550          $   3.45         27,375        $   3.43
                           ------                           ------                           ------

Exercisable at
  end of year              47,605                           29,550                          27,375
                           ======                           ======                          ======

Weighted-average
  fair value per
  option of options
  granted during
  the year                 $    2                           $    2                          $  --
                           ======                           ======                          =====
</TABLE>


          The Status of the  options  outstanding  at  December  31,  1999 is as
          follows:

<TABLE>
<CAPTION>
                            NUMBER                          WEIGHTED
          RANGE OF       OUTSTANDING       REMAINING        AVERAGE
          EXERCISE           AND          CONTRACTUAL       EXERCISE
           PRICE         EXERCISABLE         LIFE            PRICE
        -------------    -----------      -----------       --------
<S>                        <C>             <C>                <C>
        $3.10 - $3.15      18,125          0.75 years         3.14
          $3.875           12,480          9.35               3.875
           $4.00           16,000          9.75               4.00
           $4.25            1,000          9.75               4.25
                           ------
                           47,605          6.22               3.65
                           ======
</TABLE>


                                      F-19

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 14.  DIRECTOR COMPENSATION PLAN

          In 1998,  the  stockholders  approved a stock  option plan for outside
          directors  of the  Company.  The option  price for shares to be issued
          upon  exercise  of  any  option  granted  under  this  plan  shall  be
          determined by a Committee of the Company's Board of Directors,  but in
          no event shall the option  price be less than the fair market value of
          the  Company's  stock at the time of  grant.  The term of each  option
          granted under this plan shall be ten years from the date of grant.  If
          a director resigns or is removed from the Board, all of the Director's
          stock  options  must  be  exercised  within  sixty  days of his or her
          departure from the Board. The maximum aggregate number of shares which
          may be  optioned  and sold  under  the plan is  75,000  shares.  As of
          December 31, 1999, 28,500 options were outstanding under this plan.

          On March 26, 1997,  the Board of Directors  granted  stock  options to
          those members  serving on the Bank's Board of Directors,  who were not
          employees  or  officers  of the Bank,  to acquire  common  stock at an
          exercise price of $2.86.  The options expire ten years after the grant
          date, unless the Director ceases to be a member of the Bank's Board of
          Directors,  in which case the options expire sixty days following such
          date. As of December 31, 1999, there were 10,000 options outstanding.

          The status of the Option Plan during 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                  1999                         1998                         1997
                                       --------------------------    ------------------------     -------------------------
                                                        WEIGHTED                     WEIGHTED                     WEIGHTED
                                                        AVERAGE                      AVERAGE                       AVERAGE
                                         NUMBER         EXERCISE       NUMBER        EXERCISE       NUMBER        EXERCISE
                                       OF SHARES         PRICE       OF SHARES        PRICE       OF SHARES        PRICE
                                       ---------        --------     ---------       --------     ---------       --------
<S>                                     <C>            <C>            <C>           <C>            <C>           <C>
 Outstanding at January 1               26,000         $    3.48      10,000        $    2.86          --        $     --
     Granted                            14,000              4.00      16,000             3.875     10,000            2.86
     Forfeited                          (1,500)             3.875         --               --          --              --
                                        ------                        ------                       ------
 Outstanding at December 31             38,500         $    3.66      26,000        $    3.48      10,000        $   2.86
                                        ======                        ======                       ======
</TABLE>

          The status of the options  outstanding  as of December  31, 1999 is as
          follows:

<TABLE>
<CAPTION>
                       WEIGHTED          NUMBER
                       AVERAGE        OUTSTANDING       REMAINING
                       EXERCISE           AND          CONTRACTUAL
                        PRICE         EXERCISABLE         LIFE
                       -------        -----------       ---------
                       <S>              <C>             <C>
                       $ 2.860          10,000          7.25 years
                         3.875          14,500          8.75
                         4.000          14,000          10
                                        ------
                       $ 3.660          38,500          8.81
                                        ======
</TABLE>


                                      F-20

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 15.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

          The  Company is party to credit  related  financial  instruments  with
          off-balance-sheet  risk in the normal  course of  business to meet the
          financing needs of its customers.  These financial instruments include
          commitments  to extend  credit and  standby  letters  of credit.  Such
          commitments  involve,  to  varying  degrees,  elements  of credit  and
          interest  rate  risk  in  excess  of  the  amount  recognized  in  the
          consolidated balance sheets.

          The  Company's   exposure  to  credit  loss  is   represented  by  the
          contractural  amount of these  commitments.  The Company uses the same
          credit policies in making commitments as it does for  on-balance-sheet
          instruments.

          At December 31, 1999 and 1998,  the  following  financial  instruments
          were outstanding whose contract amounts represent credit risk:

<TABLE>
<CAPTION>
                                                                                  1999               1998
                                                                            ----------------    --------------
<S>                                                                         <C>                 <C>
                    Financial   instruments  whose  contract
                    amounts  represent credit risk:
                      Commitments to extend credit                          $     10,594,692    $  8,708,866
                      Standby letters of credit                             $         92,333    $    181,900
</TABLE>

          Commitments  to extend credit are  agreements to lend to a customer as
          long as there is no  violation  of any  condition  established  in the
          contract.  Commitments  generally have fixed expiration dates or other
          termination  clauses and may require  payment of a fee.  Since many of
          the  commitments  are expected to expire without being drawn upon, the
          total  commitment  amounts do not  necessarily  represent  future cash
          requirements.  The Company evaluates each customer's credit worthiness
          on a case-by-case basis. The amount of collateral obtained,  if deemed
          necessary  by the  Company  upon  extension  of  credit,  is  based on
          management's  credit evaluation of the  counterparty.  Collateral held
          varies but may include accounts  receivable,  inventory,  property and
          equipment, and income-producing commercial properties.

          Unfunded  commitments  under  commercial  lines of  credit,  revolving
          credit lines and overdraft  protection  agreements are commitments for
          possible  future  extensions  of credit to existing  customers.  These
          lines of credit may be  uncollateralized  and usually do not contain a
          specified  maturity date and may not be drawn upon to the total extent
          to which the Company is committed.

          Standby  letters of credit are conditional  commitments  issued by the
          Company to guarantee the  performance  of a customer to a third party.
          Those  guarantees  are primarily  issued to support public and private
          borrowing  arrangements,  including  commercial paper, bond financing,
          and similar transactions.  The credit risk involved in issuing letters
          of credit is  essentially  the same as that involved in extending loan
          facilities  to  customers.  The  Company  holds  cash  and  marketable
          securities supporting those commitments for which collateral is deemed
          necessary.

          The Company maintains several cash accounts in other commercial banks.
          The amount on deposit with correspondent  institutions at December 31,
          1999,  exceeded the insurance limits of the Federal Deposit  Insurance
          Corporation by $490,963.

                                      F-21

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 16.  RESTRICTIONS ON TRANSFERS TO PARENT

          Federal and state banking  regulations  place certain  restrictions on
          dividends  paid and loans or advances made by the Bank to the Company.
          The  total  amount  of  dividends,  which  may be paid at any  date is
          generally  limited to the retained  earnings of the Bank, and loans or
          advances  are  limited to 10 percent of the Bank's  capital  stock and
          surplus on a secured  basis.  As of December 31, 1999,  the  aggregate
          amount of  unrestricted  funds,  which could be  transferred  from the
          banking  subsidiary to the Parent  Company  without  prior  regulatory
          approval totaled $1,025,519 or 11.93% of the consolidated net assets.

NOTE 17.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

          The  following  methods  and  assumptions  were used by the Company in
          estimating fair value disclosures for financial instruments:

             CASH AND CASH EQUIVALENTS

               For  those  short-term  instruments,  the  carrying  amount  is a
               reasonable estimate of fair value.

             SECURITIES

               For  securities  held for  investment  purposes,  fair values are
               based on quoted market prices or dealer quotes.

             LOAN RECEIVABLES

               For  variable-rate  loans  that  reprice  frequently  and with no
               significant  change  in credit  risk,  fair  values  are based on
               carrying  values.  Fair values for certain  mortgage loans (e.g.,
               one-to-four  family  residential),  and other  consumer loans are
               based  on  quoted   market   prices  of  similar  loans  sold  in
               conjunction  with  securitization   transactions,   adjusted  for
               differences in loan characteristics.  Fair values for other loans
               (e.g.,  commercial real estate and investment  property  mortgage
               loans,  commercial  and  industrial  loans) are  estimated  using
               discounted  cash flow analyses,  using  interest rates  currently
               being  offered  for loans  with  similar  terms to  borrowers  of
               similar credit quality.  Fair values for non-performing loans are
               estimated  using  discounted  cash flow  analyses  or  underlying
               collateral values, where applicable.

             DEPOSITS

               The fair values disclosed for demand deposits (e.g., interest and
               non-interest  checking,  statement savings,  and certain types of
               money market  accounts) are, by  definition,  equal to the amount
               payable on demand at the  reporting  date (i.e.,  their  carrying
               amounts). The carrying amounts of variable-rate, fixed-term money
               market  accounts and  certificates of deposit  approximate  their
               fair values at the  reporting  date.  Fair values for  fixed-rate
               certificates  of deposit are  estimated  using a discounted  cash
               flow  calculation  that applies  interest rates  currently  being
               offered on  certificates  to a schedule  of  aggregated  expected
               monthly maturities on time deposits.

                                      F-22

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


             ACCRUED INTEREST

               The carrying amounts of accrued interest approximate fair value.

             OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

               Commitments  to extend  credit were  evaluated and fair value was
               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.  The fair value of  standby  letters of credit is
               based on fees currently charged for similar  agreements or on the
               estimated  cost  to  terminate  them  or  otherwise   settle  the
               obligations  with the  counterparties  at the reporting date. The
               carrying amount of treasury,  tax and loan deposits  approximates
               the fair value.

               The carrying amounts and fair values of financial  instruments as
               of December 31, 1999 are presented below:

<TABLE>
<CAPTION>
                                                               1999                             1998
                                                    ------------------------         ------------------------
                                                    CARRYING           FAIR          CARRYING           FAIR
                                                     AMOUNT            VALUE          AMOUNT            VALUE
                                                    --------           -----         --------           -----
                                                            (in thousands)                   (in thousands)
<S>                                                 <C>               <C>            <C>               <C>
Financial assets:
  Cash and due from banks                           $ 2,667           $ 2,667        $ 5,825           $ 5,825
  Federal funds sold and securities
   purchased under agreement to resell                   --                --          8,550             8,550
  Securities                                         24,055            24,055         19,824            19,824
  Loans, net                                         31,268            31,113         29,181            29,539
  Accrued interest receivable                           536               536            459               459

Financial liabilities:
  Deposits                                          $47,993           $47,918        $53,442           $53,684
  Securities sold under agreement
   to repurchase                                      3,001             3,001          2,287             2,287
  Accrued interest payable                               53                53             55                55

</TABLE>


                                      F-23

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 18.  CAPITAL REQUIREMENTS

          The  Company  (on a  consolidated  basis) and the Bank are  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  Company's  and Bank's  financial  statements.
          Under capital  adequacy  guidelines and the  regulatory  framework for
          prompt corrective  action, the Company and the Bank must meet specific
          capital guidelines that involve quantitative measures of their assets,
          liabilities,  and certain  off-balance-sheet items as calculated under
          regulatory   accounting    practices.    The   capital   amounts   and
          classification  are  also  subject  to  qualitative  judgments  by the
          regulators  about  components,  risk  weightings,  and other  factors.
          Prompt corrective action provisions are not applicable to bank holding
          companies.

          Quantitative  measures  established  by regulation  to ensure  capital
          adequacy  require the Company and the Bank to maintain minimum amounts
          and ratios (set forth in the table  below) of total and Tier 1 capital
          (as defined in the regulations) to  risk-weighted  assets (as defined)
          and of Tier 1 capital  (as  defined) to average  assets (as  defined).
          Management  believes,  as of  December  31,  1999 and  1998,  that the
          Company and the Bank met all capital  adequacy  requirements  to which
          they are subject.

          As of December 31, 1999, the most recent notification from the Federal
          Reserve  Bank  categorized  the  Bank as well  capitalized  under  the
          regulatory  framework for prompt corrective  action. To be categorized
          as well  capitalized,  an  institution  must  maintain  minimum  total
          risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
          in  the  table.   There  are  no   conditions  or  events  since  that
          notification  that management  believes have changed the institution's
          category.


                                      F-24

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


          The Company and  Subsidiary's  actual  capital  amounts and ratios are
          also  presented in the table.  No amount was deducted from capital for
          interest-rate risk.

<TABLE>
<CAPTION>
                                                                                                           MINIMUM
                                                                                                          TO BE WELL
                                                                                                      CAPITALIZED UNDER
                                                        MINIMUM CAPITAL                               PROMPT CORRECTIVE
                                ACTUAL                    REQUIREMENT                                 ACTION PROVISIONS
                                ------                    -----------                                 -----------------
                            AMOUNT  RATIO         AMOUNT                RATIO                   AMOUNT                  RATIO
                            ------  -----         ------                -----                   ------                  -----

                                                              (Amount in Thousands)
<S>                        <C>      <C>     <C>                     <C>                  <C>                     <C>
 As of December 31, 1999:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated         $ 9,456  24.5%   greater than            greater than                             N/A
                                             or equal to  $ 3,088    or equal to  8.0%
      The Heritage Bank    $ 9,456  24.5%   greater than            greater than         greater than            greater than
                                             or equal to  $ 3,088    or equal to  8.0%    or equal to  $ 3,860    or equal to  10.0%
  Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated         $ 9,035  23.4%   greater than            greater than                              N/A
                                             or equal to  $ 1,544    or equal to  4.0%
      The Heritage Bank    $ 9,035  23.4%   greater than            greater than         greater than            greater than
                                             or equal to  $ 1,544    or equal to  4.0%    or equal to  $ 2,316    or equal to   6.0%
    Tier 1 Capital (to
     Average Assets)
      Consolidated         $ 9,035  14.7%   greater than            greater than                              N/A
                                             or equal to  $ 2,453    or equal to  4.0%
      The Heritage Bank    $ 9,035  14.7%   greater than            greater than         greater than            greater than
                                             or equal to  $ 2,453    or equal to  4.0%    or equal to  $ 3,066    or equal to   5.0%
As of December 31, 1998:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated         $ 9,282  25.7%   greater than            greater than                              N/A
                                             or equal to  $ 2,886    or equal to  8.0%
      The Heritage Bank    $ 9,282  25.7%   greater than            greater than         greater than            greater than
                                             or equal to  $ 2,886    or equal to  8.0%    or equal to  $ 3,607    or equal to  10.0%
 Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated         $ 8,853  24.5%   greater than            greater than                              N/A
                                             or equal to  $ 1,443    or equal to  4.0%
      The Heritage Bank    $ 8,853  24.5%   greater than            greater than         greater than            greater than
                                             or equal to  $ 1,443    or equal to  4.0%    or equal to  $ 2,164    or equal to   6.0%
  Tier 1 Capital (to
    Average Assets)
      Consolidated         $ 8,853  17.2%   greater than            greater than                              N/A
                                             or equal to  $ 2,060    or equal to  4.0%
      The Heritage Bank    $ 8,853  17.2%   greater than            greater than         greater than            greater than
                                             or equal to  $ 2,060    or equal to  4.0%    or equal to  $ 2,575    or equal to   5.0%
</TABLE>

NOTE 19.  COMMON STOCK

          On May 18, 1998, the Company  completed a secondary  stock offering in
          which it sold  805,000  shares of common stock at a price of $5.50 per
          share.  Net proceeds for the Company were  $4,012,204  after deducting
          underwriting  commissions  of $309,925  and direct  offering  costs of
          $105,371. On June 8, 1998, the Company used part of the new capital to
          complete an odd-lot tender offer, purchasing 2,719 shares at $5.50 per
          share for a total cost of $14,955.

                                      F-25

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


NOTE 20.  PARENT COMPANY ONLY FINANCIAL STATEMENTS

                             HERITAGE BANCORP, INC.
                              (Parent Company Only)

                                 BALANCE SHEETS
                           December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                    1999                       1998
                                                                                -----------                -----------
       ASSETS
<S>                                                                             <C>                        <C>
Investment in subsidiary, at cost, plus
  equity in undistributed net income                                            $ 8,737,251                $ 9,017,608
                                                                                -----------                -----------
       LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES, due to subsidiary                                                  $   139,273                $    89,944
                                                                                -----------                -----------

STOCKHOLDERS' EQUITY
  Common stock                                                                  $ 2,294,617                $ 2,294,617
  Surplus                                                                         6,529,539                  6,529,539
  Retained earnings                                                                 210,534                     28,549
  Accumulated other comprehensive income                                           (436,712)                    74,959
                                                                                -----------                -----------
       Total stockholders' equity                                               $ 8,597,978                $ 8,927,664
                                                                                -----------                -----------
       Total liabilities and stockholders' equity                               $ 8,737,251                $ 9,017,608
                                                                                ===========                ===========
</TABLE>


                                      F-26

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1999, 1998 and 1997


                             HERITAGE BANCORP, INC.
                              (Parent Company Only)

                              STATEMENTS OF INCOME
                 For the Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                  1999                    1998
                                                                                --------                --------
<S>                                                                             <C>                     <C>
INCOME
  Equity in undistributed net income of subsidiary                              $231,314                $223,349
                                                                                --------                --------
EXPENSES
  Organization costs                                                            $     --                $ 89,944
  Stockholder expense                                                             49,329                      --
                                                                                --------                --------
       Total expenses                                                           $ 49,329                $ 89,944
                                                                                --------                --------
       Net income                                                               $181,985                $133,405
                                                                                ========                ========
</TABLE>


                            STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                   1999                      1998
                                                                                ---------                 ---------
<S>                                                                             <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                                     $ 181,985                 $ 133,405
 Adjustments to reconcile net income to
  net cash provided by operating activities,
  increase in due to subsidiary                                                    49,329                    89,944
 Undistributed earnings of subsidiary                                            (181,985)                 (223,349)
                                                                                ---------                 ---------

      Net cash provided by operating activities                                 $  49,329                 $      --

CASH AND CASH EQUIVALENTS, beginning of year                                           --                        --
                                                                                ---------                 ---------

CASH AND CASH EQUIVALENTS, end of year                                          $  49,329                 $      --
                                                                                =========                 =========
</TABLE>
                                      F-27