UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB
                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                         SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 1998
                         Commission File Number 0-21285

                            ATLANTIC FINANCIAL CORP.

                      Virginia                    54-1809409 
          (State or other jurisdiction     (IRS Employer ID number)
                  of incorporation)

            737 J. Clyde Morris Boulevard,
               Newport News, Virginia                23601
            (Address of principal offices)        (Zip Code)

         Registrant's telephone number including area code (757)595-7020

         Securities registered under Section 12(b) of the Exchange Act:

                                               Name of each exchange
               Title of Each Class             on which  registered
             Common stock, $5 par value         NASDAQ Stock Market

         Securities registered under Section 12(g) of the Exchange Act:
                                      None

Indicate by check mark whether the registrant (1) has filed all reports required
to be  filed by  Section  13 or 15(d) of the  Exchange  Act of 1934  during  the
preceding 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
past 90 days.
  Yes   X     No_____      

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


Registrant's revenues for the fiscal year ended December 31, 1998   $28,345,507
                                                                   ------------

The  aggregate  market  value  (based on a sale price of the stock of $16.50) of
Atlantic  Financial Corp.  voting stock held by  non-affiliates  as of March 29,
1999 was $59,316,032.

As of March 29, 1999,  Atlantic  Financial Corp. has 4,189,385  shares of Common
Stock $5 Par Value outstanding.

The Proxy  Statement of the annual meeting of  shareholders to be held April 27,
1999 is incorporated by reference in Part III of this Form 10-KSB.

<PAGE>


Form 10-KSB Cross-Reference Index

Companies have been encouraged by the Securities and Exchange  Commission  (SEC)
to combine  their Annual  Report to  Shareholders  and Form 10-KSB Annual Report
into a single document. This Form 10-KSB Annual Report incorporates by reference
certain  information  contained  in the  Annual  Report to  Shareholders,  as is
reflected in the following  Cross-Reference  Index. However, only those sections
of the Annual Report to  Shareholders  referred to in the Cross  Reference Index
below are to be deemed  "filed" with the SEC as part of this Form 10-KSB  Annual
Report.
                                                                          Page
                                                                          ----
Part I
Item 1.  Business............................................................2
Item 2.  Properties..........................................................2
Item 3.  Legal Proceedings................................................None
Item 4.  Submission to Matters to a Vote of Security Holders..............None

Part II
Item 5.  Market for Common Equity and Related Shareholder Matters............2
Item 6.  Management's Discussion and Analysis.............................5-19
Item 7.  Financial Statements............................................21-44
Item 8.  Changes In & 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 (1)
Item 10. Executive Compensation. (1)
Item 11. Security Ownership of Certain Beneficial Owners and  Management. (1)
Item 12. Certain Relationships and Related Transactions. (1)
Item 13. Exhibits and Reports on Form 8-K
         (a)  Exhibits (2)
         (b)  Reports on Form 8-K (2)

----------------
(1)      This  information  is omitted  pursuant to Instruction G of Form 10-KSB
         since the  Registrant  intends to file with the Commission a definitive
         Proxy  Statement,  pursuant to Regulation  14A, not later than 120 days
         after December 31, 1998.
(2)      A list of Exhibits and Reports on Form 8-K was filed separately. Copies
         of any  Exhibits  not  contained  herein may be  obtained by writing to
         Kenneth E. Smith,  Secretary,  Atlantic  Financial  Corp., 737 J. Clyde
         Morris Boulevard, Newport News, VA 23601.



<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.

                                            Atlantic Financial Corp.
                                            (Registrant)


                                            /s/ W. J. Farinholt 3/30/99 
                                            -----------------------------------
                                                  W. J. Farinholt / Date
                                                  President/CEO


                                            /s/ Kenneth E. Smith  3/30/99    
                                            -----------------------------------
                                            Kenneth E. Smith / Date
                                            Executive Vice President &
                                            Chief Financial 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.


/s/ Joseph A. Lombard, Jr.  3/30/99           /s/ W. J. Farinholt  3/30/99 
-----------------------------------           ------------------------------
JOSEPH A. LOMBARD, JR. / Date                 W. J. FARINHOLT / Date
Chairman of the Board                         President, CEO, Director


/s/ J. Philip Bain, Jr. 3/30/99               /s/ Charles F. Dawson  3/30/99   
-----------------------------------           ------------------------------
WILLIAM D. FARY / Date                        CHARLES F. DAWSON / Date
Director                                               Director


/s/ Robert D. Foster  3/30/99                 /s/ Harry M. Healy 3/30/99   
-----------------------------------           ------------------------------
ROBERT D. FOSTER / Date                       HARRY M. HEALY / Date
Director                                      Director


/s/ Thomas Z. Wilke  3/30/99                  /s/ Winifred O. Pearce 3/30/99
-----------------------------------           ------------------------------
THOMAS Z. WILKE / Date                        WINIFRED O. PEARCE / Date
Director                                      Chief Operating Officer, Director




<PAGE>

GREETINGS TO FELLOW SHAREHOLDERS:

We are pleased to present the first Annual Report for Atlantic  Financial  Corp.
(the Company).  Although this is technically the first, we are a Company rich in
history!  One of the  members of our  financial  family,  the Bank of Sussex and
Surry,  began banking operations in 1902 and has been a vital participant in its
community  ever since.  The official  origin of the Company was December 1, 1998
when   Mid-Atlantic   Community   BankGroup  and  United  Community   Bankshares
consummated a merger of equals and simultaneous name change. The merger resulted
in a Company  with  total  assets of $360.3  million,  placing  it among the top
fifteen banking  organizations  headquartered in Virginia.  On a combined basis,
the Company  exhibited  strong  growth in total  resources  reaching its current
level  through a $45.0  million  increase  (14.3%)  over 1997's  total assets of
$315.3 million.

The year,  1998, was a satisfying and also  challenging  one.  Rather than being
intimidated by the consolidation in the banking industry, we participated in it.
Our  merger,  described  above,  expanded  our  geographical  spread  throughout
Southeastern Virginia, stretching from the Middle Peninsula across the Peninsula
and over to the Southside.  While this  "business  marriage" was a critical step
for our future,  the  daunting  task of managing a merger of equals has required
much energy.  We brought the strengths of two companies  together and have begun
to accent and expand their influences over the combined entity.  We have already
begun providing data  processing for all subsidiary  banks in one data center on
the same software system. This will provide uniformity in management information
systems and improved financial  reporting.  Further,  it will provide management
the  tools to make  swift,  informed  decisions  and  strengthen  the  Company's
tactical position as a leader in its market.

Pre-tax net income  declined in 1998 to $5.1  million from $5.4 million in 1997.
After-tax  net income for 1998 of $3.7 million  represented a 9.8% decrease from
1997. This translated into an $0.86 per share, assuming dilution, in 1998 versus
$1.00 per share in 1997. This 14% decrease was affected somewhat by the expanded
average primary number of shares outstanding, increasing from 4,055,268 December
31, 1997 to 4,270,957 December 31, 1998.

Shareholder  value as  reflected  in December  31, 1998 book value per share was
$10.35 per share, compared to $9.70 at year-end 1997.  Additionally,  net income
represented a return on average equity of 8.89% compared to 11.32% in 1997.

                           1998 Major Accomplishments:

*     Installed and implemented check imaging system at Peninsula Trust Bank.
*     Opened two new full service banking offices at Peninsula Trust Bank.
*     Completed  franchise building purchase of 50% interest in Johnson Mortgage
      Co, LLC, with nine months operations producing 27% return on investment.
*     Converted  Automated  Teller Machine (ATM)  processing in Peninsula  Trust
      Bank to "in-house", enhancing cost control, customer service, and employee
      efficiency.

Service to our customers,  employees, and you, our shareholders,  can produce an
environment  where  the  needs of each  are met  fully.  We  thank  you for your
continued support and earnestly solicit your business and your suggestions.

Sincerely,




W. J. Farinholt                                      Joseph A. Lombard, Jr., DDS
President & CEO                                      Chairman of the Board




                                       1
<PAGE>

DESCRIPTION OF BUSINESS

Atlantic  Financial Corp. (the "Company") is the parent bank holding company for
Peninsula  Trust Bank,  Incorporated  (PTB),  The Bank of Franklin (BOF) and the
Bank of Sussex and Surry  (BSS),  (the  "Banks").  PTB, BOF and BSS are Virginia
chartered  banks that offer a full range of  banking  services,  principally  to
individuals  and small to medium  size  businesses  in their  respective  market
areas.

Peninsula  Trust Bank,  headquartered  in Gloucester,  Virginia,  operates seven
full-service banking offices located in Gloucester,  Williamsburg,  Charles City
County, Newport News, Glenns and Mattaponi,  Virginia.  Incorporated in Virginia
in 1988,  PTB is  organized  under  the  Virginia  Banking  Act as  amended  and
commenced business as a commercial bank on July 20, 1989. Peninsula Trust Bank's
operations are directly affected by the monetary and banking policies of various
regulatory  agencies,  including  the Board of Governors of the Federal  Reserve
System and the Bureau of Financial  Institutions of the Virginia State Corporate
Commission. The Bank is insured by the Federal Deposit Insurance Corporation and
is subject to regulation,  supervision  and  examination  by various  regulatory
authorities.  PTB offers a broad range of financial services including a variety
of loan and deposit  services,  personal lines of credit,  equity lines,  credit
cards and  merchant  accounts.  PTB had 124  full-time  equivalent  employees on
December 31, 1998.

The  Bank of  Franklin,  headquartered  in  Franklin,  Virginia,  operates  five
full-service  banking  offices  located  in  Franklin,  Suffolk,  Courtland  and
Newsoms,  Virginia.  BOF was  organized  and  chartered  under  the  laws of the
Commonwealth of Virginia on July 8, 1970 and commenced operations on February 4,
1971. BOF is a State  nonmember bank. The Bank is insured by the Federal Deposit
Insurance Corporation and is subject to regulation,  supervision and examination
by various  regulatory  authorities.  BOF  provides  a wide  range of  financial
services,  principally  to  individuals  and to small and medium size  business,
including individual and commercial demand,  savings, and time deposit accounts,
ATM services,  sales of US Savings bonds,  collection items and official checks.
BOF had 51 full-time equivalent employees on December 31, 1998.

The Bank of  Sussex  and  Surry,  headquartered  in  Wakefield,  operates  three
full-service  banking offices in Wakefield,  Ivor and Surry,  Virginia.  BSS was
organized and chartered under the laws of the  Commonwealth of Virginia on April
12, 1902 and  commenced  operations on July 31, 1902.  BSS is a State  nonmember
bank. The Bank is insured by the Federal  Deposit  Insurance  Corporation and is
subject  to  regulation,  supervision  and  examination  by  various  regulatory
authorities.  BSS provides a wide range of financial  services,  principally  to
individuals  and to small and medium size  business,  including  individual  and
commercial demand, savings, and time deposit accounts, ATM services, sales of US
Savings  bonds,  collection  items and official  checks.  BSS also offers a wide
array of real estate products  including a long-term fixed rate mortgage product
that is sold in a secondary market. BSS is authorized to provide trust services,
but does not  currently  do so. BSS had 26  full-time  equivalent  employees  on
December 31, 1998.

The Company's primary corporate mission is to maximize its sustainable  earnings
while  being a  responsible  business  that  maintains  an image  of  trust  and
competence in rendering high quality financial  services  targeting the business
and  professional  markets  and, at the same time,  serving  the retail  market,
through the efforts of fairly treated employees. None of the Company's employees
are  represented by any  collective  bargaining  unit and the Company  considers
relations with its employees to be good.

The banking  industry is  competitive  in the Company's  market area.  There are
approximately  11 banks with local deposits as of June 30, 1998 of $2.6 billion,
within the primary trade areas of its subsidiary banks.


PROPERTIES

The  principal  office  of  Peninsula  Trust  Bank is  located  at  7171  George
Washington  Memorial Highway,  Gloucester,  Virginia.  At December 31, 1998, PTB
conducted  business from seven locations,  all of which are owned. The Company's
Data Processing Center is housed in the Peninsula Trust Bank Glenns office.

The  principal  office of the Bank of  Franklin  is located  at 100 East  Fourth
Avenue,  Franklin,  Virginia.  At December 31, 1998, BOF conducted business from
five locations, four of which are owned and one of which is leased.

The principal  office of the Bank of Sussex and Surry is located at 205 Railroad
Avenue,  Wakefield,  Virginia. At December 31, 1998, BSS conducted business from
three  locations,  all of which are owned. BSS also owns property located on 535
County Drive, Wakefield,  Virginia, on which it owns a stand-alone ATM facility.
The Operations  Center,  including the proof  department and item processing for
BOF and BSS is housed in leased space in Courtland, Virginia.


                                       2
<PAGE>



MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

There is only one class of equity securities  outstanding,  common stock, with a
par value of $5.00 per share.  The capital stock is  registered  pursuant to the
Securities  and Exchange Act of 1934,  Section  12(g) of the Act. As of December
31, 1998, there were 1863 holders of record of the Company's common stock.

The following  table sets forth,  for the quarters  indicated,  the high and low
closing prices for AFC Common Stock on the Nasdaq SmallCap Market.

                                            High              Low
                                            ----              ---
1998                                     
Fourth Quarter......................       $19.50            $15.75
Third Quarter.......................        21.50             18.00
Second Quarter......................        24.00             20.00
First Quarter.......................        23.00             16.25
                                        
1997                                 
Fourth Quarter......................       $16.00            $12.00
Third Quarter.......................        12.75             11.50
Second Quarter......................        13.00             11.50
First Quarter.......................        13.00             11.50

1996
Fourth Quarter......................        13.00             11.75
Third Quarter.......................        12.44             11.19
Second Quarter......................        12.50             11.00
First Quarter.......................        11.75              9.25



                                       3
<PAGE>




                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                At and for the Year Ended December 31,
                                             -----------------------------------------------------------------------------------
                                                         1998            1997             1996            1995           1994
                                                         ----            ----             ----            ----           ----
<S>                                                   <C>             <C>              <C>             <C>            <C>    
EARNINGS STATEMENT DATA:
    Interest income......................             $26,263         $23,738          $21,071         $17,684        $13,849
    Interest expense.....................              11,372          10,125            9,108           7,630          5,019
                                                       ------          ------            -----           -----          -----
    Net interest income..................              14,891          13,613           11,963          10,054          8,830
    Provision for loan losses............                 477             476              481             471            441
    Noninterest income...................               2,082           1,716            1,501           1,220          1,101
    Noninterest expense..................              11,386           9,433            8,117           7,075          6,060
                                                       ------           -----            -----           -----          -----
    Income before income taxes...........               5,110           5,420            4,866           3,728          3,430
     Income taxes........................               1,448           1,360            1,409             990            962
                                                        -----           -----            -----             ---            ---
    Net income...........................              $3,662          $4,060           $3,457          $2,738        $ 2,468
                                                       ======          ======           ======          ======        =======

PER SHARE DATA: (1)
    Net income, basic....................                0.88            1.02             0.90            0.78           0.77
    Net income, diluted..................                0.86            1.00             0.88            0.77           0.77
    Cash dividends.......................                0.34            0.25             0.13            0.06           0.00
    Basic Weighted average shares                   
     Outstanding.........................           4,162,044       3,979,027        3,855,066       3,515,042      3,190,562
    Diluted weighted average shares                 
     Outstanding.........................           4,270,957       4,055,268        3,917,372       3,555,152      3,215,978  
    Book value at period end............                10.35            9.70             8.67            8.06           7.64  
                                                    
BALANCE SHEET DATA:
    Total Assets.........................            $360,303        $315,257         $286,312        $251,591       $201,864
    Loans, net...........................             207,733         185,690          167,932         135,737        115,512
    Investment securities................              94,206          83,493           83,687          82,658         59,044
    Deposits.............................             312,310         271,928          250,311         218,329        176,040
    Shareholders' equity.................              43,129          40,309           33,411          31,088         23,917

PERFORMANCE RATIOS:
    Net interest margin(2)...............               5.04%           5.17%            5.15%           5.04%          5.11%
    Return on average assets.............               1.10%           1.37%            1.32%           1.24%          1.33%
    Return on average equity.............               8.89%          11.32%           10.85%          10.20%         10.87%
    Efficiency ratio(3)..................              64.64%          59.46%           57.71%          60.55%         58.16%

ASSET QUALITY RATIOS:
    Allowance for loan losses to period
        end loans........................               1.15%           1.29%            1.36%           1.53%          1.62%
    Allowance for loan losses to
        nonperforming assets.............               2.71x           2.83x            4.57x           3.52x          1.78x
    Nonperforming assets to period end
        loans and foreclosed properties..               0.42%           0.45%            0.31%           0.44%          0.91%
    Net charge-offs to average loans.....               0.24%           0.20%            0.18%           0.37%          0.19%

CAPITAL AND LIQUIDITY RATIOS:
    Leverage.............................              11.64%          12.49%           11.77%          12.28%            N/C
    Risk Based Capital Ratios:
        Tier 1 capital...................              16.67%          18.56%           16.64%          19.14%            N/C
        Total capital....................              17.82%          19.73%           17.81%          20.41%            N/C

    Average loans to average deposits....              69.77%          70.35%           67.98%          66.97%         65.62%

</TABLE>


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

(1)      Amounts have been restated to reflect a two-for-one stock split of MACB
         in March 1998.
(2)      Net interest  margin is  calculated  as fully  taxable  equivalent  net
         interest  income  divided by average  earning assets and represents the
         Bank's  net  yield  on its  earning  assets.  
(3)      Efficiency  ratio is  computed by dividing  non-interest  expense  less
         foreclosed  property expense by the sum of fully taxable equivalent net
         interest income and  non-interest  income,  net of securities  gains or
         losses. 

N/C Items not calculated.



                                       4

<PAGE>


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

The following presents management's  discussion and analysis of the consolidated
financial  condition and results of operations of Atlantic  Financial Corp. (the
"Company") as of the dates and for the periods indicated. This discussion should
be  read  in  conjunction  with  the  Selected  Financial  Data,  the  Company's
Consolidated  Financial  Statements and the Notes thereto,  and other  financial
data appearing elsewhere in this report.

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned banking subsidiaries, Peninsula Trust Bank ("PTB"), The Bank of
Franklin  ("BOF") and The Bank of Sussex and Surry ("BSS").  Contributions  from
the Company's 50%  membership  interest in Johnson  Mortgage Co. LLC ("JMC") are
also  reflected in the financial  results.  The Company's  existence  originated
during  the third  quarter of 1996 as  Mid-Atlantic  Community  BankGroup,  Inc.
("MACB"); however, PTB was the Company's only subsidiary, representing more than
99% of the Company's  activities for 1996 and 1997.  Effective December 1, 1998,
the merger of MACB and United  Community  Bankshares  ("UCB")  was  consummated.
Therefore,  comparative  discussions  of  consolidated  financials  reflects the
merger of MACB and UCB.


Overview

Net income of $3.7 million in 1998, was a 9.81% decrease from 1997 net income of
$4.1 million.  On a pre-tax  basis,  net income for the current  period was $5.1
million  compared to $5.4  million.  Despite the  reduction  in pre-tax  income,
income tax expense was higher in 1998 due to $278,000 in merger related expenses
which are not deductible for income tax calculations. Fully diluted earnings per
share  were  $0.86 in 1998  compared  to $1.00 in 1997.  Excluding  the one time
merger related expenses,  the 1998 per share figure was $0.93.  Profitability as
measured by return on average stockholders' equity was 8.89% in 1998 compared to
11.32% in 1997.

Much of the  consideration  in the merger of UCB into MACB involved a comparison
of asset growth between the two companies. UCB's two subsidiary banks were older
and reflected  more moderate asset growth while having  accumulated  substantial
capital  levels.  MACB's  subsidiary  bank (a de novo in 1989) had  demonstrated
consistent  growth levels beyond the ability to augment capital through internal
generation. Therefore, MACB and previously PTB had borne the expense of multiple
stock  offerings  since 1989. The merger,  thus,  offered the ability for UCB to
leverage  its capital and allow PTB to continue  its rapid asset  growth with no
anticipated need to return to the market for raising additional capital.

A meaningful  measure of resource  efficiency is the Company's return on average
assets (ROA).  This measure was 1.10% for 1998 compared to 1.37% for 1997.  Both
of these  figures  compare  favorably  to an industry  wide  benchmark of 1.00%,
particularly  in light of the  Company's  strong asset growth and  commitment to
branch expansion, as well as the merger related expenses and upgrade investments
in the computer technology area.

Results of Operations

The  Company's  banking  subsidiaries  operate by  attracting  deposits from the
general  public and  employing  such deposit funds in the purchase of investment
securities and the making of commercial,  consumer, and residential construction
and permanent mortgage real estate loans.  Revenues are derived principally from
interest on loans and investments.  The Company's major expense is interest paid
on deposits. Results of operations depend primarily on the level of net interest
income,  which is the interest and fees earned on loans plus investment interest
minus  interest paid on deposits and short-term  borrowings.  Thus, net interest
income is reflective of yields received in interest-earning assets and the rates
paid on interest-bearing liabilities.

Net Interest Income

Total  interest  and fee income  from loans and  investments  for 1998 was $26.3
million  compared  to  $23.7  million  in  1997,  a  11.0%  increase.  This  was
accomplished  through an increase in total  average  earning  assets from $275.2
million for 1997 to $308.4  million for 1998.  As a percentage  of average total
assets, the earning assets component was relatively constant, declining slightly
from 93.08% in 1997 to 92.99% in 1998.  Total  interest  expense  increased $1.2
million (12.9%) in 1998 to a total of $11.4 million.

Net interest  income (tax  equivalent  interest  income less  interest  expense)
increased  $1.3  million  (9.3%) in 1998.  The net  interest  margin  ratio (tax
equivalent  net interest  income  expressed as a percentage  of average  earning
assets) declined to 5.04% in 1998 from 5.17% in 1997. The banking industry, as a
whole,  is forecasting  tighter or shrinking  interest  margins.  This is due to
steadily rising  competition for sources of funds from such nonbank  competition
as credit  unions and mutual  funds.  With  interest  rates in the bank deposits
arena  at  historically  low  levels,   depositors  are   aggressively   seeking
alternatives  and not  allowing  banks to  effectively  reprice  downward  their
greatest resource for funding. However,  borrowers are demanding the benefits of
a falling rate  environment,  thus,  reducing  yields on loans.  Competition for
consumer loans, particularly vehicle and mortgage related (equity line) products
continues to be impacted by nonbank players also.




                                       5
<PAGE>

Added  complexity of this competition is that it is being conducted on an uneven
playing  field in that  banks and  credit  unions  have  dissimilar  income  tax
liabilities. Banks bear substantially greater tax burdens than do credit unions.
This has  resulted  in intense  pressure  on  competitive  interest  rates.  The
challenge  for  Bank  management,   therefore,  is  to  expand  its  search  for
noninterest income and other efficiencies in its operations.

Non-interest Income

Total  non-interest  income in 1998 was $2.1 million a 23.5%  increase over $1.7
million the previous year. The primary  source of  non-interest  income in prior
years has been service charges and fees related to deposit accounts. All service
fees are under review for the possibility of upward adjustment.  The Company has
expanded its network of automated  teller  machines (ATM) and should  experience
increased  revenues from foreign card use at its ATMs. The Company will continue
its efforts to control what customers  perceive as nuisance  charges to maximize
its competitive  position,  although the ability to maintain  consistent  profit
levels will require greater  contributions  from  non-interest  income to offset
future  pressure on net  interest  income.  The  consummation  of the  Company's
purchase  of 50%  interest  in JMC has paid  immediate  dividends,  contributing
$134,500 to net income in the first nine months of the Company's ownership. This
new venture will enable the Company to expand its service to bank loan customers
by  providing an efficient  outlet  through  which they can seek long term fixed
rate products.  An improved base of product offerings will enhance the Company's
ability to create,  expand,  and sustain broader and more tightly woven customer
relationships. It also positions the Company to take advantage of the burgeoning
refinancing  market.  The Company also has entered into a contract with UVEST to
begin offering,  later in 1999, limited investment  products (fixed and variable
rate annuities) throughout its banking offices.

Non-interest Expense

Total  non-interest  expense  totaled $11.4 million in 1998, up from 1997's $9.4
million.  Included in this increase are the one time merger related  expenses of
$278,000  discussed  above.  Depreciation  expense  of  fixed  assets  increased
significantly  due to the  following  reasons:  (1) PTB  implemented a new image
processing system for its item capture and check processing activities,  (2) PTB
opened two new banking  offices,  (3) PTB moved its Newport News banking  office
from a temporary  facility to a permanent  site,  (4) UCB converted  both of its
subsidiary  banks' data processing system to the PTB processing center requiring
substantial upgrading in computer hardware and telecommunications  connectivity.
Additionally,  one time installation  related expenses associated with the fixed
asset expansion above further  contributed to the overall increase.  The two new
banking  offices  also  increased  salary  and  benefits  expense  in advance of
increased revenue generation.


Financial Condition

Another year of quality growth occurred as the Company saw total assets increase
to $360.3  million which  represented a $45.0  million  increase,  or 14.3% over
year-end  1997.  The  primary  source of this  growth was an  increase  in total
deposits  of $40.4  million  (14.9%).  Employment  of these  new  resources  was
accomplished  through increases in the loan portfolio and investment  securities
account of $22.0 million (11.8%) and $10.7 million (12.8%),  respectively.  Loan
demand was stable throughout 1998, although not as strong as previous years.


Provision / Allowance for Loan Losses & Asset Quality

During 1998 the Company provided  $477,000 to the reserve for loan losses.  This
represents an increase of $1,250 over 1997. At year-end 1998 the reserve equaled
$2.4  million,  a sound 1.15% of  outstanding  loans.  Non-performing  assets at
year-end 1998 totaled  $893,000.  All other  delinquencies  on which interest is
still  accruing are  considered  at  manageable  levels with more than  adequate
coverage in the reserve for loan losses  described  above.  Net  charge-offs for
1998 were $483,000 compared to $367,000 in 1997. Credit decisions continue to be
based on the borrower's cash flow, the value of underlying  collateral,  and the
integrity of the borrower. The economy, both nationally and locally, has enjoyed
an extended  recovery/growth cycle. Yet personal and small business bankruptcies
have  reflected  a  disturbing  growth  trend.  Although  the  Bank has not been
materially  "victimized" by this bankruptcy  trend,  management is substantially
more attentive to underwriting standards and the importance of a meaningful loss
reserve.


                                       6
<PAGE>


Capital Resources and Liquidity

Capital growth was again supported  through  internal  generation in the form of
retained earnings. The increase in capital resulted in a capital to total assets
ratio at year-end 1998 of 12.0%, compared to 12.8% December 31, 1997. This level
is  considered  an ample  reserve  to  support  continued  asset  growth for the
immediate  future and to provide a buffer  against  unforeseeable  downturns  in
business and economic cycles and is substantially  above  regulatory  prescribed
minimum recommended levels.  Management's target for the capital/assets ratio is
9.0%;  therefore,  significant  leveraging of current capital funds is a primary
goal.

Liquidity is provided through several sources.  The most readily  convertible to
cash is "Federal funds sold," or the overnight sale of excess  reserves to other
banks.  The Company has adopted  policy and procedure  guidelines to comply with
Regulation F of the Board of Governors of the Federal  Reserve System  regarding
interbank  liabilities risk,  limiting the Company's  exposure to credit risk in
its dealing with correspondent  banks. Sales of Fed funds averaged $18.7 million
during 1998, up 56.4% from the $11.9 million  average of 1997.  The increase was
due in part to call  activity  in the  investment  portfolio.  Also,  Management
deliberately permitted the Fed funds level to increase as the merger transaction
progressed  during the fourth  quarter of 1998,  while it was  re-evaluating  an
overall asset liability management (ALM) plan. Management will target an average
Fed funds sales level of $12.5  million for 1999.  Additional  liquidity  exists
within the  investment  account where $4.5 million  matures  within ninety days.
Also $6.9  million of callable  bonds is  projected  to be called  within  three
months and another  $7.3  million is  projected  to be called in three to twelve
months.   The  Company  also  maintains  deposit   relationships   with  several
correspondent  banks which include  commitments  through various lines of credit
for short-term borrowing needs. The Company's ability to satisfy credit demands,
routine deposit  withdrawals,  and other corporate needs is considered adequate.
Management is not aware of any known trends, demands,  events,  commitments,  or
uncertainties  that either will result or reasonably  might result in a material
decrease in liquidity.

Future Plans

The  Company  owns two  parcels  in the  southern  end of  Gloucester  County at
Gloucester Point. The Company plans to begin  construction on a new full service
banking office on the parcels in the second half of 1999,  subject to regulatory
approval. An opening is targeted for early 2000.

The Company has also developed  informal  strategic  plans for the immediate and
near future.  These include  approaches  to continued  ability to compete in the
face of  consolidation  of the  financial  services  industry and the  resultant
massive size of some of the  Company's  competitors.  In this vein,  the Company
will  continue to explore  all  avenues of  expansion  including  other  mergers
similar to the one  consummated in 1998, as well as possible  acquisitions or de
novo expansion.

The Company plans to establish some level of internet presence before the end of
1999.

Effects of Inflation and Changing Prices

The consolidated  financial  statements and notes thereto  presented herein were
prepared in accordance with generally  accepted  accounting  principles  (GAAP),
which require the  measurements of financial  position and operating  results in
terms of  historical  dollars  without  considering  the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased costs of the Company's operations.  Unlike industrial
companies,  nearly all of the assets and liabilities of the Company are monetary
in nature.  Money is the Company's primary raw material.  As a result,  interest
rates have a greater impact on the Company's  performance than do the effects of
general levels of inflation.  Interest rates are affected by inflation,  but the
timing  and  magnitude  of the  changes  may not  coincide  with  changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated  by  the  Gap  Analysis,   in  order  to  minimize  the  effects  of
inflationary trends on interest rates. Other areas of non-interest  expenses may
be more directly affected by inflation.



                                       7
<PAGE>



    Average Balances, Interest Income and Expenses, Average Yields and Rates

<TABLE>
<CAPTION>

                                                                  Year Ended December 31,



                                                   1998                      1997                               1996
                                                   ----                      ----                               ----


                                             Interest                        Interest                     Interest
                                   Average    Income/    Yield/    Average    Income/   Yield/  Average    Income/    Yield/
                                   Balance    Expense      Rate    Balance    Expense     Rate  Balance    Expense      Rate
                                   -------    -------      ----    -------    -------     ----  -------    -------      ----

                                                                            (Dollars in Thousands)
<S>                                 <C>         <C>        <C>      <C>       <C>       <C>      <C>        <C>        <C>  
Assets:
Interest earning assets:
    Securities:
       Taxable................      $62,687     $4,158     6.63%    $56,828   $3,950    6.95%    $55,292    $3,726     6.74%
       Tax exempt (1).........       26,822      1,911     7.12%     26,389    1,791    6.79%     26,829     1,961     7.31%
                                     ------      -----     -----     ------    -----    -----     ------     -----     -----
        Total securities .....       89,509      6,069     6.78%     83,212    5,741    6.90%     82,121     5,687     6.92%
   Federal funds sold ........       18,660        997     5.34%     11,931      666    5.58%      7,855       436     5.56%
   Loans, net (2) ............      200,238     19,847     9.91%    180,011   17,940    9.97%    155,020    15,614    10.07%
                                    -------     ------ -   -----    -------   ------ -  -----    -------    ------    ------
        Total earning assets .      308,407     26,913     8.73%    275,154   24,347    8.85%    244,996    21,737     8.87%
  Less: allowance for loan
  losses......................      (2,520)                         (2,450)                      (2,235)
Total non-earning assets......       25,782                          22,897                       19,890
                                     ------                          ------                       ------
Total assets .................    $ 331,669                        $295,601                     $262,651
                                  =========                        ========                     ========



Liabilities & Stockholders' equity:
Interest bearing liabilities:
 Checking.....................      $45,301     $1,363     3.01%    $39,171   $1,245    3.18%    $37,940    $1,162     3.06%
  Savings and money market
     deposits.................       48,163      1,521     3.16%     46,879    1,479    3.15%     42,648     1,426     3.34%
  Other time..................      153,045      8,435     5.51%    134,881    7,331    5.44%    116,336     6,469     5.56%
                                    -------      -----     -----    ------- --------    ----- -- ------- --  -----     -----
  Total interest bearing
     deposits.................      246,509     11,319     4.59%    220,931   10,055    4.55%    196,924     9,057     4.60%
  Short-term borrowings.......        1,098         53     4.83%      1,382       70    5.07%      1,140        54     4.74%
                                      -----         --     -----      -----       --    -----      -----        --     -----
Total interest-bearing
liabilities...................      247,607     11,372     4.59%    222,313   10,125    4.55%    198,064     9,111     4.60%
Noninterest-bearing liabilities:
  Demand deposits.............       40,498                          34,940                       31,098
  Other non-interest bearing
  liabilities.................        2,367                           2,487                        1,627
                                      -----                           -----                        -----
Total liabilities.............      290,472                         259,740                      230,789
Stockholders' equity..........       41,197                          35,861                       31,862
                                     ------                          ------                       ------
Total liabilities and
  stockholders' equity........     $331,669                        $295,601                     $262,651
                                   ========                        ========                     ========
Net Interest Income...........                 $15,541                       $14,222                       $12,626
                                               =======                       =======                       =======
Interest rate spread (3)......                             4.13%                        4.30%                          4.27%
Net Interest margin (4).......                             5.04%                        5.17%                          5.15%

</TABLE>

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

(1)      Income and yields are  reported on a tax  equivalent  basis  assuming a
         federal tax rate of 34%.
(2)      For the purposes of these calculations,  nonaccruing loans are included
         in the daily average loan amounts outstanding.
(3)      Interest  spread  is  the  average  yield  earned  on  earning  assets,
         calculated on a fully taxable  equivalent  basis, less the average rate
         incurred on interest-bearing liabilities.
(4)      Net interest margin is the net interest  income,  calculated on a fully
         taxable  basis  assuming  a  federal  tax rate of 34%,  expressed  as a
         percentage of average earning assets.

                                       8
<PAGE>


                            Volume and Rate Analysis

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,

                                      -------------------------------------------------------------------------------
                                              1998 Compared to 1997                  1997 Compared to 1996
                                              ----------------------                 ---------------------


                                                                    Increase                                Increase
                                            Volume        Rate    (Decrease)       Volume        Rate     (Decrease)
                                            ------        ----    ----------       ------        ----     ----------


<S>                                           <C>       <C>             <C>           <C>         <C>           <C> 
INTEREST EARNED ON:
Securities:
   Taxable.........................           $376      ($168)          $208          $105        $119          $224
   Tax-exempt......................             30          90           120          (32)       (138)         (170)
Loans (net)........................          1,997        (90)         1,907         2,479       (153)         2,326
Federal funds sold.................            358        (27)           331           228           2           230
                                               ---        ----           ---           ---           -           ---
   Total interest income...........          2,761       (195)         2,566         2,780       (170)         2,610
                                             -----       -----         -----         -----       -----         -----

INTEREST PAID ON:
   Checking........................            179        (61)           118            38          45            83
   Savings and money market accounts            38           4            42           124        (71)            53
   Time deposits...................          1,008          96         1,104           997       (135)           862
Short-term borrowings..............           (14)         (3)          (17)           12            4            16
                                              ----         ---          ----           ---           -            --
   Total interest expense..........          1,211          36         1,247         1,171       (157)         1,014
                                             -----          --         -----         -----       -----         -----
        Net interest income........         $1,550      ($231)        $1,319        $1,609       ($13)        $1,596
                                            ======      ======        ======        ======       =====        ======

</TABLE>

Market Risk and Interest Sensitivity Analysis

The Company's primary component of market risk is interest rate volatility.  The
Company's  net interest  income,  the primary  component  of its net income,  is
subject  to  substantial  risk due to changes  in  interest  rates or changes in
market yield curves,  particularly  if there is a  substantial  variation in the
timing between the repricing of the Company's  assets and the liabilities  which
fund them. The Company seeks to manage this risk by monitoring  and  controlling
the variation in repricing  intervals  between its assets and liabilities.  To a
lesser  extent,  the Company  also  monitors its interest  rate  sensitivity  by
analyzing  the estimated  changes in market value of its assets and  liabilities
assuming various  interest rate scenarios.  There are a variety of factors which
influence the repricing  characteristics and market values of any given asset or
liability.  The  matching  of  the  repricing   characteristics  of  assets  and
liabilities  may be  analyzed by  examining  the extent to which such assets and
liabilities  are "interest rate  sensitive"  and by monitoring an  institution's
interest rate  sensitivity  "gap".  An asset or liability is said to be interest
rate  sensitive  within a specific  time  period if it will  mature or  reprice,
either  by its  contractual  terms or based  upon  certain  assumptions  made by
management,  within that time  period.  The  interest  rate  sensitivity  gap is
defined  as  the  difference  between  the  amount  of  interest-earning  assets
anticipated to mature or reprice within a specific time period and the amount of
interest-bearing  liabilities  anticipated to mature or reprice within that same
time  period.  A gap is  considered  positive  when the amount of interest  rate
sensitive  assets maturing or repricing within a specific time frame exceeds the
amount of interest rate sensitive  liabilities maturing or repricing within that
same time  frame.  Conversely,  a gap is  considered  negative  when the reverse
relationship exists between interest rate sensitive assets and liabilities. In a
rising  interest  rate  environment,  an  institution  with a negative gap would
generally  be expected,  absent the effects of other  factors,  to  experience a
greater  increase in the costs of its  liabilities  relative to the yield of its
assets and,  thus,  a decrease in the  institution's  net  interest  income.  An
institution  with a positive gap would  generally be expected to experience  the
opposite  results.  Conversely,  during a period of falling  interest  rates,  a
negative gap would tend to result in an increase in net interest  income while a
positive gap would tend to  adversely  affect net  interest  income.  Management
monitors  interest  rate  sensitivity  so  that  adjustments  in the  asset  and
liability mix, when deemed appropriate, can be made on a timely manner.

The Company uses earnings simulations, duration, and gap analysis to analyze and
project future interest rate risk. The investment  portfolio,  specifically,  is
analyzed  as to interest  rate risk as well as call and  extension  risk.  These
three  elements  combined  will have a direct  bearing  on long  term  portfolio
profitability, both in terms of price change and, importantly, future yield. The
amount  of  interest  rate risk and call and  extension  risk  contained  in the
portfolio  will either  stabilize  or  destabilize  future  Company  earnings if
overall interest rates change.  The best  mathematical  measurements of interest
rate risk and call and extension risk are effective  modified duration (EMD) and
convexity,  especially  in today's  environment  with so many  bonds  containing
direct or indirect call options.



                                       9
<PAGE>

Since many  types of bonds are  callable  or can vary in  average  life as rates
change,  the Company  considers what effect this could have on market value, and
thus,  potential  earnings.  Duration  and  Modified  Duration  are used without
negative  convexity  and,  therefore,  are not as accurate  predictors  of price
change  when  dealing  with  bonds  that can  have  variable  principal  payouts
("callables",  "mortgages").  Negative convexity is used in conjunction with EMD
and is useful  when there is a chance of more than one  average  life or workout
date  (maturity/call  date).  It  reflects  the fact that with these type bonds,
market prices will almost always decrease in value more than they increase given
the same rate shift up and down. EMD and convexity, when used together,  provide
a close  approximation  of market price changes per 1% moves in interest  rates.
Negative convexity usually works against the bondholder in both higher and lower
rate scenarios.

The  following  table  sets  forth the  amount of  interest-earning  assets  and
interest-bearing   liabilities   outstanding  at  December  31,  1998  that  are
anticipated by the Company,  using certain  assumptions  based on its historical
experience and other data available to management,  to reprice or mature in each
of the future time periods shown.  Except as stated below,  the amount of assets
and  liabilities  shown which reprice or mature  during a particular  period was
determined  in  accordance  with the  earlier  of the term to  repricing  or the
contractual  terms of the asset or liability.  Prepayment  assumptions  have not
been  applied  in the  table  in  estimating  the  repricing  of  the  Company's
mortgage-backed  securities,  but  are  studied  monthly  in  making  investment
decisions  and managing  interest rate risk.  The estimated  rates of prepayment
assumed are based upon the current  coupon rates and their  relationship  to the
current interest rate environment.  Other assumptions included in the investment
portfolio  are  projected  redemption  dates of  current  investments  that have
callable  features  allowing the issuer of the  investment to call or redeem the
issue prior to its contractual maturity.


                        Interest Sensitivity Analysis(1)
<TABLE>
<CAPTION>

                                                                 Maturing or Repricing In:

                                        ----------------------------------------------------------------------------
                                                 Within         90-365           1-5          Over
                                                90 Days           Days         Years       5 Years            Total
                                                -------           ----         -----       -------            -----

                                                                  (Dollars in Thousands)

<S>                                             <C>             <C>           <C>           <C>            <C>     
Interest Earning Assets:
   Federal funds sold...............            $29,524         $    -        $    -        $    -         $ 29,524
   Investment securities (1)........              4,927          3,702        28,888        54,826           92,343
   Loans (2)(3).....................             54,323         27,548        82,602        45,593          210,066
                                                 ------         ------        ------        ------          -------

      Total interest-earning
       Assets.......................           $ 88,774       $ 31,250     $ 111,490     $ 100,419        $ 331,933
                                               ========       ========     =========     =========        =========
Interest Bearing Liabilities:
   Deposits:
       Interest bearing demand.......            16,206              -        19,251             -           35,457
       MMDAs and other savings.......            31,732              -        30,985             -           62,717
       Time deposits $100,000
         and over....................             9,051         15,797        11,460             -           36,308
       Other time deposits...........            24,768         55,384        48,385             -          128,537
   Other borrowed money..............             1,546             24            19             -            1,589
                                                  -----             --            --                          -----
       Total interest-bearing
         Liabilities.................          $ 83,303        $71,205     $ 110,100        $    -        $ 264,608
                                               ========        =======     =========        ======        =========
Period gap...........................           $ 5,471      $(39,955)       $ 1,390     $ 100,419         $ 67,325
Cumulative gap.......................           $ 5,471      $(34,484)     $(33,094)       $67,325
Cumulative gap as a percent of total
   earning assets....................             1.65%       (10.39%)       (9.97%)        20.28%
</TABLE>

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

(1)      The amounts shown for securities do not reflect the unrealized  gain on
         available for sale securities,  which was  approximately  $1,863,000 at
         December 31, 1998.

(2)      the amount shown for loans have not been reduced by the  allowance  for
         loan losses or unearned income, which were approximately $2,424,000 and
         $590,000, respectively, at December 31, 1998.

(3)      The amounts shown for loans do not include nonaccrual loans, which were
         approximately $681,000 at December 31, 1998.

Management's  1999 target ratio for the 0-365 day  cumulative  gap is +/- 10% in
1999.  The Company  manages the interest rate risks by monitoring  the balances,
rates, call features and maturities of rate sensitive assets and liabilities.


                                       10
<PAGE>

Securities

The Company's  securities  portfolio  serves several  purposes.  Portions of the
portfolio  are held as  investments,  while the  remaining  portions are used to
assist the Company in liquidity and asset liability management.

In June, 1993, the Financial  Accounting Standards Board adopted FASB 115, which
changes  the manner in which  financial  institutions  classify  and account for
their investment  securities for fiscal years beginning after December 15, 1993.
In response to this rule change,  as of January 1, 1994, the Company revised its
investment  securities  policy and divided its investment  securities  portfolio
into two  components,  (i)  securities  held to  maturity  and  (ii)  securities
available for sale.  Securities  are  classified as securities  held to maturity
when  management  has the intent and the  Company has the ability at the time of
purchase to hold the  securities  to maturity.  Securities  held to maturity are
carried  at  cost  adjusted  for  amortization  of  premiums  and  accretion  of
discounts.  Securities to be held for indefinite  periods of time are classified
as  securities  available  for sale.  Unrealized  gains and losses on securities
available for sale are recognized as direct increases or decreases in a separate
component  of  shareholders'  equity.  Securities  available  for  sale  include
securities  that may be sold in  response to changes in market  interest  rates,
changes in the security's  prepayment  risk,  increases in loan demand,  general
liquidity needs and other similar  factors.  The Company's  recent  purchases of
investment  securities  have generally been limited to securities of high credit
quality with short to medium term maturities.

The  following  tables  summarize  the book  value of the  Company's  investment
securities at the dates indicated.

                              Securities Portfolio

<TABLE>
<CAPTION>


                                                                                        December 31,                                
                                                       Amortized        Fair       Amortized        Fair    Amortized       Fair
                                                            Cost       Value            Cost       Value         Cost      Value
                                                            ----       -----            ----       -----         ----      -----
                                                                 1998                       1997                    1996
                                                                 ----                       ----                    ----

<S>                                                      <C>         <C>             <C>         <C>          <C>        <C>    
AVAILABLE FOR SALE:
U.S. Treasury Securities                                 $   877     $   886         $   632     $   629      $   534    $   530
U.S. Government and federal
   agencies                                               25,917      26,157          27,504      27,553       38,230     37,886
States and political subdivisions                         28,596      29,237          22,612      22,985       24,547     24,677
Mortgage-backed securities                                15,148      15,207           9,779       9,773        4,829      4,795
Corporate debt obligations                                 3,091       3,135           3,780       3,807        4,128      4,133
Collateralized mortgage obligations                           21          21              57          57          116        116
Restricted stocks                                            698         698           1,034       1,034          342        342
Other securities                                           4,069       4,940              10         756          361        882
                                                        --------    --------            ----         ---     --------     ------
   Total available-for-sale                               78,417      80,281          65,408      66,594       73,087     73,361
                                                        --------      ------          ------      ------       ------    -------

HELD-TO-MATURITY
U.S. Government and federal
   agencies                                                4,718       4,755           7,764       7,761        5,428      5,342
States and political subdivisions                          6,493       6,680           6,453       6,595        4,797      4,755
Mortgage-backed securities                                 2,715       2,738           2,573       2,589           --         --
Other securities                                              --          --             109         109          100        100
                                                          ------      ------         -------     -------      -------    -------
   Total held-to-maturity                                 13,926      14,173          16,899      17,054       10,325     10,197
                                                        --------      ------          ------      ------       ------     ------

Total securities                                         $92,343     $94,454         $82,307     $83,648      $83,412    $83,558
                                                         =======     =======         =======     =======      =======    =======
</TABLE>


The book value and weighted average yield of the Company's investment securities
at December 31, 1998, by  contractual  maturity,  are reflected in the following
tables.  Actual  maturities  will differ  from  contractual  maturities  because
certain  borrowers  may have the  right to call or  prepay  obligations  with or
without call or prepayment penalties.



                                       11
<PAGE>


                   Investment Portfolio - Maturity and Yields
                             (Dollars in thousands)

                                              
<TABLE>
<CAPTION>
                                                                                                           Over 10
                                                             1 Year           1 to 5      5 to 10          Years &
                                                             ------           ------      -------           Equity
                                                            or Less            Years        Years       Securities       Total
                                                            -------            -----        -----       ----------       -----
                                                                                                   
<S>                                                           <C>             <C>          <C>             <C>            <C>   
MATURITY DISTRIBUTION:
U.S. Agency securities:
  Amortized cost                                              2,398           11,904       11,822          4,510          30,634
  Fair value                                                  2,408           12,058       11,946          4,500          30,912
  Weighted average yield                                      5.92%            5.92%        6.78%          6.84%           6.39%
U.S. Treasury securities:
  Amortized cost                                                100                -          777              -             877
  Fair value                                                    101                -          785              -             886
  Weighted average yield                                      6.01%            0.00%        5.92%          0.00%           5.93%
State and Political Subdivisions:
  Amortized cost                                              2,258           13,077       15,900          3,854          35,089
  Fair value                                                  2,276           13,402       16,347          3,893          35,918
  Weighted average yield                                      7.40%            7.31%        7.97%          8.10%           7.42%
Other Securities:
  Amortized cost                                                571            2,640        1,902         20,630          25,743
  Fair value                                                    577            2,676        2,579         20,906          26,738
  Weighted average yield                                      7.76%            6.24%        6.02%          7.26%           7.07%
Total Securities (1):
  Amortized cost                                              5,327           27,621       30,401         28,994          92,343
  Fair value                                                  5,362           28,136       31,657         29,299          94,454
  Weighted average yield                                      6.74%            6.61%        7.34%          7.30%           7.07%
</TABLE>

(1)      Yields on tax exempt securities are computed on a tax equivalent basis.

The following  table  summarizes  the Company's  loan  portfolio for the periods
indicated.


                                 Loan Portfolio
<TABLE>
<CAPTION>


                                                                                     December 31,

                                                              1998              1997             1996            1995          1994
                                                              ----              ----             ----            ----          ----

                                                                                    (Dollars in Thousands)

<S>                                                        <C>               <C>              <C>            <C>            <C>    
Real estate mortgage:
     Commercial....................................        $48,788           $40,233          $33,786        $ 22,482       $20,811
     Residential (1-4 family)......................         52,632            49,746           45,924          41,201        36,064
     Home equity...................................         15,939            13,165           11,435           9,488         7,007
     Construction                                           13,935             8,596            9,219           9,077         7,397
     Agricultural..................................          3,044             2,485            2,894           2,791         2,678
Commercial.........................................         30,105            28,734           24,565          17,180        14,098
Agricultural                                                 6,068             7,045            6,437           5,594         4,516
Installment........................................         39,564            38,097           36,006          29,813        23,698
All other..........................................            672               617              522             717           392
                                                               ---               ---              ---             ---           ---
Total loans........................................        210,747           188,718          170,788         138,343       116,661
Less:  unearned income.............................          (590)             (598)            (535)           (489)         (436)
Less:  allowance for loan losses...................        (2,424)           (2,430)          (2,321)         (2,386)       (1,883)
                                                           ------            ------           ------          ------        ------ 
     Total net loans...............................       $207,733          $185,690        $ 167,932       $ 135,468      $114,342
                                                          ========          ========        =========       =========      ========
</TABLE>



                                       12
<PAGE>

                          Loan Portfolio by Percentage

<TABLE>
<CAPTION>


                                                                                             December 31,

                                                           1998              1997             1996            1995            1994
                                                           ----              ----             ----            ----            ----


<S>                                                     <C>               <C>              <C>             <C>             <C>    
Real estate mortgage:
     Commercial....................................      23.15%            21.32%           19.78%          16.25%          17.84%
     Residential (1-4 family)......................      24.99%            26.35%           26.89%          29.78%          30.91%
     Home equity...................................       7.56%             6.98%            6.70%           6.86%           6.01%
     Construction..................................       6.61%             4.55%            5.40%           6.56%           6.34%
     Agricultural..................................       1.44%             1.32%            1.69%           2.02%           2.30%
Commercial.........................................      14.28%            15.23%           14.38%          12.42%          12.08%
Agricultural.......................................       2.88%             3.73%            3.77%           4.04%           3.87%
Installment loans..................................      18.77%            20.19%           21.08%          21.55%          20.31%
All other..........................................       0.32%             0.33%            0.31%           0.52%           0.34%
                                                        ------            ------           ------          ------          ------ 
                                                        100.00%           100.00%          100.00%         100.00%         100.00%

</TABLE>


                     Remaining Maturities of Selected Loans

                                                      December 31, 1998
                                    Commercial, financial         Real estate -
                                      and Agricultural             Construction
                                      ----------------             ------------
                                                   (Dollars in Thousands)

Within 1 year                                  $16,856                 $ 12,415
Variable Rate:
  Over one year through five years             $ 3,647                 $    290
  Over five years                              $ 1,628                 $     86
Fixed Rate:
   Over one year through five years            $13,021                 $    680
   Over five years                             $ 2,822                 $    464



The following table summarizes non-performing assets for the periods indicated.

                              Non-Performing Assets

<TABLE>
<CAPTION>

                                                                                              December 31,
                                                                 --------------------------------------------------------

                                                                     1998        1997        1996        1995       1994
                                                                     ----        ----        ----        ----       ----
                                                                                     (Dollars in Thousands)


<S>                                                                 <C>         <C>         <C>          <C>          <C> 
Non-accrual loans........................................           $ 681       $ 482       $ 372        $ 413        $678
Real estate owned........................................             212         377         165          188         382
Restructured loans.......................................             - -         - -         - -          - -         - -
                                                                      ---         ---         ---          ---         ---

Total non-performing assets                                          $893        $859        $537         $601      $1,060
                                                                     ====        ====        ====         ====      ======

Loans past due 90 or more days and accruing interest                 $559        $196        $587         $257        $152
                                                                     ====        ====        ====         ====        ====

Non-performing loans to total loans, at period end                  0.32%       0.26%       0.22%        0.30%       0.58% 
Non-performing assets to period end assets                          0.25%       0.27%       0.19%        0.24%       0.53% 
Non-performing assets to total loans and other                      
   real estate owned                                                0.42%       0.45%       0.31%        0.44%       0.91%

</TABLE>



As to the nonaccrual loans at December 31, 1998 referred to above, approximately
$35,815 of interest  income would have been  recorded  during such period if the
loan had been current and the interest thereon had been accrued.

The provision for loan losses  totaled  $477,000,  $476,000 and $481,000 for the
years ended December 31, 1998,  1997 and 1996,  respectively.  In the opinion of
management,  the provision  charged to operations has been  sufficient to absorb
the current  year's  potential net loan losses while  continuing to increase the
allowance for loan losses as the Company's loan portfolio increases.



                                       13
<PAGE>



The following table summarizes changes in the allowance for loan losses.

                            Allowance for Loan Losses
<TABLE>
<CAPTION>

                                                                                    Year Ended December 31,

                                                                 1998         1997          1996        1995        1994
                                                                 ----         ----          ----        ----        ----

                                                                            (Dollars in Thousands)

<S>                                                            <C>         <C>            <C>         <C>         <C>   
Balance at beginning of period.......................          $2,430      $ 2,321        $2,116      $1,883      $1,522
 Charge-offs:
   Commercial........................................             191          202           141         180          70
   Real estate.......................................              45            8            84          22         121
   Installment and consumer loans                                 350          312           190         215         133
                                                                  ---          ---           ---         ---         ---
     Total loans charged-off                                      586          522           415         417         324
                                                                  ---          ---           ---         ---         ---
Recoveries:
   Commercial........................................              14           25            18          19          92
   Real estate.......................................              --           32            15          48          25
   Installment and consumer loans                                  89           98           106         112          92
                                                              -------      -------       -------      ------      ------
     Total loan recoveries                                        103          155           139         179         209
                                                              -------      -------       -------      ------      ------
Net charge-offs                                                   483          367           276         238         115
Provision charged to operations                                   477          476           481         471         476
                                                                  ---          ---           ---         ---         ---
                                                              $ 2,424      $ 2,430       $ 2,321      $2,116      $1,883
                                                              =======      =======       =======      ======      ======

Ratio of net charge-offs to average
    loans outstanding during year                               0.24%        0.20%         0.18%       0.37%       0.19%
Ratio of allowance for loan losses
    to total loans outstanding
    at year-end                                                 1.15%        1.29%         1.36%       1.53%       1.62%
</TABLE>


For each period  presented,  the provision for loan losses charged to operations
is based on management's  judgment after taking into  consideration  all factors
connected  with  the  collectibility  of  the  existing  portfolio.   Management
evaluates  the loan  portfolio in light of economic  conditions,  changes in the
nature  and  value of the  portfolio,  industry  standards  and  other  relevant
factors.  Specific  factors  considered by management in determining the amounts
charged to operations include internally generated loan review reports, previous
loan loss  experience  with the  borrower,  the status of past due  interest and
principal payments on the loan, the quality of financial information supplied by
the borrower and the general financial condition of the borrower.

A  breakdown  of the  allowance  for loan losses is based  primarily  upon those
factors  discussed  above in computing the allowance as a whole.  Because all of
these factors are subject to change, the breakdown is not necessarily indicative
of the category for determining future loan losses.

                   Allocation of the Allowance for Loan Losses

<TABLE>
<CAPTION>

                                                                      Year Ended December 31,

                                              1998         1997         1996         1995        1994
                                              ----         ----         ----         ----        ----

                                                   (Dollars in thousands)

<S>                                           <C>          <C>           <C>         <C>         <C>  
Mortgages:
  Commercial.............................        $ 505        $ 367         $ 345       $ 322       $ 280
  Residential............................          248          211           202         204         164
  Home equity............................           75           63            42          41          34
  Agricultural...........................           10           12            14          14          11
  Construction...........................          100           83            82          70          66
Commercial...............................        1,233        1,459         1,037         946         841
Installment loans........................          253          235           599         519         487
                                                   ---          ---           ---         ---         ---
     Total                                     $ 2,424      $ 2,430       $ 2,321     $ 2,116     $ 1,883
                                               =======      =======       =======     =======     =======
</TABLE>



                                       14
<PAGE>

The following table is a summary of average deposits and average rates paid.

                     Average Deposits and Average Rates Paid

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,

                                                1998                        1997                        1996
                                                -----                       ----                        ----

                                             Average   Average      Average        Average      Average       Average
                                             Balance    Rate        Balance         Rate        Balance        Rate
                                             -------    ----        -------         ----        -------        ----

                                                                    (Dollars in Thousands)

<S>                                          <C>          <C>           <C>            <C>          <C>             <C>  
Non-interest bearing accounts......
                                             $40,498      0.00%         $34,940        0.00%        $ 31,098        0.00%
Interest bearing accounts:
   Interest checking                          45,301      3.01%          39,171        3.18%          37,940        3.06%
   Savings and money
   market accounts                            48,163      3.16%          46,879        3.15%          42,648        3.34%
   Time deposits...................          153,045      5.51%         134,881        5.44%         116,336        5.56%
                                             -------                    -------                      -------
    Total interest-
     bearing                                 246,509      4.59%         220,931        4.55%         196,924        4.60%
                                             -------                    -------                      -------
Total deposits.....................         $287,007                   $255,871                     $228,022
                                            ========                   ========                     ========

</TABLE>

The  following  table is a  summary  of time  deposits  of  $100,000  or more by
remaining maturities at December 31, 1998.


                Maturities of Time Deposits of $100,000 and Over

                                                   Amount              Percent
                                                   ------              -------
                                                    (Dollars in Thousands)
         Three months or less................     $ 9,051              24.93%
         Three to six months.................       5,639              15.53%
         Six to twelve months................      10,158              27.98%
         Over twelve months..................      11,460              31.56%
                                                   ------              ------

      Total..................................     $36,308              100.0%
                                                  =======              ======


To the extent that deposits  grow faster than loans,  the Company will use these
excess funds for investment securities and other earning assets. Management will
seek to control the growth of deposits  in any new  branches,  as it does in its
current operations, through interest rate management and marketing.

The  following  table  shows  the  Company's   risk-based   capital  ratios  and
shareholders' equity to total assets at December 31, 1998, 1997 and 1996.

                               ANALYSIS OF CAPITAL

<TABLE>
<CAPTION>

                                                         Regulatory
                                                           Minimum                                  December 31,
                                                           -------                                  ------------

                                                                                    1998                1997                  1996
                                                                                    ----                ----                  ----

<S>                                                         <C>                   <C>                  <C>                  <C>   
Capital Ratios:
Risk-based capital:
   Tier 1                                                   4.00%                 16.67%               18.56%               16.64%
   Total                                                    8.00%                 17.82%               19.73%               17.81%
Leverage                                                    4.00%                 11.64%               12.49%               11.77%
Stockholders' equity to total assets                         n/a                  11.97%               12.79%               11.67%

</TABLE>



                                       15
<PAGE>

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities,"  which  is
required to be adopted in years  beginning  after June 15, 1999.  The  Statement
permits  early  adoption as of the  beginning  of any fiscal  quarter  after its
issuance.  The Company  has not  determined  whether to adopt the new  statement
early.  The Statement  will require the Company to recognize  derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge,  changes in the fair value of  derivatives  will  either be offset
against  the  change in fair value of the hedged  assets,  liabilities,  or firm
commitments through earnings or recognized in other  comprehensive  income until
the  hedged  item is  recognized  in  earnings.  The  ineffective  portion  of a
derivative's change in fair value will be immediately recognized in earnings.

Because the Company does not use  derivatives,  management  does not  anticipate
that the adoption of the new  Statement  will have a  significant  effect on the
Company's earnings or financial position.

In  October  1998,  the  FASB  issued   Statement  No.  134,   "Accounting   for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking  Enterprise,  an amendment of FASB Statement
No. 65." FASB No. 65, as  amended,  requires  that,  after  securitization  of a
mortgage loan held for sale, an entity  engaged in mortgage  banking  activities
classify the  resulting  mortgage-backed  security as a trading  security.  This
Statement   further   amends   Statement  No.  65  to  require  that  after  the
securitization  of mortgage  loans held for sale, an entity  engaged in mortgage
banking activities  classify the resulting  mortgage-backed  securities or other
retained  interests  based  on its  ability  and  intent  to sell or hold  those
investments.  This Statement  conforms the subsequent  accounting for securities
retained  after the  securitization  of  mortgage  loans by a  mortgage  banking
enterprise  with the subsequent  accounting  for  securities  retained after the
securitization  of other types of assets by a non-mortgage  banking  enterprise.
This Statement is effective beginning in 1999.


                                 Year 2000 Issue
The Company utilizes and is dependent upon data processing  systems and software
to conduct its business.  The data processing  systems include various  software
packages  licensed to the Company by outside vendors and a mainframe  processing
system,  which are run on in-house computer  networks.  All of these systems are
vulnerable to the Year 2000 (Y2K) issue.  The  Company's  Board of Directors has
addressed the Y2K issue and  identified the  seriousness  of the challenge.  The
Directors  receive routine reports from management of the Company to enable them
to monitor the Company's  progress in its  preparation  for Y2K  readiness.  The
Board  has  passed  a  resolution  authorizing  management  to  commit  the full
financial  and human  resources  of the  Company  to  achieve  satisfactory  Y2K
readiness with a minimum of disruption to ordinary operations. The Company's Y2K
coordinator, who was hired in 1997, commits approximately 75% of her schedule to
the Y2K project. In addition,  a Y2K project team was formed and meets regularly
to review and ensure consistent progress in moving toward Y2K readiness.

In 1997,  the Company  initiated a review and  assessment  of all  hardware  and
software to confirm that it will function properly in the year 2000. The Company
inventoried  more  than 70  applications  on which  it  relies  for its  routine
operations.  The degree of reliance was evaluated,  with each application  being
identified as either mission critical,  mission necessary or mission  desirable.
An  application  was deemed  mission  critical if it is vital to the  successful
continuation of a core business  activity.  The Federal  Financial  Institutions
Examination Council (FFIEC) has issued several inter-agency statements providing
guidance  and/or  requirements of all financial  institutions.  Included in this
guidance was an emphasis that mission  critical  applications  be identified and
related priorities be set by the end of the third quarter of 1998. Based on this
regulatory  guidance,  the Company's inventory process identified twelve mission
critical  applications,  all of which are associated with information technology
(IT). There were no non-IT systems identified as mission critical.  Such systems
might include elevators or other equipment with embedded  micro-controllers that
may be century date  sensitive.  The Company  currently  has only two  elevators
throughout  its  branching  network.  In each of these  locations,  all business
activities  can be  conducted  in the  event  that the  elevators  are  rendered
inoperable.   Other  non-IT  systems  include  electricity  and  telephone  line
communications.  Both of  these  are  necessary  for  daily  operations  but are
considered to be beyond the Company's  control to facilitate Y2K readiness.  The
Company is  communicating  with the providers of these services to monitor their
progress  toward Y2K  readiness.  The Company  possesses and  routinely  tests a
gasoline-powered  generator  for  temporary  electrical  power  for its  primary
computer room  operations.  This form of backup power provides  limited business
continuation  features  to  the  Company  in the  area  of  processing  customer
information in its core data processing package. Therefore, the Company believes
that the integrity of critical customer information will be protected.


                                       16
<PAGE>

Based on the assessment  described above, the Company's  mainframe  hardware (an
IBM AS-400) and banking software are currently Y2K compliant.  However,  testing
was  scheduled  for the fourth  quarter  of 1998 and early 1999 to confirm  this
compliance. The Company's core data processing package is currently installed in
more than 200 banks across the country. The vendor of this software,  Jack Henry
& Associates  (JHA) has completed  their testing of the software and distributed
the  software  release  to  provide  for Y2K  compliance.  However,  JHA is also
facilitating a process for independent  user group testing in order for the user
banks  to  test  their  live  customer  data  files  in  a  non-production  test
environment.  Members  of the  Federal  Reserve  System,  FDIC,  and OCC met JHA
management  to  discuss  and  review the  process  of User  Group  Testing.  The
regulatory  authorities,  while  unable to issue an approval of the specific JHA
plan,  did specify that User Group Testing was an acceptable  method for testing
Y2K  readiness.  The  Company was one of the users  selected  for the user group
testing.  This test was  conducted in December  1998.  Total cost to the Company
including the vendor's certification,  third party certification of the vendor's
testing,  user group testing and third party  certification of the latter's test
was less than  $10,000.  Considerable  planning  went into the  writing  of test
scripts to assess the impact of the  century  date change on the  processing  of
transactions  that  affected  date  sensitive  data  fields as well as  interest
accruals.  These  transactions were processed on a mainframe on which the system
date had been  advanced  to  January  01,  2000.  Normal  daily  processing  was
conducted  throughout  the first  quarter of 2000.  All test  transactions  were
considered  successful as related to Y2K. It is also  important to note that JHA
Liberty Banking System received an ITAA*2000  certification from the Information
Technology Association of America indicating it meets the information technology
industry's  best software  development  practices for  addressing  the Year 2000
issue.

Two of the affiliate banks, BOF and BSS, were operating  non-Y2K ready core data
processing  systems  prior to the  merger of UCB and MACB.  These two banks were
converted to the JHA Liberty  product  discussed  above and are processed in the
Company's   centralized  data  center.  For  these  two  banks  there  was  more
substantial expense associated with Y2K readiness preparation. These accumulated
historical costs  approximated  $100,000,  bringing the total for the Company to
approximately $125,000.

For certain  other  systems,  the Company  has  determined  that it will have to
replace or modify certain pieces of hardware and/or software so that the systems
will  properly  function  in the year  2000.  The third  party  vendors of these
systems have been contacted and have indicated that the hardware and/or software
will  be  Y2K  compliant.   Modifications  and/or  replacements  depend  on  the
individual  vendor and their  respective  products.  During the first quarter of
1999,  the Company is having Y2K updates  installed in each of its ATMs based on
each respective vendor's recommendation.

The Company  utilizes an extensive  network of personal  computers  (PCs) in its
daily operations. With the rapid changes in technology in the past 10 years, the
Company adopted a philosophy more than five years ago that acknowledged that the
average  useful life of PCs was in the  three-to  four-year  time range.  Having
embraced this  philosophy  previously,  replacement  of PCs is a part of routine
hardware planning. Currently,  approximately 30% of the Company's PCs are viewed
as nearing  the end of their  useful  life even  absent any Y2K  considerations.
Management has identified  approximately 20% of its PCs in addition to the above
stated 30% as requiring upgrades or replacement to make them Y2K capable.  At an
average cost of $2,200 per work  station,  this  renovation/replacement  process
could result in a capital outlay  approaching  $50,000.  This would result, on a
standard  depreciation  basis, in an increase of approximately  $17,000 per year
over and above ordinary hardware replacement expense.  Management considers that
its total requirement in hardware expenditure associated with Y2K readiness will
not  have  a  significant  negative  effect  on  the  Company's  total  earnings
performance.  It is anticipated that the total future costs directly  associated
with the Y2K project will not exceed $250,000  (approximately 6.25% of projected
1999 net income).

The Company has implemented a process by which all significant  loan and deposit
customers  have been  contacted to determine  the extent to which the Company is
vulnerable to those third parties'  failure to remedy their own Y2K issue.  Loan
officers have  received  training to include a Y2K  understanding  in the credit
decision making process. Existing borrowers have been evaluated to determine the
risk that Y2K poses to their  respective  cash flow  capacities or other related
factors that may impact their ability to repay their loans.  The Company is also
working with  borrowers who have current line of credit  commitments to properly
plan for the liquidity  requirements  of the Company to fund greater than normal
line of credit draw  requests.  In this same vein,  deposit  customers are being
evaluated to produce some basis for projecting  possible  interruption  to daily
deposit inflows. While the Company does not intend to abandon meeting the credit
needs of its  community,  it has  adopted a more  conservative  position  in its
lending  associated with overall liquidity planning as well as credit evaluation
of borrowing  requests.  Also in the interest of liquidity,  the Company will be
more  aggressive in its pricing of  certificates of deposit with maturities that
extend beyond the Year 2000.  This position  should  reduce the  possibility  of
deposit  runoff during the fourth  quarter of 1999 and first quarter of the year
2000.

The  Company  plans to  complete  the  majority of the Y2K project by the second
quarter of 1999.  Cash  expenditures  are not expected to have a large  material
effect on the  Company's  consolidated  financial  statements.  The Company will
evaluate before June 30, 1999, the loss of income that may result from increased
liquidity in the form of above normal  levels of cash and  increased  volumes of
lower yielding  overnight  federal funds sold. The following  tables present the
Company's overall progress of its mission critical applications.


                                       17
<PAGE>

Year 2000 Plan - Planned Number of Mission Critical Applications In Each Phase
<TABLE>
<CAPTION>

Year 2000 Plan
--------------------------------------------------------------------------------------------------------------
Phase                12/31/97  3/31/98   6/30/98   9/30/98   12/31/98  3/31/99   6/30/99  9/30/99   12/31/99
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
<S>                     <C>       <C>      <C>       <C>        <C>       <C>      <C>       <C>       <C>
Awareness               -         -         -         -         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Assessment              9         6         2         1         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Renovation              3         6         7         8         5         -         -        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Validation              -         -         3         3         7         9         3        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Implementation          -         -         -         -         -         3         9        12        12
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
TOTAL                   12        12       12        12         12        12       12        12        12
--------------------------------------------------------------------------------------------------------------
</TABLE>

Year 2000 Plan - Planned Percentage of Completion by Phase

<TABLE>
<CAPTION>

Year 2000 Plan
--------------------------------------------------------------------------------------------------------------
Phase                12/31/97  3/31/98   6/30/98   9/30/98   12/31/98  3/31/99   6/30/99  9/30/99   12/31/99
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
<S>                     <C>       <C>      <C>       <C>        <C>       <C>      <C>       <C>       <C>
Awareness               -         -         -         -         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Assessment              75        50       17         8         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Renovation              25        50       58        67         42        75        -        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Validation              -         -        25        25         58        25       25        -         -
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Implementation          -         -         -         -         -         -        75       100       100
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
TOTAL                  100       100       100       100       100       100       100      100       100
--------------------------------------------------------------------------------------------------------------
</TABLE>

The Company has an internal Y2K committee comprised of Senior Management,  other
officers,  and  staff  under  the  direction  of the  Company's  Executive  Vice
President  and  Chief  Financial  Officer.   The  committee  meets  monthly  and
subsequently  reports on its  activities  to the Board of  Directors.  The Board
passed a resolution in 1998  committing all of the financial and human resources
necessary to enable the Company to  satisfactorily  achieve Y2K readiness and to
conduct normal operations beyond the century date change with minimal disruption
to either the quantity or quality of customer service.

The Company is developing contingency plans to address risks associated with Y2K
issues.  These  plans  include  remediation   contingency  plans,  Y2K  business
resumption   contingency   plans,  and  event  management   plans.   Remediation
contingency  covers the actions that may be required if the current  approach to
remediating a mission critical application is falling behind schedule or may not
be  completed  when  required.  The  Company  has  substantially  completed  its
remediation contingency plans. The Company already had in place a documented and
tested  disaster  recovery  plan.  This plan is being  expanded  and enhanced to
incorporate  the elements of the Y2K challenge.  The Company will  substantially
complete and  implement  its business  resumption  contingency  plan by June 30,
1999. The plan, currently being developed, will identify core business processes
and detail each step in these processes for  identification of alternate methods
and means of completing  such steps in the event of failure of current  systems.
Business impact analysis is being accomplished  through the use of risk analysis
worksheets to asses among other things the probability of certain failures,  the
expected  warning time, the  consequences  of such failure,  and the weight that
should be applied to system  component  failure in the  overall  operation  of a
specific system or department. An example of a core business process is taking a
deposit.   Every  step  of  this  process  is  being  flowcharted  to  establish
rudimentary,  manual alternatives in the event of a failure of internal computer
systems, loss of electrical power, or loss of telecommunication  lines. Business
resumption  may also be dependent on backup or saved  information  from prior to
year-end 1999. Therefore,  all computer processing during December, 1999 will be
amended to include changes in backup save routines,  printing  hardcopy  reports
normally  only saved to optical  disks,  rotation of backup media to name a few.
The  Company  has  begun  direct   communication   with  customers  to  minimize
unwarranted  public  alarm that  could  cause  serious  problems  for  financial
institutions.

The Company  has  established  a series of trigger  dates  associated  with core
application  products  that govern  primarily the customer loan and deposit data
bases. These applications address production of new and renewal loan and deposit
accounts as well as maintenance of ongoing customer  relationships.  The trigger
dates  started  November 30, 1998 and  conclude on March 31,  1999.  Through the
various  testing  methods that management has selected to validate the readiness
of these applications,  management will determine on these trigger dates whether
to begin  negotiations  with alternate  vendors of the applications that are not
Y2K ready or to explore alternative solutions with existing vendors.  Management
has not determined that any core customer data base applications will fail to be
Y2K ready.



                                       18
<PAGE>

Worst-case analysis

Until the year 2000 event actually occurs and for a period thereafter, there can
be no assurance that there will no problems related to the year 2000. Worst-case
scenarios would indicate that if Y2K issues are not adequately  addressed by the
Company as well as third  parties,  the Company could face,  among other things,
business disruptions,  operational  problems,  financial losses, legal liability
and  similar  risks,  and the  Company's  business,  results of  operations  and
financial position could be materially adversely affected.  The Company's credit
risks  associated  with  borrowers may increase to the extent  borrowers fail to
prepare for Y2K in ways that impact their cash flow and capacity to repay.  As a
result  there may  increases  in the  Company's  problem  loans,  non-performing
assets,  and credit  losses in future  years.  Additionally  the  Company may be
subject to increased  liquidity risks associated with excessive cash withdrawals
and/or  abnormally  high draws  against  borrowers'  lines of credit.  It is not
possible to quantify  the  potential  impact of any such risks or losses at this
time.  Temporary closings of individual offices could materialize,  but would do
so only under the  allowances  provided by the banking  regulatory  authorities.
Bank customers should note that FDIC deposits are considered safe.

Forward Looking Statements

The foregoing year 2000 discussion contains "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
statements, including, without limitation, anticipated costs, the dates by which
the  Company  expects  to  complete  remediation  and  testing  of  systems  and
contingency planning,  and the impact of the redeployment of existing staff, are
based on  management's  best current  estimates,  which were  derived  utilizing
numerous assumptions about future events,  including the continued  availability
of certain  resources,  representations  received from  third-party  vendors and
other factors.  However,  there can be no guarantee that these estimates will be
achieved and actual results could differ  materially from those plans.  Specific
factors that might cause such material  differences include, but are not limited
to, the  availability  of personnel  trained in this area,  the ability of third
party vendors to correct their software and hardware, the ability of significant
customers to remedy their Y2K issues, and similar uncertainties

The foregoing Year 2000 discussion  constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.



                                       19
<PAGE>





                          INDEPENDENT AUDITOR'S REPORT




To the Stockholders and Directors
Atlantic Financial Corp. and Subsidiaries
Newport News, Virginia


               We have audited the  accompanying  consolidated  balance sheet of
Atlantic  Financial  Corp.  and  Subsidiaries  as of December 31, 1998,  and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for the year ended December 31, 1998. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these  financial  statements  based on our audit. We did not audit
the combined financial statements of The Bank of Franklin and The Bank of Sussex
and Surry which statements  reflect total assets and revenue  constituting 45.4%
and 42.9%,  respectively in 1998, and 49.5% and 46.1%,  respectively in 1997, of
the related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the  amounts  included  for the  combined  financial  statements  of The Bank of
Franklin  and The Bank of Sussex and Surry is based  solely on the report of the
other auditors. In addition,  the financial statements of Mid-Atlantic Community
BankGroup,  Inc.  for the year ended  December  31,  1997 were  audited by other
auditors  whose report of other  auditors  dated January 16, 1998,  expressed an
unqualified opinion on those statements.


               We conducted  our audit 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 audit and the  report of the other  auditors
provide a reasonable basis for our opinion.


               In our  opinion,  based on our audit and the  report of the other
auditors,  the  consolidated  financial  statements  referred  to above  present
fairly, in all material  respects,  the financial position of Atlantic Financial
Corp.  and  Subsidiaries  as of  December  31,  1998,  and the  results of their
operations  and their  cash  flows for the year  ended  December  31,  1998,  in
conformity with generally accepted accounting principles.


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

Winchester, Virginia
January 21, 1999



                                       20
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


The Boards of Directors and Stockholder
The Bank of Franklin and The Bank of Sussex & Surry


We have audited the accompanying combined balance sheets of The Bank of Franklin
and The Bank of Sussex & Surry and their  subsidiaries  as of December  31, 1998
and 1997, and the related combined statements of income,  stockholders'  equity,
and cash flows for the years then ended. These combined financial statements are
the responsibility of the Banks' management. Our responsibility is to express an
opinion on these combined 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 combined financial statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined  financial  statements  referred to above  present
fairly, in all material respects, the financial position of The Bank of Franklin
and The Bank of Sussex & Surry and their  subsidiaries  as of December  31, 1998
and 1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.


/s/ Goodman & Company, L.L.P.


Norfolk, Virginia
February 16, 1999




                                       21
<PAGE>



                           Consolidated Balance Sheets
                           December 31, 1998 and 1997

<TABLE>
<CAPTION>


                                                                                                      December 31,       
       Assets                                                                                 1998                   1997


<S>                                                                                    <C>                     <C> 
Cash and due from banks                                                                $      11 781 814       $      13 321 926
Federal funds sold                                                                            29 524 045              19 228 281
Interest-bearing deposits in other banks                                                             - -                  99 362
Securities available for sale, at fair value                                                  80 280 723              66 594 130
Securities held to maturity, at amortized cost, fair
  value of $14,173,261 and $17,053,337, respectively                                          13 925 750              16 898 903
Loans, net                                                                                   207 733 355             185 689 729
Bank premises and equipment                                                                   10 702 950               7 851 284
Accrued interest receivable                                                                    2 981 581               2 801 392
Other real estate                                                                                212 343                 377 413
Intangibles, net                                                                               1 095 665                 668 211
Other assets                                                                                   2 065 095               1 727 099
                                                                                       -----------------       -----------------

           Total assets                                                                $     360 303 321       $     315 257 730
                                                                                       =================       =================

    Liabilities and Stockholders' Equity

Liabilities
  Deposits:
    Noninterest-bearing demand                                                         $      49 291 165       $      39 618 513
    Interest-bearing                                                                         263 018 804             232 309 036
                                                                                       -----------------       -----------------
           Total deposits                                                              $     312 309 969       $     271 927 549
  Short-term borrowings                                                                        1 589 387                 631 496
  Accrued interest payable                                                                     1 086 407                 898 722
  Other liabilities                                                                            2 188 501               1 491 633
  Commitments and contingent liabilities                                                             - -                     - -  
                                                                                       -----------------       -----------------
           Total liabilities                                                           $     317 174 264       $     274 949 400
                                                                                       -----------------       -----------------

Stockholders' Equity
  Preferred stock; $1 par value per share; authorized 1,000,000
    shares; no shares issued and outstanding                                           $             - -       $             - -
  Common stock; $5 par value per share; authorized 20,000,000
    shares; issued and outstanding 4,168,941 and 3,060,232 shares,
    respectively                                                                              20 844 705              15 301 160
  Stock options                                                                                    6 843                   7 380
  Surplus                                                                                            - -               4 350 512
  Retained earnings                                                                           21 047 709              19 865 902
  Accumulated other comprehensive income                                                       1 229 800                 783 376
                                                                                       -----------------       -----------------
           Total stockholders' equity                                                  $      43 129 057       $      40 308 330
                                                                                       -----------------       -----------------

           Total liabilities and stockholders' equity                                  $     360 303 321       $     315 257 730
                                                                                       =================       =================
</TABLE>


See Notes to Consolidated Financial Statements.

                                       22
<PAGE>





                        Consolidated Statements of Income
                For Each of the Two Years Ended December 31, 1998

<TABLE>
<CAPTION>

                                                                                                 Years Ended December 31,       
                                                                                              1998                    1997

<S>                                                                                    <C>                     <C>   
Interest Income
  Loans                                                                                $      19 847 465       $      17 940 305
  Interest on investment securities:
    Taxable interest income                                                                    4 157 889               3 950 302
    Tax-exempt interest income                                                                 1 261 394               1 181 635
  Interest on Federal funds sold                                                                 996 657                 666 122
                                                                                       -----------------       -----------------
       Total interest income                                                           $      26 263 405       $      23 738 364
                                                                                       -----------------       -----------------

Interest Expense
  Deposits                                                                             $      11 318 748       $      10 067 016
  Short-term borrowings                                                                           53 290                  58 078
                                                                                       -----------------       -----------------
       Total interest expense                                                          $      11 372 038       $      10 125 094
                                                                                       -----------------       -----------------

       Net interest income                                                             $      14 891 367       $      13 613 270

Provision for Loan Losses                                                                        477 000                 475 750
                                                                                       -----------------       -----------------

       Net interest income after
         provision for loan losses                                                     $      14 414 367       $      13 137 520
                                                                                       -----------------       -----------------

Other Income
  Service charges on deposit accounts                                                  $       1 590 058       $       1 500 711
  Gain on sale of available for sale securities                                                    8 035                  18 094
  Other operating income                                                                         484 009                 197 312
                                                                                       -----------------       -----------------
       Total other income                                                              $       2 082 102       $       1 716 117
                                                                                       -----------------       -----------------

Other Expenses
  Salaries and benefits                                                                $       5 628 535       $       5 007 383
  Occupancy expense                                                                              910 118                 756 151
  Equipment and data processing                                                                1 527 006               1 166 626
  Other operating expenses                                                                     3 321 013               2 503 617
                                                                                       -----------------       -----------------
       Total other expenses                                                            $      11 386 672       $       9 433 777
                                                                                       -----------------       -----------------

       Income before income taxes                                                      $       5 109 797       $       5 419 860

Income Tax Expense                                                                             1 447 679               1 359 433
                                                                                       -----------------       -----------------

       Net income                                                                      $       3 662 118       $       4 060 427
                                                                                       =================       =================

Earnings Per Share, basic                                                              $            0.88       $            1.02
                                                                                       =================       =================

Earnings Per Share, assuming dilution                                                  $            0.86       $            1.00
                                                                                       =================       =================

</TABLE>

See Notes to Consolidated Financial Statements.


                                       23
<PAGE>






                      Consolidated Statements of Cash Flows
                For Each of the Two Years Ended December 31, 1998

<TABLE>
<CAPTION>


                                                                                                     Years Ended December 31,     

                                                                                                   1998                  1997     

<S>                                                                                       <C>                     <C> 
Cash Flows from Operating Activities
  Net income                                                                              $        3 662 118      $      4 060 427
  Adjustments to reconcile net income to net 
   cash provided by operating activities:
      Depreciation and amortization                                                                1 001 324               597 613
      Deferred tax (benefit)                                                                         153 758              (134 668)
      Provision for loan losses                                                                      477 000               475 750
      Net loss on other real estate                                                                   90 178                   - -
      Net (gain) loss on sale of bank premises and equipment                                          85 689                  (250)
      (Gain) realized on available for sale securities                                                (8 035)              (18 094)
      Accretion of discounts and amortization of premiums, net                                        73 297                39 924
      Changes in assets and liabilities:
       (Increase) in accrued interest receivable                                                    (180 189)              (85 697)
       (Increase) in other assets                                                                   (960 127)             (677 890)
       Increase in accrued interest payable                                                          187 685               102 521
       Increase (decrease) in other liabilities                                                      170 006              (190 768)
                                                                                          ------------------      ----------------
              Net cash provided by operating activities                                   $        4 752 704             4 168 868
                                                                                          ------------------      ----------------



Cash Flows from Investing Activities
  Proceeds from sales of securities available for sale                                    $        1 534 505      $     13 819 493
  Proceeds from calls and maturities of securities available for sale                             19 723 444             6 510 184
  Purchases of securities available for sale                                                     (34 293 371)          (15 867 461)
  Proceeds from calls and maturities of securities held to maturity                               10 166 843             1 252 000
  Purchases of securities held to maturity                                                        (7 200 208)           (4 093 196)
  Net (increase) in loans                                                                        (22 754 545)          (18 414 946)
  Purchases of bank premises and equipment                                                        (3 765 274)           (1 524 853)
  Proceeds from sale of bank premises and equipment                                                    3 258                   250
  Proceeds from sale of other real estate                                                            308 811                   - -
                                                                                          ------------------      ----------------
              Net cash (used in) investing activities                                     $      (36 276 537)     $    (18 318 529)
                                                                                          -------------------     ----------------



Cash Flows from Financing Activities
  Net increase in demand deposit accounts, interest-
    bearing demand deposits and savings accounts                                          $       40 382 420       $    21 618 323
  Net increase in short-term borrowings                                                              957 891                 6 776
  Proceeds from sale of stock                                                                         20 963             3 347 835
  Acquisition of common stock                                                                        (11 018)                 - -
  Dividends paid                                                                                  (1 170 133)             (803 138)
                                                                                          -------------------      ---------------
              Net cash provided by financing activities                                   $       40 180 123       $    24 169 796
                                                                                          -------------------     ----------------
                                                                                     
              Increase in cash and cash equivalents                                       $        8 656 290       $    10 020 135

Cash and Cash Equivalents
  Beginning of year                                                                               32 649 569            22 629 434
                                                                                          ------------------       ---------------

  End of year                                                                             $       41 305 859       $    32 649 569
                                                                                          ==================       ===============

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
    Interest                                                                              $       11 184 353       $    10 022 573
                                                                                          ==================       ===============


    Income taxes                                                                          $        1 618 000       $     1 777 469
                                                                                          ==================       ===============



Supplemental Disclosure of Noncash Financing Activities,
  purchase of an investment interest in Johnson Mortgage
  Company, LLC through issuance of common stock                                           $          250 000       $            --
                                                                                          ==================       ===============


</TABLE>


See Notes to Consolidated Financial Statements.



                                       24
<PAGE>






           Consolidated Statements of Changes in Stockholders' Equity
                For Each of the Two Years Ended December 31, 1998

<TABLE>
<CAPTION>



                                                                              Common             Stock
                                                                               Stock            Options              Surplus 
                                                                              ------            -------              ------- 
                                                               

<S>                                                                        <C>                 <C>              <C> 
Balance, January 1, 1997                                                   $  14 553 660       $      7 380     $    1 750 177
  Comprehensive income:
    Net income                                                                       - -                - -                - -
    Other comprehensive income:
       Unrealized holding gains on securities available for
         sale arising during the period net of tax of $316,785                       - -                - -                - -
       Less reclassification adjustment net of tax of $(6,152)                       - -                - -                - -
    Other comprehensive income, net of tax                                           - -                - -                - -
    Total comprehensive income                                                       - -                - -                - -
  Sale of common stock                                                           747 500                - -          2 600 335
  Cash dividends                                                                     - -                - -                - -
                                                                           -------------       ------------     --------------
Balance, December 31, 1997                                                 $  15 301 160       $      7 380     $    4 350 512
  Comprehensive income:
    Net income                                                                       - -                - -                - -
    Other comprehensive income:
       Unrealized holding gains on securities available for
         sale arising during the period net of tax of $232,708                       - -                - -                - -
       Less reclassification adjustment net of tax of
         $(2,732)                                                                    - -                - -                - -
    Other comprehensive income, net of tax                                           - -                - -                - -
    Total comprehensive income                                                       - -                - -                - -
  Stock split effected in form of 100% stock dividend                          5 469 165                - -         (4 350 512)
  Issuance of common stock for interest in L.L.C.                                 56 170                - -                - -
  Exercise of stock options                                                       21 500               (537)               - -
  Purchase of common stock                                                        (3 290)               - -                - -
  Cash dividends                                                                     - -                - -                - -
                                                                           -------------       ------------     --------------
Balance, December 31, 1998                                                 $  20 844 705       $      6 843     $          - -
                                                                           =============       ============     ==============

</TABLE>

See Notes to Consolidated Financial Statements.



                                       25
<PAGE>


<TABLE>
<CAPTION>






                                                                                  Accumulated          
                                                                                      Other           
                                                                    Retained      Comprehensive     Comprehensive  
                                                                    Earnings         Income           Income              Total 
                                                                    --------     -------------    -------------           ----- 
                                                                                                                            
<S>                                                             <C>               <C>              <C>              <C> 
Balance, January 1, 1997                                        $    16 919 446   $     180 382                     $    33 411 045
  Comprehensive income:                                         
    Net income                                                        4 060 427             - -    $    4 060 427         4 060 427
    Other comprehensive income:                                 
       Unrealized holding gains on securities available for     
         sale arising during the period net of tax of $316,785              - -             - -           614 936               - -
       Less reclassification adjustment net of tax of $(6,152)              - -             - -           (11 942)              - -
                                                                                                   --------------
    Other comprehensive income, net of tax                                  - -         602 994    $      602 994           602 994
                                                                                                   --------------
    Total comprehensive income                                              - -             - -    $    4 663 421               - -
  Sale of common stock                                                                             ==============
  Cash dividends                                                            - -             - -                           3 347 835
                                                                     (1 113 971)            - -                          (1 113 971)
                                                                ---------------   -------------                     ---------------
Balance, December 31, 1997                                      $    19 865 902   $     783 376                     $    40 308 330
  Comprehensive income:                                         
    Net income                                                        3 662 118             - -    $    3 662 118         3 662 118
    Other comprehensive income:                                 
       Unrealized holding gains on securities available for     
         sale arising during the period net of tax of $232,708              - -             - -           451 727               - -
       Less reclassification adjustment net of tax of           
         $(2,732)                                                           - -             - -            (5 303)              - -
                                                                                                   --------------
    Other comprehensive income, net of tax                                  - -         446 424    $      446 424           446 424
                                                                                                   --------------
    Total comprehensive income                                              - -             - -    $    4 108 542               - -
                                                                                                   ==============
  Stock split effected in form of 100% stock dividend                (1 118 653)            - -                                 - -
  Issuance of common stock for interest in L.L.C.                       193 830             - -                             250 000
  Exercise of stock options                                                 - -             - -                              20 963
  Purchase of common stock                                               (7 728)            - -                             (11 018)
  Cash dividends                                                     (1 547 760)            - -                          (1 547 760)
                                                                 --------------    -------------                     --------------
Balance, December 31, 1998                                       $   21 047 709    $   1 229 800                     $   43 129 057 
                                                                 ==============    =============                     ============== 
                                                                                                               
                                                                
</TABLE>



                                       26
<PAGE>







                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996


Note 1.        Summary of Significant Accounting Policies

                  General

                     The accompanying  consolidated financial statements include
                     the  accounts of  Atlantic  Financial  Corp.  (AFC) and its
                     wholly-owned  subsidiaries,   Peninsula  Trust  Bank,  Inc.
                     (PTB),  The Bank of  Franklin  (BOF) and The Bank of Sussex
                     and Surry  (BSS).  PTB,  BOF and BSS are  commercial  banks
                     offering  lending and deposit  services to  individual  and
                     commercial  customers  with an emphasis  on those  services
                     traditionally  associated with independent community banks.
                     These entities are  collectively  referred to herein as the
                     Company.  The  Company  primarily  serves  the  Gloucester,
                     Charles City,  Newport News,  Williamsburg  and the western
                     Tidewater areas of Virginia.  All significant  intercompany
                     accounts  and   transactions   have  been   eliminated   in
                     consolidation.

                  Business Combination

                     On December 1, 1998, Mid-Atlantic Community BankGroup, Inc.
                     (MACB), and United Community Bankshares,  Inc. (UCB) became
                     affiliated   pursuant   to  an   Agreement   and   Plan  of
                     Reorganization  (the Agreement) dated July 8, 1998. UCB was
                     a bank holding  company which wholly owned the stock of BOF
                     and BSS. In conjunction with the merger, UCB was dissolved.
                     The  terms  of the  Agreement  provided  for,  among  other
                     provisions, that each outstanding share of UCB common stock
                     be  exchanged  for 1.075 shares of MACB common  stock.  The
                     name of MACB  was  changed  to AFC  immediately  after  the
                     completion  of  the  merger.  See  Note  2  for  additional
                     discussion of the transaction.

                  Basis of Presentation

                     The accounting and reporting policies of the Company are in
                     accordance with generally  accepted  accounting  principles
                     and  conform  to  general   practices  within  the  banking
                     industry.  The  more  significant  of  these  policies  are
                     summarized below.

                  Risks and Uncertainties

                     In its normal  course of business,  the Company  encounters
                     two  significant  types of risk:  economic and  regulatory.
                     There are three main components of economic risk:  interest
                     rate risk,  credit  risk and market  risk.  The  Company is
                     subject  to  interest  rate  risk to the  degree  that  its
                     interest-bearing liabilities mature or reprice more rapidly
                     or on a different basis than its  interest-earning  assets.
                     Credit  risk is the risk of default on the  Company's  loan
                     portfolio  that  results from the  borrowers'  inability or
                     unwillingness  to  make  contractually  required  payments.
                     Market  risk  reflects  changes in the value of  collateral
                     underlying  loans  receivable  and  the  valuation  of real
                     estate held by the Company.

                     The  determination of the allowance for loan losses and the
                     valuation  of real estate are based on  estimates  that are
                     particularly  susceptible  to  significant  changes  in the
                     economic  environment  and  market  conditions.  Management
                     believes  that, as of December 31, 1998,  the allowance for
                     loan losses and the  valuation  of real estate are adequate
                     based on information  currently  available.  A worsening or
                     protracted  economic  decline or  substantial  increase  in
                     interest rates, would increase the likelihood of losses due
                     to credit  and market  risks and could  create the need for
                     substantial increases to the allowance for loan losses.

                     The  Company  is  subject  to the  regulations  of  various
                     regulatory  agencies  which can change  significantly  from
                     year to year. In addition,  the Company undergoes  periodic
                     examinations by regulatory agencies which may subject it to
                     further changes based on the regulators'  judgements  about
                     information   available  to  them  at  the  time  of  their
                     examinations.

                  Securities

                  Investments   in   equity   securities   that   have   readily
                  determinable   fair  values  and  all   investments   in  debt
                  securities  are  classified  in  three   categories  based  on
                  management's intent and accounted for as follows:

                  a.    Securities Held to Maturity

                        Securities classified as held to maturity are those debt
                        securities  the  Company has both the intent and ability
                        to hold to  maturity  regardless  of  changes  in market
                        conditions,   liquidity  needs  or  changes  in  general
                        economic  conditions.  These  securities  are carried at
                        cost adjusted for  amortization of premium and accretion
                        of discount,  computed by the interest method over their
                        contractual lives.


                                       27
<PAGE>

                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

                  b.    Securities Available for Sale

                        Securities  classified  as available  for sale are those
                        debt and equity  securities  that the Company intends to
                        hold  for  an  indefinite   period  of  time,   but  not
                        necessarily to maturity. Any decision to sell a security
                        classified  as  available  for  sale  would  be based on
                        various  factors,  including  significant  movements  in
                        interest  rates,  changes  in  the  maturity  mix of the
                        Company's  assets  and  liabilities,   liquidity  needs,
                        regulatory  capital  considerations,  and other  similar
                        factors.  Securities  available  for sale are carried at
                        fair value. Unrealized gains or losses are reported as a
                        separate component of other comprehensive income, net of
                        the  related  deferred  tax  effect.  Realized  gains or
                        losses, determined on the basis of the amortized cost of
                        specific securities sold, are included in earnings.

                  c.    Trading Securities

                        Trading  securities,  which are  generally  held for the
                        short term in anticipation of market gains,  are carried
                        at fair value.  Realized and unrealized gains and losses
                        on trading  account  assets  are  included  in  interest
                        income on trading account  securities.  The Company held
                        no assets  classified as trading  securities at December
                        31, 1998 or 1997.

                  Loans

                  Loans  are  shown  on  the  balance  sheets  net  of  unearned
                  discounts and the allowance for loan losses.

                  Interest is computed by methods which result in level rates of
                  return on principal. Loans are charged off when in the opinion
                  of management they are deemed to be uncollectible after taking
                  into  consideration  such  factors  as the  current  financial
                  condition of the customer and the  underlying  collateral  and
                  guarantees.

                  Impairment of loans that have been  separately  identified for
                  evaluation  is to be measured  based on the  present  value of
                  expected future cash flows or,  alternatively,  the observable
                  market price of the loans or the fair value of the collateral.
                  However,  for those loans that are collateral  dependent (that
                  is, if  repayment  of those  loans is  expected to be provided
                  solely by the underlying  collateral) and for which management
                  has  determined   foreclosure  is  probable,  the  measure  of
                  impairment  of those loans is to be based on the fair value of
                  the collateral.

                  The  Company  considers  all  consumer  installment  loans and
                  residential  mortgage  loans to be  homogeneous  loans.  These
                  loans are not subject to the above  impairment  provisions.  A
                  loan is  considered  impaired  which it is  probable  that the
                  Company will be unable to collect all  principal  and interest
                  amounts  according  to  the  contractual  terms  of  the  loan
                  agreement. Factors involved in determining impairment include,
                  but are not limited to, expected future cash flows,  financial
                  condition   of  the   borrower,   and  the  current   economic
                  conditions.  A performing loan may be considered impaired,  if
                  the factors above  indicate a need for  impairment.  A loan on
                  nonaccrual  status may not be  impaired  if in the  process of
                  collection or there is an insignificant  shortfall in payment.
                  An insignificant  delay of less than 30 days or a shortfall of
                  less than 5% of the required  principal  and interest  payment
                  generally  does not indicate an  impairment  situation,  if in
                  management's  judgment  the loan  will be paid in full.  Loans
                  that  meet the  regulatory  definitions  of  doubtful  or loss
                  generally  qualify  as  an  impaired  loan.   Charge-offs  for
                  impaired  loans occur when the loan, or portion of the loan is
                  determined to be uncollectible, as is the case for all loans.

                  Loans are  placed on  nonaccrual  when a loan is  specifically
                  determined  to be  impaired or when  principal  or interest is
                  delinquent for 90 days or more. Any unpaid interest previously
                  accrued  on those  loans is  reversed  from  income.  Interest
                  income generally is not recognized on specific  impaired loans
                  unless  the  likelihood  of further  loss is remote.  Interest
                  payments  received on such loans are applied as a reduction of
                  the  loan  principal   balance.   Interest   income  on  other
                  nonaccrual  loans is recognized only to the extent of interest
                  payments received.

                  Allowance for Loan Losses

                  The  allowance for loan losses is maintained at a level which,
                  in management's  judgment, is adequate to absorb credit losses
                  inherent in the loan  portfolio.  The amount of the reserve is
                  based on management's  evaluation of the collectibility of the
                  loan portfolio,  including the nature of the portfolio, credit
                  concentrations, trends in historical loss experience, specific
                  impaired  loans,  and  economic  conditions.   Allowances  for
                  impaired  loans are generally  determined  based on collateral
                  values or the  present  value of  estimated  cash  flows.  The
                  allowance is increased by a provision  for loan losses,  which
                  is charged  to expense  and  reduced  by  charge-offs,  net of
                  recoveries.  Changes in the  allowances  relating  to impaired
                  loans  are  charged  or  credited  to the  provision  for loan
                  losses.  Because of  uncertainties  inherent in the estimation
                  process,  management's  estimate of credit losses  inherent in
                  the loan portfolio and the related allowance may change in the
                  near term.



                                       28
<PAGE>

                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996


                  Premises and Equipment

                  Premises  and  equipment  are stated at cost less  accumulated
                  depreciation  and  amortization.  Premises and  equipment  are
                  depreciated  over  their  estimated  useful  lives;  leasehold
                  improvements  are amortized  over the lives of the  respective
                  leases  or  the   estimated   useful  life  of  the  leasehold
                  improvements, whichever is less. Depreciation and amortization
                  are recorded on the straight-line method.

                  Costs of  maintenance  and  repairs are charged to expenses as
                  incurred.  Costs of replacing  structural parts of major units
                  are considered individually and are expensed or capitalized as
                  the facts dictate.

                  Other Real Estate

                  Foreclosed  properties  are  recorded  at  the  lower  of  the
                  outstanding  loan  balance at the time of  foreclosure  or the
                  estimated fair value less estimated costs to sell.

                  Intangible Assets

                  Intangible assets relate to the purchase of a branch by BOF in
                  1995,  the  1998  branch  acquisition  by PTB,  and  the  1998
                  purchase of an  investment  in a mortgage  company by AFC. All
                  are  amortized  over  fifteen  years  using the  straight-line
                  method.  Amortization expense was $176,663 and $16,566 for the
                  years ended December 31, 1998 and 1997, respectively.

                  Income Tax

                  Deferred  taxes are  provided  on a liability  method  whereby
                  deferred tax assets are recognized  for  deductible  temporary
                  differences,  operating  loss  carryforwards,  and tax  credit
                  carryforwards.  Deferred tax  liabilities  are  recognized for
                  taxable temporary  differences.  Temporary differences are the
                  differences   between  the  reported  amounts  of  assets  and
                  liabilities  and their tax  bases.  Deferred  tax  assets  are
                  reduced  by a  valuation  allowance  when,  in the  opinion of
                  management,  it is more likely  than not that some  portion or
                  all of the deferred assets will not be realized.  Deferred tax
                  assets and liabilities are adjusted for the effects of changes
                  in tax laws and rates on the date of enactment.

                  Cash and Cash Equivalents

                  For  purposes of the  statement  of cash flows,  cash and cash
                  equivalents  include cash on hand,  amounts due from banks and
                  federal funds sold.

                  Advertising Costs

                  The  Company  follows the policy of  charging  the  production
                  costs of advertising to expense as incurred.

                  Use of Estimates

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

                  Earnings Per Share

                  In 1997,  the  Financial  Accounting  Standards  Board  issued
                  Statement  No.  128,   "Earnings  per  Share."  Statement  128
                  replaced the calculation of primary and fully diluted earnings
                  per share with basic and  diluted  earnings  per share.  Basic
                  earnings per share  excludes any dilutive  effects of options,
                  warrants  and  convertible  securities.  Diluted  earnings per
                  share is very similar to the previously reported fully diluted
                  earnings per share.  

                  Comprehensive Income

                  As of January 1, 1998, the Company  adopted  Statement of FASB
                  No.  130,  "Reporting  Comprehensive  Income."  FASB  No.  130
                  establishes  new  rules  for  the  reporting  and  display  of
                  comprehensive income and its components; however, the adoption
                  of this statement had no impact on the Company's net income or
                  stockholders'    equity.   FASB   No.   130   requires   other
                  comprehensive  income to include  unrealized gains (losses) on
                  available  for sale  securities,  which prior to adoption were
                  reported separately in stockholders'  equity. The December 31,
                  1997 financial statements have been reclassified to conform to
                  the requirements of FASB No. 130.


                                       29
<PAGE>
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

Note 2.        Business Combination

               On December 1, 1998, the Company effected a business  combination
               with UCB by exchanging  1,965,741  shares of its common stock for
               all of the common stock of UCB. Immediately following the merger,
               UCB was dissolved.  The  combination  has been accounted for as a
               pooling  of  interests  and,  accordingly,  all  prior  financial
               statements  have been  restated  to include  UCB.  The results of
               operations  of the separate  companies  for periods  prior to the
               combination are summarized as follows:
<TABLE>
<CAPTION>

                                                          Net Interest
                                                            Income         Net Income 
                                                          ------------     ---------- 
                                                                 (Thousands)
                  Nine months ended September 30, 1998
<S>                                                      <C>               <C>   
                      MACB                               $    6 407        $   1 404
                      UCB                                     4 636            1 613


                  Year ended December 31, 1997

                      MACB                               $    7 552        $   1 830
                      UCB                                     6 061            2 230
</TABLE>

Note 3.        Joint Venture

               On March 31,  1998,  the  Company  consummated  an  agreement  to
               acquire a 50% membership  interest in Johnson  Mortgage  Company,
               L.L.C.,  which is the  successor to Johnson  Mortgage  Company of
               Newport News. Half of the purchase price was paid in cash and the
               other half was paid in shares of the Company's  common stock, for
               a total purchase price of $500,000. This resulted in the issuance
               of 11,234 additional shares of common stock.

Note 4.        Cash and Due From Banks

               The Company is required to  maintain  reserve  balances  with the
               Federal  Reserve Bank. For the final weekly  reporting  period in
               the years ended December 31, 1998 and 1997, the aggregate amounts
               of daily average required balances were approximately  $1,610,000
               and $1,015,000, respectively.


Note 5.        Securities

               Securities  available for sale  at December 31, 1998,  consist of
the following:

<TABLE>
<CAPTION>
                                                                  Gross               Gross
                                            Amortized          Unrealized          Unrealized            Fair
                                                Cost              Gains             (Losses)             Value     
                                            ---------          ----------          ----------            -----     

<S>                                            <C>                   <C>                <C>              <C>
               U. S. Treasury
                securities               $        877 040   $          8 772    $          - -     $        885 812
               U. S. Government
                and federal agencies           25 916 936            321 448            (81 875)         26 156 509
               State and local
                governments                    28 595 951            695 946            (54 683)         29 237 214
               Mortgage-backed
                securities                     15 147 817             96 892            (37 390)         15 207 319
               Corporate debt
                obligations                     3 091 639             49 396             (6 284)          3 134 751
               Collateralized
                mortgage
                obligations                        20 852                 63               - -               20 915
               Restricted stocks                  698 500                - -               - -              698 500
               Other securities                 4 068 645            880 908             (9 850)          4 939 703
                                         ----------------   ----------------    ---------------    ----------------
                                         $     78 417 380   $      2 053 425    $      (190 082)   $     80 280 723
                                         ================   ================    ===============    ================
</TABLE>

                                       30
<PAGE>

                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996



               Securities  available for sale  at December 31, 1997,  consist of
the following:
<TABLE>
<CAPTION>

                                                                  Gross               Gross
                                            Amortized          Unrealized          Unrealized            Fair
                                                Cost              Gains             (Losses)             Value     
                                            ---------          ----------          ----------            -----     

<S>                                      <C>                <C>                 <C>                <C> 
               U. S. Treasury
                 securities              $      1 695 369   $            569    $       (5 845)    $      1 690 093
               U. S. Government
                 and federal agencies          26 440 440            199 395          (147 859)          26 491 976
               State and local
                 governments                   22 611 790            462 593           (89 873)          22 984 510
               Mortgage-backed
                 securities                     9 778 874             47 055           (52 823)           9 773 106
               Corporate debt
                 obligations                    3 780 313             29 070            (2 778)           3 806 605
               Collateralized mortgage
                 obligations                       56 942                - -                (3)              56 939
               Restricted stocks                1 034 650                - -               - -            1 034 650
               Other securities                    10 006            746 245               - -              756 251
                                         ----------------   ----------------    --------------     ----------------
                                         $     65 408 384   $      1 484 927    $     (299 181)    $     66 594 130
                                         ================   ================    ===============    ================
</TABLE>

               Securities  held to maturity at December 31, 1998, consist of the
following:

<TABLE>
<CAPTION>

                                                                  Gross               Gross
                                            Amortized          Unrealized          Unrealized            Fair
                                                Cost              Gains              (Losses)            Value     
                                            ---------          ----------          ----------            -----     

<S>                                      <C>                <C>                 <C>                <C>
               U. S. Government
                 and federal agencies    $      4 717 751   $         40 853    $        (3 750)   $      4 754 854
               State and local
                 governments                    6 492 832            199 004            (11 486)          6 680 350
               Mortgage-backed
                 securities                     2 715 167             22 954                (64)          2 738 057
                                         ----------------   ----------------    ---------------    ----------------
                                         $     13 925 750   $        262 811    $       (15 300)   $     14 173 261
                                         ================   ================    ===============    ================
</TABLE>



               Securities  held to maturity  at December 31, 1997 consist of the
following:

<TABLE>
<CAPTION>
                                                                  Gross               Gross
                                            Amortized          Unrealized          Unrealized            Fair
                                                Cost              Gains             (Losses)             Value     
                                            ---------          ----------          ----------            -----     

<S>                                      <C>                <C>                 <C>                <C> 
               U. S. Government
                 and federal agencies    $      7 764 123   $         22 758    $       (26 361)   $      7 760 520
               State and local
                 governments                    6 452 614            143 038             (1 046)          6 594 606
               Mortgage-backed
                 securities                     2 572 976             16 060               - -            2 589 036
               Other                              109 190                - -                (15)            109 175
                                         ----------------   ----------------    ---------------    ----------------
                                         $     16 898 903   $        181 856    $       (27 422)   $     17 053 337
                                         ================   ================    ===============    ================
</TABLE>

                                       31
<PAGE>

                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996



               The schedule below  reflects the  maturities of  securities.  The
               classification  of   mortgage-backed   securities  was  based  on
               expected maturities,  while contractual  maturities were used for
               other  debt   securities.   Expected   maturities   differ   from
               contractual  maturities  because  borrowers may have the right to
               call or prepay  obligations  with or without  call or  prepayment
               penalties.


<TABLE>
<CAPTION>

                                                                                     Amortized           Fair
                                                                                       Cost              Value     
<S>                                                                             <C>                <C>  
               Available for Sale:
                Due in one year or less                                         $      4 461 276   $      4 492 143
                Due after one year through five years                                 24 230 369         24 679 489
                Due after five years through ten years                                26 130 179         26 559 428
                Due after ten years                                                   18 828 411         18 911 460
                Other                                                                  4 767 145          5 638 203
                                                                                ----------------   ----------------
                                                                                $     78 417 380   $     80 280 723
                                                                                ================   ================

                                                                                    Amortized            Fair
                                                                                       Cost              Value     
               Held to Maturity:
                Due in one year or less                                         $        870 018   $        874 453
                Due after one year through five years                                  2 888 892          2 946 393
                Due after five years through ten years                                 4 268 572          4 414 659
                Due after ten years                                                    5 898 268          5 937 756
                                                                                ----------------   ----------------
                                                                                $     13 925 750   $     14 173 261
                                                                                ================   ================
</TABLE>

               There were no sales of securities from the held to maturity
               category.

               Proceeds from sales of securities  available for sale during 1998
               and 1997 were $1,534,505 and $13,819,493. Gross realized gains of
               $16,051  and  $36,324  and gross  realized  losses of $8,016  and
               $18,230 were recognized on those sales.

               At December  31,  1998 and 1997,  approximately  $12,851,000  and
               $12,710,000,  respectively,  of those  securities were pledged to
               secure  deposits  of the U.S.  Government,  the  Commonwealth  of
               Virginia, and repurchase agreements.

Note 6.        Loans

               Major classifications of loans are as follows:
<TABLE>
<CAPTION>

                                                                                             December 31,        
                                                                                       1998              1997    
                                                                                ----------------   --------------
                                                                                       (Dollars in Thousands)

<S>                                                                             <C>                <C>           
               Commercial                                                       $       30 105     $       28 734
               Agriculture                                                               6 068              7 045
               Real estate mortgage:
                Construction                                                            13 935              8 596
                Residential (1-4 family)                                                52 632             49 746
                Home equity lines                                                       15 939             13 165
                Commercial                                                              48 788             40 233
                Agricultural                                                             3 044              2 485
               Loans to individuals for household,
                family and other consumer expenditures                                  39 564             38 097
               All other loans                                                             672                617
                                                                                --------------     --------------
                                                                                $      210 747     $      188 718
               Less unearned income                                                       (590)              (598)
               Less allowance for loan losses                                           (2 424)            (2 430)
                                                                                $      207 733     $      185 690
                                                                                ==============     ==============
</TABLE>



                                       32
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997


Note 7.        Allowance For Loan Losses

               Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>

                                                                                             December 31,        
                                                                                       1998              1997    
                                                                                --------------     --------------

<S>                                                                             <C>                <C>   
               Balance at beginning of year                                     $    2 430 143     $    2 320 972
               Provision for loan losses                                               477 000            475 750
               Recoveries                                                              109 868            166 378
               Charge-offs                                                            (592 751)          (532 957)
                                                                                --------------     --------------
               Balance at end of year                                           $    2 424 260     $    2 430 143
                                                                                ==============     ==============
</TABLE>


               Information  about  impaired  loans as of and for the  year ended
               December  31, 1998 is as follows:


               Impaired loans                                 $      257 944
               Allowance provided for impaired loans,
                included in the allowance for loan losses                - - 
               Average balance in impaired loans                      64 486 
               Interest income recognized                              8 095 


               The Company had no impaired loans as of December 31, 1997.

               Nonaccrual  loans  excluded from impaired loan  disclosure  under
               FASB No. 114  amounted to $423,718  and  $482,181 at December 31,
               1998 and 1997, respectively.  If interest on these loans had been
               accrued,  such  income  would have been  $35,815  and  $49,162 at
               December 31, 1998 and 1997, respectively.


Note 8.        Related Party Transactions

               Officers,  directors  and  their  affiliates  had  borrowings  of
               $3,223,014   and  $3,373,016  at  December  31,  1998  and  1997,
               respectively.  New  advances to directors  and  officers  totaled
               $1,455,807  and repayments  totaled  $1,605,809 in the year ended
               December 31, 1998.

               These transactions occurred in the ordinary course of business on
               substantially  the same terms as those prevailing at the time for
               comparable transactions with unrelated persons.


Note 9.        Premises and Equipment

               Major classifications of premises and equipment are summarized as
               follows:
<TABLE>
<CAPTION>

                                                                                             December 31,        
                                                                                      1998               1997    
                                                                                --------------     --------------

<S>                                                                         <C>                    <C> 
               Building and improvements                                    $   5 654 544          $   4 283 855
               Furniture and equipment                                          5 786 710              4 261 887
               Land                                                             3 348 659              2 781 142
               Construction in progress                                           111 155                367 016
               Leasehold improvements                                              29 657                    - -
                                                                            -------------          -------------
                                                                            $  14 930 725          $  11 693 900
               Accumulated depreciation                                        (4 227 775)            (3 842 616)
                                                                            -------------          -------------
                                                                            $  10 702 950          $   7 851 284
                                                                            =============          =============
</TABLE>

 

               For  the  years  ended  December 31, 1998 and 1997,  depreciation
               expense was  $824,661 and  $581,047, respectively.


                                       33
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997


Note 10.       Deposits

               The aggregate  amount of  certificates  of deposit with a minimum
               denomination  of $100,000 was $36,308,184 and $25,487,745 in 1998
               and 1997, respectively.

               At December 31, 1998, the scheduled maturities on certificates of
               deposit are as follows:

                          1999                       $      106 377 699
                          2000                               41 102 796
                          2001                                4 720 363
                          2002                                3 013 338
                          2003 and thereafter                 9 630 715
                                                     ------------------
                                                     $      164 844 911
                                                     ==================


Note 11.       Employee Benefit Plans

               AFC maintains two qualified  profit sharing plans under 401(k) of
               the Internal  Revenue  Code.  The first plan existed prior to the
               business  combination  explained  in  Note  2.  Under  the  plan,
               employees may elect to defer up to 15% of their  salary,  subject
               to Internal  Revenue  Service  limits.  The plan is  available to
               substantially   all   employees   of  PTB.   The  Bank  may  make
               discretionary  matching  contributions.  The Bank's contributions
               for 1998 and 1997 totaled $35,160 and $19,893,  respectively. The
               plan may be  amended  or  terminated  at any time by the Board of
               Directors. Contributions to the plan are included in salaries and
               employee benefits.

               The second plan also existed  prior  to the  business combination
               and  covers substantially all  employees of BOF  and BSS who have
               completed one year of  service. Vesting  in  the plan begins with
               the second year of  participation and  increases  annually by 20%
               until  full   vesting  occurs  after six  years.  Employees   may
               contribute  up  to  15% of  their  salaries,  and the Banks match
               50%  of the  first  6% of   employee  contributions.  The   plan
               provides  for  a   required  contribution  of  3% of net  income.
               Additional  contributions  can  be  made  by  the  Banks  at  the
               discretion of  the  Board  of  Directors.  Prior to the formation
               of this  plan, each  of the  Banks had qualified retirement plans
               for  the  future  benefit  of  their employees.  During 1998, BOF
               and BSS contributed  $42,000  and $27,600,  respectively, to  the
               plan for eligible participants.
                                          
               The BOF  defined  contribution  plan  was  restated,  and the BSS
               defined  benefit  plan    terminated,   subject  to   regulatory
               approvals.   Accordingly,   substantially   all  BOF   and   BSS
               employees  rolled  over  their  balances into the plan, which was
               in turn  assumed  by  AFC. During 1997, BOF  contributed  $31,250
               to the plan for eligible participants.
               


                                       34
<PAGE>


                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997


               Information about the BSS defined benefit plan follows:

<TABLE>
<CAPTION>


                                                                                        1998                 1997   
                                                                                   ------------         ------------
<S>                                                                                <C>                  <C>          
                  Change in Benefit Obligation
                    Benefit obligation, beginning                                  $    803 401         $    614 540
                    Service cost                                                            - -               50 276
                    Interest cost                                                       217 779               42 845
                    Actuarial loss                                                          - -              100 259
                    Benefits paid                                                      (713 506)              (4 519)
                    Impact of settlement/curtailments                                  (307 674)                 - -
                                                                                   ------------         ------------
                    Benefit obligation, ending                                     $         - -        $    803 401
                                                                                   ============         ============

                  Change in Plan Assets
                    Fair value of plan assets, beginning                           $    688 614         $    510 525
                    Actual return on plan assets                                         24 892              122 816
                    Employer contributions                                                  - -               59 792
                    Benefits paid                                                      (713 506)              (4 519)
                                                                                   ------------         ------------
                    Fair value of plan assets, ending                              $        - -         $    688 614
                                                                                   ============         ============

                    Deferred Asset (Gain)                                          $        - -         $    (87 252)
                                                                                   ============         ============

                    Funded status                                                  $        - -         $   (114 787)
                    Unrecognized net actual loss                                            - -               27 958
                    Unrecognized net obligation at transition                               - -               84 326
                    Unrecognized prior service cost                                         - -              (57 402)
                                                                                   ------------         ------------
                    Accrued benefit cost included in other liabilities             $        - -         $    (59 905)
                                                                                   ============         ============

                  Components of Net Periodic Benefit Cost
                    Service cost                                                   $        - -         $     50 276
                    Interest cost                                                       217 779               42 845
                    Expected return on plan assets                                      (24 892)             (35 564)
                    Amortization of prior service cost                                  (57 402)              (3 588)
                    Amortization of net obligation at transition                         84 326                5 394
                    Recognized net actuarial loss                                        27 958                  - -
                    Settlement/curtailment (gain)                                      (307 674)                 - -
                                                                                   ------------        -------------
                    Net periodic benefit cost                                      $    (59 905)       $      59 363
                                                                                   ============        =============

                  Weighted-Average Assumptions as of December 31
                    Discount rate                                                         7.00%                7.00%
                    Expected return on plan assets                                        7.00%                7.00%
                    Rate of compensation increase                                         5.00%                5.00%

</TABLE>

                                       35
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



Note 12.       Income Taxes

               Net deferred tax assets (liabilities) consist of the following as
of December 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                                              1998             1997   
                                                                         ------------     ------------

<S>                                                                      <C>              <C>
                Deferred tax assets:
                Deferred loan fees                                       $    123 542     $    184 392
                  Allowance for loan losses                                   249 826          306 796
                  Other                                                        65 781           81 192
                                                                         ------------     ------------
                                                                         $    439 149     $    572 380
                                                                         ------------     ------------

                Deferred tax liabilities:
                  Unrealized gain on available for sale securities       $    633 543     $    403 560
                  Fixed assets                                                147 575          133 231
                  Other                                                        28 949           22 766
                                                                         ------------     ------------
                                                                         $    810 067     $    559 557
                                                                         ------------     ------------

                                                                         $   (370 918)    $     12 823
                                                                         ============     ============
</TABLE>

         The  provision  for income taxes  charged to  operations  for the years
         ended December 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>

                                                                              1998             1997   
                                                                         ------------     ------------

<S>                                                                      <C>              <C> 
                Current tax expense                                      $  1 293 921     $  1 494 101
                Deferred tax expense (benefit)                                153 758         (134 668)
                                                                         ------------     ------------
                                                                         $  1 447 679     $  1 359 433
                                                                         ============     ============
</TABLE>

               The income tax  provision  differs  from the amount of income tax
               determined by applying the U.S. Federal income tax rate to pretax
               income for the years ended December 31, 1998 and 1997, due to the
               following:
<TABLE>
<CAPTION>

                                                                                        1998                1997    
                                                                                  -------------       --------------

<S>                                                                               <C>                 <C>   
                Income tax at statutory rate                                      $   1 737 331       $    1 842 752
                Increase (decrease) resulting from:
                  Tax-exempt income                                                    (424 056)            (396 948)
                  Merger expenses                                                        94 782                  - -
                  Other                                                                  39 622              (86 371)
                                                                                  $   1 447 679       $    1 359 433
                                                                                  =============       ==============
</TABLE>


                                       36
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



Note 13.       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.  Weighted
               average  number  of  shares  for all  years  reported  have  been
               restated   giving   effect  to  stock  splits  and  the  business
               combination  explained in Note 2. Potential dilutive common stock
               had  no  effect  on  income  available  to  common  stockholders.


<TABLE>
<CAPTION>
                                                                              1998                            1997                  
                                                               -----------------------------   ----------------------------
                                                                                  Per Share                       Per Share
                                                                     Shares         Amount          Shares          Amount    
                                                                     ------         ------          ------          ------    

<S>                                                                  <C>         <C>                <C>          <C>        
                Basic earnings
                  per share                                          4 162 044   $       .88        3 979 027    $      1.02
                                                                                 ===========                     ===========

                Effect of dilutive
                  securities:
                    Stock options                                      108 913                         76 241
                                                               ---------------                 --------------
                Diluted earnings
                  per share                                          4 270 957   $       .86        4 055 268    $      1.00
                                                               ===============   ===========   ==============    ===========
</TABLE>


Note 14.       Commitments and Contingent Liabilities

               BOF is a member of the Federal Home Loan Bank of Atlanta  (FHLB).
               As such, the Bank may borrow funds based on criteria  established
               by  the  FHLB.  As  of  December  31,  1998,   BOF  could  borrow
               approximately  $6,500,000,  if collateral  acceptable to FHLB was
               provided.  In  addition,  federal  funds  arrangement  with other
               institutions  provide  an  additional  $7,280,000  of  short-term
               borrowing capacity. The Bank had not drawn on the lines of credit
               at December 31, 1998.

               BSS is also a member of the FHLB.  As of December 31,  1998,  the
               Bank  could  borrow  approximately   $6,500,000,   if  collateral
               acceptable to the FHLB was provided.  In addition,  federal funds
               arrangement  with  other   institutions   provide  an  additional
               $11,591,000 of  short-term borrowing  capacity.  The Bank had not
               drawn on these lines of credit at December 31, 1998.

               The Company is conducting a comprehensive  review of its computer
               systems to  identify  the  systems  that could be affected by the
               Year 2000 Issue,  and is developing a remediation plan to resolve
               the Issue.  The Issue is whether  computer  systems will properly
               recognize  date-sensitive  information  when the year  changes to
               2000.  Systems that do not properly  recognize  such  information
               could  generate  erroneous  data or cause a system  to fail.  The
               Company  is  heavily  dependent  on  computer  processing  in the
               conduct of its  business  activities.  Failure  of these  systems
               could have a significant impact on the Company's operations.

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

               See  Note  17  with   respect  to  financial   instruments   with
               off-balance-sheet risk.


                                       37
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997


Note 15.       Stock Compensation Plans

               At  December  31,  1998,   the  Company  has  three   stock-based
               compensation plans which are described below.  Grants under these
               plans are  accounted for following APB Opinion No. 25 and related
               interpretations.  Accordingly,  no  compensation  cost  has  been
               recognized  for  grants  under  these  stock  option  plans.  Had
               compensation cost for the stock-based plans 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 adjusted to the pro forma  amounts
               shown below:
<TABLE>
<CAPTION>
                                                          1998             1997    
                                                     -------------    -------------
<S>                                                  <C>              <C>  
                    Net income:
                      As reported                    $   3 662 118    $   4 060 427
                      Pro forma                      $   3 662 118    $   3 869 039

                    Basic earnings per share:
                      As reported                    $         .88    $        1.02
                      Pro forma                      $         .88    $         .97

                    Diluted earnings per share:
                      As reported                    $         .86    $        1.00
                      Pro forma                      $         .86    $         .95
</TABLE>
                  
               The  Company  has a fixed  stock  option  plan under which it may
               grant options to certain key employees of BOF and BSS to purchase
               the  Company's  common  stock.  All options  under this plan have
               ten-year terms,  vest and become fully exercisable in six months.
               The option  price equals or exceeds the market price of the stock
               as of the date the option was granted.

               The Company also has a fixed stock option plan for key  employees
               of PTB. The  employee  incentive  stock option plan  provides for
               granting options to allow key employees to purchase the Company's
               common stock. The stock options give the holder the right, over a
               ten-year period, to acquire the Company's common stock.  Options,
               when granted under this plan,  will have an exercise  price equal
               to the  greater of the stock's  fair market  value or 100% of the
               book value per share of all of the Company's  common stock at the
               date of the grant.  The Company  has  reserved up to a maximum of
               100,000  shares of unissued  common stock for issuance under this
               employee incentive stock option plan.


               Also, the Company has a nonemployee  directors' stock option plan
               that  allowed the  directors  of PTB to purchase  options  during
               August  1990.  A total of  59,044  were sold at a price of $.125.
               Each option  entitles the owner  thereof to purchase one share of
               common stock for $4.875. These options expire during August 2000.

               A summary of the activity in the stock option plans follow:

<TABLE>
<CAPTION>
                                                                             1998                           1997            
                                                                   ------------------------      ---------------------------
                                                                                  Weighted                          Weighted
                                                                                   Average                           Average
                                                                                  Exercise                          Exercise
                                                                   Shares           Price          Shares            Price    

<S>                                                            <C>               <C>           <C>               <C>        
                     Outstanding at beginning of year                  177 086   $      7.51          136 044    $      6.55
                     Granted                                               - -           - -           41 042          10.70
                     Exercised                                           4 300          4.88              - -            - -
                     Forfeited                                             - -           - -              - -            - -
                                                               ---------------                 --------------
                     Outstanding at end of year                        172 786          7.58          177 086           7.51
                                                               ===============                 ==============
                     Exercisable at end of year                        172 786                        177 086
                     Weighted-average fair value
                       per option of options granted
                       during the year                                           $       - -                     $      9.70
                                                                                 ===========                     ===========
</TABLE>


                                       38
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997

                    
               The fair value of each grant is estimated at the grant date using
               the  Black-Scholes   option-pricing   model  with  the  following
               assumptions for 1997: dividend rate of 1.00%;  risk-free interest
               rate of 6.96%;  price volatility of 34.68%; and expected lives of
               10 years.


                     A further summary about the options outstanding at December
31, 1998 is as follows:

<TABLE>
<CAPTION>

                                                                                    Options Outstanding
                                                                                      and Exercisable       
                                                                                 ------------------------    
                                                                                 Weighted
                                                                                  Average        Weighted
                                                                                 Remaining        Average
                                          Range of              Number          Contractual      Exercise
                                       Exercise Price          Outstanding           Life           Price    
                                       --------------          -----------      -----------      ---------   

<S>                                    <C>                          <C>               <C>      <C>         
                                       $   4.875                    54 744            2        $      4.875
                                           5.00                      8 000            2               5.00
                                           5.625                    20 000            3               5.625
                                           8.00 - 8.25              44 000            6               8.01
                                          11.25                      5 000            7              11.25
                                          12.50                      7 000            8              12.50
                                           9.61                     34 042            9               9.61
</TABLE>

                     All  options  have  been  restated  for both  years  giving
                     retroactive  effect to the two for one stock  split in 1998
                     and the business combination discussed in Note 2.


Note 16.       Restrictions on Transfers to Parent

               Transfers  of funds from the banking  subsidiaries  to the Parent
               Company in the form of loans,  advances and cash  dividends,  are
               restricted  by federal and state  regulatory  authorities.  As of
               December  31, 1998 the  aggregate  amount of  unrestricted  funds
               which could be transferred  from the banking  subsidiaries to the
               Parent  Company  without  prior   regulatory   approval   totaled
               $5,095,984 or 11.8% of the consolidated net assets.


Note 17.       Financial Instruments With Off-Balance-Sheet Risk

               The   Company   is  a  party  to   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. Those instruments  involve, to varying degrees,  elements
               of  credit  and  interest  rate  risk  in  excess  of the  amount
               recognized in the balance  sheet.  The contract  amounts of those
               instruments  reflect the extent of involvement the Company has in
               particular classes of financial instruments.

               The   Company's   exposure   to  credit  loss  in  the  event  of
               nonperformance  by the other party to the  financial  instruments
               for commitments to extend credit and standby letters of credit is
               represented by the contractual amounts of those instruments.  The
               Company uses the same credit  policies in making  commitments and
               conditional   obligations   as  it  does   for   on-balance-sheet
               instruments.

               A summary of the  contract  or notional  amount of the  Company's
               exposure to  off-balance-sheet  risk as of December  31, 1998 and
               1997, is as follows:
<TABLE>
<CAPTION>

                                                               1998                 1997      
                                                         ----------------     ----------------
                                                               (Dollars in Thousands)
<S>                                                      <C>                  <C>  
                    Financial instruments whose 
                      contract amounts represent
                      credit risk:
                        Commitments to extend credit     $         24 039     $         34 056
                        Standby letters of credit        $          3 445     $          3 177
</TABLE>


                                       39
<PAGE>


                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



               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  creditworthiness  on a case-by-case basis. The amount
               of collateral  obtained,  if deemed necessary by the Company upon
               extension of credit,  is based on management's  credit evaluation
               of the  counterparty.  Collateral  held  varies  but may  include
               accounts  receivable,  inventory,  property  and  equipment,  and
               income-producing commercial properties.

               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 property, inventory and bank deposits as collateral
               supporting  those  commitments  for  which  collateral  is deemed
               necessary. The extent of collateral held for those commitments at
               December 31, 1998, varies from 0 percent to 100 percent.

               The  Company  maintains  its cash  accounts  in other  commercial
               banks. The amount on deposit with  correspondent  institutions at
               December 31, 1998,  exceeded the insurance  limits of the Federal
               Deposit Insurance Corporation by $3,067,794.

Note 18.       Disclosures About Fair Value of Financial Instruments

               The following  methods and assumptions  were used to estimate the
               fair value of each class of financial instruments for which it is
               practicable to estimate that value:

                  Cash and Short-Term Investments

                     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 certain  homogeneous  categories of loans, such as some
                     residential mortgages, and other consumer loans, fair value
                     is estimated  using the quoted market prices for securities
                     backed by similar loans,  adjusted for  differences in loan
                     characteristics.  The fair value of other types of loans is
                     estimated  by  discounting  the future cash flows using the
                     current  rates  at  which  similar  loans  would be made to
                     borrowers  with  similar  credit  ratings  and for the same
                     remaining maturities.

                  Deposits

                     The  fair  values  disclosed  for  deposits  (for  example,
                     checking,  savings and money market  accounts) are equal to
                     the amount  payable on demand at the  reporting  date.  The
                     fair values disclosed for time deposits are estimated using
                     the rates  currently  paid for deposits of similar size and
                     remaining maturities.

                  Other Borrowed Funds

                     Fair values of other  borrowings  are  estimated  using the
                     discounted  cash  flow  analyses  based  on  the  Company's
                     current  incremental  borrowing  rates for similar types of
                     borrowing arrangements.

                  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.



                                       40
<PAGE>


                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



               The carrying  amounts and fair values of financial instruments as
               of December 31, 1998 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                                         1998                               1997         
                                                        -------------------------------   -------------------------------
                                                          Carrying            Fair          Carrying          Fair
                                                           Amount            Value           Amount           Value          
                                                                  (In Thousands)                     (In Thousands)

<S>                                                     <C>              <C>              <C>               <C>          
               Financial assets:
                  Cash and due from banks               $       11 782   $       11 782   $       13 421    $      13 421
                  Federal funds sold                            29 524           29 524           19 228           19 228
                  Securities                                    94 206           94 454           83 493           83 647
                  Loans, net                                   207 733          226 786          185 690          185 714
                                                        --------------   --------------   --------------    -------------
                                                        $      343 245   $      362 546   $      301 832    $     302 010
                                                        ==============   ==============   ==============    =============

               Financial liabilities:
                  Deposits                              $      312 310   $      317 852   $      271 928    $     270 966
                  Short-term borrowings                          1 589            1 602              631              631
                                                        --------------   --------------   --------------    -------------
                                                        $      313 899   $      319 454   $      272 559    $     271 597
                                                        ==============   ==============   ==============    =============

</TABLE>

Note 19.       Regulatory Matters

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

               Quantitative measures established by regulation to ensure capital
               adequacy  require  the Company to  maintain  minimum  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  to average  assets.  Management  believes,  as of
               December 31, 1998,  that the Company  meets all capital  adequacy
               requirements to which it is subject.

               As of December  31, 1998 the most  recent  notification  from the
               Federal Reserve Bank  categorized the Company as well capitalized
               under the regulatory  framework for prompt corrective  action. To
               be  categorized  as well  capitalized  the Company must  maintain
               minimum total  risk-based,  Tier 1 risk-based and Tier 1 leverage
               ratios as set forth in the table.  There have been no  conditions
               or events since that notification  that management  believes have
               changed the institution's capital adequacy category.



                                       41
<PAGE>


                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



               The  regulatory   framework  for  prompt   corrective  action  is
               applicable  only to banks and not to bank holding  companies  and
               their  nonbank  subsidiaries.  The  actual and  required  capital
               amounts and ratios are as follows:


<TABLE>
<CAPTION>
                                                                                                            To Be Well
                                                                                                          Capitalized Under
                                                                          For Capital                     Prompt Corrective
                                               Actual                    Adequacy Purposes                Action Provisions
                                       Amount        Ratio             Amount         Ratio             Amount         Ratio        
                                       ------        -----             ------         -----             ------         ----- 
                                                                      (Amount in Thousands)
<S>                             <C>                  <C>        <C>              <C>             <C>              <C>   
As of December 31, 1998:
 Total Capital (to Risk
   Weighted Assets):
     Consolidated               $    43 612          17.8%      =>$    19 577    =>    8.0%                N/A
     PTB                        $    18 304          12.9%      =>$    11 315    =>    8.0%      =>$    14 144    =>   10.0%
     BOF                        $     9 782          15.9%      =>$     4 918    =>    8.0%      =>$     6 147    =>   10.0%
     BSS                        $     9 931          23.9%      =>$     3 320    =>    8.0%      =>$     4 151    =>   10.0%
 Tier 1 Capital (to Risk
   Weighted Assets):
     Consolidated               $    40 804          16.7%      =>$     9 789    =>    4.0%                  N/A
     PTB                        $    16 919          12.0%      =>$     5 658    =>    4.0%      =>$     8 486    =>    6.0%
     BOF                        $     9 155          14.9%      =>$     2 459    =>    4.0%      =>$     3 688    =>    6.0%
     BSS                        $     9 144          22.0%      =>$     1 660    =>    4.0%      =>$     2 490    =>    6.0%
 Tier 1 Capital (to
   Average Assets):
     Consolidated               $    40 804          11.6%      =>$    14 027    =>    4.0%                  N/A
     PTB                        $    16 919           8.9%      =>$     7 631    =>    4.0%      =>$     9 539    =>    5.0%
     BOF                        $     9 155           9.8%      =>$     3 752    =>    4.0%      =>$     4 690    =>    5.0%
     BSS                        $     9 144          13.8%      =>$     2 644    =>    4.0%      =>$     3 305    =>    5.0%

As of December 31, 1997:
 Total Capital (to Risk
   Weighted Assets):
     Consolidated               $    41 005          19.7%      =>$    16 629    =>    8.0%                  N/A
     PTB                        $    17 274          15.6%      =>$     8 874    =>    8.0%      =>$    11 093    =>   10.0%
     BOF                        $     9 761          16.7%      =>$     4 674    =>    8.0%      =>$     5 843    =>   10.0%
     BSS                        $    10 696          27.8%      =>$     3 078    =>    8.0%      =>$     3 848    =>   10.0%
 Tier 1 Capital (to Risk
   Weighted Assets):
     Consolidated               $    38 575          18.6%      =>$     8 315    =>    4.0%                  N/A
     PTB                        $    15 950          14.4%      =>$     4 437    =>    4.0%      =>$     6 656    =>    6.0%
     BOF                        $     9 081          15.5%      =>$     2 337    =>    4.0%      =>$     3 506    =>    6.0%
     BSS                        $    10 270          26.7%      =>$     1 539    =>    4.0%      =>$     2 309    =>    6.0%
 Tier 1 Capital (to
   Average Assets):
     Consolidated               $    38 575          12.5%      =>$    12 356    =>    4.0%                  N/A
     PTB                        $    15 950          10.2%      =>$     6 255    =>    4.0%      =>$     7 819    =>    5.0%
     BOF                        $     9 081          10.4%      =>$     3 508    =>    4.0%      =>$     4 385    =>    5.0%
     BSS                        $    10 270          15.8%      =>$     2 593    =>    4.0%      =>$     3 241    =>    5.0%

</TABLE>


                                       42
<PAGE>


                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



Note 20.    Parent Company Only Financial Statements

                            ATLANTIC FINANCIAL CORP.
                              (Parent Company Only)

                                 Balance Sheets
                           December 31, 1998 and 1997


<TABLE>
<CAPTION>

                                                                                 1998                 1997    
                                                                           ---------------     ---------------
<S>                                                                        <C>                 <C>  
          Assets

Cash and due from banks                                                    $     3 057 944     $     3 280 486
Securities available for sale                                                      383 515             100 000
Investment in subsidiaries                                                      37 209 677          36 751 573
Bank premises and equipment                                                         19 432              63 115
Intangibles, net                                                                   332 450                 - -
Due from subsidiaries                                                            2 997 626             546 916
Other assets                                                                       131 889             113 156
                                                                            --------------     ---------------


          Total assets                                                      $   44 132 533     $    40 855 246
                                                                            ==============     ===============



   Liabilities and Stockholders' Equity

Liabilities
  Dividends payable                                                        $       924 543     $       546 916
  Other liabilities                                                                 78 933                 - -
                                                                           ---------------     ---------------     

       Total liabilities                                                   $     1 003 476     $       546 916
                                                                           ---------------     ---------------

Stockholders' Equity
  Preferred stock                                                          $           - -     $           - -
  Common stock                                                                  20 844 705          15 301 160
  Stock options                                                                      6 843               7 380
  Surplus                                                                              - -           4 350 512
  Retained earnings                                                             21 047 709          19 865 902
  Accumulated other comprehensive
    income, net                                                                  1 229 800             783 376
                                                                           ---------------     ---------------
          Total stockholders' equity                                       $    43 129 057    $     40 308 330
                                                                           ----------------    ---------------
          Total liabilities and
            stockholders' equity                                           $    44 132 533     $    40 855 246
                                                                           ===============     ===============

</TABLE>



                                       43
<PAGE>

                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997



                            ATLANTIC FINANCIAL CORP.
                              (Parent Company Only)

                              Statements of Income
                     Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>



                                                                                          1998              1997    
                                                                                ---------------      ---------------
<S>                                                                             <C>                  <C> 
Income
  Dividends from subsidiaries                                                   $     4 153 067      $     1 396 203
  Interest from subsidiaries                                                             86 521                  - -
  Other income                                                                          466 902              152 874
  Gain on sale of securities                                                                - -                  800
                                                                                ---------------      ---------------
                                                                                $     4 706 490      $     1 549 877
                                                                                ---------------      ---------------

Expenses
  Stockholder expenses                                                          $        64 835      $        30 695
  Merger expenses                                                                       278 770                  - -
  Professional fees                                                                     112 219               64 172
  Insurance                                                                              49 907               34 163
  Printing and postage                                                                   30 523                5 505
  Directors' fees                                                                        38 751               35 000
  Miscellaneous                                                                         207 495               34 038
                                                                                ---------------      ---------------
                                                                                $       782 500      $       203 573
                                                                                ---------------      ---------------
           Net income before income tax
             benefit and undistributed
             equity in subsidiaries                                             $     3 923 990      $     1 346 304

Income tax benefit                                                                       (4 254)             (16 328)
                                                                                ----------------     ----------------

           Net income before undistributed earnings
             of subsidiaries and equity investments                             $     3 928 244      $     1 362 632

Undistributed (distributed) equity in subsidiaries                                     (266 126)           2 697 795
                                                                                ---------------      ---------------

           Net income                                                           $     3 662 118      $     4 060 427
                                                                                ===============      ===============

</TABLE>



                                       44
<PAGE>



                   Notes to Consolidated Financial Statements
                     Years Ended December 31, 1998 and 1997




                            ATLANTIC FINANCIAL CORP.
                              (Parent Company Only)

                            Statements of Cash Flows
                     Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>


                                                                                     1998                   1997    
                                                                                ---------------      ---------------
<S>                                                                             <C>                  <C> 
Cash Flows from Operating Activities
  Net income                                                                    $     3 662 118      $     4 060 427
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Amortization                                                                       17 500                  - -
      Depreciation                                                                       65 353                4 304
      Gain on sale of securities                                                            - -                 (800)
      Distributed (undistributed) earnings of subsidiaries                              266 126           (2 697 795)
      Undistributed earnings of equity investments                                     (133 465)                 - -
      (Increase) in due from subsidiaries                                            (2 450 710)            (309 683)
      (Increase) in other assets                                                        (18 733)            (126 794)
      Increase (decrease) in other liabilities                                            8 933             (381 469)
                                                                                ---------------      ----------------
           Net cash provided by operating activities                            $     1 487 122      $       548 190
                                                                                ---------------      ---------------

Cash Flows from Investing Activities
  Purchase of securities available for sale                                     $      (250 000)     $      (100 000)
  Proceeds from sale of securities available for sale                                       - -              351 800
  Purchase of premises and equipment                                                   (299 476)             (67 419)
                                                                                ----------------     ----------------
           Net cash provided by (used in) investing activities                  $      (549 476)     $       184 381
                                                                                ----------------     ---------------

Cash Flows from Financing Activities
  Cash dividends paid                                                           $    (1 170 133)     $      (803 138)
  Issuance of common stock                                                               20 963            3 347 835
  Acquisition of common stock                                                           (11 018)                 - -
                                                                                ----------------     ---------------
           Net cash provided by (used in) financing activities                  $     (1 160 188)    $     2 544 697
                                                                                ----------------     ---------------

           Increase (decrease) in cash and cash equivalents                     $       (222 542)    $     3 277 268

Cash and Cash Equivalents
  Beginning                                                                            3 280 486               3 218
                                                                                ----------------     ---------------

  Ending                                                                        $     3 057 944      $     3 280 486
                                                                                ===============      ===============

Supplemental Schedule of Noncash Investing Activities,
  contribution of premises and equipment to capital of a
  subsidiary bank                                                               $       277 806      $           - -
                                                                                ===============      ===============

</TABLE>

                                       45
<PAGE>


Item 13.
     
         (a)    Exhibits

Exhibit No.                                 Document

3.1               Amended  and  Restated  Articles  of Incorporation of Atlantic
                  Financial Corp.
3.2               Bylaws of Atlantic Financial Corp.
10.1              Mid-Atlantic  Community BankGroup,  Inc.  1998 Incentive Plan,
                  incorporated by reference to Exhibit 10.3 of the  Registrant's
                  Registration   Statement   on  Form  S-4,   Registration   No.
                  333-62997, filed September 4, 1998.
10.2              Employment  Agreement,  dated as of December 1, 1998,  between
                  Atlantic Financial Corp. and William J. Farinholt.
10.3              Employment  Agreement,  dated as of December 1, 1998,  between
                  Atlantic Financial Corp. and Wenifred O. Pearce.
10.4              Employment  Agreement,  dated as of December 1, 1998,  between
                  Atlantic Financial Corp. and Kenneth E. Smith.
10.5              Employment  Agreement,  dated as of December 1, 1998,  between
                  Atlantic Financial Corp. and D. Eugene Brittle.
21                Subsidiaries of the Registrant.
27                Financial Data Schedule (filed electronically only).

         (b)    Reports on Form 8-K

         On December 16, 1998,  the Company  filed a Current  Report on Form 8-K
dated  December  1, 1998 to  disclose,  under  Item 2, the  consummation  of the
Company's merger with United Community Bankshares, Inc.