Securities and Exchange Commission
                             Washington, D.C. 20549


                                    Form 10-Q

                   Quarterly Report Under Section 13 or 15(d)
                     Of the Securities Exchange Act of 1934



For Quarter Ended:                                      Commission File
December 31, 1996                                       Number: 33-67746


                      Virginia First Financial Corporation
             (Exact Name of Registrant as Specified in its Charter)


               Virginia                                 54-1678497
 (State or Other Jurisdiction of                     (I.R.S. Employer
  Incorporation or Organization)                   Identification Number)


      Franklin and Adams Streets, Petersburg, Virginia      23804-2009
       (Address of Principal Executive Office)               (Zip Code)


                          804-733-0333 or 804-748-5847
              (Registrant's Telephone Number, Including Area Code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No


At February 1, 1997,  5,789,123  shares of common stock of the  Registrant  were
outstanding.



<PAGE>



                      Virginia First Financial Corporation
                          Quarterly Report on Form 10-Q
                                December 31, 1996


                                      Index

Part I.  Financial Information                                         Page No.


   Item 1  Consolidated Statements of Condition as of
           December 31, 1996, June 30, 1996, and December 31, 1995        3

           Consolidated Statements of Operations for the
           three-month and six-month periods ended
           December 31, 1996 and December 31, 1995                        4

           Consolidated Statements of Cash Flows for the
           three-month and six-month periods ended
           December 31, 1996 and December 31, 1995                        5

           Selected Notes to Consolidated Financial Statements            6


   Item 2  Management's Discussion and Analysis of
           Financial Condition and Results of Operations                  7


Part II.  Other Information

   Item 4  Submission of Matters to a Vote of Security Holders           43


   Item 6  Exhibits and Reports on Form 8-K                              43


           Signatures                                                    44




                                       2

<PAGE>




                         PART I.  FINANCIAL INFORMATION
              VIRGINIA FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>

                                                                             December 31,            June 30,        December 31,
  (IN THOUSANDS, EXCEPT SHARE DATA)                                              1996                  1996              1995
                                                                           ----------------          ---------      ---------------
                                                                              (Unaudited)             (Note)          (Unaudited)
<S> <C>

ASSETS

Cash and cash equivalents                                                          $ 19,269         $ 24,575         $ 31,367
Investment securities, net                                                           12,695           12,663           16,584
Mortgage-backed securities and collateralized
     mortgage obligations, net                                                       22,065           15,694            7,095
Loans receivable held for investment, net                                           649,991          615,554          591,309
Loans receivable held for sale                                                       69,705           46,481           44,787
Real estate owned, net                                                                6,376            5,353            4,403
Accrued interest receivable, net                                                      5,439            5,292            5,155
Federal Home Loan Bank stock, at cost                                                 7,453            6,998            5,545
Office properties and equipment, net                                                  9,167            8,780            8,833
Other assets                                                                          6,385            5,477            4,841
                                                                                  ----------       ----------       ----------
          Total assets                                                             $808,545         $746,867         $719,919
                                                                                  ==========       ==========       ==========


LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                           $579,984         $573,536         $549,800
Notes payable and other borrowings                                                    9,657              639               30
Advances from Federal Home Loan Bank                                                149,052          102,052          110,908
Advance payments by borrowers for taxes and insurance                                 2,105            2,169            1,983
Accrued interest payable                                                                965              716            1,141
Accrued expenses and other liabilities                                                3,313            6,759            3,050
                                                                                  ----------       ----------       ----------
          Total liabilities                                                         745,076          685,871          666,912
                                                                                  ----------       ----------       ----------

Stockholders' equity:
  Preferred stock of $1 par value.  Authorized 10,000,000 shares;
     none issued                                                                    -                -                -
  Common stock of $1 par value.  Authorized 20,000,000 shares;
     issued and outstanding 5,774,855 shares at December 31, 1996
     5,740,503 at June 30, 1996 and 5,615,450 at December 31, 1995                    5,775            5,740            5,615
  Additional paid-in capital                                                          8,671            8,439            8,341
  Retained earnings - substantially restricted                                       49,029           46,943           39,036
  Net unrealized gain (loss) on securities available for sale, net of taxes              (6)            (126)              15
                                                                                  ----------       ----------       ----------
          Total stockholders' equity                                                 63,469           60,996           53,007
                                                                                  ----------       ----------       ----------

          Total liabilities and stockholders' equity                               $808,545         $746,867         $719,919
                                                                                  ==========       ==========       ==========
</TABLE>


NOTE:  The Consolidated Statements of Condition for June 30, 1996, has been
       taken from the Audited Financial Statements.

       The  accompanying  notes are an integral  part of these  unaudited
       Consolidated Financial Statements.



                                       3

<PAGE>




                         PART I.  FINANCIAL INFORMATION
             VIRGINIA FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                       Three Months Ended                  Six Months Ended
                                                                         December 31,                        December 31,
                                                                ---------------------------         -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)                              1996           1995                    1996           1995
                                                               ------------  --------------         --------------- -------------
                                                              (Unaudited)       (Unaudited)         (Unaudited)       (Unaudited)
<S> <C>
INTEREST INCOME
Loans receivable                                               $   15,531      $     13,825           $    30,288      $   27,917
Mortgage-backed securities and collateralized
   mortgage obligations                                               382                88                   759             199
Investment securities                                                 334               380                   661             831
Other interest-earning assets                                         237               109                   460             287
                                                               -----------     -------------         -------------     -----------
          Total interest income                                    16,484            14,402                32,168          29,234
                                                               -----------     -------------         -------------     -----------

INTEREST EXPENSE
Deposits                                                            6,870             6,619                13,667          12,923
Borrowings                                                          2,032             1,514                 3,744           3,403
                                                               -----------     -------------         -------------     -----------
          Total interest expense                                    8,902             8,133                17,411          16,326
                                                               -----------     -------------         -------------     -----------
Net interest income                                                 7,582             6,269                14,757          12,908
Provision for loan losses                                             581               449                 1,142             931
                                                               -----------     -------------         -------------     -----------
Net interest income after provision for loan losses                 7,001             5,820                13,615          11,977
                                                               -----------     -------------         -------------     -----------

NONINTEREST INCOME
Gain on sale of loans and securitized loans, net                    1,143               462                 1,891             927
Loan servicing income                                                 377               889                   720           1,715
Gain (loss) on sale of investment securities                                             -                     -               -
Loss on sale and revaluation of mortgage-backed securities
   and collateralized mortgage obligations                                               -                     -               -
Financial service fees                                                683               563                 1,325           1,131
Gain on sale of real estate owned                                      37                11                    97              70
Loss on revaluation of real estate owned                             (202)             (138)                 (214)           (367)
Other                                                                  10                43                   143              96
                                                               -----------     -------------         -------------     -----------
          Total noninterest income                                  2,048             1,830                 3,962           3,572
                                                               -----------     -------------         -------------     -----------

NONINTEREST EXPENSE
Personnel                                                           2,920             2,301                 5,575           4,579
Occupancy, net                                                        431               384                   839             755
Equipment                                                             336               297                   669             596
Advertising                                                           119                79                   200             180
Federal deposit insurance premiums                                    253               285                 3,727             561
Data processing                                                       468               440                   933             848
Amortization of intangibles                                            62                62                   123             124
Other                                                                 970               836                 1,914           1,512
                                                               -----------     -------------         -------------     -----------
          Total noninterest expenses                                5,559             4,684                13,980           9,155
                                                               -----------     -------------         -------------     -----------

Earnings before income tax expense                                  3,490             2,966                 3,597           6,394
Income tax expense                                                  1,313             1,062                 1,223           2,386
                                                               ===========     =============         =============     ===========
          Net earnings                                         $    2,177      $      1,904           $     2,374      $    4,008
                                                               ===========     =============         =============     ===========

Net earnings per share                                         $      0.37     $        .33           $      0.40      $     .69
                                                               ===========     =============         =============     ===========
</TABLE>


The  accompanying  notes are an integral  part of these  unaudited  Consolidated
Financial Statements.


                                        4

<PAGE>




                          PART I. FINANCIAL INFORMATION
              VIRGINIA FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                               Three Months Ended            Six Months Ended
                                                                                  December 31,                 December 31,
                                                                       ----------------------------- ----------------------------
(IN THOUSANDS)                                                             1996           1995            1996          1995
                                                                       ---------------  -----------   ----------     -----------
                                                                          (Unaudited)   (Unaudited)  (Unaudited)     (Unaudited)
<S> <C>
OPERATING ACTIVITIES:
   Net earnings                                                        $     2,177      $   1,904    $    2,374      $      4,008
   Adjustments to reconcile net earnings to net cash
     provided in operating activities:
          Depreciation and amortization                                        315            297           617               555
          Provision for loan losses and losses on
             real estate owned                                                 783            587         1,356             1,298
          Loans and securitized loans held for sale:
                       Originations and purchases                         (125,323)      (103,380)     (234,570)         (209,953)
                       Gains on sales                                       (1,396)          (687)       (2,144)           (1,152)
                       Proceeds from sales                                 103,718        101,425       210,427           196,709
          Gains (losses) on securities                                           8              0             8                 0
          (Increase) decrease in other assets                                 (518)             4        (1,111)              615
          Increase in accrued expenses and other liabilities                (4,107)          (293)       (3,196)              551
                                                                       ------------     ----------   -----------     -------------
              Net cash used in operating activities                        (24,343)          (143)      (26,239)           (7,369)
                                                                       ------------     ----------   -----------     -------------

INVESTING ACTIVITIES:
   Net decrease (increase) in loans receivable held for
     investment                                                            (16,930)       (11,060)      (35,515)          (10,546)
   Mortgage-backed securities:
            Purchases                                                            0              0       (10,245)                0
            Proceeds from sales, net                                         2,283              0         2,283                 0
            Principal collected                                                906          1,341         1,661             2,299
   Investment securities:
            Purchases                                                            0         (6,000)       (2,500)          (11,000)
            Principal collected                                              2,526         10,464         2,552            17,490
  Proceeds from sale of real estate owned                                      442          1,630           914             2,565
  Office properties and equipment
            Purchases                                                         (221)          (211)         (598)             (397)
            Proceeds from sales                                                  1              0             1                 1
                                                                       ------------     ----------   -----------     -------------
              Net cash provided by (used in)
                investing activities                                       (10,993)        (3,836)      (41,447)              412
                                                                       ------------     ----------   -----------     -------------

FINANCING ACTIVITIES:
   Net increase (decrease) in savings, checking and
       money market deposit accounts                                        (1,711)        (1,612)       (7,028)            7,524
   Net increase in certificates of deposit                                   9,303         17,573        13,476            38,609
   Borrowings resulting from:
     Securities sold under agreements to repurchase                              0              0        18,544                 0
     Advances from Federal Home Loan Bank                                   87,000         38,000       217,400            64,500
     Other                                                                   4,155          3,064         8,450             6,410
   Repayments of borrowings attributable to:
     Securities sold under agreements to repurchase                           (493)             0        (9,523)                0
     Advances from Federal Home Loan Bank                                  (64,500)       (34,500)     (170,400)          (88,250)
     Other                                                                  (4,146)        (3,653)       (8,453)           (6,940)
   Net increase in mortgage escrow funds                                      (670)          (879)          (63)             (271)
   Proceeds from issuance of common stock                                      231             93           264               285
   Cash dividends paid                                                        (144)           (97)         (287)             (181)
                                                                       ------------     ----------   -----------     -------------
              Net cash provided by financing activities                     29,025         17,989        62,380            21,686
                                                                       ------------     ----------   -----------     -------------

              Net increase (decrease) in cash and due from banks            (6,311)        14,010        (5,306)           14,729
   Cash and due from banks at beginning of period                           25,580         17,357        24,575            16,638
                                                                       ============     ==========   ===========     =============
   Cash and due from banks at end of period                            $    19,269      $  31,367    $   19,269      $     31,367
                                                                       ============     ==========   ===========     =============


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   Cash payments of interest                                           $     8,709      $   7,719    $  17,162      $      16,119
                                                                       ============     ==========   ==========     ==============

   Cash payments of income taxes                                       $     2,656      $   1,323    $   5,551      $       1,533
                                                                       ============     ==========   ==========     ==============

</TABLE>
The  accompanying  notes are an integral  part of these  unaudited  Consolidated
Financial Statements.

                                        5
<PAGE>



                         Part I.  Financial Information
             Virginia First Financial Corporation and Subsidiaries
              Selected Notes to Consolidated Financial Statements

Note 1:  The interim condensed consolidated financial statements are unaudited
         but, in the opinion of management, reflect all adjustments necessary
         for a fair presentation of results for such periods.  All such
         adjustments are of a normal, recurring nature. The results of
         operations for any interim period are not necessarily indicative of
         results for the full year.  These consolidated financial statements
         should be read in conjunction with the consolidated financial
         statements and notes thereto contained in the Company's Annual Report
         for the year ended June 30, 1996 ("fiscal year 1996"). The accompanying
         consolidated financial statements for prior periods reflect certain
         reclassifications in order to conform to the fiscal year 1997
         presentation.

Note 2:  For purposes of computing net earnings per share, the weighted average
         number of shares outstanding for the quarters ended December 31, 1996
         and 1995 were 5,847,075 and 5,790,256, respectively.  The number of
         shares for the three and six month periods ended December 31, 1995 has
         been adjusted to reflect the two-for- one split of the Company's common
         stock, which occurred November 17, 1995. During the quarters ended
         December 31, 1996 and 1995, the Company paid cash dividends of 2.5
         cents per share and 3.0 cents per share, respectively.

Note 3:  Regulatory Capital of Virginia First Savings Bank:
                                                                  Excess
                                                                   Over
                              Actual           Required         Requirement
                         Amount   Percent   Amount   Percent  Amount  Percent
(In thousands)
December 31, 1996

Tangible capital        $60,388     7.49%   $12,983   1.50%   $48,305    5.99%

Core capital             60,572     7.51     32,229   4.00     28,343    3.51

Risk-based capital       67,815    11.70     46,533   8.00     21,462    3.70

December 31, 1995

Tangible capital        $48,332     6.93%   $10,463   1.50%   $37,869    5.43%

Core capital             48,669     6.97     27,915   4.00     20,754    2.97

Risk-based capital       53,848    10.92     39,463   8.00     14,385    2.92


See Page 37 for a  reconciliation  of GAAP capital to  regulatory  capital as of
December 31, 1996.


                                       6

<PAGE>



                         Part I.  Financial Information
             Virginia First Financial Corporation and Subsidiaries


Item 2.     Management's Discussion and Analysis of Financial Condition
               and Results of Operations


General


         Virginia First Financial  Corporation  (the "Company") was incorporated
in Virginia in 1993 to serve as the holding  company of Virginia  First  Savings
Bank,  F.S.B.  (the "Savings Bank").  The Savings Bank is a federally  chartered
capital stock savings bank with its principal  offices in Petersburg,  Virginia.
The  Savings  Bank,  incorporated  in  1888,  is  one of  the  oldest  financial
institutions in the Commonwealth of Virginia.

         The  Company's  principal  business  activities,  which  are  conducted
through the Savings Bank, are attracting  checking and savings deposits from the
general public through its retail banking  offices and  originating,  servicing,
investing in and selling loans secured by first mortgage liens on  single-family
dwellings,  including  condominium units. The Company also lends funds to retail
banking customers by means of home equity and installment  loans, and originates
residential  construction  loans  and  loans  secured  by  commercial  property,
multi-family  dwellings and  manufactured  housing units. The Company invests in
certain U.S.  Government and agency obligations and other investments  permitted
by applicable  laws and  regulations.  The operating  results of the Company are
highly dependent on net interest income,  the difference between interest income
earned on loans and  investments  and the cost of checking and savings  deposits
and borrowed funds.

         Deposit accounts up to $100,000 are insured by the Savings  Association
Insurance Fund  administered by the Federal Deposit  Insurance  Corporation (the
"FDIC"). The Savings Bank is a member of the Federal Home Loan Bank (the "FHLB")
of Atlanta.  The Company  and the Savings  Bank are subject to the  supervision,
regulation and examination of the Office of Thrift  Supervision  (the "OTS") and
the FDIC.  The Savings Bank is also subject to the  regulations  of the Board of
Governors  of the  Federal  Reserve  System  governing  reserves  required to be
maintained against deposits.

         The  Company's  only  direct  subsidiary  is the  Savings  Bank and the
Company  has no  material  assets or  liabilities,  except  for the stock of the
Savings Bank. The Savings Bank has three active subsidiaries;  one is engaged in
real estate  development  and another is a title  insurance  agency.  The third,
American Finance and Investment, Inc., is a mortgage banking company, the assets
of which were acquired December 19, 1996. (See discussion on page 24)


                                       7

<PAGE>



         The following  commentary  discusses major  components of the Company's
business  and  presents  an overview of the  Company's  consolidated  results of
operations  during the three-month and six-month periods ended December 31, 1996
and 1995, and its consolidated financial position at December 31, 1996, June 30,
1996 and December 31, 1995.  This  discussion  should be reviewed in conjunction
with the  consolidated  financial  statements and  accompanying  notes and other
statistical  information presented in the Company's Annual Report for the fiscal
year ended June 30, 1996.


Results of Operations

         Results of operations for the three-month  and six-month  periods ended
December 31, 1996 (the fiscal year ending June 30, 1997,  or "fiscal year 1997")
and  December  31, 1995 (the fiscal year ended June 30,  1996,  or "fiscal  year
1996")  reflect the  Company's  focus on  expanding  its  community  banking and
mortgage banking operations.

         The Company's  results of operations for the first six months of fiscal
year 1997 reflect several  differences from the same period in fiscal year 1996.
First, net earnings for the first quarter of fiscal year 1997 reflect a one-time
pre-tax charge of $3,149,000 to pay for a special assessment to recapitalize the
Savings  Association  Insurance  Fund (the  "SAIF")  maintained  by the  Federal
Deposit Insurance  Corporation (the "FDIC"). The FDIC's authority to assess this
special assessment is contained in the omnibus appropriations bill passed by the
Congress and signed into law by President Clinton on September 30, 1996.

         Second,  the Company's  income from  servicing  loans declined by 58.0%
during the first half of fiscal year 1997  compared to the same period in fiscal
year 1996. This decline is due to the Company's sale of substantially all of its
servicing  rights related to mortgage loans serviced for others in a transaction
effective as of April 1, 1996. The Company's  decision to exit the mortgage loan
servicing  business was driven by the increasing  "critical  mass"  necessary to
generate acceptable returns on loan servicing activities. The after-tax proceeds
of the sale of  $4,148,000  have been  deployed in other  areas,  including  the
$1,954,000  after-tax funding of the FDIC special assessment,  and are providing
additional capital to enhance the Company's core business activities.

         Third,  as a result of rising market  interest  rates,  originations of
residential  mortgage  loans declined  dramatically  in the first half of fiscal
year 1996 compared to fiscal year 1995, which resulted in a significant decrease
in gains on sales of mortgage loans in the first six-months of fiscal year 1996.
This situation  turned around in fiscal year 1997, as market  interest rates had
moderated and the Company  realized  higher loan  originations,  sales and gains
than in the first six- months of fiscal year 1996. The addition of four mortgage
loan origination offices in August 1996 also contributed to the increase in loan
originations.



                                       8

<PAGE>



         Net interest income increased by 14.3% in the first half of fiscal year
1997,  compared  to the first  half of fiscal  year  1996  after  posting a 0.9%
decrease by in the first  six-months  of fiscal year 1996,  compared to the same
period in fiscal year 1995.  Increases in capital in recent years have permitted
the  Company  to  increase  both its  assets  and  liabilities.  Most of the net
increases  in  interest  income in the first six months of fiscal year 1997 were
attributable to increases in the size of the balance sheet. When compared to the
first  quarter  of  fiscal  year  1995,  the  rates  paid  on   interest-bearing
liabilities in the first half of fiscal year 1996 increased at faster rates than
yields earned on interest-earning  assets. While the Company's balance sheet was
larger  in  the  first  half  of  fiscal  year  1997,   market   rates  on  both
interest-earning assets and interest-bearing  liabilities moderated and declined
slightly,  when compared to the same period in fiscal year 1996, and the Company
continued to experience a migration by depositors from  lower-yielding  checking
and savings deposits to higher-yielding certificates of deposit.

         Net  Earnings.  The  Company's  net earnings for the second  quarter of
fiscal year 1997 were  $2,177,000,  an increase of 14.3% over the $1,904,000 for
the second  quarter of fiscal year 1996. On a per share basis,  earnings for the
second quarter of fiscal year 1997 were $.37, an increase of 12.1% over the $.33
for the second quarter of fiscal year 1996.

         The  Company's net earnings for the first half of fiscal year 1997 were
$2,374,000,  a decrease  of 40.8%  versus the  $4,008,000  for the first half of
fiscal year 1996.  On a per share  basis,  earnings for the first half of fiscal
year 1997 were $.40,  a decrease of 42.0%  versus the $.69 for the first half of
fiscal year 1996.

         The per share  earnings  figures for the three- and  six-month  periods
ended December 31, 1995 have been adjusted to reflect the  two-for-one  split of
the Company's common stock, which occurred on November 17, 1995.

         As described earlier,  the Company's net earnings for the first half of
fiscal year 1997 reflect a one-time, after-tax charge of $1,954,000, or $.34 per
share, to recapitalize the SAIF fund administered by the FDIC.  Without the FDIC
charge,  the Company's net earnings for the first half of fiscal year 1997 would
have been $4,348,000, or $.74 per share, an increase of 7.2%, or $.05 per share,
from the same six-month period in fiscal year 1996.

         The new law also authorizes the FDIC to reduce insurance premiums after
December  31,  1996 to reflect the  recapitalized  insurance  fund.  The Company
expects that beginning January 1, 1997, its annualized  insurance  premiums will
be  approximately  $940,000  lower on a pre-tax  basis than they would have been
without the special assessment law. In addition,  future growth in deposits will
be subject to the lower statutory premiums.






                                       9

<PAGE>



         The following table shows changes in earnings per share:

                                         Fiscal Year      Fiscal Year
                                              1997          1996
                                         Versus 1996      Versus 1995

Net earnings per share for the
    first six months of fiscal years
    1996 and 1995, respectively           $   .69         $   .60

Increase (decrease) attributable to:
  Net interest income                         .32            (.02)
  FDIC SAIF Assessment                       (.54)             --
  Provision for loan losses                  (.04)           (.06)
  Noninterest income                          .07             .11
  Noninterest expense                        (.28)            .08
  Income taxes                                .20            (.01)
  Average shares outstanding                 (.02)           (.01)
                                           ------          ------
    Net increase (decrease)                  (.29)            .09
                                           ------          ------
Net earnings per share for the
    first six months of fiscal years
    1997 and 1996, respectively           $   .40         $   .69
                                           ======          ======


         Net Interest Income.  Net interest income before the provision for loan
losses for the second quarter of fiscal year 1997 was $7,582,000, an increase of
$1,313,000,  or 20.9%,  compared to the second  quarter of fiscal year 1996. For
the second quarter of fiscal year 1996, net interest income before the provision
for loan losses was $6,269,000, a decrease of $406,000, or 6.1%, compared to the
second quarter of fiscal year 1995.

         Net interest  income before the provision for loan losses for the first
half of fiscal year 1997 was $14,757,000,  an increase of $1,849,000,  or 14.3%,
compared  to the first half of fiscal  year  1996.  For the first half of fiscal
year  1996,  net  interest  income  before  the  provision  for loan  losses was
$12,908,000,  a decrease  of  $111,000,  or 0.9%,  compared to the first half of
fiscal year 1995.

         The Company's net earnings are highly  dependent on the difference,  or
"spread", between the income it receives from its loan and investment portfolios
and its cost of funds,  consisting  principally of the interest paid on checking
and savings accounts and borrowings.



                                       10

<PAGE>



         The average  yield  received on the  Company's  loan  portfolio may not
change at the same pace as the  interest  rates it must pay on its  deposits and
borrowings.  As a result,  in times of rising interest  rates,  decreases in the
difference  between the yield  received on loans and other  investments  and the
rate paid on deposits and borrowings usually occur.  However,  interest received
on short-term  investments and adjustable  rate mortgage loans and  construction
loans also increases as a result of upward trends in short-term  interest rates,
which  enables the Company to partially  compensate  for  increased  deposit and
borrowing costs.

         The following  tables  reflect the average yields earned and rates paid
by the Company during the three-month  and six-month  periods ended December 31,
1996 and 1995. In computing the average yields and rates,  the accretion of loan
fees are considered an adjustment to yield.



                                       11

<PAGE>



(In thousands)
Three-Month Periods
Ended December 31

<TABLE>
<CAPTION>

                                                                         1996                               1995
                                                     -------------------------------------  ------------------------------------
                                                                    Interest                              Interest
                                                     Average        Income/      Yield/      Average       Income/     Yield/
                                                     Balance        Expense        Rate      Balance       Expense      Rate
<S> <C>

Interest-earning assets;
    Loans receivable (1)(2)                           $ 698,313    $  15,531       8.82%   $621,383      $13,825         8.83%
    Mortgage-backed securities and
      collateralized mortgage obligations                23,798          382       6.37       7,737           88         4.51
    Investments                                          21,376          334       6.20      25,683          380         5.87
    Other interest-earning assets                        18,151          237       5.18       8,531          109         5.07
                                                      ---------     --------     ------    --------      -------        ------
        Total interest-earning assets                   761,638       16,484       8.59     663,334       14,402         8.61
                                                      ---------     --------     ------    --------      -------        ------

Noninterest-earning assets:
    Cash and cash equivalents                             8,065                               8,487
    Office properties and equipment, net                  8,923                               8,886
    Other assets                                         18,271                              10,006
    Allowance for loan losses                            (8,256)                             (5,858)
                                                      ---------                           ---------
         Total assets                                 $ 788,641                            $684,855
                                                      =========                           =========

Interest-bearing liabilities:
    Checking and money market
       deposit accounts                               $ 101,345          949       3.72    $ 85,973          861         3.97
    Savings deposits                                     67,151          575       3.40      67,328          583         3.44
    Certificates                                        374,718        5,346       5.66     343,350        5,175         5.98
    Federal Home Loan Bank advances                     138,845        1,900       5.43      96,902        1,509         6.18
    Other borrowings                                      9,799          132       5.43         304            5         6.53
                                                      ---------     --------     ------    --------      -------        ------
         Total interest-bearing liabilities             691,858        8,902       5.10     593,857        8,133         5.43
                                                      ---------     --------     ------    --------      -------        ------

Noninterest-bearing liabilities:
    Deposits                                             23,126                              29,909
    Other                                                10,508                               8,030
                                                      ---------                           ---------

         Total liabilities                              725,492                             631,796
Stockholders' equity                                     63,149                              53,059

         Total liabilities and
             stockholders' equity                     $ 788,641                           $ 684,855
                                                      =========                           =========

Average dollar difference between
   interest-earning assets
   and interest-bearing liabilities                   $  69,780                           $  69,477
                                                      =========                           =========
Net interest income                                                $   7,582                           $   6,269
                                                                   =========                           =========

Interest rate spread (3)                                                           3.49%                           3.18%
                                                                                   =====                           =====
Net yield on average interest-earning assets (4)                                   3.95%                           3.75%
                                                                                   =====                           =====
</TABLE>


------------------
Notes on Page 13.



                                       12

<PAGE>



(In thousands)
Six-Month Periods
Ended December 31

<TABLE>
<CAPTION>

                                                                         1996                               1995
                                                     -------------------------------------  ------------------------------------
                                                                    Interest                              Interest
                                                     Average        Income/      Yield/      Average       Income/     Yield/
                                                     Balance        Expense        Rate      Balance       Expense      Rate
<S> <C>

Interest-earning assets;
    Loans receivable (1)(2)                         684,694        $  30,288     8.78%       $618,245      $27,917     8.96%
    Mortgage-backed securities and
      collateralized mortgage obligations            23,465              759     6.42           8,328          199     4.74
    Investments                                      20,992              661     6.25          27,410          831     6.01
    Other interest-earning assets                    17,292              460     5.28          11,057          287     5.15
                                                  ---------         --------    ------       --------      -------   ------
        Total interest-earning assets               746,443           32,168     8.55         665,040       29,234     8.72
                                                  ---------         --------    ------       --------      -------   ------
Noninterest-earning assets:
    Cash and cash equivalents                         7,953                                     8,913
    Office properties and equipment, net              8,852                                     8,873
    Other assets                                     17,231                                     9,429
    Allowance for loan losses                        (7,973)                                   (6,004)
                                                  ---------                                 ---------
         Total assets                             $ 772,506                                 $ 686,251

Interest-bearing liabilities:
    Checking and money market
       deposit accounts                           $  99,806            1,871     3.72        $ 83,995        1,675     3.96
    Savings deposits                                 68,133            1,167     3.40          68,659        1,188     3.43
    Certificates                                    371,163           10,630     5.68         334,410       10,060     5.97
    Federal Home Loan Bank advances                 126,376            3,500     5.49         108,554        3,392     6.20
    Other borrowings                                  8,923              243     5.40             347           11     6.29
                                                  ---------         --------    ------       --------      -------   ------
         Total interest-bearing liabilities         674,401           17,411     5.12         595,965       16,326     5.43
                                                  ---------         --------    ------       --------      -------   ------

Noninterest-bearing liabilities:
    Deposits                                         23,888                                    29,466
    Other                                            11,328                                     8,835
                                                  ---------                                 ---------
         Total liabilities                          709,617                                   634,266
Stockholders' equity                                 62,889                                    51,985
                                                  ---------                                 ---------
         Total liabilities and
             stockholders' equity                 $ 772,506                                 $ 686,251
                                                  =========                                 =========
Average dollar difference between
   interest-earning assets
   and interest-bearing liabilities               $  72,042                                 $  69,075
                                                  =========                                 =========

Net interest income                                                   $  14,757                          $  12,908
                                                                      =========                          =========
Interest rate spread (3)                                                         3.43%                                 3.29%
                                                                                 =====                                 =====
Net yield on average interest-earning assets (4)                                 3.92%                                 3.85%
                                                                                 =====                                 =====
</TABLE>

(1) Loans receivable shown gross of allowance for loan losses, gross of
    premiums/discounts.

(2) Nonaccrual loans are included in the average loan balances and income on
    such loans is recognized on a cash basis.

(3) Average yield on total interest-earning assets during the period less the
    average rate paid on total interest-bearing liabilities.

(4) Net interest income divided by average interest-earning assets.


                                       13

<PAGE>



         The  Company's  net  interest  income is  affected  by  changes in both
average  interest rates and the average volumes of  interest-earning  assets and
interest-bearing  liabilities.  Total interest income increased by $2,934,000 in
the first half of fiscal year 1997 and increased by $3,683,000 in the first half
of fiscal  year 1996,  as compared to the same  periods in the  previous  fiscal
years.  Total  interest  expense  increased by  $1,085,000  in the first half of
fiscal year 1997 and  increased by  $3,794,000  in the first half of fiscal year
1996, as compared to the same periods in the previous  fiscal years.  The fiscal
year 1996 and 1995  increases in both interest  income and interest  expense are
due   primarily   to   increases   in   average   interest-earning   assets  and
interest-bearing liabilities.

         The following tables show the amounts of the changes in interest income
and expense which can be  attributed  to rate (change in rate  multiplied by old
volume) and volume (change in volume multiplied by old rate) for the three-month
and  six-month  periods  ended  December  31, 1996 and 1995.  The changes in net
interest  income due to both  volume and rate  changes  have been  allocated  to
volume and rate in proportion to the  relationship of absolute dollar amounts of
the change of each. The table  demonstrates that the $1,850,000  increase in net
interest  income in the first  half of fiscal  year 1997 was the net result of a
growing  balance  sheet  partially  offset by rising  deposit  rates,  while the
$111,000  decline in net  interest  income in the first half of fiscal year 1996
was the net  result of a growing  balance  sheet  adversely  affected  by rising
deposit rates.

(In thousands)
Three-Month Periods
Ended December 31

<TABLE>
<CAPTION>

                                             Fiscal Year 1997 Versus 1996       Fiscal Year 1996 Versus 1995
                                              Increase (Decrease) Due to         Increase (Decrease) Due to
                                             Volume        Rate     Total        Volume       Rate     Total
<S> <C>

Loans receivable                           $ 1,722       $ (16)   $ 1,706       $ 1,416     $(109)   $ 1,307
Mortgage-backed securities and
  collateralized mortgage obligations          245          49        294           (46)      (61)      (107)
Investments                                    (69)         23        (46)          (71)       (2)       (73)
Other interest-earning assets                  126           2        128            17         7         24
                                           -------      ------    -------       -------     ------   -------
   Total interest-earning assets             2,204          58      2,082         1,316      (165)     1,151
                                           -------      ------    -------       -------     ------   -------
Checking and money market
   deposit accounts                            134         (47)        87            (9)      113        104
Savings deposits                                (1)         (7)        (8)         (241)       (4)      (245)
Certificates                                   415        (243)       172         1,285       542      1,827
Federal Home Loan Bank advances                543        (152)       391           (26)       59         33
Other borrowings                               129          (1)       128          (193)       31       (162)
                                           -------      ------    -------       -------     ------   -------
   Total interest-bearing liabilities        1,220        (450)       770           816       741      1,557
                                           -------      ------    -------       -------     ------   -------

Net interest income                        $   804       $ 508    $ 1,312       $   500     $(906)   $  (406)
                                           =======      ======    =======       =======     ======   =======
</TABLE>




                                       14

<PAGE>



(In thousands)
Six-Month Periods
Ended December 31

<TABLE>
<CAPTION>
                                              Fiscal Year 1997 Versus 1996      Fiscal Year 1996 Versus 1995
                                               Increase (Decrease) Due to       Increase (Decrease) Due to
                                             Volume     Rate      Total          Volume       Rate     Total
<S> <C>
Loans receivable                           $ 2,916    $(545)      $ 2,371       $ 3,319    $   418   $ 3,737
Mortgage-backed securities and
  collateralized mortgage obligations          469       91           560           (75)       (72)     (147)
Investments                                   (205)      35          (170)          (58)        24       (34)
Other interest-earning assets                  166        7           173           100         27       127
                                           -------   ------       -------       -------     ------   -------
   Total interest-earning assets             3,346     (412)        2,934         3,286        397     3,683
                                           -------   ------       -------       -------     ------   -------

Checking and money market
   deposit accounts                            289      (93)          196           (80)       260       180
Savings deposits                               (10)     (11)          (21)         (529)        (9)     (538)
Certificates                                 1,021     (451)          570         2,645      1,159     3,804
Federal Home Loan Bank advances                357     (250)          107           356        258       614
Other borrowings                               233       (1)          232          (290)        24      (266)
                                           -------   ------       -------       -------     ------   -------
   Total interest-bearing liabilities        1,890     (806)        1,084         2,102      1,692     3,794
                                           -------   ------       -------       -------     ------   -------

Net interest income                        $ 1,456    $ 394       $ 1,850       $ 1,184    $(1,295)  $  (111)
                                           =======   ======       =======       =======    =======   =======
</TABLE>

         Asset/Liability  Management.  Management strives to manage the maturity
or  repricing  match  between  assets and  liabilities.  The degree to which the
Company is  "mismatched" in its maturities is a primary measure of interest rate
risk. In periods of stable interest rates,  net interest income can be increased
by financing  higher  yielding  long-term  mortgage  loan assets with lower cost
short-term  deposits  and  borrowings.  Although  such a strategy  may  increase
profits in the short run, it increases  the risk of exposure to rising  interest
rates and can result in funding  costs  rising  faster  than asset  yields.  The
Company  attempts to limit its  interest  rate risk by selling a majority of the
fixed rate mortgage loans that it originates.

         The following tables  summarize the contractual  repayment terms of the
total loans  receivable  of the Company as of December 31, 1996,  as well as the
amount of fixed rate and variable  rate loans due after  December 31, 1997.  The
tables have not been  adjusted for estimates of  prepayments  and do not reflect
periodic  repricing of adjustable rate loans. The tables do include  $52,432,000
of fixed rate loans  receivable  held for sale and  $17,333,000  adjustable rate
loans held for sale as of December 31, 1996.




                                       15

<PAGE>


<TABLE>
<CAPTION>

                                             Balance            Principal Repayment Contractually Due in
                                           Outstanding             12-Month Period Ending December 31,
                                           December 31,                                 2000-      2002-    2007 and
(In thousands)                                1996         1997      1998      1999      2001       2006   Thereafter
<S> <C>
Residential and commercial real estate (1)   $535,257   $ 34,658   $22,942   $24,337   $39,977   $ 88,273   $325,069
Construction                                  126,030     97,974    21,686     6,028       342       --         --
Consumer and other loans                       58,409     16,267    12,552     9,774    11,160      4,325      4,332
                                             --------   --------   -------   -------   -------   --------   --------
                                             $719,696   $148,899   $57,180   $40,139   $51,479   $ 92,598   $329,401
                                             ========   ========   =======   =======   =======   ========   ========
</TABLE>


(1)  Includes loans held for sale.

<TABLE>
<CAPTION>

                                                     Fixed             Variable
(In thousands)                                        Rate               Rate            Total
<S> <C>
Residential and commercial real estate (2)          $161,399          $339,200         $500,599
Construction                                             329            27,727           28,056
Consumer and other loans                              39,507             2,635           42,142
                                                    --------          --------         --------
     Total due after December 31, 1997              $201,235          $369,562         $570,797
                                                    ========          ========         ========
</TABLE>

(2)  Includes loans held for sale.


         Contractual  principal  repayments of loans do not necessarily  reflect
the actual term of the Company's loan  portfolio.  The average lives of mortgage
loans is  substantially  less  than  their  contractual  terms  because  of loan
prepayments and because of enforcement of due-on-sale  clauses,  which gives the
Company  the right to declare a loan  immediately  due and payable in the event,
among other things, the borrower sells the real property subject to the mortgage
and the loan is not repaid. In addition, certain borrowers increase their equity
in the security  property by making  payments in excess of those  required under
the terms of the mortgage.

         Asset and liability management  strategies impact the one year maturity
"gap",   which  is  the   difference   between   interest-earning   assets   and
interest-bearing  liabilities  maturing or  repricing  in one year or less.  The
Company's  one year gap was a positive  6.53% of total  assets at  December  31,
1996, as follows:




                                       16

<PAGE>

<TABLE>
<CAPTION>


                                                          1 Year      1 - 3       3 - 5      Over 5
(In thousands)                                Total      or Less      Years       Years      Years
<S> <C>
Interest-earning assets:
   Loans receivable (1)                     $ 728,303    $467,406   $ 129,477    $29,084   $102,336
   Mortgage-backed securities and
    collateralized mortgage obligations        22,065       4,535       3,379      4,369      9,782
   Investments                                 20,148       7,714         859      4,557      7,018
   Other interest-earning assets                4,649       4,649        --         --         --
                                            ---------    --------   ---------    -------   --------
       Total interest-earning assets        $ 775,165    $484,304   $ 133,715    $38,010   $119,136
                                                         ========   =========    =======   ========
Noninterest-earning assets                     41,987
Allowance for loan losses                      (8,607)

       Total assets                         $ 808,545
                                            =========
Interest-bearing liabilities:
   Checking and money-market
     Deposit accounts (2)                      96,742      34,692        --         --       62,050
   Savings deposits (3)                     $  66,519    $ 16,630   $   9,313    $ 7,982   $ 32,594
   Certificates                               381,063     263,553      73,313     42,554      1,643
   FHLB advances                              149,052     107,000      31,500      7,500      3,052
   Other borrowings                             9,657       9,657        --         --         --
                                            ---------    --------   ---------    -------   --------
       Total interest-bearing liabilities   $ 703,333    $431,352   $ 114,126    $58,036   $ 99,339
                                                         ========   =========    =======   ========
Noninterest-bearing liabilities                42,043
                                            ---------
       Total liabilities                      745,076
Stockholders' equity                           63,469
                                            ---------

       Total liabilities and
         stockholders' equity               $ 808,545
                                            =========

Maturity/repricing gap                                   $  52,773    $ 19,589   $ (20,026)   $19,797

Cumulative gap                                           $  52,733    $ 72,362   $  52,336    $72,132

As percent of total assets                                  6.53 %      8.95 %      6.47 %     8.92 %

</TABLE>

(1) Loans receivable shown gross of allowance for loan losses, net of
    premiums/discounts.

(2) The Company has found that interest checking accounts are generally not
    sensitive to changes in interest rates and therefore has placed such
    deposits in the "over 5 years" category.

(3) In  accordance  with  standard  industry  practice,  decay factors have been
    applied to savings deposits.

         The preceding table does not reflect the degree to which  adjustment of
rate  sensitive  assets may be restricted by  contractual  or other  limitations
(such as loan rate ceilings) to applicable asset repricing mechanisms.  Included
in rate  sensitive  assets  maturing or repricing in one year or less are $167.0
million of  adjustable  rate  mortgage  loans  with rates tied to U.S.  Treasury
securities with a constant maturity of one year and a 2.00% annual interest rate
increase or decrease cap. The movement of interest  rates on these loans may not
precisely  correspond with the upward or downward  movement in loan market rates
or deposit and borrowing rates.

                                       17

<PAGE>



         The  Company's   portfolio  of  loans  held  for   investment   totaled
$649,991,000  at December  31, 1996,  representing  80.4% of total  assets.  The
following  table sets forth  information at the dates  indicated  concerning the
composition of the Company's loan portfolio, by type:

<TABLE>
<CAPTION>


                                     December 31, 1996      June 30, 1996       December 31, 1995
                                                 Percent             Percent               Percent
                                                   of                  of                    of
                                                 Gross               Gross                 Gross
(In thousands)                         Amount    Loans     Amount    Loans       Amount    Loans
<S> <C>
First mortgage loans:
   Residential - fixed rate           $ 70,126   10.6%   $ 77,266     12.3%    $ 75,975    12.7%
   Residential - adjustable rate       287,057   43.5     270,374     43.2      261,289    43.6
                                      -------    ----    --------     ----     --------    ----
        Total residential              357,183   54.1     347,640     55.5      337,264    56.3
                                      -------    ----    --------     ----     --------    ----

   Commercial - fixed rate              16,168    2.4      16,633      2.7       17,112     2.8
   Commercial - adjustable rate         29,178    4.4      32,089      5.1       38,421     6.4
                                      -------    ----    --------     ----     --------    ----
        Total commercial                45,346    6.8      48,722      7.8       55,533     9.2
                                      -------    ----    --------     ----     --------    ----

   Construction - fixed rate            16,655    2.5      20,185      3.2       11,240     1.9
   Construction - adjustable rate      113,178   17.1     101,190     16.2      101,234    16.8
                                      -------    ----    --------     ----     --------    ----
        Total construction (1)         129,833   19.6     121,375     19.4      112,474    18.7
                                      -------    ----    --------     ----     --------    ----

Total first mortgage loans             532,362   80.5     517,737     82.7      505,271    84.2
                                      -------    ----    --------     ----     --------    ----

Second mortgage loans (2):
   Fixed rate                           20,572    3.1      18,201      2.9       16,146     2.7
   Adjustable rate                      30,512    4.6      29,233      4.7       28,372     4.7
                                      -------    ----    --------     ----     --------    ----
        Total second mortgage loans     51,084    7.7      47,434      7.6       44,518     7.4
                                      -------    ----    --------     ----     --------    ----

Loans on savings accounts                2,017     .3       1,691      0.3        1,440     0.2
                                      -------    ----    --------     ----     --------    ----

Installment loans:
   Fixed rate                           72,531   11.0      55,910      8.9       45,907     7.6
   Adjustable rate                       3,000     .5       3,275      0.5        3,467     0.6
                                      -------    ----    --------     ----     --------    ----
        Total installment loans         75,531   11.5      59,185      9.4       49,374     8.2
                                      -------    ----    --------     ----     --------    ----

Gross Loans                            660,994  100.0%    626,047    100.0%     600,603   100.0%
                                                ======               ======               ======
Less:
   Unearned discount                        99                301                   778
   Deferred income                       2,297              2,665                 2,399
   Allowance for loan losses             8,607              7,527                 6,117
                                      --------           --------            ----------
                                        11,003             10,493                 9,294
                                      --------           --------            ----------

Total net loans held for investment   $649,991           $615,554            $  591,309
                                      ========           ========            ==========
</TABLE>


(1)  Construction loans are shown net of undisbursed loan funds.
(2)  Includes home equity lines of credit.

                                       18

<PAGE>



         Provision for Loan Losses.  The Company  provided  $581,000  during the
second  quarter  of fiscal  year 1997 as  additions  to the  allowance  for loan
losses,  compared  to $449,000  in the second  quarter of fiscal year 1996.  The
Company  provided  $1,142,000  during  the  first  half of  fiscal  year 1997 as
additions to the  allowance  for loan losses,  compared to $931,000 in the first
half of fiscal year 1996.  In  establishing  the level of the allowance for loan
losses,   the  Company  considers  many  factors,   including  general  economic
conditions,  loan loss experience,  historical  trends and other  circumstances,
both  internal  and  external.  The amount of the  provision  for loan losses is
established  based on  evaluations  of the  adequacy of the  allowance  for loan
losses.  The Company considers the size and risk exposure of each segment of the
loan portfolio.  For secured loans,  management  considers estimates of the fair
value of the  collateral,  considering  the  current and  currently  anticipated
future   operating  or  sales   conditions.   Such  estimates  are  particularly
susceptible  to changes  that could  result in a material  adjustment  to future
results of operations.  Factors such as independent appraisals, current economic
conditions and the financial  condition of borrowers are continuously  evaluated
to determine  whether the  Company's  investment  in such assets does not exceed
their estimated  values.  The Company's  policy is to establish both general and
specific allowances for loan losses.

                                       19

<PAGE>



         The following  table  presents the activity in the Company's  allowance
for loan losses and  selected  loan loss data for the first six months of fiscal
years 1996 and 1995:

(In thousands)
Six-Month Periods
Ended December 31
                                                       1996          1995

Balance at beginning of period                      $  7,527     $   6,373
Provision charged to expense                           1,142           931

Loans charged off:
  Residential real estate                                 -              3
  Commercial real estate                                  -          1,056
  Construction                                            -             -
  Consumer and other loans                                95           162
      Total charge-offs                                   95         1,221

Recoveries of loans previously charged off:
  Residential real estate                                  -             -
  Commercial real estate                                   -             -
  Construction                                             -             -
  Consumer and other loans                                33            34
      Total recoveries                                    33            34

      Net charge-offs                                     62         1,187

Balance at end of period                            $  8,607      $  6,117

Average loans held for investment (1)               $640,361      $589,664
Loans held for investment at period end (1)          658,598       597,426
Ratio of provision for loan losses to
    average loans held for investment                   0.18%         0.16%
Ratio of net charge-offs to average
    loans held for investment                           0.01%         0.20%
Ratio of allowance for loan losses to loans
    held for investment at period end                   1.31%         1.02%
-------------------------------
(1) Loans receivable shown gross of allowance for loan losses, net of
    premium/discount.

         While the Company's  management believes that its present allowance for
loan losses is adequate, future adjustments may be necessary.

         The allowance for loan losses is a general allowance  applicable to all
loan categories;  however, management has allocated the allowance to the various
portfolios to provide an indication of the relative risk  characteristics of the
total loan portfolio.  The allocation is based on the same  judgmental  criteria
discussed  earlier in  determining  the level of the allowance and should not be
interpreted as an indication that chargeoffs for the balance of fiscal year 1997
will occur in these amounts,  or proportions,  or that the allocation  indicates
future trends. The allocation of

                                       20

<PAGE>



the allowance at December 31, 1996,  June 30, 1996 and December 31, 1995 and the
ratio  of the  related  outstanding  loan  balances  to  total  loans  held  for
investment are as follows:

<TABLE>
<CAPTION>

         (In thousands)     December 31, 1996         June 30, 1996      December 31, 1995
                                    Ratio of                Ratio of               Ratio of
                                    Loans to                Loans to               Loans to
                                    Total Loans             Total Loans            Total Loans
                                    Held for                Held for               Held for
                         Allowance  Investment   Allowance  Investment  Allowance  Investment
<S> <C>
Residential real estate    $1,545      18.0%       $1,425      63.1%      $1,205     63.7%
Commercial real estate      2,792      32.4         2,552       7.8        2,052      9.2
Construction                2,800      32.5         2,200      19.4        1,600     18.7
Consumer and other loans    1,470      17.1         1,350       9.7        1,260      8.4
                           ------     -----        ------     -----       ------    -----
                           $8,607     100.0%       $7,527     100.0%      $6,117    100.0%
                           ======     =====        ======     =====       ======    =====
</TABLE>

         Business Lines.  The Company tracks the  performance  of  its  business
lines  using  an  internal  value-based  accounting  system.   Unlike  generally
accepted accounting principles, no authoritative body  of  guidance  exists  for
internal  financial accounting and reporting.  The Company's internal accounting
process is based on practices which support its management structure and is  not
necessarily comparable with similar information for other institutions.  Results
for the first six months of fiscal years  1997  and  1996  are  presented  in  a
consistent  manner.  However,  methodologies  may  change  from  time to time as
accounting systems are enhanced or business products change.

         The  following  table  details the  profitability  of the Company's two
business lines, retail banking and mortgage banking. Retail banking includes the
retail  branch  network  and the retail  lending  group,  the  Company's  equity
line/second  mortgage and  installment  loan  portfolios,  and related  customer
service  and  administrative  activities.  Mortgage  banking  includes  the loan
production and servicing functions, the Company's mortgage loan and construction
loan portfolios,  and related administrative activities. A match-funded transfer
pricing system is used to allocate  interest  income and expense between the two
business  lines.  Since  retail  banking is a net  provider of  corporate  funds
(retail  deposits exceed the retail loan  portfolio),  and mortgage banking is a
net user of corporate funds,  the match-funded  pricing system has the effect of
transferring  interest income from mortgage banking to retail banking. Loan loss
provisions  are  allocated  based on risk  weightings  in each  business  line's
portfolio and changes  therein.  Corporate  administrative  costs have also been
allocated to the business lines.


<TABLE>
<CAPTION>

(In thousands)                     Retail Banking             Mortgage Banking                 Total
Six-Month Periods                            Increase                     Increase                       Increase
Ended December 31            1996     1995  (Decrease)    1996    1995   (Decrease)    1996       1995  (Decrease)
<S> <C>
Net interest income         $7,902   $6,652   $ 1,249    $6,857   $6,256   $   601    $14,759   $12,908   $ 1,850
Provision for loan losses      183      179         4       960      752       208      1,143       931       212
Noninterest income           1,250    1,076       174     2,712    2,496       216      3,962     3,572       390
Noninterest expenses         8,777    5,183     3,594     5,204    3,972     1,232     13,979     9,155     4,824
Income taxes                    74      914      (840)    1,150    1,472      (322)     1,224     2,386    (1,162)
                            ------   ------   -------    ------   ------   -------    -------   -------   -------
  Net earnings              $  118   $1,452   $(1,334)   $2,255   $2,556   $  (301)   $ 2,374   $ 4,008   $(1,634)
                            ======   ======   =======    ======   ======   =======    =======   =======   =======
</TABLE>


                                       21

<PAGE>



         Retail  banking  produced a net  earnings  of $118,000 in the first six
months of fiscal year 1997,  compared to $1,452,000 of net earnings in the first
six months of fiscal year 1996.  If the FDIC  special  assessment  is  excluded,
retail banking yielded net earnings of $2,072,000, an increase of 42.7% over the
first  half of fiscal  year  1996.  Net  interest  income  from  retail  banking
increased by $1,250,000,  or 18.8%, as loans and deposits grew and yields earned
on  interest-earning  assets  and  rates  paid on  deposits  declined  slightly.
Customers  continued  to show a  preference  for  placing  their  deposits  into
higher-rate certificates of deposit instead of lower-rate savings,  checking and
money-market accounts.

         Net earnings from mortgage banking  decreased by 11.8% to $2,255,000 in
the six months of fiscal year 1997,  when compared to net earnings of $2,556,000
in the first six months of fiscal  year  1996.  Noninterest  expenses  increased
$1,232,000  or 31% with the  opening  of four new  branches  during  the  second
quarter  and the  acquisition  of AFI.  Higher  loan  production  volume,  lower
mortgage  loan  interest  rates,  and the  majority of mortgage  loan sales on a
servicing released basis resulted higher loan sale gains and an 8.7% increase in
the mortgage banking's noninterest income.

         Retail Banking  Operations.  The Company's  retail  banking  activities
consist of  attracting  checking and savings  deposits  from the general  public
through its retail banking offices and lending funds to retail banking customers
by means of home equity and installment loans.

         As of December 31, 1996, the Company operated twenty-three full service
retail  facilities  throughout  Virginia.  The  Company  opened a twenty  fourth
full-service retail banking branch on January 27, 1997.

         The  Company  opened a branch on  September  11,  1995.  The  branch is
located  at the  intersection  of Old Bridge  Road and Hedges Run Drive,  at the
"Lake Ridge Commons  Shopping  Center" in Woodbridge,  Virginia.  The Woodbridge
branch was the Company's first retail banking presence in the Northern  Virginia
market.  The  Company's  Mortgage  Banking  Division  is also  headquartered  in
Woodbridge.

         The Company originated $5,045,000 of residential equity lines of credit
and fixed-rate  second  mortgages during the second quarter of fiscal year 1997,
compared to  $4,606,000 in the second  quarter of fiscal year 1996.  The Company
originated  $10,452,000  of  residential  equity lines of credit and  fixed-rate
second  mortgages  during  the  first  half of fiscal  year  1997,  compared  to
$13,120,000 in the first half of fiscal year 1996.

         The Company  originated  $12,368,000 of consumer and installment  loans
during the second  quarter of fiscal year 1997,  compared to  $5,226,000  in the
second  quarter of fiscal  year 1996.  The  Company  originated  $29,635,000  of
consumer  and  installment  loans  during  the first  half of fiscal  year 1997,
compared to $10,857,000 in the first half of fiscal year 1996.



                                       22

<PAGE>





         The  Company  has  placed  emphasis  on  making  these  forms of credit
available to its retail customers. The Company's success in promoting these loan
products is attributed  to enhanced  training of retail  branch  personnel,  the
centralization of credit  decision-making,  and marketing  campaigns that target
these products.

         In   addition  to   originating   consumer-type   loans,   the  Company
occasionally  purchases  loans to obtain  geographic  diversity  and  yields not
obtainable  in  the  Company's  normal  lending  areas.  The  Company  purchased
$3,623,000 of such loans during the second quarter,  and $11,622,000  during the
first six months of fiscal 1997; no such loans were  purchased in the comparable
periods in fiscal year 1996.

         The following table  summarizes  retail banking loan  originations  and
purchases  by type of loan  for the  three-month  and  six-month  periods  ended
December 31, 1996 and 1995:

(In thousands)
Three-Month Periods
Ended December 31                                 1996               1995
                                                      % of                % of
                                            Amount    Total     Amount    Total

Residential equity lines of credit (1)     $ 3,091    17.8%    $ 2,567     26.1%
Fixed-rate second mortgage loans             1,954    11.2       2,039     20.7
Consumer loans                              12,368    71.0       5,226     53.2
                                           -------   -----     -------    -----
Total originations and purchases           $17,413   100.0%    $ 9,832    100.0%
                                           =======   =====     =======    ======
Six-Month Periods
Ended December 31                                 1996               1995
                                                      % of                % of
                                            Amount    Total     Amount    Total

Residential equity lines of credit (1)     $ 5,743    14.3%    $ 6,003     25.0%
Fixed-rate second mortgage loans             4,709    11.7       7,117     29.7
Consumer loans                              29,635    74.0      10,857     45.3
                                           -------   -----     -------    -----
Total originations and purchases           $40,087   100.0%    $23,977    100.0%
                                           =======   =====     =======    ======


 (1)  Reflects loan balances prior to deduction of undisbursed loan amounts.


         Management  believes  that it is important for the Company to diversify
beyond the traditional  offerings of home equity loans and consumer  installment
loans.  The Company  has begun to offer  banking  services to small  businesses,
including loans and checking accounts. In addition,  the Savings Bank has formed
a new  subsidiary,  Freedom  Financial  Services,  Inc.,  which  will offer more
financing alternatives to customers at competitive rates.

                                       23

<PAGE>



         Mortgage Banking Operations.  The principal sources of revenue from the
Company's  mortgage banking operations are loan origination fees, loan servicing
fees,  revenues  from sales of loans,  and revenues  from any sales of rights to
service loans.

         During the second  half of fiscal year 1996,  the Company  consolidated
three of its loan  production  centers into other  offices.  In August 1996, the
Company  opened  mortgage loan centers in the Maryland  communities of Columbia,
Frederick,  Timonium  and Bel Air. At December 31,  1996,  the Company  operated
twelve mortgage loan production centers in Virginia and Maryland.

          The  Company will continue to evaluate the number and locations of its
mortgage loan  origination  centers  to  ensure  the most  efficient   and  cost
effective  allocation  of mortgage lending resources.  In subsequent periods the
Company may  open  new  centers  or  close  or  consolidate   existing  centers,
depending on market conditions.

         The Company's  present  operating  strategy is to originate  fixed rate
loans for sale in the secondary mortgage market,  while adjustable rate mortgage
loans are originated both for sale and for the Company's portfolio.

         On December 19, 1996, the Company purchased a majority of the assets of
American  Finance and  Investments,  Inc.  ("AFI"),  a provider  of  residential
mortgage  loans  through  the  Internet.  AFI  generates  mortgage  loans  on an
automated  basis  through a computer  network  presently  available to potential
customers in forty-four states.  Headquartered in Fairfax,  Virginia,  AFI is in
the evolving market for electronic commerce.  During the past fifteen months AFI
has  expanded  rapidly by means of software  designed to  facilitate  "on line "
mortgage loan  originations.  The acquisition of AFI provides the Company with a
means of expansion of electronic  commerce to the retail banking  customer base.
The Company's introduction to the Internet as a medium of product delivery might
logically expand to other bank-related products and services.

         See the  discussion  under  "Mortgage  Loan  Servicing"  regarding  the
Company's sale of substantially  all of its servicing rights related to mortgage
loans serviced for others, in a transaction effective as of April 1, 1996.

         Origination  and  Purchase of Mortgage  Loans.  The Company  originated
$139,168,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans  Administration  ("VA") residential loans during the second quarter
of fiscal year 1997,  compared to  $112,385,000  in the second quarter of fiscal
year 1996 and $45,575,000 in the second quarter of fiscal year 1995. The Company
originated $262,612,000 of such loans during the first half of fiscal year 1997,
compared to $225,514,000 in the first half of fiscal year 1996 and  $130,757,000
in the first half of fiscal year 1995.  The 72.5%  increase in the first half of
fiscal  year 1996  compared  to the same period in fiscal year 1995 was due to a
moderation  in market  interest  rates and an increase  in new  housing  starts,
primarily in the Northern Virginia and Maryland  markets.  The 16.4% increase in
the first half of 1997  compared to the same period in 1996 is due to continuing
moderate  market  interest  rates  as well as the  addition  of  four  new  loan
origination  centers in August 1996 and the acquisition of American  Finance and
Investment, Inc. in December, 1996.

                                       24

<PAGE>



         The Company  originated  $18,264,000  of  adjustable  rate  residential
mortgage  loans  during the  second  quarter of fiscal  year 1997,  compared  to
$20,382,000  in the second  quarter of fiscal year 1996 and  $25,103,000  in the
second quarter of fiscal year 1995. The Company  originated  $42,212,000 of such
loans during the first half of fiscal year 1997,  compared to $41,526,000 in the
first half of fiscal year 1996 and  $54,418,000 in the first half of fiscal year
1995. Originations in the first half of fiscal year 1996 were 23.7% less than in
the same  period in fiscal  year 1995,  as  moderating  interest  rates  shifted
consumer interest back to the fixed rate products.  This trend continued in 1997
as  adjustable  rate  mortgage  loan  originations  shrank  to  12.4%  of  total
originations  in the first half of fiscal  year 1997,  compared  to 14.2% in the
first half of fiscal year 1996.

         In addition to originating residential mortgage loans, the Company also
purchases loans to obtain geographic  diversity and yields not obtainable in the
Company's normal lending areas.  However, no ARM loans were purchased during the
first or second quarters of fiscal years 1997 and 1996.

         The Company  originated  $25,067,000 of  construction  loans during the
second quarter of fiscal year 1997, compared to $9,555,000 in the second quarter
of fiscal year 1996 and  $18,414,000  in the second quarter of fiscal year 1995.
The Company  originated  $35,504,000 of construction loans during the first half
of fiscal year 1997,  compared to  $22,521,000  in the first half of fiscal year
1996 and $38,515,000 in the first half of fiscal year 1995.  Construction  loans
were 10.4% of total permanent  mortgage loan and construction  loan originations
in the first  half of fiscal  year 1997,  compared  to 7.7% in the first half of
fiscal year 1996. The increases in both outstanding  construction  loan balances
and loan commitments has been consistent with management's goals of diversifying
the Company's loan portfolio and  penetrating  undeserved  markets.  The Company
believes that its construction lending underwriting  standards are conservative.
Substantial builder equity is typically required and home starts ahead of actual
sales are strictly controlled.

         The  Company  has  successfully  incorporated  a  strategic  initiative
focusing  on the  use  of a  construction  loan  as the  integral  component  in
obtaining a permanent  mortgage loan. The Company has successfully  utilized the
integrated construction loan product, in which the home buyer prequalifies for a
permanent  mortgage loan and upon completion of the house the construction  loan
automatically converts to a permanent loan without the need for a second closing
transaction.

         While  the  Company  has  financed  residential  construction  projects
throughout   its  business   area,  a  substantial   portion  of  the  Company's
construction  lending in the past two fiscal years has been in Northern Virginia
and Maryland. The Company utilized residential construction loan financing as an
entry  mechanism  into the Northern  Virginia and Maryland  markets at a time of
diminished competition due to savings institution failures, deflated real estate
prices and a migration by traditional lending sources away from construction and
residential  mortgage  lending.  While the Company's  market  penetration of the
Northern Virginia and Maryland markets in the

                                       25

<PAGE>


past two years has been  substantial,  management  is committed to retaining its
conservative  credit risk profile,  and is willing to forego market share to new
or  returning  competitors  who may be willing to  sacrifice  quality to achieve
volume goals.  Management's  adherence to its quality  standards could result in
reductions in construction loan balances and commitments in future periods.  The
Company  continues to evaluate the  feasibility  of  sustaining or expanding the
present construction lending levels.

         The following  tables  summarize first mortgage and  construction  loan
originations  by type of loan for the  three-month  and six-month  periods ended
December 31, 1996 and 1995:

(In thousands)
Three-Month Periods
Ended December 31                            1996                   1995
                                                  % of                   % of
                                       Amount     Total       Amount     Total

Permanent mortgage loans:
      Fixed rate residential:
          Conventional               $ 87,301      47.9%    $ 83,275      58.5%
          FHA/VA                       51,867      28.4       29,110      20.5
                                     --------     -----     --------     -----
                                      139,168      76.3      112,385      79.0
                                     --------     -----     --------     -----
     Adjustable rate residential:
          One year                      9,857       5.4       13,208       9.3
          Three year                    8,407       4.6        7,174       5.0
                                     --------     -----     --------     -----
                                       18,264      10.0       20,382      14.3
                                     --------     -----     --------     -----

Construction loans (1):
    Residential construction           18,619      10.2        8,755       6.1
    Acquisition, development
       and commercial construction      6,448       3.5          800       0.6
                                     --------     -----     --------     -----
                                       25,067      13.7        9,555       6.7
                                     --------     -----     --------     -----


Total originations and purchases     $182,499     100.0%    $142,322     100.0%
                                     ========     =====     ========     =====


 (1)  Reflects loan balances prior to deduction of undisbursed loan amounts.




                                       26

<PAGE>



(In thousands)
Six-Month Periods
Ended December 31                            1996                  1995
                                                  % of                  % of
                                       Amount     Total      Amount     Total

Permanent mortgage loans:
      Fixed rate residential:
          Conventional               $168,095      49.4%    $166,929      57.0%
          FHA/VA                       94,517      27.8       58,585      20.0
                                     --------     -----     --------     -----
                                      262,612      77.2      225,514      77.0
                                     --------     -----     --------     -----
     Adjustable rate residential:
          One year                     22,724       6.7       27,369       9.3
          Three year                   19,488       5.7       14,157       4.8
                                     --------     -----     --------     -----
                                       42,212      12.4       41,526      14.2
                                     --------     -----     --------     -----
     Fixed rate commercial               --         --         3,283       1.1
                                     --------     -----     --------     -----


Construction loans (1):
    Residential construction           28,376       8.3       18,421       6.3
    Acquisition, development
       and commercial construction      7,128       2.1        4,100       1.4
                                     --------     -----     --------     -----
                                       35,504      10.4       22,521       7.7
                                     --------     -----     --------     -----

Total originations and purchases     $340,328     100.0%    $292,844     100.0%
                                     ========     =====     ========     =====


 (1)  Reflects loan balances prior to deduction of undisbursed loan amounts.

         Risks Associated with Mortgage Loan "Pipeline".  The Company's mortgage
banking  activities  involve risks of loss if secondary mortgage market interest
rates increase or decrease  substantially while a loan is in the "pipeline" (the
period  beginning  with the  application to make or the commitment to purchase a
loan and ending  with the sale of the loan).  In order to reduce  this  interest
rate risk,  the Company  typically  enters into forward sales  commitments in an
amount approximately equal to the closed loans held in inventory, plus a portion
of the unclosed  loans that the Company has committed to make which are expected
to close.  Additionally,  the Company  occasionally  purchases  over-the-counter
options to refine a risk  management  position  in the event the  percentage  of
loans which actually closes differs from the original expectations. Such options
provide  the owner  with the  right,  but not the  obligation,  to  deliver  the
underlying commodity or financial asset to the transaction's  counter party at a
specific price for a specific period of time. In this instance, the commodity or
financial asset would generally consist of  mortgage-backed  securities  created
with  securitized  originated  mortgage loans. The portion of the unclosed loans
which the Company  commits to sell depends on numerous  factors,  including  the
total amount of

                                       27

<PAGE>



the Company's  outstanding  commitments to make loans, the portion of such loans
that is likely to close, the timing of such closings, and anticipated changes in
interest rates. The Company  continually  monitors these factors and adjusts its
commitments and options positions accordingly.

         Sale of Mortgage Loans.  There is an active  secondary  market for most
types of mortgage  loans  originated by the Company.  By  originating  loans for
subsequent sale in the secondary  mortgage market, the Company is able to obtain
funds  which may be used for lending and  investment  purposes.  The Company had
been selling a large portion of its loans with the Company  retaining the rights
to service the loans.  However,  beginning  January 1, 1996, the Company shifted
its business  strategy with respect to mortgage loan servicing,  and most of the
loan sales  since  that date have been on a  servicing-released  basis.  See the
discussion  under  "Mortgage  Loan  Servicing"  regarding the Company's  sale of
substantially  all of its servicing rights related to loans serviced for others,
in a transaction effective as of April 1, 1996.

         Gains  from the sales of  mortgage  loans and  securitized  loans  were
$1,143,000  in the second  quarter of fiscal year 1997, an increase of $681,000,
or 147.4%, over the gains of $462,000 in the second quarter of fiscal year 1996.
Gains from such sales were  $1,891,000 in the first half of fiscal year 1997, an
increase of $964,000, or 104.0%, over the gains of $927,000 in the first half of
fiscal year 1996.

         All  fixed  rate   mortgage   loans   originated  by  the  Company  are
underwritten  following  guidelines  which  will  qualify  them  for sale in the
secondary market. The Company sells its FHA and VA loans to various investors on
a servicing-released basis. The Company either sells its conventional fixed rate
residential  production on an individual loan basis or securitizes loans through
the creation of Federal National Mortgage  Association ("FNMA") and Federal Loan
Mortgage  Corporation  ("FHLMC")  mortgage-backed   securities.  The  securities
created by securitizing  loans originated by the Company are immediately sold to
various  investors.  No portions of such  securities were held by the Company at
December 31, 1996, June 30, 1996, or December 31, 1995. In the event the Company
were to hold such a security as of the end of an accounting period, the security
would  constitute  a "trading  security",  and as such would be  recorded on the
consolidated  statement of financial  condition  at fair value,  and  unrealized
holding gains and losses would be included in earnings.

         The  Company  sold   $91,762,000  of  fixed  rate  mortgage  loans  and
securitized  loans  during the second  quarter of fiscal year 1997,  compared to
$83,814,000  in the  second  quarter  of fiscal  year  1996.  The  Company  sold
$195,436,000  of such loans during the first half of fiscal year 1997,  compared
to  $160,143,000  in the first half of fiscal year 1996.  The sale of fixed rate
product is  intended  to protect the  Company  from  precipitous  changes in the
general level of interest rates. The magnitudes of the period-to-period  changes
in loan sales are consistent  with and reflect the  percentage  changes in fixed
rate mortgage loan originations in those periods.



                                       28

<PAGE>



         The  valuation of  adjustable  rate  mortgage  loans is not as directly
dependent  on the level of  interest  rates as is the value of fixed rate loans.
Decisions to hold or sell  adjustable  rate mortgage loans are based on the need
for such loans in the Company's  portfolio,  which is influenced by the level of
market interest rates and the Company's asset/liability  management strategy. As
with other investments,  the Company regularly  monitors the  appropriateness of
the level of adjustable rate mortgage loans in its portfolio and may decide from
time to time to sell such loans and reinvest  the  proceeds in other  adjustable
rate investments.

         The Company sold  $19,201,000  of adjustable  rate  mortgage  loans and
securitized  loans  during the second  quarter of fiscal year 1997,  compared to
$18,498,000  in the  second  quarter  of fiscal  year  1996.  The  Company  sold
$28,213,000 of such loans during the first half of fiscal year 1997, compared to
$40,310,000  in the first half of fiscal year 1996.  The sizable  proportion  of
adjustable  rate loan and  securitized  loan sales to total sales in fiscal year
1995  compared  to  fiscal  year  1996  is due to the  increased  popularity  of
adjustable rate mortgage loans in the rising interest rate environment,  and the
corresponding  demand for adjustable  rate loans and securities in the secondary
market. In addition, production of adjustable rate loans in the first and second
quarters of both fiscal years 1996 and 1995 exceeded the  Company's  capacity to
add such loans to its loan portfolio.

         The following tables summarize  mortgage loan sales by type of loan for
the  three-month  and six-month  periods ended  December 31, 1996 and 1995.  The
table does not reflect  commitments  sold for which  mortgage loans had not been
delivered and funded at period end.

(In thousands)
Three-Month Periods
Ended December 31                     1996               1995
                                         % of                % of
                                 Amount  Total     Amount    Total

Fixed rate                     $ 91,762   82.7%   $ 83,814   81.9%
Adjustable rate                  19,201   17.3      18,498   18.1
                               --------  -----    --------  -----
Total mortgage loans sold      $110,903  100.0%   $102,312  100.0%
                               ========  =====    ========  =====

Six-Month Periods
Ended December 31                     1996               1995
                                         % of                % of
                                Amount   Total     Amount    Total

Fixed rate                     $195,436   87.4%   $160,143   79.9%
Adjustable rate                  28,213   12.6      40,310   20.1
                               --------  -----    --------  -----
Total mortgage loans sold      $223,649  100.0%   $200,453  100.0%
                               ========  =====    ========  =====



                                       29

<PAGE>



         Included in the figures above are mortgage loans which were securitized
into  mortgage-backed  securities in connection  with and  immediately  prior to
sale.  Securitized  loans in the above figures totaled  $93,245,000 in the first
half of fiscal year 1997 and $74,127,000 in the first half of fiscal year 1996.

         In an environment of stable interest rates,  the Company's gains on the
sale of mortgage loans and securitized loans would generally be limited to those
gains  resulting  from the  yield  differential  between  retail  mortgage  loan
interest rates and rates required by secondary  market  purchasers.  A loss from
the sale of a loan may occur if  interest  rates  increase  between the time the
Company  establishes  the interest rate on a loan and the time the loan is sold.
Because of the  uncertainty  of future  loan  origination  volume and the future
level of interest rates, there can be no assurance that the Company will realize
gains on the sale of financial assets in future periods.

         The Company defers fees it receives in loan origination, commitment and
purchase transactions. Loan origination fees and certain direct loan origination
costs are  deferred  and  recognized  over the lives of the related  loans as an
adjustment of the loan's yield using the level-yield method. Net commitment fees
for permanent forward  commitments  issued to builders and/or developers for the
purpose of  securing  loans for their  purchasers  are also  deferred.  Deferred
income  pertaining  to loans held for sale is taken  into  income at the time of
sale of the loan.

         Mortgage  Loan  Servicing.   Loan  servicing  includes  collecting  and
remitting loan payments,  accounting for principal and interest,  holding escrow
funds for payment of taxes and  insurance,  making  required  inspections of the
mortgage premises, contacting delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults, and generally  administering the loans for the
investors to whom they have been sold.  The Company  receives fees for servicing
mortgage loans,  generally  ranging from 1/4% to 1/2% per annum on the declining
principal balances of the loans. Servicing fees are collected by the Company out
of monthly mortgage payments.

         The Company sold  substantially  all of its servicing rights related to
loans serviced for others,  in a transaction  effective as of April 1, 1996. The
transaction  generated a pre-tax gain of  $6,847,000.  The amount of the gain is
net of the write-off of the remaining $14,000 of unamortized  purchased mortgage
loan servicing rights and $767,000 of unamortized  capitalized excess servicing.
The Company's  decision to exit the mortgage loan servicing  business was driven
by the increasing  "critical mass" necessary to generate  acceptable  returns on
loan servicing activities.

         As a result of the sale of the rights to service loans for others, loan
servicing  income  declined by  $995,000  to  $720,000  during the first half of
fiscal year 1997.  The income in the first half of fiscal year 1997  consists of
late charges and other fee income related to the Company's loan portfolio.

                                       30

<PAGE>



         The  Company  has  adopted  SFAS  No.  122,  "Accounting  for  Mortgage
Servicing  Rights," beginning July 1, 1996. The Statement requires that the cost
of mortgage  loans  originated or purchased  with a definitive  plan to sell the
loans and  retain the  servicing  rights,  be  allocated  between  the loans and
servicing  rights based on their estimated values at the purchase or origination
date. Upon the sales of the loans, additional income may be recognized resulting
from a lower  adjusted  cost basis on the  mortgage  loans sold.  The  servicing
rights asset is amortized  over the life of the servicing  revenue  stream,  and
thus has the effect of reducing loan  servicing  income in future  periods.  The
adoption  of the new  accounting  standard  has had no  material  effect  on the
Company,  since mortgage loan servicing rights are no longer being  accumulated,
but instead are being sold concurrently with the sale of the underlying loans.

         Investments.  The Company  classifies a large portion of its investment
securities and mortgage-backed securities as available for sale. Such securities
are reported on a fair value basis,  with  unrealized  gains and losses excluded
from earnings and reported as a separate component of stockholders'  equity, net
of any deferred  tax  provision.  Management  believes  the  available  for sale
classification allows the most flexibility in meeting liquidity needs, adjusting
interest  rate risk and  controlling  balance  sheet  trends.  The Company could
experience volatility in its capital account in future periods because of market
price fluctuation in its investment  securities and  mortgage-backed  securities
holdings.

                                       31

<PAGE>



         The  amortized  cost  and  fair  value  of  the  Company's   investment
securities and mortgage-backed  securities  (including  collateralized  mortgage
obligations, or "CMOs") are as follows:

<TABLE>
<CAPTION>

(In thousands)                         December 31, 1996      June 30, 1996         December 31, 1995
                                       Amortized   Fair      Amortized   Fair     Amortized     Fair
                                         Cost      Value       Cost      Value       Cost      Value
<S> <C>
Investment Securities

         Held to maturity:
            FHLB notes                $   --      $  --     $   --      $  --     $  1,000    $ 1,000
            Municipal bonds              6,226      6,226      6,278      6,278      7,556      7,556
                                      --------    -------   --------    -------   --------    -------
                                         6,226      6,226      6,278      6,278      8,556      8,556
                                      --------    -------   --------    -------   --------    -------
         Available for sale:

            FHLB notes                   6,447      6,449      6,440      6,385      6,000      6,000
            FNMA bonds                    --         --         --         --        1,966      2,028
                                      --------    -------   --------    -------   --------    -------
                                                                          6,385      7,966      8,028

         Net unrealized gain (loss)         22       --          (55)      --           62       --
                                      --------    -------   --------    -------   --------    -------
                                         6,469      6,469      6,385      6,385      8,028      8,028
                                      --------    -------   --------    -------   --------    -------
                                      $ 12,695    $12,695   $ 12,663    $12,663   $ 16,584     16,584
                                      ========    =======   ========    =======   ========    =======
Mortgage-Backed Securities

         Held to maturity:
            FHLMC                     $    372    $   379   $    374    $   382   $    378    $   388
            Other                         --         --         --         --          196        196
                                      --------    -------   --------    -------   --------    -------
                                           372        379        374        382        574        584
                                      --------    -------   --------    -------   --------    -------
         Available for sale:
            FHLMC                        4,735      4,753
            FNMA                         5,113      5,114      3,066      3,051      3,245      3,189
            CMOs                        11,876     11,826     12,402     12,269      3,316      3,332
                                      --------    -------   --------    -------   --------    -------
                                        21,724     21,693     15,468     15,320      6,561      6,521
            Net unrealized loss            (31)      --         (148)      --          (40)      --
                                      --------    -------   --------    -------   --------    -------
                                        21,693     21,693     15,320     15,320      6,521      6,521
                                      --------    -------   --------    -------   --------    -------
                                      $ 22,065    $22,072   $ 15,694    $15,702   $  7,095    $ 7,105
                                      ========    =======   ========    =======   ========    =======

</TABLE>




                                                        32

<PAGE>



         Noninterest  Income.  Financial service fees increased by $120,000,  or
21.3% in the second  quarter of fiscal  1997 and by  $66,000,  or 13.3%,  in the
second  quarter  of  fiscal  year  1996,  compared  to the same  periods  in the
respective previous years. Such fees increased by $194,000 or 17.2% in the first
half of fiscal year 1997 and by $104,000,  or 10.1%, in the first half of fiscal
year 1996,  compared to the same periods in the respective previous years. These
three-month and six-month period-to-period increases are primarily attributed to
the  increase  in the number of checking  accounts  resulting  from  promotional
campaigns targeted to the checking product.

         In  addition,  financial  service fees in the first half of fiscal year
1997  include  $38,000  earned from the  Company's  relationship  with  CoreLink
Financial,  Inc.  ("CoreLink").  The Company earned $37,000 in the first half of
fiscal  year  1996  under a  previous  arrangement.  Pursuant  to a  contractual
arrangement, CoreLink leases office space in certain of the Company's facilities
through  which  stocks,  bonds,  mutual  funds  and  investment  counseling  are
provided.  Such  fees were  lower in the first  half of  fiscal  year  1997,  as
compared to the same period in fiscal year 1996, since the CoreLink relationship
is in a start-up  mode.  Effective  as of April 1,  1996,  the  Company  engaged
CoreLink to replace INVEST Financial  Services,  Inc. as its  broker-dealer  for
providing mutual funds and other securities products to the Company's customers.

         Sales of real estate owned  yielded net gains of $37,000 and $11,000 in
the second  quarters of fiscal  years 1997 and 1996,  respectively,  and yielded
gains of $97,000  and  $70,000,  respectively,  for the first six months of such
fiscal years.  The Company  recorded  losses on the  revaluation  of real estate
owned of $202,000 and  $138,000 in the second  quarters of fiscal years 1997 and
1996, respectively, and recorded losses of $214,000 and $367,000,  respectively,
for the first six months of such fiscal  years.  It is the  Company's  policy to
record allowances for estimated losses on real estate owned when, based upon its
evaluation  of  various  factors  such as  independent  appraisals  and  current
economic conditions, it determines that the investment in such assets is greater
than their fair values less cost to dispose.

         Other  noninterest  income  includes  gains  on  sales  of real  estate
acquired for development of $1,000 in the first half of fiscal year 1996; $5,000
of such gains were realized in the first half of fiscal year 1997.

         Century Title Insurance Agency,  Inc. was incorporated in December 1994
as a subsidiary of the Savings Bank.  This new business unit offers a full range
of  title   insurance   products  to  the  general   public  and   enhances  the
diversification  of products to both  existing  and  prospective  mortgage  loan
customers.  It based at the headquarters of the Virginia First Mortgage Division
in  Woodbridge,  Virginia.  Century Title  generated  $49,000 of gross title fee
income in the second  quarter of fiscal year 1997 and $110,000 in the first half
of fiscal year 1997.


                                       33

<PAGE>


         Noninterest  Expenses.  Personnel and related employee benefits expense
is the Company's largest non-interest expense.  Personnel expense for the second
quarter of fiscal year 1997 was $2,920,000, compared to $2,301,000 in the second
quarter of fiscal year 1996 and  $2,549,000 in the second quarter of fiscal year
1995.  Such  expense  for the  first  half of fiscal  year 1997 was  $5,575,000,
compared to $4,579,000  in the first half of fiscal year 1996 and  $5,330,000 in
the first half of fiscal year 1995. The 14.1%  decrease in personnel  expense in
the first half of fiscal  year 1996,  as  compared  to the same period in fiscal
year 1995, reflects the consolidation of back office operations of the Companies
mortgage banking  divisions.  The  consolidation  eliminated  duplicate  support
structures  and provided  for more  efficient  and uniform  delivery of mortgage
services.  Also,  commissions  paid to  mortgage  loan  originators,  which is a
substantial  component of personnel  expense,  declined  proportionately  to the
reduction in the volume of loans closed. The 21.8% increase in personnel expense
in the first half of fiscal year 1997,  as compared to the same period in fiscal
year 1996,  reflects the overall increase in loan originations,  the addition of
four loan  origination  offices in August 1996,  and the effect of acquiring the
assets and personnel of American  Finance and  Investment,  Inc. on December 19,
1996.  The increase in personnel  expense also  reflects the impact of personnel
hired to meet the Company initiatives in marketing, consumer finance, commercial
lending, and deposits.

         Occupancy expense for the second quarters of fiscal years 1997 and 1996
was $431,000 and $384,000, respectively. Such expense was $839,000 and $755,000,
respectively, for the first six months of those fiscal years. The 11.1% increase
for the first half of fiscal  year 1997 is  attributable  to the  opening of one
retail banking branch, the opening of four mortgage offices, and the acquisition
of American Finance & Investment, Inc.

         Data  processing  expense for the second  quarters of fiscal years 1997
and 1996 was $468,000 and $440,000,  respectively. Such expense was $839,000 and
$755,000,  respectively,  for the first six months of those  fiscal  years.  The
fiscal year 1996 and 1995 increases of 7.6% and 4.5%, respectively,  were due to
increased loan and deposit account volume and local area networking.

         Income Taxes.  Income tax expense for the second quarter of fiscal year
1997 was $1,313,000, resulting in an effective tax rate of 37.6%. By comparison,
the Company had income tax expense of  $1,062,000  for an effective  tax rate of
35.8% in the second  quarter of fiscal  year 1996.  The income tax  expense  and
effective  tax rate of the first six months of fiscal year 1997 were  $1,223,000
and 34.0%,  compared to  $2,386,000  and 37.3% in the same period in fiscal year
1996.

         The effective tax rates differ from the statutory  federal  rates.  The
prohibition  against  claiming  amortization  for  certain  purchase  accounting
adjustments  (goodwill)  for income tax purposes tends to increase the effective
tax  rate,  while the  effective  tax rate  tends to be lower due to  tax-exempt
interest income. The effective rate also provides for state income taxes.


                                       34

<PAGE>



Financial Condition

         Liquidity and Capital  Resources.  The primary sources of funds for the
Company  consist of checking  and savings  deposits,  loan sale  fundings,  loan
repayments,  borrowings  from the FHLB  and  others,  and  funds  provided  from
operations.  Deposits totaled  $579,984,000 at December 31, 1996, an increase of
$6,448,000,  or 1.1%, over the  $573,536,000  at June 30, 1996.  Certificates of
deposit grew by $13,476,000 in the first half of fiscal year 1997, while savings
deposits  declined by $2,305,000 and checking and money market deposit  accounts
declined  by a total of  $4,723,000.  The  principal  reason for the  decline in
checking  deposits  was the  transfer  of  mortgage  loan  servicing  collateral
accounts at the conclusion of the subservicing  arrangement  related to the sale
of mortgage loan servicing rights.  Approximately  $263.6 million in certificate
accounts will mature in the  twelve-month  period ending  December 31, 1997. The
Company's  management  believes  that most of the maturing  liabilities  will be
reinvested with the Company.

         Advances from the FHLB  increased by  $47,000,000  to  $149,052,000  at
December 31, 1996,  compared to  $102,052,000  at June 30, 1996. The Company has
access to advances from the FHLB  generally  secured by pledging  mortgage loans
and its stock in the FHLB.

         The  Company  will   sometimes   borrow  from  several   sources  using
mortgage-backed securities as collateral.  Such borrowings totaled $9,021,000 at
December 31, 1996;  there were no such borrowings  outstanding at June 30, 1996.
The Company's management will use this method of financing to the extent that it
is less expensive than alternative sources and is within regulatory  guidelines.
The Company's  borrowings,  including FHLB  advances,  at December 31, 1996 were
19.6% of assets, compared to 13.7% of assets at June 30, 1996.

         The Company sells mortgage loans and securitized loans in the secondary
market and redeploys the sales proceeds in its lending  operations.  To a lesser
extent,  the proceeds of periodic loan  payments and loan payoffs  provide funds
for the lending operations.

         The  primary  use of funds by the  Company  is loan  originations.  The
Company's loan portfolio, including loans held for sale, totaled $719,696,000 at
December 31, 1996  compared to  $662,035,000  at June 30,  1996,  an increase of
$57,661,000,  or 8.7%.  The  Company's  loans held for  investment  and for sale
represented 89.0% of assets at December 31, 1996, compared to 88.6% of assets at
June 30, 1996.

         The Company had outstanding fixed rate loan origination  commitments of
$655,000  and  outstanding  adjustable  rate loan  commitments  of  $565,000  at
December 31, 1996.

         The Company had $5,000,000 in outstanding loan purchase  commitments at
December 31, 1996. The Company had outstanding  commitments to fund  $29,383,000
of  construction  loans at  December  31,  1996.  In  addition,  the Company had
$30,633,000 outstanding in lines of credit extended to its customers at December
31, 1996.  The Company's  management  does not anticipate  any  difficulties  in
satisfying these commitments.


                                       35

<PAGE>



         Due to the relative size of the Company's loan portfolio, purchases and
sales  of  investments   have  a  limited   impact  on  the  Company's   funding
requirements.  Investments and mortgage-backed  securities (classified as either
held to maturity or available for sale) totaled $34,760,000 at December 31, 1996
and  $28,357,000  at June 30, 1996.  Such  balances  represented  4.3% and 3.8%,
respectively, of total assets at those dates.

         Liquidity  is  the  ability  to  meet  present  and  future   financial
obligations,  either through the  acquisition of additional  liabilities or from
the sale or maturity of existing assets,  with minimal loss.  Regulations of the
OTS require thrift  associations  and/or savings banks to maintain liquid assets
at  certain  levels.  At  present,  the  required  ratio  of  liquid  assets  to
withdrawable  savings and  borrowings due in one year or less is 5.0%. In fiscal
year 1997 the Company is  maintaining  liquidity at or in excess of the required
amount. At December 31, 1996 and June 30, 1996, the Company had liquidity ratios
of 5.0% and 5.2%,  respectively.  The Company's  management  anticipates that it
will be able to maintain its current  level of regulatory  liquidity  during the
balance of fiscal year 1997.

         At December  31,  1996,  the Savings  Bank's net worth under  generally
accepted accounting principles ("GAAP") was $63,469,000. OTS Regulations require
that savings  institutions  maintain the following capital levels:  (1) tangible
capital of at least 1.5% of total adjusted  assets,  (2) core capital of 4.0% of
total  adjusted  assets,  and (3)  overall  risk-based  capital of 8.0% of total
risk-weighted assets. As of December 31, 1996, the Savings Bank satisfied all of
the regulatory capital requirements, as shown in the following table reconciling
the Savings Bank's GAAP capital to regulatory capital:

                                                               Risk-
                                    Tangible      Core         Based
(In thousands)                       Capital     Capital      Capital

GAAP capital                       $ 63,469     $ 63,469     $ 63,469
Non-allowable assets:
         Goodwill                    (2,168)      (2,168)      (2,168)
         Other intangible assets       (184)        --           --
         Equity in subsidiaries        (734)        (734)        (734)
Additional capital items:
         Unrealized gain on
           debt securities, net           5            5            5
         General loss allowances       --           --          7,243
                                   --------     --------     --------
Regulatory capital - computed        60,388       60,572       67,815
Minimum capital requirement          12,083       32,229       46,353
                                   --------     --------     --------
Excess regulatory capital          $ 48,305     $ 28,343     $ 21,462
                                   ========     ========     ========
Ratios:
Regulatory capital - computed          7.49%        7.51%       11.70%
Minimum capital requirement            1.50         4.00         8.00
                                   --------     --------     --------
Excess regulatory capital              5.99%        3.51%        3.70%
                                   ========     ========     ========

         The Company has addressed the phase-in of higher  capital  requirements
and the phase-out from capital of certain assets. Management believes that there
are  sufficient  alternatives  available  to  enable  the  Company  to remain in
compliance with its capital requirements.


                                       36

<PAGE>



         As a result of federal  legislation,  the Company  has been  subject to
higher federal deposit insurance premiums and supervisory examination expenses.

         The Company is not aware of any other trends,  events or  uncertainties
which will have or that are likely to have a material effect on the Company's or
the Savings Bank's liquidity,  capital  resources or operations.  The Company is
not aware of any current recommendations by regulatory authorities which if they
were implemented would have such an effect.

         Asset  Quality.  When a borrower fails to make a required loan payment,
the Company contacts the borrower and attempts to cause the default to be cured.
In  general,  first  attempts  at contact  are made  immediately  following  the
assessment of late charges 15 days  following  the due date.  Defaults are cured
promptly  in most  cases.  If the  borrower  has not  paid  by the  45th  day of
delinquency  a letter is sent  giving  the  borrower 7 days in which to cure the
default.  If the  default  is not  cured  by the  expiration  date  the  loan is
accelerated.  If the  delinquency  on a mortgage loan exceeds 90 days and is not
cured  through the  Company's  normal  collection  procedures,  or an acceptable
arrangement  is not worked out with the  borrower,  the Company  will  institute
measures to remedy the default, including commencing a foreclosure action or, in
special  circumstances,  accepting  from the  mortgagor a voluntary  deed of the
secured property in lieu of foreclosure.

         Loans are placed on  non-accrual  status when,  in the judgement of the
Company's management,  the probability of collection of interest is deemed to be
insufficient to warrant further accrual.  Generally, all loans more than 90 days
delinquent  are  placed  on  non-accrual  status.  When  a  loan  is  placed  on
non-accrual  status,  previously  accrued but unpaid  interest is deducted  from
interest income.

         If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder.  If the Company is the successful
bidder, the acquired real estate property is then included in the Company's real
estate owned  account until it is sold.  The Company is permitted  under federal
regulations  to finance  sales of real  estate  owned by "loans to  facilitate,"
which may involve more favorable  interest rates and terms than generally  would
be granted under the Company's underwriting guidelines.


                                       37

<PAGE>



         The following table sets forth information  regarding non-accrual loans
and real estate owned held by the Company at the dates indicated:

(In thousands)                               December 31, June 30, December 31,
                                                 1996       1996       1995

Non-accrual loans:
   Residential mortgage                       $  4,598   $  5,029   $  4,964
   Commercial mortgage                           1,928      1,827      2,761
   Construction                                  1,514      2,747      1,573
   Consumer non-mortgage                         1,612      1,342      1,155
                                              --------   --------   --------
  Total non-accrual loans                        9,652     10,945     10,453
  Specific loss allowances                        (895)      (646)      (703)
                                              --------   --------   --------
      Total non-accrual loans, net               8,757     10,299      9,750

Real estate acquired through foreclosure:
   One to four family
      residential units                          3,484      2,319      2,229
   Residential land/lots                         2,023      2,004      1,940
   Shopping/retail centers                       1,686      1,727        672
   Office buildings                               --         --         --
   Commercial land                                 192        192        351
                                              --------   --------   --------
  Total real estate acquired
     through foreclosure                         7,385      6,242      5,192
  Specific and general
   allowances for losses                        (1,009)      (889)      (789)
                                              --------   --------   --------
      Total real estate acquired through
         foreclosure, net                        6,376      5,353      4,403
                                              --------   --------   --------
Total non-performing assets                   $ 15,133   $ 15,652   $ 14,153
                                              ========   ========   ========

Non-accrual loans to gross loans                  1.20%      1.63%      1.63%

Total non-performing assets to sum of
  gross loans and real estate acquired
  through foreclosure                             2.05%      2.32%      2.19%

Total non-performing assets to total assets       2.02%      2.10%      1.97%


         The net amount of interest  income  foregone during the second quarters
of fiscal years 1997 and 1996 on loans classified as non-performing was $164,000
and $132,000, respectively. The amount foregone in the first half of fiscal year
1997 was $334,000, compared to $241,000 in the first half of fiscal year 1996.



                                       38

<PAGE>



         At June 30, 1995, the Company had $8,354,000 of restructured commercial
real estate loans (five loans) which were  performing in  accordance  with their
restructured  terms.  These loans were  reclassified  as performing  loans as of
September  30, 1995.  As of December 31, 1996,  the Company had no  restructured
loans subject to special reporting rules.

         The following table summarizes all non-accrual  loans, by loan type, at
December 31, 1996:
                        Number
                          of    Principal    Specific       Net
(Dollars in thousands)  Loans    Balance    Allowances   Investment

Residential mortgage       65    $ 4,598      $  --        $4,598
Commercial mortgage         7      1,928         --         1,928
Construction                6      1,514         --         1,514
Consumer non-mortgage     127      1,612         (895)        717
                          ---    -------      -------      ------
                          205    $ 9,652      $  (895)     $8,757
                          ===    =======      =======      ======

         Impaired  loans are  measured  based on the  present  value of expected
future cash flows  discounted at the effective  interest rate of the loan, or at
fair value of the loan's collateral for "collateral  dependent" loans. A loan is
considered  impaired  when it is  probable  that a  creditor  will be  unable to
collect all interest and principal  payments as scheduled in the loan agreement.
A loan is not  considered  impaired  during a period of delay in  payment if the
ultimate collectibility of all amounts due is expected. A valuation allowance is
required to the extent that the measure of the  impaired  loans is less than the
recorded  investment.  These rules do not apply to larger groups of  homogeneous
loans such as consumer  installment and real estate  mortgage  loans,  which are
collectively  evaluated for impairment.  Impaired loans are therefore  primarily
business  loans,   which  include  commercial  loans  and  income  property  and
construction  real estate loans.  The Company's  impaired  loans are  nonaccrual
loans, as generally loans are placed on nonaccrual  status on the earlier of the
date that principal or interest amounts are 90 days or more past due or the date
that  collection of such amounts is judged  uncertain  based on an evaluation of
the net realizable  value of the  collateral  and the financial  strength of the
borrower.

         Impaired loans and the applicable  valuation  allowance at December 31,
1996 were as follows:

(In thousands)                                                  Related
                                                Loan          Valuation
                                               Balance        Allowance

Impaired with specific valuation allowance      $ --             $--
Impaired without specific valuation allowance    3,561            --
                                               -------          ----
         Total impaired loans                   $3,561           $--
                                               =======          ====

                                       39

<PAGE>



         Collateral dependent loans, which are measured at the fair value of the
collateral, constituted 100% of impaired loans at December 31, 1996.

         Consistent  with the Company's  method for nonaccrual  loans,  interest
receipts for impaired  loans are  recognized  as interest  income and applied to
principal when the ultimate collectibility of principal is in doubt. The average
recorded investment in impaired loans, the amount of interest income recognized,
and the amount of interest income  recognized on a cash basis during the periods
ended December 31, 1996 were as follows:

                                  Three Months Ended     Six Months Ended
(In thousands)                     December 31, 1996     December 31, 1996

Average recorded investment
  in impaired loans                         $4,660             $5,116
Interest income recognized
  during impairment                             59                 76
Interest income recognized
  on a cash basis during impairment             59                 76


         The  following  table  summarizes  all  real  estate  acquired  through
foreclosure, by property type, at December 31, 1996:

                                       Number
                                        of    Original               Net
(Dollars in thousands)                 Units   Basis   Allowances Investment


One to four family residential units    30   $ 3,483    $  (142)    $3,341
Residential land/lots                    6     2,024       (205)     1,818
Shopping/retail centers                  2     1,686       (212)     1,474
Commercial land                          1       192                   192
                                       ---    -------   -------     ------
                                        39     7,385       (559)     6,826
General loss allowance                  --        --       (450)      (450)
                                       ---    -------   -------     ------
                                        39    $ 7,385   $(1,009)    $6,376
                                       ===    =======   =======     ======


         There  are  no  loans  classified  for  regulatory  purposes  as  loss,
doubtful,  substandard or special  mention that have not been  disclosed  above,
that either (a) represent or result from trends or uncertainties that management
reasonable expects will materially impact future operating results, liquidity or
capital  resources or (b) represent  material  credits about which management is
aware of any information that causes management to have serious doubts as to the
ability of such borrowers to comply with loan repayment terms.

         During the quarter ended  September 30, 1995, the Company  modified the
financing for a strip  shopping  center located in Marietta,  Georgia.  Prior to
June 30, 1995,  Management was advised by the owners of the shopping center that
they were  interested  in selling  the  property.  The  Company  had  previously
acquired the shopping center though  foreclosure in March 1990 and  subsequently
sold the property to new owners in October 1990. The resulting "loan to

                                       40

<PAGE>



facilitate"  was made at a  below-market  rate of interest and was the Company's
largest individual  outstanding loan balance at June 30, 1995. Although the loan
was  performing in accordance  with its terms,  the owners had minimal equity in
the project,  and the loan was  classified  for  regulatory  purposes  since its
inception. Management added to the allowance for commercial mortgage loan losses
in the past few years due to its concerns for this specific loan.

         Management  subsequently reached an agreement with the owners to accept
the net  sales  proceeds  from the sale of the  project  to a third  party.  The
transaction  was  concluded  in  August  1995 and  resulted  in a  chargeoff  of
$1,056,000  against the  allowance  for  commercial  mortgage  loan  losses.  An
arms-length  loan was made by the  Company  to the  acquiring  entity  at market
terms,  including a substantial equity contribution.  The new loan is being held
in the  Company's  commercial  mortgage  loan  portfolio  and is classified as a
performing credit.  Management believes that the $2,652,000 in the allowance for
commercial  mortgage loans at December 31, 1996, is adequate to cover  potential
problems in the portfolio.

New Accounting Standard

         In  October   1995,   SFAS  No.  123,   "Accounting   for   Stock-Based
Compensation,"  was  issued.  SFAS  123  prescribes   accounting  and  reporting
standards  for all  stock-based  compensation  plans.  The new  standard  allows
companies to continue to follow present  accounting  rules which often result in
no compensation expense being recorded or to adopt the SFAS 123 fair-value-based
method. The fair-value-based method will generally result in higher compensation
expense based on the  estimated  fair value of  stock-based  awards on the grant
date.  Companies electing to continue following present accounting rules will be
required to provide pro-forma disclosures of net earnings and earnings per share
as if the  fair-value-  based method had been  adopted.  The Company  intends to
continue to follow present  accounting rules and to implement the new disclosure
requirements  in  fiscal  year  1997 as  required.  The  adoption  of SFAS  123,
therefore,  will not impact the financial condition and results of operations of
the Company.

         In June 1996, SFAS No. 125,  "Accounting for Transfers and Servicing of
Financial  Assets and  Extinguishments  of  Liabilities,"  was  issued.  The new
standard is effective  for  transfers  and  servicing  of  financial  assets and
extinguishment  of liabilities  occurring  after December 31, 1996, and is to be
applied  prospectively.  Earlier or  retroactive  application  is not permitted.
Specific transition  provisions apply to servicing contracts in existence before
January 1, 1997 and certain  financial  assets subject to  prepayment.  SFAS 125
provides accounting and reporting  standards based on consistent  application of
the "financial components" approach that focuses on control. Under the approach,
after a transfer of assets,  an entity  recognizes  the  financial and servicing
assets it controls and the liabilities it has incurred,  derecognizes  financial
assets when control has been  surrendered,  and  derecognizes  liabilities  when
extinguished.  It provides consistent standards for distinguishing  transfers of
financial  assets that are sales from  transfers  that are  secured  borrowings.
Implementation

                                       41

<PAGE>



guidance is provided  for  assessing  isolation  of  transferred  assets and for
accounting for transfers of partial  interests,  servicing of financial  assets,
securitizations, transfers of sales-type and direct financing lease receivables,
securities  lending  transactions,   repurchase  agreements,  including  "dollar
rolls," "wash sales," loan syndications and participations,  risk recourse,  and
extinguishments  of  liabilities.  The  Company's  adoption  of SFAS  125 is not
expected  to have a  material  adverse  effect on the  financial  condition  and
results of operations of the Company.

         Impact of Inflation and Changing  Prices.  The  consolidated  financial
statements  and  related  data  presented  in this  quarterly  report  have been
prepared in accordance  with generally  accepted  accounting  principles,  which
require the measurement of the financial  position and operating  results of the
Company  in terms of  historical  dollars,  without  considering  changes in the
relative purchasing power of money over time due to inflation.

         Virtually all of the assets of the Company are monetary in nature. As a
result,  interest rates have a more  significant  impact on of general levels of
inflation.  Interest rates do not necessarily move in the same direction or with
the same magnitude as the prices of goods and services.



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<PAGE>



                          Part II.  Other Information
             Virginia First Financial Corporation and Subsidiaries


Item 4.     Submissions of Matters to a Vote of Security Holders

         None.




Item 6.     Exhibits and Reports on Form 8-K

  (a)  Exhibits - None

  (b)  Reports  on Form 8-K - There were no reports on Form 8-K filed
       for the three months ended December 31, 1996.




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<PAGE>




                                   SIGNATURES



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.



                                       Virginia First Financial Corporation
                                       ------------------------------------
                                                (Registrant)







         Date:  February 14, 1997             /s/ Charles A. Patton
                                             -----------------------
                                             Charles A. Patton
                                             President and
                                             Chief Operating Officer






         Date:  February 14, 1997             /s/ William J. Vogt
                                             -----------------------
                                             William J. Vogt
                                             Senior Vice President and
                                             Chief Financial Officer



                                       44