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
March 31, 1997                                             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 May 1,  1997,  5,807,608  shares  of  common  stock  of the  Registrant  were
outstanding.



<PAGE>



                      Virginia First Financial Corporation
                          Quarterly Report on Form 10-Q
                                 March 31, 1997


                                      Index

Part I.  Financial Information                                         Page No.


   Item 1         Consolidated Statements of Condition as of
                  March 31, 1997, June 30, 1996, and March 31, 1996           3

                  Consolidated Statements of Operations for the
                  three-month and nine-month periods ended
                  March 31, 1997 and March 31, 1996                           4

                  Consolidated Statements of Cash Flows for the
                  three-month and nine-month periods ended
                  March 31, 1997 and March 31, 1996                           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>

                                                                               March 31,     June 30,    March 31,
(In thousands, except share data)                                                1997         1996         1996
                                                                             -----------   ----------   -----------
                                                                             (Unaudited)     (Note)     (Unaudited)
<S>                                                                           <C>          <C>          <C>      
Assets

Cash and cash equivalents                                                     $  26,195    $  24,575    $  22,067
Investment securities, net                                                       12,627       12,663       11,550
Mortgage-backed securities and collateralized
     mortgage obligations, net                                                   12,532       15,694       12,613
Loans receivable held for investment, net                                       666,908      615,554      592,882
Loans receivable held for sale                                                   64,132       46,481       44,972
Real estate owned, net                                                            5,671        5,353        5,831
Accrued interest receivable, net                                                  5,774        5,292        4,952
Federal Home Loan Bank stock, at cost                                             7,828        6,998        5,728
Office properties and equipment, net                                              9,598        8,780        8,759
Other assets                                                                      6,048        5,477        4,577
                                                                              =========    =========    =========
          Total assets                                                        $ 817,313    $ 746,867    $ 713,931
                                                                              =========    =========    =========


Liabilities and Stockholders' Equity

Deposits                                                                      $ 595,126    $ 573,536    $ 575,942
Notes payable and other borrowings                                                  648          639          598
Advances from Federal Home Loan Bank                                            146,552      102,052       74,552
Advance payments by borrowers for taxes and insurance                             3,417        2,169        3,103
Accrued interest payable                                                            768          716          494
Accrued expenses and other liabilities                                            4,911        6,759        4,128
                                                                              ---------    ---------    ---------
          Total liabilities                                                     751,422      685,871      658,817
                                                                              ---------    ---------    ---------

Stockholders' equity:
  Preferred stock of $1 par value.  Authorized 5,000,000 shares;
     none issued                                                                   --           --           --
  Common stock of $1 par value.  Authorized 20,000,000 shares;
     issued and outstanding 5,804,661  shares at March 31, 1997,
     5,740,503 at June 30, 1996 and 5,615,450 at  March 31, 1996                  5,805        5,740        5,615
  Additional paid-in capital                                                      9,032        8,439        8,341
  Retained earnings - substantially restricted                                   51,098       46,943       41,143
  Net unrealized gain (loss) on securities available for sale, net of taxes         (44)        (126)          15
                                                                              ---------    ---------    ---------
          Total stockholders' equity                                             65,891       60,996       55,114
                                                                              ---------    ---------    ---------

          Total liabilities and stockholders' equity                          $ 817,313    $ 746,867    $ 713,931
                                                                              =========    =========    =========

</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      Nine Months Ended 
                                                           March 31,              March 31,     
                                                    ---------------------   ----------------------
(In thousands, except per share data)                   1997       1996        1997        1996   
                                                    ----------  ---------   ---------  -----------
                                                   (Unaudited) (Unaudited) (Unaudited) (Unaudited) 
<S>                                                   <C>       <C>         <C>         <C>      
Interest Income
Loans receivable                                      $15,773   $ 13,880    $ 46,061    $ 41,797 
Mortgage-backed securities and collateralized
   mortgage obligations                                   260        105       1,019         304 
Investment securities                                     319        276         980       1,107 
Other interest-earning assets                             251        220         711         507 
                                                      -------   --------    --------    -------- 
          Total interest income                        16,603     14,481      48,771      43,715 
                                                      -------   --------    --------    -------- 

Interest Expense
Deposits                                                6,889      6,697      20,556      19,620 
Borrowings                                              1,975      1,207       5,718       4,610 
                                                      -------   --------    --------    -------- 
          Total interest expense                        8,864      7,904      26,274      24,230 
                                                      -------   --------    --------    -------- 
Net interest income                                     7,739      6,577      22,497      19,485 
Provision for loan losses                                 609        413       1,751       1,344 
                                                      -------   --------    --------    -------- 
Net interest income after provision for loan losses     7,130      6,164      20,746      18,141 
                                                      -------   --------    --------    -------- 

Noninterest Income
Gain on sale of loans and securitized loans, net        1,723      1,083       3,676       2,010 
Loan servicing income                                     548        805       1,206       2,520 
Financial service fees                                    679        546       2,004       1,677 
Gain on sale of real estate owned                          27         66         124         136 
Loss on revaluation of real estate owned                    0        (77)       (214)       (444)
Other                                                      72         90         216         186 
                                                      -------   --------    --------    -------- 
          Total noninterest income                      3,049      2,513       7,012       6,085 
                                                      -------   --------    --------    -------- 

Noninterest Expense
Personnel                                               3,614      2,548       9,188       7,127 
Occupancy, net                                            451        447       1,290       1,202 
Equipment                                                 400        347       1,069         943 
Advertising                                               319         87         519         267 
Federal deposit insurance premiums                         92        301       3,819         862 
Data processing                                           416        438       1,350       1,286 
Amortization of intangibles                                71         61         194         185 
Other                                                   1,366      1,026       3,281       2,538 
                                                      -------   --------    --------    -------- 
          Total noninterest expenses                    6,729      5,255      20,710      14,410 
                                                      -------   --------    --------    -------- 

Earnings before income tax expense                      3,450      3,422       7,048       9,816 
Income tax expense                                      1,236      1,231       2,460       3,617 
                                                      =======   ========    ========    ======== 
          Net earnings                                $ 2,214   $  2,191    $  4,588    $  6,199 
                                                      =======   ========    ========    ======== 

Net earnings per share                                $  0.38   $   0.38    $   0.78    $   1.07 
                                                      =======   ========    ========    ======== 

</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          Nine Months Ended
                                                                             March 31,                 March 31,
                                                                   --------------------------  --------------------------
(In thousands)                                                           1997          1996        1997         1996
                                                                   --------------------------  --------------------------
                                                                     (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)

<S>                                                                    <C>          <C>          <C>          <C>      
 Operating Activities:
    Net earnings                                                       $   2,214    $   2,191    $   4,588    $   6,199
    Adjustment to reconcile net earnings to net cash
      provided by operating activities:
           Depreciation                                                      232          261          664          755
           Provision for loan losses and losses on real estate owned         609          490        1,965        1,789
           Loans and securitized loans held for sale:
                        Originations and purchases                      (105,854)    (100,683)    (339,856)    (310,697)
                        Gains on sales                                    (1,469)        (842)      (3,614)      (1,994)
                        Proceeds from sales                              102,592       92,565      313,019      289,275
           Gains (losses) on securities                                      (29)           0          (20)           0
           (Increase) decrease in other assets                              (391)         285       (1,883)       1,021
           Increase in accrued expenses and other liabilities              1,400          431       (1,796)         981
                                                                       ---------    ---------    ---------    --------- 
               Net cash used in operating activities                        (696)      (5,302)     (26,933)     (12,671)
                                                                       ---------    ---------    ---------    --------- 

 Investing Activities:
    Net decrease (increase) in loans receivable held for investment       (8,312)       4,544      (43,827)      (6,002)
    Mortgage-backed securities:
             Purchases                                                         2       (6,112)     (10,241)      (6,112)
             Proceeds from sales, net                                      8,997            0       11,280            0
             Principal collected                                             528          566        2,188        2,866
    Investment securities:
             Purchases                                                         0            0       (2,500)     (11,000)
             Principal collected                                              26        5,026        2,578       22,516
    Proceeds from sale of real estate owned                                1,658          684        2,571        3,248
    Office properties and equipment
             Purchases                                                      (471)        (158)      (1,069)        (556)
             Proceeds from sales                                               1            1            2            2
                                                                       ---------    ---------    ---------    --------- 
               Net cash provided by (used in) investing activities         2,429        4,551      (39,018)       4,962
                                                                       ---------    ---------    ---------    --------- 

 Financing Activities:
    Net increase (decrease) in savings, checking and
        money market deposit accounts                                      4,797       13,464       (2,232)      20,989
    Net increase in certificates of deposit                               10,346       12,677       23,822       51,286
    Borrowings resulting from:
      Securities sold under agreements to repurchase                           0            0       18,544            0
      Advances from Federal Home Loan Bank                                76,500       70,144      293,900      134,644
      Other                                                                4,086        3,621       12,537       10,030
    Repayments of borrowings attributable to:
      Securities sold under agreements to repurchase                      (9,021)           0      (18,544)           0
      Advances from Federal Home Loan Bank                               (79,000)    (106,500)    (249,400)    (194,750)
      Other                                                               (4,075)      (3,053)     (12,528)      (9,993)
    Net increase in mortgage escrow funds                                  1,312        1,120        1,248          849
    Proceeds from issuance of common stock                                   392            0          656          285
    Cash dividends paid                                                     (144)         (22)        (432)        (202)
                                                                       ---------    ---------    ---------    --------- 
               Net cash provided by financing activities                   5,193       (8,549)      67,571       13,138
                                                                       ---------    ---------    ---------    --------- 

               Net increase in cash and due from banks                     6,926       (9,300)       1,620        5,429
    Cash and due from banks at beginning of period                        19,269       31,367       24,575       16,638
                                                                       =========    =========    =========    ========= 
    Cash and due from banks at end of period                           $  26,195    $  22,067    $  26,195    $  22,067
                                                                       =========    =========    =========    ========= 


 Supplemental Disclosures of Cash Flow Information:

    Cash payments of interest                                          $   9,060    $   8,550    $  26,222    $  24,669
                                                                       =========    =========    =========    ========= 

    Cash payments of income taxes                                      $      14    $   1,131    $   5,565    $   2,664
                                                                       =========    =========    =========    ========= 
</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 March 31,  1997 and 1996 were  5,858,851  and  5,805,881
                  respectively.  During the  quarters  ended  March 31, 1997 and
                  1996,  the Company  paid cash  dividends  of 2.5 cents and 1.5
                  cents per share, respectively.

Note 3:           Regulatory Capital of Virginia First Savings Bank:

<TABLE>
<CAPTION>
                                                                                                          Excess
                                                                                                           Over
                                                    Actual                   Required                  Requirement
                                               Amount  Percent            Amount Percent              Amount  Percent
                                               ------  -------            --------------              ------  -------
<S>                                        <C>           <C>          <C>            <C>          <C>           <C>  
(In thousands)
March 31, 1997
--------------

Tangible capital                           $   62,175    7.64%        $   12,212     1.50%        $   49,963    6.14%

Core capital                                   62,328    7.65             32,572     4.00             29,756    3.65

Risk-based capital                             69,734   11.77             47,400     8.00             22,334    3.77
 .
March 31, 1996
--------------

Tangible capital                             $52,488     7.38%        $   10,669     1.50%         $  41,819    5.88%

Core capital                                  52,764     7.42             28,463     4.00             24,301    3.42

Risk-based capital                            58,626    11.45             40,953     8.00             17,673    3.45
</TABLE>

See Page 36 for a  reconciliation  of GAAP capital to  regulatory  capital as of
March 31, 1997.




                                        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 23).


                                        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 nine-month  periods ended March 31, 1997
and 1996, and its  consolidated  financial  position at March 31, 1997, June 30,
1996 and March 31, 1996. 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  periods ended March 31, 1997
(the third  quarter of the fiscal  year ending June 30,  1997,  or "fiscal  year
1997") and March 31,  1996 (the third  quarter of 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 nine 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 52.1%
during the first three  quarters 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 during the first nine months 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 nine 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  nine-months  of fiscal year 1996.  The addition of four
mortgage  loan  origination  offices  in  August  1996 also  contributed  to the
increase in loan originations, sales, and gains.



                                        8

<PAGE>



         Net  interest  income  increased  by 15.5% in the first nine  months of
fiscal year 1997,  compared to the same period of fiscal year 1996 after posting
a 0.6% decrease in the first  nine-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 nine 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 third  quarter of
fiscal year 1997 were  $2,214,000,  an increase of 1.0% over the  $2,191,000 for
the third  quarter of fiscal year 1996.  On a per share basis,  earnings for the
third  quarter  of fiscal  year 1997 were $.38  remaining  the same as the third
quarter of fiscal year 1996.

         The  Company's  net  earnings  for the first nine months of fiscal year
1997 were  $4,588,000,  a decrease of 26.0% versus the  $6,199,000 for the first
nine months of fiscal year 1996.  On a per share  basis,  earnings for the first
nine months of fiscal year 1997 were $.78,  a decrease of 27.1% versus $1.07 for
the first three quarters of fiscal year 1996.

         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 nine months of fiscal year 1997
would have been $6,542,000, or $1.12 per share, an increase of 4.7%, or $.05 per
share, from the same nine 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 nine months of fiscal years
    1996 and 1995, respectively                    $ 1.07           $ .96

Increase (decrease) attributable to:
  Net interest income                                 .51            (.02)
  FDIC SAIF Assessment                               (.54)             -
  Provision for loan losses                          (.07)           (.07)
  Noninterest income                                  .16             .28
  Noninterest expense                                (.54)           (.08)
  Income taxes                                        .20             .02
  Average shares outstanding                         (.01)           (.02)
                                                    -----            ---- 

    Net increase (decrease)                          (.29)            .11
                                                    -----            ---- 

Net earnings per share for the
    first nine months of fiscal years
    1997 and 1996, respectively                     $ .78           $1.07
                                                    =====           =====


         Net Interest Income.  Net interest income before the provision for loan
losses for the third quarter of fiscal year 1997 was $7,739,000,  an increase of
$1,162,000, or 17.7%, compared to the third quarter of fiscal year 1996. For the
third quarter of fiscal year 1996, net interest  income before the provision for
loan losses was  $6,577,000,  an increase  of $2,000,  or 0.1%,  compared to the
third quarter of fiscal year 1995.

         Net interest  income before the provision for loan losses for the first
nine months of fiscal year 1997 was $22,497,000,  an increase of $3,012,000,  or
15.5 %,  compared to the first nine  months of fiscal  year 1996.  For the first
nine months of fiscal year 1996,  net interest  income  before the provision for
loan losses was $19,485,000,  an increase of $109,000,  or 0.6%, compared to the
first nine months 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.

         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

                                       10

<PAGE>



received on  short-term  investments  and  adjustable  rate  mortgage  loans and
construction  loans also  increase  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  nine-month  periods ended March 31,
1997 and 1996. In computing the average yields and rates,  the accretion of loan
fees are considered an adjustment to yield.



                                       11

<PAGE>

<TABLE>
<CAPTION>


(In thousands)
Three-Month Periods
-------------------
Ended March 31                                         1997                                        1996
--------------                              --------------------------                ---------------------------
                                                     Interest                                    Interest
                                            Average    Income/  Yield/                  Average   Income/  Yield/
                                            Balance    Expense    Rate                  Balance   Expense   Rate
Interest-earning assets;
<S>                                          <C>       <C>      <C>                   <C>        <C>        <C>  
    Loans receivable (1)(2)                  $715,724  $15,773  8.94%                 $631,769   $13,880    8.91%
    Mortgage-backed securities and
      collateralized mortgage obligations      15,759      260  6.69                     7,090       105    6.01
    Investments                                19,922      319  6.49                    19,504       276    5.74
    Other interest-earning assets              19,777      251  5.15                    17,697       220    5.04
                                             --------   ------  ----                   -------   -------    ----
        Total interest-earning assets         771,182   16,603  8.73                   676,060    14,481    8.69
                                             --------   ------  ----                   -------   -------    ----

Noninterest-earning assets:
    Cash and cash equivalents                   9,791                                    8,183
    Office properties and equipment, net        9,359                                    8,832
    Other assets                               18,101                                   14,821
    Allowance for loan losses                  (8,802)                                  (6,253)
                                             --------                                  ------- 

         Total assets                        $799,631                                 $701,643
                                             ========                                 ========

Interest-bearing liabilities:
    Checking and money market
       deposit accounts                      $103,474      948  3.71%                 $ 88,703       828    3.79%
    Savings deposits                           67,411      565  3.40                    67,823       577    3.45
    Certificates                              385,775    5,376  5.65                   360,784     5,292    5.95
    Federal Home Loan Bank advances           140,280    1,930  5.58                    89,733     1,202    5.43
    Other borrowings                            3,347       45  5.45                       425         5    4.77
                                             --------   ------  ----                   -------   -------    ----
         Total interest-bearing liabilities   700,287    8,864  5.13                   607,468     7,904    5.28
                                             --------   ------  ----                   -------   -------    ----

Noninterest-bearing liabilities:
    Deposits                                   24,928                                   30,558
    Other                                       9,260                                    8,790
                                                                                       -------

         Total liabilities                    734,475                                  646,816
Stockholders' equity                           65,156                                   54,827
                                             --------                                  -------

         Total liabilities and
             stockholders' equity           $ 799,631                                 $701,643
                                            ---------                                 ========

Average dollar difference between
   interest-earning assets
   and interest-bearing liabilities         $  70,895                                 $ 68,592
                                            =========                                 ========

Net interest income                                  $   7,739                                    $6,577
                                                     =========                                    ======

Interest rate spread (3)                                        3.60%                                     3.41%
                                                                =====                                     ====

Net yield on average interest-earning assets (4)                4.07%                                     3.95%
                                                                =====                                     ====
</TABLE>


Notes on Page 12.



                                       12

<PAGE>

<TABLE>
<CAPTION>


(In thousands)
Nine-Month Periods
------------------
Ended March 31                                        1997                                        1996
--------------                              ---------------------------                ----------------------------
                                                      Interest                                    Interest
                                            Average    Income/  Yield/                  Average   Income/    Yield/
                                            Balance    Expense    Rate                  Balance   Expense     Rate
                                            -------    -------    ----                  -------   -------     ----
<S>                                         <C>        <C>        <C>                   <C>        <C>        <C>  
Interest-earning assets;
    Loans receivable (1)(2)                 $694,886   $46,061    8.83%                 $622,720   $41,797     8.94%
    Mortgage-backed securities and
      collateralized mortgage obligations     20,934     1,018    6.48                     7,918       304     5.11
    Investments                               20,641       980    6.32                    24,794     1,107     5.95
    Other interest-earning assets             18,108       712    5.24                    13,254       507     5.10
                                             -------   -------    ----                   -------    ------     ----
        Total interest-earning assets        754,569    48,771    8.61                   668,686    43,715     8.71
                                             -------    ------    ----                   -------    ------     ----

Noninterest-earning assets:
    Cash and cash equivalents                  8,557                                       8,671
    Office properties and equipment, net       9,018                                       8,859
    Other assets                              17,516                                      11,214
    Allowance for loan losses                 (8,245)                                     (6,086)
                                             -------                                      ------

         Total assets                      $ 781,415                                    $691,344
                                           =========                                    ========

Interest-bearing liabilities:
    Checking and money market
       deposit accounts                    $ 101,011     2,820    3.72%                 $ 85,942     2,504     3.88%
    Savings deposits                          67,896     1,731    3.40                    68,382     1,764     3.44
    Certificates                             375,962    16,005    5.67                   342,749    15,352     5.97
    Federal Home Loan Bank advances          130,943     5,430    5.52                   102,326     4,594     5.98
    Other borrowings                           7,092       288    5.41                       372        16     5.73
                                             -------     -----    ----                   -------    ------     ----
         Total interest-bearing liabilities  682,904    26,274    5.13                   599,771    24,230     5.38
                                             -------    ------    ----                   -------   -------     ----

Noninterest-bearing liabilities:
    Deposits                                  24,230                                      29,827
    Other                                     10,648                                       8,821
                                              ------                                     -------

         Total liabilities                   717,782                                     638,419
Stockholders' equity                          63,633                                      52,925
                                              ------                                     -------

         Total liabilities and
             stockholders' equity           $781,415                                    $691,344
                                            ========                                    ========

Average dollar difference between
   interest-earning assets
   and interest-bearing liabilities         $ 71,665                                   $  68,915
                                            ========                                   =========

Net interest income                                    $22,497                                    $ 19,485
                                                       =======                                    ========

Interest rate spread (3)                                          3.48%                                        3.33%
                                                                  =====                                        ====

Net yield on average interest-earning assets (4)                  3.97%                                        3.88%
                                                                  =====                                        ====
</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 $5,056,000 in
the first nine months of fiscal year 1997 and  increased  by  $4,429,000  in the
first nine  months of fiscal year 1996,  as compared to the same  periods in the
previous  fiscal years.  Total interest  expense  increased by $2,044,000 in the
first nine months of fiscal year 1997 and  increased by  $4,538,000 in the first
nine months of fiscal year 1996, as compared to the same periods in the previous
fiscal  years.  The fiscal  year 1997 and  fiscal  year 1996  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 nine-month periods ended March 31, 1997 and 1996. 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 $3,012,000  increase in net
interest income in the first nine months of fiscal year 1997 was the result of a
growing balance sheet and falling deposit rates,  while the $109,000  decline in
net  interest  income in the first nine  months of fiscal  year 1996 was the net
result of a growing balance sheet adversely affected by rising deposit rates.

<TABLE>
<CAPTION>

(In thousands)
Three-Month Periods
Ended March 31                               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>        <C>   <C>             <C>          <C>        <C>  
Loans receivable                               $1,846     $47   $1,893          $1,216       $ (365)    $  851
Mortgage-backed securities and
  collateralized mortgage obligations             142      13      155             (48)          (5)       (53)
Investments                                         6      37       43            (181)          11       (170)
Other interest-earning assets                      26       5       31             135          (17)       118
                                               ------    ----   ------          -------       ------    ------
   Total interest-earning assets                2,020     102    2,122           1,122         (376)       746
                                               ------    ----   ------          -------       ------    ------

Checking and money market
   deposit accounts                               137     (17)     120              54          (11)        43
Savings deposits                                  (4)      (8)     (12)           (142)          (2)      (144)
Certificates                                      305    (221)      84           1,171          323      1,494
Federal Home Loan Bank advances                   698      30      728            (272)        (230)      (502)
Other borrowings                                   39       1       40            (118)         (29)      (147)
                                               ------    ----   ------          -------       ------     ------
   Total interest-bearing liabilities           1,175    (215)     960             693           51        744
                                               ------    ----   ------          -------       ------     ------

Net interest income                             $ 845   $ 317   $1,162          $  429      $  (427)    $    2
                                                =====   =====   ======          ======      ========   ========

</TABLE>




                                       14

<PAGE>

<TABLE>
<CAPTION>


(In thousands)
Nine-Month Periods
Ended March 31                                            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>           <C>           <C>           <C>           <C>           <C>    
Loans receivable                                      $ 4,770       $  (506)      $ 4,264       $ 4,558       $    30       $ 4,588
Mortgage-backed securities and
  collateralized mortgage obligations                     614           100           714          (120)          (80)         (200)
Investments                                              (202)           75          (127)         (201)           (3)         (204)
Other interest-earning assets                             191            14           205           237             8           245
                                                      -------       -------       -------       -------       -------       -------
   Total interest-earning assets                        5,373          (317)        5,056         4,474           (45)        4,429
                                                      -------       -------       -------       -------       -------       -------

Checking and money market
   deposit accounts                                       413           (97)          316           (31)          254           223
Savings deposits                                          (13)          (20)          (33)         (671)          (10)         (681)
Certificates                                            1,356          (703)          653         3,813         1,484         5,297
Federal Home Loan Bank advances                         1,153          (317)          836            75            37           112
Other borrowings                                          273            (1)          272          (397)          (16)         (413)
                                                      -------       -------       -------       -------       -------       -------
   Total interest-bearing liabilities                   3,183        (1,139)        2,044         2,789         1,749         4,538
                                                      -------       -------       -------       -------       -------       -------

Net interest income                                   $ 2,190       $   822       $ 3,012       $ 1,685       $(1,794)      $  (109)
                                                      =======       =======       =======       =======       =======       =======
</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 March 31,  1997,  as well as the
amount of fixed rate and  variable  rate  loans due after  March 31,  1998.  The
tables have not been  adjusted for estimates of  prepayments  and do not reflect
periodic  repricing of adjustable rate loans. The tables do include  $49,526,000
of fixed rate loans  receivable held for sale and $14,606,000 of adjustable rate
loans held for sale as of March 31, 1997.




                                       15

<PAGE>

<TABLE>
<CAPTION>


                                                      Balance                  Principal Repayment Contractually Due in
                                                     Outstanding                 12-Month Period Ending December 31,
                                                                   -----------------------------------------------------------------
                                                     March 31,                                        2001-     2003-     2008 and
(In thousands)                                           1997        1998        1999       2000       2002      2007     Thereafter
                                                      ---------    --------    --------    -------    -------   -------   ----------

<S>                                                    <C>         <C>         <C>         <C>        <C>        <C>        <C>     
Residential and commercial real estate (1)             $538,574    $ 38,767    $ 27,106    $17,989    $38,965    $94,025    $321,722
Construction                                            130,998     109,661      16,148      4,848        341       --          --
Consumer and other loans                                 61,468      16,222      13,178     10,270     11,568      4,483       5,747
                                                       --------    --------    --------    -------    -------    -------    --------
                                                       $731,040    $164,650     $56,432    $33,107    $50,874    $98,508    $329,469
                                                       ========    ========    ========    =======    =======    =======    ========
</TABLE>


(1)  Includes loans held for sale.


<TABLE>
<CAPTION>

                                                      Fixed             Variable
(In thousands)                                         Rate              Rate            Total
                                                       ----              ----            -----

<S>                                                  <C>               <C>             <C>      
Residential and commercial real estate (2)           $161,343          $338,464        $ 499,807
Construction                                                0            21,337           21,337
Consumer and other loans                               42,067             3,179           45,246
                                                     --------          --------         --------
     Total due after December 31, 1997               $203,410          $362,980         $566,390
                                                     ========          ========         ========
</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 are  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 7.62% of total assets at March 31, 1997 as
follows:








                                       16

<PAGE>

<TABLE>
<CAPTION>



                                                                                1 Year          1 - 3          3 - 5         Over 5
(In thousands)                                                   Total          or Less         Years          Years          Years
--------------                                                   -----          -------         -----          -----          -----

<S>                                                            <C>              <C>            <C>            <C>           <C>     
Interest-earning assets:
   Loans receivable (1)                                        $ 739,880        $502,716       $111,083       $37,532       $ 88,549
   Mortgage-backed securities and
     collateralized mortgage obligations                          12,532             212              0             0         12,320
   Investments                                                    20,455           7,828              0         4,000          8,627
   Other interest-earning assets                                  16,829          16,829              0             0              0
                                                               ---------        --------       --------       -------       --------
       Total interest-earning assets                             789,696        $527,585       $111,083       $41,532       $109,496
                                                                                ========       ========       =======       ========
Noninterest-earning assets                                        36,457
Allowance for loan losses                                         (8,840)

       Total assets                                            $ 817,313

Interest-bearing liabilities:
   Checking and money-market
     deposit accounts (2)                                      $  99,310        $ 37,260       $      0       $     0       $ 62,050
   Savings deposits (3)                                           69,275          17,319          9,699         8,313         33,945
   Certificates                                                  391,409         278,058         77,802        33,985          1,564
   FHLB advances                                                 146,552         132,000          6,500         7,500            552
   Other borrowings                                                  648             648              0             0              0
                                                               ---------        --------       --------       -------       --------
       Total interest-bearing liabilities                        707,194        $465,285       $ 94,001       $49,798       $ 98,111
                                                                                ========       ========       =======       ========
Noninterest-bearing liabilities                                   44,228
                                                                                                                            --------

       Total liabilities                                         751,422
Stockholders' equity                                              65,891

       Total liabilities and
         stockholders' equity                                  $ 817,313

aturity/repricing gap                                                           $ 62,301       $ 17,083       $(8,266)      $ 11,385

Cumulative gap                                                                  $ 62,301       $ 79,383       $71,117       $ 82,502

As percent of total assets                                                         7.62%          9.71%         8.70%         10.09%
</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 $224.0
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
$666,908,000  at  March  31,  1997,  representing  81.6% 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>

                                             March 31, 1997              June 30, 1996            March 31, 1996
                                            -----------------         -----------------         -----------------
                                                      Percent                   Percent                   Percent
                                                         of                       of                         of
                                                        Gross                    Gross                      Gross
(In thousands)                                Amount    Loans           Amount   Loans           Amount     Loans
                                            ---------   -----         ---------  -----          --------    -----

<S>                                        <C>         <C>            <C>        <C>             <C>         <C>  
First mortgage loans:
   Residential - fixed rate                $ 68,945    10.2%          $ 77,266   12.3%           $ 74,387    12.3%
   Residential - adjustable rate            291,186    42.9            270,374   43.2             257,543    42.8
                                            -------    ----            -------   ----            --------   -----
        Total residential                   360,131    53.1            347,640   55.5             331,930    55.1
                                            -------    ----            -------   ----            --------   -----

   Commercial - fixed rate                   17,938     2.6             16,633    2.7              17,769     3.0
   Commercial - adjustable rate              29,851     4.4             32,089    5.1              36,132     6.0
                                            -------    ----            -------   ----            --------   -----
        Total commercial                     47,789     7.0             48,722    7.8              53,901     9.0
                                            -------    ----            -------   ----            --------   -----

   Construction - fixed rate                 16,274     2.4             20,185    3.2              15,194     2.5
   Construction - adjustable rate           118,818    17.5            101,190   16.2             104,325    17.3
                                            -------    ----            -------   ----            --------   -----
        Total construction (1)              135,092    19.9            121,375   19.4             119,519    19.8
                                            -------    ----            -------   ----            --------   -----

Total first mortgage loans                  543,012    80.0            517,737   82.7             505,350    83.1
                                            -------    ----            -------   ----            --------   -----

Second mortgage loans (2):
   Fixed rate                                20,917     3.1             18,201    2.9              16,403     2.7
   Adjustable rate                           30,918     4.6             29,233    4.7              28,167     4.7
                                            -------    ----            -------   ----            --------   -----
        Total second mortgage loans          51,835     7.7             47,434    7.6              44,570     7.4
                                            -------    ----            -------   ----            --------   -----

Loans on savings accounts                     1,964     0.3              1,691    0.3               1,339     0.2
                                            -------    ----            -------   ----            --------   -----

Installment loans:
   Fixed rate                                78,422    11.6             55,910    8.9              47,904     8.0
   Adjustable rate                            2,953     0.4              3,275    0.5               3,333     0.5
                                            -------    ----            -------   ----            --------   -----
        Total installment loans              81,375    12.0             59,185    9.4              51,237     8.5
                                            -------    ----            -------   ----            --------   -----

Gross Loans                                 678,186   100.0%           626,047  100.0%            602,496   100.0%
                                                      ======                    ======                     ======



Less:
   Unearned discount                             76                        301                        429
   Deferred income                            2,362                      2,665                      2,703
   Allowance for loan losses                  8,840                      7,527                      6,482
                                             ------                      -----                  ---------
                                             11,278                     10,493                      9,614
                                             ------                     ------                  ---------

Total net loans held for investment        $666,908                   $615,554                   $592,882
                                           ========                   ========                   ========
</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  $609,000  during the
third quarter of fiscal year 1997 as additions to the allowance for loan losses,
compared  to  $413,000  in the third  quarter of fiscal  year 1996.  The Company
provided  $1,751,000  during  the  first  nine  months  of  fiscal  year 1997 as
additions to the allowance for loan losses,  compared to $1,344,000 in the first
nine months 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 nine months of fiscal
years 1997 and 1996:

(In thousands)
Nine-Month Periods
Ended March 31                                        1997             1996
--------------                                        ----             ----

Balance at beginning of period                        $ 7,527       $   6,373
Provision charged to expense                            1,751           1,344

Loans charged off:
  Residential real estate                                 -                 3
  Commercial real estate                                  156           1,056
  Construction                                            -               -
  Consumer and other loans                                326             219
                                                     --------        --------
      Total charge-offs                                   482           1,278
                                                     --------        --------

Recoveries of loans previously charged off:
  Residential real estate                                 -               -
  Commercial real estate                                  -               -
  Construction                                            -               -
  Consumer and other loans                                 44              43
                                                     --------         -------
      Total recoveries                                     44              43
                                                     --------         -------

      Net charge-offs                                     438           1,235
                                                      -------         -------

Balance at end of period                              $ 8,840         $ 6,482
                                                      =======         =======

Average loans held for investment                     648,505        $591,441
Loans held for investment at period end (1)           675,748         599,364
Ratio of provision for loan losses to
    average loans held for investment                    0.27%           0.23%
Ratio of net charge-offs to average
    loans held for investment                             .07%           0.21%
Ratio of allowance for loan losses to loans
    held for investment at period end                    1.31%           1.08%


-------------------------------
(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

                                       20

<PAGE>



in these  amounts,  or  proportions,  or that the  allocation  indicates  future
trends.  The  allocation of the  allowance at March 31, 1997,  June 30, 1996 and
March 31, 1996 and the ratio of the related  outstanding  loan balances to total
loans held for investment are as follows:

<TABLE>
<CAPTION>

         (In thousands)                              March 31, 1997                 June 30, 1996               March 31, 1996
                                                   -----------------           ----------------------        --------------------
                                                                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>                <C>         <C>                <C>         <C>            <C>  
Residential real estate                         $1,605             60.8%       $1,425             63.1%       $1,280         62.5%
Commercial real estate                           2,760              7.0         2,552              7.8         2,127          9.0
Construction                                     3,100             19.9         2,200             19.4         1,825         19.8
Consumer and other loans                         1,375             12.3         1,350              9.7         1,250          8.7
                                                ------          -------        ------          -------        ------        -----

                                                $8,840            100.0%       $7,527            100.0%       $6,482        100.0%
                                                ======          =======        ======          =======        ======        =====
</TABLE>

         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 March 31, 1997,  the Company  operated  twenty-four  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 $3,360,000 of residential equity lines of credit
and fixed-rate  second  mortgages  during the third quarter of fiscal year 1997,
compared to  $3,489,000  in the third  quarter of fiscal year 1996.  The Company
originated  $13,812,000  of  residential  equity lines of credit and  fixed-rate
second mortgages  during the first nine months of fiscal year 1997,  compared to
$16,609,000 in the first nine months of fiscal year 1996.

         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
$5,194,000 of fixed rate equity and mobile home loans during the third  quarter,
and  $16,556,000  during the first nine months of fiscal  1997.  The Company had
purchased  $976,000  in  the  third  quarter  of the  prior  fiscal  year.  This
represented the balance year-to-date as well in 1996.


                                       21

<PAGE>



         The  Company  originated  in  aggregate  $20,057,000  of  consumer  and
installment  loans  during the third  quarter of fiscal  year 1997,  compared to
$10,721,000 in the second  quarter of fiscal year 1996.  The Company  originated
$60,144,000 of consumer and installment loans during the first three quarters of
fiscal year 1997,  compared to $34,698,000 in the first three quarters of fiscal
year 1996.

         Within the figures  above,  the Company  began  originating  commercial
loans in its new commercial  lending  division.  Commercial  loans originated in
this new  retail  division  aggregated  $3,140,000  during the  quarter  and are
detailed in the chart below.

         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.


         The following table  summarizes  retail banking loan  originations  and
purchases by type of loan for the three-month and nine-month periods ended March
31, 1997 and 1996:

<TABLE>
<CAPTION>

         (In thousands)
         Three-Month Periods
         Ended March 31                                  1997              1996
         --------------                           -----------------  -----------------
                                                              % of               % of
                                                    Amount    Total    Amount    Total

<S>                                               <C>          <C>   <C>          <C>  
         Residential equity lines of credit (1)   $ 1,816       9.0% $ 2,104      19.6%
         Fixed-rate second mortgage loans           6,738      33.6    2,361      22.0
         Consumer loans                             8,363      41.7    6,256      58.4
         Commercial loans                           3,140      15.7     --         --
                                                  -------   -------  -------     -----

         Total originations and purchases         $20,057     100.0% $10,721     100.0%
                                                  =======   =======  =======     =====

</TABLE>















                                       22

<PAGE>


<TABLE>
<CAPTION>

         Nine-Month Periods
         Ended March 31                                                     1997                       1996
         ------------------                                            ---------------          ------------------
                                                                                 % of                       % of
                                                                       Amount    Total           Amount    Total
                                                                       ------    -----           ------    -----

<S>                                                                   <C>       <C>           <C>          <C>  
         Residential equity lines of credit (1)                          7,559    12.6%         $ 8,107      23.4%
         Fixed-rate second mortgage loans                               22,809    37.9            9,478      27.3
         Consumer loans                                                 26,636    44.3           17,113      49.3
         Commercial loans                                                3,140     5.2               -         -
                                                                       --------  -----          -------     -----

         Total originations and purchases                             $ 60,144   100.0%         $34,698     100.0%
                                                                      ========   =====          =======     =====

</TABLE>

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

         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.


                                       23

<PAGE>



         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
$152,742,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans Administration ("VA") residential loans during the third quarter of
fiscal year 1997,  compared to  $101,040,000 in the third quarter of fiscal year
1996 and  $42,937,000  in the third  quarter of fiscal  year 1995.  The  Company
originated  $415,354,000  of such loans  during the first nine  months of fiscal
year 1997, compared to $326,554,000 in the first nine months of fiscal year 1996
and  $173,694,000  in the  first  nine  months of fiscal  year  1995.  The 88.0%
increase  in the first  nine  months 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 27.2% increase in the first nine months 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.

         The Company  originated  $21,282,000  of  adjustable  rate  residential
mortgage  loans  during the third  quarter  of fiscal  year  1997,  compared  to
$16,816,000  in the third  quarter of fiscal  year 1996 and  $14,731,000  in the
third quarter of fiscal year 1995.  The Company  originated  $63,494,000 of such
loans during the first nine months of fiscal year 1997,  compared to $58,342,000
in the first nine months of fiscal year 1996 and  $69,149,000  in the first nine
months of fiscal year 1995.  Originations  in the first three quarters of fiscal
year 1996 were  15.6%  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 12.0% of total  originations in the first nine months of
fiscal  year 1997,  compared  to 13.6% in the first nine  months 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 three quarters of fiscal years 1997 and 1996.

         The Company  originated  $16,015,000 of  construction  loans during the
third quarter of fiscal year 1997,  compared to $19,253,000 in the third quarter
of fiscal year 1996 and  $14,489,000  in the third  quarter of fiscal year 1995.
The Company originated  $51,519,000 of construction loans during the first three
quarters  of fiscal  year  1997,  compared  to  $41,774,000  in the first  three
quarters  of fiscal year 1996 and  $53,004,000  in the first half of fiscal year
1995.  Construction  loans  were  9.7% of  total  permanent  mortgage  loan  and
construction  loan originations in the first three quarters of fiscal year 1997,
compared to 9.7% in the first three  quarters 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

                                       24

<PAGE>



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 homebuyer 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  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.  As a  percentage  of the
Company's loan originations,  construction and development lending during fiscal
year 1997 is expected  to be less than the levels seen in fiscal year 1996.  The
Company  continues to evaluate the  feasibility  of  sustaining or expanding the
present construction lending levels.



                                       25

<PAGE>



         The following  tables  summarize first mortgage and  construction  loan
originations by type of loan for the  three-month  and nine-month  periods ended
March 31, 1997 and 1996:

<TABLE>
<CAPTION>

         (In thousands)
         Three-Month Periods
         Ended March 31                                            1997                       1996
         --------------                                     --------------------       -----------------
                                                                         % of                      % of
                                                               Amount     Total          Amount     Total
<S>                                                          <C>          <C>           <C>         <C>  
         Permanent mortgage loans:
              Fixed rate residential: 
                   Conventional                              $ 110,720    58.3%         $ 76,476    55.8%
                   FHA/VA                                       42,022    22.1            24,564    17.9
                                                              --------    ----          --------   -----
                                                               152,742    80.4           101,040    73.7
                                                              --------    ----          --------   -----

              Adjustable rate residential:
                   One year                                      8,737     4.6             8,827     6.5
                   Three year                                    7,429     3.9             7,989     5.8
                   Other                                         5,116     2.7                -       -
                                                              --------    ----          --------   -----
                                                                21,282    11.2            16,816    12.3
                                                              --------    ----          --------   -----

         Construction loans (1):
             Residential construction                           13,710     7.2            10,876     7.9
             Acquisition, development 
                and commercial construction                      2,305     1.2             8,377     6.1
                                                              --------    ----          --------   -----
                                                                16,015     8.4            19,253    14.0
                                                              --------    ----          --------   -----

         Total originations and purchases                    $ 190,039   100.0%         $137,109   100.0%
                                                              ========   ======         ========   ======
</TABLE>



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


                                       26

<PAGE>


<TABLE>
<CAPTION>

         (In thousands)
         Nine-Month Periods
         Ended March 31                                             1997                      1996
         --------------                                    -----------------------   ---------------------
                                                                         % of                      % of
                                                               Amount     Total          Amount     Total

<S>                                                          <C>          <C>          <C>         <C>  
         Permanent mortgage loans:
               Fixed rate residential:

                   Conventional                              $278,815     52.6%        $243,405    56.6%
                   FHA/VA                                     136,539     25.7           83,149    19.3
                                                              -------    -----         --------    ----
                                                              415,354     78.3          326,554    75.9
                                                              -------    -----         --------    ----

              Adjustable rate residential:
                   One year                                    31,461      5.9           36,196     8.4
                   Three year                                  26,917      5.1           22,146     5.2
                   Other                                        5,116      1.0              -        -
                                                              -------    -----         --------    ----
                                                               63,494     12.0           58,342    13.6
                                                              -------    -----         --------    ----

              Fixed rate commercial                               -         -             3,283     0.8
                                                              -------    -----         --------    ----

         Construction loans (1):
             Residential construction                          42,086      7.9           29,297     6.8
             Acquisition, development
                and commercial construction                     9,433      1.8           12,477     2.9
                                                              -------    -----         --------    ----
                                                               51,519      9.7           41,774     9.7
                                                              -------    -----         --------    ----

         Total originations and purchases                   $ 530,367    100.0%        $429,953   100.0%
                                                            =========    =====         ========   =====

</TABLE>
------------------------

         (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 the Company's outstanding commitments to make loans, the portion
of such loans that is likely

                                       27

<PAGE>



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
$1,723,000 in the third quarter of fiscal year 1997, an increase of $640,000, or
59.1%,  over the gains of  $1,083,000  in the third quarter of fiscal year 1996.
Gains from such sales were $3,676,000 in the first three quarters of fiscal year
1997, an increase of $1,666,000,  or 82.9%,  over the gains of $2,010,000 in the
first three quarters 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
March  31,1997,  June 30, 1996, or March 31, 1996. 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  $107,203,000  of  fixed  rate  mortgage  loans  and
securitized  loans  during the third  quarter of fiscal  year 1997,  compared to
$85,200,000  in the  third  quarter  of  fiscal  year  1996.  The  Company  sold
$302,639,000  of such loans  during the first nine  months of fiscal  year 1997,
compared to  $245,343,000 in the first nine months 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 as well as to create an income
stream from servicing fees on loans sold. 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.

         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

                                       28

<PAGE>



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  $31,422,000  of adjustable  rate  mortgage  loans and
securitized  loans  during the third  quarter of fiscal  year 1997,  compared to
$17,966,000  in the  third  quarter  of  fiscal  year  1996.  The  Company  sold
$59,635,000  of such loans  during the first  nine  months of fiscal  year 1997,
compared  to  $58,306,000  in the first nine  months of fiscal  year  1996.  The
sizable  proportion of adjustable rate loan and securitized  loan sales to total
sales in fiscal year 1996  compared to fiscal year 1997 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,  second and third  quarters  of both  fiscal  year 1997 and
fiscal year 1996 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 nine-month  periods ended March 31, 1997 and 1996. The table
does  not  reflect  commitments  sold  for  which  mortgage  loans  had not been
delivered and funded at period end.
<TABLE>
<CAPTION>

         (In thousands)
         Three-Month Periods
         Ended March 31                                                              1997                   1996
         --------------                                                         ----------------    ------------------
                                                                                           % of                  % of
                                                                                Amount     Total      Amount     Total

<S>                                                                             <C>         <C>      <C>          <C>  
         Fixed rate                                                             $107,203    77.3%    $ 85,200     82.6%
         Adjustable rate                                                          31,422    22.7       17,996     17.4
                                                                                --------   ------    --------   ------

         Total mortgage loans sold                                              $138,625   100.0%    $103,196    100.0%
                                                                                ========   ======    ========   ======
</TABLE>

<TABLE>
<CAPTION>

         Nine-Month Periods
         Ended March 31                                                              1997                   1996
         --------------                                                         ----------------    ------------------
                                                                                           % of                  % of
                                                                                Amount     Total      Amount     Total


<S>                                                                             <C>         <C>      <C>          <C>  
         Fixed rate                                                             $302,639    83.5%    $245,343     80.8%
         Adjustable rate                                                          59,635    16.5       58,306     19.2
                                                                                --------   -----     --------   ------

         Total mortgage loans sold                                              $362,274   100.0%    $303,649    100.0%
                                                                                ========   ======    ========   ======

</TABLE>

         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

                                       29

<PAGE>



figures  totaled  $147,639,000  in the first nine months of fiscal year 1997 and
$75,614,000 in the first nine months 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 $1,314,000  to $1,206,000  during the first three
quarters of fiscal year 1997.  The income in the first three  quarters of fiscal
year 1997 consists of late charges and other fee income related to the Company's
loan portfolio.

         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

                                       30

<PAGE>



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)                                           March 31, 1997              June 30, 1996               March 31, 1996
                                                      -------------------      ---------------------     --------------------------
                                                      Amortized      Fair        Amortized       Fair       Amortized        Fair
                                                        Cost         Value         Cost          Value       Cost            Value
                                                        ----         -----         ----          -----       ----            -----
<S>                                                   <C>            <C>          <C>            <C>          <C>            <C>  
Investment Securities          

         Held to maturity:

            FHLB notes                                $   --         $  --        $   --         $  --        $   --         $  --
            Municipal bonds                              6,200         6,200         6,278         6,278         7,520         7,520
                                                      --------       -------      --------       -------      --------       -------

                                                         6,200         6,200         6,278         6,278         7,520         7,520
                                                      --------       -------      --------       -------      --------       -------

         Available for sale:
            FHLB notes                                   6,450         6,427         6,440         6,385         2,000         1,983
            FNMA bonds                                    --            --            --            --           1,968         2,047
                                                      --------       -------      --------       -------      --------       -------
                                                         6,450         6,427         6,440         6,385         3,968         4,030
         Net unrealized gain (loss)                        (23)         --             (55)         --              62          --
                                                      --------       -------      --------       -------      --------       -------

                                                         6,427         6,427         6,385         6,385         4,030         4,030
                                                      --------       -------      --------       -------      --------       -------
                                                      $ 12,627       $12,627      $ 12,663       $12,663      $ 11,550       $11,550
                                                      ========       =======      ========       =======      ========       =======
Mortgage-Backed Securities

         Held to maturity:
            FHLMC                                     $    370       $   377      $    374       $   382      $    375       $   385
            Other                                         --            --            --            --             184           184
                                                      --------       -------      --------       -------      --------       -------

                                                           370           377           374           382           559           569
                                                      --------       -------      --------       -------      --------       -------

         Available for sale:
            FNMA                                           555           541         3,066         3,051         3,189         3,189
            CMOs                                        11,657        11,621        12,402        12,269         8,905         8,865
                                                      --------       -------      --------       -------      --------       -------
                                                        12,212        12,162        15,468        15,320        12,094        12,054
            Net unrealized loss                            (50)         --            (148)         --             (40)         --
                                                      --------       -------      --------       -------      --------       -------

                                                        12,162        12,162        15,320        15,320        12,054        12,054
                                                      --------       -------      --------       -------      --------       -------

                                                      $ 12,532       $12,539      $ 15,694       $15,702      $ 12,613       $12,623
                                                      ========       =======      ========       =======      ========       =======
</TABLE>


         Noninterest  Income.  Financial service fees increased by $133,000,  or
24.4% in the third quarter of fiscal 1997 and by $87,000, or 19.0%, in the third
quarter of fiscal  year 1996,  compared  to the same  periods in the  respective
previous  years.  Such fees  increased  by  $327,000 or 19.5% in the first three
quarters  of fiscal  year 1997 and by  $191,000,  or 12.9%,  in the first  three
quarters of fiscal year 1996,  compared  to the same  periods in the  respective
previous years. These three-month and nine-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.

                                       32

<PAGE>



         In addition,  financial service fees in the first nine months of fiscal
year 1997 include $67,000 earned from the Company's  relationship  with CoreLink
Financial,  Inc.  ("CoreLink").  The  Company  earned  $52,000 in the first nine
months  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 $27,000 and $66,000 in
the third  quarters  of fiscal  years 1997 and 1996,  respectively,  and yielded
gains of $124,000 and $136,000,  respectively, for the first nine months of such
fiscal years.  The Company  recorded  losses on the  revaluation  of real estate
owned of $0 and  $77,000 in the third  quarters  of fiscal  years 1997 and 1996,
respectively,  and recorded losses of $214,000 and $444,000,  respectively,  for
the first nine 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.

         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 is based  at the  headquarters  of the  Virginia  First  Mortgage
Division in Woodbridge,  Virginia.  Century Title generated $46,000 of net title
fee income in the third  quarter of fiscal  year 1997 and  $157,000 in the first
nine months of fiscal year 1997.

         Noninterest  Expenses.  Personnel and related employee benefits expense
is the Company's largest non-interest  expense.  Personnel expense for the third
quarter of fiscal year 1997 was $3,614,000,  compared to $2,548,000 in the third
quarter of fiscal year 1996 and  $2,309,000  in the third quarter of fiscal year
1995.  Such  expense  for the  first  three  quarters  of  fiscal  year 1997 was
$9,188,000,  compared to $7,127,000  in the first three  quarters of fiscal year
1996 and  $7,639,000 in the first three  quarters of fiscal year 1995.  The 6.7%
decrease in personnel  expense in the first three  quarters 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 28.9% increase in personnel  expense in the first three quarters of
fiscal year 1997,  as compared to the same period in fiscal year 1996,  reflects
the  Company's  expansion,  (the  addition of four loan  origination  offices in
August  1996,  the  acquisition  of  American  Finance and  Investment,  Inc. in
December 1996, and the opening of our

                                       33

<PAGE>



Garrisonville retail office in January, 1997). The increase in personnel expense
also reflects the impact of personnel  hired to meet the Company  initiatives in
marketing,  consumer finance,  commercial lending,  deposits, and the commission
expenses related to our increase in loan originations.

         Occupancy  expense for the third quarters of fiscal years 1997 and 1996
was  $451,000  and  $447,000,  respectively.  Such  expense was  $1,290,000  and
$1,202,000,  respectively,  for the first nine months of those fiscal years. The
7.3% increase for the first three  quarters 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 third quarters of fiscal years 1997 and
1996 was $416,000 and $438,000,  respectively.  Such expense was  $1,350,000 and
$1,286,000,  respectively,  for the first nine months of those fiscal years. The
fiscal year 1997 of 4.9% was due to increased  loan and deposit  account  volume
and local area networking.

         Income  Taxes.  Income tax expense for the third quarter of fiscal year
1997 was $1,236,000, resulting in an effective tax rate of 35.8%. By comparison,
the Company had income tax expense of  $1,231,000  for an effective  tax rate of
36.0% in the third  quarter of fiscal  year 1996.  The  income tax  expense  and
effective tax rate of the first nine months of fiscal year 1997 were  $2,460,000
and 34.9%,  compared to  $3,617,000  and 36.8% 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.

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  $595,126,000  at March 31, 1997,  an increase of
$21,590,000,  or 3.8%, over the  $573,536,000 at June 30, 1996.  Certificates of
deposit grew by $23,827,000 in the first nine months of fiscal year 1997,  while
savings  deposits  increased by $451,000  and checking and money market  deposit
accounts decreased by a total of $2,688,000. Higher market interest rates in the
first  nine  months  of  fiscal  year  1997  increased  the   attractiveness  of
certificates  compared to savings and checking products, on which interest rates
have risen more slowly.  Approximately  $278.0 million in  certificate  accounts
will mature in the  twelve-month  period  ending March 31, 1998.  The  Company's
management  believes  that most of the maturing  liabilities  will be reinvested
with the Company.


                                       34

<PAGE>



         Advances from the FHLB  increased by  $44,500,000  to  $146,552,000  at
March 31,  1997,  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.  However,  no such  borrowings  were
outstanding at March 31, 1997. 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 March 31, 1997 were 18.0% 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 lending operations.

         The  primary  use of funds by the  Company  is loan  originations.  The
Company's loan portfolio, including loans held for sale, totaled $666,908,000 at
March 31,  1997  compared  to  $615,554,000  at June 30,  1996,  an  increase of
$51,354,000,  or 8.3%.  The  Company's  loans held for  investment  and for sale
represented  89.4% of assets at March 31,  1997,  compared to 88.6% of assets at
June 30, 1996.

         The Company had outstanding fixed rate loan origination  commitments of
$2,878,000 and outstanding adjustable rate loan commitments of $774,000 at March
31, 1997.

         The Company had no outstanding  loan purchase  commitments at March 31,
1997.  The  Company  had   outstanding   commitments  to  fund   $35,650,000  of
construction  loans at March 31, 1997. In addition,  the Company had $30,664,000
outstanding in lines of credit  extended to its customers at March 31, 1997. The
Company's  management does not anticipate any  difficulties in satisfying  these
commitments.

         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),  excluding  FHLB  stock,  totaled
$25,159,000 at March 31, 1997 and  $28,357,000  at June 30, 1996.  Such balances
represented 3.1% 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 in excess of the required amount.
At March 31, 1997 and June 30, 1996,  the Company had  liquidity  ratios of 5.3%
and 5.2%, respectively. The Company's management anticipates that

                                       35

<PAGE>



it will be able to maintain its current level of regulatory liquidity during the
balance of fiscal year 1997.

         At March  31,  1997,  the  Savings  Bank's  net worth  under  generally
accepted accounting principles ("GAAP") was $65,904,000. 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 March 31, 1997,  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:
<TABLE>
<CAPTION>
                                                                                          Risk -
                                                     Tangible            Core             Based
         (In thousands)                               Capital           Capital          Capital
         --------------                               -------           -------          -------

<S>                                                   <C>                <C>             <C>    
         GAAP capital                                 $65,904            $65,904         $65,904
         Non-allowable assets:
                  Goodwill                             (2,133)           (2,133)          (2,133)
                  Other intangible assets                (153)            -                -
                  Equity in subsidiaries               (1,487)           (1,487)          (1,487)
                  Other                                   -                -                 -
         Additional capital items:
                  Unrealized gain on
                    debt securities, net                   44                44               44
                  General loss allowances                   -                 -            7,406
                                                     --------          --------         --------
         Regulatory capital - computed                 62,175            62,328           69,734
         Minimum capital requirement                   12,212            32,572           47,400
                                                     --------          --------         --------
         Excess regulatory capital                    $49,963           $29,756          $22,334
                                                      =======           =======          =======

         Ratios:

         Regulatory capital - computed                   7.64%             7.65%           11.77%
         Minimum capital requirement                     1.50              4.00             8.00
                                                        -----             -----           ------
         Excess regulatory capital                       6.14%             3.65%            3.77%
                                                        =====             =====           ======
</TABLE>

         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.

         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.



                                       36

<PAGE>



         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:

<TABLE>
<CAPTION>

         (In thousands)                                March 31,     June 30,    March 31,
                                                         1997          1996        1996
                                                         ----          ----        ----

<S>                                                       <C>       <C>          <C>     
         Non-accrual loans:
            Residential mortgage                          6,463     $  5,029     $  4,427
            Commercial mortgage                           1,901        1,827        4,215
            Construction                                  3,052        2,747        4,703
            Consumer non-mortgage                         1,607        1,342        1,226
                                                       --------     --------     --------

           Total non-accrual loans                       13,023       10,945       14,571
           Specific loss allowances                        (576)        (646)        (596)
                                                       --------     --------     --------
               Total non-accrual loans, net              12,447       10,299       13,975
                                                       --------     --------     --------

         Real estate acquired through foreclosure:
            One to four family
               residential units                          2,945        2,319        2,818
            Residential land/lots                         1,424        2,004        2,489
            Shopping/retail centers                       1,650        1,727        1,020
            Office buildings                               --           --           --
            Commercial land                                 192          192          192
                                                       --------     --------     --------
           Total real estate acquired
              through foreclosure                         6,211        6,242        6,519
           Specific and general
            allowances for losses                          (540)        (889)        (688)
                                                       --------     --------     --------
               Total real estate acquired through
                  foreclosure, net                        5,671        5,353        5,831
                                                       --------     --------     --------

         Total non-performing assets                   $ 18,118     $ 15,652     $ 19,806
                                                       ========     ========     ========


         Non-accrual loans to gross loans                  1.84%        1.63%        2.26%

         Total non-performing assets to sum of
           gross loans and real estate acquired
           through foreclosure                             2.65%        2.32%        3.05%

         Total non-performing assets to total assets       2.22%        2.10%        2.77%

</TABLE>

         The net amount of interest income foregone during the third quarters of
fiscal years 1997 and 1996 on loans  classified as  non-performing  was $104,000
and  $265,000,  respectively.  The amount  foregone  in the first nine months of
fiscal year 1997 was $438,000,  compared to $507,000 in the first nine months of
fiscal year 1996.




                                       38

<PAGE>



As of March 31, 1997, the Company had no  restructured  loans subject to special
reporting rules.

         The following table summarizes all non-accrual  loans, by loan type, at
March 31, 1997:

<TABLE>
<CAPTION>

                                               Number
                                                 of           Principal         Specific           Net
         (Dollars in thousands)                Loans           Balance          Allowances       Investment
         ----------------------                -----           -------          ----------       ----------

<S>                                                <C>          <C>           <C>                  <C>    
         Residential mortgage                      68           $ 6,463       $  -                 $ 6,463
         Commercial mortgage                        6             1,901          -                   1,901
         Construction                               7             3,052          -                   3,052
         Consumer non-mortgage                    182             1,607          (576)               1,031
                                                 ----           -------         ------               -----
                                                  263           $13,023        $ (576)             $12,447
                                                  ===           =======       ========             =======

</TABLE>


         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 March 31, 1997
were as follows:

         (In thousands)                                                Related
                                                           Loan        Valuation
                                                          Balance      Allowance

         Impaired with specific valuation allowance             -           -
         Impaired without specific valuation allowance      5,076           -
                                                           ------      ------

                  Total impaired loans                      5,076           -
                                                           ======      ======


Collateral  dependent  loans,  which  are  measured  at the  fair  value  of the
collateral, constituted 100% of impaired loans at March 31, 1997.

                                       39

<PAGE>



         Consistent  with the Company's  method for nonaccrual  loans,  interest
receipts  for  impaired  loans  are  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 March 31,
1997 were as follows:

<TABLE>
<CAPTION>
                                                                   Three Months Ended        Nine Months Ended
(In thousands)                                                         March 31, 1997           March 31, 1997
                                                                   ---------------------     -----------------

<S>                                                                     <C>                       <C>  
Average recorded investment in impaired loans                           4,426                     5,092
Interest income recognized during impairment                               84                       233
Interest income recognized on a cash basis during impairment               84                       233

</TABLE>

         The  following  table  summarizes  all  real  estate  acquired  through
foreclosure, by property type, at March 31, 1997:

<TABLE>
<CAPTION>

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


<S>                                                 <C>  <C>        <C>        <C>    
         One to four family residential units       23   $ 2,945    $     0    $ 2,945
         Residential land/lots                       5     1,424       (200)     1,224
         Shopping/retail centers                     2     1,650       (200)     1,450
         Commercial land                             1       192          0        192
                                                ------   -------    -------    -------
                                                    31   $ 6,211    $  (400)   $ 5,811
                                                ======   =======    =======    =======
         General loss allowance                   --        --         (140)      (140)
                                                ------   -------    -------    -------
                                                    31   $ 6,211    $  (540)   $ 5,671
                                                ======   =======    =======    =======

</TABLE>

         Potential problem loans consist of loans that are currently  performing
in  accordance  with  contractual  terms but for which  potential  operating  or
financial concerns of the obligors have caused management to have serious doubts
regarding  the ability of such  obligors  to  continue  to comply  with  present
repayment  terms. At March 31, 1997,  such potential  problem loans that are not
included  in  the  above  tables  as  nonperforming  amounted  to  approximately
$7,948,000.  Depending on the changes in the  economy and other  future  events,
these  loans  and  others  not  presently  identified  could  be  classified  as
non-performing  assets  in  the  future.  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.


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<PAGE>



         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
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 a 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 $2,760,000 in the allowance for
commercial  mortgage  loans at March 31,  1997,  is adequate to cover  potential
problems in the portfolio.



New Accounting Standards

         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

                                       41

<PAGE>



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  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  a  financial
institution's  performance  than the  effects  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.



                                       42

<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 March 31, 1997.




                                       43

<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: May 13, 1997                       /s/ Charles A. Patton
                                               ------------------------
                                               Charles A. Patton
                                               President and
                                               Chief Executive Officer






         Date: May 13, 1997                       /s/ William J. Vogt
                                               ----------------------
                                               William J. Vogt
                                               Senior Vice President and
                                               Chief Financial Officer









                                       44