--------------------------------------------------------------------------------
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                  --------------------------------------------
                                    FORM 10-K
                  --------------------------------------------

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

                  For the fiscal year ended: December 31, 1996

                                       OR

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

                             Commission File Number
                                     0-24744
                  --------------------------------------------

                               LIFE BANCORP, INC.
             (Exact name of registrant as specified in its charter)

               VIRGINIA                                        54-1711207
    (State or other jurisdiction of                         (I.R.S. Employer
    incorporation or organization)                       Identification Number)

         109 East Main Street
           Norfolk, Virginia                                      23510
(Address of principal executive offices)                        (Zip Code)

                                 (757) 858-1000
              (Registrant's telephone number, including area code)
                  --------------------------------------------

                 Securities registered pursuant to Section 12(b)
                                  of the Act:
                                 Not applicable

                 Securities registered pursuant to Section 12(g)
                                  of the Act:
                    Common Stock, (par value $0.01 per share)
                                (Title of Class)
                  --------------------------------------------

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 [  ] 

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

As of March 7, 1997, the aggregate value of the 8,585,729 shares of Common Stock
of the Registrant issued and outstanding on such date, which excludes  1,261,111
shares held by all directors and executive  officers of the  Registrant  and the
Registrant's   Employee  Stock   Ownership   Plan  ("ESOP")  as  a  group,   was
approximately $171.7 million. This figure is based on the last known trade price
of $20.00 per share of the Registrant's  Common Stock on March 7, 1997. Although
directors and executive officers and the ESOP were assumed to be "affiliates" of
the Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.

Number of shares of Common Stock outstanding as of March 7, 1997: 9,846,840.

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the  document  is  incorporated: 

(1)  Portions  of the Annual  Report to  Stockholders  for the fiscal year ended
     December 31, 1996, are incorporated into Parts II and IV.
(2)  Portions  of the  definitive  proxy  statement  for the  Annual  Meeting of
     Stockholders are incorporated into Part III.

<PAGE>

                               LIFE BANCORP, INC.
                        FORM 10-K ANNUAL REPORT FOR 1996

                                TABLE OF CONTENTS
                                                                       Page

PART I.................................................................  1

Item 1.  Business......................................................  1
     General...........................................................  1
     Acquisition of Seaboard Bancorp, Inc..............................  1
     Lending Activities................................................  2
         General.......................................................  2
         Activity in Loans.............................................  2
         Contractual Principal Repayments..............................  3
         Loan Portfolio Composition....................................  4
         Single-Family Residential Loans...............................  5
         Multi-Family Residential and Commercial Real Estate Loans.....  6
         Construction Loans............................................  7
         Land Loans....................................................  8
         Consumer Loans................................................  8
         Mortgage Banking..............................................  9
         Loans-to-One Borrower Limitations............................. 10
     Asset Quality..................................................... 10
         General....................................................... 10
         Impaired Loans................................................ 11
         Troubled Debt Restructurings.................................. 12
         Non-Performing Assets......................................... 12
         Potential Problem Loans....................................... 13
         Allowance for Loan Losses..................................... 13
         Other Classified Assets....................................... 15
         Allowance for Losses on Real Estate Owned..................... 15
     Investments and Mortgage-Backed Securities........................ 16
         Investments................................................... 16
         Mortgage-Backed Securities.................................... 16
     Sources of Funds.................................................. 20
         General....................................................... 20
         Deposits...................................................... 20
         Borrowings.................................................... 22
         Stockholders' Equity.......................................... 23
     Subsidiaries...................................................... 24
         The First Colony Service Corporation.......................... 24
         Life Financial Services Corporation........................... 24
         Life Capital Corporation...................................... 24
         Life Products Corp............................................ 24
         Seaboard Equity Corporation................................... 24
     Employees......................................................... 24
     Competition....................................................... 24
     Regulation........................................................ 25
         The Company................................................... 25
          Federal Activities Restrictions.............................. 25
          Limitations on Transactions with Affiliates.................. 26
          Restrictions on Acquisitions................................. 26
         The Bank...................................................... 27
          Insurance of Accounts........................................ 27
          Regulatory Capital Requirements.............................. 29

                                        i

<PAGE>



          Prompt Corrective Action..................................... 31
          Safety and Soundness......................................... 32
          Brokered Deposits............................................ 32
          Liquidity Requirements....................................... 32
          Qualified Thrift Lender Test................................. 33
          Restrictions on Capital Distributions........................ 33
          Loans-to-One Borrower........................................ 34
          Classified Assets............................................ 34
          Community Reinvestment....................................... 35
          Nationwide Banking........................................... 35
          Policy Statement on Nationwide Branching..................... 35
          Federal Home Loan Bank System................................ 35
          Federal Reserve System....................................... 35
     Federal Taxation.................................................. 36
         General....................................................... 36
         Fiscal Year................................................... 36
         Method of Accounting.......................................... 36
         Bad Debt Reserves............................................. 36
         Distributions................................................. 37
         Minimum Tax................................................... 37
         Audit by Internal Revenue Service............................. 37
     State Taxation.................................................... 37

Item 2.  Properties.................................................... 38

Item 3.  Legal Proceedings............................................. 40

Item 4.  Submission of Matters to a Vote of Security Holders........... 40

PART II................................................................ 40

Item 5.  Market for Registrant's Common Equity and Related 
          Stockholder Matters.......................................... 40

Item 6.  Selected Financial Data....................................... 40

Item 7.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations.................................... 40

Item 8.  Financial Statements and Supplementary Data................... 40

Item 9.  Changes in and Disagreements on Accounting and Financial
           Disclosure.................................................. 40

PART III............................................................... 40

Item 10. Directors and Executive Officers of the Registrant............ 40

Item 11. Executive Compensation........................................ 40

Item 12. Security Ownership of Certain Beneficial Owners and 
           Management.................................................. 41

Item 13. Certain Relationships and Related Transactions................ 41

PART IV................................................................ 41

Item 14. Exhibits, Financial Statement Schedules and Reports on 
           Form 8-K.................................................... 41

SIGNATURES............................................................. 43


                                       ii

<PAGE>

PART I

Item 1. Business

General

        Life Bancorp,  Inc. (the "Company") is a Virginia corporation  organized
in May 1994,  by Life Savings Bank,  FSB ("Life  Savings" or the "Bank") for the
purpose  of  acquiring  all of the  capital  stock  of the  Bank  issued  in the
conversion of the Bank to stock form (the "Conversion"),  which was completed on
October 11, 1994. At such date, the Company offered  10,910,625 shares of common
stock,  in  connection  with the  Conversion  of the Bank  from  mutual to stock
ownership,   and  the  Bank   reorganized  into  the  holding  company  form  of
organization  with the Company  becoming the holding  company for the Bank.  The
only  significant  assets of the Company are the capital stock of the Bank,  the
Company's  loan  to an  Employee  Stock  Ownership  Plan  ("ESOP"),  and the net
conversion  proceeds  retained  by the  Company.  To date,  the  business of the
Company has  consisted  of the business of the Bank.  At December 31, 1996,  the
Company had consolidated assets of $1.4 billion,  deposits of $732.3 million and
stockholders' equity of $150.9 million.

        Life Savings  operates  twenty retail  banking  offices in its immediate
market area - South Hampton  Roads,  Virginia,  which  consists of the cities of
Chesapeake,  Norfolk,  Portsmouth,  Suffolk and Virginia Beach. Hampton, Newport
News and  Williamsburg  are also a part of Hampton  Roads,  the  Bank's  primary
market  area,  which,  with  1.5  million  residents,   is  the  fourth  largest
metropolitan  statistical  area in the Southeast region of the United States and
the 27th largest in the Nation.

        Through its retail banking  offices,  Life Savings delivers a wide range
of banking  products and services to meet the needs of  individuals,  businesses
and organizations. The Bank attracts retail deposits from the general public and
the  business  community  through a variety of deposit  products.  Deposits  are
insured by the Savings Association Insurance Fund ("SAIF"),  administered by the
Federal Deposit Insurance Corporation ("FDIC"), within applicable limits.

        The Bank's lending  activities focus on meeting the needs of individuals
and  businesses  in its  market  area by  offering  permanent  and  construction
residential loans, second mortgages and equity lines of credit,  consumer loans,
commercial real estate and business loans, and lines of credit.

        The Company's  common stock trades on the Nasdaq National Market tier of
The  Nasdaq  Stock  Market(sm)  under the  symbol  "LIFB."  The Bank has been in
business since 1935. It is the largest  financial  institution  headquartered in
Hampton Roads and the largest savings bank in Virginia.

        The  Company,  as a  registered  savings and loan  holding  company,  is
subject  to  examination  and  regulation  by the  Office of Thrift  Supervision
("OTS")  and is subject  to  various  reporting  and other  requirements  of the
Securities and Exchange Commission  ("SEC").  The Bank is subject to examination
and  comprehensive  regulation  by  the  OTS,  which  is the  Bank's  chartering
authority and primary  regulator.  The Bank is also  regulated by the FDIC,  the
administrator  of the SAIF. The Bank is subject to certain reserve  requirements
established by the Board of Governors of the Federal  Reserve System ("FRB") and
is a member of the Federal Home Loan Bank  ("FHLB") of Atlanta,  which is one of
the 12 regional banks comprising the FHLB System.

Acquisition of Seaboard Bancorp, Inc.

        On January 31, 1996, the Company  completed its  acquisition of Seaboard
Bancorp,  Inc.  ("Seaboard"),  the holding  company for Seaboard  Savings  Bank,
F.S.B., ("Seaboard Savings"). Seaboard Savings, headquartered in Virginia Beach,
operated three offices, one each in the Virginia cities of Chesapeake,  Virginia
Beach and Portsmouth, The operations of Seaboard Savings were merged into the

                                        1

<PAGE>



Bank effective February 1, 1996,  representing a natural extension of the Bank's
existing  operations and strengthening its presence in the Hampton Roads market.
Results of operations of Seaboard,  beginning  February 1, 1996, are included in
the results of the Company.  For additional  information  regarding the Seaboard
acquisition,  see Note 2 to the Consolidated  Financial  Statements  included in
Item 8 hereof.

Lending Activities

        General.  At December 31, 1996, the Bank's net loans held for investment
totaled  $622.4  million,  or 43.8% of the total  assets at such date.  The Bank
originates conventional loans secured by first liens on single-family residences
located  primarily  in the Hampton  Roads area.  Conventional  residential  real
estate  loans are  loans  which  are  neither  insured  by the  Federal  Housing
Administration  ("FHA") nor partially guaranteed by the Veterans  Administration
("VA").  The Bank also  originates  loans secured by commercial  real estate and
multi-family (over four units) residential properties, consumer loans (including
home equity loans) and construction loans.  Virtually all of the Bank's mortgage
loans are secured by properties located in Virginia.

        Additional  information  regarding  the  Company's  loans  receivable is
provided in  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations  and in Note 5 to the  Consolidated  Financial  Statements
included in Items 7 and 8 hereof.

        Activity  in  Loans.   The   following   table  shows  the  Bank's  loan
originations,  sales and repayments during the periods  indicated.  The Bank did
not purchase any loans during the periods indicated.
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                       -----------------------------------------------------
                                                            1996               1995                1994
                                                       --------------     ---------------     --------------
                                                                       (Dollars in Thousands)
<S>                                                      <C>                 <C>                 <C>    
Gross loans at beginning of period                       $491,350            $442,055            $386,314
Originations of loans for
  investment:
  Single-family residential:
    Conventional                                           62,493              54,511              82,014
    FHA and VA                                              4,707               4,228               7,564
  Multi-family residential                                  1,012                 365                 153
  Commercial real estate                                   32,219              14,369               9,052
  Construction                                              5,902               4,132               8,523
  Land loans                                                2,102               3,320               2,104
  Consumer loans                                           35,777              17,848              13,317
                                                         --------            --------            --------
    Total originations for investment                     144,212              98,773             122,727
Loans originated for sale                                     880              10,451               5,881
                                                         --------            --------            --------
Total originations                                        145,092             109,224             128,608
Loans acquired from Seaboard                               69,525                  --                  --
Repayments                                                (37,311)            (49,478)            (59,400)
Loan sales                                                   (880)            (10,451)            (13,467)
                                                         --------            --------            --------
Net activity in loans                                     176,426              49,295              55,741
                                                         --------            --------            --------
Gross loans at end of period                             $667,776            $491,350            $442,055
                                                         ========            ========            ========
</TABLE>
        The  lending   activities   of  Life  Savings  are  subject  to  written
underwriting standards and loan origination procedures established by the Bank's
Board of Directors and management.  Applications for consumer loans are taken at
all of the Bank's branch offices by the branch manager or other  designated loan
officer.  Applications for  single-family  residential  first mortgage loans are
obtained  through  designated  branch  offices  and  loan  originators  who  are
employees of the Bank. The Bank's loan originators  will take loan  applications
outside of the Bank's offices at the customer's  convenience and are compensated
on a salary plus commission  basis.  Loan applications are forwarded to the Loan
Processing Department, which supervises the process of obtaining credit reports,
appraisals  and  other  documentation  supporting  the  loan  request.  The Bank
requires that a property's market value be determined in

                                        2

<PAGE>

connection with all new mortgage loans.  Such values generally are determined by
an independent appraiser selected from an appraisal panel approved by the Bank's
Board of Directors or by a member of the Bank's internal  appraisal staff.  Life
Savings  requires that title insurance and hazard insurance be maintained on all
security  properties and that flood insurance be maintained if the  improvements
are within a designated flood hazard area.

        Residential  mortgage loan  applications are obtained through  referrals
from real estate brokers and builders, existing customers and walk-in customers.
Residential   mortgage  loans  also  are  originated   through   correspondents.
Commercial  and  multi-family  real estate loan  applications  are obtained from
previous borrowers, direct solicitations by Bank personnel,  commercial mortgage
brokers  and  through  referrals.  Consumer  loans  originated  by the  Bank are
obtained through existing and walk-in  customers who have been made aware of the
Bank's  programs by advertising  and other means.  Automobile and boat loans are
also obtained  indirectly through an established  network of automobile and boat
dealers located in the Hampton Roads area.

        Applications for residential and commercial  mortgage loans are approved
in  accordance  with the  Bank's  Board of  Directors'  authorization  to a Loan
Approval Committee,  a committee comprised of certain designated officers of the
Bank.  Residential  and commercial  mortgage loans in excess of $350,000 must be
approved by the Bank's Board of Directors.  Loans under $150,000 may be approved
by certain  designated  officers of the Bank, while loans not exceeding $350,000
may be approved by the Loan Approval  Committee.  All loans which do not require
approval of the Bank's Board of Directors are submitted to the Board at its next
meeting for review, acknowledgement and approval ratification.

        Contractual  Principal  Repayments.   The  following  table  sets  forth
scheduled contractual  amortization of the Bank's loans at December 31, 1996, as
well as the dollar  amount of such loans which are scheduled to mature after one
year which have  fixed or  adjustable  interest  rates.  Demand  loans and loans
having no schedule of repayments  and no stated  maturity are reported as due in
one year or less.  Loans which are  callable at the Bank's  option at  specified
dates  are  reported  at their  contractual  maturity  date and are  treated  as
adjustable rate loans for purposes of this table.
<TABLE>
<CAPTION>
                                                          Principal Repayments Contractually Due
                                                              in Year(s) Ended December 31,
                                   -----------------------------------------------------------------------------------
                       Total at
                     December 31,                                       2000-       2002-        2008-
                        1996         1997       1998        1999        2001        2007         2013       Thereafter
                     ----------    --------   --------    --------    --------    ---------    ---------    ----------
                                                                     (Dollars in Thousands)

<S>                   <C>          <C>        <C>         <C>         <C>         <C>           <C>         <C>
Loans receivable:
  First mortgage
   loans              $589,134     $68,603    $29,502     $24,500     $39,509     $ 95,756      $89,590     $241,674
  Consumer and
   other loans          78,642      20,606     16,089      12,330      15,440        9,194        3,411        1,572
                      --------     -------    -------     -------     -------     --------      -------     --------
      Total(1)        $667,776     $89,209    $45,591     $36,830     $54,949     $104,950      $93,001     $243,246
                      ========     =======    =======     =======     =======     ========      =======     ========
-----------------------------
<FN>
(1)       Of the $578.6 million of loan principal  repayments  contractually due
          after  December 31, 1997,  $247.7 million have fixed rates of interest
          and $330.9 million have adjustable rates of interest.
</FN>
</TABLE>
        The  scheduled  contractual  amortization  of loans does not reflect the
expected  term of the  Bank's  loan  portfolio.  The  average  life of  loans is
substantially  less than their  contractual  terms because of prepayments,  call
features  and  due-on-sale  clauses,  which give the Bank the right to declare a
conventional loan immediately due and payable in the event,  among other things,
that the borrower  sells the real property  subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage  loan  rates are  higher  than rates on  existing  mortgage  loans and,
conversely,  decrease  when rates on  existing  mortgage  loans are higher  than
current  mortgage loan rates (due to  refinancings  at lower  rates).  Under the
latter  circumstances,   the  weighted  average  yield  on  loans  decreases  as
higher-yielding loans are repaid or refinanced at lower rates.

                                        3

<PAGE>

     Loan Portfolio Composition.  The following table sets forth the composition
of the Bank's loans held in portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                            December 31,
                               ----------------------------------------------------------------------------------------------------
                                     1996 (1)              1995                1994               1993                1992
                               -------------------  -------------------  -----------------  ------------------   ------------------ 
                                        Percent of           Percent of         Percent of          Percent of          Percent of
                                Amount    Total     Amount     Total     Amount    Total    Amount    Total      Amount    Total
                                ------   -------    ------    -------    ------   -------   ------   -------     ------    ------
                                                                        (Dollars in Thousands)
<S>                            <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>    
Mortgage loans:
  Single-family residential:
    Conventional               $370,956    55.55%  $307,584    62.60%  $281,507    63.68%  $234,085    62.10%  $280,261    63.27%
    FHA/VA                       22,582     3.38     22,209     4.52     21,993     4.97     22,217     5.89     24,205     5.46
  Multi-family                   22,686     3.40     24,926     5.07     22,663     5.13     23,786     6.31     24,452     5.52
  Construction                   58,228     8.72     25,351     5.16     21,748     4.92      3,937     1.04      6,046     1.36
  Commercial real estate        110,991    16.62     51,239    10.43     44,543    10.08     41,607    11.04     46,634    10.53
  Land loans                      3,691     0.55      4,986     1.01      2,877     0.65      2,261     0.60      3,758     0.85
                               --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
    Total mortgage loans        589,134    88.22    436,295    88.80    395,331    89.43    327,893    86.98    385,356    86.99
Consumer loans:
  Home equity                    34,425     5.16     27,826     5.66     23,768     5.38     26,998     7.16     33,071     7.47
  Automobile                     31,072     4.65     15,970     3.25     11,402     2.58     11,612     3.08     13,437     3.03
  Lines of credit                 5,608     0.84      5,803     1.18      6,358     1.44      6,414     1.70      6,765     1.53
  Other                           7,537     1.13      5,456     1.11      5,196     1.17      4,051     1.08      4,324     0.98
                               --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
    Total consumer loans         78,642    11.78     55,055    11.20     46,724    10.57     49,075    13.02     57,597    13.01
                               --------   ------   --------   ------   --------   ------   --------   ------   --------   ------
    Total loans receivable      667,776   100.00%   491,350   100.00%   442,055   100.00%   376,968   100.00%   442,953   100.00%
                               --------   ======   --------   ======   --------   ======   --------   ======   --------   ======
Less:
  Allowance for loan
    losses                        9,656               4,438               4,459               3,274               2,741
  Loans-in-process               31,631              16,062              11,991               2,703               3,492
  Purchase accounting
    discount                        757                 481                 581                 865               1,343
  Unearned discount               1,134                 595                 579               1,157               2,127
  Net deferred loan
    origination fees              2,142               2,068               2,875               1,975               2,604
  Discount on loans
    purchased                        51                 282                 379                 484                 595
                               --------            --------            --------            --------            --------
    Loans receivable, net      $622,405            $467,424            $421,191            $366,510            $430,051
                               ========            ========            ========            ========            ========

<FN>
(1)     Includes loans obtained in the Seaboard acquisition.
</FN>
</TABLE>

                                        4

<PAGE>

        Single-Family  Residential Loans. The Bank's  single-family  residential
mortgage  loans  consist  of  conventional   loans  and,  to  a  lesser  extent,
FHA-insured  and   VA-guaranteed   loans.  At  December  31,  1996,  the  Bank's
conventional  single-family  loans amounted to $371.0  million,  or 55.6% of the
total loan  portfolio,  an  increase  of $63.4  million,  or 20.6%,  compared to
December 31, 1995. This increase resulted from the acquisition of Seaboard and a
lower  volume  of loan  sales as well as  internal  growth  in the  Bank's  loan
portfolio.  FHA/VA loans  amounted to $22.6  million,  or 3.4% of the total loan
portfolio.  Substantially all of the Bank's  single-family  residential mortgage
loans are secured by  properties  located in  Virginia,  primarily in the Bank's
Hampton Roads market area and, to a lesser extent,  the Richmond,  Lynchburg and
Roanoke  metropolitan  areas.  The vast majority of  residential  mortgage loans
originated by the Bank are originated under terms and documentation which permit
their  sale to the  Federal  Home Loan  Mortgage  Corporation  ("FHLMC")  or the
Government National Mortgage Association  ("GNMA").  During 1994, and 1995, and,
to a much lesser extent,  1996, the Bank,  consistent  with its  asset/liability
management  strategies,  sold certain of its longer term fixed-rate  residential
mortgage loans. See "- Mortgage Banking Activities."

        The  single-family  residential  mortgage  loans  offered  by  the  Bank
currently consist of fixed-rate loans,  adjustable-rate  mortgage ("ARM") loans,
loans  which have a one-time  adjustment  feature,  and  convertible  ARMs which
permit the borrower to convert the loan to a fixed-rate.

        Fixed-rate  loans generally have  maturities  ranging from ten to thirty
years and are fully  amortizing  with monthly loan payments  sufficient to repay
the total  amount of the loan with  interest  by the end of the loan  term.  The
Bank's fixed-rate loans are originated under terms, conditions and documentation
which permit them to be sold to U.S. Government-sponsored  agencies, such as the
FHLMC and the GNMA, or other investors in the secondary market for mortgages. At
December  31,  1996,  $152.5  million,  or 39.0%,  of the  Bank's  single-family
residential mortgage loans were fixed-rate loans.

        The  adjustable-rate  loans currently  offered by the Bank have interest
rates which  initially  adjust  every one,  three,  five,  seven or ten years in
accordance with a designated index, such as U.S. Treasury obligations,  adjusted
to  a  constant  maturity  ("CMT"),   plus  a  stipulated   margin.  The  Bank's
adjustable-rate single-family residential real estate loans generally have a cap
of 2% on any increase or decrease in the interest rate at any  adjustment  date,
and a cap of 6% over the life of the loan, except for certain seven and ten year
ARMs on which the caps are 3% and 5%, respectively.  The Bank's  adjustable-rate
loans  require  that any  payment  adjustment  resulting  from a  change  in the
interest  rate  of an  adjustable-rate  loan be  sufficient  to  result  in full
amortization  of the loan by the end of the loan term and,  thus,  do not permit
any of the increased payment to be added to the principal amount of the loan, or
so-called negative amortization. Certain ARMs permit the borrower, at his or her
option,  upon  payment of a  pre-determined  fee,  to convert  the loan during a
limited  time period to a fixed-rate  loan based upon a designated  index plus a
margin.   At  December  31,  1996,   $241.0  million  or  61.0%  of  the  Bank's
single-family residential mortgage loans were adjustable-rate loans.

        Adjustable-rate  loans  decrease  the risks  associated  with changes in
interest  rates but involve other risks,  primarily  because,  as interest rates
increase, the borrower's required loan payment increases to the extent permitted
by the  terms  of the  loan,  thereby  increasing  the  potential  for  default.
Moreover,  as interest  rates  increase,  the  marketability  of the  underlying
collateral property may be adversely affected by higher interest rates. The Bank
believes that these risks,  which have not had a material  adverse effect on the
Bank  to date  because  of the  generally  declining  and  lower  interest  rate
environment in recent years,  generally are less than the risks  associated with
holding fixed-rate loans in an increasing interest rate environment.

        The Bank  currently  will lend up to 95% of the  appraised  value of the
property securing a single-family residential loan with a principal amount up to
$300,000.  The Bank requires that private mortgage  insurance be obtained if the
principal amount of the loan exceeds 80% of the value of the security  property,
except for certain  special  Community  Reinvestment  loan programs.  The Bank's
current policy

                                        5

<PAGE>



is that  single-family  residential  loans with principal  amounts  greater than
$300,000 and up to $350,000 generally will have  loan-to-value  ratios of 90% or
less and that  single-family  residential  loans with principal  amounts greater
than $350,000 will have loan-to-value ratios of 75% or less.

        Multi-Family  Residential and Commercial  Real Estate Loans.  The Bank's
multi-family   residential  and  commercial  real  estate  loans  generally  are
one-year, three-year or five-year adjustable-rate loans indexed to U.S. Treasury
obligations  of similar  terms plus a margin.  Usually,  fees of 1% to 2% of the
principal loan balances are charged to the borrower upon closing. Although terms
for  multi-family  residential  and  commercial  real estate loans may vary, the
Bank's underwriting standards generally provide for terms of up to 25 years with
amortization of principal over the term of the loan and loan-to-value  ratios of
not more than 85% for commercial real estate and multi-family residential loans.
While the Bank originates long-term multi-family residential and commercial real
estate loans, such loans typically include  provisions which permit the Bank, at
its sole  discretion,  to call the loan at  predetermined  dates,  ranging  from
annually to up to a ten-year period,  throughout the term of the loan. Such call
provisions reduce the  interest-rate  risk to the Bank of such loans by allowing
the Bank to require repayment of the loan or, more typically, permit the Bank to
renegotiate the interest rate.  Generally,  the Bank obtains personal guarantees
of the  principals  as  additional  security  for  commercial  real  estate  and
multi-family  residential  loans and requires  that the borrower have at least a
15% equity  investment in any  commercial  real estate  property and 10% for any
multi-family property.

        The Bank  evaluates  various  aspects  of  commercial  and  multi-family
residential  real estate loan  transactions in an effort to mitigate risk to the
extent  possible.  In underwriting  these loans,  consideration  is given to the
stability of a  property's  cash flow  history,  future  operating  projections,
current and  projected  occupancy,  location  and physical  condition.  The Bank
generally  imposes a debt coverage ratio (the ratio of net cash from  operations
before  payment  of debt  service  to debt  service)  of not less  than 110% for
multi-family  loans and commercial real estate loans. The underwriting  analysis
also  includes  credit  checks and a review of the  financial  condition  of the
borrower and guarantor(s),  if applicable.  To substantiate  property values for
every commercial real estate and  multi-family  loan  transaction,  an appraisal
report is prepared by a state-licensed and certified  appraiser  commissioned by
the Bank or by the Bank's appraisal staff. All appraisal reports are reviewed by
the Bank's appraisal department prior to the closing of the loan.

        At December 31, 1996,  loans secured by commercial  real estate amounted
to $111.0 million, or 16.6%, of the Bank's total loan portfolio,  an increase of
$59.8  million,  or 116.6%,  compared to $51.2 million,  or 10.4%,  of the total
portfolio,  at December 31, 1995. This increase resulted from the acquisition of
Seaboard as well as the Bank's  strategy to  increase  its market  share of well
underwritten  commercial  real estate loans.  The Bank's  commercial real estate
loans are secured by office buildings,  shopping  centers,  warehouses and other
industrial  buildings,  hotels,  motels and other commercial  properties located
primarily in the Bank's market area.

        Multi-family  residential  loans amounted to $22.7 million,  or 3.4%, of
the Bank's total loan portfolio at December 31, 1996, compared to $24.9 million,
or  5.1%,  of  the  total  portfolio,  at  December  31,  1995.  Of  the  Bank's
multi-family  residential loans at December 31, 1996, $10.9 million were secured
by properties with 20 units or less and $11.8 million were secured by properties
with 21 units or more.

        Multi-family  and  commercial  real estate loans  generally  have higher
rates and entail different and significant  risks when compared to single-family
residential lending because such loans typically involve larger loan balances to
individual  borrowers  and  because  the  payment  experience  on such  loans is
typically dependent on the successful operation of the project or the borrower's
business.  These risks can also be  significantly  affected by supply and demand
conditions  in the local market for  apartments,  offices,  warehouses  or other
commercial  space.  The Bank  attempts to minimize its risk exposure by limiting
such lending to proven  developers/owners,  primarily considering borrowers with
existing

                                        6

<PAGE>



operating  performance  which  can  be  analyzed,  requiring  conservative  debt
coverage  ratios,  and  periodically   monitoring  the  operation  and  physical
condition of the collateral.

        Construction  Loans. The Bank's  construction loan portfolio consists of
loans to  individuals  to construct  their  primary  residences,  to custom home
builders and to developers.  The loans to  individuals  and custom home builders
generally have a maximum term of twelve months,  have variable rates of interest
based upon the prime rate as quoted in the  eastern  edition of The Wall  Street
Journal ("Prime Rate") plus a margin,  have loan-to-value  ratios of 85% or less
of the  appraised  value  upon  completion  and  generally  do not  require  the
amortization  of principal  during the term.  The Bank  typically  requires that
permanent  financing,  with the Bank or some other lender,  be in place prior to
closing a construction  loan to an  individual,  but may make loans without such
requirement to custom home builders or developers.

        At December  31,  1996,  the  majority of the Bank's  construction  loan
portfolio  consisted of  construction  loans and lines of credit to  developers.
Such loans generally have terms of 36 months or less, have maximum loan-to-value
ratios of the lesser of 75% of the appraised value upon completion or 85% of the
discounted prospective future value upon completion and generally do not require
the amortization of the principal during the term. Generally, the loans are made
with  adjustable  rates of interest  based on the Prime Rate plus a margin.  The
Bank generally  receives  origination fees, which range from 0.5% to 2.0% of the
commitment.  The  majority  of such  loans  consist of loans to  selected  local
developers  with whom the Bank is familiar to build  single-family  dwellings on
either a pre-sold or speculative basis;  however,  the Bank generally limits the
number of unsold units which are under construction. The borrower is required to
have a minimum of 15% equity in the  project.  Loan  proceeds  are  disbursed in
stages after inspections of the project indicate that such disbursements are for
costs  already  incurred and which have added to the value of the  project.  The
Bank's  construction  loans include loans to developers to acquire the necessary
land,  develop the site and construct the residential units ("ADC loans").  Upon
the release of any lot to a buyer, the Bank generally  requires the developer to
make a payment  on the loan  equal to the  greater  of 110% of the pro rata loan
advanced  on such  lot or 70% of the  sales  price.  The  Bank  also  originates
construction loans for the construction of commercial properties.

        At December 31, 1996, construction loans totaled $58.2 million, or 8.7%,
of the total loan portfolio,  an increase of $32.9 million, or 129.7%,  compared
to $25.4  million,  or 5.2% of the loan  portfolio at December  31,  1995.  This
increase  resulted  from  the  acquisition  of  Seaboard  as well as the  Bank's
strategy to increase its market share in construction  lending.  At December 31,
1996, the  construction  loan portfolio  consisted of $53.3 million,  which were
secured  by  commercial  properties  and $4.9  million,  which  were  secured by
residential properties.

        Prior to  making a  commitment  to fund a  construction  loan,  the Bank
requires  an  appraisal  of  the  property  by the  Bank's  appraisal  staff  or
independent  state-licensed  and certified  appraisers  approved by the Board of
Directors.  Officers of the Bank also review and inspect each  project  prior to
the  commencement of construction.  In addition,  the project is inspected by at
least one officer or contract agent of the Bank prior to every  disbursement  of
funds  during the term of the  construction  loan.  Such  inspection  includes a
review  for  compliance  with  the  construction   plans,   including  materials
specifications.

        Construction   financing  usually  has  higher  interest  rates  and  is
generally  considered to involve a higher degree of risk of loss than  long-term
financing  on  improved,   owner-occupied   real  estate.  Risk  of  loss  on  a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's  value at completion of  construction  or development  and the
estimated cost (including  interest) of  construction.  During the  construction
phase,  a number of factors  could  result in delays and cost  overruns.  If the
estimate of value proves to be  inaccurate,  the Bank may be  confronted,  at or
prior to the  maturity of the loan,  with a project,  when  completed,  having a
value which is insufficient to assure full repayment.

                                        7

<PAGE>




        Land   Loans.   The  Bank   funds   land   loans  to   individuals   and
builders/developers for their use in future construction activity. Loans in this
category include:  residential consumer lot loans; loans for the acquisition and
development   of  land  (loans  to  finance   the   purchase  of  land  and  the
accomplishment of all improvements  required to convert it to developed building
lots);  loans for the acquisition of developed  building lots; and loans secured
by  vacant  land.  Residential  consumer  lot loans  generally  are  secured  by
unimproved lots in the Bank's market area. Such loans are funded for the purpose
of constructing a residence to be occupied by the borrower.  The Bank also makes
land  acquisition  and development  loans to experienced and financially  strong
builders and developers in order to provide additional construction and mortgage
lending  opportunities  for the Bank. Loans are also made available to qualified
builders  and  developers  for the purpose of  acquiring  unimproved  land to be
developed for residential  building  sites,  residential  housing  subdivisions,
multi-family  dwellings,  and a variety of commercial  uses. Land loans are also
available to facilitate  the  acquisition  of developed  lots for the purpose of
single  family,   townhomes  and  condominium   construction.   Land  loans  are
underwritten  and  processed  by the Bank in much the same manner as  commercial
construction and commercial real estate loans. Land lending  generally  involves
additional  risks  compared  to  loans  secured  by  single  family  properties;
therefore,  the Bank carefully  evaluates the borrowers'  assumptions  and their
ability to service the loans if the original  assumptions  are  incorrect due to
changes in market  conditions and absorption  rates. Land loans amounted to $3.7
million, or 0.6%, of the Bank's total loan portfolio at December 31, 1996.

        Consumer  Loans.  The Bank offers  consumer  loans in its primary market
area in order to  provide  a full  range of  retail  financial  services  to its
customers.  At December 31, 1996,  consumer loans amounted to $78.6 million,  or
11.8%,  of the Bank's total loan  portfolio,  an increase of $23.6  million,  or
42.8%,  compared  to $55.1  million,  or $11.2% of the total loan  portfolio  at
December 31, 1995.  This increase  resulted from the  acquisition of Seaboard as
well as the Bank's strategy to increase its market share in consumer loans.

        The largest  component  of the Bank's  consumer  loan  portfolio is home
equity  loans,  which are  secured by the  underlying  equity in the  borrower's
residence or second home.  Home equity loans are amortizing  loans and generally
have fixed interest rates for fixed-term loans up to 15 years. Home equity loans
with terms  greater  than 15 years and up to 30 years have a provision  allowing
for the loan to be called every three or five years.  At December 31, 1996, home
equity  loans  amounted  to $34.4  million,  or 5.2%,  of the Bank's  total loan
portfolio.

        The second  largest  component of the Bank's  consumer loan portfolio is
automobile loans, both for new and used vehicles. The majority of such loans are
originated  indirectly  through automobile dealers located in the Bank's primary
market  area.  The term of such loans  generally  cannot  exceed 72 months  with
respect to new car financing  and 48 months with respect to used car  financing.
The Bank  requires all  borrowers to maintain  automobile  insurance,  including
collision,  fire and theft,  with the Bank listed as loss payee. At December 31,
1996,  automobile  loans  totaled  $31.1  million,  or 4.7%,  of the total  loan
portfolio.

        At December 31, 1996, the Bank's  remaining  consumer loan portfolio was
comprised  of secured  and  unsecured  lines of credit,  which  amounted to $5.6
million, or 0.8%, of the Bank's total loan portfolio,  and other consumer loans,
which  amounted to $7.5 million,  or 1.1%, of the Bank's total loan portfolio at
such date.  The secured  revolving  lines of credit  offered by the Bank consist
solely of home  equity  lines of  credit in  amounts  of up to  $100,000.  Other
consumer loans include both MasterCard and VISA credit cards, which totaled $1.6
million at December  31,  1996,  and other loans such as boat loans and personal
and other consumer credit.

        Consumer loans  generally  have shorter terms and higher  interest rates
than mortgage  loans but generally  involve more credit risk than mortgage loans
because of the type and nature of the  collateral  and,  in certain  cases,  the
absence  of  collateral.  These  risks are not as  prevalent  in the case of the
Bank's  consumer  loan  portfolio,  however,  because a high  percentage  of the
portfolio is comprised of home equity

                                        8

<PAGE>



loans and home  equity  lines of credit  which are  secured  by real  estate and
underwritten  in a manner  such that they  result  in a  lending  risk  which is
substantially similar to single-family residential loans.

        Mortgage  Banking.  Due to customer  preference  for  fixed-rate  loans,
especially  during the declining and relatively  lower interest rate environment
in  recent  years,  the Bank  continued  to  originate  such  loans,  and sold a
substantial  amount of the  long-term  (15 years or more),  fixed-rate  mortgage
loans originated during 1994 and 1995, and, to a lesser extent, during 1996. The
Bank's net gains on sales of mortgage  loans  amounted to $12,000,  $142,000 and
$95,000 during the years ended December 31, 1996,  1995 and 1994,  respectively.
The Bank had no  mortgage  loans  held for sale at  either  December  31,  1996,
December 31, 1995 or December 31, 1994.

        The  Bank's  mortgage  loans  sold to others  are sold in groups or on a
loan-by-loan  basis  primarily to the FHLMC. A period of 30 to 90 days generally
lapses  between  the  closing  of the loan by the Bank  and its  purchase  by an
investor.  Mortgages with established  interest rates generally will decrease in
value during periods of increasing interest rates. Accordingly,  fluctuations in
prevailing  interest  rates may result in a gain or loss to the Bank as a result
of adjustments to the carrying value of loans held for sale or on sale of loans.
Because of the  increasing  volatility in interest  rates during 1994,  the Bank
determined to originate  and retain for  portfolio  more ARM loans and to retain
for  portfolio  a larger  portion  of  newly  originated  long-term,  fixed-rate
mortgage loans.

        During  1995,  the  flattening  yield  curve  had a  dramatic  effect on
lending,  by making ARM loans less attractive for potential borrowers than fixed
rate loans; however, the Bank was able to originate a total of $109.2 million in
loans,   of  which  $36.7  million  were   fixed-rate  and  $72.5  million  were
adjustable-rate.  Because  of the  concern  for the  impact on the net  interest
margin and the  interest-rate  risk  position of the Bank,  approximately  $10.5
million  of lower  yielding  fixed-rate  loans were  originated  for sale in the
secondary   market   during  1995,   compared  to  $5.9  million   during  1994.
Nevertheless, the Bank's net loans receivable rose $46.2 million, or 11.0%, from
$421.2 million ($177.0 million fixed-rate and $244.2 million adjustable-rate) at
the end of 1994, to $467.4 million ($193.2 million fixed-rate and $274.2 million
adjustable-rate) at the end of 1995.

        In 1996 the interest  rate yield curve  steepened  slightly to the level
that  many  potential  borrowers  preferred  ARM  loans  once  again.  The  Bank
originated  $145.1 million in loans during the year, of which $93.2 million were
ARM loans.  In an effort to leverage  the  Company,  all except  $880,000 of the
loans  were  retained  in its  portfolio.  The  result  was that  average  loans
increased  $130.0 million during the year,  including the $69.2 million in loans
from the Seaboard acquisition.

        Borrowers  are  generally   charged  an  origination  fee,  which  is  a
percentage  of the  principal  balance  of the  loan.  In  accordance  with  the
provisions  of  Statement  of Financial  Accounting  Standards  ("SFAS") No. 91,
"Accounting for  Nonrefundable  Fees and Costs  Associated  with  Originating or
Acquiring  Loans and Initial  Direct Costs of Leases," the various fees received
by the  Bank in  connection  with the  origination  of loans  are  deferred  and
amortized as a yield  adjustment  over the lives of the related  loans using the
interest method.  However,  when such loans are sold, the remaining  unamortized
fees  (which  are all or  substantially  all of such fees due to the  relatively
short period during which such loans are held) are recognized as income.

        The Bank generally retains the servicing on loans sold. In addition, the
Bank  services  substantially  all  of  the  loans  which  are  retained  in its
portfolio.  Loan  servicing  includes  collecting  and remitting  loan payments,
accounting  for  principal  and interest,  making  advances to cover  delinquent
payments,  making  inspections  as required of  mortgaged  premises,  contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied  defaults and generally  administering the loans. Funds that
have been  escrowed by borrowers for the payment of  mortgage-related  expenses,
such  as  property  taxes  and  hazard  and  mortgage  insurance  premiums,  are
maintained in noninterest-bearing

                                        9

<PAGE>



accounts at the Bank. At December 31, 1996,  the Bank had $644,000  deposited in
escrow accounts for its loans serviced for others.

        The following table presents information regarding the loans serviced by
the Bank for others at the dates indicated.
<TABLE>
<CAPTION>
                                                                            December 31,
                                                    -------------------------------------------------------
                                                          1996                 1995                1994
                                                    ---------------      ---------------       ------------
                                                                   (Dollars in Thousands)
<S>                                                      <C>                 <C>                 <C>   
Mortgage loans serviced for others:
  FHLMC                                                  $131,514            $147,871            $152,359
  Virginia Housing Development 
    Authority ("VHDA")                                      7,640               7,838               7,960
  GNMA                                                     17,646              19,352              20,883
  Other investors                                             166                 291                 244
                                                         --------            --------            --------
    Total loans serviced for others                      $156,966            $175,352            $181,446
                                                         ========            ========            ========
</TABLE>
        The Bank receives fees for servicing  mortgage  loans,  which  generally
amount to 0.25% per annum,  (0.44% in the case of loans  serviced for the GNMA),
on the declining  principal  balance of the mortgage  loans.  Such fees serve to
compensate  the Bank for the costs of performing the servicing  function.  Other
sources of loan servicing revenues include late charges on delinquent  payments.
For the years ended December 31, 1996, 1995 and 1994, the Bank earned gross fees
of $577,000, $636,000 and $674,000, respectively, from loan servicing.

        During  1995 and 1996,  in an effort to price  conventional,  VA and FHA
fixed-rate, fixed-term loans more competitively, the Bank began pricing selected
loans for sale "servicing  released." By selling servicing,  the Bank is able to
offer a more competitive rate to borrowers  resulting in an increased demand for
loans.  Relationships  were established with several  wholesale loan purchasers.
During 1996 and 1995,  $781,000 and $1.9  million,  respectively,  of VA and FHA
fixed-rate, fixed-term loans were sold servicing released to wholesalers.

        Loans-to-One   Borrower   Limitations.    Current   regulations   impose
limitations on the aggregate  amount of loans that a savings  institution  could
make to any one borrower,  including related entities. The permissible amount of
loans-to-one  borrower  follows the national bank standard for all loans made by
savings  institutions,  which generally does not permit loans-to-one borrower to
exceed 15% of  unimpaired  capital and  surplus.  Loans in an amount equal to an
additional 10% of unimpaired  capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. At December 31,
1996,  Life  Savings'  five largest  loans or groups of  loans-to-one  borrower,
including  related  entities,  ranged from an  aggregate of $6.3 million to $9.2
million,  and the Bank's  loans-to-one  borrower limit was $18.2 million at such
date.  Of the Bank's five largest  loans or groups of  loans-to-one  borrower at
December 31, 1996,  none were deemed to be  non-accruing,  although one borrower
had an outstanding balance of $6.4 million, of which $1.3 million was classified
as substandard  and $3.4 million was  designated as special  mention due to past
delinquencies  and financial  difficulties of certain of the principals.  See "-
Asset Quality - Potential Problem Loans."

Asset Quality

        General. When a borrower fails to make a required payment on a loan, the
Bank  attempts to cure the  deficiency  by  contacting  the borrower and seeking
payment.  These  contacts are generally  made 15 days after a payment is due. In
most cases,  deficiencies are cured promptly. If a delinquency  continues,  late
charges are assessed and additional  efforts are made to collect the loan. While
the Bank  prefers to work with  borrowers  to resolve  such  problems,  when the
account becomes 90 days delinquent,  the Bank generally  pursues  foreclosure or
other proceedings, as necessary, to minimize any potential loss.


                                       10

<PAGE>

        Impaired Loans.  Effective January 1, 1995, the Company adopted SFAS No.
114, as amended by SFAS No. 118. SFAS No. 114, as amended,  provides that a loan
is impaired when, based on current  information and events,  it is probable that
the creditor will be unable to collect all  principal  and interest  amounts due
according  to the  contractual  terms of the loan  agreement.  SFAS No.  114, as
amended,  requires that impaired loans be measured based on the present value of
the expected  future cash flows,  discounted  at the loan's  effective  interest
rate.  The  effective  interest  rate of a loan is  defined  as the  contractual
interest  rate,  adjusted  for any  deferred  loan  fees or costs,  premiums  or
discounts  existing at the inception or  acquisition of the loan. If the loan is
collateral  dependent,  as a practical  expedient,  impairment can be based on a
loan's observable market price or the fair value of the collateral. The value of
the loan is adjusted  through a  valuation  allowance  created  through a charge
against income.  Residential  mortgages,  consumer  installment  obligations and
credit  cards  may  be  excluded.   Loans  that  were  treated  as  in-substance
foreclosures  under  previous  accounting  pronouncements  are  considered to be
impaired  loans and under SFAS No.  114,  as  amended,  will  remain in the loan
portfolio.

        A loan may be placed on  non-accrual  status  and not  classified  as an
impaired loan when in the opinion of  management,  based on current  information
and events, it is probable that the Bank will collect all principal and interest
amounts due  substantially  consistent  with the  contractual  terms of the loan
agreement.  Interest  income for impaired  loans is generally  recognized  on an
accrual  basis  unless it is deemed  inappropriate  to do so. In those  cases in
which the receipt of interest payments is deemed more uncertain,  the cash basis
of income recognition is utilized.  Loans are placed on non-accrual status when,
in the judgment of management,  the probability of timely collection of interest
is deemed to be insufficient to warrant further accrual.  As a matter of policy,
the Bank does not accrue  interest on loans past due 90 days or more except when
the  estimated  value  of the  collateral  and  collection  efforts  are  deemed
sufficient to ensure full recovery. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income.

        The  following  table  sets  forth  information  relating  to the Bank's
recorded investment in impaired loans at or during the periods indicated.  Since
the data relating to impaired loans was not collected until January 1, 1995, the
date the Company  adopted  SFAS No. 114,  as amended,  certain  data for periods
prior to such date is not available.
<TABLE>
<CAPTION>
                                                          Year Ended            Year Ended           Year Ended
                                                          December 31,          December 31,         December 31,
                                                            1996 (1)               1995                 1994
                                                       ---------------        ---------------      ---------------
                                                                          (Dollars in Thousands)
<S>                                                           <C>                 <C>                 <C>   
Impaired loans for which there is a related
allowance for credit losses                                   $9,022              $4,223              $4,129

Impaired loans for which there is no related
allowance for credit losses                                       --                  --                  --

Total impaired loans                                          $9,022              $4,223              $4,129
                                                              ======              ======              ======

Allowance for credit losses on impaired
loans                                                         $3,500              $  768              $  702
                                                              ======              ======              ======

Average impaired loans during the period                      $9,659              $4,493                 N/A
                                                              ======              ======              ======

Interest income recognized on impaired
loans during the time within the period that
the loans were impaired                                       $  506              $  430                 N/A
                                                              ======              ======              ======

Interest income recognized on impaired  
loans using a  cash-basis  method of
accounting during the time within the
period that the loans were impaired                           $  506              $  430                 N/A
                                                              ======              ======              ======
<FN>
-----------------------------
(1)     Includes loans obtained in the Seaboard acquisition which were designated as impaired loans by the Bank.
</FN>
</TABLE>
                                       11

<PAGE>
        Troubled  Debt  Restructurings.   Under  Generally  Accepted  Accounting
Principles  ("GAAP"),   the  Bank  is  required  to  account  for  certain  loan
modifications or restructurings as "troubled debt  restructurings."  In general,
the  modification  or  restructuring  of a  debt  constitutes  a  troubled  debt
restructuring  if the  Bank,  for  economic  or  legal  reasons  related  to the
borrower's financial difficulties,  grants a concession to the borrower that the
Bank  would  not  otherwise  consider  under  current  market  conditions.  Debt
restructurings or loan  modifications  for a borrower do not necessarily  always
constitute   troubled   debt   restructurings,   however,   and  troubled   debt
restructurings do not necessarily result in non-accrual loans. The Bank had $2.5
million of troubled debt restructurings,  net of specific reserves,  at December
31, 1996.  Included in the Bank's troubled debt  restructurings  at December 31,
1996,  is one loan  with a  carrying  value  of $1.1  million,  net of  specific
reserves, which is secured by an office warehouse complex. At December 31, 1996,
this loan was  classified  substandard.  The loan was added as a  troubled  debt
restructuring as a result of the purchase of Seaboard  Savings.  At December 31,
1996,  this loan was  current.  The  remaining  $1.4  million of  troubled  debt
restructurings  at December 31, 1996,  consisted of multi-family  and commercial
properties located in Virginia Beach and Norfolk.

        Non-Performing  Assets.  The  following  table  sets  forth  information
relating  to the  Bank's net  carrying  value of its  non-performing  assets and
troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
                                                                                   December 31,
                                               ---------------------------------------------------------------------------------
                                                  1996 (1)           1995              1994             1993             1992
                                               ------------     ------------      ------------     ------------     ------------
                                                                              (Dollars in Thousands)
<S>                                                <C>               <C>             <C>             <C>               <C>   
Non-performing assets:
  Non-accruing loans:
    Mortgage loans:
      Single-family:
        Conventional                               $1,498            $  859          $   341         $   943           $ 1,554
        FHA/VA                                        698               245              102             163               139
      Multi-family                                     --                --              297             185                --
      Commercial                                       46               436              778              39             1,812
    Consumer loans                                    308               195               98             182               151
                                                   ------            ------          -------         -------           -------
  Total non-accruing loans                          2,550             1,735            1,616           1,512             3,656
  Real estate owned, net (2)                        1,202               622              870           9,368            15,016
                                                   ------            ------          -------         -------           -------

Total non-performing assets                        $3,752            $2,357          $ 2,486         $10,880           $18,672
                                                   ======            ======          =======         =======           =======

Troubled debt restructurings, net (3)              $2,464            $4,525          $ 8,511         $ 9,698           $ 8,857
                                                   ======            ======          =======         =======           =======

Total non-performing assets and
    troubled debt restructurings                   $6,216            $6,882          $10,997         $20,578           $27,529
                                                   ======            ======          =======         =======           =======

Non-accruing loans to total loans
    held for investment                              0.41%             0.37%            0.38%           0.41%             0.85%
                                                   ======            ======          =======         =======           =======

Total non-performing assets to total
    assets                                           0.26%             0.21%            0.25%           1.41%             2.70%
                                                   ======            ======          =======         =======           =======

Total non-performing assets and
    troubled debt restructurings to
    total assets                                     0.44%             0.63%            1.10%           2.67%             3.98%
                                                   ======            ======          =======         =======           =======

<FN>
-----------------------------
(1)     Includes assets obtained in the Seaboard acquisition.
(2)     Amounts are net of the allowance for real estate owned which amounted to $30,000, $33,000, $0, $5.1
        million and $386,000 at December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(3)     Amounts are net of specific valuation allowances which totaled $3.5 million, $719,000, $990,000, $0 and
        $0 at December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
</FN>
</TABLE>

                                       12

<PAGE>

        The Bank's real estate owned ("REO") at December 31, 1996,  consisted of
18  properties,  substantially  each of which had  carrying  values of less than
$175,000.  During 1996, the Bank sold 12 properties (8 single family residences,
2 hotel condominiums,  1 multi-family  dwelling and one parcel of land which was
acquired  through a deed in lieu of foreclosure) for an aggregate sales price of
approximately  $4.0 million.  After  satisfying  superior liens,  deductions for
valuation allowances,  repairs,  holding costs and settlement expenses, the Bank
realized  a net gain on the sale of these  properties  of  $300,000.  Additional
information  regarding  the  Company's  REO is in  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations  and in Note 7 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.

        Potential  Problem Loans. In addition to the loans included in the above
impaired  loans and  non-performing  assets  and  troubled  debt  restructurings
tables,  at December 31, 1996,  the Bank had loans totaling $10.2 million which,
even though they were not impaired or categorized as a  non-performing  asset or
troubled debt restructuring, were designated as substandard or special mention.

        At December 31, 1996, the Bank had eight  performing loans totaling $5.5
million to five  borrowers,  which the Bank had designated as  substandard.  One
such loan, a performing construction loan, is secured by a retirement home under
construction  in  Virginia  Beach.  In  August  1996 the  partially  constructed
building was substantially destroyed by fire and the Bank classified the loan as
substandard.  At  December  31,  1996,  the loan  was  current  as the  borrower
continues to fund the interest  payments and plans to rebuild.  Of the remaining
seven  loans,  two  loans  totaling  $1.5  million  are  secured  by  commercial
properties located in Norfolk,  Virginia;  three loans,  totaling $600,000,  are
secured by commercial  properties  in Virginia  Beach;  and two loans,  totaling
$200,000,  are secured by various multi-family  properties and developed lots in
Norfolk,  Virginia.  At this time, the Bank does not anticipate losses on any of
these loans.

        Additionally,  at December 31, 1996, there were three performing  loans,
totaling $4.7 million, to two borrowers which the Bank had designated as special
mention. All three of these loans are secured by multi-family  dwelling units in
Norfolk and Virginia Beach. At this time, the Bank does not anticipate losses on
any of these loans.

        Allowance  for Loan  Losses.  Provisions  for loan losses are charged to
earnings  to bring the total  allowance  for loan  losses to a level  considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Company, the amount of the Company's classified assets,
the  status  of past due  principal  and  interest  payments,  general  economic
conditions,  particularly as they relate to the Company's market area, and other
factors  related  to  the   collectibility  of  the  Company's  loan  portfolio.
Management  reviews the  allowance  for loan losses on a monthly basis and makes
provisions  for loan  losses  as deemed  appropriate  in order to  maintain  the
adequacy of the allowance.

        Effective  December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency ("OCC"), the FDIC and the FRB, issued the Policy
Statement  regarding an institution's  allowance for loan and lease losses.  The
Policy Statement, which reflects the position of the issuing regulatory agencies
and  does  not  necessarily  constitute  GAAP,  includes  guidance  (i)  on  the
responsibilities  of  management  for the  assessment  and  establishment  of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy  of  such  allowance  and  the  policies  utilized  to  determine  such
allowance.  The Policy Statement sets forth the following  quantitative measures
which examiners may use to determine the reasonableness of an allowance: (i) 50%
of the portfolio that is classified doubtful;  (ii) 15% of the portfolio that is
classified  substandard;  and (iii) for the portions of the portfolio  that have
not been classified  (including loans  designated  special  mention),  estimated
credit losses over the upcoming  twelve months based on facts and  circumstances
available on the  evaluation  date.  While the Policy  Statement sets forth this
quantitative  measure,  such guidance is not intended as a "floor" or "ceiling."
Upon review of the Policy  Statement,  in 1994, the Bank reconsidered its policy
for establishing its

                                       13

<PAGE>
allowance for loan losses and made certain  adjustments  to the model it uses in
order to make provisions to the allowance.

        The following table sets forth the activity in the Bank's  allowance for
loan losses during the periods indicated.

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                           ---------------------------------------------------------------------------------------
                                                1996               1995               1994               1993              1992
                                           -------------     -------------      -------------      -------------     -------------
                                                                             (Dollars in Thousands)
<S>                                            <C>                <C>                <C>                <C>               <C>   
Allowance at beginning of
  period                                       $4,438             $4,459             $3,274             $2,741            $3,102
Allowance acquired from
  Seaboard                                      5,185                 --                 --                 --                --
Provisions (credited) charged to
  operations                                     (265)               454              1,431                715               894
Loans charged-off:
  Mortgage loans:
    Single-family                                (159)              (157)              (278)              (109)              (91)
    Multi-family                                  (38)              (174)              (291)                (5)             (194)
    Construction                                   --                 --                 --                 --                --
    Commercial                                     --               (291)              (233)              (167)             (840)
    Residential lots                               --                 --                 --                 (4)               (3)
  Consumer loans                                 (395)              (166)              (266)              (167)             (358)
                                               ------             ------             ------             ------            ------
      Total                                      (592)              (788)            (1,068)              (452)           (1,486)
Other charge-off                                 (837)                --                 --                 --                --
Recoveries:
  Mortgage loans:
    Single-family                                  11                 21                162                 24               161
    Multi-family                                   --                 58                333                 63                 2
    Construction                                   --                 --                 --                 --                --
    Commercial                                  1,657                158                218                 73                10
  Consumer loans                                   59                 76                109                110                58
                                               ------             ------             ------             ------            ------
      Total                                     1,727                313                822                270               231
                                               ------             ------             ------             ------            ------
Allowance at end of period                     $9,656             $4,438             $4,459             $3,274            $2,741
                                               ======             ======             ======             ======            ======

Allowance for loan losses to
 total non-accruing loans at
 end of period                                 378.67%            255.79%            275.93%            216.53%            74.97%
                                               ======             ======             ======             ======            ======

Allowance for loan losses
  to total impaired loans
  at end of period (1)                         107.03%            105.09%            108.00%                N/A               N/A
                                               ======             ======             ======             =======           =======

Allowance for loan losses
  to total loans held for
  investment at end of period                    1.55%              0.95%              1.06%               0.89%             0.64%
                                               ======             ======             ======             =======           =======
-----------------------------
<FN>
(1)     Since  the data  relating  to  impaired  loans was not  collected  until
        January 1, 1995, the date the Company  adopted SFAS No. 114, as amended,
        certain data for periods prior to such date is not available.
</FN>
</TABLE>
        The Bank's model for calculating the minimum loan loss allowance applies
varying ratios to different types of loans, which are aggregated.  However,  the
Bank does not currently  allocate its allowance for loan losses  individually to
its various categories of loans.


                                       14

<PAGE>

        The other  charge-off in 1996  recognizes a potential  loss from a fraud
perpetrated  upon the Bank, of which $137,000 was recovered in the first quarter
of 1997. Additional claims and recoveries are pending, and the Bank continues to
diligently  pursue all areas of collection;  however,  there can be no assurance
that there will be additional recoveries.

        In July 1996, the Bank acquired by deed in lieu of  foreclosure  certain
properties  located in  Williamsburg,  Virginia in  settlement  of a  previously
charged-off  deficiency  relating to three  Williamsburg  hotels sold in October
1994. The acquired  property was subsequently  sold for $3.3 million and settled
on September 30, 1996. After satisfying superior liens on the property and other
costs  associated  with the  acquisition  and sale,  the Bank netted a loan loss
recovery of $1.4  million and a gain on sale of REO of  $206,000.  This  sizable
recovery  during 1996 more than offset  normally  determined  adjustments to the
Bank's loan loss  allowance  and  resulted in a net loan loss credit for 1996 of
$265,000.

        As of December 31, 1996, the Bank's  allowance for loan losses  amounted
to 54.0% of its substandard loans and 378.7% of total non-accruing loans.

        Based on facts and  circumstances  currently  available  to the Company,
management  believes that the allowance for loan losses was adequate at December
31, 1996.  However,  there can be no assurances that additions to such allowance
will not be  necessary  in future  periods,  which  would  adversely  affect the
Company's results of operations.

        Other Classified Assets.  Federal  regulations require that each insured
savings  association review the classification of its assets on a regular basis.
In addition,  in connection with examinations of insured  institutions,  federal
examiners have authority to identify problem assets and, if appropriate, require
re-classification.   There  are  three   classifications   for  problem  assets:
"substandard,"  "doubtful"  and  "loss."  Substandard  assets  have  one or more
defined  weaknesses and have the distinct  possibility that the institution will
sustain some loss if the  deficiencies  are not corrected.  Doubtful assets have
the weaknesses of substandard  assets with the additional  characteristics  that
the weaknesses make collection or liquidation in full, on the basis of currently
existing  facts,  conditions  and  values,  questionable,  and  there  is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that its  continuance  as an asset is not  warranted.  Another
category  designated  "special  mention" also must be established and maintained
for  assets  which  do not  currently  require  classification  as  substandard,
doubtful or loss, but have  potential  weaknesses or risk  characteristics  that
could result in future problems.

        At December 31, 1996,  the Bank had $17.9  million of assets  classified
substandard, and $135,000 classified as doubtful and $45,000 classified as loss.
In addition, at such date, $4.7 million were categorized as special mention.

        Allowance for Losses on Real Estate Owned. In 1992, the Bank established
an allowance for losses on REO.

        The following  table sets forth the activity in the allowance for losses
on REO during the periods indicated.
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                            ----------------------------------------------------------------------------------
                                                 1996              1995             1994             1993              1992
                                            ------------      ------------     ------------     ------------      ------------
                                                                           (Dollars in Thousands)

<S>                                               <C>               <C>            <C>               <C>             <C>   
Allowance at beginning of period                  $ 33              $ --           $ 5,060           $   386         $    --
Allowance acquired from
  Seaboard                                           8                --                --                --              --
Provisions charged to operations                    61                41               746             6,290           3,177
Losses charged-off                                 (72)              (11)           (5,808)           (1,701)         (3,047)
Recoveries                                          --                 3                 2                85             256
                                                  ----              ----           -------           -------         -------
Allowance at end of period                        $ 30              $ 33           $    --           $ 5,060         $   386
                                                  ====              ====           =======           =======         =======
</TABLE>

                                       15

<PAGE>

        The 1995  provision  and  $230,000  of the 1994  provision  were made to
absorb periodic  charges to the allowance for losses on REO necessary to reflect
the fair value of the Bank's REO.  Substantially  all the Bank's  allowance  for
losses on REO at December 31, 1993, were related to three hotel properties owned
by the Bank,  which were sold during  1994.  Additionally,  $516,000 of the 1994
provision  and the  provisions  during 1993 and 1992 were  related to those same
hotel  properties.  The provision in 1994  reflected a final  valuation upon the
sale of the hotel properties,  while the provisions in 1993 reflect,  to a large
extent, an outside valuation received by management of the Bank as well as sales
negotiations  with  respect  to the  hotels  and,  to a  lesser  extent,  an OTS
examination  in the fourth  quarter of 1993 which  resulted  in the Bank  making
provisions with respect to certain other REO  properties.  The provision in 1992
was due primarily to adjustments  to the carrying  values of the hotels upon the
Bank's  consideration  of the  results of an OTS  examination  during the fourth
quarter of that year. See " - Non-Performing Assets."

Investments and Mortgage-Backed Securities

        Investments.  Federally-chartered savings institutions have authority to
invest in various  types of liquid  assets,  including  United  States  Treasury
obligations,  securities  of various  federal  agencies and state and  municipal
governments,  certificates  of deposit at  federally-insured  banks and  savings
institutions, certain bankers' acceptances and Federal funds. Subject to various
restrictions, federally-chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally-chartered  savings
institutions are otherwise authorized to make directly.

        At December 31, 1996, investment securities totaled $30.7 million all of
which  were  classified  as  available-for-sale.  At such  date,  the  remaining
investment  securities  had a  contractual  maturity  of between 1 month and 9.2
years, and the portfolio had a weighted average yield of 6.82%.

        The following table sets forth information  regarding the amortized cost
and estimated market value of the Company's  investment  securities at the dates
indicated.
<TABLE>
<CAPTION>
                                                                           December 31,
                                    ---------------------------------------------------------------------------------------------
                                              1996                             1995                             1994
                                    ----------------------------     ----------------------------     ---------------------------
                                                      Estimated                        Estimated                       Estimated
                                     Amortized         Market         Amortized         Market         Amortized         Market
                                        Cost            Value            Cost            Value           Cost            Value
                                    -----------      -----------     -----------      -----------     -----------     -----------
                                                                      (Dollars in Thousands)


<S>                                     <C>             <C>              <C>             <C>             <C>              <C>
U.S. Government and
  federal agency
  obligations:
    Held-to-maturity                         --              --               --              --         $18,414          $17,984
    Available-for-sale                  $31,316         $30,742          $17,957         $18,025              --               --
Mutual Funds:
   Available-for-sale                       --               --            5,000           5,015              --               --
                                        -------         -------          -------         -------         -------          -------
                                        $31,316         $30,742          $22,957         $23,040         $18,414          $17,984
                                        =======         =======          =======         =======         =======          =======
</TABLE>

        Additional  information regarding the Company's investments is discussed
in the "Financial Condition" section of Management's  Discussion and Analysis of
Financial  Condition  and  Results  of  Operations  and in  Notes 3 and 4 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.

        Mortgage-Backed Securities.The Bank maintains a significant portfolio of
mortgage-backed  securities as a means of investing in housing-related  mortgage
instruments without the costs associated

                                       16

<PAGE>



with originating  mortgage loans for portfolio retention and with limited credit
risk of  default  which  arises in  holding a  portfolio  of loans to  maturity.
Mortgage-backed  securities  (which  also are  known as  mortgage  participation
certificates or pass-through certificates) represent a participation interest in
a pool of  single-family or multi-family  mortgages.  The principal and interest
payments on  mortgage-backed  securities are passed from the mortgage  servicer,
through    intermediaries    (generally    U.S.    Government    agencies    and
government-sponsored  enterprises)  that pool and  repackage  the  participation
interests in the form of securities,  to investors  such as the Bank.  Such U.S.
Government agencies and government  sponsored  enterprises,  which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
Federal  National  Mortgage  Association  ("FNMA")  and the GNMA.  The Bank also
invests in certain privately issued, credit enhanced mortgage-backed  securities
rated AAA or AA by national securities rating agencies.

        The FHLMC, a public corporation chartered by the U.S. Government, issues
participation  certificates  backed principally by conventional  mortgage loans.
The FHLMC  guarantees the timely payment of interest and the ultimate  return of
principal  on  participation  certificates.  The FNMA is a  private  corporation
chartered by the U.S.  Congress  with a mandate to establish a secondary  market
for mortgage  loans.  The FNMA  guarantees  the timely  payment of principal and
interest on FNMA  securities.  FHLMC and FNMA  securities  are not backed by the
full faith and credit of the United States,  but, because the FHLMC and the FNMA
are U.S. Government-sponsored enterprises, these securities are considered to be
among the highest quality  investments  with minimal credit risks. The GNMA is a
government  agency within the Department of Housing and Urban  Development which
is  intended  to  help  finance   government-assisted   housing  programs.  GNMA
securities are backed by FHA-insured  and  VA-guaranteed  loans,  and the timely
payment of principal and interest on GNMA  securities are guaranteed by the GNMA
and  backed by the full  faith and credit of the U.S.  Government.  Because  the
FHLMC,  the FNMA and the GNMA were  established to provide  support for low- and
middle-income  housing,  there are  limits  to the  maximum  size of loans  that
qualify for these  programs,  which  limit is  currently  $214,600.  A number of
private  institutions  have  also  established  their  own  home  securitization
programs.

        Mortgage-backed  securities  typically are issued with stated  principal
amounts,  and the  securities  are backed by pools of mortgages  that have loans
with  interest  rates  that  are  within a  specified  range  and  have  varying
maturities.  The  underlying  pool  of  mortgages  can  be  composed  of  either
fixed-rate or adjustable-rate  loans. As a result,  the risk  characteristics of
the underlying pool of mortgages,  (i.e., fixed-rate or adjustable rate) as well
as  prepayment  risk,  are passed on to the  certificate  holder.  The life of a
mortgage-backed,  pass-through  security  thus  approximates  the  life  of  the
underlying mortgages.

        Mortgage-backed  securities  include  regular and residual  interests in
Collateralized  Mortgage Obligations ("CMO"),  including CMOs which qualify as a
Real Estate Mortgage  Investment  Conduit  ("REMIC") under the Internal  Revenue
Code of 1986,  as amended  ("Code")  (CMOs and REMICs  sometimes are referred to
collectively  as  "mortgage-related  securities").  CMOs have been  developed in
response to investor concerns regarding the uncertainty of cash flows associated
with the prepayment option of the underlying  mortgagor and are typically issued
by governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar  institutions.  A CMO can be  collateralized  with
loans or by securities which are insured or guaranteed by the FNMA, the FHLMC or
the GNMA. In contrast to pass-through  mortgage-backed securities, in which cash
flow is  received  pro rata by all  security  holders,  the cash  flow  from the
mortgages  underlying  a  CMO  is  segmented  and  paid  in  accordance  with  a
predetermined  priority to investors holding various CMO classes.  By allocating
the principal and interest cash flows from the underlying  collateral  among the
separate CMO classes,  different classes of bonds are created, each with its own
stated   maturity,   estimated   average  life,   coupon  rate  and   prepayment
characteristics.

        The  short-term  classes of a CMO usually carry a lower coupon rate than
the longer term classes and, therefore, the interest differential cash flow on a
residual interest is greatest in the early years of the

                                       17

<PAGE>



CMO.  As the early  coupon  classes are  extinguished,  the  residual  cash flow
declines.  Thus,  the longer the lower coupon classes  remain  outstanding,  the
greater the cash flow accruing to CMO  residuals.  Generally,  as interest rates
decline,  prepayments  accelerate,  the interest  differential  narrows, and the
future cash flow from the CMO declines.  Conversely, as interest rates increase,
prepayments  generally  decrease,  generating  a larger  future cash flow to the
residual class.

        A  senior-subordinated  structure  often is used  with  CMOs to  provide
credit  enhancement for securities  which are backed by collateral  which is not
guaranteed by the FNMA, FHLMC or GNMA.  These  structures  divide mortgage pools
into two risk classes: a senior class and one or more subordinated  classes. The
subordinated  classes provide  protection to the senior class. When cash flow is
impaired, debt service goes first to the holders of senior classes. In addition,
incoming  cash  flows  also  may go  into a  reserve  fund to  meet  any  future
shortfalls  of  cash  flow  to  holders  of  senior  classes.   The  holders  of
subordinated  classes  may not  receive  any funds  until the  holders of senior
classes have been paid and, when  appropriate,  until a specified level of funds
has been contributed to the reserve fund.

        Certain  mortgage-related  securities,  including REMIC  residuals,  are
classified as "high-risk mortgage  securities" under OTS Thrift Bulletin 52 ("TB
52").  Pursuant to TB 52, a savings  institution  such as the Bank generally may
only  acquire  high-risk   mortgage   securities,   which  are  defined  as  any
mortgage-related  security  that at the time of purchase,  or at any  subsequent
date,  meets any of the three  tests set forth  therein,  to reduce its  overall
interest-rate risk. An institution with strong capital and earnings and adequate
liquidity and that has a closely  supervised trading department may acquire such
securities  if they are  reported  as trading  assets or  available-for-sale  at
market value. At December 31, 1996, the Bank had one  mortgage-related  security
designated  as a high-risk  mortgage  security  under TB 52. This security had a
carrying  value of  approximately  $332,000  and was acquired by the Bank in the
acquisition of Seaboard.

        Mortgage-backed  securities  generally  yield less than the loans  which
underlie  such  securities   because  of  their  payment  guarantees  or  credit
enhancements which minimize credit risk. In addition, mortgage-backed securities
are more liquid than individual  mortgage loans and may be used to collateralize
certain obligations of the Bank. At December 31, 1996, $291.4 million, or 41.5%,
of  the  Bank's  mortgage-backed  securities  were  pledged  to  secure  various
obligations of the Bank.  Mortgage-backed securities issued or guaranteed by the
FNMA or the FHLMC (except interest-only  securities or the residual interests in
CMOs) are  weighted  at no more  than  20.0% for  risk-based  capital  purposes,
compared to a weight of 50.0% to 100.0% for residential loans. See "Regulation -
The Bank Regulatory Capital Requirements."

        In addition to mortgage-backed securities issued by FNMA, FHLMC or GNMA,
commonly called agency securities,  the Bank invests in highly rated, investment
grade,  private  label  mortgage-backed  securities  structured in the form of a
REMIC. At December 31, 1996, included in the Company's aggregate total of $706.1
million  mortgage-backed  securities  there were $168.5 million  ($139.6 million
fixed-rate and $28.9 million  adjustable-rate)  in REMICs. Of this amount $147.4
million were rated AAA by at least two nationally  recognized  rating  agencies.
The remaining $21.1 million were rated AA.

        The  Bank's   mortgage-backed   securities   are  classified  as  either
"held-to-maturity"  or  "available-for-sale"  based upon the  Bank's  intent and
ability  to hold  such  securities  to  maturity  at the  time of  purchase,  in
accordance  with GAAP. At December 31, 1996,  mortgage-backed  securities  (both
held-to-maturity and  available-for-sale)  totaled $706.1 million. At such date,
the  held-to-maturity  mortgage-backed  securities totaled $141.0 million ($10.2
million  adjustable-rate and $130.8 million  fixed-rate),  and the available-for
sale totaled $565.1 million ($390.9 million  adjustable-rate  and $174.2 million
fixed-rate). The Bank classified all mortgage-backed securities purchased during
1996  as  available-for-sale,  providing  the  Bank  with  increased  asset  and
liability  management  flexibility  to react to yield  curve and  interest  rate
changes.  At  December  31,  1996,  the  Company's  mortgage-backed   securities
available-for-sale  had an unrealized gain of $2.3 million,  net of taxes, which
was added to stockholders' equity at such date per

                                       18

<PAGE>



SFAS No.  115.  Higher  interest  rates  will  cause the  carrying  value of the
available-for-sale  portfolio to be reduced,  which will result in an adjustment
to  stockholders'  equity.  Additional  information  on  Life's  mortgage-backed
securities  portfolio  may be  found  in  Notes  3, 4 and  22 of  the  Notes  to
Consolidated  Financial  Statements  included in Item 8 hereof. The tables below
present   the  Bank's   mortgage-backed   securities   on  the  basis  of  these
classifications,  which  are  included  in  the  Bank's  Consolidated  Financial
Statements.  In accordance with SFAS No. 115, the mortgage-backed  securities of
the Bank,  which are  held-to-maturity,  are carried at cost,  adjusted  for the
amortization  of premiums and the  accretion  of discounts  using a method which
approximates a level yield, while mortgage-backed securities  available-for-sale
are carried at the current market value, net of taxes.

        The  following   table  sets  forth  the   composition   of  the  Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
                                                                                     December 31,
                                         -----------------------------------------------------------------------------------------
                                                      1996                          1995                          1994
                                         -----------------------------   ---------------------------   ---------------------------
                                             Held to     Available for     Held to     Available for     Held to     Available for
                                            Maturity         Sale         Maturity         Sale         Maturity         Sale
                                         ------------    -------------   ------------   ------------   ------------   ------------
                                                                                 (Dollars in Thousands)

<S>                                         <C>            <C>            <C>            <C>            <C>            <C>

Mortgage-backed securities:
  FHLMC                                     $ 71,457       $179,930       $ 88,934       $169,961       $212,870       $ 47,735
  FNMA                                        58,007        156,503         67,907         92,007        177,251         47,552
  GNMA                                         1,485         64,631          1,738          3,538          2,089          3,581
                                            --------       --------       --------       --------       --------       --------
    Total mortgage-backed securities         130,949        401,064        158,574        265,506        392,210         98,868
                                            --------       --------       --------       --------       --------       --------
REMICs:
  FHLMC                                       10,025          1,363         10,028             --         10,034             --
  FNMA                                            --          9,743             --         10,612             --         11,398
  Private label                                   --        149,153             --        114,607             --          3,439
                                            --------       --------       --------       --------       --------       --------
    Total REMICs                              10,025        160,259         10,028        125,219         10,034         14,837
                                            --------       --------       --------       --------       --------       --------
    Total mortgage-backed and
      REMICs, net                           $140,974(1)    $561,323(1)    $168,602(2)    $390,725(2)    $402,244(3)    $113,705(3)
                                            ========       ========       ========       ========       ========       ========
      Total market value                    $141,269       $565,086       $169,195       $393,587       $388,252       $107,264
                                            ========       ========       ========       ========       ========       ========
<FN>
(1)     At December 31, 1996,  $165.2  million and $366.8  million of the Bank's
        mortgage-backed   securities  had  fixed  rates  and  adjustable  rates,
        respectively,  and $141.4 million and $28.9 million of the Bank's REMICs
        had fixed rates and adjustable rates, respectively.

(2)     At December 31, 1995,  $219.5  million and $204.5  million of the Bank's
        mortgage-backed   securities  had  fixed  rates  and  adjustable  rates,
        respectively,  and $87.3  million and $48.1 million of the Bank's REMICs
        had fixed rates and adjustable rates, respectively.

(3)     At December 31, 1994,  $299.0  million and $192.1  million of the Bank's
        mortgage-backed   securities  had  fixed  rates  and  adjustable  rates,
        respectively,  and $17.8  million and $7.0 million of the Bank's  REMICs
        had fixed rates and adjustable rates, respectively.
</FN>
</TABLE>

        At December 31, 1996, the weighted average  contractual  maturity of the
Bank's  mortgage-backed  securities and REMICs was  approximately  22 years. The
actual maturity of a  mortgage-backed  security is less than its stated maturity
due to  prepayments  of the  underlying  mortgages.  At such date, the estimated
average life and duration of the Bank's  mortgage-backed  securities  and REMICs
were  4.4  and  3.1  years,  respectively.  Prepayments  that  are  faster  than
anticipated may shorten the life of the security and could adversely  affect its
yield to  maturity.  The  yield  is  based  upon  the  interest  income  and the
amortization of any premium or discount related to the mortgage-backed security.
In accordance with GAAP, premiums and discounts are amortized to provide a level
yield over the estimated lives of the mortgage-backed securities, which decrease
and increase interest income,  respectively.  The prepayment assumptions used to
determine the amortization  period for premiums and discounts can  significantly
affect the yield of the mortgage-backed security;  therefore,  these assumptions
are reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors,

                                       19

<PAGE>



including the type of  mortgages,  the coupon rate,  the age of  mortgages,  the
geographical  location  of the real estate  collateralizing  the  mortgages  and
general levels of market  interest  rates,  the difference  between the interest
rates on the  underlying  mortgages and the prevailing  mortgage  interest rates
generally is the most significant determinant of the rate of prepayments. During
periods of falling mortgage interest rates, if the coupon rate of the underlying
mortgages  exceeds the  prevailing  market  interest  rates offered for mortgage
loans,  refinancing  generally  increases and  accelerates the prepayment of the
underlying  mortgages and the related security.  Under such  circumstances,  the
Bank may be subject to reinvestment risk because,  to the extent that the Bank's
mortgage-related securities amortize or prepay faster than anticipated, the Bank
may not be able to reinvest the proceeds of such  repayments and  prepayments at
comparable  rates. The declining yields earned during recent periods is a direct
response to falling interest rates and accelerated prepayments.

        In an effort to reduce the Bank's exposure to interest-rate risk, during
1994,  1995 and 1996,  the Bank  increased its  investment  in  adjustable  rate
mortgage-backed  securities  and REMICs.  At December  31,  1996,  of the Bank's
$706.1 million in mortgage-backed securities and REMICs, net, $401.1 million, or
56.8%, had adjustable rate features.  As of December 31, 1996, $359.7 million of
the Bank's  adjustable  securities  were backed by  mortgages  which adjust to a
margin over the one-year U.S. Treasury obligation adjusted to a CMT.

        Additional   information   regarding   the   Company's   mortgage-backed
securities  is discussed in  Management's  Discussion  and Analysis of Financial
Condition  and Results of  Operations  and in Notes 3 and 4 to the  Consolidated
Financial Statements included in items 7 and 8 hereof.

Sources of Funds

        General.  The  Company's  principal  source of funds for use in lending,
investments  and  for  other  general  business  purposes   includes   deposits,
borrowings from the FHLB of Atlanta and other sources, including securities sold
under agreements to repurchase  ("Repos") and stockholders'  equity. The Company
also derives funds from  amortization  and prepayments of outstanding  loans and
mortgage-backed  securities,  from sales of loans and from  maturing  investment
securities.  Loan  repayments  are a relatively  stable  source of funds,  while
deposits inflows and outflows are  significantly  influenced by general interest
rates and money market  conditions.  The Company uses  borrowings  to supplement
deposits.

        Deposits. The Bank's current deposit products include passbook accounts,
negotiable order of withdrawal ("NOW") accounts,  money market deposit accounts,
certificates  of  deposit  ranging  in  terms  from  14  days  to 10  years  and
noninterest-bearing  personal and business checking accounts. The Bank's deposit
products also include Individual Retirement Account ("IRA") certificates,  Keogh
accounts and other retirement accounts.

        The Bank's deposits are obtained from residents in its immediate  market
area and, with respect to larger (over $95,000  certificates  of deposit),  from
depositors  throughout  the  United  States.  The Bank  attracts  local  deposit
accounts by offering a wide variety of accounts, competitive interest rates, and
convenient  branch  office  locations  and  service  hours.  The  Bank  utilizes
traditional  marketing  methods to attract new customers  and savings  deposits,
including  print media,  radio and television  advertising  and direct mail. The
Bank also accepts a substantial amount of its deposits from out-of-state through
deposit brokers; however, the Bank does not actively solicit such funds nor does
it pay any brokerage fees in accepting such deposits.

        The Bank has been  competitive  in the types of  accounts  and  interest
rates it has offered on its deposit  products,  but does not necessarily seek to
match the highest rates paid by competing  institutions.  During 1996,  deposits
increased  by  $125.2  million  or  20.6%,  including  $66.8  million  from  the
acquisition of Seaboard.  The overall  increase in deposits was primarily due to
increases in certificates

                                       20

<PAGE>

of deposit which totaled $578.9 million or 79.1% of the Bank's deposit portfolio
at  December  31,  1996.  During  1996,  the  majority of this  increase  was in
certificates  of  deposit  with  remaining  maturities  of less  than one  year.
Certificates of deposit with remaining  maturities of one year or less increased
from 57.1% of the Bank's total  certificates of deposit at December 31, 1994, to
64.1% of the Bank's  total  certificates  of deposit at December 31, 1995 and to
69.2% at December 31,  1996.  Additionally,  the Bank's  money  market  accounts
increased  both in terms of  dollars  and as a percent  of total  deposits  as a
result of the Bank's  successful  marketing  campaign  offering  a tiered  money
market account having rates highly competitive with money market funds. The Bank
intends to continue its efforts to attract  certificates of deposit and checking
accounts  as a  principal  source  of  funds  for  supporting  its  lending  and
investment activities.

        The  following  table sets forth  certain  information  relating  to the
Bank's deposits at the dates indicated.
<TABLE>
<CAPTION>
                                                                              December 31,
                                    -----------------------------------------------------------------------------------------------
                                               1996 (1)                           1995                              1994
                                    ----------------------------     -----------------------------     ----------------------------
                                                        Percent                          Percent                          Percent
                                                       of Total                          of Total                         of Total
                                        Amount         Deposits          Amount          Deposits         Amount          Deposits
                                    ------------    ------------     ------------     ------------     ------------     -----------
                                                                          (Dollars in Thousands)
<S>                                   <C>               <C>             <C>             <C>              <C>               <C>
NOW accounts                          $ 29,496            4.03%         $ 26,294           4.33%         $ 23,445            3.98%
Money market accounts                   68,704            9.38            34,025           5.60            39,274            6.68
Noninterest-bearing
  checking accounts                      2,557            0.35             1,403           0.23               909            0.16
                                      --------          ------          --------        -------          --------          ------
  Total demand deposits                100,757           13.76            61,722          10.16            63,628           10.82
                                      --------          ------          --------        -------          --------          ------
Passbook savings
  deposits                              52,521            7.17            58,208           9.59            65,441           11.12
                                      --------          ------          --------        -------          --------          ------
Certificates of deposit:
  6 months or less                     277,716           37.92           216,139          35.60           173,287           29.46
  7-12 months                          122,624           16.74            96,038          15.82            88,842           15.10
  13-36 months                         141,348           19.30           127,827          21.05           144,083           24.49
  More than 36 months                   37,189            5.08            47,205           7.78            52,981            9.01
                                      --------          ------          --------        -------          --------          ------
Total certificates                     578,877           79.05           487,209          80.25           459,193           78.06
                                      --------          ------          --------        -------          --------          ------
Purchase accounting -
  Seaboard                                 167             .02               N/A                              N/A
                                      --------          ------          --------                         --------
Total deposits                        $732,322          100.00%         $607,139        100.00%          $588,262          100.00%
                                      ========          ======          ========        ======           ========          ======
<FN>
-----------------------------
(1)     Includes deposits from the acquisition of Seaboard
</FN>
</TABLE>
        The  following  table sets  forth the  activity  in the Bank's  deposits
during the periods indicated.
<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                             -----------------------------------------
                                                  1996             1995              1994
                                             ------------     ------------      ------------
                                                      (Dollars in Thousands)
<S>                                            <C>               <C>              <C>   
Beginning balance                              $607,139          $588,262         $528,932
Deposits acquired from Seaboard                  66,854               N/A              N/A
Net increase (decrease)
 before interest credited                        35,291              (611)          43,610
Interest credited                                23,038            19,488           15,720
                                               --------          --------         --------
Net increase in deposits                        125,183            18,877           59,330
                                               --------          --------         --------
Ending balance                                 $732,322          $607,139         $588,262
                                               ========          ========         ========
</TABLE>
                                       21

<PAGE>

        The following table sets forth, by various interest rate categories, the
certificates of deposit with the Bank at the dates indicated.

<TABLE>
<CAPTION>
                                                            December 31,
                                         -----------------------------------------------
                                              1996             1995              1994
                                         ------------     ------------      ------------
                                                       (Dollars in Thousands)
<S>                                         <C>               <C>               <C>             
 3.00% to  3.99%                            $     68          $  1,370          $ 36,262
 4.00% to  4.99%                              32,834            49,946           199,631
 5.00% to  6.99%                             521,509           401,781           186,033
 7.00% to  8.99%                              21,703            29,747            29,694
 9.00% to 10.99%                               2,763             4,365             7,562
11.00% and over                                   --                --                11
                                            --------          --------          --------
                                            $578,877          $487,209          $459,193
                                            ========          ========          ========
</TABLE>

        The following  table sets forth the amount and  maturities of the Bank's
certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
                                                       Over Six            Over One           Over Two
                                                        Months               Year               Years
                                   Six Months           Through            Through             Through              Over
                                    and Less           One Year           Two Years          Three Years         Three Years
                                --------------     --------------      --------------     ---------------     ---------------
                                                                    (Dollars in Thousands)

<S>                                  <C>                <C>                 <C>                 <C>                 <C>   
3.00% to  3.99%                      $      5           $     --            $    62             $    --             $     1
4.00% to  4.99%                        21,546              9,993              1,140                 155                  --
5.00% to  6.99%                       253,299            107,300             89,319              42,255              29,336
7.00% to  8.99%                         2,229              5,331              1,286               5,005               7,852
9.00% to 10.99%                           637                 --              1,448                 678                  --
                                     --------           --------            -------             -------             -------
                                     $277,716           $122,624            $93,255             $48,093             $37,189
                                     ========           ========            =======             =======             =======
</TABLE>

        At December  31, 1996,  the Bank had $84.0  million of  certificates  of
deposit in amounts of $100,000 or more,  of which $24.0 million was scheduled to
mature in three  months,  $17.3  million was  scheduled  to mature in over three
months  through six months,  $15.7  million was  scheduled to mature in over six
months  through 12 months and $27.0  million was  scheduled to mature in over 12
months.

        Additional  information regarding the Company's deposits is discussed in
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations and in Note 10 to the Consolidated  Financial  Statements included in
Items 7 and 8 hereof.

        Borrowings.  The Company's borrowings are comprised of (i) advances from
the FHLB of Atlanta,  which totaled  $261.7  million at December 31, 1996;  (ii)
Repos  considered as  borrowings,  which totaled  $259.0 million at December 31,
1996;  and (iii) other  borrowings,  which  totaled $5.2 million at December 31,
1996. The Company's  borrowings are generally used to fund lending,  investments
and other ordinary course of business activities.

        The Bank may obtain  advances from the FHLB of Atlanta upon the security
of the common stock it owns in that bank and certain of its residential mortgage
loans and securities,  provided certain standards  related to  credit-worthiness
have been met. Such advances are made pursuant to several credit programs,  each
of which has its own interest  rate and range of  maturities.  From time to time
the Company also enters into  agreements  to sell  securities  under terms which
require it to  repurchase  the same or  substantially  similar  securities  by a
specified date.  Repos are considered  borrowings  which are secured by the sold
securities.  Historically,  Repos were generally short-term (90 days or less) in
nature;

                                       22

<PAGE>



however,  longer-term  (greater  than 90  days up to  three  years)  Repos  have
recently  become  available,  and the Company has utilized  such in managing its
asset and liability  structure.  The Company  continuously  reviews  alternative
sources of borrowings and in this regard has more recently  increased its use of
advances from the FHLB of Atlanta relative to Repos due to the FHLB of Atlanta's
lower costing advances.

        In addition to FHLB  advances and Repos,  the  Company's  borrowings  at
December 31, 1996, include $5.2 million of a long-term CMO financing  originated
in 1985,  for $32.1  million  through a wholly  owned,  single  purpose  finance
subsidiary  of the Bank.  Such  obligation,  which had an average  rate of 11.6%
during the year ended  December 31, 1996, is not due to mature until 2016,  but,
due to significant prepayments, the balance has been amortized much more rapidly
than initially anticipated.

        Additional  information  regarding the Company's  borrowings,  including
maturities,  is discussed in  Management's  Discussion and Analysis of Financial
Condition  and  Results  of  Operations  and  in  Notes  11,  12  and  13 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.

        The  following  table sets forth  certain  information  relating  to the
Company's borrowings at the dates or for the periods indicated.

<TABLE>
<CAPTION>
                                                              At or For the Year Ended December 31,
                                  -------------------------------------------------------------------------------------------
                                              1996                           1995                            1994
                                  --------------------------        -------------------------       -------------------------
                                                                     (Dollars in Thousands)

<S>                                   <C>             <C>             <C>             <C>             <C>             <C>
FHLB advances:
  Maximum balance                     $261,711                        $185,336                        $196,727
  Average balance                     $161,646                        $166,725                        $180,741
  Balance at end of period            $261,711                        $148,636                        $174,977
  Weighted average rate:
    at end of period                                   5.67%                           6.16%                           6.16%
    during the period                                  6.14%                           6.11%                           5.04%

Repurchase agreements:
  Maximum balance                     $361,145                        $195,000                        $ 65,468
  Average balance                     $258,417                        $114,058                        $ 11,475
  Balance at end of period            $259,000                        $162,000                        $ 65,468
  Weighted average rate:
    at end of period                                   5.60%                           6.02%                           6.03%
    during the period                                  5.67%                           6.17%                           6.45%

Other borrowings:
  Maximum balance                     $  6,518                        $  7,015                        $  9,590
  Average balance                     $  5,869                        $  6,807                        $  8,660
  Balance at end of period            $  5,227                        $  6,518                        $  7,744
   Weighted average rate:
     at end of period                                 11.63%                          11.64%                          11.65%
     during the period                                11.63%                          11.63%                          11.61%

</TABLE>
        Stockholders'   Equity.   Stockholders'  equity  provides  a  source  of
permanent  funding,  allows for future  growth and  provides  the Company with a
cushion to withstand  unforeseen,  adverse  developments.  At December 31, 1996,
stockholders' equity totaled $150.9 million or 10.6% of total assets.

        Additional  information regarding the Company's  stockholders' equity is
discussed in the "Financial  Condition"  section of Management's  Discussion and
Analysis of Financial  Condition and Results of Operations  and in Note 4 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.

                                       23

<PAGE>




Subsidiaries

        The Bank is  permitted  to invest up to 2% of its assets in the  capital
stock of, or in secured or unsecured loans to, subsidiary corporations,  with an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community development  purposes.  Under such limitations,
as of December 31, 1996, the Bank was  authorized to invest up to  approximately
$28.4  million  in the stock of, or in loans  to,  service  corporations.  As of
December  31,  1996,  the net book  value of the  Bank's  investment  in  stock,
unsecured  loans,  and  conforming  loans in its service  corporations  was $2.5
million.

        The Bank has five active, wholly-owned subsidiaries. A brief description
of the activities of these five subsidiaries is set forth as follows.

        The  First  Colony  Service   Corporation.   The  First  Colony  Service
Corporation  ("First  Colony")  engages in  activities  permissible  for service
corporations under OTS regulations.  First Colony acts as trustee for the Bank's
secured lending  activity.  As of December 31, 1996, First Colony's total assets
amounted to $124,000.

        Life Financial Services Corporation. Life Financial Services Corporation
("Life  Financial")  was  incorporated  in  November  1993,  for the  purpose of
offering  the  Bank's  accountholders  and the  general  public a full  range of
non-FDIC insured investment  products including  annuities,  insurance,  general
securities,  mutual funds and financial planning  services.  Life Financial is a
duly  licensed  insurance  agent/agency  under the laws of the  Commonwealth  of
Virginia.  As of December 31, 1996,  Life  Financial's  total assets amounted to
$433,000.

        Life Capital Corporation. Life Capital Corporation ("Life Capital") is a
single-purpose  finance subsidiary of the Bank. During 1985, Life Capital issued
$32.1  million  of  debt  securities  secured   principally  by  mortgage-backed
securities.  At December 31, 1996,  $5.2 million of such long-term debt remained
outstanding.  See "- Sources of Funds -  Borrowings."  As of December  31, 1996,
Life Capital's total assets amounted to $7.5 million.

        Life Products Corp.  The  activities  of  Life  Products  Corp.  ("Life
Products") consisted of owning and operating three hotel properties located  in
Williamsburg,  Virginia,  each acquired by the Bank through  foreclosure,  which
were sold in 1994. As of December 31, 1996, Life Products' total assets amounted
to $450. See "- Asset Quality - Non-Performing Assets."

        Seaboard  Equity  Corporation.  Seaboard Equity  Corporation  ("Seaboard
Equity") engages in activities  permissible for service  corporations  under OTS
regulations  and acts as trustee on certain of the loans acquired from Seaboard.
At December 31, 1996, Seaboard Equity's total assets amounted to $575.

Employees

        The   Company   and  the  Bank   (including   the  Bank's   wholly-owned
subsidiaries)  had an  aggregate  of 227  full-time  employees  and 14 part-time
employees as of December 31, 1996.  None of these  employees is represented by a
collective bargaining agreement.  The Company and the Bank each believes that it
enjoys excellent relations with its personnel.

Competition

        The Bank faces strong competition both in attracting deposits and making
real estate loans.  Its most direct  competition  for deposits has  historically
come from other savings associations, credit unions and commercial banks located
in  the  Hampton  Roads  area  of  Virginia,   including  many  large  financial
institutions which have greater financial and marketing  resources  available to
them. In addition, during

                                       24

<PAGE>



times  of high  interest  rates,  the  Bank  has  faced  additional  significant
competition for investors' funds from short-term money market securities, mutual
funds and other corporate and government securities.  The ability of the Bank to
attract and retain savings deposits depends on its ability to generally  provide
a rate of return,  liquidity  and risk  comparable  to that offered by competing
investment opportunities.

        The  Bank   experiences   strong   competition  for  real  estate  loans
principally  from other  savings  associations,  commercial  banks and  mortgage
banking companies.  The Bank competes for loans principally through the interest
rates and loan fees it  charges,  the  efficiency  and  quality of  services  it
provides  borrowers and the convenient  locations of its branch office  network.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.

Regulation

        Set forth below is a brief  description of certain laws and  regulations
which relate to the regulation of the Company and the Bank.  The  description of
these laws and  regulations,  as well as  descriptions  of laws and  regulations
contained  elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.

        The  Company.  The  Company is a  registered  savings  and loan  holding
company  and  is  subject  to OTS  regulations,  examinations,  supervision  and
reporting  requirements.  As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.

        Federal Activities Restrictions.  There are generally no restrictions on
the  activities of a savings and loan holding  company with only one  subsidiary
savings  association.  However, if the Director of the OTS determines that there
is  reasonable  cause to believe  that the  continuation  by a savings  and loan
holding  company of an  activity  constitutes  a serious  risk to the  financial
safety,  soundness or  stability  of its  subsidiary  savings  association,  the
Director may impose such  restrictions as deemed necessary to address such risk,
including  limiting (i) payment of dividends  by the savings  association;  (ii)
transactions  between the savings association and its affiliates;  and (iii) any
activities of the savings association that might create a serious risk such that
the  liabilities of the holding company and its affiliates may be imposed on the
savings association.  Notwithstanding the above rules as to permissible business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
association  subsidiary  of such a  holding  company  fails to meet a  qualified
thrift lender ("QTL") test,  then such unitary holding company also shall become
subject to the activities  restrictions  applicable to multiple savings and loan
holding  companies  and,  unless the savings  association  requalifies  as a QTL
within  one year  thereafter,  shall  register  as,  and  become  subject to the
restrictions  applicable to, a bank holding company. See "- The Bank - Qualified
Thrift Lender Test."

        If the Company were to acquire control of another  savings  association,
other than  through  merger or other  business  combination  with the Bank,  the
Company  would  thereupon  become a multiple  savings and loan holding  company.
Except where such acquisition is pursuant to the regulatory authority to approve
emergency  thrift  acquisitions  and where each subsidiary  savings  association
meets the QTL test, as set forth below, the activities of the Company and any of
its subsidiaries (other than the Bank or other subsidiary savings  associations)
would  thereafter be subject to further  restrictions.  No multiple  savings and
loan holding company or subsidiary thereof,  which is not a savings association,
shall  commence  or  continue  for a limited  period of time  after  becoming  a
multiple  savings and loan holding  company or  subsidiary  thereof any business
activity,  other than:  (i) furnishing or performing  management  services for a
subsidiary  savings  association;  (ii) conducting an insurance agency or escrow
business;  (iii) holding,  managing,  or liquidating assets owned by or acquired
from a subsidiary savings association;  (iv) holding or managing properties used
or occupied by a subsidiary  savings  association;  (v) acting as trustee  under
deeds of trust;  (vi) those  activities  authorized by regulation as of March 5,
1987, to be engaged in by multiple savings and loan holding companies;  or (vii)
unless the Director of the OTS by regulation

                                       25

<PAGE>



prohibits  or limits such  activities  for savings and loan  holding  companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies.  The activities  described in (i) through (vi) above may only
be engaged in after giving the OTS prior notice and being  informed that the OTS
does not object to such  activities.  In addition,  the activities  described in
(vii)  above also must be  approved  by the  Director  of the OTS prior to being
engaged in by a multiple savings and loan holding company.

        Limitations  on  Transactions  with  Affiliates.   Transactions  between
savings  associations  and any affiliate are governed by Sections 23A and 23B of
the Federal  Reserve Act ("FRA").  An affiliate of a savings  association is any
company or entity which  controls,  is controlled by or is under common  control
with the savings  association.  In a holding company context, the parent holding
company of a savings  association  (such as the Company) and any companies which
are  controlled  by such parent  holding  company are  affiliates of the savings
association.  Generally,  Sections 23A and 23B (i) limit the extent to which the
savings  association or its  subsidiaries  may engage in "covered  transactions"
with any one affiliate to an amount equal to 10% of such  association's  capital
stock and surplus,  and contain an aggregate limit on all such transactions with
all  affiliates  to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such  transactions be on terms  substantially the same, or
at least as favorable,  to the  association or subsidiary as those provided to a
non-affiliate.  The term  "covered  transaction"  includes  the making of loans,
purchase  of assets,  issuance  of a  guarantee  and  similar  transactions.  In
addition  to the  restrictions  imposed  by  Sections  23A and 23B,  no  savings
association may (i) loan or otherwise extend credit to an affiliate,  except for
any affiliate  which engages only in activities  which are  permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds,  debentures,
notes or similar  obligations of any affiliate,  except for affiliates which are
subsidiaries of the savings association.

        In addition,  Sections  22(h) and (g) of the FRA place  restrictions  on
loans to executive officers, directors and principal stockholders. Under Section
22(h),  loans to a director,  an  executive  officer  and to a greater  than 10%
stockholder of a savings  institution (a "principal  stockholder"),  and certain
affiliated  interests  of  either,  may not  exceed,  together  with  all  other
outstanding  loans  to  such  person  and  affiliated  interests,   the  savings
institution's  loans-to-one  borrower  limit  (generally  equal  to  15%  of the
institution's unimpaired capital and surplus).  Section 22(h) also requires that
loans to directors,  executive  officers and principal  stockholders  be made on
terms  substantially  the same as offered in  comparable  transactions  to other
persons and also requires prior board  approval for certain loans.  In addition,
the aggregate  amount of extensions  of credit by a savings  institution  to all
insiders  cannot  exceed  the  institution's  unimpaired  capital  and  surplus.
Furthermore,  Section 22(g) places additional restrictions on loans to executive
officers.  At  December  31,  1996,  the Bank was in  compliance  with the above
restrictions.

        Restrictions  on  Acquisitions.   Except  under  limited  circumstances,
savings and loan holding companies are prohibited from acquiring,  without prior
approval  of  the  Director  of the  OTS,  (i)  control  of  any  other  savings
association or savings and loan holding company or substantially  all the assets
thereof or (ii) more than 5% of the voting  shares of a savings  association  or
holding  company  thereof  which is not a  subsidiary.  Except  with  the  prior
approval  of the  Director  of the OTS,  no director or officer of a savings and
loan holding  company or person owning or controlling by proxy or otherwise more
than  25%  of  such  company's   stock,  may  acquire  control  of  any  savings
association,  other  than a  subsidiary  savings  association,  or of any  other
savings and loan holding company.

        The Director of the OTS may only approve  acquisitions  resulting in the
formation of a multiple  savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings  association which operated a home or branch
office  located in the state of the  association  to be  acquired as of March 5,
1987;  (ii) the  acquiror  is  authorized  to  acquire  control  of the  savings
association  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit Insurance Act ("FDIA");  or (iii) the statutes of the state in which the
association to be acquired is located  specifically  permit  institutions  to be
acquired by the state-chartered

                                       26

<PAGE>



associations  or savings and loan holding  companies  located in the state where
the  acquiring  entity is located (or by a holding  company that  controls  such
state-chartered savings associations).

        The FRB may approve an application by a bank holding  company to acquire
control of a savings association. A bank holding company that controls a savings
association  may merge or consolidate  the assets and liabilities of the savings
association  with, or transfer  assets and  liabilities  to, any subsidiary bank
which is a member of the Bank  Insurance  Fund  ("BIF") with the approval of the
appropriate  federal  banking  agency and the FRB. As a result of these  amended
provisions,  there have been a number of acquisitions of savings associations by
bank holding companies in recent years.

        The Bank. The OTS has extensive regulatory authority over the operations
of savings  associations.  As part of this authority,  savings  associations are
required  to file  periodic  reports  with the OTS and are  subject to  periodic
examinations  by the OTS.  The  investment  and  lending  authority  of  savings
associations  are  prescribed  by  federal  laws  and  regulations  and they are
prohibited  from  engaging  in any  activities  not  permitted  by such laws and
regulations.  Those  laws  and  regulations  generally  are  applicable  to  all
federally  chartered savings  associations and may also apply to state-chartered
savings associations.  Such regulation and supervision is primarily intended for
the protection of depositors.

        The OTS' enforcement  authority over all savings  associations and their
holding  companies  includes,  among other  things,  the ability to assess civil
money  penalties,  to issue  cease and desist or removal  orders and to initiate
injunctive actions.  In general,  these enforcement actions may be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading or untimely reports filed with the OTS.

        Insurance  of  Accounts.  The  deposits  of the Bank are  insured to the
maximum  extent  permitted  by the SAIF,  and are  backed by the full  faith and
credit of the United States  Government.  As insurer,  the FDIC is authorized to
conduct examinations of, and to require reporting by, FDIC-insured institutions.
It also may prohibit any FDIC-insured  institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to the FDIC.
The FDIC also has the authority to initiate  enforcement actions against savings
associations, after giving the OTS an opportunity to take such action.

        The FDIC may terminate the deposit  insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution has engaged or is engaging in unsafe or unsound practices,  is in an
unsafe  or  unsound  condition  to  continue  operations,  or has  violated  any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.

        On  September  30,  1996,  the  President  signed  into law the  Omnibus
Consolidated  Appropriations  Act. Part of this act, the Deposit Insurance Funds
Act of 1996  ("BIF/SAIF  Legislation"),  provides for,  among other things,  the
resolution of the FDIC premium  disparity between BIF and SAIF insured financial
institutions.  Prior to the legislation,  most insured  depository  institutions
holding BIF-assessable deposits paid the statutory minimum of $2,000 for deposit
insurance  while  most  insured  depository  institutions  with  SAIF-assessable
deposits,  such as the Bank, paid the statutory  minimum of 23 basis points (100
basis points being equal to 1%).

        The  BIF/SAIF  Legislation  required a one-time  special  assessment  to
recapitalize  the SAIF. The assessment,  based on the amount of  SAIF-assessable
deposits held by an institution as of March 31, 1995, was effective on September
30, 1996, and, in accordance with final rules adopted by the FDIC, was paid

                                       27

<PAGE>



in November 1996.  The FDIC  determined  that, in order to fully  capitalize the
SAIF to statutorily  mandated levels, all SAIF insured  depository  institutions
(except  certain  "weak  institutions")  were  assessed  65.7  basis  points  on
SAIF-assessable deposits as of March 31, 1995. If an institution had merged with
or acquired another  institution since March 31, 1995, it was required to add to
its  special  assessment  base the March 31,  1995  assessable  deposits  of the
institution that was acquired.

        The  Emerging  Issues Task Force  ("EITF") of the  Financial  Accounting
Standards Board ("FASB")  previously  discussed the financial  reporting  issues
relating  to a  special  assessment,  and,  in  November  1995,  indicated  that
institutions with SAIF-assessable  deposits should accrue the liability when the
legislation  is enacted and the related charge should be reported as a component
of operating  expenses in the period that includes the enactment  date. The EITF
further  determined  that the charge should not be reported as an  extraordinary
item.

        Consistent with the BIF/SAIF  Legislation,  the Bank's pro-rata one-time
special assessment to recapitalize the SAIF was $4.4 million. In conformity with
the applicable FASB guidelines, the Bank accrued this liability on September 30,
1996,  resulting in the additional one-time increase in FDIC premiums,  and paid
the assessment in November 1996.

        Effective January 1, 1997, the BIF/SAIF  Legislation  requires that SAIF
members have the same  risk-based  assessment  schedule as BIF members,  ranging
from 0 basis points for  "well-capitalized  institutions" to 27 basis points for
"weak  institutions."  Additionally,  the  legislation  provides  for a  sharing
formula  to meet the  Financing  Corporation  bond  obligation  ("FICO  Bonds")1
between  members of the SAIF and the BIF.  Beginning  January 1, 1997, FICO Bond
assessments of 6.4 and 1.3 basis points will be added to any regular premium for
SAIF-assessable  institutions  and  BIF-assessable  institutions,  respectively,
until  December  31, 1999.  Thereafter,  about 2.4 basis points will be added to
regular  premium  assessments  for  all  insured  depositories,  achieving  full
pro-rata  FICO  sharing.   The  BIF/SAIF   Legislation  also  provides  for  the
conditional merger of the BIF and the SAIF no earlier than January 1, 1999. When
the funds are merged, the FICO Bond premium will be equal for all members of the
new fund.

        As a "well capitalized institution", the Bank previously paid the lowest
SAIF  insurance  premium  rate of 23 basis  points on insured  deposits  for the
fourth quarter of 1996. Since the SAIF became fully capitalized as of October 1,
1996,  the regular  assessment  rate for  SAIF-member  institutions  was lowered
retroactively  to that date.  Until January 1, 1997, FICO payments could be made
only from assessments on SAIF-member institutions;  therefore, during the fourth
quarter of 1996 the SAIF  premium  assessment  should  have been only the amount
necessary  to cover the FICO  obligations.  Overpayment  of fourth  quarter FDIC
premiums (currently estimated at approximately 1.25 basis points, or $88,300 for
the Bank) will be refunded or credited  toward future FDIC  insurance  premiums.
Beginning   January  1,  1997,  unless  the  base  rate  for  "well  capitalized
institutions"  is modified,  the Bank's FDIC premium  should be 6.4 basis points
(the FICO Bond  obligation).  Based on deposit levels at December 31, 1996, this
will reduce the Bank's annual premium assessment by approximately $1.2 million.

        The BIF/SAIF  Legislation provides for the conditional merger of the BIF
and the SAIF on January 1, 1999,  depending  upon the  outcome of  re-chartering
issues associated with the legislation.  By March 31, 1997, the Secretary of the
Treasury  is  required  to  conduct  a study and  prepare  a report to  Congress
addressing all issues which the Secretary considers relevant with respect to the
development of

-----------------------------
1 FICO  Bonds  were  issued in an attempt  undertaken  between  1987 and 1989 to
provide  funds for the ailing  Federal  Savings and Loan  Insurance  Corporation
("FSLIC") without a direct taxpayer expense. Since the establishment of the SAIF
in 1989, a portion of the SAIF  premiums has been  earmarked to satisfy the $780
million in annual  interest  obligations on FICO Bonds,  interest that continues
until 2019.


                                       28

<PAGE>



a common charter for all insured  depository  institutions  and the abolition of
separate and distinct charters between banks and savings institutions.

        Regulatory Capital Requirements.  Federally insured savings associations
are  required to maintain  minimum  levels of  regulatory  capital.  The OTS has
established  capital  standards  applicable to all savings  associations.  These
standards generally must be as stringent as the comparable capital  requirements
imposed  on  national  banks.  The OTS  also is  authorized  to  impose  capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis.

        Current OTS capital  standards  require savings  associations to satisfy
three  different   capital   requirements.   Under  these   standards,   savings
associations  must maintain  "tangible"  capital equal to 1.5% of adjusted total
assets,  "core" capital equal to 3% of adjusted total assets and "total" capital
(a  combination  of  core  and   "supplementary"   capital)  equal  to  8.0%  of
"risk-weighted"  assets. For purposes of the regulation,  core capital generally
consists  of  common   stockholders'   equity  (including   retained  earnings),
noncumulative perpetual preferred stock and related surplus,  minority interests
in  the   equity   accounts   of  fully   consolidated   subsidiaries,   certain
nonwithdrawable  accounts  and  pledged  deposits  and  "qualifying  supervisory
goodwill."  Tangible  capital is given the same  definition  as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings  association's  intangible assets, with only a limited exception
for purchased  mortgage  servicing  rights  ("PMSRs").  The Bank had no PMSRs at
December 31,  1996.  Both core and  tangible  capital are further  reduced by an
amount  equal  to  a  savings  association's  debt  and  equity  investments  in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries  engaged in  activities  undertaken  as agent for  customers  or in
mortgage  banking  activities and subsidiary  depository  institutions  or their
holding  companies).  At  December  31,  1996,  the  Bank had no  investment  in
subsidiaries  which was  impermissible  and  required  to be  deducted  from its
capital  calculation.  See  Note  14 of  the  Notes  to  Consolidated  Financial
Statements included in Item 8 hereof.

        A savings  association  is  allowed  to include  both core  capital  and
supplementary  capital in the  calculation  of its total capital for purposes of
the risk-based capital  requirements,  provided that the amount of supplementary
capital does not exceed the savings  association's  core capital.  Supplementary
capital generally consists of hybrid capital  instruments;  perpetual  preferred
stock which is not eligible to be included as core  capital;  subordinated  debt
and  intermediate-term  preferred stock;  and,  subject to limitations,  general
allowances for loan losses.  Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring  no  additional  capital) for assets such as cash to 100% for
repossessed  assets  or  loans  more  than  90  days  past  due.   Single-family
residential  real estate loans which are not past-due or non-accruing  and which
have been made in accordance with prudent underwriting  standards are assigned a
50%  level  in  the  risk-weighing  system,  as  are  certain   privately-issued
mortgage-backed  securities  representing  indirect  ownership  of  such  loans.
Off-balance  sheet items also are  adjusted to take into  account  certain  risk
characteristics.

        OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets,  reduced by any valuation  allowances,  in
excess of deferred tax  liabilities).  Application  of the limit  depends on the
possible  sources of  taxable  income  available  to an  institution  to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally  are not  limited:  taxes  paid in prior  carryback  years and  future
reversals  of existing  taxable  temporary  differences.  To the extent that the
realization  of deferred tax assets depends on an  institution's  future taxable
income (exclusive of reversing temporary differences and carryforwards),  or its
tax-planning  strategies,  such  deferred tax assets are limited for  regulatory
capital  purposes to the lesser of the amount  that can be  realized  within one
year of the  quarter-end  report date or 10% of core  capital.  At December  31,
1996,  the Bank had  $64,000  of net  deferred  tax  assets  under  SFAS No. 109
included in the Bank's other  assets.  See Note 16 of the Notes to  Consolidated
Financial Statements included in Item 8 hereof.


                                       29

<PAGE>



        Effective  November 28, 1994,  the OTS revised its interim policy issued
in August 1993,  under which  savings  institutions  computed  their  regulatory
capital in accordance with SFAS No. 115,  "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy,  savings institutions
must  value  securities  available-for-sale  at  amortized  cost for  regulatory
capital  purposes.  This means that in  computing  regulatory  capital,  savings
institutions  should add back any  unrealized  losses and deduct any  unrealized
gains,  net of income taxes, on securities  reported as a separate  component of
GAAP capital.  The Bank adopted SFAS No. 115 on January 1, 1994. At December 31,
1996,  the  application  of SFAS No. 115  resulted in a net increase in retained
earnings of $2.0  million  ($3.2  million net of income tax of $1.2  million) on
mortgage-backed securities available-for-sale.

        In  August  1993,  the  OTS  adopted  a  final  rule   incorporating  an
interest-rate risk component into the risk-based capital  regulation.  Under the
rule, an institution  with a greater than "normal" level of  interest-rate  risk
will be subject to a deduction of its  interest-rate  risk  component from total
capital for purposes of calculating risk-based capital requirement. As a result,
such an institution will be required to maintain  additional capital in order to
comply with the risk-based  capital  requirement.  An institution with a greater
than "normal"  interest-rate risk is defined as an institution that would suffer
a loss of net portfolio  value  exceeding 2.0% of the estimated  market value of
its assets in the event of a 200 basis point  increase or decrease (with certain
minor  exceptions) in interest rates. The  interest-rate  risk component will be
calculated,  on a quarterly  basis,  as one-half  of the  difference  between an
institution's  measured  interest-rate  risk and 2.0%,  multiplied by the market
value of its assets.  The rule also  authorizes  the Director of the OTS, or his
designee,  to waive or defer an institution's  interest-rate risk component on a
case-by-case  basis.  The final rule was  originally  effective as of January 1,
1994,  subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest-rate risk and the effective
date of each quarter's  interest-rate risk component.  However, in October 1994,
the Director of the OTS indicated that it would waive the capital deductions for
institutions  with a greater  than  "normal"  risk  until the OTS  publishes  an
appeals  process.  The OTS has  indicated  that no savings  institution  will be
required to deduct capital for  interest-rate  risk until further notice. In any
event,  management  of the Bank does not  believe  that the OTS'  adoption of an
interest-rate  risk  component  to  the  risk-based  capital   requirement  will
adversely affect the Bank's regulatory capital position.


                                       30

<PAGE>

        The following is a  reconciliation  of the Bank's  equity  determined in
accordance  with GAAP to the four  components of regulatory  capital at December
31, 1996.
<TABLE>
<CAPTION>
                                                                                                    Tier 1
                                               Equity          Tangible             Core          Risk-Based       Risk-Based
                                               Capital          Capital           Capital           Capital         Capital
                                            ------------     -------------     -------------     -------------    -----------
<S>                                          <C>              <C>               <C>                <C>            <C>   
Stockholders' equity,
substantially                                $  127,844       $  127,844        $  127,844         $127,844       $127,844
      restricted
Unrealized gain on securities
      available-for-sale, net of tax             (1,968)          (1,968)           (1,968)          (1,968)        (1,968)
                                             ----------       ----------        ----------         --------       --------
Adjusted GAAP capital                        $  125,876          125,876           125,876          125,876        125,876
                                             ==========
Unallowable land loans                                                --                --               --           (787)
Intangible assets                                                 (4,821)           (4,821)          (4,821)        (4,821)
General valuation allowances                                          --                --               --          5,973
                                                              ----------        ----------         --------       --------
Regulatory capital measure                                       121,055           121,055          121,055        126,241
Minimum capital required                                          21,195            42,390           23,570         47,139
                                                              ----------        ----------         --------       --------
Excess                                                        $   99,860        $   78,665         $ 97,485       $ 79,102
                                                              ==========        ==========         ========       ========
Total assets per Thrift Report               $1,418,659
Total risk-weighted assets                   ==========                                            $589,241       $589,241
                                                                                                   ========       ========
Total tangible assets                                         $1,412,973        $1,412,973
                                                              ==========        ==========
Capital ratio                                       8.9%             8.6%              8.6%            20.5%          21.4%
Regulatory capital category:
      Well capitalized, equal
         to or greater than                                          N/A               5.0%             6.0%          10.0%
                                                              ----------        ----------         --------       --------
Excess                                                               N/A               3.6%            14.5%          11.4%
                                                              ==========        ==========         ========       ========
</TABLE>

      Any  savings  association  that fails any of the capital  requirements  is
subject to possible  enforcement  actions by the OTS or the FDIC.  Such  actions
could  include a  capital  directive,  a cease and  desist  order,  civil  money
penalties,  the establishment of restrictions on an association's operations and
the  appointment  of a  conservator  or receiver.  The OTS'  capital  regulation
provides that such actions, through enforcement proceedings or otherwise,  could
require one or more of a variety of corrective actions.

      Prompt  Corrective  Action.  Under  Section 38 of the FDIA as added by the
Federal Deposit Insurance Corporation  Improvement Act of 1991 ("FDICIA"),  each
federal  banking  agency is required to implement a system of prompt  corrective
action for institutions which it regulates. In early September 1992, the federal
banking agencies,  including the OTS, adopted  substantially similar regulations
which are intended to implement Section 38 of the FDIA. These regulations became
effective  December 19, 1992.  Under the  regulations,  an institution  shall be
deemed to be (i) "well  capitalized" if it has total risk-based capital of 10.0%
or more,  has a Tier I risk-based  capital  ratio of 6.0% or more,  has a Tier I
leverage  capital ratio of 5.0% or more and is not subject to any order or final
capital  directive to meet and maintain a specific capital level for any capital
measure,  (ii)  "adequately  capitalized" if it has a total  risk-based  capital
ratio of 8.0% or more, a Tier I risk-based  capital  ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized," (iii) "undercapitalized"
if it has a total  risk-based  capital  ratio that is less than  8.0%,  a Tier I
risk-based  capital  ratio that is less than 4.0% or a Tier I  leverage  capital
ratio  that  is  less  than  4.0%  (3.0%  under  certain  circumstances),   (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
Tier I  leverage  capital  ratio  that is less than  3.0%,  and (v)  "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal  to or  less  than  2.0%.  Section  38 of the  FDIA  and  the  regulations
promulgated  thereunder also specify circumstances under which a federal banking
agency may

                                       31

<PAGE>



reclassify a well  capitalized  institution  as adequately  capitalized  and may
require an adequately capitalized institution or an undercapitalized institution
to comply  with  supervisory  actions as if it were in the next  lower  category
(except  that the  FDIC  may not  reclassify  a  significantly  undercapitalized
institution as critically undercapitalized).  At December 31, 1996, the Bank was
in the "well capitalized" category.

      Safety and  Soundness.  FDICIA  requires each federal  banking  regulatory
agency to  prescribe,  by  regulation  or  guideline,  standards for all insured
depository institutions and depository institution holding companies relating to
(i)  internal  controls,  information  systems  and  audit  systems;  (ii)  loan
documentation;  (iii) credit underwriting; (iv) interest-rate risk exposure; (v)
asset  growth;  (vi)  compensation,  fees and  benefits;  and (vii)  such  other
operational and managerial standards as the agency determines to be appropriate.
The  compensation   standards  would  prohibit  employment  contracts  or  other
compensatory arrangements that provide excess compensation,  fees or benefits or
could lead to  material  financial  loss.  In  addition,  each  federal  banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality,  earnings and stock  valuation as the agency  determines to be
appropriate.  Effective August 9, 1995, the federal banking agencies,  including
the OTS, implemented final rules and guidelines  concerning standards for safety
and soundness required to be prescribed by regulation  pursuant to Section 39 of
the FDIA. In general,  the standards  relate to (1)  operational  and managerial
matters; (2) asset quality and earnings;  and (3) compensation.  The operational
and managerial  standards cover (a) internal  controls and information  systems,
(b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e)
interest  rate  exposure,  (f)  asset  growth,  and (g)  compensation,  fees and
benefits. Under the asset quality and earnings standards, the Savings Bank would
be required to establish and maintain systems to (i) identify problem assets and
prevent  deterioration  in those assets,  and (ii) evaluate and monitor earnings
and ensure that earnings are sufficient to maintain  adequate capital  reserves.
Finally,  the compensation  standard states that compensation will be considered
excessive if it is unreasonable  or  disproportionate  to the services  actually
performed by the individual being  compensated.  Effective  October 1, 1996, the
federal  banking  agencies  also adopted  quality and earnings  standards.  If a
savings  institution  fails  to  meet  any  of  the  standards   promulgated  by
regulation,  then such  institution  will be required to submit a plan within 30
days to the OTS specifying the steps it will take to correct the deficiency.  In
the event that a savings  institution  fails to submit or fails in any  material
respect to  implement a  compliance  plan within the time allowed by the federal
banking  agency,  Section  39 of the FDIA  provides  that the OTS must order the
institution to correct the  deficiency  and may (1) restrict  asset growth;  (2)
require the savings  institution  to  increase  its ratio of tangible  equity to
assets; (3) restrict the rates of interest that the savings institution may pay;
or (4) take any other  action that would  better carry out the purpose of prompt
corrective action. The Bank believes that it has been and will continue to be in
compliance with each of the standards as they have been adopted by the OTS.

      Brokered  Deposits.  The FDIC  has  promulgated  regulations  implementing
limitations  on brokered  deposits  pursuant to FDICIA.  Under the  regulations,
well-capitalized  institutions are subject to no brokered  deposit  limitations,
while adequately capitalized institutions are able to accept, renew or roll over
brokered  deposits only (i) with a waiver from the FDIC, and (ii) subject to the
limitation  that they do not pay an effective  yield on any such  deposit  which
exceeds by more than (a) 75 basis points the effective yield paid on deposits of
comparable  size and  maturity  in such  institution's  normal  market  area for
deposits  accepted in its normal  market area,  or (b) by 120 percent for retail
deposits and 130 percent for wholesale  deposits,  respectively,  of the current
yield on comparable  maturity U.S.  treasury  obligations for deposits  accepted
outside the institution's normal market area. Undercapitalized  institutions are
not  permitted  to accept  brokered  deposits  and may not  solicit  deposits by
offering  an  effective  yield  that  exceeds  by more than 75 basis  points the
prevailing  effective yields on insured  deposits of comparable  maturity in the
institution's  normal  market area or in the market area in which such  deposits
are being  solicited.  At December  31,  1996,  the Bank was a  well-capitalized
institution  and was not  subject to  restrictions  on  brokered  deposits.  See
"Business - Sources of Funds - Deposits."

       Liquidity Requirements. All savings associations are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its average daily balance of net withdrawable

                                       32

<PAGE>



deposit  accounts  and  borrowings  payable in one year or less.  The  liquidity
requirement  may vary  from time to time  (between  4% and 10%)  depending  upon
economic  conditions  and  savings  flows of all  savings  associations.  At the
present  time,  the required  minimum  liquid  asset ratio is 5%.  Additionally,
current regulations require that short-term liquid assets must continue at least
1% of the  average  daily  balance  of net  withdrawable  accounts  and  current
borrowings.  The  Bank,  as a  component  of its  overall  asset  and  liability
management  strategy,  maintains qualifying liquid assets at levels which exceed
regulatory  requirements  and at  December  31,  1996,  had a  total  regulatory
liquidity of 9.2% and a short-term regulatory liquidity of 1.1%.

      Qualified  Thrift Lender Test.  Under  legislation  adopted by Congress in
1996, a savings  association  can comply with the QTL test by either meeting the
QTL test set  forth in the Home  Owners'  Loan  Act,  as  amended  ("HOLA")  and
implementing   regulations  or  qualifying  as  a  domestic  building  and  loan
association as defined in the Code. A savings  association  that does not comply
with the QTL test must  either  convert  to a bank  charter  or comply  with the
following restrictions on its operations:  (i) the association may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible  for a national  bank;  (ii) the branching
powers of the association shall be restricted to those of a national bank; (iii)
the association  shall not be eligible to obtain any advances from its FHLB; and
(iv)  payment  of  dividends  by the  association  shall be subject to the rules
regarding  payment of dividends by a national bank. Upon the expiration of three
years  from the date the  association  ceases  to be a QTL,  it must  cease  any
activity and not retain any investment not  permissible  for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).

      The QTL  test  set  forth  in the  HOLA  requires  that  Qualified  Thrift
Investments  ("QTIs")  represent  65% of portfolio  assets on a monthly  average
basis in nine out of every 12  months.  Portfolio  assets  are  defined as total
assets less intangibles,  property used by a savings association in its business
and liquidity  investments in an amount not exceeding 20% of assets.  Generally,
QTIs are residential  housing related  assets.  The 1996 amendments  allow small
business loans, credit card loans, student loans and loans for personal,  family
and  household   purposes  to  be  included  without   limitation  as  qualified
investments.  At December 31, 1996,  95.1% of the Bank's assets were invested in
QTIs which  exceeded the  percentage  required to qualify the Bank under the QTL
test.

      Restrictions  on Capital  Distributions.  OTS  regulations  govern capital
distributions  by savings  associations,  which  include cash  dividends,  stock
redemptions  or  repurchases,  cash-out  mergers,  interest  payments on certain
convertible  debt and other  transactions  charged to the  capital  account of a
savings  association to make capital  distributions.  Generally,  the regulation
creates a safe  harbor  for  specified  levels  of  capital  distributions  from
associations  meeting at least their minimum  capital  requirements,  so long as
such  associations  notify the OTS and receive no objection to the  distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval  before making any capital
distributions.

      Generally,  savings  associations  that  before  and  after  the  proposed
distribution meet or exceed their fully phased-in capital requirements,  or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar  year-to-date  plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is  defined to mean the  percentage  by which the  association's  ratio of total
capital to assets exceeds the ratio of its fully phased-in  capital  requirement
to  assets.  "Fully  phased-in  capital  requirement"  is  defined  to  mean  an
association's  capital requirement under the statutory and regulatory  standards
applicable  on  December  31,  1994,  as  modified  to  reflect  any  applicable
individual minimum capital requirement imposed upon the association.  Failure to
meet fully  phased-in  or minimum  capital  requirements  will result in further
restrictions on capital  distributions  including possible  prohibition  without
explicit OTS approval. See "- Regulatory Capital Requirements."


                                       33

<PAGE>



      Tier 2  associations,  which are  associations  that  before and after the
proposed  distribution  meet or exceed their minimum capital  requirements,  may
make capital distributions during any calendar year up to 75% of net income over
the most recent four-quarter period.

      In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations  must submit  written notice to the OTS 30 days prior to making the
distribution.  The OTS may object to the distribution  during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal  supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association (a Tier 3 association  is an association  that does
not meet current  minimum  capital  requirements or has been notified by the OTS
that it will be  treated as a Tier 3  association  because it is in need of more
than normal supervision and, consequently,  a Tier 3 association cannot make any
capital distribution without obtaining prior OTS approval) as a result of such a
determination.  The Bank  currently is a Tier 1 institution  for purposes of the
regulation dealing with capital distributions.

      On December 5, 1994, the OTS published a notice of proposed  rulemaking to
amend its capital  distribution  regulation.  Under the  proposal,  institutions
would only be permitted to make capital  distributions  that would not result in
their  capital  being  reduced  below the level  required to remain  "adequately
capitalized," as defined under "- Prompt Corrective  Action" above.  Because the
Bank is a subsidiary of a holding  company,  the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital  distribution.  The
Bank does not believe that the  proposal  will  adversely  affect its ability to
make capital distributions if it is adopted substantially as proposed.

      OTS  regulations  also  prohibit  the Bank from  declaring  or paying  any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
(or total) capital of the Bank would be reduced below the amount  required to be
maintained for the liquidation  account established by it for certain depositors
in connection with its conversion from mutual to stock form.

      Loans-to-One  Borrower.  The permissible  amount of loans-to-one  borrower
generally  follows  the  national  bank  standard  for all loans made by savings
institutions.  The national bank standard generally does not permit loans-to-one
borrower  to exceed the greater of  $500,000  or 15% of  unimpaired  capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable  securities.  For  information  about the largest  borrowers from the
Bank, see "Business - Lending Activities - Loans-to-One Borrower Limitations."

      Classified Assets.  Federal  regulations require that each insured savings
institution  classify its assets on a regular basis. In addition,  in connection
with examinations of insured  institutions,  federal examiners have authority to
identify  problem assets and, if  appropriate,  classify  them.  There are three
classifications  for  problem  assets:  "substandard,"  "doubtful"  and  "loss."
Substandard  assets have one or more defined weaknesses and are characterized by
the distinct  possibility that the insured institution will sustain some loss if
the  deficiencies  are not  corrected.  Doubtful  assets have the  weaknesses of
substandard assets, with the additional  characteristic that the weaknesses make
collection  or  liquidation  in full on the basis of currently  existing  facts,
conditions and values questionable,  and there is a high possibility of loss. An
asset classified loss is considered  uncollectible and of such little value that
continuance as an asset of the  institution is not warranted.  Another  category
designated  "special mention" also must be established and maintained for assets
which do not currently expose an insured  institution to a sufficient  degree of
risk  to  warrant  classification  as  substandard,  doubtful  or  loss.  Assets
classified  as  substandard  or doubtful  require the  institution  to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the  portion of the asset  classified  loss,  or
charge-off such amount.  General loss  allowances  established to cover possible
losses related to assets  classified  substandard or doubtful may be included in
determining an institution's  regulatory  capital up to certain  amounts,  while
specific  valuation  allowances  for loan  losses do not  qualify as  regulatory
capital. Federal examiners may disagree

                                       34

<PAGE>



with an insured  institution's  classifications  and amounts reserved.  See
"Business - Asset Quality - Other Classified Assets."

      Community  Reinvestment.  Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations,  a savings association has a
continuing  and  affirmative  obligation  consistent  with its  safe  and  sound
operation to help meet the credit needs of its entire  community,  including low
and moderate income  neighborhoods.  The CRA does not establish specific lending
requirements  or  programs  for  financial  institutions  nor  does it  limit an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular  community,  consistent with the CRA.
The CRA  requires  the OTS,  in  connection  with its  examination  of a savings
institution,  to assess the institution's  record of meeting the credit needs of
its community and to take such record into account in its  evaluation of certain
applications by such  institution.  Public  disclosure of an  institution's  CRA
rating is required,  and the OTS is required to provide a written  evaluation of
an  institution's  CRA performance  utilizing a four tiered  descriptive  rating
system.  The Bank  received  an  "outstanding"  rating  as a result  of its last
evaluation in June 1996.

      Nationwide  Banking.  The  Bank  may  face  additional   competition  from
commercial  banks  headquartered  outside of the  Commonwealth  of Virginia as a
result of the  enactment of the  Riegle-Neal  Interstate  Banking and  Branching
Efficiency Act of 1994, which becomes fully effective on June 1, 1997, and which
will allow banks and bank holding companies headquartered outside of Virginia to
enter the Bank's market through  acquisition,  merger or de novo branching.  For
further information about the Bank's competition, see "Business - Competition."

      Policy  Statement on  Nationwide  Branching.  Currently,  OTS  regulations
permit  nationwide  branching  to the extent  allowed by federal  statute  which
generally permits a federally  chartered savings association to establish branch
offices outside of its home state if the association meets the domestic building
and loan test in Section  7701(a)(19) of the Code or the asset  composition test
of subparagraph (c) of that section,  and if, with respect to each state outside
of its home state where the association has established branches,  the branches,
taken alone,  also satisfy one of the two tax tests.  An association  seeking to
take  advantage  of this  authority  would have to have a branching  application
approved  by the  OTS,  which  would  consider  the  regulatory  capital  of the
association and its record under the CRA, as amended, among other things.

      Federal  Home  Loan  Bank  System.  The  Bank is a  member  of the FHLB of
Atlanta,  which is one of 12 regional  FHLBs that  administers a home  financing
credit  function  for  savings  associations.  Each FHLB  serves as a reserve or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of  Atlanta  in an  amount  equal to at least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the  beginning  of each  year or 5% of its  advances  from the FHLB of  Atlanta,
whichever is greater.  At December 31, 1996,  the Bank had $13.1 million in FHLB
stock, which was in compliance with this requirement.

      Federal  Reserve System.  The FRB requires all depository  institutions to
maintain  reserves against their  transaction  accounts  (primarily NOW checking
accounts) and non-personal time deposits.  At December 31, 1996, the Bank was in
compliance with applicable requirements. However, because required reserves must
be  maintained in the form of vault cash or a  noninterest-bearing  account at a
Federal  Reserve Bank,  the effect of this reserve  requirement  is to reduce an
institution's earning assets.


                                       35

<PAGE>



Federal Taxation

      General.  The  Company  and the  Bank are  subject  to the  corporate  tax
provisions  of the Code,  as well as certain  additional  provisions of the Code
which apply to thrift and other types of financial  institutions.  The following
discussion  of tax matters is intended only as a summary and does not purport to
be a  comprehensive  description of the tax rules  applicable to the Company and
the Bank.

      Fiscal  Year. The  Company  and  the  Bank  and  its  subsidiaries  file a
consolidated federal income tax return on a calendar year basis.

      Method of Accounting. The Bank maintains its books and records for federal
income tax purposes using the accrual  method of accounting.  The accrual method
of accounting, for income tax purposes,  generally requires that items of income
be recognized  when all events have occurred that establish the right to receive
the income and the amount of income can be determined with reasonable  accuracy,
and that  items of  expense  be  deducted  at the later of (i) the time when all
events have  occurred  that  establish  the liability to pay the expense and the
amount of such liability can be determined with reasonable  accuracy or (ii) the
time when economic performance with respect to the item of expense has occurred.

      Bad Debt  Reserves.  On August 20, 1996, as part of the Small Business Job
Protection Act of 1996 ("SBJPA"),  Congress  enacted  legislation  which,  among
other  things,  substantially  changed the method  savings  institutions  use to
compute deductions for bad debt. Since 1952, savings  institutions have received
special  tax  treatment  with  respect to  calculating  deductions  for bad debt
reserves.  Generally,  most businesses  compute bad debt deductions by using the
specific charge-off method,  which allows a taxpayer to deduct the amount of any
debt that becomes wholly or partially  worthless during the year. Under previous
law, a qualified savings  institution,  such as the Bank, could elect to use one
of two reserve methods of accounting, -- the experience method or the percentage
of taxable income method. To qualify, 60% of a savings  institution's assets had
to consist of "qualifying assets" such as cash, government obligations, or loans
secured by residential real property.  If a savings institution used the reserve
method,  it was required to  establish  and maintain a reserve for bad debts and
charge  actual  losses  against  the  reserve.  Regardless  of whether a savings
institution experienced actual losses, it was allowed to deduct annual additions
to its bad debt reserve that were  computed by using  either the  percentage  of
taxable income method or the experience method. A savings institution's reserve,
however,  was subject to recapture if it  converted  to a commercial  bank,  was
acquired by a  commercial  bank,  or failed to satisfy the 60%  qualified  asset
test. The SBJPA  prohibits the continued use of the percentage of taxable income
method for all savings  institutions.  While savings institutions with less than
$500 million in assets may still use the experience  method,  all others will be
required to use the specific charge-off method.

      Additionally,  the SBJPA  changes the law  regarding  the recapture of bad
debt reserves  accumulated before 1988 and requires all savings  institutions to
recapture  their post-1987  reserves.  Reserves  accumulated  after 1987 must be
restored  to taxable  income  ratably  over a  six-year  period  starting  after
December 31, 1995,  unless the institution meets a residential loan requirement,
in which case the  recapture may be suspended on a per annum basis for up to two
years. A savings  institution with more than $500 million in assets, such as the
Bank, is generally  required to recapture its entire post-1987  additions to its
bad debt reserve.  The Bank has determined  that  approximately  $1.4 million of
post-1987  tax  reserves  are subject to  recapture.  Since the Bank  previously
established  a  deferred  tax  liability  corresponding  to  its  post-1987  tax
reserves,  the effects of the recapture are not material to the Bank's financial
condition  or results of  operations.  These new  recapture  provisions  make it
substantially  easier for savings  institutions  to convert to a commercial bank
charter, diversify their assets, or merge into a commercial bank.

      The SBJPA  also  repeals  certain  other  provisions  in  present  tax law
applicable only to savings  institutions,  including special rules applicable to
foreclosures;  a reduction in the dividends received deduction; the ability of a
savings institution to use net operating losses to offset its income from a

                                       36

<PAGE>



residual interest in a REMIC; and the denial of a portion of certain tax credits
to a savings institution. The Bank has not determined what effect, if any, these
changes may have on its financial condition or results of operations.

      Distributions.  While the Bank maintains a bad debt reserve, if it were to
distribute cash or property to its sole  stockholder  having a total fair market
value in excess of its  accumulated  tax-paid  earnings and profits,  or were to
distribute cash or property to its  stockholder in redemption of its stock,  the
Bank would  generally be required to recognize as income an amount  which,  when
reduced by the amount of federal  income tax that would be  attributable  to the
inclusion of such amount in income, is equal to the lesser of: (i) the amount of
the  distribution  or (ii) the sum of (a) the amount of the accumulated bad debt
reserve  of the Bank with  respect to  qualifying  real  property  loans (to the
extent  that  additions  to such  reserve  exceed  the  additions  that would be
permitted  under  the  experience  method)  and (b)  the  amount  of the  Bank's
supplemental bad debt reserve.

      Minimum Tax. The Code imposes an alternative  minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax  preferences  ("alternative
minimum  taxable income" or "AMTI").  The alternative  minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction  allowable for
a taxable year  pursuant to the  percentage  of taxable  income  method over the
amount allowable under the experience  method. The other items of tax preference
that constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986,)  private  activity  bonds other than certain
qualified  bonds and (b) for taxable  years  beginning  after  1989,  75% of the
excess (if any) of (i) adjusted  current  earnings as defined in the Code,  over
(ii) AMTI  (determined  without regard to this preference and prior to reduction
by net operating  losses).  Net operating  losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.

      Audit by Internal Revenue Service.  The Bank's consolidated federal income
tax returns for taxable  years through  December 31, 1990,  have been closed for
the purpose of correct examination by the Internal Revenue Service.

State Taxation

      The  Commonwealth  of  Virginia  imposes  a tax at the rate of 6.0% on the
"Virginia  taxable income" of the Bank and the Company.  Virginia taxable income
is equal  to  federal  taxable  income  with  certain  adjustments.  Significant
modifications include the subtraction from federal taxable income of interest or
dividends on obligations or securities of the United States that are exempt from
state income taxes.

                                       37

<PAGE>



Item 2.        Properties

       The  following  table  sets forth  certain  information  relating  to the
Company's offices at December 31, 1996.
<TABLE>
<CAPTION>
                                                  Net Book Value of
                                                    Property and
                                                     Leasehold
                                      Owned or     Improvements at        Deposits at
        Location                      Leased     December 31, 1996     December 31, 1996
--------------------------------     ---------   ------------------    ------------------
                                                        (Dollars in Thousands)


<S>                                   <C>           <C>                     <C>    

Main Office:

109 East Main Street                  Owned (1)     $ 6,728                 $142,606
Norfolk, Virginia 23510


Branch Offices:

7420 Granby Street                    Owned             358                   88,102
Norfolk, Virginia 23505

944 Independence Boulevard            Owned             617                   57,124
Virginia Beach, Virginia 23455

3225 High Street                      Owned             467                   48,262
Portsmouth, Virginia 23707

6056 East Indian River Road           Owned             136                   44,536
Virginia Beach, Virginia 23462

Military Circle Shopping Center       Owned             206                   39,182
East Ring Road
Norfolk, Virginia 23502

213 Battlefield Boulevard, South      Owned              44                   38,683
Chesapeake, Virginia 23320

3921 Poplar Hill Road                 Owned             153                   37,153
Chesapeake, Virginia 23321

2336 East Little Creek Road           Owned (2)          29                   34,010
Norfolk, Virginia 23518

2008 Cromwell Drive                   Owned             199                   33,903
Norfolk, Virginia 23509

1316 North Great Neck Road            Owned (3)         116                   30,697
Virginia Beach, Virginia 23454

501 S. Independence Boulevard         Owned             730                   27,284
Virginia Beach, Virginia  23452

6201 Portsmouth Boulevard             Owned             182                   25,276
Portsmouth, Virginia  23701

728 West 21st Street                  Leased (4)          6                   23,107
Norfolk, Virginia 23517

                                                       (Footnotes on following page)

                                       38

<PAGE>


3801 Pacific Avenue                   Owned         $   208                 $ 14,966
Virginia Beach, Virginia 23451

330 West Constance Road               Owned             507                   13,587
Suffolk, Virginia 23434

601 Lynnhaven Parkway                 Owned             418                   13,427
Virginia Beach, Virginia 23452

1400 Kempsville Road                  Leased (5)         28                    7,673
Chesapeake, Virginia  23320

4530 East Virginia Beach Boulevard    Owned (6)       2,368                    7,327
Norfolk, Virginia 23502

2089 General Booth Boulevard          Owned             273                    5,417
Virginia Beach, Virginia
23454-5801


Other Properties:

120 East Main Street                  Owned           1,809                     N/A
                                                    -------                 -------
Norfolk, Virginia  23510

                                                    $15,582                 $732,322
                                                    =======                 ========
<FN>
-----------------------------
(1)    Building is an eight-story office building with Bank operations occupying
       two stories.  Approximately  70% of the space currently is leased and the
       Bank  anticipates  entering  into  additional  leases within the next few
       months.

(2)    The branch office building is owned by the Bank and the land is leased. 
       The land lease expires in September 2000.

(3)    The branch  office  building is owned by the Bank and the land is leased.
       The land lease expires in March 2008; the Bank has options  through March
       2028.

(4)    Lease  expires  in  December  1999; the Bank has options through December 
       2019.

(5)    Lease expires in March 2001; the Bank has options through March 2011.

(6)    Building also serves as the Bank's operations center.
</FN>
</TABLE>


                                       39

<PAGE>



Item 3.        Legal Proceedings.

       The  Company  and the Bank are  involved  in  routine  legal  proceedings
occurring  in the  ordinary  course of business  which,  in the  aggregate,  are
believed by  management  to be  immaterial  to the  financial  condition  of the
Company.

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

       Not applicable.

PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder 
               Matters.

       The information required herein is incorporated by reference from page 64
of the Registrant's 1996 Annual Report to Stockholders ("Annual Report").

Item 6.        Selected Financial Data.

       The  information  required  herein is  incorporated by reference from the
table on page 5 of the Registrant's 1996 Annual Report.

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

       The information required herein is incorporated by reference from pages 6
through 22 of the Registrant's 1996 Annual Report.

Item 8.        Financial Statements and Supplementary Data.

       The  information  required herein is incorporated by reference from pages
23 through 62 of the Registrant's 1996 Annual Report.

Item 9.        Changes in and Disagreements on Accounting and Financial 
               Disclosure.

       Not applicable.


PART III

Item 10.       Directors and Executive Officers of the Registrant.

       The information required herein is incorporated by reference from pages 4
to 7  of  the  Registrant's  Proxy  Statement  dated  March  17,  1997,  ("Proxy
Statement").

Item 11.       Executive Compensation.

       The information required herein is incorporated by reference from pages 8
through 16 of the Registrant's Proxy Statement.



                                       40

<PAGE>

Item 12.       Security Ownership of Certain Beneficial Owners and Management.

       The information required herein is incorporated by reference from pages 2
and 3 of the Registrant's Proxy Statement.

Item 13.       Certain Relationships and Related Transactions.

       The information  required herein is incorporated by reference to pages 13
and 14 of the Registrant's Proxy Statement.

PART IV

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)    Documents filed as part of this Report.

1.     Financial Statements.

       The following  financial  statements are filed as part of this report and
       are incorporated  herein by reference from the  Registrant's  1996 Annual
       Report.
<TABLE>
<CAPTION>

                                                                                                Annual Report
                                                                                                 Page Number
       <S>                                                                                           <C>    
       Index to Consolidated Financial Statements:

          Report of Independent Auditor.......................................................       23

          Consolidated Balance Sheets as of December 31, 1996 and 1995........................       24

          Consolidated Statements of Operations for the years ended
            December 31, 1996, 1995 and 1994..................................................       25

          Consolidated Statement of Changes in Stockholders' Equity for
            the years ended December 31, 1996, 1995 and 1994..................................       26

          Consolidated Statements of Cash Flows for the years ended
            December 31, 1996, 1995 and 1994..................................................       27 and 28

          Notes to Consolidated Financial Statements..........................................       29 through 62
</TABLE>

2.     Supplementary Data and Financial Statement Schedules.

       All schedules for which  provision is made in the  applicable  accounting
       regulation of the Securities and Exchange  Commission are omitted because
       they are not  applicable or the required  information  is included in the
       Consolidated Financial Statements or notes thereto.

                                       41

<PAGE>



3.     Exhibits required by Item 601 of Regulation S-K.

     No.                           Description
----------      ---------------------------------------------------------------


       The  following  such  Exhibits  are  filed as part of this  Form 10-K and
       attached hereto as Exhibits, and this list includes the Exhibit Index:

        13      1996 Annual Report to Stockholders
        23      Consent of Edmondson, LedBetter & Ballard, L.L.P. independent 
                auditor to the Company
        27      Financial Data Schedule

       The  following  such Exhibits are filed as part of this Form 10-K and are
       incorporated herein by reference:

        3.1     Articles of Incorporation of Life Bancorp, Inc. *
        3.2     Bylaws of Life Bancorp, Inc. *
       10.1     Life Bancorp, Inc. Employee Stock Ownership Plan and Trust 1/ **
       10.2     Employment Agreement among the Registrant, Life Savings Bank, 
                FSB and Edward E. Cunningham 1/ **
       10.3     Employment Agreement among the Registrant, Life Savings Bank, 
                FSB and Tollie W. Rich, Jr. 1/ **
       10.4     Severance Agreement among the Registrant, Life Savings Bank, 
                FSB and Nelson R. Arnold (representative of similar agreements
                entered into with T. Frank Clements, Ralph T. Dempsey, Jr., 
                Emory J. Dunning, Jr. and Edward M. Locke) 1/ **
       10.5     1982 Deferred Compensation Plan, as amended and restated 1/ **
       10.6     1991 Deferred Compensation Plan, as amended and restated 1/ **
       10.7     Directors' Retirement Plan 1/ *
       10.8     Consulting Agreement by and among Life Savings Bank, FSB and 
                William J. Fanney 1/ **
       10.9     Life Bancorp, Inc. 1995 Stock Option Plan, as amended 1/ ***
       10.10    Life Bancorp, Inc. Recognition and Retention Plan and Trust 
                Agreement, as amended 1/ ***
        21      Subsidiaries of the Registrant - Reference is made to Item 1.  
                "Business" for the required information
-----------------------------

1/     Management contract or compensatory plan or arrangement.
*      Incorporated by reference from the Registration Statement on Form S-1 
       (Registration No. 33-80772) filed by the Registrant with the Securities 
       and Exchange Commission on June 27, 1994, as amended.
**     Incorporated  by reference  from the Form 10-K of the  Registrant for the
       year ended  December 31,  1994,  filed with the  Commission  on March 31,
       1995.
***    Incorporated by reference from the Form 8-K of the Registrant, filed with
       the Commission on July 26, 1996.


(b)    Reports filed on Form 8-K.
          No  reports  on Form 8-K were  filed  during  the last  quarter of the
          period covered by this Form 10-K.
(c)    Exhibits.
          See (a)3. above for all Exhibits filed herewith and the Exhibit Index.
(d)    Financial Statement Schedules.
          All  financial  statement  schedules  required by  Regulation  S-X are
          included in the Annual Report to Stockholders.

                                       42

<PAGE>



                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) 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.

                                       LIFE BANCORP, INC.



                                       By: /s/ Edward E. Cunningham
                                           -------------------------------------


                                           Edward E. Cunningham
                                           President, Chief Executive Officer
                                           and Chairman of the Board

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.



/s/ Edward E. Cunningham                                          March 27, 1997
------------------------------------------


Edward E. Cunningham
President, Chief Executive Officer and
 Chairman of the Board
 (Principal Executive Officer)


/s/ Emory J. Dunning, Jr.                                         March 27, 1997
------------------------------------------


Emory J. Dunning, Jr.
Senior Vice President, Treasurer and
 Chief Financial Officer
 (Principal Financial Officer)


/s/ Joseph C. Addington, Jr.                                      March 27, 1997
------------------------------------------


Joseph C. Addington, Jr.
Director


/s/ Charles M. Earley, Jr., M.D.                                  March 27, 1997
------------------------------------------


Charles M. Earley, Jr., M.D.
Director


                                       43

<PAGE>






/s/ E. Saunders Early, Jr.                                        March 27, 1997
------------------------------------------


E. Saunders Early, Jr.
Director


/s/ William J. Fanney                                             March 27, 1997
------------------------------------------


William J. Fanney
Director


                                                                  March 27, 1997
/s/ Donald I. Fentress
------------------------------------------


Donald I. Fentress
Director


/s/ William J. Jonak, Jr.                                         March 27, 1997
------------------------------------------


William J. Jonak, Jr.
Director


/s/ Frederick V. Martin                                           March 27, 1997
------------------------------------------


Frederick V. Martin
Director


/s/ Tollie W. Rich, Jr.                                           March 27, 1997
------------------------------------------


Tollie W. Rich, Jr.
Executive Vice President, Chief
 Operating Officer and Director


/s/ Braden Vandeventer                                            March 27, 1997
------------------------------------------


Braden Vandeventer
Director




                                       44