Exhibit 13

                       VIRGINIA FIRST FINANCIAL CORP.


                                      1997

                                  Annual Report




<PAGE>


ABOUT THE COVER

Virginia First has been building its company - and the fortunes of its customers
- for more than a  century.  Through  the  years,  quite a story has  developed.
Within these pages, we'll share it with you.



CONTENTS

Financial Highlight                                           1
---------------------------------------------------------------
Letter to Stockholders                                        2
---------------------------------------------------------------
The History of Virginia First Financial Corp.                 4
---------------------------------------------------------------
Financial Contents                                            8
---------------------------------------------------------------
Offices and Loan Centers                                     54
---------------------------------------------------------------
Locations, Products and Services                             55
---------------------------------------------------------------
Directors & Officers                                         56
---------------------------------------------------------------
Stockholders Information                      Inside Back Cover
---------------------------------------------------------------






<PAGE>


FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)

---------------------------------------------------------------------------------------------------------------------------
                                                                             Years Ended June 30
                                                                             -------------------

                                                                             1997           1996         % Change
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>                  <C>
RESULTS OF OPERATIONS
Net interest income                                                       $30,520        $26,719             14%
Provision for loan losses                                                   2,347          2,429             (3%)
Noninterest income                                                          8,739         14,913            (41%)
Noninterest expense                                                        28,924         20,029             44%
Net Income                                                                  5,112         12,142            (58%)

BALANCE SHEET AT YEAR-END
Assets                                                                    858,403       $746,867             15%
Investment securities                                                      34,249         35,355             (3%)
Loans                                                                     685,366        623,081             10%
Loans held for sale                                                        92,495         46,481             99%
Deposits                                                                  600,205        573,536              5%
Stockholders' equity                                                       66,492         60,966              9%
Shares outstanding                                                          5,810          5,741              1%

PER SHARE DATA
Net income per share                                                        $0.87       $   2.09            (58%)
Cash dividends declared                                                      0.10            .07             43%
Book Value                                                                  11.44          10.63              8%
Weighted Average Shares Outstanding                                         5,855          5,809              1%

SELECTED RATIOS
Return on average assets                                                     0.64%          1.74%           (63%)
Return on average equity                                                     7.90          22.49            (65%)
Allowance for loan losses to total loans                                     1.36           1.21             12%
Net charge offs to average loans outstanding                                 0.09           0.21            (57%)

</TABLE>



[TOTAL ASSETS BAR GRAPH]

1993                       $561,239
1994                       $583,580
1995                       $693,549
1996                       $746,867
1997                       $858,403

Fiscal Year Ended June 30


[STOCKHOLDERS' EQUITY BAR GRAPH]

1993                       $34,512
1994                       $41,079
1995                       $48,772
1996                       $60,966
1997                       $66,492

Fiscal Year Ended June 30


[JUNE 30, 1997 CAPITAL RATIOS BAR GRAPH]

Tangible Capital           7.38%
Core Capital               7.39%
Total Risk-Based Capital   11.61%



                                       1
<PAGE>

LETTER TO STOCKHOLDERS

Dear Fellow Stockholders,
     Over the last five years, Virginia First has undergone tremendous expansion
in an environment of radical change in both the financial  services industry and
in the  communities  where we do business.  In the midst of these changes,  your
bank has  continually  adapted  to the times,  responding  with  innovations  in
technology, processes and in our corporate strategy.
     Virginia First has always striven to operate in the best interests of its 
employees,  customers and shareholders.  Often, this determination has led us to
make  acquisitions  and  expansions  to bolster our  strength in crucial  areas,
preparing  us for the times  ahead.  For example,  our  acquisition  of Southern
Atlantic  Mortgage in 1991 gave us a key expansion point in the dynamic mortgage
banking  industry.  In 1996, we formed  Freedom  Financial  Services,  Inc., our
consumer finance subsidiary,  to ease our expansion into non-traditional lending
markets.
     Most recently,  our acquisition of American  Finance and  Investment,  Inc.
during 1996 to offer mortgage  origination  services over the Internet continues
to  provide  exciting   potential.   AFI  is  generating   substantial   volume,
approximately  $20  million  on a monthly  basis,  and  continues  to refine the
technology to offer mortgage  services  electronically.  We've also expanded our
mortgage banking activities,  in the state of Maryland,  making Virginia First a
major player in the mortgage banking industry throughout the Mid-Atlantic region
and beyond.
     It's  ironic  that  the  growth  and  success  of the  bank has led us to a
crossroad that would  determine the bank's course into the future.  We're now at
the point where we feel it is necessary to dramatically increase our investments
in both  technology  and  more  traditional  delivery  methods  such  as  branch
facilities in order to maintain our competitive  edge as we move toward the year
2000. To that extent,  we've examined the  possibilities of partnering  Virginia
First with a larger entity that embodies and shares our  philosophy  and values,
allowing us to vault forward to the next level without engaging in a lengthy and
expensive process of change.
                                       2
<PAGE>

     As we approach $1 billion in assets,  we enter a competitive arena where it
would become relatively  inefficient for us to compete directly with much larger
banks. It is our perspective that growing outside of our normal  parameters as a
"community  bank" into a mid-level  or larger  bank is  important  for  Virginia
First;  but at the same time, it places us in a position that makes it difficult
to offer the variety of products and services  that top-tier  organizations  can
provide.
     As you are probably  already aware, the pending merger into BB&T presents a
timely and unique  solution to  Virginia  First that allows our bank to generate
the "critical mass" necessary to operate  efficiently and to sustain the revenue
growth  experienced  in recent years.  Just as  important,  we believe that BB&T
offers  a  perfect  fit with our  philosophy  and  values,  in  addition  to the
longer-term strategies we have envisioned for Virginia First.
     Throughout its history, BB&T has embodied many of the same attributes that
have  set  Virginia  First  apart  for all of  these  years.  Theirs  is truly a
"community bank" philosophy within the context of a much larger entity. In fact,
BB&T is largely an  amalgamation  of  community  banks just like ours.  At BB&T,
clients don't represent mere numbers; they represent  relationships.  We believe
that expanding and solidifying those relationships is crucial for success in the
years  ahead  -  especially  as  the  battleground   becomes  increasingly  more
competitive,  and "non-banks"  continue to erode the market share of traditional
financial institutions. Developing a structure that will provide and satisfy all
the  financial  needs  of a  customer  is  an  absolute  necessity  to  maintain
relationships, and BB&T can make this possible.
     We  believe  that this is the best and most  effective  way for our bank to
continue to thrive in the years to come. In addition,  the range of products and
services we can offer as part of BB&T is  dramatically  greater  than we've ever
been able to  provide.  I'm  certain  that  you'll  notice  and  appreciate  the
difference.
     Throughout the years,  and especially  throughout our  deliberations on the
best course for  Virginia  First,  we have been  mindful of your support for our
endeavors.  Thank you for your great  contributions  to the  success of Virginia
First,  and for your  constant  confidence in us. This is a bank to be proud of,
and the best is yet to come.

     Sincerely,

     /s/ Charles A. Patton    
     Charles A. Patton
     President and Chief Executive Officer

                                       3
<PAGE>



                          THE HISTORY OF VIRGINIA FIRST


                                      1888
         During the rebuilding period following the War Between The States,  the
Richmond/Petersburg  area - which had seen more than its share of  destruction -
became the birthplace for The Virginia  Mutual Savings and Loan  Association:  a
bank that would play an instrumental role for the area in the years to come.


                                      1919
         In the boom years after World War I, the Petersburg Mutual Building and
Loan  Association is chartered to serve the financial  needs of individuals  and
businesses.


                                      1930
         Both  the  Virginia  Mutual  Savings  and  Loan   Association  and  the
Petersburg  Mutual Building and Loan Association  survive the stock market crash
and Great Depression.


                                      1956
         William A. Patton is hired by  Petersburg  Savings and Loan,  beginning
the career of the single person who has the greatest impact on the Institution's
growth spanning the next four decades.


                                      1963
         While the war in Vietnam  dominates the headlines,  the Petersburg area
benefits  from the upturn in  military  facilities  and  personnel.  The Defense
General Supply Center,  Fort Pickett and Fort Lee all have a major effect on the
financial   fortunes  of  Virginia  Mutual  Savings  and  Loan  Association  and
Petersburg Savings and Loan.

                                       4
<PAGE>


         For more  than 110  years,  our goal has been to serve the  varied  and
changing needs of our customers and shareholders  as effectively and efficiently
as possible.

                                 FINANCIAL CORP.


                                      1971
         Petersburg  Savings  and Loan  Association,  a founder of Data  Systems
Corporation, automates its processes and places the bank in a leadership role in
meeting customer needs in a cost-effective way.


                                      1973
         To pool their  strengths  and serve  clients in the best way  possible,
Petersburg Savings and Loan agrees to be merged into Virginia Mutual Savings and
Loan Association.


                                      1978
         Virginia  Mutual  becomes the first bank in  Virginia  to convert  from
mutual status to stock  ownership,  setting the trend for the stock ownership of
banks in the years to come. The Company changes its name to Virginia First.


                                      1980
         Virginia First converts from a state to a federal charter.


                                      1981
         Colony Savings Bank is bought by Virginia First, the bank's first 
expansion  beyond the  tri-cities  area.  Adding  three  branches in the Roanoke
Valley to Virginia First's six, the bank is better positioned for growth.

                                       5
<PAGE>


         In many ways  throughout the years, we have succeeded in our quest.


                                      1985
         The real estate crisis of the  mid-eighties  signals the demise of many
banks - but not Virginia  First.  While the effect was certainly  felt, the bank
was able to demonstrate  its ability to manage its way through the  difficulties
and emerge as a financially strong, well-managed bank.


                                      1991
         Virginia First dramatically  expands its mortgage banking  capabilities
by purchasing  Southern Atlantic  Mortgage.  This adds mortgage and construction
lending  expertise outside of the bank's home markets to the bank's growing list
of  capabilities.  This new division - Virginia  First Mortgage - is to become a
major contributor to the organization's growth through the nineties.


                                      1992
         A corporate  culture is formed that  fosters  coaching as a  management
style.  It sets a tone of teamwork for the company  Virginia  First would become
over the next few years.  Working  hand-in-hand.  Virginia  First  branches also
develop a retail  mission  statement  that focuses on the specific  needs of the
customer, empowering employees to take a leadership role in service delivery.


                                      1993
         Drawing  upon its  financial  strength  in the wake of the real  estate
crisis.  Virginia  First buys former  Coreast  Savings Bank branch  locations in
Lynchburg,  Midlothian, Laburnum. Appomattox and Rocky Mount from the Resolution
Trust Company.


                                       6
<PAGE>



         Throughout  the history of the banks that would merge to form  Virginia
First Financial Corporation, one purpose remained constant: to always act in the
best interest of its customers and  shareholders.  This purpose  remains as true
today as it did in the bank's humble beginnings so long ago.

         Throughout the decades,  Virginia First has always been at the vanguard
of banking and  finance,  always  testing  new ideas and  shaping the  financial
fortunes of Petersburg and the  surrounding  areas. In many ways, the history of
Virginia  First has been a reflection  of the areas where the bank has conducted
business,  growing during times of growth, remaining steadfast in the times when
a steady hand has been required.

         The  story  of  Virginia  First,  therefore,  has  been a story of sage
management and dynamic strength.  It has guided us for more than a century,  and
it is a story we're proud to claim as our own.

                                      1996
         Freedom  Financial is formed as a consumer finance  subsidiary to allow
the bank to offer new products to its  existing  customer  base while  forming a
platform  for  expansion  beyond   traditional  bank  markets  and  distribution
channels.


                                      1996
         Charles A. Patton, the son of William A. Patton, succeeds his father as
Chief Executive Officer of Virginia First.  Virginia First also enters the arena
of  electronic  commerce and the Internet  through its  acquisition  of American
Finance and Investment, a mortgage  banking  company that  originates  mortgages
throughout a nationwide market via telemarketing and the World Wide Web.


                                      1997
                                      BB&T
         Virginia First Financial Corporation enters into an agreement with BB&T
to merge  Virginia  First into the BB&T  family,  giving it a stronger  foothold
entry in the Central  Virginia  market-place  and a point of entry into  Western
Virginia.

                                       7
<PAGE>



                               FINANCIAL CONTENTS





                  Five Year Summary of Selected Financial Data           9
                  Management's Discussion and Analysis                  10
                  Standards of Financial Reporting                      30
                  Independent Auditors' Report                          31
                  Consolidated Financial Statements                     32
                  Notes to Consolidated Financial Statements            36


                                        8

<PAGE>

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

(Dollars in thousands, except per share data)

---------------------------------------------------------------------------------------------------------------------------
Years Ended June 30                         1997            1996           1995           1994            1993
---------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>         <C>              <C>            <C>       
RESULTS OF OPERATIONS
Total interest income                      $ 66,131      $  59,041       $ 53,525        $ 42,403       $ 40,307
Total interest expense                       35,611         32,322         27,631          21,187         21,850
Net interest income                          30,520         26,719         25,894          21,216         18,457
Provision for loan losses                     2,347          2,429          1,390           1,090          1,171
Noninterest income                            8,739         14,913          6,450          11,878          9,735
Noninterest expense                          28,924         20,029         18,412          21,342         18,640
Income tax expense                            2,876          7,032          4,992           3,681          3,127
   Net earnings                               5,112         12,142          7,550           6,981          6,404

SELECTED YEAR-END BALANCES
Assets                                     $858,403       $746,867       $693,549        $583,580       $561,239
Securities                                   34,249         35,355         39,794          36,647         36,005
Loans                                       685,366        615,554        580,507         486,039        365,689
Loans held for sale                          92,495         46,481         35,542          27,943         99,812
Deposits                                    600,205        573,536        503,667         456,720        454,231
Advances from Federal Home Loan Bank        181,552        102,052        134,658          79,872         66,000
Stockholders' equity                         66,492         60,966         48,772          41,079         34,512

PER SHARE DATA
Net earnings                            $       .87       $   2.09    $      1.33      $     1.25     $     1.17
Cash dividends declared                         .10            .07            .05             .05          -
Book value                                    11.44          10.63           8.76            7.66           6.58

SELECTED RATIOS                                           
Return on average assets                        .64%          1.74%          1.19%           1.24%          1.00%
Return on average equity                       7.90          22.49          16.58           18.19          16.26
Average equity to average assets               8.14           7.74           7.16            6.83           6.13
Stockholders' equity to total assets           7.75           8.17           7.03            7.04           6.15
Nonperforming assets to total assets           2.30           2.10           1.70            1.65           2.15
Allowance for loan losses to loans             1.36           1.21           1.09            1.14           1.25
===========================================================================================================================

</TABLE>

                                       9
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

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

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

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

     The  Company's  only direct  subsidiary is the Savings Bank and the Company
has no material assets or liabilities, except for the stock of the Savings Bank.
The Savings  Bank has three active  subsidiaries;  one is engaged in real estate
development,  one is a title insurance  agency,  and the third is a company that
originates mortgage loans via the Internet.

     The  following  commentary  discusses  major  components  of the  Company's
business  and  presents  an overview of the  Company's  consolidated  results of
operations  during the fiscal years ended June 30, 1997,  1996 and 1995, and its
consolidated  financial  position  at June 30,  1997 and 1996.  This  discussion
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes and other statistical information presented elsewhere in this
Annual Report.

RESULTS OF OPERATIONS

     Results of  operations  for the years  ended June 30,  1997,  1996 and 1995
("fiscal  year 1997",  "fiscal year 1996" and "fiscal year 1995",  respectively)
reflect the Company's strategies of expanding its community banking and mortgage
banking operations.

     A number of events have occurred during the Company's 1997 fiscal year that
affect the comparability of operations between years. These events are:

     o In September,  1996, Congress passed legislation  allowing for a one-time
assessment to recapitalize the Savings Association  Insurance Fund (the "SAIF").
The  Company's  assessment  charged to earnings was  $3,149,000.  Following  the
assessment,  the annual deposit  insurance  premium paid by the Company declined
from $.23 per $100 of insured deposits to $.065 per $100 of insured deposits.

                                       10
<PAGE>



     o  On  December  19,  1996,  the  Company  acquired  American  Finance  and
Investment Inc. ("AFI") in a cash transaction. AFI is a mortgage banking company
originating  mortgage  loans on an automated  basis through the Internet.  It is
available to potential  customers in forty-four states.  During fiscal 1997, AFI
originated  $115  million  in loans,  generated  $1.2  million in  revenue,  and
incurred $1.7 million in operating expenses since the acquisition.  The purchase
price  in  excess  of the fair  value of the net  assets  acquired  amounted  to
$594,000 and is being amortized over a period of 15 years.

     o On May 26, 1997,  BB&T  Corporation  and the Company  announced that BB&T
Corporation will acquire the Company in a transaction  valued at $148.4 million.
Upon approval of  shareholders  and receipt of necessary  regulatory  approvals,
shareholders  will receive between $22.50 and $25.00 per share for each share of
the Company stock held.

     o Primarily as a result of the aforementioned  transaction,  the "gross-up"
provision of the Company's  nonqualified  stock option plan resulted in a charge
to earnings for 1997 of $2,488,000  representing the tax gross-up  applicable to
the appreciation in the outstanding stock options.

     o In addition to the above,  approximately  $537,000 in expenses related to
the merger have been incurred to date and charged to earnings.

     o The sale of substantially  all of the Company's loan servicing  portfolio
in fiscal 1996 has  resulted in a 53% decline in loan  servicing  and fee income
from  $3,056,000 in 1996 to $1,430,000 in 1997.  Loan servicing  income included
therein was $92,000 in 1997.

     Net interest  income  increased by 14% in fiscal year 1997,  compared  with
fiscal  year 1996,  compared  with a 3% increase in fiscal year 1996 over fiscal
year 1995.  Increases in capital in recent years have  permitted  the Company to
increase  both its assets and  liabilities.  Assets  grew 15% in 1997 with loans
growing  10% and  loans  held for  sale  99%.  Because  deposits  grew  only 5%,
borrowings  increased 77% to fund the asset growth.  Most of the increase in net
interest income in fiscal years 1997 and 1996 were  attributable to the increase
in the size of the balance  sheet.  As market  rates  moderated  in 1997 on both
earning assets and interest-bearing  liabilities, the Company experienced growth
in the origination of mortgages and other loans while  depositors  migrated from
lower yielding checking and savings deposits to higher yielding  certificates of
deposit.

     Net  Earnings.  The  Company's  net  earnings  for  fiscal  year  1997 were
$5,112,000,  compared to net  earnings of  $12,142,000  for fiscal year 1996 and
$7,550,000 for fiscal year 1995. On a per share basis,  earnings for fiscal year
1997 were $.87,  compared  with $2.09 for fiscal  year 1996 and $1.33 for fiscal
year 1995.

     The per share figures for fiscal years 1995 and prior have been adjusted to
reflect the two-for-one  split of the Company's common stock,  which occurred on
November 17, 1995.

     Of the $1.22  decline in earnings per share,  the earnings per share effect
of the one-time  SAIF charge,  the  nonqualified  stock option  charge,  and the
merger  expenses to date  amounted to $.67 of the decline and the  reduction  in
loan  servicing  fee income  amounted to $.18.  The one-time gain on the sale of
servicing in 1996 added $.72 to earnings per share in 1996.

     Earnings per share in 1996,  without the one-time sale of servicing,  would
have been $1.37 and earnings in 1997 without the  one-time  expenses  would have
been $1.54 for a 12% increase in core earnings.

                                       11
<PAGE>



     The following table shows changes in earnings per share:
<TABLE>
<CAPTION>

                                                             Fiscal Year 1997      Fiscal Year 1996    Fiscal Year 1995
                                                                 Versus 1996         Versus 1995         Versus 1994
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>                  <C>  
Net earnings per share for fiscal years
   1996, 1995 and 1994, respectively                                   $2.09               $1.33                $1.25
---------------------------------------------------------------------------------------------------------------------------

Increase (decrease) attributable to:
   Net interest income                                                   .65                 .14                  .82
   Provision for loan losses                                             .01                (.18)                (.05)
   Noninterest income                                                  (1.06)               1.46                 (.96)
   Noninterest expense                                                  (.47)               (.28)                 .52
   SAIF recapitalization assessment                                     (.54)               -                    -
   Compensation value of nonqualified stock options                     (.43)               -                    -
   Merger related expenses                                              (.09)               -                    -
   Income taxes                                                          .71                (.35)                (.23)
   Average shares outstanding                                           _                   (.03)                (.02)
---------------------------------------------------------------------------------------------------------------------------
   Net (decrease) increase                                             (1.22)                .76                  .08
---------------------------------------------------------------------------------------------------------------------------

Net earnings per share for fiscal years
   1997, 1996 and 1995, respectively                                   $ .87               $2.09                $1.33
===========================================================================================================================
</TABLE>


     Net  Interest  Income.  Net  interest  income  for  fiscal  year  1997  was
$30,520,000,  an increase of  $3,801,000,  or 14.2%,  compared  with fiscal year
1996. For fiscal year 1996, net interest income was $26,719,000,  an increase of
$825,000, or 3.2%, compared to fiscal year 1995.

     The Company's net earnings are highly  dependent on the difference  between
the  income  it  receives  from  loans  and  investments  and its cost of funds,
consisting  principally  of the interest paid on  interest-bearing  deposits and
borrowings.

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

                                       12
<PAGE>



     The following  table  reflects the average  yields earned and rates paid by
the Company during the last three fiscal years.

<TABLE>
<CAPTION>

(In thousands) Years Ended June 30                1997                        1996                         1995
---------------------------------------------------------------------------------------------------------------------------

                                                 Interest                     Interest                    Interest
                                         Average  Income/ Yield/      Average  Income/Yield/     Average   Income/ Yield/
                                         Balance  Expense  Rate       Balance  Expense Rate       Balance Expense   Rate
---------------------------------------------------------------------------------------------------------------------------
Interest-earnings assets:
<S>     <C>                            <C>       <C>         <C>    <C>       <C>         <C>   <C>       <C>         <C>  
  Loans (1)                            $707,741  $62,640     8.85%  $626,313  $56,368     9.00% $566,965  $50,685     8.94%
  Investments (3)                        39,472    2,786     7.06     33,702    1,979     5.87    39,076    2,376     6.08
  Other interest-earning assets          17,986      949     5.28     13,558      694     5.12     8,627      464     5.38
---------------------------------------------------------------------------------------------------------------------------
    Total interest-earning assets       765,199   66,375     8.67    673,573   59,041     8.77   614,668   53,525     8.71
---------------------------------------------------------------------------------------------------------------------------

Noninterest-earning assets:
  Cash and due from banks                 8,678                        8,417                       8,494
  Office properties and equipment, net    9,172                        8,847                       8,589
  Other assets                           19,616                       12,571                       9,923
  Allowance for loan losses              (8,440)                      (6,118)                     (6,126)
---------------------------------------------------------------------------------------------------------------------------

    Total assets                       $794,225                     $697,290                    $635,548
===========================================================================================================================

Interest-bearing liabilities:
  Checking and money market
       deposit accounts                $101,896    3,787     3.72  $  88,089    3,375     3.83  $ 85,395    3,081     3.61
  Savings deposits                       67,873    2,306     3.40     68,512    2,349     3.43    89,537    3,087     3.45
  Certificates                          380,106   21,551     5.67    348,664   20,609     5.91   267,934   14,511     5.41
  Federal Home Loan Bank advances       137,068    7,672     5.60     98,365    5,968     6.07   105,173    6,414     6.10
  Other borrowings                        5,427      294     5.42        375       21     5.60     8,875      538     6.06
---------------------------------------------------------------------------------------------------------------------------

    Total interest-bearing liabilities  692,370   35,610     5.14    604,005   32,322     5.35   556,914   27,631     4.96
---------------------------------------------------------------------------------------------------------------------------

Noninterest-bearing liabilities:
  Deposits                               26,408                       30,189                      25,503
  Other                                  10,778                        9,103                       7,608
---------------------------------------------------------------------------------------------------------------------------

    Total liabilities                   729,556                      643,297                     590,025
Stockholders' equity                     64,669                       53,993                      45,523
---------------------------------------------------------------------------------------------------------------------------

    Total liabilities and
       stockholders' equity            $794,225                     $697,290                    $635,548
===========================================================================================================================
Net interest income                              $30,765                      $26,719                     $25,894
---------------------------------------------------------------------------------------------------------------------------
Interest rate spread (2)                                     3.53%                        3.42%                       3.75%
---------------------------------------------------------------------------------------------------------------------------
Net interest margin                                          4.02%                        3.97%                       4.21%
===========================================================================================================================
</TABLE>


(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
(2) Average yield on total interest-earning assets less the average rate paid on
    total  interest-bearing   liabilities.   
(3) Interest  income  is  on  a  fully taxable-equivalent basis.

                                       13
<PAGE>


     The Company's net interest income is affected  by changes  in both  average
interest  rates  and  the  average  volumes  of   interest-earning   assets  and
interest-bearing  liabilities.  Total interest income increased by $7,334,000 in
fiscal year 1997 and increased by $5,516,000 in fiscal year 1996, as compared to
the  respective  previous  fiscal years.  Total  interest  expense  increased by
$3,288,000  in fiscal year 1997 and increased by $4,691,000 in fiscal year 1996,
as  compared  to the  previous  fiscal  years.  The  fiscal  year  1997 and 1996
increases  in  both  interest  income  and  interest  expense,  compared  to the
respective   previous  years,   were  due  primarily  to  increases  in  average
interest-earning assets and interest-bearing  liabilities.  The decline in rates
in 1997  compared  with  1996,  particularly  in  deposits,  contributed  to the
increase in net interest  income.  Deposit  rates  increased in fiscal year 1996
over 1995, while asset yields remained flat.

     The following table shows the amounts of the changes in interest income and
expense which can be attributed to rate (change in rate  multiplied by the prior
year volume) and volume  (change in volume  multiplied by the prior year average
rate) for the past two fiscal years.  The changes in net interest  income due to
both  volume  and  rate  changes  have  been  allocated  to  volume  and rate in
proportion to the relationship of absolute dollar amounts of the change of each.
The table  demonstrates  that the $4,046,000  increase in net interest income in
fiscal  year 1997 was the net result of a growing  balance  sheet and  declining
deposit rates, while the $825,000 increase in net interest income in fiscal year
1996 over 1995 was the result of growth in the  balance  sheet  offset by rising
deposit interest rates.

<TABLE>
<CAPTION>

                                                  Fiscal Year 1997 Versus 1996        Fiscal Year 1996 Versus 1995
                                                   Increase (Decrease) Due to          Increase (Decrease) Due to
(In thousands)                                    Volume       Rate      Total          Volume     Rate      Total
---------------------------------------------------------------------------------------------------------------------------

<S>                                                <C>         <C>       <C>            <C>      <C>         <C>   
Loans receivable                                   $7,221      $(949)    $6,272         $5,339   $    344    $5,683
Investment securities                                 370        437        807           (321)       (76)     (397)
Other interest-earning assets                         233         22        255            251        (21)      230
---------------------------------------------------------------------------------------------------------------------------
   Total interest-earning assets                    7,824       (490)     7,334          5,269        247     5,516
---------------------------------------------------------------------------------------------------------------------------

Checking and money market
   deposit accounts                                   516       (104)       412             99        196       295
Savings deposits                                      (22)       (21)       (43)          (721)       (17)     (738)
Certificates                                        1,806       (864)       942          4,679      1,418     6,097
Federal Home Loan Bank advances                     2,196       (492)     1,704           (413)       (33)     (446)
Other borrowings                                      274         (1)       273           (479)       (38)     (517)
---------------------------------------------------------------------------------------------------------------------------
   Total interest-bearing liabilities               4,770     (1,482)     3,288          3,165      1,526     4,691
---------------------------------------------------------------------------------------------------------------------------

   Change in net interest income                   $3,054      $ 992     $4,046         $2,104    $(1,279)  $   825
===========================================================================================================================
</TABLE>


     Asset  Liability  Management.  The primary  objectives  of asset  liability
management are to provide for the safety of depositor and investor funds, assure
adequate  liquidity,  and  maintain  an  appropriate  balance  between  interest
sensitive  earning assets and interest bearing  liabilities.  During fiscal year
1997, the Company  initiated a new approach to assessing its exposure to changes
in interest rates.  Three new analytical tools are used to evaluate and quantify
the interest rate risk  exposure--a  matched funding  matrix,  simulation of the
effect on net interest  income under various  possible  interest rate scenarios,
and computation of the economic value of equity for each of the scenarios.

     Interest rate risk is determined by the relative  sensitivities  of earning
asset yields and interest bearing  liability costs to changes in interest rates.
Overnight borrowed funds on which rates change daily and loans which are tied to
the prime rate or a Treasury rate differ considerably from long-term  investment
securities  and fixed rate loans.  Similarly,  time  deposits  over $100,000 and
money market  deposit  accounts are much more interest  sensitive  than interest
bearing checking and savings accounts.

                                       14
<PAGE>


     One method by which  banks  evaluate  interest  rate risk is to look at the
interest  sensitivity gap, the difference  between interest sensitive assets and
interest sensitive liabilities  repricing during the same period,  measured at a
specific point in time. The Company's  interest rate  sensitivity is illustrated
in the  following  interest  rate  sensitivity  gap  table.  The table  reflects
rate-sensitive  positions at June 30, 1997, and is not necessarily reflective of
positions  throughout the year. The carrying amounts of  interest-rate-sensitive
assets and  liabilities  are presented in the periods in which they next reprice
to  market  rates  or  mature  and are  aggregated  to show  the  interest  rate
sensitivity  gap.   Anticipated   prepayments  on  mortgage  related  loans  and
mortgage-backed   securities  assumes  a  reasonable  level  of  prepayments  as
currently experienced by the Company in a stable, or flat, rate environment.

     As can be seen from the table,  the Company is asset  sensitive  within one
year and after five years and is slightly  liability  sensitive from one year to
five years.  However,  looking at the cumulative  interest  sensitivity gap, the
Company is asset sensitive throughout the time frame shown. This would generally
indicate that the Company would have an improved net interest  margin in periods
of rising  rates  and  would  have a lower net  interest  margin in  periods  of
declining  rates.  From the gap table, it is not possible to quantify the actual
dollar impact on earnings in a changing rate environment.

     While the static gap evaluation of interest rate sensitivity is useful,  it
is not indicative of the actual dollar impact of  fluctuating  interest rates on
net interest income as the Company has significant  loans with contractual terms
that limit the amount of interest  rate change in any one year and in total over
the  life of the  loan.  Thus  the  Company  runs  various  earnings  simulation
scenarios  used to  quantify  the effect on net  interest  income in a rising or
declining rate  environment over a several year time horizon.  In addition,  the
Company also computes the market value of equity (also called  economic value of
equity)  which  essentially  discounts  the future  cash flows  inherent  in the
current balance sheet. This provides an even longer term view of the exposure to
equity for changes in interest  rates.  In  addition to these  computations  the
Company also computes a rate shock to the balance sheet. The shock tests are for
an immediate,  and sustained, 1%, 2%, 3%, and 4% increase in rates and similarly
a shock decrease in rates.

     As noted  previously,  the gap table  would  indicate  the Company is asset
sensitive  thereby  benefiting in a rising rate  environment but not a declining
rate environment.  The results of the simulation computations confirm this. A 2%
increase in rates would  improve net  interest  income  approximately  5% in the
first 12 months  whereas a 2% decline in rates  would  have  approximately  a 9%
negative impact on net interest income. In the second 12 months, the positive or
negative impact is significantly  less than the first 12 month impact. For these
same 2%  scenarios,  the  impact  on the  economic  value of  equity  would be a
negative 18% for a 2% rise in rates and a 13% favorable  impact for a 2% decline
in rates.

     The  processes  described  herein are  currently  evaluated  on a quarterly
basis.  The Company  believes that given the current and projected  forecast for
interest rates, it does not have an undue exposure to changes in interest rates.
It must also be noted that  changes  in  interest  rates can affect the  banking
habits  of the  customer  and the  general  level of  economic  activity.  These
changes,  which are difficult to predict,  can also have additional favorable or
negative effects on the Company's earnings.

                                       15
<PAGE>

INTEREST RATE SENSITIVITY GAP ANALYSIS

<TABLE>
<CAPTION>

June 30,1997                                                Expected Repricing or Maturity Date
------------------------------------------------------------------------------------------------------------------------------------


                                       Within             One to           Three to              After Five
                                      One Year          Three Years       Five Years                Years                Total
------------------------------------------------------------------------------------------------------------------------------------
                                  Amount      Rate    Amount    Rate     Amount     Rate     Amount       Rate       Amount    Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>            <C>   <C>          <C>    <C>          <C>    <C>           <C>     <C>          <C>  
Assets
  Interest-bearing deposits with
    the FHLB                     $  15,978    6.36% $      -     0.00%  $     -      0.00%  $     -       0.00%   $  15,978    6.36%
  Investment securities             10,424    6.58        37      8.0     4,017      6.54    19,771       6.47       34,249    6.51
  Mortgages held for sale           92,495    7.61                                                                   92,495    7.61
  Loans                            477,903    8.88   100,299     9.11    36,780      9.38    70,384       9.26      685,366    8.98
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets      596,800    8.58   100,336     9.11    40,797      9.10    90,155       8.65      828,088    8.68
-----------------------------------------------------------------------------------------------------------------------------------

Liabilities
  Time deposits                    271,743    5.24   100,498      6.0    30,398      6.01     1,434       6.38      404,073    5.70
  Savings and interest checking*    25,276    3.14    38,200     3.14    19,100      3.14    19,100       3.14      101,676    3.14
  Money market checking*            63,477    4.17                                                                   63,477    4.17
  FHLB borrowings                  167,000    6.25     6,500     6.66     7,500      6.19       552       2.00      181,552    6.25
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 527,496    5.25   145,198     5.27    56,998      4.49    21,086       3.33      750,778    5.21
-----------------------------------------------------------------------------------------------------------------------------------
Asset-liability gap              $  69,304        $  (44,862)          $(16,201)            $69,069               $  77,310
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate
  sensitivity gap                $  69,304        $   24,442           $  8,241             $77,310
===================================================================================================================================
</TABLE>



*Projected  runoff of  non-maturity  deposits  was  computed  based  upon  decay
assumptions  developed by bank  regulators to assist banks in addressing  FDICIA
rule 305.


                                       16
<PAGE>

     The Company's  portfolio of loans totalled  $685,366,000  at June 30, 1997.
The following table sets forth information at the dates indicated concerning the
composition of the Company's loan portfolio, by type:
<TABLE>
<CAPTION>

(In thousands) June 30                    1997           1996              1995               1994                1993
-----------------------------------------------------------------------------------------------------------------------------
                                         Percent           Percent            Percent            Percent             Percent
                                           of                of                 of                 of                  of
                                          Gross             Gross              Gross             Gross                Gross
                                  Amount  Loans    Amount   Loans     Amount   Loans     Amount  Loans      Amount    Loans
-----------------------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>  <C>         <C>   <C>          <C>    <C>         <C>    <C>         <C>  
First mortgage loans:
  Residential - fixed rate      $ 67,489      9.8% $ 77,266    12.3% $ 74,592     12.6%  $ 79,979    16.1%  $ 38,882    10.4%
  Residential - adjustable rate  292,943     42.6   270,374    43.2   256,463     43.4    190,490    38.4    179,331    47.8
-----------------------------------------------------------------------------------------------------------------------------
    Total residential            360,432     52.4   347,640    55.5   331,055     56.0    270,469    54.5    218,213    58.2
-----------------------------------------------------------------------------------------------------------------------------

  Commercial - fixed rate         16,248      2.4    16,633     2.7    14,678      2.5     17,970     3.6     17,786     4.8
  Commercial - adjustable rate    30,548      4.4    32,089     5.1    45,630      7.7     54,067    10.9     61,975    16.5
-----------------------------------------------------------------------------------------------------------------------------
    Total commercial              46,796      6.8    48,722     7.8    60,308     10.2     72,037    14.5     79,761    21.3
-----------------------------------------------------------------------------------------------------------------------------

  Construction - fixed rate       15,877      2.3    20,185     3.2     9,640      1.6         -        -          -       -
  Construction - adjustable rate 126,105     18.3   101,190    16.2   100,477     17.0    90,456     18.3     36,531     9.8
-----------------------------------------------------------------------------------------------------------------------------
    Total construction           141,982     20.6   121,375    19.4   110,117     18.6    90,456     18.3     36,531     9.8
-----------------------------------------------------------------------------------------------------------------------------

Total first mortgage loans       549,210     79.8   517,737    82.7   501,480     84.8   432,962     87.3    334,505    89.3
-----------------------------------------------------------------------------------------------------------------------------

Second mortgage and home equity loans:
  Fixed rate                      22,159      3.2    18,201     2.9    14,981      2.6     9,180      1.8      6,204     1.7
  Adjustable rate                 31,668      4.6    29,233     4.7    24,845      4.2    20,679      4.2     14,658     3.9
-----------------------------------------------------------------------------------------------------------------------------
    Total second mortgage loans   53,827      7.8    47,434     7.6    39,826      6.8    29,859      6.0     20,862     5.6
-----------------------------------------------------------------------------------------------------------------------------

Loans on savings accounts          2,190       .3     1,691     0.3     1,363      0.2       970      0.2      1,038     0.3
-----------------------------------------------------------------------------------------------------------------------------

Installment loans:
  Fixed rate                      80,442     11.7    55,910     8.9    44,977      7.6    31,787      6.4     17,622     4.7
  Adjustable rate                  2,890       .4     3,275     0.5     3,481      0.6       639      0.1        415     0.1
-----------------------------------------------------------------------------------------------------------------------------
    Total installment loans       83,332     12.1    59,185     9.4    48,458      8.2    32,426      6.5     18,037     4.8
-----------------------------------------------------------------------------------------------------------------------------

Gross loans                      688,559    100.0%  626,047   100.0%  591,127    100.0%  496,217    100.0%   374,442   100.0%
-----------------------------------------------------------------------------------------------------------------------------

Less:
  Unearned discount                  581                301             1,361              1,555               1,847
  Deferred income                  2,612              2,665             2,886              3,012               2,290
-----------------------------------------------------------------------------------------------------------------------------
    Total adjustments              3,193              2,966             4,247              4,567               4,137
-----------------------------------------------------------------------------------------------------------------------------

Total loans                     $685,366           $623,081          $586,880           $491,650            $370,305
=============================================================================================================================
</TABLE>

     Provision for Loan Losses.  The Company provided  $2,347,000  during fiscal
year  1997  as  additions  to the  allowance  for  loan  losses,  compared  with
$2,429,000  in  fiscal  year  1996  and  $1,390,000  in  fiscal  year  1995.  In
establishing the level of the allowance for loan losses,  the Company  considers
many factors,  including  general  economic  conditions,  loan loss  experience,
historical  trends and other  circumstances,  both  internal and  external.  The
amount of the provision for loan losses is  established  based on evaluations of
the adequacy of the  allowance for loan losses.  The Company  considers the size
and risk  exposure of each  segment of the loan  portfolio.  For secured  loans,
management considers estimates of the fair value of the collateral,  considering
the current and currently anticipated future operating or sales conditions. Such
estimates  are  particularly  susceptible  to  changes  that  could  result in a
material adjustment to future results of operations. Factors such as independent
appraisals, current economic conditions and the financial condition of borrowers
are periodically  evaluated to determine whether or not the Company's investment
in such assets  exceeds  their  estimated  values.  The  Company's  policy is to
establish both general and specific allowances for loan losses.

                                       17
<PAGE>

     The following  table  presents the activity in the Company's  allowance for
loan losses and selected loan loss data for the past five fiscal years:
<TABLE>
<CAPTION>

(In thousands) Years Ended June 30          1997               1996           1995             1994            1993
---------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>             <C>             <C>              <C>              <C>      
Balance at beginning of year                $   7,527       $   6,373       $   5,611        $   4,616        $   3,570
Provision charged to expense                    2,347           2,429           1,390            1,090            1,171
Loans charged off:
   Residential real estate                         27              23               9               68                9
   Commercial real estate                         156           1,056             458                _                _
   Construction                                     _               _               _                _                _
   Consumer and other loans                       466             257             205               71              222
---------------------------------------------------------------------------------------------------------------------------
     Total gross charge-offs                      649           1,336             672              139              231
---------------------------------------------------------------------------------------------------------------------------

Recoveries of loans previously charged off:
   Residential real estate                          _               _               _                _                _
   Commercial real estate                           _               _               _                _                _
   Construction                                     _               _               _                _                _
   Consumer and other loans                        70              61              44               44              106
---------------------------------------------------------------------------------------------------------------------------
     Total recoveries                              70              61              44               44              106
---------------------------------------------------------------------------------------------------------------------------
     Net charge-offs                              579           1,275             628               95              125
---------------------------------------------------------------------------------------------------------------------------
   Balance at end of year                  $    9,295       $   7,527       $   6,373        $   5,611        $   4,616
===========================================================================================================================

Average loans outstanding (1)                $650,036        $594,653        $550,056         $485,454         $437,253
Loans at year end (1)                         685,366         623,081         586,880          491,650          370,305
Ratio of provision for loan
   losses to average loans                        .30%           0.41%           0.25%            0.22%            0.27%
Ratio of net charge-offs
   to average loans                               .09%           0.21%           0.11%            0.02%            0.03%
Ratio of allowance for loan
   losses to loans                               1.36%           1.21%           1.09%            1.14%            1.25%
===========================================================================================================================
</TABLE>


(1) Loans receivable  shown gross of allowance for loan losses,  net of unearned
income, deferred income, and discounts.

     The allowance for loan losses is a general allowance applicable to all loan
categories;  however,  management  has  allocated  the  allowance to the various
portfolios to provide an indication of the relative risk  characteristics of the
total loan portfolio.  The allocation is based on the same  judgmental  criteria
discussed  earlier in  determining  the level of the allowance and should not be
interpreted as an indication that  charge-offs in fiscal year 1998 will occur in
these amounts, or proportions,  or that the allocation  indicates future trends.
The allocation of the allowance at June 30 for the years indicated and the ratio
of the related  outstanding loan balances to total loans held for investment are
as follows:

<TABLE>
<CAPTION>

(In thousands) June 30                 1997               1996             1995              1994               1993
------------------------------------------------------------------------------------------------------------------------------

                                         Category          Category          Category           Category            Category
Percent of                              Percent of         Percent of        Percent of         Percent of          Percent of   
                                 Allowance Loans    Allowance Loans   Allowance Loans  Allowance   Loans   Allowance   Loans
------------------------------------------------------------------------------------------------------------------------------

<S>                               <C>        <C>    <C>        <C>     <C>       <C>     <C>         <C>    <C>         <C>  
Residential real estate           $1,640     60.2%  $1,425     63.1%   $1,055    62.8%   $  807      60.5%  $  594      63.8%
Commercial real estate             2,880      6.8    2,552      7.8     2,958    10.2     3,099      14.5    3,170      21.3
Construction                       3,400     20.6    2,200     19.4     1,150    18.6       730      18.3      272       9.8
Consumer and other loans           1,375     12.4    1,350      9.7     1,210     8.4       975       6.7      580       5.1
------------------------------------------------------------------------------------------------------------------------------

  Total                           $9,295    100.0%  $7,527    100.0%   $6,373   100.0%   $5,611     100.0%  $4,616     100.0%
==============================================================================================================================
</TABLE>

                                       18
<PAGE>

     Retail Banking Operations.  The Company's retail banking activities consist
of attracting  checking and savings deposits from the general public through its
retail banking offices and lending funds to retail banking customers by means of
home equity and  installment  loans.  The Company's  "Community  Banking"  focus
operates most  successfully  and  efficiently  in residential  communities,  and
management  believes  that in some  instances  metropolitan  locations no longer
match management's philosophy of operation.

     On January 27, 1997, the Company opened a full-service retail branch in the
Brafferton Shopping Center on Garrisonville Road in Stafford, VA. As of June 30,
1997, the Company operated twenty-four full service retail facilities throughout
Virginia.

     The Company originated/purchased $19,177,000 of residential equity lines of
credit and fixed-rate  second mortgages  during fiscal year 1997,  compared with
$22,808,000 in fiscal year 1996 and $17,070,000 in fiscal year 1995. The Company
also  originated/purchased  $55,662,000 of consumer and installment loans during
fiscal year 1997,  compared with $24,705,000 in fiscal year 1996 and $25,527,000
in fiscal year 1995.  The Company has placed  emphasis on making  these forms of
credit  available to its retail  customers.  The Company's  success in promoting
these  loan  products  is  attributed  to  enhanced  training  of retail  branch
personnel, the centralization of credit decision-making, and marketing campaigns
that target these products.

     The Company occasionally purchases loans to obtain geographic diversity and
yields not  obtainable  in the  Company's  normal  lending  areas.  The  Company
purchased  $19,289,000 of loans in fiscal year 1997  ($16,768,000  of fixed-rate
second  mortgages and  $2,521,000  of  manufactured  home loans),  compared with
$6,930,000  of  fixed-rate  second  mortgage  loans in  fiscal  year  1996,  and
$10,172,000  of loans in  fiscal  year 1995  ($3,170,000  of fixed  rate  second
mortgage loans and $7,002,000 of manufactured home loans).

     The following table summarizes  retail banking loan  originations and 
purchases by type of loan for fiscal years 1997, 1996 and 1995:
<TABLE>
<CAPTION>

(In thousands)  Years Ended June 30                   1997                     1996                       1995
---------------------------------------------------------------------------------------------------------------------------

                                                            % of                      % of                     % of
                                               Amount       Total         Amount      Total        Amount      Total
---------------------------------------------------------------------------------------------------------------------------

<S>                                <C>         <C>            <C>       <C>             <C>       <C>            <C>  
Residential equity lines of credit (1)         $10,116        13.5%     $10,997         20.2%     $10,250        19.5%
Fixed-rate second mortgages                     25,829        34.5       18,741         34.4        9,990        18.9
Consumer loans                                  38,894        52.0       24,705         45.4       32,529        61.6
---------------------------------------------------------------------------------------------------------------------------
   Total originations and purchases            $74,839       100.0%     $54,443        100.0%     $52,769       100.0%
===========================================================================================================================
</TABLE>

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


                                       19
<PAGE>

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

     During  fiscal  year  1996,  the  Company  consolidated  three  of its loan
production centers into other offices. As of February 1, 1996, the mortgage loan
office in  Arnold,  Maryland  was  consolidated  with the  office in  Rockville,
Maryland.  Then  on  March  1,  1996,  the  office  in  Sterling,  Virginia  was
consolidated  with the  office in  Annandale,  Virginia.  And in May  1996,  the
mortgage loan office in Petersburg, Virginia was consolidated with the relocated
office in Chesterfield County, Virginia.

     The  consolidations  in fiscal year 1996 continued a process of realignment
of the Company's  mortgage loan  resources.  As of October 31, 1994, the Company
operated  six  mortgage  loan  origination  centers in  southside,  central  and
southwestern  Virginia  under the trade name Virginia  First  Mortgage,  and six
mortgage loan  origination  centers in northern  Virginia and southern  Maryland
under the trade name Southern Atlantic Mortgage. Effective November 1, 1994, the
Company  consolidated  the  back-office   operations  of  its  mortgage  banking
divisions.  The  divisions  were merged into a single unit based in  Woodbridge,
Virginia  and  using  the  name  Virginia  First  Mortgage.   The  consolidation
eliminated  duplicate  support  structures  and provided for more  efficient and
uniform delivery of mortgage loan services,  which  contributed to a substantial
decrease in personnel expenses.  Additionally,  as of March 1, 1995, the Company
closed its mortgage loan production center in Clinton,  Maryland.  During fiscal
year 1994 the Company closed its office in Chesapeake Beach, Maryland and opened
the Sterling, Virginia office which was subsequently closed.

     In August 1996,  the Company  opened  mortgage loan centers in the Maryland
communities of Columbia,  Frederick, Timonium and Bel Air. At June 30, 1997, the
Company operated 12 loan production centers in northern Virginia and Maryland.

     On  December  16,  1996,  the  Company   acquired   American   Finance  and
Investments,  Inc. ("AFI"), a provider of residential mortgage loans through the
Internet and through telemarketing. AFI generates mortgage loans on an automated
basis through a sophisticated  computer network presently available to potential
customers in forty-four  states.  Headquartered  in Fairfax,  Virginia,  AFIis a
recognized  leader in the evolving  market for electronic  commerce.  During the
past twelve  months AFI has expanded  rapidly by means of  proprietary  software
uniquely  designed to  facilitate  "on line"  mortgage  loan  originations.  The
acquisition of AFI provides the Company with a springboard  for the expansion of
electronic   commerce  to  the  retail  banking  customer  base.  The  Company's
introduction to the Internet as a medium of product delivery may expand to other
bank-related products and services. The acquisition of AFI allows the Company to
keep pace with  expanding  technology  involving  financial  service  companies.
During the first six months of ownership, AFI generated $115,000,000 in mortgage
loan originations.

     Origination  and  Purchase  of  Mortgage  Loans.  The  Company   originated
$628,091,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans Administration ("VA") residential mortgage loans during fiscal year
1997,  compared to $431,069,000  in fiscal year 1996 and  $252,254,000 in fiscal
year 1995.  The 70.9% increase in  originations  in fiscal year 1996 compared to
fiscal  year  1995 was due to a  moderation  in  market  interest  rates  and an
increase in new housing starts,  primarily in the Northern Virginia and Maryland
markets. The 45.7% increase in fiscal year 1997 compared to fiscal year 1996 was
due to the acquisition of AFI which added $115,000,000 in originations.


                                       20
<PAGE>

     The Company originated  $75,534,000 of adjustable rate residential mortgage
loans during fiscal year 1997,  compared to  $81,741,000 in fiscal year 1996 and
$82,534,000  in  fiscal  year  1995.   Despite  the  increase  in  overall  loan
originations in fiscal year 1996,  adjustable  rate  originations in fiscal year
1996 were 1.0% less than in fiscal  year  1995,  as  moderating  interest  rates
shifted consumer interest back to fixed rate products.  Adjustable rate mortgage
loan  originations  were 9.7% of total permanent  mortgage loan and construction
loan originations in fiscal year 1997, compared to 14.2% in fiscal year 1996 and
20.3% in fiscal year 1995.

     In addition to  originating  residential  mortgage  loans,  the Company may
purchase  loans  periodically  to obtain  geographic  diversity  and  yields not
obtainable in the Company's  normal lending areas.  However,  no adjustable rate
residential  mortgage  loans were purchased  during fiscal years 1997,  1996 and
1995.

     The Company originated $77,006,000 of construction loans during fiscal year
1997,  compared with  $57,973,000 in fiscal year 1996 and  $70,277,000 in fiscal
year 1995.  Construction  loans were 9.8% of total  permanent  mortgage loan and
construction  loan  originations  in fiscal  year 1997,  compared  with 10.1% in
fiscal  year  1996  and  17.3%  in  fiscal  year  1995.  The  increases  in both
outstanding  construction loan balances and loan commitments has been consistent
with  management's  goals of  diversifying  the  Company's  loan  portfolio  and
penetrating  underserved  markets.  The Company  believes that its  construction
lending underwriting  standards do not expose the Company to additional risks of
loss.  Substantial builder equity is typically required and home starts ahead of
actual sales are strictly controlled.

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

     While the Company has financed residential construction projects throughout
its business area, a substantial portion of the Company's  construction  lending
in the past three fiscal years has been in Northern  Virginia and Maryland.  The
Company utilized  residential  construction loan financing as an entry mechanism
into  the  Northern  Virginia  and  Maryland  markets  at a time  of  diminished
competition due to savings institution failures, deflated real estate prices and
a  migration  by  traditional   lending  sources  away  from   construction  and
residential  mortgage  lending.  While the Company's  market  penetration of the
Northern  Virginia  and  Maryland  markets  in the  past  three  years  has been
substantial,  management  is committed to retaining a  conservative  credit risk
profile,  and is willing to forego market share to new or returning  competitors
who may be willing to sacrifice  quality to achieve  volume goals.  Management's
adherence to its credit  standards  could result in reductions  in  construction
loan  balances  and  commitments  in  future  periods.  As a  percentage  of the
Company's loan originations,  construction and development lending during fiscal
year 1998 is not  expected to exceed the levels  seen in fiscal  year 1996.  The
Company  continues to evaluate the  feasibility  of  sustaining or expanding the
present construction lending levels.


                                       21
<PAGE>


     The following table  summarizes  permanent first mortgage and  construction
loan originations by type of loan for fiscal years 1997, 1996 and 1995:

<TABLE>
<CAPTION>

(In thousands) Years Ended June 30                  1997                   1996                          1995
---------------------------------------------------------------------------------------------------------------------------

                                                           % of                     % of                      % of
                                               Amount      Total       Amount     Total         Amount       Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>      <C>           <C>       <C>           <C>  
Permanent mortgage loans:
   Fixed rate residential:
     Conventional                                $312,896        39.9%    $317,884      55.4%     $167,204      41.2%
     FHA/VA                                       315,195        40.1      113,185      19.7        85,050      21.0
---------------------------------------------------------------------------------------------------------------------------
     Total fixed rate residential                 628,091        80.0      431,069      75.1       252,254      62.2
---------------------------------------------------------------------------------------------------------------------------

   Adjustable rate residential:
     One year                                      41,259         5.3       46,635       8.1        71,307      17.5
     Three year                                    34,275         4.4       35,106       6.1        11,227       2.8
---------------------------------------------------------------------------------------------------------------------------
     Total adjustable rate residential             75,534         9.7       81,741      14.2        82,534      20.3
---------------------------------------------------------------------------------------------------------------------------

   Fixed rate commercial                            4,154          .5        3,283       0.6             -         -
---------------------------------------------------------------------------------------------------------------------------

   Adjustable rate commercial:
     One year                                           -           -            -         -           804       0.2
     Other                                              -           -            -         -             -         -
---------------------------------------------------------------------------------------------------------------------------
     Total adjustable rate commercial                   -           -            -         -           804       0.2
---------------------------------------------------------------------------------------------------------------------------

Construction loans (1):
   Residential construction                        54,873           -       41,121       7.2        47,451      11.7
   Acquisition, development
     and commercial construction                   22,133           -       16,852       2.9        22,826       5.6
---------------------------------------------------------------------------------------------------------------------------
     Total construction                            77,006         9.8       57,973      10.1        70,277      17.3
---------------------------------------------------------------------------------------------------------------------------

     Total originations and purchases            $784,785       100.0%    $574,066     100.0%     $405,869     100.0%
===========================================================================================================================
</TABLE>

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


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


                                       22
<PAGE>

     Sale of Mortgage Loans.  There is an active secondary market for most types
of mortgage loans originated by the Company. By originating loans for subsequent
sale in the secondary mortgage market, the Company is able to obtain funds which
may be used for lending and  investment  purposes.  During fiscal years 1996 and
1995,  a large  portion  of the  Company's  loans  were  sold  with the  Company
retaining  the rights to service the loans.  Since,  the quarter ended March 31,
1996,  the Company has shifted its  business  strategy  with respect to mortgage
loan  servicing,  and most loan sales during the second half of fiscal year 1996
were on a servicing-released basis. Of total sales of $399,562,000 during fiscal
year 1996,  the Company  sold  $82,598,000,  or 20.7%,  on a  servicing-retained
basis.  By comparison,  38.6% of sales in fiscal year 1995 and 49.2% of sales in
fiscal year 1994 were on a  servicing-retained  basis.  See the discussion under
"Mortgage Loan Servicing"  regarding the Company's sale of substantially  all of
its  servicing  rights  related to loans  serviced for others,  in a transaction
effective as of April 1, 1996.

     Gains  from  the  sales  of  mortgage  loans  and  securitized  loans  were
$4,205,000 in fiscal year 1997, an increase of  $1,340,000,  or 46.8%,  over the
gains in  fiscal  year  1996.  Gains  from such  sales in fiscal  year 1996 were
$2,865,000,  an increase of $1,968,000, or 219.4%, from the gains of $897,000 in
fiscal year 1995.  The  substantially  higher  gains in fiscal year 1997 reflect
both the higher loan origination  volume and the higher gains from selling loans
on a  servicing-released  basis.  Such  gains are  higher  since  the  servicing
component is being sold concurrently with the loan.

     The following table summarizes  mortgage loan sales by type of loan for the
past three fiscal years.  The table does not reflect  commitments sold for which
mortgage loans had not been delivered and funded at period end.
<TABLE>
<CAPTION>

(In thousands) Years Ended June 30                      1997                    1996                    1995
---------------------------------------------------------------------------------------------------------------------------

                                                             % of                   % of                      % of
                                                 Amount     Total        Amount     Total        Amount      Total
---------------------------------------------------------------------------------------------------------------------------

<S>                                            <C>             <C>      <C>            <C>      <C>             <C>  
Fixed rate                                     $378,328        74.0%    $331,434       82.9%    $180,454        69.4%
Adjustable rate                                 132,926        26.0       68,128       17.1       79,556        30.6
---------------------------------------------------------------------------------------------------------------------------
   Total mortgage loans sold                   $511,254       100.0%    $399,562      100.0%    $260,010       100.0%
===========================================================================================================================
</TABLE>


     Included in the figures  above are  mortgage  loans which were  securitized
into  mortgage-backed  securities in connection  with and  immediately  prior to
sale.  Securitized  loans in the above figures  totalled  $163,600,000 in fiscal
year 1997,  $117,913,000  in fiscal year 1996,  and  $51,905,000  in fiscal year
1995.

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

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

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

                                       23
<PAGE>

     Loan servicing  income  decreased to $92,000 in fiscal 1997 and by $130,000
to  $3,056,000  during  fiscal year 1996 and increased by $580,000 to $3,186,000
during  fiscal year 1995.  The increases in mortgage  loan  servicing  income in
fiscal year 1995 was due to the increases in mortgage  loans serviced for others
and the  decreases in  amortization  of excess  servicing.  The decrease in such
income in fiscal  year 1997 was due to the sale in the fourth  quarter of fiscal
1996 of substantially all loans serviced for others except for $21,164,000 still
retained.

     Effective as of April 1, 1996,  the Company sold  substantially  all of its
servicing rights related to mortgage loans serviced for others.  The transaction
generated  a pre-tax  gain of  $6,847,000.  The amount of the gain is net of the
write-off  of  $14,000  of   unamortized   PMSRs  and  $767,000  of  unamortized
capitalized  excess servicing.  The Company's decision to exit the mortgage loan
servicing  business was driven by the increasing  "critical  mass"  necessary to
generate  acceptable returns on loan servicing  activities.  Management believes
that the  after-tax  proceeds of the sale of  $4,184,000  can be  deployed  more
efficiently in other areas, and will provide  additional  capital to enhance the
Company's core business activities.

     The following table indicates the components of the Company's mortgage loan
servicing portfolio at the indicated dates:

<TABLE>
<CAPTION>

(Dollars in thousands) Years Ended June 30                  1997                    1996                    1995
---------------------------------------------------------------------------------------------------------------------------

                                                           Amount                 Amount                    Amount
---------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>                     <C>                    <C>        
Company's mortgage loan portfolio                        $496,917                $440,062               $   429,438

Serviced for others:
   FNMA                                                     6,081                   7,252                   655,073
   FHLMC                                                   14,789                  13,528                    30,406
   Other investors                                            294                   7,056                    60,214
---------------------------------------------------------------------------------------------------------------------------
   Total serviced for others                               21,164                  27,836                   745,693
---------------------------------------------------------------------------------------------------------------------------

   Total mortgage loans serviced                         $518,081                $467,898                $1,175,131
===========================================================================================================================
</TABLE>



     Investments. The table below shows the carrying value of securities at the
dates indicated:
<TABLE>
<CAPTION>

(In thousands) June 30                                                      1997             1996             1995
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                <C>                 <C>    
Held to maturity:
   U.S. government agency                                             $         -        $         -         $15,460
   State and municipal                                                      6,174              6,278           7,630
   Agency mortgage/backed                                                     369                374             593
---------------------------------------------------------------------------------------------------------------------------
     Total held to maturity                                                 6,543              6,652          23,683
---------------------------------------------------------------------------------------------------------------------------

Available for sale:
   FHLB stock                                                               9,078              6,998           7,333
   U.S. government agency notes                                             6,461              6,385               -
   Agency mortgage/backed                                                  12,167             15,320           8,778
---------------------------------------------------------------------------------------------------------------------------
     Total available for sale                                              27,706             28,703          16,111
---------------------------------------------------------------------------------------------------------------------------
     Total                                                                $34,249            $35,355         $39,794
===========================================================================================================================
</TABLE>


                                       24
<PAGE>

     The table  below  shows the  weighted  average  yields and  maturities,  at
carrying value, of securities (excluding the FHLB stock) at June 30, 1997:
<TABLE>
<CAPTION>

(In thousands)
                                                 After One But         After Five But
                             Within One Year    Within Five Years     Within Ten Years        After Ten Years           Total
----------------------------------------------------------------------------------------------------------------------------------

                            Amount     Yield   Amount      Yield       Amount    Yield     Amount        Yield   Amount      Yield
----------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>         <C>    <C>          <C>        <C>        <C>      <C>            <C>    <C>         <C>  
Held to maturity:
  State and municipal       $    -       -%    $    -          -%      $   -        -%     $  6,174       5.06%  $  6,174    5.06%
  Other                          -       -          -          -           -        -           379       8.00        369    8.00
----------------------------------------------------------------------------------------------------------------------------------
    Total held to maturity       -       -          -          -           -        -         6,543       5.23      6,543    5.23
----------------------------------------------------------------------------------------------------------------------------------

Available for sale:
  U.S. government agency notes   -       -      3,973       6.52           -        -         2,488       7.00      6,461    6.71
  Agency mortgaged/backed        -       -          -          -           -        -        12,167       7.14     12,167    7.14
----------------------------------------------------------------------------------------------------------------------------------

    Total available for sale     -       _      3,973       6.52           -        -        14,655       7.12     18,628    6.99
----------------------------------------------------------------------------------------------------------------------------------

    Total                  $     -       -%    $3,973       6.52%      $   -        -%      $21,198       6.54%   $25,171    6.53%
==================================================================================================================================
</TABLE>


     Noninterest  Income. As a result of the Company's sale of substantially the
entire loan  servicing  portfolio in 1996,  such loan  servicing  and fee income
declined from $3,050,000 in 1996 to $1,430,000 in 1997  consisting  primarily of
loan fee income.  The gain on the sale of loans and securitized  loans increased
from $2,865,000 in 1996 to $4,205,000 in 1997. The increase is attributable to a
combination of the volume increase in loans  originated and sold and the sale of
loans with servicing released.  Financial service fees increased by $482,000, or
21.0%,  in fiscal year 1997,  and by  $265,000,  or 13.1%,  in fiscal year 1996,
compared to the respective  previous  years.  These  year-to-year  increases are
primarily  attributed  to  the  increase  in the  number  of  checking  accounts
resulting from  promotional  campaigns  targeted to the checking  product and an
increase in ATM fees  resulting  from the  implementation  of surcharge  fees on
certain ATM usages.  In  addition,  financial  service  fees in fiscal year 1997
included no fees from the Company's previous  relationship with INVEST Financial
Services, Inc. ("INVEST"),  compared to $52,000 in fiscal year 1996 and $155,000
in fiscal year 1995. Such fees are lower in the fiscal year 1996, as compared to
the previous  year,  since rising market  interest rates in fiscal year 1995 and
1996  reduced the  popularity  of mutual  fund-type  investments  in relation to
alternative investments such as savings certificates of deposit. Effective as of
April 1, 1996, the Company engaged CoreLink Financial,  Inc. ("CoreLink") as its
broker-dealer  for providing mutual funds and other  securities  products to the
Company's customers.

     Sales of real  estate  owned  yielded net gains of  $46,000,  $279,000  and
$282,000 in fiscal years 1997, 1996 and 1995, respectively. The Company recorded
losses on the  revaluation  of real  estate  owned of $777,000  and  $192,000 in
fiscal years 1996 and 1995. The Company did not have a revaluation allowance for
estimated losses on real estate owned at June 30, 1997.

     Century Title Insurance Agency, Inc. was incorporated in December 1994 as a
subsidiary of the Savings Bank.  This business unit offers a full range of title
insurance  products to the general  public and enhances the  diversification  of
products  to  both  existing  and  prospective  mortgage  loan  customers.   Its
headquarters  is based at the Virginia  First  Mortgage  Division in Woodbridge,
Virginia. Century Title generated $223,000,  $192,000 and $28,000 of gross title
fee income in fiscal  years 1997,  1996 and 1995,  respectively  and recorded in
other income.

     Other  noninterest  income in fiscal year 1995 includes a nonrecurring item
in the  amount of  $211,000,  which  represents  the net gain on the sale of the
deposit  liabilities  and  subsequent  closing of a retail banking branch office
location.

     Noninterest Expense. Personnel and related employee benefits expense is the
Company's largest non-interest  expense.  Personnel expense for fiscal year 1997
was $14,149,000, compared with $10,188,000 in fiscal year 1996 and $9,802,000 in
fiscal year 1995.  The  $3,961,000  increases in personnel  costs in fiscal year
1997,  as compared  with  fiscal  year 1996,  includes  the  $2,488,000  expense
applicable to the nonqualified  stock options and $751,000 in personnel


                                       25
<PAGE>

costs  at  AFI,  since  acquisition.  Excluding  these  items,  personnel  costs
increased  7.1% over 1996.  The balance of personnel cost increases is primarily
attributable to the increased volume in mortgage  originations and general merit
increases to staff personnel.

     Occupancy   expense  for  the  past  three  fiscal  years  was  $1,777,000,
$1,594,000  and  $1,451,000,  respectively.  A portion of the 11.5% increase for
fiscal year 1997 and the 9.9% increase for fiscal year 1996 was  attributable to
the addition of retail banking branch offices.

     Data  processing  expense for the past three fiscal  years was  $1,861,000,
$1,753,000 and $1,515,000,  respectively.  The fiscal year 1997 increase of 6.2%
was due to general growth in the bank whereas the 1996 increase of 15.7% was due
to increased loan and deposit account volume,  a mortgage loan tracking  system,
and local area networking.

     Advertising expense amounted to $858,000, $366,000, and $269,000 for fiscal
years 1997, 1996, and 1995, respectively.  The increase of $292,000 between 1997
and 1996 is attributable to the advertising  costs at AFI. The significant  cost
of  deposit  insurance  premiums  in  1997  is  attributable  to  the  one  time
recapitalization   premium  of  $3,149,000  paid  in  fiscal  year  1997.  Other
noninterest  expense was $4,580,000,  $3,492,000,  and $2,956,000 in 1997, 1996,
and 1995, respectively.  Approximately half ($537,000) of the increase from 1996
to 1997 is applicable to expenses  incurred in connection  with the  anticipated
merger with BB&T Corporation.

     Income  Taxes.  Income tax  expense  for fiscal  year 1997 was  $2,876,000,
resulting  in an effective  tax rate of 36.0%.  By  comparison,  the Company had
income tax expense of  $7,032,000  for an effective  tax rate of 36.7% in fiscal
years  1996 and  $4,992,000  in fiscal  year 1995 for an  effective  tax rate of
39.8%.

     The  effective  tax  rates  for the  three  fiscal  years  differ  from the
statutory  federal rates.  The prohibition  against  claiming  amortization  for
certain purchase accounting adjustments (goodwill) for income tax purposes tends
to increase the  effective  tax rate,  while the  effective tax rate tends to be
lower due to tax-exempt  interest  income.  The effective rate also provides for
state income taxes.  As noted  earlier,  the effective tax rates for fiscal year
1996 was reduced by the receipt of income tax refunds related to the fiscal year
ended June 30, 1980.

FINANCIAL CONDITION

     Liquidity and Capital Resources. The primary sources of funding (liquidity)
for the Company  consist of checking and savings  deposits,  borrowings from the
FHLB and others,  and net earnings  retained from operations.  Deposits totalled
$600,205,000  at June 30, 1997, an increase of  $26,669,000,  or 4.6%,  over the
$573,536,000 at June 30, 1996. Certificates of deposit grew by $36,487,000 while
checking and money market deposit  accounts  decreased by $8,311,000 and savings
deposits  declined by  $9,818,000.  The movement of customer  deposits  from the
lower rate  checking  and savings  products to the higher rate  certificates  of
deposit  products is a  continuation  of the trend in banking  that has occurred
over recent years.

     Advances from the FHLB increased by $79,500,000 to $181,552,000 at June 30,
1997,  compared  with  $102,052,000  at June 30,  1996.  The  increase  in these
borrowings  funded the  $46,014,000  increase in loans held for sale and the 11%
increase in loans outstandings.

     Standby  letters  of  credit  are  conditional  commitments  issued  by the
Company.  The credit risk involved in issuing  letters of credit is  essentially
the same as that involved in extending loans to customers. At June 30, 1997, the
Company was conditionally  committed under standby letters of credit aggregating
$20,843,000.

     Due to the relative size of the Company's  loan  portfolio,  the investment
portfolio is not a material component of earning assets. Investments (classified
as either held to maturity or available for sale)  totalled  $34,249,000 at June
30, 1997 and  $35,355,000 at June 30, 1996. Such balances  represented  4.0% and
4.7%, respectively, of total assets at those dates.

     Liquidity is the ability to meet present and future financial  obligations,
either  through the  acquisition  of additional  liabilities or from the sale or
maturity of existing assets,  with minimal loss.  Regulations of the OTS require
thrift  


                                       26
<PAGE>

associations  and/or savings banks to maintain  liquid assets at certain levels.
At present,  the required  ratio of liquid  assets to  withdrawable  savings and
borrowings  due in one year or less is  5.0%.  At June 30,  1997 and  1996,  the
Company  had  liquidity  ratios of 4.3% and 5.2%,  respectively.  The  Company's
management  anticipates  that it will be able to maintain  its current  level of
regulatory liquidity during fiscal year 1998.

     At June 30, 1997,  the Savings  Bank's net worth under  generally  accepted
accounting  principles  ("GAAP") was $66,492,000.  OTS Regulations  require that
savings institutions maintain the following capital levels: (1) tangible capital
of at least 1.5% of total  adjusted  assets,  (2) core  capital of 4.0% of total
adjusted  assets,   and  (3)  overall   risk-based  capital  of  8.0%  of  total
risk-weighted assets. As of June 30, 1997, the Savings Bank satisfied all of the
regulatory capital requirements.

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

     The Savings Bank is a member of the Savings Association Insurance Fund (the
"SAIF"). Banks,  generally,  are members of the Bank Insurance Fund (the "BIF").
Both the SAIF and the BIF are administered by the FDIC. Until recently,  deposit
insurance  premium rates for SAIF and BIF members were comparable.  On August 8,
1995,  the FDIC  announced  that the BIF had reached a reserve ratio of 1.25% of
insured  deposits,  and it  reduced  the BIF  annual  deposit  premium  for well
capitalized  banks to $0.04 per $100 of insured  deposits.  The  majority of BIF
member banks paid no deposit  premiums since 1996.  Due to the  undercapitalized
nature of the SAIF, and the current  expectation  that the SAIF will not reach a
1.25% reserve ratio until 2002, the FDIC retained the $0.23 to $0.31 per $100 of
deposits premium rate structure for all SAIF-insured  institutions.  In response
to concerns raised  regarding the disparity in BIF and SAIF insurance rates, the
FDIC, the OTS, the Treasury  Department,  and the thrift  industry  considered a
number of legislative  solutions to the problem that would recapitalize the SAIF
and either  reduce or eliminate  the  disparity  between BIF and SAIF  insurance
rates once the SAIF becomes fully capitalized.

     In September,  1996,  Congress passed legislation  authorizing the Board of
Directors  of the  FDIC  to  impose  a  one-time  special  assessment  at a rate
sufficient to bring the reserve ratio of the SAIF to 1.25% of insured  deposits.
The one-time special  assessment charged the Company in December was $3,149,000.
Thereafter,  the Company's  deposit insurance premium dropped from $.23 to $.065
per $100 of insured deposits.

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

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

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

                                       27
<PAGE>

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

(In thousands) June 30                        1997            1996              1995            1994         1993
---------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>             <C>            <C>           <C>    
Non-accrual loans:
   Residential mortgage                        $  7,419         $ 5,029         $ 3,415        $ 3,705       $ 4,544
   Commercial mortgage                            1,061           1,827           2,068          2,718         2,287
   Construction                                   3,092           2,747           3,259              -             -
   Consumer non-mortgage                            507           1,342             545            346           347
---------------------------------------------------------------------------------------------------------------------------
   Total non-accrual loans                       12,079          10,945           9,287          6,769         7,178

   Specific loss allowances                           -            (646)           (768)        (1,046)         (518)
---------------------------------------------------------------------------------------------------------------------------
     Total non-accrual loans, net                12,079          10,299           8,519          5,723         6,660
---------------------------------------------------------------------------------------------------------------------------

Real estate acquired through foreclosure:
   One to four family residential units           5,903           2,319           2,576          3,359         1,789
   Residential lots or projects                     934           2,004             106            137           141

   Shopping/retail centers                          623           1,727             672            672         4,426

   Office buildings                                   -               -             188              -         1,005

   Commercial land                                  187             192             351            350           159
---------------------------------------------------------------------------------------------------------------------------
   Total real estate acquired through foreclosure 7,647           6,242           3,893          4,518         7,520

   Specific and general allowances for losses         -            (889)           (637)          (615)       (2,134)
---------------------------------------------------------------------------------------------------------------------------
     Total real estate acquired through
        foreclosure, net                          7,647           5,353           3,256          3,903         5,386

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

   Total non-performing assets                  $19,726         $15,652         $11,775        $ 9,626       $12,046
===========================================================================================================================

Non-accrual loans to total loans                   1.76%           1.67%           1.47%          1.18%         1.82%

Total non-performing assets to sum of
   loans and net real estate acquired
   through foreclosure                             2.85%           2.52%           2.02%          1.96%         3.25%

Total non-performing assets
   to total assets                                 2.30%           2.10%           1.70%          1.65%         2.15%
===========================================================================================================================
</TABLE>


     The net amount of interest  income  foregone during fiscal years 1997, 1996
and 1995 on loans  classified  as  non-performing  was $576,000,  $263,000,  and
$250,000 respectively.

     The  following   table   summarizes  all  real  estate   acquired   through
foreclosure, by property type, at June 30, 1997:

<TABLE>
<CAPTION>

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

<S>                                                                <C>         <C>         <C>             <C>   
One to four family residential units                               25          $5,903      $  -            $5,903
Residential lots or projects                                        5             934         -               934
Shopping/retail centers                                             2             623         -               623
Commercial land                                                     1             187         -               187
---------------------------------------------------------------------------------------------------------------------------
                                                                   33           7,647         -             7,647
General loss allowance                                              -               -         -                 -
---------------------------------------------------------------------------------------------------------------------------
   Total real estate acquired through foreclosure                  33          $7,647      $  -            $7,647
===========================================================================================================================
</TABLE>


                                       28
<PAGE>

     Potential  problem loans consist of loans that are currently  performing in
accordance with contractual terms but for which potential operating or financial
concerns of the obligors have caused management to have serious doubts regarding
the ability of such obligors to continue to comply with present repayment terms.
At June 30,  1997,  such  potential  problem  loans that are not included in the
above tables as nonperforming amounted to approximately $4.3 million.

NEW ACCOUNTING STANDARDS

     In May 1995, SFAS No. 122,  "Accounting for Mortgage Servicing Rights", was
issued.  SFAS 122 became effective for fiscal years beginning after December 15,
1995, with earlier  adoption  allowed.  The Statement  requires that the cost of
mortgage loans  originated or purchased with a definitive plan to sell the loans
and retain the servicing  rights,  be allocated  between the loans and servicing
rights based on their estimated values at the purchase or origination date. Upon
the sales of the loans,  additional  income may be recognized  resulting  from a
lower adjusted cost basis on the mortgage loans sold. The servicing rights asset
is amortized  over the life of the servicing  revenue  stream,  and thus has the
effect of reducing loan servicing income in future periods.  The Company adopted
SFAS 122 effective July 1, 1996. The new accounting standard has had no material
adverse effect on the Company's operations or financial condition.

     In October 1995, SFAS No. 123,  "Accounting for Stock-Based  Compensation",
was issued.  SFAS 123  prescribes  accounting  and  reporting  standards for all
stock-based compensation plans. The new standard allows companies to continue to
follow present  accounting  rules which often result in no compensation  expense
being   recorded  or  to  adopt  the  SFAS123   fair-value-based   method.   The
fair-value-based  method will generally  result in higher  compensation  expense
based on the  estimated  fair  value of  stock-based  awards on the grant  date.
Companies  electing  to  continue  following  present  accounting  rules will be
required to provide pro-forma disclosures of net earnings and earnings per share
as if the  fair-value-based  method had been  adopted.  The  Company  intends to
continue following present accounting rules.

     In June 1996,  SFAS No. 125,  "Accounting  for  Transfers  and Servicing of
Financial  Assets  and  Extinguishments  of  Liabilities"  was  issued.  The new
standard is effective  for  transfers  and  servicing  of  financial  assets and
extinguishment  of liabilities  occurring  after December 31, 1996, and is to be
applied  prospectively.  SFAS No.  125  supercedes  SFAS  No.  122.  Earlier  or
retroactive  application is not permitted.  Specific transition provisions apply
to servicing contracts in existence before January 1, 1997 and certain financial
assets  subject  to  prepayment.  SFAS 125  provides  accounting  and  reporting
standards based on consistent application of the "financial-components approach"
that  focuses on control.  Under the  approach,  after a transfer of assets,  an
entity  recognizes  the  financial  and  servicing  assets it  controls  and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered,  and  derecognizes  liabilities  when  extinguished.   It  provides
consistent  standards for distinguishing  transfers of financial assets that are
sales from transfers  that are secured  borrowings.  Implementation  guidance is
provided for assessing  isolation of  transferred  assets and for accounting for
transfers of partial interests, servicing of financial assets,  securitizations,
transfers of  sales-type  and direct  financing  lease  receivables,  securities
lending  transactions,  repurchase  agreements,  including "dollar rolls", "wash
sales", loan syndications and participations, risk recourse, and extinguishments
of  liabilities.  The  Company's  adoption of SFAS 125 is not expected to have a
material adverse effect on the financial  condition and results of operations of
the Company.

     In  February  1997,  SFAS No.  128,  Earnings  Per  Share was  issued.  The
Statement  supersedes APB No. 15 and AICPA Accounting  Interpretations  1-102 of
Opinion 15. It replaces  the  presentation  of primary  earnings per share (EPS)
with a presentation  of basic EPS. It also requires dual  presentation  of basic
and diluted EPS on the face of the income statement for all entries with complex
capital structures.  Basic EPS excludes dilution and is computed by dividing net
income by the weighted-average number of common shares outstanding.  Diluted EPS
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common  stock were  exercised or converted  into common stock
and then shared in the earnings of the entity.  This  statement is effective for
financial  statements issued for periods ending after December 15, 1997. Earlier
application  is not  permitted,  however,  an entity is  permitted  to  disclose
proforma  amounts  computed  using  this  Statement  in the  notes to  financial
statements in periods prior to required  adoption.  On a proforma  basis, if the
Company had adopted this  Statement at June 30, 1997,  basic EPS would have been
$.89 for fiscal year 1997 and diluted EPS would have been $.87 per share.



                                       29
<PAGE>

Standards Of Financial Reporting

     The  accompanying  consolidated  financial  statements  of  Virginia  First
Financial  Corporation  and  subsidiaries  ("the Company") have been prepared by
management.  Management is responsible  for the accuracy and  reliability of the
financial statements presented in this Annual Report. These statements have been
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances  and, of necessity,  include certain amounts that are based
on management's  best judgments and estimates.  Also,  management is responsible
for the consistency of all representations and financial  information  contained
in this Annual Report.

     Management  depends  upon  the  Company's  system  of  internal  accounting
controls in meeting its responsibility for reliable financial information. There
are inherent limitations in the effectiveness of any system of internal control,
including the possibility of human error and the  circumvention or overriding of
controls.  Accordingly,  even an effective  internal  control system can provide
only  reasonable  assurance  with  respect to financial  statement  preparation.
Further,  because of changes in  conditions,  the  effectiveness  of an internal
control  system  may vary  over  time.  The  internal  control  system  contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
Due regard has been given to  maintaining  an  appropriate  balance  between the
costs of the internal control structure and the benefits derived.

     The  Company's  year-end  financial  statements  are  audited  by KPMG Peat
Marwick LLP. The annual audit includes  consideration of the Company's  internal
controls to the extent  required by  generally  accepted  auditing  standards in
establishing the scope of their audit of the financial statements.

     The Audit Committee of the Board of Directors, to whom the internal auditor
reports, is comprised entirely of directors who are not officers or employees of
Virginia First Financial  Corporation or its  subsidiaries.  The committee meets
periodically with the independent auditors,  the internal auditor and management
to discuss  planned  audit scope and results,  internal  accounting  control and
financial reporting matters and to ensure that each is properly  discharging its
responsibilities.  Both the independent  auditors and the internal  auditor have
free access to the  committee,  without  management  being  present,  to discuss
appropriate matters.




         /s/ Charles A. Patton                       /s/ William J. Vogt

         Charles A. Patton                           William J. Vogt
         President and                               Senior Vice President
         Chief Executive Officer                     and Chief Financial Officer


                                       30
<PAGE>

INDEPENDENTS AUDITOR'S REPORT


The Board of Directors
Virginia First Financial Corporation
Petersburg, Virginia


     We have  audited the  accompanying  consolidated  statements  of  financial
condition  of  Virginia  First  Financial   Corporation  and  subsidiaries  (the
"Company") as of June 30, 1997 and 1996, and the related consolidated statements
of  earnings,  changes  in  stockholders'  equity and cash flows for each of the
years in the three-year period ended June 30, 1997. These consolidated financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  financial  statement  presentation.  We  believe  that our  audits
provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Virginia
First Financial  Corporation and  subsidiaries as of June 30, 1997 and 1996, and
the  results of their  operations  and their cash flows for each of the years in
the three-year period ended June 30, 1997 in conformity with generally  accepted
accounting principles.


                                                       /s/ KPMG Peat Marwick LLP

Richmond, Virginia
August 14, 1997

                                       31
<PAGE>

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>

(In thousands, except share data) June 30                                                1997                  1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                  <C>      
ASSETS      
   Cash and cash equivalents (includes interest bearing deposits of
     $15,978 in 1997 and $12,270 in 1996)                                              $ 26,738             $  24,575
   Securities held to maturity
     (fair value $6,609 in 1997 and $6,660 in 1996) (note 2)                              6,543                 6,652
   Securities available for sale (note 3)                                                27,706                28,703
   Loans, net of unearned income and discounts (note 4)                                 685,366               623,081
   Less: allowance for loan losses                                                       (9,295)               (7,527)
---------------------------------------------------------------------------------------------------------------------------
     Net loans                                                                          676,071               615,554
   Loans held for sale                                                                   92,495                46,481
   Real estate owned, net (note 5)                                                        7,647                 5,353
   Office properties and equipment, net (note 6)                                          9,644                 8,780
   Accrued interest receivable, net                                                       5,781                 5,292
   Other assets                                                                           5,778                 5,477
---------------------------------------------------------------------------------------------------------------------------

     Total assets                                                                      $858,403              $746,867
---------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY                                    
   Deposits (note 7)                                                                   $600,205              $573,536
   Notes payable and other borrowings (note 8)                                              611                   639
   Advances from Federal Home Loan Bank (note 9)                                        181,552               102,052
   Advance payments by borrowers for taxes and insurance                                  3,397                 2,169
   Accrued expenses and other liabilities                                                 6,146                 7,475
---------------------------------------------------------------------------------------------------------------------------

     Total liabilities                                                                  791,911               685,871
---------------------------------------------------------------------------------------------------------------------------

   Stockholders' equity (notes 10, 11, and 13):
   Preferred stock of $1 par value.  Authorized 5,000,000 shares; none issued                                       -
   Common stock of $1 par value.  Authorized 20,000,000 shares; issued and
     outstanding 5,810,462 shares in 1997 and 5,740,503 shares in 1996                    5,810                 5,740
   Additional paid-in capital                                                             9,115                 8,439
   Retained earnings-substantially restricted                                            51,478                46,943
   Net unrealized gain (loss) on securities available for sale                               89                  (126)
---------------------------------------------------------------------------------------------------------------------------

     Total stockholders' equity                                                          66,492                60,996
---------------------------------------------------------------------------------------------------------------------------

   Commitments and contingencies (notes 6, 10, 12, and 15)

     Total liabilities and stockholders' equity                                        $858,403              $746,867
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.



                                       32
<PAGE>

CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>

(In thousands, except share data) Years Ended June 30                1997                   1996                 1995
---------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                    <C>                  <C>      
INTEREST INCOME
   Loans and loans available for sale                             $62,640                $56,368              $50,685
   Securities and held to maturity                                    778                    519                  578
   Securities available for sale                                    1,764                  1,460                1,798
   Other interest-earning assets                                      949                    694                  464
---------------------------------------------------------------------------------------------------------------------------
     Total interest income                                         66,131                 59,041               53,525
---------------------------------------------------------------------------------------------------------------------------

INTEREST EXPENSE
   Deposits (note 7)                                               27,645                 26,333               20,679
   Borrowings                                                       7,966                  5,989                6,952
---------------------------------------------------------------------------------------------------------------------------
     Total interest expense                                        35,611                 32,322               27,631
---------------------------------------------------------------------------------------------------------------------------
     Net interest income                                           30,520                 26,719               25,894
   Provision for loan losses (note 4)                               2,347                  2,429                1,390
---------------------------------------------------------------------------------------------------------------------------
     Net interest income after provision for loan losses           28,173                 24,290               24,504
---------------------------------------------------------------------------------------------------------------------------

NONINTEREST INCOME
   Gain on sale of loans and securitized loans, net                 4,205                  2,865                  897
   Loan servicing and fee income                                    1,430                  3,056                3,186
   Gain on sale of loan servicing rights                                -                  6,847                   14
   Gain (loss) on sale of investment securities                         -                      4                 (103)
   Financial service fees                                           2,775                  2,293                2,028
   Gain on sale of real estate owned                                  260                    279                  282
   Loss on revaluation of real estate owned                          (214)                  (777)                (192)
   Other                                                              283                    346                  338
---------------------------------------------------------------------------------------------------------------------------
     Total noninterest income                                       8,739                 14,913                6,450
---------------------------------------------------------------------------------------------------------------------------

NONINTEREST EXPENSE
   Personnel                                                       14,149                 10,188                9,802
   Occupancy, net                                                   1,777                  1,594                1,451
   Equipment                                                        1,521                  1,216                1,125
   Advertising                                                        858                    366                  269
   Federal deposit insurance premiums                               3,912                  1,173                1,047
   Data processing                                                  1,861                  1,753                1,515
   Amortization of intangibles                                        266                    247                  247
   Other                                                            4,580                  3,492                2,956
---------------------------------------------------------------------------------------------------------------------------
     Total noninterest expense                                     28,924                 20,029               18,412
---------------------------------------------------------------------------------------------------------------------------
     Earnings before income tax expense                             7,988                 19,174               12,542
   Income tax expense (note 10)                                     2,876                  7,032                4,992
---------------------------------------------------------------------------------------------------------------------------
     Net earnings                                                $  5,112                $12,142              $ 7,550
===========================================================================================================================
     Net earnings per share (note 11)                            $    .87                $  2.09             $   1.33
===========================================================================================================================
     Average common and common equivalent shares outstanding    5,854,732              5,809,410            5,676,406
===========================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       33
<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


(In thousands, except share data) Years Ended June 30, 1997, 1996 and 1995
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                              Net
                                                                                                           Unrealized
                                                                                               Retained  Gain (Loss) on
                                                                               Additional    Earnings -    Securities        Total
                                                   Common Stock                   Paid-in  Substantially    Available  Stockholders'
                                                         Shares        Amount     Capital    Restricted     for Sale         Equity
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>            <C>         <C>         <C>            <C>         <C>     
Balance, June 30, 1994                                   5,367,448      $5,368      $7,967      $ 28,045       $(301)      $ 41,079
     Net earnings                                                -           -           -         7,550           -          7,550
     Cash dividends ($.05 per share)                             -           -           -          (275)          -           (275)
     Common stock issued due to
         exercise of stock options                         202,188         202         111          (101)          -            212
     Change in net unrealized
         loss on securities
         available for sale, net of
         income taxes of $125                                    -           -           -             -         206            206
-----------------------------------------------------------------------------------------------------------------------------------

Balance, June 30, 1995                                   5,569,636       5,570       8,078        35,219         (95)        48,772
     Net earnings                                                -           -           -        12,142           -         12,142
     Cash dividends ($.07 per share)                             -           -           -          (395)          -           (395)
     Common stock issued due to
         exercise of stock options                         145,370         145         179           (10)          -            314
     Common stock issued under
         incentive compensation plan                        25,314          25         180           (13)        192
     Common stock issued under
         dividend reinvestment
         and stock purchase plan                               183           -           2             -           2
     Change in net unrealized
         loss on securities
         available for sale, net of
         income taxes of $19                                     -           -           -             -         (31)           (31)
-----------------------------------------------------------------------------------------------------------------------------------

Balance, June 30, 1996                                   5,740,503       5,740       8,439        46,943        (126)        60,996
     Net earnings                                                -           -           -         5,112           -          5,112
     Cash dividends ($.10 per share)                             -           -           -          (577)          -           (577)
     Common stock issued due to
         exercise of stock options                          45,000          45         270             -           -            315
     Common stock issued under
         incentive compensation plan                         9,210           9         116             -           -            125
     Common stock issued under
         dividend reinvestment
         and stock purchase plan                            15,749          16         290             -           -            306
     Change in net unrealized
         gain (loss) on securities
         available for sale, net of
         income taxes of $82                                     -           -           -             -         215            215
-----------------------------------------------------------------------------------------------------------------------------------

Balance, June 30, 1997                                   5,810,462      $5,810      $9,115      $ 51,478       $  89       $ 66,492
===================================================================================================================================
</TABLE>



See accompanying notes to consolidated financial statements.



                                       34
<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>




(In thousands) Years Ended June 30                                                    1997                1996                1995
----------------------------------                                                    ----                ----                ----
OPERATING ACTIVITIES                                                                                                   
<S>                                                                                 <C>                <C>                <C>      
Net earnings                                                                        $   5,112          $  12,142          $   7,550
Adjustments to reconcile net earnings to net
     cash provided by operating activities
     Depreciation and amortization                                                      1,355              1,143              1,044
     Provision for loan losses and losses on real estate owned                          2,561              3,206              1,582
     Loans held for sale:
          Originations and purchases                                                 (553,064)          (386,178)          (231,122)
          Gain on sales                                                                (4,204)            (2,865)              (911)
          Proceeds from sales                                                         511,254            378,104            224,434
     Losses (gains) on securities available for sale                                      -                   (4)               103
     Increase in other assets                                                          (1,056)            (1,716)            (3,281)
     (Decrease) increase in accrued expenses and other liabilities                     (1,329)             3,834                228
     Other net                                                                              0                506                383
                                                                                    ---------          ---------          ---------
          Net cash (used)/provided by operating activities                            (39,371)             8,172                 10
                                                                                    ---------          ---------          ---------

INVESTING ACTIVITES
Net increase in loans                                                                 (62,864)           (42,850)           (97,343)
Securities held to maturity:
     Principal collected                                                                  109              1,352                263
Securities available for sale:
     Purchases                                                                        (19,900)           (27,376)           (13,757)
     Net proceeds from sales                                                           16,257              3,974              7,252
     Principal collected                                                                4,855             25,658              5,483
Net (increase) decrease real estate owned                                              (2,508)             2,439              1,896
Office properties and equipment:
     Purchases                                                                         (1,954)              (818)            (1,030)
     Proceeds from sales                                                                    2                 13                  1
                                                                                    ---------          ---------          ---------
          Net cash used in investing activities                                       (66,003)           (37,608)           (97,235)
                                                                                    ---------          ---------          ---------

FINANCING ACTIVITIES
Net increase (decrease) in savings, checking and
      money market deposit accounts                                                    (2,385)            18,194            (48,778)
Net increase in certificates of deposit                                                29,054             51,675             95,725
Borrowings resulting from:
     Securities sold under agreements to repurchase                                    18,544              5,962             18,661
     Advances from Federal Home Loan Bank                                             353,900            292,544            185,478
     Other                                                                             18,910             13,379             12,745
Repayments of borrowings attributable to:
     Securities sold under agreements to repurchase                                   (18,544)            (5,962)           (18,661)
     Advances from Federal Home Loan Bank                                            (274,400)          (325,150)          (130,692)
     Other                                                                            (18,938)           (13,297)           (12,738)
Net increase (decrease) in mortgage escrow funds                                        1,228                (85)               308
Proceeds from issuance of common stock                                                    745                508                212
Cash dividends paid                                                                      (577)              (395)              (275)
                                                                                    ---------          ---------          ---------
          Net cash provided by financing activities                                   107,537             37,373            101,985
                                                                                    ---------          ---------          ---------
Net increases in cash and cash equivalents                                              2,163              7,937              4,760
Cash and cash equivalents at beginning of year                                         24,575             16,638             11,878
                                                                                    ---------          ---------          ---------
Cash and cash equivalents at end of year                                            $  26,738          $  24,575          $  16,638
                                                                                    ---------          ---------          ---------

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash payments of interest                                                           $  35,377          $  33,972          $  27,154
                                                                                    ---------          ---------          ---------
Cash payments of income taxes                                                       $   7,435          $   4,782          $   4,924
                                                                                    =========          =========          =========


</TABLE>

          See accompanying notes to consolidated financial statements.


                                       35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation
     The accompanying  consolidated financial statements include the accounts of
Virginia First Financial  Corporation  and its  wholly-owned  subsidiaries  (the
"Company").  Virginia First  Financial  Corporation  (the "Parent  Company") was
incorporated  in Virginia in 1993 to serve as the holding  company for  Virginia
First Savings Bank (the "Savings Bank"). All significant  intercompany  accounts
and transactions have been eliminated in consolidation.

Description of Business
     The Company's  principal business  activities,  which are conducted through
the Savings Bank, are attracting  checking and savings deposits from the general
public through its retail banking offices and originating,  servicing, investing
in and selling loans secured by first mortgage liens on single-family dwellings,
including  condominium  units.  All of the retail banking offices are located in
Virginia,  while the  mortgage  loan  origination  offices are in  Virginia  and
Maryland.  The Company also lends funds to retail banking  customers by means of
home equity and installment loans, and originates residential construction loans
and  loans  secured  by   commercial   property,   multi-family   dwellings  and
manufactured  housing units. The Company invests in certain U.S.  Government and
agency  obligations  and other  investments  permitted  by  applicable  laws and
regulations.

Use of Estimates
     Generally  accepted  accounting   principles  require  management  to  make
estimates and assumptions when preparing  financial  statements.  Actual results
could differ from those estimates.

Investment Securities
     The Company  classifies its debt and marketable equity securities as either
held to maturity or available for sale.

     Securities classified as "held to maturity" are stated at cost and adjusted
for  amortization  of premiums or accretion  of discounts  using the level yield
method.  The  carrying  value of these  assets  is not  adjusted  for  temporary
declines in fair value since the Company has the positive  intent and ability to
hold them to their maturities.

     Securities classified as "available for sale" are stated at fair value with
unrealized holding gains and losses excluded from earnings and reported as a net
amount,  net of related income taxes, as a separate  component of  stockholders'
equity until realized. Such identification as available for sale is made at time
of purchase.  Adjustments to fair value,  below amortized or accreted cost, that
are deemed  other  than  temporary  are  charged to  earnings  resulting  in the
establishment  of a new cost basis.  Realized gains and losses are derived using
the specific  identification method for determining the cost of securities sold.
The Company does not have  securities  classified  as  "trading".  The Company's
investment  in the stock of the  Federal  Home Loan Bank  ("FHLB") of Atlanta is
stated at cost.

     Mortgage-backed   securities   are  comprised  of  mortgage   participation
certificates  guaranteed by the Federal National Mortgage  Association  ("FNMA")
and the Federal  Home Loan  Mortgage  Corporation  ("FHLMC"),  and also  include
Collateralized Mortgage Obligations ("CMO").

Loans and Loans Held for Sale
     Loans  consist  primarily of long-term  real estate loans  secured by first
deeds of trust on single  family  residences,  other  residential  property  and
commercial  property  located  predominantly  in  the  states  of  Virginia  and
Maryland.  Loans are recorded at cost.  The Company has the positive  intent and
ability to hold these loans to  maturity.  Discounts  and  premiums on purchased
loans are amortized over their  estimated  remaining lives using the level yield
method. Interest on loans is recognized based on the level yield method.



                                       36
<PAGE>


     The Company defers loan  origination  and  commitment  fees, net of certain
direct loan origination costs. The net deferred fees or costs are amortized into
interest  income over the lives of the related loans as yield  adjustments.  Any
unamortized  fees or costs on  loans  fully  repaid  or sold are  recognized  in
earnings  in  the  year  of  repayment  or  sale.  Deferred  fees  on  permanent
adjustable-rate  loans are  amortized  into income over the period  necessary to
adjust the yield on the loans to market rates using the level yield method.

     At the time of origination or purchase,  the Company identifies loans which
may be sold prior to maturity.  These loans have been  classified  as loans held
for sale and are  recorded at the lower of cost,  adjusted for  amortization  of
premiums and accretion of  discounts,  or market  value.  Adjustments  to market
value,  below  amortized  or accreted  cost are  reflected  in the  consolidated
statements of operations as gains and losses on the sale of loans held for sale.
Gain or loss on the  sale of  loans  is  based  on the  specific  identification
method.

Loan Sales and Servicing
      The Company sells loans on an individual  loan basis or securitizes  loans
through  the  creation  of  FNMA  and  FHLMC  mortgage-backed   securities.  The
securities   created  by  securitized   loans  originated  by  the  Company  are
immediately  sold to various  investors.  In the event the Company  holds such a
security  as of the end of an  accounting  period,  it is  treated  as a trading
security and is recorded at fair value with unrealized  holding gains and losses
included in earnings.

     When the Company sells loans and  securitized  loans it  recognizes  both a
cash and a present  value gain or loss. A cash gain or loss is recognized to the
extent that the sale proceeds of the mortgage loans or loan  participations sold
exceed or are less than the book value at the time of sale. A present value gain
or loss is calculated based on the difference between the loan interest rate and
the net  yield  to the  investor  excluding  a  normal  loan  servicing  fee and
considering  estimated  prepayments on such loans.  Fees for servicing loans for
investors are recorded when earned.  Loan servicing costs are charged to expense
as incurred.

Nonaccrual of Interest
     The  Company  places  loans on a  nonaccrual  status  after being more than
ninety  days  delinquent,  or  earlier  in  situations  in which the loans  have
developed  inherent  problems that indicate payment of principal and/or interest
will  not be  made in  full.  Whenever  the  accrual  of  interest  is  stopped,
previously  accrued but  uncollected  interest  income is reversed.  Thereafter,
interest is  recognized  only as cash is received.  The loan is reinstated to an
accrual  basis after it has been brought  current as to  principal  and interest
under the contractual terms of the loan.

Valuation Allowances
     It is management's  policy to establish  allowances for estimated losses on
loans and real  estate  owned.  These  allowances  are based on  estimates,  and
ultimate  losses  may vary  from the  current  estimates.  These  estimates  are
reviewed periodically and, as adjustments become necessary, they are reported in
operations in the periods in which they become known.

                                       37
<PAGE>

     The Company has  implemented and adheres to an internal asset review system
and loan loss  methodology  designed to detect problem assets and provide for an
adequate  allowance for loan losses  inherent in its  portfolio.  Provisions for
loan losses are charged to operations when, based upon  management's  evaluation
of various factors, such as historical loss experience,  independent appraisals,
current economic  conditions,  and the financial  condition of borrowers,  it is
determined that the investment in such assets is greater than the estimated fair
value of the underlying collateral.

Impaired Loans
     Effective July 1, 1995, the Company  adopted the provisions of Statement of
Financial  Accounting  Standards ("SFAS") No. 114,  "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114") and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan-Income  Recognition and Disclosures".  SFAS 114, as amended
by SFAS 118,  requires that an impaired loan be measured  based upon the present
value of expected future cash flows discounted at the effective interest rate of
the  loan,  or at the fair  value of the  collateral  if the loan is  collateral
dependent.  A loan is  considered  impaired  when it is probable that a creditor
will be unable to collect all  interest and  principal  payments as scheduled in
the loan agreement.  The initial  adoption of SFAS114 and 118 did not require an
addition to the allowance for loan losses.  Interest income is recognized on the
cash basis for impaired loans.

Securities Sold Under Agreements to Repurchase
     The Company  periodically  enters into sales of securities under agreements
to  repurchase.  Fixed-coupon  agreements  are  treated as  financings,  and the
obligations  to repurchase  securities  sold are reflected as a liability in the
consolidated statements of financial condition.  The dollar amount of securities
underlying  the  agreements  remains  in  the  asset  accounts.  The  securities
underlying the agreements are typically delivered to the dealers who arrange the
transactions.  The dealers may have sold,  loaned, or otherwise disposed of such
securities to other parties in the normal course of their  operations,  and have
agreed to resell the Company  identical or substantially  the same securities at
the  maturities of the  agreements.  There were no such  agreements in effect at
June 30, 1997 or 1996.

Financial Options and Forward Sales Contracts
     Premiums  relating  to  options  transactions  consummated  in an effort to
reduce the Company's interest rate risk (hedged transactions) are recorded as an
adjustment to the underlying  asset or liability.  For other financial  options,
premiums are recorded as income or expense upon  expiration  of the option,  and
the  underlying  option  contract  is marked to  market  during  the term of the
option.

     The Company enters into forward  contracts for the sale of  mortgage-backed
securities  for the purpose of hedging its  portfolio  of closed  loans held for
sale and its pipeline of loans expected to close. As loans are closed,  they are
typically  pooled,  securitized  and the resulting  securities  are delivered to
national securities firms at prices specified in the forward contracts. Gains or
losses may arise if the yields of the loans  delivered vary from those specified
in the  forward  contracts.  Unrealized  gains and losses on the  contracts  are
included in cost values used in adjusting  the carrying  value of loans held for
sale to the lower cost or market value. Realized gains or losses and adjustments
to the lower of cost or market  value are  included in gain on sale of loans and
securitized loans in the consolidated statements of operations.

Real Estate Owned
     Real  estate  owned  was acquired through foreclosure or by deed in lieu of
foreclosure  and is recorded at the lower of cost, or fair value less  estimated
costs to sell, at the time of acquisition. Specific valuation allowances on real
estate  owned are  recorded  through a charge to  earnings if there is a further
deterioration  in fair value.  Costs relating to development  and improvement of
real estate are  capitalized,  whereas  those related to holding the real estate
are  expensed  as  incurred.  Recognition  of  gains on sale of real  estate  is
dependent upon the transaction  meeting certain criteria  relating to the nature
of property  sold and the terms of the sale.  Under certain  circumstances,  the
gain, or a portion  thereof,  is deferred until the necessary  criteria are met.



                                       38
<PAGE>

Depreciation and Amortization
     Office  properties  and  equipment  are  stated  at cost  less  accumulated
depreciation and amortization.  Depreciation is computed using the straight-line
method over the estimated useful lives of the respective assets. Amortization of
leasehold  improvements  is  computed  using the  straight-line  method over the
shorter of their  estimated  useful  lives or the term of the  lease.  Estimated
useful lives are three to seven years for  furniture,  fixtures,  equipment  and
vehicles and ten to 39 years for buildings and improvements.

Income Taxes
     Deferred tax assets and liabilities are recognized for the estimated future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those  temporary  differences are expected to be
recovered  or settled.  The effect of deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income tax  expense  in the  period  that
includes the enactment date.

Excess of Cost Over Fair Value of Tangible Net Assets Acquired
     Included  in other  assets is the  excess of cost over the  estimated  fair
value of  tangible  net assets  acquired  in  business  combinations  and branch
purchases  totalling  $2,251,000  and  $1,983,000  at June 30,  1997  and  1996,
respectively. Such amounts are amortized using the straight-line method over the
periods estimated to be benefited, 11 years for identifiable  intangibles and 15
to 20 years for unidentifiable intangibles.

Cash and Cash Equivalents
     The Company considers cash on hand, amounts due from banks, certificates of
deposit, and federal funds sold as cash equivalents.

Reclassifications
     Certain  amounts in the  consolidated financial statements for fiscal years
1996 and 1995 have been  reclassified to conform to  classifications  adopted in
fiscal year 1997.


2. SECURITIES HELD TO MATURITY

     The amortized cost, fair value and gross unrealized gains and losses of the
Company's securities held to maturity are as follows:
<TABLE>
<CAPTION>

                                                                              Gross              Gross
                                                          Amortized       Unrealized          Unrealized       Fair
(In thousands)                                              Cost             Gains              Losses         Value
---------------------------------------------------------------------------------------------------------------------------
June 30, 1997
<S>                                                        <C>                 <C>              <C>           <C>   
Municipal bonds                                            $6,174              $52              $  -          $6,226
Federal agency mortgage-backed                                369               14                 -             383
---------------------------------------------------------------------------------------------------------------------------
   Total                                                    6,543              $66              $  -          $6,609
---------------------------------------------------------------------------------------------------------------------------

June 30, 1996
Municipal bonds                                            $6,278             $  -              $  -          $6,278
Federal agency mortgage-backed                                374                8                 -             382
---------------------------------------------------------------------------------------------------------------------------
   Total                                                   $6,652             $  8              $  -          $6,660
===========================================================================================================================
</TABLE>


                                       39
<PAGE>



3. SECURITIES AVAILABLE FOR SALE

     The amortized cost, fair value,  and gross  unrealized  gains and losses of
the Company's securities available for sale are as follows:
<TABLE>
<CAPTION>

                                                                              Gross            Gross
                                                         Amortized         Unrealized       Unrealized         Fair
(In thousands)                                             Cost               Gains           Losses           Value
---------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                <C>                <C>          <C>     
June 30, 1997
FHLB stock                                               $  9,078           $    -             $   -        $  9,078
Federal agency notes                                        6,453                8                 -           6,461
Federal agency mortgage-backed                             12,032              135                 -          12,167
---------------------------------------------------------------------------------------------------------------------------
   Total                                                 $ 27,563           $  143             $   -        $ 27,706
===========================================================================================================================

June 30, 1996
FHLB stock                                               $  6,998           $    -             $   -        $  6,998
Federal agency notes                                        6,440                -                55           6,385
Federal agency mortgage-backed                             15,468                -               148          15,320
---------------------------------------------------------------------------------------------------------------------------
   Total                                                 $ 28,906           $    -             $ 203        $ 28,703
===========================================================================================================================
</TABLE>


     The table below shows the  maturities of investment  securities at June 30,
1997, excluding the FHLB stock.

<TABLE>
<CAPTION>

                                                                                            Amortized          Fair
(in thousands)                                                                                Cost             Value
---------------------------------------------------------------------------------------------------------------------------
Held to maturity:
<S>                                                                                      <C>             <C>        
   After five but within ten years                                                       $         -     $         -
   After ten years                                                                             6,543           6,609
---------------------------------------------------------------------------------------------------------------------------
     Total held to maturity                                                                    6,543           6,609
---------------------------------------------------------------------------------------------------------------------------


Available for sale:
   Within one year                                                                                 -               -
   After one but within five years                                                             3,953           3,973
   After five but within ten years                                                            14,532          14,655
---------------------------------------------------------------------------------------------------------------------------
     Total available for sale                                                                 18,485          18,628
---------------------------------------------------------------------------------------------------------------------------
     Total                                                                                   $25,028         $25,237
===========================================================================================================================
</TABLE>

     Proceeds  from sales of  securities  available  for sale during fiscal year
1997 were  $16,257,000  resulting in no gain or loss; for fiscal year 1996 there
were  $3,974,000  in sales  resulting in gross gains of $4,000 and proceeds from
such sales during fiscal year 1995 were $7,252,000  resulting in gross losses of
$103,000.



                                       40
<PAGE>

4. LOANS

     Loans are summarized as follows:
<TABLE>
<CAPTION>

(In thousands) June 30                                                                  1997                  1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                  <C>     
First mortgage loans:
   Residential                                                                         $360,432             $347,640
   Commercial                                                                            46,796               48,722
   Construction                                                                         141,982              121,375
---------------------------------------------------------------------------------------------------------------------------
     Total first mortgage loans                                                         549,210              517,737
---------------------------------------------------------------------------------------------------------------------------
Second mortgage loans                                                                    53,827               47,434
Loans on savings accounts                                                                 2,190                1,691
Consumer loans                                                                           83,332               59,185
---------------------------------------------------------------------------------------------------------------------------
   Gross loans                                                                          688,559              626,047
Less:
   Unearned discount                                                                        581                  301
   Deferred income                                                                        2,612                2,665
---------------------------------------------------------------------------------------------------------------------------
   Loans                                                                                685,366              623,081
     Allowance for loan losses                                                            9,295                7,527
---------------------------------------------------------------------------------------------------------------------------
     Total loans, net                                                                  $676,071             $615,554
===========================================================================================================================
</TABLE>


     At June 30, 1997 and 1996,  mortgage loans held for investment  with unpaid
principal  balances  totaling  $10,352,000  and $9,603,000,  respectively,  were
contractually delinquent as to principal or interest for ninety days or more. As
of June 30,  1997,  the Company  had no  restructured  loans  subject to special
reporting rules. There were no material  commitments to lend additional funds to
customers whose loans were classified as non-performing at June 30, 1997.

     Construction  loans and commercial  real estate mortgage loans on which the
recognition of interest has been discontinued amounted to $4,153,000 at June 30,
1997,  $4,574,000  at June 30, 1996 and  $5,327,000  at June 30, 1995.  Interest
income that would have been recorded  under the original terms of such loans and
the  interest  income  actually  recognized  for the past three fiscal years are
summarized below:

<TABLE>
<CAPTION>
(In thousands) Years Ended June 30                                   1997                  1996                  1995
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                   <C>                   <C> 
Interest income that would have been recorded                        $650                  $411                  $583
Interest income recognized                                            332                   207                   378
---------------------------------------------------------------------------------------------------------------------------
   Interest income foregone                                          $318                  $204                  $205
===========================================================================================================================
</TABLE>


     Interest due on first mortgage loans sixty days or more  delinquent at June
30, 1997 and 1996 amounted to $409,000 and $626,000,  respectively. An allowance
of $409,000 and $549,000 at June 30, 1997 and 1996,  respectively,  was provided
for  the  potential  loss  of  interest  on such  mortgage  loans  contractually
delinquent for more than ninety days.



                                       41
<PAGE>




   Activity in the  allowance  for losses on  installment  loans and real estate
loans is summarized as follows:
<TABLE>
<CAPTION>

                                                                Installment           Real Estate
(In thousands)                                                     Loans                 Loans                Total
---------------------------------------------------------------------------------------------------------------------------

<S>                                                               <C>                   <C>                  <C>    
Balance, June 30, 1994                                            $   975               $ 4,636              $ 5,611
   Provision                                                          396                   994                1,390
   Charge-offs                                                       (205)                 (467)                (672)
   Recoveries                                                          44                     -                   44
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995                                              1,210                 5,163                6,373
Provision                                                             336                 2,093                2,429
   Charge-offs                                                       (257)               (1,079)              (1,336)
   Recoveries                                                          61                     -                   61
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996                                              1,350                 6,177                7,527
   Provision                                                          421                 1,926                2,347
   Charge-offs                                                       (466)                 (183)                (649)
   Recoveries                                                          70                     -                   70
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997                                             $1,375                $7,920               $9,295
===========================================================================================================================
</TABLE>


     At June 30, 1997 and June 30, 1996, the recorded  investment in loans which
have been  identified  as  impaired,  in  accordance  with  SFAS  114,  totalled
$4,153,000  and  $5,134,000,  respectively.  SFAS 114 does not  apply to  larger
groups of homogenous loans such as consumer installment and residential mortgage
loans, which are collectively  evaluated for impairment.  The Company's impaired
loans are nonaccrual  loans, as generally loans are placed on nonaccrual  status
on the earlier of the date that  principal  or  interest  amounts are 90 days or
more past due or the date that  collection  of such amounts is judged  uncertain
based on an evaluation of the net  realizable  value of the  collateral  and the
financial  strength  of the  borrower.  Impaired  loans  at June 30,  1997  were
comprised of  $1,061,000  of commercial  loans and  $3,092,000  of  construction
loans.  None of the Company's  impaired loans had a valuation  allowance at June
30,  1997.  All  impaired  loans  were  measured  based on the fair value of the
collateral.


5. REAL ESTATE OWNED, NET

     Real estate owned is summarized as follows:

<TABLE>
<CAPTION>

(In thousands) June 30                                                                   1997                  1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                  <C>   
Residential properties                                                                   $6,837               $4,323
Commercial properties                                                                       810                1,919
---------------------------------------------------------------------------------------------------------------------------
                                                                                          7,647                6,242
Less allowance for losses                                                                     -                 (889)
---------------------------------------------------------------------------------------------------------------------------
   Total real estate owned, net                                                          $7,647               $5,353
===========================================================================================================================
</TABLE>




                                       42
<PAGE>



     Activity in the  allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>

                                                                 Residential             Commercial
(In thousands)                                                    Properties             Properties            Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>                 <C>  
Balance, June 30, 1994                                                428                   187                  615
   Provision                                                          152                    40                  192
   Charge-offs                                                       (170)                    -                 (170)
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995                                                410                   227                  637
   Provision                                                          771                     6                  777
   Charge-offs                                                       (404)                 (121)                (525)
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996                                                777                   112                  889
   Provision                                                           14                   200                  214
   Charge-offs                                                       (791)                 (312)              (1,103)
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997                                                 $0                    $0                   $0
===========================================================================================================================
</TABLE>


     Non-cash  additions to real estate owned were  $7,418,000,  $8,721,000, and
$2,349,000 in the fiscal years ended June 30, 1997, 1996 and 1995, respectively.


6. OFFICE PROPERTIES AND EQUIPMENT, NET

     Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>

(In thousands) June 30                                                                   1997                 1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                 <C>    
Land                                                                                     $2,275              $ 2,275
Buildings and improvements                                                                7,775                7,589
Furniture, fixtures and equipment                                                         6,849                5,155
Vehicles                                                                                    172                  128
---------------------------------------------------------------------------------------------------------------------------
                                                                                         17,071               15,147
Less accumulated depreciation and amortization                                           (7,427)              (6,367)
---------------------------------------------------------------------------------------------------------------------------
   Total                                                                                 $9,644              $ 8,780
===========================================================================================================================
</TABLE>



     Depreciation and amortization  expense on office properties and equipment
totaled  $1,089,000,  $896,000,  and $797,000 for the years ended June 30, 1997,
1996 and 1995, respectively.

     The Company  occupies certain  properties  under long-term  operating lease
agreements.  Rental  expenses  under  these  agreements  approximated  $813,000,
$594,000,  and  $578,000  for fiscal  years 1997,  1996 and 1995,  respectively.
Scheduled  minimum rental payments on these  noncancelable  long-term  operating
lease commitments at June 30, 1997 were as follows (in thousands):

                            Minimum
                            Year Ending                    Rental
                            June 30                       Payments
                         ------------------------------------------
                               1998                          $685
                               1999                           586
                               2000                           483
                               2001                           442
                               2002                           372
                             Later years                    1,643
                          -----------------------------------------
                               Total                       $4,211
                          =========================================


                                       43
<PAGE>

7. DEPOSITS

     A summary of deposits follows:
<TABLE>
<CAPTION>

(In thousands) June 30                                  1997                                    1996
---------------------------------------------------------------------------------------------------------------------------
                                                      Weighted                                Weighted
                                                       Average     Range of                    Average    Range of
                                                      Interest     Interest                   Interest    Interest
                                           Cost         Rate        Rates           Cost        Rate        Rates
---------------------------------------------------------------------------------------------------------------------------

<S>                                     <C>               <C>     <C>            <C>              <C>     <C>         
Checking accounts                       $  65,338         1.07%   0.00%-5.00%    $  69,878        1.14%   0.00%-5.00%
Money market deposit accounts              63,477         4.17    2.45%-4.50%       67,248        4.28    2.45%-4.50%
Savings deposits                           67,317         3.42    1.00%-3.50%       68,824        3.35    1.00%-3.50%
Certificates                              404,073         5.71    2.25%-9.50%      367,586        5.77    2.25%-9.50%
---------------------------------------------------------------------------------------------------------------------------
  Total deposits                         $600,205         4.78%                   $573,536        4.74%
===========================================================================================================================
</TABLE>


     Scheduled  maturities of  certificates  of deposit at June 30, 1997 were as
follows (in thousands):


                                                     Amount
               ---------------------------------------------------
                        1998                        $271,611
                        1999                          51,445
                        2000                          49,253
                        2001                          10,536
                        2002                          19,875
                     Thereafter                        1,353
               ----------------------------------------------------
                        Total                       $404,073
               ====================================================


     Certificates  of deposit with  balances  greater than  $100,000 at June 30,
1997 and 1996 were $54,077,000 and $46,779,000,  respectively. A summary of such
certificates of deposit by maturity at June 30,1997 follows (in thousands):

                                                          Amount
             ---------------------------------------------------------
                     Within three months                 $10,209
              After three but within six months            6,593
              After six but within twelve months          18,772
                     After twelve months                  18,503
             ----------------------------------------------------------
                            Total                        $54,077
             ==========================================================


     Interest expense on deposits is summarized as follows:

(In thousands) Years Ended June 30             1997         1996          1995
-------------------------------------------------------------------------------

Checking and money market deposit accounts    $ 3,395     $  3,376     $  3,082
Savings deposits                                2,306        2,349        3,087
Certificates                                   21,944       20,608       14,510
-------------------------------------------------------------------------------
   Total interest expense on deposits         $27,645      $26,333      $20,679
===============================================================================


                                       44
<PAGE>


8. NOTES PAYABLE AND OTHER BORROWINGS

     At June 30, 1997 and 1996, notes payable and other borrowings  consisted of
U.S. Treasury tax and loan notes, collateralized by FNMA and FHLMC participation
certificates.  At June 30, 1997, the FNMA and FHLMC  participation  certificates
had an aggregate carrying value of $918,000 and a fair value of $921,000.

     During the fiscal  years ended June 30,  1997,  1996 and 1995,  the Company
sold securities under agreements to repurchase.  The securities were surrendered
to  a  financial  intermediary  during  the  periods  in  which  the  repurchase
agreements  were in effect.  However,  there were no outstanding  obligations to
repurchase  securities  as of June 30,  1997 or 1996.  Selected  information  on
agreements to repurchase follows:

(In thousands)
                               Daily         Maximum Amount
Years                     Average Amount     Outstanding at    Weighted Average
Ended                       Outstanding       Any Month-End      Interest Rate
June 30                    For the Year      During the Year     For the Year
-------------------------------------------------------------------------------

1997                          $    -            $     -                    -%
1996                              16                  -                 5.35
1995                          $8,547            $13,996                 6.04
===============================================================================


     Interest expense on notes payable and other borrowings totalled $294,000,
$21,000, and $538,000 in fiscal years 1997, 1996 and 1995, respectively.


9. ADVANCES FROM FEDERAL HOME LOAN BANK

     Advances from the Federal Home Loan Bank ("FHLB") of Atlanta are summarized
below by maturity date:
<TABLE>
<CAPTION>

(In thousands)

Due in Years                                        June 30, 1997                             June 30, 1996
Ending June 30                               Amount        Interest Rates              Amount        Interest Rates
---------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>              <C>                       <C>             <C>          
1997                                        $167,000         5.26% - 6.48%             $  60,000       5.47% - 7.15%
1998                                               -                    -                  2,500               5.26%
1999                                           6,500         5.79% - 7.20%                25,000               4.75%
2000                                           5,000                 6.23%                 6,500       5.79% - 7.20%
2001                                           2,500                 6.10%                 5,000               6.23%
Later years                                      552                 2.00%                 3,052       2.00% - 6.10%
---------------------------------------------------------------------------------------------------------------------------
   Total                                    $181,552                                    $102,052
===========================================================================================================================
Weighted Average
   Interest Rate                                6.29%                                       5.55%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

     At June 30,  1997,  the Company  has pledged its FHLB stock and  qualifying
residential  loans with an aggregate  balance of  $242,176,000 as collateral for
such  Federal Home Loan Bank  advances  under a specific  collateral  agreement.
Interest is computed  based on the lender's  prime rate of interest and the cost
of overnight funds.

     Interest  expense on FHLB advances  totalled  $7,672,000,  $5,968,000,  and
$6,414,000 in the fiscal years ended June 30, 1997, 1996 and 1995, respectively.


                                       45
<PAGE>


10.  INCOME TAXES

     Prior to 1996, the Internal Revenue Code provided that a qualified  savings
institution  could compute its bad debt reserve,  and the related  deduction for
income tax  reporting  purposes,  based upon  either the  percentage  of taxable
income method or the ratio of actual charge-offs to loans  outstanding,  subject
to a base year amount  determined at June 30, 1983. The Company computed its bad
debt deduction for income tax reporting purposes using the percentage of taxable
income method for fiscal years 1996 and 1995.  Due to law changes  effective for
1996, the Company  computed its bad debt deduction  using the direct  charge-off
method for the fiscal year ended June 30, 1997.

     The  Company's  retained  earnings  at  June  30,  1997  and  1996  include
$7,247,000  of tax bad  debt  reserves  for  which  deferred  tax  has not  been
provided.  Pursuant to provisions in the Small  Business Job  Protection  Act of
1996,  the reserves would be subject to tax only if the Company fails to qualify
as a "bank" or in the case of certain excess distributions to shareholders.

     Income tax expense (benefit) is summarized as follows:

(In thousands) Years Ended June 30         1997          1996        1995
-----------------------------------------------------------------------------

Current: Federal                          $4,153        $6,949      $4,480
         State                               799           823         495
-----------------------------------------------------------------------------
         Total current                     4,952         7,772       4,975
-----------------------------------------------------------------------------

Deferred:Federal                          (1,756)         (630)         14
         State                              (320)         (110)          3
-----------------------------------------------------------------------------
         Total deferred                   (2,076)         (740)         17
-----------------------------------------------------------------------------

 Total:  Federal                           2,397         6,319       4,494
         State                               479           713         498
-----------------------------------------------------------------------------
         Total                            $2,876        $7,032      $4,992
=============================================================================


     The  differences  between  the  statutory  federal  income tax rate and the
effective rate of income tax are as follows:

Years Ended June 30                               1997        1996       1995
-------------------------------------------------------------------------------

Statutory federal income tax rate                  34.0%       35.0%      35.0%
Increase (reduction) in taxes resulting from:
   Tax-exempt interest                             (1.1)       (0.4)      (0.6)
   State income taxes                               4.0         2.6        2.7
   Other                                            (.9)       (0.5)       2.7
-------------------------------------------------------------------------------
   Effective income tax rate                       36.0%       36.7%      39.8%
===============================================================================


     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and  deferred  tax  liabilities  at June 30,
1997 and 1996 are as follows:

(In thousands) June 30                             1997                 1996
------------------------------------------------------------------------------

Deferred tax assets:
   Allowance for loan losses                      $2,653               $2,061
   Deferred compensation                           1,047                  907
   Other, net                                        968                  112
------------------------------------------------------------------------------
   Total gross deferred tax assets                 4,668                3,080
------------------------------------------------------------------------------

Deferred tax liabilities:
   Federal Home Loan Bank stock dividends            140                  270
   Depreciation and amortization                     309                  350
   Deferred loan fees                                467                  544
   Other, net                                        453                  561
------------------------------------------------------------------------------
   Total gross deferred tax liabilities            1,369                1,725
------------------------------------------------------------------------------
   Net deferred tax asset                         $3,299               $1,355
==============================================================================

                                       46
<PAGE>

     The  Company  believes  that a  valuation  allowance  with  respect  to the
realization of the total gross  deferred tax assets is not  necessary.  Based on
the Company's historical earnings, future expectations of taxable income and the
reversal of gross  deferred tax  liabilities  and potential  net operating  loss
carrybacks, management believes it is more likely than not that the Company will
realize the gross deferred tax assets existing at June 30, 1997. However,  there
can be no assurances that the Company will generate taxable income in any future
period or that the  reversal  of  temporary  differences  attributable  to gross
deferred tax  liabilities  will occur during the future tax periods as currently
expected.

11. STOCKHOLDERS' EQUITY

     On November 17, 1995, the Company  issued a two-for-one  stock split in the
form of a 100% common  stock  dividend  (the "stock  split").  This  transaction
resulted in the issuance of 2,807,725  additional  shares of common  stock.  All
share and per share data in these  consolidated  financial  statements have been
restated to reflect the stock split.

     The Company has adopted three  incentive plans to assist in the recruitment
and retention of managers and other key full-time employees. The Company adopted
the Incentive  Stock Option Plan in fiscal year 1985 and the Key Employee  Stock
Compensation  Program in fiscal year 1987. All of the shares authorized by these
two plans have  previously  been granted.  During fiscal year 1993,  the Company
adopted  the 1992  Incentive  Plan  authorizing  the  issuance  of up to 375,000
shares.  The plan was amended in fiscal year 1995 to add 300,000 shares.  During
fiscal year 1997, 10,000 shares of restricted stock and 135,000 of stock options
were granted, leaving 276,686 shares still available under the plan for grant or
issuance.  The option  prices under these plans equaled the market values of the
Company's  stock at the dates of grant with expiration ten years after the dates
of grant.

     The Company  applies  Accounting  Principles  (APB)  Opinion 25 and related
interpretations in accounting for the Plans.  Accordingly,  no compensation cost
has been recognized for its fixed stock options.  Had compensation  cost for the
options granted under the Plans been  determined  based on the fair value at the
grant dates  consistent  with the  alternative  method of FASB Statement No. 123
(FAS 123),  the Company's net earnings and per common share for fiscal year 1997
would  have been  reduced  from the  reported  net  earnings  of  $5,112,000  to
$4,588,000 and reported earnings per share of $.87 to $.78 per share. No options
were  granted in fiscal  years 1996 or 1995.  For purpose of  computing  the pro
forma amounts  indicated  above, the fair value of each option on the grant date
was estimated  using the  Black-Scholes  option pricing model with the following
assumptions  used for  grants  in  fiscal  year  1997:  dividend  yield of .73%;
expected  volatility of 49%; a risk-free interest rate of 6.90%; and an expected
option life of 10 years. 

     Stock option transactions are summarized below:

<TABLE>
<CAPTION>

Years Ended June 30
---------------------------------------------------------------------------------------------------------------------------
                                                       Weighted                   Weighted                   Weighted
                                                        Average                    Average                    Average
                                                       Exercise                   Exercise                   Exercise
                                           1997          Price          1996        Price          1995        Price
---------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>          <C>            <C>        <C>             <C>  
Options outstanding at July 1             217,980         $  7.00      363,350        $7.00      574,890         $4.85
Granted                                   135,000          $13.14            0            -            0             -
Exercised                                 (45,000)        $  7.00     (145,370)       $7.00     (211,540)        $1.17
Lapsed                                          0               -            0            -            0             -
---------------------------------------------------------------------------------------------------------------------------
Options outstanding at June 30            307,980         $  9.69      217,980        $7.00      363,350         $7.00
===========================================================================================================================
Options exerciseable at June 30           257,980                      217,980                   363,350
Options available for grant at June 30    276,686                      421,686                   447,000
===========================================================================================================================
</TABLE>


                                       47
<PAGE>


     The following table summarizes  information about stock options outstanding
at June 30, 1997:

<TABLE>
<CAPTION>

                                Options Outstanding                                       Options Exercisable
---------------------------------------------------------------------------------------------------------------------------
                                              Weighted
                                               Average           Weighted                                Weighted
                                              Remaining           Average                                 Average
      Exercise           Number              Contractual         Exercise                Number          Exercise
       Prices          Outstanding              Life               Price               Exercisable         Price
---------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                    <C>                  <C>                 <C>                <C>    
  $         7.00        172,980                7   Years            $  7.00             172,980            $  7.00
  $        13.00        110,000                9.75                 $ 13.00              85,000            $ 13.00
  $        13.75         25,000                10                   $ 13.75
-------------------------------------------------------------------------------------------------------------------------
    $7.00-$13.75        307,980                8.2 Years            $  9.69             257,980            $  8.98
===========================================================================================================================

</TABLE>

     Earnings per share are computed  based on the  weighted  average  number of
common and common  equivalent  shares  outstanding  during  each  period.  Stock
options are treated as common stock  equivalents using the treasury stock method
during each  period in which  their  effects  are  dilutive.  Stock  options had
dilutive  effects in fiscal  years 1997,  1996 and 1995.  The  weighted  average
number of shares of common  stock used to compute  earnings per share for fiscal
years 1997, 1996 and 1995 were 5,854,732, 5,809,410 and 5,676,406, respectively.

     In April 1996, the Company adopted the Preferred Share Purchase Rights Plan
(the "Rights Plan"). The Rights Plan provides for a dividend distribution of one
right for each share of common  stock of the  Company to holders of record as of
the close of business on April 26, 1996. The rights will become exercisable only
in the event, with certain exceptions, an acquiring party accumulates 10 percent
or more of the  Company's  common  stock or  announces  an offer to  acquire  10
percent or more of the common stock. The rights have an exercise price of $45.00
and will  expire on April 19,  2006.  Upon the  occurrence  of  certain  events,
holders of the rights  will be  entitled to  purchase  the  Company's  preferred
shares or shares in an acquiring  company at half of market price.  Prior to the
acquisition  by a person or group of beneficial  ownership of 10 percent or more
of the Company's  common stock, the rights are redeemable for one cent per right
at the option of the Board of Directors.


12. EMPLOYEE BENEFIT PLANS

     The Company maintains a qualified plan under Section 401(a) of the Internal
Revenue  Code which  includes a  qualified  cash or deferred  arrangement  under
Section 401(k) of the Internal  Revenue Code. The plan allows employees who meet
minimum service  requirements to make  contributions by salary deduction up to a
maximum  of 16% of their  salary.  For fiscal  years  1997,  1996 and 1995,  the
Company made  contributions on behalf of eligible  employees equal to 50% of the
employees'  contributions to a maximum 6% of salary. The Company's contributions
to the plan were $240,000,  $197,000,  and $166,000 for fiscal years 1997,  1996
and 1995, respectively.

     The Company does not provide any benefits that are subject to the 
provisions of SFAS No. 106, "Employers' Accounting for Post-Retirement  Benefits
Other  Than   Pensions"   and  SFAS  No.   112,   "Employers'   Accounting   for
Post-Employment Benefits".

     Under an agreement  with its Chairman and former Chief  Executive  Officer,
the Company will pay a retirement  benefit for life to  supplement  the benefits
under the former defined benefit pension plan, which was terminated in 1989. The
amount of the annual  benefit will be equal to 80% of the average salary for the
final three years of employment, reduced by Social Security and benefit received
in respect of the  amount  accumulated  under such  defined  benefit  plan.  The
estimated  annual  benefit  under the  agreement  is $66,000  and the  Company's
obligation has been accrued in its consolidated financial statements.


                                       48
<PAGE>

13. REGULATORY CAPITAL

     Savings  institutions  must maintain specific capital standards that are no
less  stringent  than  the  capital  standards  applicable  to  national  banks.
Regulations of the Office of Thrift  Supervision (the "OTS") currently  maintain
three  capital  standards:  a  tangible  capital  requirement,  a  core  capital
requirement, and a risk-based capital requirement.

     The  tangible  capital  standard  requires  the  Savings  Bank to  maintain
tangible capital in an amount not less than 1.5% of total adjusted assets. As it
applies to the Savings Bank,  "tangible  capital" means core capital (as defined
below) less any intangible assets (including goodwill).

     The core  capital  standard  requires  the Savings  Bank to maintain  "core
capital"  of not less than 3.0% of total  adjusted  assets.  However,  since any
institution  with less than 4.0% core capital is considered  "undercapitalized",
the Savings Bank considers its minimum core capital requirement to be 4.0%. Core
capital includes the Savings Bank's common  stockholders'  equity,  less certain
intangible assets (including goodwill).

     The  risk-based  capital  standard  requires  the Savings  Bank to maintain
capital  equal to 8.0% of  risk-weighted  assets.  The  rules  provide  that the
capital  ratio  applicable to an asset will be adjusted to reflect the degree of
credit risk  associated  with such asset,  and the asset base used for computing
the capital requirement includes off-balance sheet assets.

     As  of  June  30,  1997,  the  Savings  Bank  was  classified  as  a  "well
capitalized"  institution  as determined by the OTS and satisfied all regulatory
capital  requirements,  as shown in the following table  reconciling the Savings
Bank's GAAP capital to regulatory capital:

<TABLE>
<CAPTION>
                                                                                                             Risk-
                                                                 Tangible               Core                 Based
(In thousands)                                                   Capital               Capital              Capital
---------------------------------------------------------------------------------------------------------------------------

<S>                                                               <C>                   <C>                 <C>    
GAAP capital                                                      $66,466               $66,466             $66,466
Non-allowable assets:
         Goodwill                                                  (2,129)               (2,129)             (2,129)
         Other intangible assets                                     (123)                    _                   _
         Equity in subsidiaries                                      (908)                 (908)               (908)
Additional capital items:
         Unrealized gain on debt securities, net                      (89)                  (89)                (89)
         General loss allowances                                        -                     -               7,655
---------------------------------------------------------------------------------------------------------------------------

Regulatory capital - computed                                      63,217                63,340              70,995
Minimum capital requirement                                        12,854                25,713              48,907
---------------------------------------------------------------------------------------------------------------------------
Capital above minimum requirement                                 $50,363               $37,627             $22,088
===========================================================================================================================

Ratios:

Regulatory capital - computed                                        7.38%                 7.39%              11.61%
Minimum capital requirement                                          1.50                  4.00                8.00
===========================================================================================================================
</TABLE>


     The payment of cash  dividends by the Savings Bank is subject to regulation
by  the  OTS.  The  OTS  measures  an  institution's  ability  to  make  capital
distributions,  which  includes  the  payment  of  dividends,  according  to the
institution's capital position. For institutions, such as the Savings Bank, that
meet their fully phased-in capital  requirements,  the OTS has established "safe
harbor"  amounts  of  capital  distributions  that  institutions  can make after
providing  notice to the OTS, but without needing prior  approval.  Institutions
can  distribute  amounts in excess of the safe harbor without the prior approval
of the OTS.  The Savings  Bank paid cash  dividends  of  $676,000,  $455,000 and
$478,000 in fiscal  years  1997,  1996 and 1995,  respectively.  See note 14 for
limitations  on the  payment  of  dividends  by the  Savings  Bank to the Parent
Company.


                                       49
<PAGE>


14. PARENT COMPANY FINANCIAL INFORMATION

     The Parent Company was organized in 1993 and became the holding  company of
the Savings Bank on January 14, 1994.  Condensed  financial  information  of the
Parent Company is presented below:

<TABLE>
<CAPTION>

STATEMENTS OF FINANCIAL CONDITION
(In thousands) June 30                                                                    1997                1996
---------------------------------------------------------------------------------------------------------------------------

<S>                                                                                      <C>                 <C>    
ASSETS
   Investment in subsidiary, at equity                                                   $66,466             $60,955
   Other assets                                                                               26                  41
---------------------------------------------------------------------------------------------------------------------------
   Total assets                                                                          $66,492             $60,996
---------------------------------------------------------------------------------------------------------------------------


LIABILITIES AND STOCKHOLDERS' EQUITY
   Total liabilities                                                                     $     -             $     -
---------------------------------------------------------------------------------------------------------------------------
   Stockholders' equity:
     Stockholders' equity before unrealized gain (loss)                                   66,403              61,122
     Net unrealized gain (loss) on securities available for sale                              89                (126)
---------------------------------------------------------------------------------------------------------------------------
   Total stockholders' equity                                                             66,492              60,996
---------------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity                                            $66,492             $60,996
===========================================================================================================================
</TABLE>

<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS
(In thousands) Years Ended June 30                                                          1997                1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>      
   Noninterest expense                                                                      $133           $     126
   Income tax benefit                                                                         35                  48
---------------------------------------------------------------------------------------------------------------------------
   Loss before equity in undistributed net earnings of subsidiary                            (98)                (78)
   Equity in undistributed net earnings of subsidiary                                      5,210              12,220
---------------------------------------------------------------------------------------------------------------------------
     Net earnings                                                                        $ 5,112             $12,142
===========================================================================================================================
</TABLE>

<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS
(In thousands) Years Ended June 30                                                          1997                1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                  <C>    
Operating Activities
   Net earnings                                                                          $ 5,112             $12,142
   Adjustments to reconcile net earnings to net cash
     provided by operating activities:
     Amortization                                                                             14                  14
     Equity in undistributed net earnings of subsidiary                                   (5,210)            (12,220)
     Decrease in other assets                                                                (15)                  -
     Decrease in accrued expenses and other liabilities                                        -                   4
---------------------------------------------------------------------------------------------------------------------------
       Net cash used in operating activities                                                 (99)                (60)
---------------------------------------------------------------------------------------------------------------------------

Investing Activities
   Purchases of subsidiary stock                                                            (740)               (508)
   Cash dividends received                                                                   676                 455
---------------------------------------------------------------------------------------------------------------------------
       Net cash provided by (used in) investment activities                                  (64)                (53)
---------------------------------------------------------------------------------------------------------------------------

Financing Activities
   Proceeds from issuance of common stock                                                    740                 508
   Cash dividends paid                                                                      (577)               (395)
---------------------------------------------------------------------------------------------------------------------------
       Net cash provided by financing activities                                             163                 113
---------------------------------------------------------------------------------------------------------------------------
   Net increase in cash and cash equivalents                                                   -                   -
   Cash and cash equivalents at beginning of year                                              -                   -
---------------------------------------------------------------------------------------------------------------------------
   Cash and cash equivalents at end of year                                              $     -             $     -
</TABLE>


                                       50
<PAGE>


     The Parent Company and its  subsidiaries are affiliates within the meaning
of Section 23A of the Federal Reserve Act. Accordingly,  they are subject to the
limitations  specified  in such  section on the making of loans or  extension of
credit to, or purchase of securities under repurchase agreement from, any of the
subsidiaries within the affiliate group. Therefore, substantially all of the net
assets of the affiliated  group are restricted from use by the Parent Company in
the form of loans or  advances.  Dividends,  however,  may be paid to the Parent
Company  by the  Savings  Bank under  formulas  established  by the  appropriate
regulatory authorities. Substantially all of the retained earnings of the Parent
Company are represented by undistributed earnings of subsidiaries.


15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF 
    CREDIT RISK

     The Company is a party to financial instruments with off-balance-sheet-risk
in the normal  course of business to meet the  financing  needs of its customers
and to  reduce  its own  exposure  to  fluctuations  in  interest  rates.  These
financial   instruments   include   commitments  to  extend  credit,   financial
guarantees,  financial  options and forward sales contracts.  These  instruments
involve, to varying degrees,  elements of credit and interest rate risk that are
not recognized in the consolidated statements of financial condition.

     Exposure to credit loss in the event of  non-performance by the other party
to the  financial  instrument  for  commitments  to extend  credit and financial
guarantees  written is represented by the  contractual  notional amount of those
instruments. The Company generally requires collateral to support such financial
instruments in excess of the contractual  notional  amount of those  instruments
and, therefore, is in a fully secured position. The Company uses the same credit
policies in making commitments as it does for on-balance-sheet  instruments. The
Company  controls  the credit risk of its  financial  options and forward  sales
contracts through credit approvals,  limits and monitoring procedures;  however,
it does not generally require collateral for such financial instruments.

     There were no financial  guarantees or options outstanding at June 30, 1997
and 1996.  Commitments  to extend credit are agreements to lend to a customer as
long as there is no  violation of any  condition  established  in the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may  require  payment  of a fee.  Since a  portion  of the  commitments  are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily  represent  future cash  requirements.  The Company  evaluates  each
customer's  creditworthiness  on a case-by-case  basis. The amount of collateral
obtained by the Company upon extension of credit is based on management's credit
evaluation of the counterparty and consists of real estate with estimated market
values of at least 110-115% of the commitment amount.

     To reduce  the risk  associated  with a  possible  decline  in the value of
residential  mortgage loans  originated for sale, the Company  executes  forward
contracts  for the  delivery of loans  generally up to 90 days  thereafter  at a
specified  price and yield.  Risks may arise from the possible  inability of the
Company to originate  loans to fulfill the contracts,  in which case  securities
would be  purchased  in the open  market  for  delivery  under  the terms of the
contracts. Contracts outstanding at June 30, 1997 and 1996 totalled $107,600,000
and $77,275,000, respectively.

     The  Company  had  outstanding  loan  origination  commitments  aggregating
$5,101,000 at June 30, 1997. Fixed interest rate commitments are at market rates
as of the application date and generally expire within 60 days.

     The Company had no outstanding loan purchase  commitments in effect at June
30,  1997.  The Company  had  outstanding  commitments  to fund  $30,958,000  of
construction  loans at June 30, 1997. In addition,  the Company had  $31,279,000
outstanding in lines of credit extended to its customers at June 30, 1997.

     Standby  letters  of  credit  are  conditional  commitments  issued  by the
Company.  The credit risk involved in issuing  letters of credit is  essentially
the same as that involved in extending loans to customers. At June 30, 1997, the
Company was conditionally  committed under standby letters of credit aggregating
$20,843,000.

                                       51
<PAGE>


     The Company originates primarily residential real estate loans and a lesser
amount of installment  loans to customers  throughout the states of Virginia and
Maryland . In order to diversify its geographic risk, the Company buys and sells
loans  to/from  other  financial  institutions  operating in other  states.  The
Company  estimates  that  more  than 90% of its loan  portfolio  is based in the
states of Virginia and Maryland.


16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Listed below are the carrying amount and fair value of financial  instruments at
June 30, 1997 and 1996:

<TABLE>
<CAPTION>

(In thousands) June 30                                                     1997                         1996
---------------------------------------------------------------------------------------------------------------------------
                                                                 Carrying          Fair        Carrying        Fair
                                                                  Amount           Value        Amount         Value
---------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>            <C>          <C>      
Cash and cash equivalents                                         $26,738        $26,738      $  24,575    $  24,575
Securities held to maturity                                         6,543          6,609          6,652        6,660
Securities and available for sale                                  27,706         27,706         28,703       28,703
Loans                                                             685,366        707,350        623,081      629,958
Loans held for sale                                                92,495         92,495         46,481       46,481
Deposits                                                         (600,205)      (605,082)      (573,536)    (577,205)
Notes payable and other borrowings                                   (611)          (611)          (639)        (639)
Advances from Federal Home Loan Bank                             (181,552)      (182,586)      (102,052)    (100,646)
===========================================================================================================================
</TABLE>


     The  majority  of  the  Company's  assets  and  liabilities  are  financial
instruments;  however,  most of these  financial  instruments  lack an available
trading   market.   Significant   estimates,   assumptions   and  present  value
calculations were therefore used for purposes of this disclosure, resulting in a
greater  degree of  subjectivity  inherent in the indicated  fair value amounts.
Comparability  among  financial  institutions  may be difficult  due to the wide
range  of  permitted  valuation   techniques  and  the  numerous  estimates  and
assumptions which must be made.

     The fair value of cash and cash  equivalents  is the carrying  amount.  The
fair value of investment  securities is determined by reference to quoted market
prices,  where  available.  The fair value of loans  receivable is determined by
discounting  the future cash flows,  using the  current  rates at which  similar
loans would be made to borrowers with similar credit  ratings,  and for the same
remaining terms to maturity.  The carrying amount of construction,  equity line,
and installment loans  approximates fair value. The fair value of loans held for
sale is determined by outstanding  sale  commitments,  or current investor yield
requirements.  For stock in the  Federal  Home Loan Bank,  the fair value is the
carrying amount.

     For demand deposits,  savings accounts,  and certain money market deposits,
the carrying amount approximates fair value. For fixed-maturity  certificates of
deposit,  fair value is determined by discounting  the future cash flows,  using
the rates  currently  offered  for  deposits  with  similar  remaining  terms to
maturities.   The  carrying  amount  of  notes  payable  and  other   borrowings
approximates  fair value.  The fair value of advances from the Federal Home Loan
Bank is  determined  using the rates  currently  offered for  similar  remaining
maturities.

     The majority of the Company's  commitments  to extend credit and letters of
credit carry  current  market  interest  rates if  converted  to loans.  Because
commitments  to extend credit and letters of credit are generally not assignable
by either the Company or the  borrower,  they only have value to the Company and
the borrower.  The estimated  fair value of such  instruments  approximates  the
recorded  deferred  fee  amounts,  included  above as a  component  of net loans
receivable.


                                       52
<PAGE>




17. QUARTERLY FINANCIAL DATA
(Unaudited)

     The following is a summary of selected quarterly  operating results for 
each of the four quarters in fiscal years 1997 and 1996:
<TABLE>
<CAPTION>

(In thousands, except per share data)                            Sept. 30         Dec. 31       Mar. 31      Jun. 30
---------------------------------------------------------------------------------------------------------------------------
       1997
<S>                                                               <C>            <C>            <C>          <C>    
Total interest income                                            $ 15,684       $ 16,484      $  16,603    $  17,360
Total interest expense                                              8,508          8,902          8,864        9,337
---------------------------------------------------------------------------------------------------------------------------
Net interest income                                                 7,176          7,582          7,739        8,023
Provision for loan losses                                             562            581            609          595
Noninterest income                                                  1,913          2,048          3,049        1,729
Noninterest expense                                                 8,420          5,559          6,729        8,216
---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense                                    107          3,490          3,450          941
Income tax (benefit) expense                                          (89)         1,313          1,236          416
---------------------------------------------------------------------------------------------------------------------------
   Net earnings                                                  $    196       $  2,177       $  2,214    $     525
---------------------------------------------------------------------------------------------------------------------------
   Net earnings per share                                        $    .03       $    .37       $    .38    $     .09
===========================================================================================================================

       1996
Total interest income                                             $14,832        $14,402        $14,481      $15,326
Total interest expense                                              8,193          8,133          7,904        8,092
---------------------------------------------------------------------------------------------------------------------------
Net interest income                                                 6,639          6,269          6,577        7,234
Provision for loan losses                                             482            449            413        1,085
Noninterest income                                                  1,742          1,830          2,513        8,828
Noninterest expense                                                 4,471          4,684          5,255        5,619
---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense                                  3,428          2,966          3,422        9,358
Income tax expense                                                  1,324          1,062          1,231        3,415
---------------------------------------------------------------------------------------------------------------------------
   Net earnings                                                  $  2,104       $  1,904       $  2,191     $  5,943
---------------------------------------------------------------------------------------------------------------------------
   Net earnings per share                                        $  1 .36       $    .33       $    .38     $   1.02
===========================================================================================================================
</TABLE>


18. PENDING ACQUISITION

     Virginia  First  has  entered  into an  agreement  to be  acquired  by BB&T
Corporation in a transaction consisting of approximately 70% stock and 30% cash.
The value  received by Virginia First  shareholders  can vary between $22.50 and
$25.00  per  share.  Based  on  BB&T's  June  30  stock  price,  Virginia  First
shareholders  would  receive  $17.50 in BB&T share value and $7.50 in cash for a
combined value of $25.00 for each share of Virginia  First held.  Virginia First
shareholders  will be  asked to vote on the  merger  agreement  at its  upcoming
annual meeting  scheduled for November 26, 1997. The  transaction is expected to
be consummated on or about December 1, 1997.


                                       53
<PAGE>


CUSTOMER SERVICE DEPARTMENT
   (804) 748-3930 or Toll Free (800) 348-0333


FULL SERVICE RETAIL OFFICES

Petersburg
 * Franklin & Adams Streets, (804) 733-0333,
   (804) 748-5847, or Toll-Free (800) 523-0839
   2048 South Sycamore Street, (804) 732-1336
   801 South Adams Street, (804) 733-8507

Colonial Heights
 * 2609 Boulevard, (804) 526-1363

Hopewell
 * 105 North Main Street, (804) 458-8570

Chester
 * 2531 West Hundred Rd., (804) 748-5052

Emporia
   North Main Street & Weaver Avenue, (804) 634-9431

Richmond
   1210 Westover Hills Boulevard, (804) 233-5497
 * 1773 Parham, (804) 288-1611
 * 10051 Midlothian Turnpike, (804) 272-5897
 * 4802 South Laburnum Avenue, (804) 226-9333
 * 1650 Willow Lawn Dr., (804) 288-3980

Ashland
   201 North Washington Highway, (804) 798-1444

Fredericksburg
 * 3205 Plank Road, (540) 786-9864

Roanoke
   316 South Jefferson Street, (540) 344-6661
 * 1620 Hershberger Road, (540) 362-5801
 * 3119 Chaparral Drive, (540) 989-8504

Salem
   303 East Burwell Street, (540) 387-0281

Vinton
   203 Virginia Avenue, (540) 345-8128

Lynchburg
 * 7114 Timberlake Road, (804) 237-6541

Appomattox
 * History Junction, (804) 352-7168

Rocky Mount
   216 College Street, (540) 483-9216

Lake Ridge
 * 12451 Hedges Run Dr., (703) 491-7723

Stafford
 * 305 Garrisonville Rd., (540) 659-9699


 * Virginia First ATM Locations


VIRGINIA FIRST MORTGAGE DIVISION
LOAN CENTERS

Woodbridge (Division Headquarters)
   1308 Devils Reach Road, Suite 200,
   (703) 494-9945

Fairfax
   10400 Eaton Place, Suite 130
   (703) 218-4000

Charlottesville
   1160 Pepsi Place, Suite 109, (804) 978-1110

Fredericksburg
   3205 Plank Road, (540) 786-4819

Lynchburg
   7331 Timberlake Road, Suite 306,
   (804) 237-7961

Richmond
   9200 Arboretum Pkwy., Suite 104,
   (804) 320-2500

Roanoke
   3119 Chaparral Drive, (540) 989-1116

Bel Air, Maryland
   139 N. Main St., Suite 101, (410) 879-1800

Columbia, Maryland
   8818 Centre Park Dr., Suite 100,
   (410) 995-0134

Frederick, Maryland
   211 S. Jefferson St., Suite B, (301) 620-1100

Bethesda, Maryland
   6550 Rock Spring Dr., Suite 210,
   (301) 493-4900

Timonium, Maryland
   9515 Deereco Rd., Suite 1010,
   (410) 561-0472


                                       54
<PAGE>


DEPOSIT ACCOUNTS

   Totally Free Checking
   Interest Checking
   Freedom 55 Checking
   VIP Checking
   Money Market Checking
   Advantage Accounts
   Regular Savings
   Christmas Clubs

INVESTMENT OPTIONS

   Certificates of Deposit (Flexible Terms)
   Century Account Penalty-Free Certificates
   Individual Retirement Accounts

ALTERNATIVE INVESTMENT OPTIONS

   Free Financial Planning Services
   Mutual Funds Services
   Tax Deferred Annuities
   Insurance Products
   Equities

RESIDENTIAL MORTGAGE LENDING

   Conventional Fixed Rate
   Adjustable Rate Mortgage (ARMs)
   5 and 7 Year Two Step
   Jumbo Fixed Rate
   Jumbo ARMs
   Federal Housing Administration
     Mortgages (FHA)
   Veterans Administration Mortgages (VA)
   Virginia Housing Development Authority
     (VHDA)/Conventional Blend
   VHDA/FHA Blend
   VHDA/VA Blend
   Construction-to-Permanent Loans
   Builder Lines of Credit

RETAIL LENDING

   Second Mortgages
   Home Equity Lines of Credit
   Automobile Loans
   Automobile Refinance Loans
   Home Improvement Loans
   Personal Loans
   Manufactured Housing Loans

OTHER SERVICES

   Bank Cards (Master Card/Visa)
   Travelers Cheques
   Money Orders
   Bank Checks
   Wire Transfers
   ATMs (Most, Exchange and Cirrus 
     Networks linking the Discover,
     American Express, Mastercard and
     Diners Club cards)
   Notary



                                       55
<PAGE>

DIRECTORS

                  

Frasier W. Brickhouse
Assistant Dean, School of Business,
Virginia State University


Preston H. Cottrell
President and Chief Executive Officer,
Cottrell Communications


William L. Eure, Jr.
Owner, President and General Manager,
Eure Communications, Inc.


Benjamin S. Gill
Owner, Benny's BBQ


George R. Mercer
President, Mercer Rug Cleaning and Carpet Sales


Charles A. Patton
President and Chief Executive Officer,
Virginia First Financial Corporation and
Virginia First Savings Bank


William A. Patton
Chairman of the Board,
Virginia First Financial Corporation and
Virginia First Savings Bank


Francis R. Payne, Jr., M.D.
Retired, Petersburg Obstetrics and Gynecology
Association, Ltd.


John H. VanLandingham, Jr.
Chairman of the Board,
Builders Supply Company of Petersburg



OFFICERS


OFFICERS OF VIRGINIA FIRST SAVINGS BANK

Charles A. Patton  *
President and Chief Executive Officer


William J. Vogt  *
Senior Vice President and Chief Financial Officer


Gary L. Martin
Senior Vice President, Mortgage Banking


Teresa R. Mathisen
Vice President Human Resources


Maria R. Campbell
Vice President, Retail Banking
Central Region


Rebecca E. Truax  *
Corporate Secretary


Steven A. Whitley
Executive Vice President, Chief Operating Officer


David L. Huntington
Senior Vice President, Retail Lending


Linda Markham
Vice President and Regional Manager-Western Division


John M. Silver
Vice President, Internal Audit


Gary L. Armstrong
Vice President, Commercial Lending


*  Also serves in same capacity as officer of
   Virginia First Financial Corporation

                                       56
<PAGE>

STOCKHOLDER INFORMATION

FORM 10-K

A copy of the annual  report on Form 10-K may be  obtained  without  charge upon
request to William J. Vogt,  Senior Vice President and Chief Financial  Officer,
Virginia  First  Financial  Corporation,  P.O.  Box 2009,  Petersburg,  Virginia
23804-2009.


CORPORATE LEGAL COUNSEL

Williams, Mullen, Christian & Dobbins
Two James Center
1021 East Cary Street, Suite 1500
Richmond, Virginia 23219


STOCK LISTINGS

The  Company's  common  stock is traded on the  NASDAQ  National  Market  System
("NMS") under the trading symbol VFFC.


INDEPENDENT AUDITORS

KPMG Peat Marwick LLP
Certified Public Accountants
Two James Center
1021 East Cary Street, Suite 1900
Richmond, Virginia  23219

TRANSFER AGENT AND REGISTRAR

First Union National Bank
Capital Management Group
Two First Union Center, CMG-16
Charlotte, North Carolina  28288-1165


DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN

Virginia First's Dividend Reinvestment and Stock Purchase Plan is an economical,
convenient  way for  stockholders  to increase  their  holdings of the Company's
stock. Once enrolled in this plan, stockholders may purchase new shares directly
from the Company by reinvesting  cash dividends,  making optional cash purchases
or both. To obtain a plan prospectus and enrollment card, write or call Virginia
First at 804-733-0333.

STOCK PRICE AND DIVIDEND INFORMATION (1)

<TABLE>
<CAPTION>


Year Ended June 30                             1997                          1996       1995      1994     1993
--------------------------------------------------------------------------------------------------------------------

                           Fourth       Third        Second     First
                          Quarter      Quarter      Quarter    Quarter
--------------------------------------------------------------------------------------------------------------------

<S>                        <C>          <C>          <C>        <C>          <C>        <C>       <C>       <C>  
High                       $23.25       $17.00       $15.25     $13.75       $14.25     $9.38     $7.63     $5.63

Low                         13.38        12.25        12.50      11.00         8.38      5.94      4.88      2.00

Close                       23.25        14.75        12.75      13.75        13.75      8.75      7.25      4.75

Dividends                    .025         .025         .025       .025          .07       .05       .05         -
====================================================================================================================
</TABLE>


(1) All stock price and dividend data has been adjusted to reflect a two-for-one
    stock split which occurred November 17, 1995.