<PAGE>
 
As filed with the Securities and Exchange Commission on September 11, 1998
                                                 Registration No. 333-__________
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                    FORM S-1
                             REGISTRATION STATEMENT
                        UNDER THE SECURITIES ACT OF 1933

                       VIRGINIA CAPITAL BANCSHARES, INC.


             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                <C>                                <C>
              VIRGINIA                         6035                        BEING APPLIED FOR
(State or Other Jurisdiction of    (Primary Standard Industrial       (IRS Employer Identification No.)
 Incorporation or Organization)    Classification Code Number)
 </TABLE>

                               400 GEORGE STREET
                         FREDERICKSBURG, VIRGINIA 22404
                                 (540) 899-5500
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)

                             SAMUEL C. HARDING, JR.
                                   PRESIDENT
               FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
                               400 GEORGE STREET
                         FREDERICKSBURG, VIRGINIA 22404
                                 (540) 899-5500
           (Name, Address, Including Zip Code, and Telephone Number,
                   Including Area Code, of Agent for Service)

                                   Copies to:
                        JOSEPH A. MULDOON, JR., ESQUIRE
                           LORI M. BERESFORD, ESQUIRE
                           MULDOON, MURPHY & FAUCETTE
                          5101 WISCONSIN AVENUE, N.W.
                             WASHINGTON, D.C. 20016
                                 (202) 362-0840

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:  As soon as
practicable after this Registration Statement becomes effective.

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
                               ---- 

     If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /   /
                                              ---- 

     If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.   /   /
            ---- 

     If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.   /   /
            ---- 
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434, 
please check the following box. /   /
                                ----

<TABLE>
<CAPTION>
================================================================================================== 
                                      CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------- 
Title of each Class of           Amount to     Proposed Maximum   Proposed Maximum     Amount of
Securities to be Registered    be Registered   Offering Price    Aggregate Offering   Registration
                                                  Per Unit           Price (2)           Fee
<S>                            <C>             <C>               <C>                  <C>
--------------------------------------------------------------------------------------------------
Common Stock
$.01 par value(1)               15,082,848         $10.00           $150,828,480         $44,495
==================================================================================================
</TABLE>

(1) Includes shares of Common Stock to be issued to the Fredericksburg Savings
    Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.


THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
 
    [To be used in connection with the Syndicated Community Offering only ]

SYNDICATED PROSPECTUS SUPPLEMENT


                       VIRGINIA CAPITAL BANCSHARES, INC.
                  (PROPOSED HOLDING COMPANY FOR FREDERICKSBURG
                             SAVINGS BANK, F.S.B.)

                       __________ SHARES OF COMMON STOCK


     Virginia Capital Bancshares, Inc. (the "Company"), a Virginia corporation,
is offering for sale in a syndicated community offering (the "Syndicated
Community Offering") __________ shares, at a per share price of $10.00, of its
common stock, par value $.01 per share (the "Common Stock"), to be sold upon the
conversion (the "Conversion") of Fredericksburg Savings and Loan Association,
F.A., Fredericksburg, Virginia from a federally chartered mutual savings bank to
a federally chartered stock savings bank ( Fredericksburg Savings and Loan
Association, F.A. and Fredericksburg Savings Bank, F.S.B. are hereafter referred
to as the "Bank") and the issuance of the Bank's outstanding capital stock to
the Company pursuant to a plan of conversion, (the "Plan of Conversion").  The
remaining __________ shares of the Common Stock to be sold in the Conversion
have been subscribed for in subscription and community offerings (the
"Subscription and Community Offerings") by holders of deposit accounts with the
Bank with a balance of $50 or more as of June 30, 1997, by the Fredericksburg
Savings Bank, F.S.B. Employee Stock Ownership Plan, a tax-qualified employee
benefit plan, and related trust (the "ESOP"), by holders of deposit accounts
with the Bank with a balance of $50 or more as of ______________, 1997, by
certain other account holders and borrowers of the Bank and, then, by certain
members of the general public.  See "The Conversion - General."  Contained
herein is the Prospectus in the form used in the Subscription and Community
Offerings.  The purchase price for all shares sold in the Syndicated Community
Offering will be the same as the price paid by subscribers in the Subscription
and Community Offerings (the "Purchase Price").  The Purchase Price of $10.00
per share is the amount to be paid for each share at the time a purchase order
is submitted.  See the cover page of the Prospectus and the table below for
information as to the method by which the range within which the number of
shares offered may vary and the method of subscribing for shares of the Common
Stock.

     Funds submitted to the Bank with purchase orders will earn interest at the
Bank's passbook rate of interest from the date of receipt until completion or
termination of the Conversion.  The Syndicated Community Offering will expire no
later than _______________, 199_, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 199_.  If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription.  If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds will be returned promptly with
interest.  The minimum number of shares which may be purchased 
<PAGE>
 
is 25 shares. Except for the ESOP, which may purchase up to 10% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $170,000 at the
Purchase Price and no person, together with associates of and persons acting in
concert with such person, may purchase more than $300,000 in the Conversion. See
"Plan of Conversion -Subscription Rights and Limitations on Common Stock
Purchases." The Company reserves the right, in its absolute discretion, to
accept or reject, in whole or in part, any or all subscriptions in the
Syndicated Community Offering.

     The Company and the Bank have engaged Trident Securities, Inc. ("Trident")
as financial advisors to assist them in the sale of the Common Stock in the
Syndicated Community Offering. It is anticipated that Trident will use the
services of other registered broker-dealers ("Selected Dealers") and that fees
to Trident and such Selected Dealers will not exceed ____% of the aggregate
Purchase Price of the shares sold in the Syndicated Community Offering.  Neither
Trident nor any Selected Dealer shall have any obligation to take or purchase
any shares of Common Stock in the Syndicated Community Offering.

     The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market ("NASDAQ") under the symbol "VCAP."  Prior
to this offering, there has not been a public market for the Common Stock, and
there can be no assurance that an active and liquid trading market for the
Common Stock will develop.  The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the stock.

     FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES ____ TO ____ OF THE PROSPECTUS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.  ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.



THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.

                                       2
<PAGE>
 
<TABLE>
<CAPTION>
                                                    Estimated                      Estimated Net Pro-
                                                  Underwriting    Estimated Net    ceeds of Subscrip-
                                                   Commissions     Proceeds of      tion, Community
                                   Syndicated       and Other      Syndicated        and Syndicated
                                   Community        Fees and        Community          Community
                                 Offering Price    Expenses(1)      Offering        Offerings(2)(3)
===================================================================================================
<S>                              <C>             <C>              <C>            <C>
 
Minimum Per Share                $10.00          $                $              $
 
Midpoint Per Share               $10.00          $                $              $
 
Maximum Per Share                $10.00          $                $              $
 
Total Minimum(4)                 $               $                $              $
 
Total Midpoint                   $               $                $              $
 
Total Maximum(4)                 $               $                $              $

Total Maximum, As Adjusted(5)    $               $                $              $
===================================================================================================
</TABLE>

______________________________
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
    Company in connection with the Conversion (other than estimated fees to be
    paid to Trident for services in connection with the Subscription and
    Community Offerings) and estimated compensation of Trident and Selected
    Dealers in connection with the sale of the remaining shares in the
    Syndicated Community Offering which fees are estimated to be $__________ and
    $__________ at the minimum and the maximum of the estimated price range and
    may be deemed to be underwriting fees.  The information under "Pro Forma
    Data" in the Prospectus was based on the assumptions stated therein, which
    may differ from the estimates used for this table.  See "The Conversion -
    Marketing and Underwriting Arrangements" for a more detailed discussion of
    fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds.  The balance of
    the net proceeds will be transferred to the Bank in exchange for all of the
    capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon the
    sale of the __________ shares subscribed for at a price of $_____ per share
    and after allocation of a pro rata portion of the estimated expenses
    relating to the Conversion) are estimated to be $__________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
    per share (the "Estimated Price Range").  The Total Minimum reflects the
    sale of __________ shares at a per share price of $_____, leaving a total of
    __________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due to
    an increase in the Estimated Price Range of up to 15% to reflect changes in
    market and financial conditions following commencement of the offerings.
    See "The Conversion - Stock Pricing."  For a discussion of the distribution
    and allocation of the additional shares, see "The Conversion - Subscription
    Rights and Limitations on Common Stock Purchases."


                            TRIDENT SECURITIES, INC.
                                        
                       _________________________________


        The date of this Prospectus Supplement is _______________, 1997.

                                       3
<PAGE>
 
PROSPECTUS

                       VIRGINIA CAPITAL BANCSHARES, INC.
                         (Proposed Holding Company for
                         Fredericksburg Savings Bank)

                    UP TO 13,965,600 SHARES OF COMMON STOCK


       This offering is made as part of the plan of conversion of Fredericksburg
Savings and Loan Association, F.A., Fredericksburg, Virginia from a federally
chartered mutual savings and loan association to a federally chartered stock
savings bank to be known as Fredericksburg Savings Bank (Fredericksburg Savings
and Loan Association, F.A. and Fredericksburg Savings Bank are both referred to
herein as either the "Bank" or "Fredericksburg Savings"). In this conversion,
the Bank will become a wholly-owned subsidiary of Virginia Capital Bancshares,
Inc. (the "Company"). No shares will be sold if the minimum number of shares are
not subscribed for or if the necessary approvals from the banking regulatory
authorities and the members of the Bank are not received.

       There is currently no public market for the common stock. The Company has
received conditional approval for the common stock to be listed on the Nasdaq
National Market ("Nasdaq") under the symbol "VCAP" upon completion of the
conversion.

       INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.


       THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY, NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


       THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY. THE COMMON STOCK IS
SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.


<TABLE>
<CAPTION>
                                                                                                        MAXIMUM
                                                                             MINIMUM                   AS ADJUSTED
                                                                            8,976,000                   13,965,600
                                                       PER SHARE              SHARES                     SHARES
                                                    -----------------    -----------------     -----------------------
<S>                                                 <C>                  <C>                   <C>
Offering price......................................   $10.00               $89,760,000                $139,656,000
Estimated underwriting commissions
    and other expenses..............................       --                 2,000,000                   2,000,000
Estimated proceeds to Company.......................       --                87,760,000                 137,656,000
</TABLE>


     The shares are offered first in a Subscription Offering to persons who have
specified priorities of subscription rights based on their relationship with the
Bank. IN ORDER TO PURCHASE SHARES PURSUANT TO A SUBSCRIPTION RIGHT, YOU MUST
SUBMIT A PROPERLY COMPLETED SUBSCRIPTION ORDER FORM AND CERTIFICATION, TOGETHER
WITH FULL PAYMENT FOR THE SHARES, TO THE BANK PRIOR TO THE EXPIRATION DATE,
____________, EASTERN TIME, ON _______________, 1998, UNLESS EXTENDED. All funds
received from subscribers will be held in an interest-bearing savings account at
the Bank until the completion or termination of the Conversion. Funds will be
returned promptly if the Conversion is terminated. If the Conversion is not
completed by __________, 1998 and the Office of Thrift Supervision consents to
an extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their orders. No single extension may
exceed 90 days and such extensions may not go beyond ____________, 2000.

     To the extent sufficient shares to complete the conversion are not sold in
the Subscription Offering, the remaining shares will be offered for sale in a
Community Offering and, if necessary, other public offering.

     Trident Securities, Inc. has agreed to assist the Company in selling the
shares, but does not guarantee that at least the minimum number of shares will
be sold.


             =====================================================
                           TRIDENT SECURITIES, INC.
             =====================================================

              The date of this Prospectus is _____________, 1998.
<PAGE>
 
--------------------------------------------------------------------------------

                             INSERT MAP PAGE HERE
--------------------------------------------------------------------------------

                                       2
<PAGE>
 
--------------------------------------------------------------------------------

                                    SUMMARY

         This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you should
read carefully this entire Prospectus, including the financial statements and
the notes to the financial statements of Fredericksburg Savings.. References in
this document to the "Bank" or "Fredericksburg Savings" refer to Fredericksburg
Savings and Loan Association, F.A. when in mutual form and to Fredericksburg
Savings Bank upon conversion to stock form References in this document to the
"Company" refer to Virginia Capital Bancshares, Inc.

VIRGINIA CAPITAL 
 BANCSHARES, INC....................    The Company was recently organized as a
                                        Virginia corporation to become a savings
                                        and loan holding company and own all of
                                        the capital stock of Fredericksburg
                                        Savings Bank to be issued upon its
                                        conversion from mutual to stock form. To
                                        date, the Company has not engaged in any
                                        business.

                                        The Company's office is located at 400
                                        George Street, Fredericksburg, Virginia
                                        and its telephone number is (540) 899-
                                        5500. The Bank's executive office has
                                        the same address and phone number.

FREDERICKSBURG SAVINGS
 BANK...............................    The Bank which is currently a federally
                                        chartered mutual savings and loan
                                        association, will become a federally
                                        chartered stock savings bank known as
                                        Fredericksburg Savings Bank in
                                        connection with its conversion from
                                        mutual to stock form. At June 30, 1998,
                                        the Bank had total assets of $472.3
                                        million, total deposits of $373.7
                                        million and total equity capital of
                                        $83.5 million.

                                        The Bank operates four banking offices,
                                        one in the City of Fredericksburg, one
                                        in Stafford County and two in
                                        Spotsylvania County, Virginia. The Bank
                                        historically has operated as a 
                                        community-oriented banking institution
                                        primarily providing one- to four-family
                                        residential mortgage loans and consumer
                                        loans and a variety of retail deposit
                                        products in its primary market area,
                                        which consists of the City of
                                        Fredericksburg, and Stafford,
                                        Spotsylvania and King George Counties,
                                        Virginia.

THE CONVERSION......................    The Bank has adopted a Plan of
                                        Conversion which is subject to
                                        requirements of the Office of Thrift
                                        Supervision (the "OTS"), the primary
                                        federal banking regulator of the Bank.
                                        The conversion, which hereafter is
                                        referred to as the "Conversion," is
                                        governed by the Plan and has three major
                                        components, as follows:

                                        (i)   The conversion of the Bank from
                                        mutual to stock form;

                                        (ii)  The acquisition by the Company of
                                        all of the outstanding capital stock of
                                        the Bank;

                                        (iii) The sale by the Company of common
                                        stock.

                                        The Conversion is subject to the
                                        approval of the OTS, and approval of
                                        members of the Bank eligible to vote at
                                        a special meeting to be held on
                                        _____________, 1998 (the "Special
                                        Meeting").

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

                                       3
<PAGE>
 
--------------------------------------------------------------------------------

FREDERICKSBURG SAVINGS
  CHARITABLE FOUNDATION.............    The Bank has established a charitable
                                        foundation, Fredericksburg Savings
                                        Charitable Foundation, or the
                                        "Foundation." The Company intends to
                                        contribute to the Foundation common
                                        stock up to 8% of the common stock
                                        sold in the Conversion. The authority
                                        for the affairs of the Foundation is
                                        vested in its Board of Directors, all of
                                        whom are existing Directors or officers
                                        of the Company and the Bank.

TERMS OF THE OFFERING...............    The shares of common stock are offered
                                        at a fixed price of $10.00 per share in
                                        the Subscription Offering pursuant to
                                        subscription rights in the following
                                        order of priority to:

                                        (i)   Eligible Account Holders -holders
                                              of deposit accounts at the Bank
                                              totalling $50 or more as of June
                                              30, 1997;

                                        (ii)  the Employee Stock Ownership Plan
                                              of the Company and the Bank (the
                                              "ESOP");

                                        (iii) Supplemental Eligible Account
                                              Holders - holders of deposit
                                              accounts at the Bank totalling $50
                                              or more as of ____ who are not
                                              entitled to a first priority
                                              subscription right; and

                                        (iv)  Other Members - holders of deposit
                                              accounts at the Bank as of ______
                                              who are not entitled to a higher
                                              priority subscription right.

                                        Shares of common stock not subscribed
                                        for by persons having priority
                                        subscription rights will be offered to
                                        certain members of the general public in
                                        a Community Offering with preference 
                                        given to natural persons residing in the
                                        City of Fredericksburg and Stafford and
                                        Spotsylvania and King George Counties.

EXPIRATION DATE OF
  SUBSCRIPTION OFFERING.............    Subscription rights will expire if not
                                        exercised and all orders to purchase
                                        common stock in the Subscription
                                        Offering must be received by __:__ ____,
                                        Eastern time, on ________, 1998, unless
                                        extended, which is the "Expiration
                                        Date."

NONTRANSFERABILITY OF
  SUBSCRIPTION RIGHTS...............    The subscription rights are not
                                        transferable. Persons found to be
                                        transferring such rights will be subject
                                        to the forfeiture of such rights and
                                        possible further sanctions and penalties
                                        imposed by the OTS.

NUMBER OF SHARES OFFERED............    The Company is offering between a
                                        minimum of 8,976,000 shares and a
                                        maximum of 12,144,000 shares of common
                                        stock, or up to an adjusted maximum of
                                        13,965,600 shares if the maximum number
                                        of shares is increased.

                                        The number of shares offered is based
                                        upon an independent appraisal prepared
                                        by FinPro, Inc. ("FinPro") dated as of
                                        ____________, 1998, which estimates that
                                        the aggregate pro forma market value of
                                        the Company ranged from $89.8 million to
                                        $121.4 million. (This range is referred
                                        to as the "Estimated Price Range").
                                        FinPro is an independent appraisal firm
                                        experienced in appraisals of savings
                                        institutions. Establishing the
                                        Foundation in connection with the
                                        Conversion will result in a lower
                                        aggregate market valuation than if the
                                        Conversion was completed without the
                                        Foundation.

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

                                       4
<PAGE>
 
--------------------------------------------------------------------------------

                                        The final aggregate estimated pro forma
                                        market value of the Company will be
                                        determined at the time of closing of the
                                        Subscription Offering, or if all shares
                                        are not sold in the Subscription
                                        Offering, the closing of the Community
                                        Offering or other subsequent offering.
                                        Such estimated aggregate pro forma
                                        market value is subject to change due to
                                        changes in market and general financial
                                        and economic conditions.

                                        The maximum number of shares to be sold
                                        may be increased up to the adjusted
                                        maximum, a 15% increase over the
                                        maximum, if the aggregate estimated pro
                                        forma market value of the common stock
                                        to be sold is increased.

HOW TO ORDER STOCK..................    If you have a subscription right, you
                                        may order shares in the Subscription
                                        Offering by delivering to the Bank a
                                        properly executed stock order and
                                        certification form together with full
                                        payment for the shares ordered on or
                                        prior to the Expiration Date. ONCE
                                        TENDERED, SUBSCRIPTION ORDERS CANNOT BE
                                        REVOKED OR MODIFIED WITHOUT THE CONSENT
                                        OF THE BANK. Please make sure you review
                                        the Prospectus carefully. To ensure that
                                        each purchaser receives a prospectus at
                                        least 48 hours prior to the Expiration
                                        Date in accordance with Rule 15c2-8 of
                                        the Securities Exchange Act of 1934, no
                                        prospectus will be mailed any later than
                                        five days prior to the Expiration Date
                                        or hand delivered any later than two
                                        days prior to such date. The Bank is not
                                        obligated to accept subscriptions not
                                        submitted on an original stock order
                                        form. To ensure that subscription rights
                                        are properly identified, persons must
                                        list all qualifying savings accounts, as
                                        of the respective qualifying dates, on
                                        the stock order form. Persons who do not
                                        list all qualifying savings accounts may
                                        be subject to reduction or rejection of
                                        their subscription.

                                        Persons wishing to order shares offered
                                        in the Community Offering also must
                                        submit a properly executed stock order
                                        and certification form prior to the
                                        expiration date to be set for the
                                        Community Offering.

FORM OF PAYMENT FOR SHARES..........    Payment for subscriptions may be made:

                                        (i)   in cash (if delivered in person);
                                        (ii)  by check, bank draft or money
                                              order; or
                                        (iii) by authorization of withdrawal
                                              from deposit accounts maintained
                                              at the Bank.

                                        Orders for common stock in the
                                        Subscription Offering which aggregate
                                        $50,000 or more must be paid by official
                                        bank or certified check or by withdrawal
                                        authorization from a deposit account at
                                        the Bank. No wire transfers will be
                                        accepted.

NUMBER OF SHARES THAT MAY
    BE ORDERED......................    Minimum:  25 shares ($250).

                                        Maximum:

                                        .     No Eligible Account Holder,
                                              Supplemental Eligible Account
                                              Holder or Other Member may
                                              purchase in the Subscription
                                              Offering more than $300,000 of
                                              common stock.

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

                                       5
<PAGE>
 
--------------------------------------------------------------------------------

                                        .    No person, together with associates
                                             or persons acting in concert with
                                             such person, may purchase in the
                                             Community Offering more than
                                             $300,000 of common stock.

                                        .    No person, together with associates
                                             or persons acting in concert with
                                             such person, may purchase in the
                                             aggregate more than the overall
                                             maximum purchase limitation of 1%
                                             of the total number of shares of
                                             Common Stock sold. However, the
                                             ESOP may purchase up to 10% of the
                                             Common Stock to be issued in
                                             connection with the Conversion,
                                             including shares issued to the
                                             Foundation. It is intended that the
                                             ESOP will purchase 8% of the Common
                                             Stock issued, including shares
                                             issued to the Foundation.

USE OF PROCEEDS.....................    The Company will use 50% of the net
                                        proceeds from the sale of common stock
                                        to purchase all of the common stock of
                                        the Bank to be issued in the Conversion.
                                        The portion of net proceeds retained by
                                        the Company will be used for general
                                        business activities, including the loan
                                        of funds to the ESOP (to the extent such
                                        loan is not funded by a third party) to
                                        enable the ESOP to purchase up to 8% of
                                        the stock issued in connection with the
                                        Conversion, including shares issued to
                                        the Foundation. The Company intends
                                        initially to invest the remaining net
                                        proceeds primarily in short-term U.S.
                                        Government and Agency obligations,
                                        including adjustable-rate mortgage-
                                        backed securities with terms of less
                                        than five years. The Bank intends to
                                        utilize the net proceeds from the sale
                                        of its stock to the Company for general
                                        business purposes, including investment
                                        in loans and to expand its products and
                                        services.

DIVIDEND POLICY.....................    Upon Conversion, the Board of Directors
                                        of the Company will have authority to
                                        declare dividends on the Common Stock,
                                        subject to statutory and regulatory
                                        requirements. Depending on market
                                        conditions, the Company's Board of
                                        Directors intends to pay cash dividends
                                        on the Common Stock; however, no
                                        decision has been made regarding the
                                        level of dividends or when they will be
                                        paid, and no assurance can be given that
                                        dividends will actually be paid.
                                        In addition, from time to time in an 
                                        effort to manage capital to a reasonable
                                        level, the Board of Directors may
                                        determine to pay periodic special cash
                                        dividends in addition to, or in lieu of,
                                        regular cash dividends. Additionally, in
                                        connection with the Conversion, the
                                        Company and the Bank have committed to
                                        the OTS that during the one-year period
                                        following the Conversion, the Company
                                        will not make any distribution to
                                        stockholders that, for federal tax
                                        purposes, would be treated as a return
                                        of capital without prior approval of 
                                        the OTS.

BENEFITS OF THE CONVERSION TO
  MANAGEMENT........................    Among the benefits to the Bank and the
                                        Company anticipated from the Conversion
                                        is the ability to attract and retain
                                        personnel through the use of stock
                                        options and other stock related benefit
                                        programs. Subsequent to the Conversion,
                                        the Company intends to adopt a Stock-
                                        Based Incentive Plan for the benefit of
                                        directors, officers and employees of the
                                        Company and Bank. If the Stock-Based
                                        Incentive Plan is adopted within one
                                        year after the Conversion, the plan will
                                        be subject to stockholders' approval at
                                        a meeting of stockholders which may not
                                        be held earlier than six months after
                                        the Conversion. If adopted and approved
                                        by stockholders, it is expected the
                                        benefits set forth in the table below
                                        would be available for distribution to
                                        employees and directors pursuant to that
                                        plan.

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

                                       6
<PAGE>

--------------------------------------------------------------------------------
 
                                        Additionally, an ESOP, which is a tax
                                        qualified plan, will be established to
                                        provide retirement benefits to
                                        employees. Benefits under that plan will
                                        be distributed to eligible employees
                                        over an approximate twenty year period.
                                        See the table below for the estimated
                                        value of such benefits.

<TABLE> 
<CAPTION> 
                                                                  ESTIMATED         PERCENTAGE OF SHARES ISSUED,  
                                                                   VALUE OF           INCLUDING SHARES ISSUED      
                                                                  SHARES(1)            TO THE FOUNDATION(2)          
                                                                  --------------    ----------------------------
<S>                                                               <C>               <C> 
          Employee Stock Ownership Plan ...................       $ 9,123,840             8.0%
          Stock-Based Incentive Plan:                        
           Stock Awards(2).................................         4,561,920             4.0
           Stock Options...................................               --(3)          10.0
</TABLE> 

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

          (1)   Assumes shares are allocated to participants at $10.00 per share
                and that shares are issued in the Conversion at the midpoint of
                the Estimated Price Range.
          (2)   Any Common Stock awarded under the Stock-Based Incentive Plan
                will be awarded at no cost to the recipients.
          (3)   Stock options will be granted with an exercise price equal to
                the fair market value of the Company's Common Stock on the day
                of grant. Recipients of stock options realize value only in the
                event of an increase in the price of the Common Stock of the
                Company following the date of grant of the stock options.

                                        In addition, the Company and Bank will
                                        enter into employment agreements with
                                        the Company's and Bank's two executive
                                        officers. Benefits under such agreements
                                        would only be paid if the officer were
                                        terminated without cause or if the
                                        officer voluntarily retired under
                                        certain circumstances following a Change
                                        in Control. The amounts payable under
                                        these agreements will depend upon the
                                        compensation paid to the officer in
                                        recent years prior to termination. See
                                        "Management of the Bank--Executive
                                        Compensation."

                                        See "Management of the Bank" for more
                                        detail regarding these benefits.


PURCHASES BY OFFICERS
  AND DIRECTORS.....................    Directors and executive officers of the
                                        Bank and the Company expect to purchase
                                        approximately 2.06% or 1.53% of shares
                                        of common stock to be issued in the
                                        Conversion, including shares issued to
                                        the Foundation, based on the estimated
                                        minimum and maximum of such shares,
                                        respectively.

MARKET FOR STOCK....................    As a mutual institution, the Bank has
                                        never issued capital stock and,
                                        consequently, there is no existing
                                        market for the Common Stock. The Company
                                        has received conditional approval to
                                        have its Common Stock listed on the
                                        Nasdaq under the symbol "VCAP" subject
                                        to the completion of the Conversion and
                                        compliance with certain conditions.

NO BOARD RECOMMENDATIONS............    The Bank's Board of Directors and the
                                        Company's Board of Directors make no
                                        recommendation to depositors or other
                                        potential investors regarding whether
                                        such persons should purchase the common
                                        stock. An investment in the common stock
                                        must be made pursuant to each investor's
                                        evaluation of his or her best interests.

STOCK INFORMATION CENTER............    If you have any questions regarding the
                                        Conversion, please call the Stock
                                        Information Center at (___) ___-____.

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

                                       7
<PAGE>
 
--------------------------------------------------------------------------------

                 SELECTED FINANCIAL AND OTHER DATA OF THE BANK

     The selected financial and other data of the Bank set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Bank and Notes thereto presented elsewhere in this Prospectus.

<TABLE>
<CAPTION>
                                                AT
                                              JUNE 30,                          AT DECEMBER 31,
                                             ----------   ----------------------------------------------------------
                                               1998(1)       1997       1996(2)      1995        1994        1993
                                             ----------   ----------  ----------  ----------  ----------  ----------
                                                                         (IN THOUSANDS)
<S>                                          <C>          <C>         <C>         <C>         <C>          <C>
SELECTED FINANCIAL DATA:
  Total Assets............................    $472,280      $471,920    $469,917    $468,759    $451,035    $447,706
  Loans receivable, net(3)................     415,986       413,032     405,145     390,541     371,269     375,229
  Mortgage-backed securities..............       1,190         1,291       1,502       1,879       2,109       2,640
  Investment securities(4)................      30,928        31,151      31,979      49,257      52,361      49,629
  Cash and cash equivalents...............       9,031        11,287      15,937      11,980      11,088       6,772
  Deposits................................     373,719       377,114     375,652     386,376     376,083     380,977
  FHLB advances...........................       8,000         8,000      15,000       8,000       8,000       8,000
  Equity capital..........................      83,500        80,073      73,296      68,703      62,217      54,905
</TABLE>

<TABLE>
<CAPTION>
                                               FOR THE SIX MONTHS
                                                 ENDED JUNE 30,                     FOR THE YEAR ENDED DECEMBER 31,
                                             ----------------------   ----------------------------------------------------------
                                               1998(1)     1997(1)       1997       1996(2)      1995        1994        1993
                                             ----------  ----------   ----------  ----------  ----------  ----------  ----------
                                                                                (IN THOUSANDS)
<S>                                          <C>         <C>          <C>         <C>         <C>         <C>         <C>
SELECTED OPERATING DATA:
  Interest income.........................      $17,392     $17,586      $35,445     $35,230     $35,576     $32,338     $34,015
  Interest expense........................        9,620       9,568       19,418      19,535      18,997      16,620      17,978
                                                -------     -------      -------     -------     -------     -------     -------
    Net interest income...................        7,772       8,018       16,027      15,695      16,579      15,718      16,037
  Provision for loan losses...............          269         241          375         325         412       1,010       1,129
                                                -------     -------      -------     -------     -------     -------     -------
    Net interest income after
      provision for loan losses...........        7,503       7,777       15,652      15,370      16,167      14,708      14,908
  Total noninterest income................        1,276         784        1,734       1,410       1,269       1,152       1,037
  Total noninterest expense...............        3,244       3,152        7,009       9,798       6,708       6,850       7,326
                                                -------     -------      -------     -------     -------     -------     -------
  Income before income taxes and
    cumulative effect of change in
    accounting principle..................        5,535       5,409       10,377       6,982      10,728       9,010       8,619
  Income tax expense......................        2,215       2,150        3,952       2,401       4,070       1,687       3,935
                                                -------     -------      -------     -------     -------     -------     -------
    Net income before cumulative effect of
     change in accounting principle.......         3,320       3,259        6,425       4,581       6,658       7,323       4,684
  Cumulative effect of change in
    accounting principle(5)...............           --          --           --          --          --          --         680
                                                -------     -------      -------     -------     -------     -------     -------
     Net income...........................      $ 3,320     $ 3,259      $ 6,425     $ 4,581     $ 6,658     $ 7,323     $ 5,364
                                                =======     =======      =======     =======     =======     =======     =======
</TABLE>

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

                                       8
<PAGE>
 
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                  AT OR FOR THE SIX
                                                                    MONTHS ENDED
                                                                       JUNE 30,               FOR THE YEAR ENDED DECEMBER 31,
                                                                 -------------------  ---------------------------------------------
                                                                  1998(1)   1997(1)     1997    1996(2)    1995     1994     1993
                                                                 --------- ---------  -------- --------- -------- -------- --------
<S>                                                              <C>       <C>        <C>      <C>       <C>      <C>      <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(6)
PERFORMANCE RATIOS:
  Return on average assets....................................       1.40%     1.39%     1.36%     0.98%    1.45%    1.62%    1.19%
  Return on average equity....................................       8.12      8.71      8.39      6.42    10.17    12.61    10.26
  Average interest rate spread(7).............................       2.58      2.76      2.71      2.73     3.04     3.04     3.20
  Net interest margin(8)......................................       3.37      3.52      3.50      3.45     3.71     3.55     3.64
  Net yield on average-interest earning assets................       7.60      7.72      7.74      7.74     7.96     7.31     7.73
  Net interest income after provisions for loan
    losses, to total non-interest expenses....................     231.29    246.73    223.31    156.86   241.05   214.72   203.49
  Total noninterest expense to average assets.................       1.37      1.34      1.49      2.09     1.46     1.52     1.62
  Efficiency ratio(9).........................................      35.85     35.81     39.46     57.28    37.58    40.60    42.91

REGULATORY CAPITAL RATIOS(10):
  Tangible capital............................................      17.28%    17.63%    16.59%    15.29%   14.46%   13.61%   12.26%
  Core capital................................................      17.28     17.63     16.59     15.29    14.46    13.61    12.26
  Risk-based capital..........................................      30.20     30.60     28.60     27.50    24.20    25.24    23.12

ASSET QUALITY RATIOS:
  Non-performing loans to total assets(11)(12)................       0.61%     0.78%     0.60%     1.86%    1.45%    2.34%    1.50%
  Non-performing loans to total loans(11)(12).................       0.66      0.89      0.65      2.05     1.64     2.67     1.68
  Non-performing assets to total assets(12)...................       1.01      1.18      1.01      2.21     1.92     2.59     2.01
  Allowance for loan losses to non-performing
    loans(12).................................................     174.85%   152.26%   194.60%    63.33%   80.60%   52.46%   79.66%
NUMBER OF FULL-SERVICE BANKING FACILITIES.....................        4         4         4         4        4        4        4
</TABLE>

_____________
(1)  The data presented for the six months ended June 30, 1998 and 1997 was
     derived from unaudited financial statements and reflect, in the opinion of
     management, all adjustments (consisting only of normal recurring
     adjustments) which are necessary to present fairly the results for such
     interim periods. Interim results at and for the six months ended June 30,
     1998 are not necessarily indicative of the results that may be expected for
     the year ended December 31, 1998.
(2)  Includes effect of the one-time special assessment of $2.5 million, on a
     pre-tax basis, to recapitalize the SAIF, which was recorded by the Bank in
     1996.
(3)  Loans receivable, net, consist of loans receivable minus the allowance for
     loan losses, deferred loan fees and unadvanced loan funds. The allowance
     for loan losses at June 30, 1998 and December 31, 1997, 1996, 1995, 1994
     and 1993 was $5.6 million, $5.5 million, $5.5 million, $5.5 million, $5.5
     million and $5.4 million, respectively.
(4)  The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
     115, "Accounting for Certain Investments in Debt and Equity Securities"
     ("SFAS No. 115"), as of January 1, 1995. On December 31, 1995, a majority
     of the Bank's portfolio was classified as "available-for-sale." Securities
     do not include Federal Home Loan Bank of Atlanta ("FHLB-Atlanta") stock of
     $3.5 million, $3.4 million, $3.2 million, $3.1 million, $4.1 million and
     $4.1 million at June 30, 1998 and December 31, 1997, 1996, 1995, 1994 and
     1993, respectively.
(5)  Represents the cumulative effect, as of January 1, 1993, of the initial
     application of Financial Accounting Standards Board Statement 109,
     "Accounting for Income Taxes."
(6)  Asset Quality Ratios and Regulatory Capital Ratios are end of period
     ratios. With the exception of end of period ratios, all ratios are based on
     average monthly balances during the indicated periods and are annualized
     where appropriate.
(7)  The average interest rate spread represents the difference between the
     weighted average yield on average interest-earning assets (which includes
     FHLB-Atlanta stock and other equity securities) and the weighted average
     cost of average interest-bearing liabilities.
(8)  The net interest margin represents net interest income as a percent of
     average interest-earning assets.
(9)  The efficiency ratio represents the ratio of noninterest expenses divided
     by the sum of net interest income and noninterest income.
(10) For definitions and further information relating to the Bank's regulatory
     capital compliance requirements, see "Regulation--Federal Savings
     Institution Regulation--Capital Requirements." See "Regulatory Capital
     Compliance" for the Bank's pro forma capital levels as a result of the
     Offerings.
(11) Loans include total loans before the allowance for loan losses.
(12) Non-performing assets consist of non-performing loans and real estate owned
     ("REO"). Non-performing loans consist of all loans 90 days or more past due
     and other loans which have been identified by the Bank as presenting
     uncertainty with respect to the collectibility of interest or principal. It
     is the Bank's policy to cease accruing interest on all such loans. See
     "Business of the Bank."

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

                                       9
<PAGE>
 
                                 RISK FACTORS

         Investors should consider the following risk factors, in addition to
those discussed elsewhere in this Prospectus before deciding whether to purchase
the Common Stock offered hereby.

SENSITIVITY TO CHANGES IN INTEREST RATES

         The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.

         The Bank attempts to manage its interest rate risk by seeking to
originate and retain adjustable-rate and shorter-term fixed-rate loans, and by
originating shorter-term, higher yielding consumer loans and investing in
securities with shorter stated or estimated maturities. However, in recent years
the Bank has originated primarily fixed-rate mortgage loans with terms of 15 to
30 years, which the Bank retains in its portfolio. The Bank has done this in
response to very low customer demand for adjustable-rate loans and the Bank's
concern that failure to continue to originate loans in its primary market area
would adversely affect the Bank's ability to compete against other financial
services companies in its market area over the long term. Most recently, while
the Bank has continued to emphasize 15 year fixed-rate loans, the Bank has
primarily originated 30 year fixed-rate loans due to market demand. This has
resulted in the Bank becoming significantly vulnerable to changes in interest
rates. At June 30, 1998, the Bank's gross total loans had an average weighted
maturity of 13.4 years. At such date, $117.1 million, or 26.8% of the Bank's
loans had adjustable interest rates with a weighted average maturity of 20.0
years. At June 30, 1998, the Bank had $196.7 million of certificates of deposit
with maturities of less than one year and $45.3 million of certificates of
deposit over $100,000 ("jumbo certificates of deposit"). Such jumbo certificates
of deposit tend to be less stable sources of funding as compared to money
market, savings and retail checking. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management of Interest Rate
Risk and Market Risk Analysis." At June 30, 1998, the Bank's total interest-
bearing liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $167.8
million, representing a cumulative one-year interest sensitivity gap as a
percentage of total assets of negative 35.5%. To date, the Bank's policy of
remaining competitive, notwithstanding the potentially negative effects this
strategy may have, has not adversely affected the Bank. However, in a rapidly
rising interest rate environment, the cost of the Bank's interest-bearing
liabilities will generally increase at a rate faster than the yield on its
interest-earning assets thereby likely adversely affecting the Bank's net
interest income. The Bank's high level of capital and liquid assets could limit
the effect of such a change in interest rates, but the Bank would also be
subject to other risks. Specifically, increases in interest rates also could
adversely affect the type (fixed-rate or adjustable-rate) and amount of loans
originated by the Bank which, in turn, could adversely impact the yields earned
on the Bank's loan portfolios as well as the amount of secondary market activity
in which the Bank may engage.

         Furthermore, increases in market interest rates would result in an
increase in the interest rates on the Bank's adjustable-rate loans, thereby
causing higher loan payment amounts by the borrowers which, in turn, may result
in elevated delinquencies on such loans. Increases in the level of interest
rates may also adversely affect the value of the Bank's investment securities
and other interest-earning assets and, in turn, its results of operations or
retained earnings. At June 30, 1998, the Bank's securities available-for-sale
had an estimated fair value of $30.9 million, which was $458,000 greater than
the amortized cost of $30.5 million. At the same date, the Bank's mortgage-
backed securities held-to-maturity had an estimated fair value of $1.2 million,
which was $36,000 greater than their amortized cost. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis," "Business of Bank--
Lending Activities--One- to Four-Family Lending" and "--Investment Activities."


POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION

         At June 30, 1998, the Bank's ratio of equity capital to total assets
was 17.68%. The Company's equity position will be significantly increased as a
result of the Conversion. On a pro forma basis as of June 30, 1998, assuming the
sale of Common Stock at the midpoint of the Estimated Price Range, the Company's
ratio of 

                                       10
<PAGE>
 
stockholders' equity to total assets would have been 37.4%. The Company's
ability to deploy this new capital through investments in interest-earning
assets, such as loans and securities, which bear rates of return comparable to
its current investments, will be significantly affected by industry competition
for such investments. The Company currently anticipates that it will take time
to prudently deploy such capital. In addition, although the Bank has operated
extremely efficiently in the past and management intends to continue to control
costs, the Bank will incur additional expenses operating as a public company.
Furthermore, the addition of new products and services may result in increased
expense, including the hiring of additional personnel. As a result of these
factors, the Company's return on equity initially is expected to be below its
historical return on equity and may be below peer group institutions after the
Conversion. Additionally, due to the implementation of stock-based benefit plans
such as the ESOP and the Stock-Based Incentive Plan, the Company's future
compensation expense will be increased, thereby, adversely affecting its net
income and return on equity.

LENDING RISKS ASSOCIATED WITH NON-RESIDENTIAL REAL ESTATE, CONSTRUCTION AND
DEVELOPMENT, MULTI-FAMILY, LAND AND LAND DEVELOPMENT AND CONSUMER LOANS

         At June 30, 1998, the Bank's non-residential real estate, construction
and development, land and land development, multi-family and consumer loan
portfolios totalled $70.2 million, or 16.06%, of total loans. Of this amount,
$3.4 million, or 0.78%, consisted of multi-family loans, $20.0 million, or
4.57%, consisted of construction and development loans, $35.3 million, or 8.08%,
consisted of non-residential real estate loans, which includes $12.1 million in
loans to local churches, $2.3 million or 0.53% consisted of land and land
development and $9.2 million, or 2.10%, consisted of consumer loans. These types
of loans are generally viewed as exposing the lender to greater risk of loss
than one- to four-family residential loans and, with the exception of consumer
loans, frequently have higher principal amounts. The specific risks associated
with these types of loans are discussed in "Business of the Bank -- Lending
Activities."

ESTABLISHMENT OF THE FOUNDATION

         The Company intends to establish the Foundation and to contribute to it
shares of common stock equal to 8% of the shares to be sold in the Conversion.
Establishment of the Foundation is subject to the approval of the Bank's members
at a Special Meeting. If approved by members, the establishment of the
Foundation will be dilutive to the voting and ownership interests of
stockholders and will have an adverse impact on the operating results of the
Company for its year ending December 31, 1998, possibly resulting in an
operating loss for that year.

         DILUTION OF STOCKHOLDERS' INTERESTS. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
be 718,080, 844,800, and 971,520 shares, with a value of $7,180,800, $8,448,000,
and $9,715,200, respectively, based on the public offering price of $10.00 per
share for the shares of common stock to be sold in the Conversion (the "Purchase
Price"). Upon completion of the Conversion and establishment of the Foundation,
the Company will have 12,144,000 shares issued and outstanding at the maximum of
the Estimated Price Range, of which the Foundation will own 971,520 shares, or
7.4% AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."

         NEGATIVE IMPACT ON EARNINGS. The Company will recognize an expense in
the amount of the contribution to the Foundation in the quarter in which it
occurs, which is expected to be the fourth quarter of 1998. Such expense will
reduce earnings and have a material adverse impact on the Company's earnings for
the fiscal year. The amount of the contribution will range from $7.2 million to
$9.7 million, depending on the amount of common stock sold in the Conversion.
The contribution expense will be partially offset by the tax deductibility of
the expense. The Company has been advised by its independent accountants that
the contribution to the Foundation will be deductible for federal income tax
purposes, subject to a limitation based on 10% of the Company's annual taxable
income. Assuming a contribution of $8.4 million in common stock, based on the
mid-point of the Estimated Price Range, the Company estimates a net tax effected
expense of $5.2 million. If the Foundation had been established at June 30,
1998, the Bank would have reported a net loss of $1.9 million for the first six
months of 1998 rather than reporting net income of $3.3 million. In addition to
the contribution to the Foundation, the Bank may in the future continue to make
ordinary charitable contributions within its community.

                                       11
<PAGE>
 
         POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. The Company estimates
that substantially all of the contribution to the Foundation should be
deductible for federal tax purposes over the permissible six-year period.
However, no assurance can be made that the Company will have sufficient pre-tax
income over the five-year period following the year in which the contribution is
initially made to fully utilize the carryover related to the excess
contribution. Furthermore, although the Company and the Bank have received an
opinion of their independent accountants that the Company will be entitled to
the deduction for the contribution to the Foundation, there can be no assurance
that the IRS will recognize the Foundation as a Section 501(c)(3) exempt
organization or that the deduction will be permitted. In such event, there would
be no tax benefit related to the Foundation.

         POTENTIAL ANTI-TAKEOVER EFFECT. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's common stock outstanding. However, pursuant to the terms of the
contribution as mandated by the OTS, the shares of common stock held by the
Foundation must be voted in the same ratio as all other shares of the Company's
common stock on all proposals considered by the stockholders of the Company. As
a result, the Company does not believe the Foundation will have an anti-takeover
effect on the Company. In the event, however, that the OTS were to waive this
voting restriction and not impose other restrictions and requirements with
respect to the Foundation, the Foundation's board of directors would exercise
sole voting power over such shares. See "The Conversion--Establishment of the
Charitable Foundation--Regulatory Conditions Imposed on the Foundation." If the
Foundation's shares are combined with shares purchased directly by officers and
directors of the Company, shares held by proposed stock benefit plans, if
approved by stockholders, and shares held in the Bank's ESOP, the aggregate of
such shares could exceed 20% of the Company's outstanding common stock, which
could enable management to defeat stockholder proposals requiring 80% approval.
Consequently, in the event the voting restriction was waived, this potential
voting control might preclude takeover attempts that certain stockholders deem
to be in their best interest, and might tend to perpetuate management. Since the
ESOP shares are allocated to all eligible employees of the Bank, and any
unallocated shares will be voted by an independent trustee, and because awards
under the proposed stock benefit plans may be granted to employees other than
executive officers and directors, management of the Company does not expect to
have voting control of all shares held or allocated by the ESOP or other stock
benefit plans. See "--Certain Anti-Takeover Provisions Which May Discourage
Takeover Attempts--Voting Control of Officers and Directors."

          There will be no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Company by the Foundation which may discourage takeover
attempts, including agreements related to voting, acquisition or disposition of
the Company's common stock. Finally, as the Foundation sells its shares of
common stock over time, its ownership interest and voting power in the Company
are expected to decrease.

         POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in only a
limited number of instances. As such, the Foundation may be subject to potential
challenges notwithstanding that the Boards of Directors of the Company and the
Bank have carefully considered the various factors involved in the establishment
of the Foundation. See "The Conversion--Establishment of the Charitable
Foundation--Purpose of the Foundation." If anyone were to institute an action
seeking to require that the Bank eliminate establishment of the Foundation, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Conversion or that any objecting persons would
not be ultimately successful in obtaining the elimination of the Foundation or
other equitable relief or monetary damages against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.


         APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at a Special Meeting. The Foundation will be considered as a
separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the
aggregate pro forma market value of the common stock to be sold in the
Conversion since the estimate of such amount takes into account the dilutive
impact of the issuance of shares to the Foundation. If the aggregate pro forma
market value of the common stock without the Foundation is either greater than
$139.7 million or less than $89.8 million, the Bank will establish a new

                                       12
<PAGE>
 
Estimated Price Range and commence a resolicitation of subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscriptions funds will be promptly
refunded with interest at the Bank's passbook rate of interest, or be permitted
to increase, decrease, or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. See "The Conversion--Stock
Pricing." A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond ________, 2000.

FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION

         The Bank is subject to extensive regulation and supervision as a
federal savings association. In addition, the Company, as a savings and loan
holding company, is subject to regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the Federal Deposit Insurance Corporation
("FDIC") or the Congress, could have a material impact on the Company, the Bank,
its operations or the Bank's Conversion. See "Regulation."

THRIFT RECHARTERING

         The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance fund
that covers most commercial bank deposits) and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill originally reported by the House Banking
Committee would have required federal thrifts to become national banks or state
banks within two years of enactment or they would have become national banks by
operation of law. OTS would have been abolished and its functions transferred to
the bank regulatory agencies. The bill as passed by the House of
Representatives, however, did not provide for the elimination of the federal
thrift charter or OTS, but did provide that unitary savings and loan holding
companies existing or applied for after March 31, 1998 would not have the
ability to engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
holding companies existing or applied for before such date would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Senate
has not acted on the legislation but if such legislation were enacted, the
Company would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Bank is unable to predict whether the legislation will be enacted
or, given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Bank is also unable to predict whether
the SAIF and BIF will eventually be merged or the federal thrift charter
eliminated, and what effect, if any, such legislation would have on the Bank.

EXPENSES ASSOCIATED WITH ESOP AND THE STOCK-BASED INCENTIVE PLAN

         If the ESOP and the Stock-Based Incentive Plan are implemented, the
Bank will recognize additional material employee compensation and benefit
expenses that stem from the shares purchased or granted to employees and
executives under those plans. The Bank cannot predict the actual amount of these
new expenses because applicable accounting practices require that they be based
on the fair market value of the shares of common stock when the expenses are
recognized. Expenses for the ESOP would be recognized when shares are committed
to be released to participants' accounts, and expenses for the Stock-Based
Incentive Plan would be recognized over the vesting period of awards made to
recipients. These expenses have been reflected in the pro forma financial
information under "Pro Forma Data" assuming the $10.00 per share purchase price
as fair market value. Actual expenses, however, will be based on the fair market
value of the common stock at the time of recognition, which may be higher or
lower than $10.00. For further discussion of these plans, see "Management of the
Bank -- Benefits -- Employee Stock Ownership Plan and Trust" and "-- Benefits --
Stock-Based Incentive Plan."

                                       13
<PAGE>
 
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN

         Following the Conversion, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of common stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of common
stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted stock options
under the Stock-Based Incentive Plan in an amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation. The
exercise of such Stock Options may be satisfied by the issuance of authorized
but unissued shares. If all of the Stock Options were to be exercised using
authorized but unissued common stock and the Stock Awards granted under the
Stock-Based Incentive Plan were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted at that
time by 12.3%.

VOTING CONTROL OF EXECUTIVE OFFICERS AND DIRECTORS.

         Directors and executive officers of the Bank and the Company expect to
purchase approximately 2.06% or 1.53% of the shares of Common Stock to be issued
in the Conversion, including shares issued to the Foundation, based upon the
minimum and the maximum of the Estimated Price Range, respectively. The ESOP may
be viewed as giving directors, officers and employees the potential to control
the voting of an additional 8% of the Company's common stock. In addition, the
Foundation will be funded with a contribution by the Company up to 8% of the
common stock sold in the Conversion. If a waiver of the voting restriction
imposed on such common stock is obtained from the OTS and the OTS does not
impose other restrictions, the Foundation shares may be voted as determined by
the directors of the Foundation who also will be directors or officers of the
Company and Bank. Management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders. As a result, this potential voting control may
preclude takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's Articles
of Incorporation and Bylaws."

CERTAIN ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING
INSTRUMENTS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS

         Certain provisions of the Company's Articles of Incorporation and
Bylaws and the Bank's Stock Articles of Incorporation and Bylaws, as well as
certain federal regulations and state laws, may assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of outstanding shares, and certain uniform price provisions for certain
business combinations. These provisions in the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate existing management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisitions of
the Company and the Bank."

ABSENCE OF MARKET FOR COMMON STOCK

         The Company and the Bank have never issued capital stock. The Company
has received conditional approval to have its common stock listed on Nasdaq
under the symbol "VCAP" upon completion of the Conversion. However, there can be
no assurance that an active and liquid trading market for the common stock will
develop or, once developed, will continue, nor can there be any assurances that
purchasers of the common stock will be able to sell their shares at or above the
purchase price. The absence or discontinuance of a market for the common stock
would have an adverse impact on both the price and liquidity of the common
stock. See "Market for the Common Stock."

                                       14
<PAGE>
 
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED

         The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 13,965,600 shares of common stock for
an aggregate purchase price of up to $139.7 million. An increase in the number
of shares issued will decrease a subscriber's pro forma net earnings per share
and stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the purchase price as a percentage of pro forma stockholders' equity
per share and net earnings per share.

YEAR 2000 COMPLIANCE

         As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Bank has conducted a comprehensive review of its
systems to identify applications that could be affected by the "Year 2000" issue
and has developed an implementation plan to address the issue. The Bank has
already begun testing on its own systems. The Bank has been told that its
primary service providers anticipate all reprogramming efforts will be complete
by December 31, 1998, allowing the Bank significant time for testing. The Bank
believes that its costs related to Year 2000 will be approximately $200,000.
There can be no assurances, however, that the performance by the Bank's vendors
will be effective to remedy all potential problems. To the extent the Company's
systems are not fully Year 2000 compliant, there can be no assurance that
potential systems interruptions or the cost necessary to update software would
not have a materially adverse effect on the Company's business, financial
condition, results of operations and business prospects.

COMPETITION

         Due to the significant growth in the Fredericksburg area in recent
years, the Bank has encountered a significant increase in competition for both
loan origination and attracting deposits. The Bank's primary market area is
highly competitive and the Bank faces direct competition from a significant
number of financial institutions, many with a state-wide or regional presence
and, in some cases, a national presence. Many of these financial institutions
are significantly larger and have greater financial resources than the Bank. The
Bank's competition for loans comes principally from commercial banks, savings
banks, credit unions, mortgage brokers, mortgage banking companies, and
insurance companies, and most recently, from one- to four-family home builders
who not only finance their own projects, but also arrange permanent financing
for purchasers. Its most direct competition for deposits has historically come
from savings, cooperative and commercial banks and credit unions. In addition,
the Bank faces significant competition for deposits from non-bank institutions
such as brokerage firms and insurance companies in such instruments as
short-term money market funds, corporate and government securities funds, mutual
funds and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. The Bank
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.

                       VIRGINIA CAPITAL BANCSHARES, INC.

         The Company was organized under Virginia law in September 1998 at the
direction of the Board of Directors of the Bank for the purpose of acquiring all
of the capital stock to be issued by the Bank in the Conversion. The Company has
applied to the OTS to become a savings and loan holding company and, upon
approval, will be subject to regulation by the OTS. Upon consummation of the
Conversion, the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation--Holding Company Regulation." After
completion of the Conversion, the Company's assets will consist of all of the
outstanding shares of the Bank's capital stock issued to the Company in the
Conversion and that portion of the net proceeds of the Offerings retained by the
Company. The Company intends to use part of the net proceeds it retains to loan
funds to the ESOP to enable the ESOP to 

                                       15
<PAGE>
 
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. Based on certain regulatory and market conditions, the
Company and Bank may, however, alternatively choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The Company
intends to initially invest any remaining proceeds in federal funds and short-
term U.S. Government and agency obligations. See "Use of Proceeds." Immediately
after the Conversion, the Company will have no significant liabilities.
Initially, the Company will neither own nor lease any property, but will instead
use the premises, equipment and furniture of the Bank. The management of the
Company is set forth under "Management of the Company." At the present time, the
Company does not intend to employ any persons other than officers of the Company
who are also officers of the Bank, but will utilize the support staff of the
Bank from time to time. Additional employees will be hired as appropriate to the
extent the Company expands its business in the future.

         Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities, should
it decide to do so, through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.

         The Company's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.


                            FREDERICKSBURG SAVINGS

         The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences. To
a lesser extent, the Bank invests in multi-family, construction and development,
commercial real estate and consumer loans. The Bank originates one- to
four-family loans primarily for investment. At June 30, 1998, the Bank's loans,
net, totalled $415.9 million, or 88.0% of total assets. To a significantly
lesser extent, the Bank also invests in securities, primarily consisting of U.S.
Government and agency obligations and highly rated corporate bonds. At June 30,
1998, the Bank's securities portfolio totalled $32.1 million, or 0.74% of total
assets, of which $30.9 million, or 96.6%, were classified as available-for-sale.
For the six months ended June 30, 1998, the Bank's deposit accounts averaged
$375.3 million, or 95.69% of total liabilities, of which $83.1 million, or
21.45%, were savings, money market and negotiable order of withdrawal ("NOW")
accounts (collectively, "core deposits"). The Bank also uses advances from the
FHLB-Atlanta as a source of funds. At June 30, 1998, such advances totalled $8.0
million, or 2.06% of total liabilities. See "Business of the Bank."

         The Bank's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.

                                       16
<PAGE>
 
         REGULATORY CAPITAL COMPLIANCE

         At June 30, 1998, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." Set forth below is a summary of the Bank's compliance with the
regulatory capital standards as of June 30, 1998, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Stock-Based Incentive Plan are deducted from pro
forma regulatory capital.

<TABLE> 
<CAPTION> 
                                                                              Fredericksburg Savings                            
                                                                  Pro Forma at June 30, 1998 Based Upon the Sale                
                                                                       of Common Stock at $10.00 Per Share                      
                                                      -----------------------------------------------------------------------   
                                                                                                                   13,965,600     
                                                             8,976,000          10,560,000         12,144,000        Shares     
                                                               Shares             Shares             Shares        (15% Above   
                                                            (Minimum of        (Midpoint of       (Maximum of      Maximum of   
                                      Historical at          Estimated          Estimated          Estimated        Estimated   
                                      June 30, 1998         Price Range)       Price Range)       Price Range)   Price Range)(1)
                                    -----------------   ------------------   ---------------    ---------------  ---------------
                                             Percent              Percent            Percent            Percent           Percent
                                               of                   of                 of                 of                of 
                                     Amount  Assets(2)   Amount   Assets(2)  Amount  Assets(2)  Amount  Assets(2) Amount  Assets(2)
                                    -------  --------   --------  --------   ------  --------   ------  --------  ------  ---------
<S>                                 <C>      <C>        <C>       <C>        <C>     <C>        <C>     <C>       <C>     <C> 
                                                                          (Dollars in thousands) 
GAAP Capital...................     $83,500   17.68%    $115,747   22.94%   $121,614  23.83%    $127,482  24.69%  $134,229  25.66%  
                                                                          
Tangible Capital:                                                                                                                   
  Capital Level................     $81,588   17.28%    $113,835   22.65%   $119,702  23.54%    $125,570  24.41%  $132,317  25.39%  
  Requirement..................       7,056    1.50        7,540    1.50       7,628   1.50        7,728   1.50      7,817   1.50  
                                    -------   -----     --------   -----    --------  -----     --------  -----   --------  -----
  Excess.......................     $74,532   15.78%    $106,295   21.15%   $112,074  22.04%    $117,752  22.91%  $124,500  23.89%  
                                    =======   =====     ========   =====    ========  =====     ========  =====   ========  =====   
Tier I Capital:                                                                                                                     
   Capital Level...............     $81,588   17.28%    $113,835   22.65%   $119,702  23.54%    $125,570  24.41%  $132,317  25.39%  
   Requirement(3)..............      14,112    3.00       15,080    3.00      15,256   3.00       15,432   3.00     15,634   3.00  
                                    -------   -----     --------   -----    --------  -----     --------  -----   --------  -----   
   Excess......................     $67,476   14.28%    $ 98,755   19.65%   $104,446  20.54%    $110,138  21.41%  $116,683  22.39%  
                                    =======   =====     ========   =====    ========  =====     ========  =====   ========  =====   
Risk-Based Capital:                                                                                                                 
  Capital Level(4)(5)..........     $85,131   30.20%    $117,378   39.39%   $123,245  40.96%    $129,113  42.49%  $135,860  44.22%  
  Requirement..................      22,549    8.00       23,839    8.00      24,073   8.00       24,308   8.00     24,578   8.00   
                                    -------   -----     --------   -----    --------  -----     --------  -----   --------  -----   
  Excess.......................     $62,582   22.20%    $ 93,539   31.39%   $ 99,172  32.96%    $104,805  34.49%  $111,282  36.22%  
                                    =======   =====     ========   =====    ========  =====     ========  =====   ========  =====   
</TABLE> 

____________________                                  
(1)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.

(2)  Tangible capital levels are shown as a percentage of tangible assets. Tier
     I capital levels are shown as a percentage of total adjusted assets. Risk-
     based capital levels are shown as a percentage of risk-weighed assets.

(3)  The current OTS core capital requirement for savings associations is 3% of
     total adjusted assets. The OTS has proposed core capital requirements which
     would require a core capital ratio of 3% of total adjusted assets for
     thrifts that receive the highest supervisory rating for safety and
     soundness and a 4% to 5% core capital ratio requirement for all other
     thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
     Requirements."

(4)  Assumes net proceeds are invested in assets that carry a 50% risk-
     weighting.

(5)  The difference between equity under generally accepted accounting
     principles ("GAAP") and regulatory risk-based capital is attributable to a
     portion of the general valuation allowance of $3.5 million and any
     unrealized gains on available-for-sale securities at June 30, 1998.

                                       17
<PAGE>
 
                                USE OF PROCEEDS

         Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $87.8 million and $119.4 million (or $137.7 million if the Estimated
Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion--Stock Pricing" as to the assumptions used to arrive at such amounts.
The Company will be unable to utilize any of the net proceeds of the Offerings
until the consummation of the Conversion.

         The Company will purchase all of the outstanding capital stock of the
Bank to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings, with the remaining net proceeds to be retained by the Company. Based
on net proceeds of $103.6 million, the Company expects to utilize $51.8 million
of net proceeds to purchase the common stock of the Bank. Such portion of net
proceeds will be added to the Bank's general funds which the Bank currently
intends to utilize for general corporate purposes, including: investment in
loans, particularly residential, commercial real estate, construction and
consumer loans; investment primarily in U.S. Treasury and Agency obligations,
including one year adjustable-rate mortgage-backed securities; the repayment of
FHLB advances; funding of stock-based benefit plans; and, to a lesser extent,
investment in short-term high quality investments, such as highly rated
corporate bonds and municipal bonds. The Bank also intends to seek opportunities
to expand its products and services and intends to examine opportunities to
expand its facilities and operations through acquisitions of other financial
institutions, branch offices or other financial services companies, however, the
Bank has no specific acquisition plans at this time.

         The Company intends to use a portion of the net proceeds it retains to
loan funds to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation.
Alternatively, the Company and Bank may choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The remaining
net proceeds retained by the Company will initially be invested in short-term
U.S. Treasury and Agency obligations. Based upon the sale of 8,976,000 shares or
12,144,000 shares at the minimum and maximum of the Estimated Price Range and
the issuance of shares to the Foundation, the amount of the loan to the ESOP
would be $7.8 million or $10.5 million, respectively (or $12.1 million if the
Estimated Price Range is increased by 15%) to be repaid approximately over a
twenty year period at the prevailing prime rate of interest, which currently is
8.5%. See "Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust."

         The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of financial institutions or
their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. The Company has no
current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender
("QTL"). See "Regulation--Holding Company Regulation" for a description of
certain regulations applicable to the Company.

         Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to conduct stock repurchases, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except (i) for an offer to all stockholders on
a pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a 12-month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 10 days prior to the
commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. See "Regulation--Prompt Corrective Regulatory Action."
In addition, under current OTS policies, repurchases may be allowed in the first
year following Conversion and in amounts greater than 5% in the second and third
years following Conversion provided there are valid and compelling business
reasons for such repurchases and the OTS does not object to such repurchases.

                                       18
<PAGE>
 
         Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but not
be limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
Although the Company has no current plans to repurchase its stock, in the event
the Company does determine to repurchase stock, such repurchases may be made at
market prices which may be in excess of the Purchase Price in the Conversion.

         Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Conversion--Certain
Restrictions on Purchase or Transfer of Shares after Conversion."


                                DIVIDEND POLICY

         Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Depending on market conditions, the Company's Board of
Directors intends to pay cash dividends on the Comon Stock; however no decision
has been made regarding the level of dividends that will actually be paid. In
addition, from time to time, in an effort to manage capital to a reasonable
level, the Board of Directors may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends. Declarations of
dividends by the Board of Directors, if any, will depend upon a number of
factors, including the amount of net proceeds retained by the Company in the
Conversion, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.

         The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
For information concerning federal regulations which apply to the Bank in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation--Distributions" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."

         Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Virginia law,
which generally provide that a Virginia corporation may make distributions to
its stockholders unless, after giving effect to the distribution, (i) the
corporation would not be able to pay its debts as they become due in the usual
course of business, or (ii) the corporation's total assets would be less than
the sum of its total liabilities plus (unless the articles of incorporation
permit otherwise, which in the case of the Company they do not) the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.

         Additionally, in connection with the Conversion, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the OTS.

                                       19
<PAGE>
 
                          MARKET FOR THE COMMON STOCK

         The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on Nasdaq
under the symbol "VCAP" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on Nasdaq or that an active and liquid trading market will
develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the purchase price of the Common Stock after the Conversion.

                                       20
<PAGE>
 
                                CAPITALIZATION

         The following table presents the unaudited historical consolidated
capitalization of the Bank at June 30, 1998 and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."

<TABLE> 
<CAPTION> 
                                                                              Company Pro Forma Based Upon Sale of Common Stock    
                                                                                             at $10.00 Per Share                   
                                                                              ---------------------------------------------------  
                                                                              8,976,000    10,560,000   12,144,000   13,965,600    
                                                                                Shares       Shares       Shares       Shares      
                                                                              (Minimum of   (Midpoint    (Maximum    (15% Above    
                                                                              (Minimum of       of           of       Maximum of    
                                                                               Estimated     Estimated    Estimated    Estimated    
                                                                     Bank       Price          Price        Price        Price
                                                                   Historical   Range)        Range)       Range)      Range)(1)    
                                                                   ---------- ------------ ------------ ------------ ------------  
<S>                                                                <C>        <C>          <C>          <C>          <C>           
                                                                                               (In thousands)                      
                                                                                                                                   
Deposits(2)...................................................      $373,719     $373,719     $373,719     $373,719     $373,719
FHLB borrowings...............................................         8,000        8,000        8,000        8,000        8,000
                                                                   ---------     --------    ---------    --------      --------
Total deposits and borrowings.................................      $381,719     $381,719     $381,719     $381,719     $381,719
                                                                    ========     ========     ========     ========     ========
Stockholders' equity:
  Preferred Stock, $.01 par value, 5,000,000
    shares authorized; none to be issued......................     $      --    $      --   $       --   $       --   $       --
  Common Stock, $.01 par value, 75,000,000 shares
    authorized; shares to be issued as reflected..............            --           97          114          131          151
  Additional paid-in capital(3)...............................            --       87,663      103,486      119,309      137,505
  Retained earnings(4)........................................        83,216       83,216       83,216       83,216       83,216
  Net unrealized gain on available-for-sale securities........           284          284          284          284          284
  Less:  Expense of contribution to the Foundation,
             net of taxes(5)..................................            --       (4,452)      (5,238)      (6,023)      (6,927)
  Plus:  Shares issued to the Foundation......................            --        7,181        8,448        9,715       11,172
  Less:  Common Stock acquired by the ESOP(6).................            --       (7,755)      (9,124)     (10,492)     (12,066)
         Common Stock acquired by the Stock-Based
            Incentive Plan(7).................................            --       (3,878)      (4,562)      (5,246)      (6,033)
                                                                   ---------  -----------  -----------  -----------  -----------

Total stockholders' equity....................................       $83,500     $162,356     $176,624     $190,894     $207,302
                                                                     =======     ========     ========     ========     ========    

</TABLE> 

________________
(1)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.
(2)  Does not reflect withdrawals from deposit accounts for the purchase of
     Common Stock in the Conversion. Such withdrawals would reduce pro forma
     deposits by the amount of such withdrawals.
(3)  No effect has been given to the issuance of additional shares of Common
     Stock to the Foundation at a value of $10.00 per share or to the issuance
     of additional shares pursuant to the Company's Stock-Based Incentive Plan
     intended to be adopted by the Company. An amount equal to 10% of the shares
     of Common Stock issued in the Conversion, including shares issued to the
     Foundation, will be reserved for issuance upon the exercise of options to
     be granted under the Stock-Based Incentive Plan. See "Risk Factors--
     Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote 4 to the
     tables under "Pro Forma Data" and "Management of the Bank--Benefits--Stock-
     Based Incentive Plan."
(4)  The retained earnings of the Bank will be substantially restricted after
     the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
     Federal Savings Institution Regulation--Limitations on Capital
     Distributions."
(5)  Represents the value of the contribution of Common Stock to the Foundation
     at $10.00 per share reduced by the associated tax benefits $2.7 million,
     $3.2 million, $3.7 million and $4.2 million at the minimum, midpoint,
     maximum and 15% above the maximum of the Estimated Price Range,
     respectively, based on an effective tax rate of 38%. The realization of the
     federal tax benefit is limited annually to 10% of the Company's annual
     taxable income, subject to the ability of the Company to carry forward any
     unused portion of the deduction for five years following the year in which
     the contribution is made. For state income tax purposes, the Bank will not
     be able to utilize any such carry forward.
(6)  Assumes that 8% of the shares issued in connection with the Conversion,
     including shares issued to the Foundation, will be purchased by the ESOP
     and that the funds used to acquire such shares will be borrowed from the
     Company. See "Use of Proceeds." The Common Stock acquired by the ESOP is
     reflected as a reduction of stockholders' equity. See "Management of the
     Bank--Benefits--Employee Stock Ownership Plan and Trust."
(7)  Assumes that subsequent to the Conversion, an amount equal to 4% of the
     shares of Common Stock issued in the Conversion, including shares issued to
     the Foundation, is purchased by the Stock-Based Incentive Plan through open
     market purchases at the offering price of $10.00 per share. The Common
     Stock purchased by the Stock-Based Incentive Plan is reflected as a
     reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
     Effect of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro
     Forma Data" and "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."

                                       21
<PAGE>

                                PRO FORMA DATA
 
          The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $87.8 million and $119.4 million (or $137.7
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) Trident will receive a fee of $525,000 for its
marketing services and financial advisory role in connection with the
Conversion; and (ii) other Conversion expenses, excluding the marketing fees
paid to Trident, will be approximately $1.5 million. Actual Conversion expenses
may vary from those estimated.

          Pro forma consolidated net income of the Company for the six months
ended June 30, 1998, and for the year ended December 31, 1997, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.41% and 5.41%
which is equivalent to the one year Treasury rate at June 30, 1998. The
calculations have been based on the one year Treasury rate, as opposed to the
Bank's yield on average assets, because the Bank will initially invest the
proceeds in short-term assets, at a lower yield, and will more effectively
invest the proceeds over time.. The tables below do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock or the effect
of any possible use of the net Conversion proceeds. The pro forma after-tax
yields for the Company and the Bank are assumed to be 3.35% and 3.35% for the
six months ended June 30, 1998 and for the year ended December 31, 1997,
respectively. All calculations were based on an effective combined federal and
state income tax rate of 38%. Historical and pro forma net earnings per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, as adjusted to give effect to unallocated and
uncommitted shares held by the ESOP. Historical and pro forma stockholders'
equity per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock issued in the
Conversion, including the issuance of shares to the Foundation.

          The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Pro forma consolidated stockholders' equity represents the difference between
the stated amount of assets and liabilities of the Company. The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be stated in an amount greater than amounts that would be
available for distribution to stockholders in the event of liquidation.

          The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the six months ended June 30, 1998 and at or
for the year ended December 31, 1997, based on the assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give effect
to the Stock-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion and presented to stockholders for approval at a
meeting of stockholders. See Footnote 3 to the tables and "Management of the
Bank--Benefits--Stock-Based Incentive Plan." No effect has been given in the
tables to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock-Based Incentive Plan to be adopted by the Board
of Directors of the Company and presented to stockholders for approval at a
meeting of stockholders, nor does book value give any effect to the liquidation
account to be established for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders or, in the event of liquidation of the
Bank, to the tax effect of the bad debt reserve and other factors. See Footnote
3 to the tables below, "The Conversion--Liquidation Rights" and "Management of
the Bank--Benefits--Stock-Based Incentive Plan." THE FOLLOWING TABLES ASSUME
THAT THE FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVE
EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON
STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE
VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLES BELOW, TAKES INTO ACCOUNT
THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.

                                       22
<PAGE>
 
<TABLE>
<CAPTION>
                                                                        At or For the Six Months Ended June 30, 1998
                                                            -------------------------------------------------------------------
                                                                                                               13,965,600
                                                                  8,976,000      10,560,000     12,144,000    Shares Sold
                                                                 Shares Sold    Shares Sold    Shares Sold     at $10.00
                                                                  at $10.00      at $10.00      at $10.00      Per Share
                                                                  Per Share      Per Share      Per Share      (15% above
                                                                  (Minimum       (Midpoint      (Maximum       Maximum of
                                                                of Estimated   of Estimated   of Estimated     Estimated
                                                                Price Range)   Price Range)   Price Range)  Price Range)(8)
                                                                ------------   ------------   -----------   ---------------
                                                                          (In thousands, except per share amounts)
<S>                                                         <C>                <C>            <C>           <C>
Gross proceeds.............................................         $89,760       $105,600      $121,440        $139,656
Plus: Shares issued to Foundation (equal to 8% of the
  stock sold in the Conversion)............................           7,181          8,448         9,715          11,172
                                                                   --------       --------      --------        --------
 Pro forma market capitalization...........................         $96,941       $114,048      $131,155        $150,828
                                                                   ========       ========      ========        ========
Gross proceeds.............................................         $89,760       $105,600      $121,440        $139,656
 Less: Offering expenses and commission....................          (2,000)        (2,000)       (2,000)         (2,000)
                                                                   --------       --------      --------        --------
   Estimated net proceeds..................................          87,760        103,600       119,440         137,656
 Less: Common Stock acquired by the ESOP...................          (7,755)        (9,124)      (10,492)        (12,066)
       Common Stock to be acquired by Stock-Based
        Incentive Plan.....................................          (3,878)        (4,562)       (5,246)         (6,033)
                                                                   --------       --------      --------        --------
   Estimated net proceeds, as adjusted.....................         $76,127        $89,914      $103,702        $119,557
                                                                   ========       ========      ========        ========
Consolidated net earnings(1):
 Historical................................................          $3,320         $3,320        $3,320          $3,320
 Pro forma earnings on net proceeds........................           1,275          1,506         1,737           2,003
 Less: Pro forma ESOP adjustment(2)........................            (120)          (141)         (163)           (187)
       Pro forma Stock-Based Incentive Plan
        adjustment(3)......................................            (240)          (283)         (325)           (374)
                                                                   --------       --------      --------        --------
   Pro forma net earnings..................................          $4,235         $4,402        $4,569          $4,762
                                                                   ========       ========      ========        ========
Per share net earnings(1)(4):
 Historical................................................          $ 0.37         $ 0.32        $ 0.27          $ 0.24
 Pro forma earnings on net proceeds........................            0.14           0.14          0.14            0.14
 Less: Pro forma ESOP adjustment(2)........................           (0.01)         (0.01)        (0.01)          (0.01)
       Pro forma Stock-Based Incentive Plan
        adjustment(3)......................................           (0.03)         (0.03)        (0.03)          (0.03)
                                                                   --------       --------      --------        --------
   Pro forma net earnings per share........................          $ 0.47         $ 0.42        $ 0.37          $ 0.34
                                                                   ========       ========      ========        ========
Stockholders' equity:
 Historical................................................       $  83,500      $  83,500     $  83,500       $  83,500
 Estimated net proceeds....................................          87,760        103,600       119,440         137,656
 Plus: Tax benefit of Foundation(1)........................           2,729          3,210         3,692           4,245
 Less: Common Stock acquired by ESOP(2)....................          (7,755)        (9,124)      (10,492)        (12,066)
       Common Stock to be acquired by Stock-Based
        Incentive Plan(3)..................................          (3,878)        (4,562)       (5,246)         (6,033)
                                                                   --------       --------      --------        --------
   Pro forma stockholders' equity(3)(5)(6).................        $162,356       $176,624      $190,894        $207,302
                                                                   ========       ========      ========        ========
Stockholders' equity per share(7):
 Historical................................................         $  8.61        $  7.32       $  6.37         $  5.54
 Estimated net proceeds....................................            9.05           9.08          9.11            9.13
 Plus: Tax benefit of Foundation...........................            0.28           0.28          0.28            0.28
 Less: Common Stock acquired by ESOP(2)....................           (0.80)         (0.80)        (0.80)          (0.80)
       Common Stock to be acquired by Stock-Based
        Incentive Plan(3)..................................           (0.40)         (0.40)        (0.40)          (0.40)
                                                                   --------       --------      --------        --------
   Pro forma stockholders' equity per share(3)(5)(6).......          $16.74         $15.48        $14.56          $13.75
                                                                   ========       ========      ========        ========
Offering price as a percentage of pro forma stockholders'
 equity per share..........................................           59.74%         64.60%        68.68%          72.73%
Offering price to pro forma net earnings
 per share (annualized)....................................           10.64          11.90         13.51           14.71
</TABLE>

                                                        (Footnotes on next page)

                                       23
<PAGE>
 
_____________________
(1)  Does not give effect to the non-recurring expense that is expected to be
     recognized in the fourth quarter of 1998 if the establishment of the
     Foundation is approved. In that event, the Company will recognize an after-
     tax expense for the amount of the contribution to the Foundation which is
     expected to be $4.5 million, $5.2 million, $6.0 million and $6.9 million at
     the minimum, midpoint, maximum, and maximum as adjusted, of the Estimated
     Price Range, respectively, based on an effective tax rate of 38%.
(2)  It is assumed that 8% of the shares of Common Stock issued in the
     Conversion, including shares issued to the Foundation, will be purchased by
     the ESOP. For purposes of this table, the funds used to acquire such shares
     are assumed to have been borrowed by the ESOP from the Company. See "Use of
     Proceeds." The amount to be borrowed is reflected as a reduction of
     stockholders' equity. The Bank intends to make annual contributions to the
     ESOP in an amount at least equal to the principal and interest requirement
     of the debt. The Bank's total annual payment of the ESOP debt is based upon
     20 equal annual installments of principal, with an assumed interest rate at
     8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
     to the ESOP is equivalent to the debt service requirement for the six
     months ended June 30, 1998 and was made at the end of the period; (ii) that
     19,388, 22,810, 26,231 and 30,166 shares at the minimum, midpoint, maximum
     and 15% above the maximum of the Estimated Price Range, respectively, were
     committed to be released during the six months ended June 30, 1998 at an
     average fair value of $10.00 per share in accordance with Statement of
     Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
     released were considered outstanding for purposes of the net earnings per
     share calculations. A tax rate of 38% was used for all calculations. See
     "Management of the Bank--Benefits--Employee Stock Ownership Plan and
     Trust."
(3)  Gives effect to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion, and assumes any necessary stockholder
     or regulatory approval of the Stock-Based Incentive Plan has been received.
     The Stock-Based Incentive Plan intends to acquire an amount of Common Stock
     equal to 4% of the shares of Common Stock issued in the Conversion,
     including shares issued to the Foundation, or 387,763, 456,192, 524,621 and
     603,314 shares of Common Stock at the minimum, midpoint, maximum and 15%
     above the maximum of the Estimated Price Range, respectively, either
     through open market purchases, if permissible, or from authorized but
     unissued shares of Common stock or treasury stock of the Company, if any.
     Funds used by the Stock-Based Incentive Plan to purchase the shares will be
     contributed to the Stock-Based Incentive Plan by the Bank. In calculating
     the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
     the shares were acquired by the Stock-Based Incentive Plan at the beginning
     of the period presented in open market purchases at the Purchase Price and
     that 10% of the amount contributed was an amortized expense during such
     period. The issuance of authorized but unissued shares of the Company's
     Common Stock to the Stock-Based Incentive Plan instead of open market
     purchases would dilute the voting interests of existing stockholders by
     approximately 3.8% and pro forma net earnings per share would be $0.46,
     $0.41, $0.37 and $0.34 at the minimum, midpoint, maximum and 15% above the
     maximum of the range, respectively, and pro forma shareholders' equity per
     share would be $16.10, $14.89, $13.99 and $13.22 at the minimum, midpoint,
     maximum and 15% above the maximum of the range, respectively. There can be
     no assurance that stockholder approval of the Stock-Based Incentive Plan
     will be obtained, or that the actual purchase price of the shares will be
     equal to the Purchase Price. A tax rate of 38% was used for all
     calculations. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."
(4)  The number of shares used in the calculation of historical and pro forma
     earnings per share was 8,937,942, 10,515,226, 12,092,509 and 13,906,386
     shares at the minimum, midpoint, maximum and 15% above the maximum of the
     Estimated Price Range, respectively.
(5)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion. An amount equal to 10% of the Common
     Stock issued in the Conversion, including shares issued to the Foundation,
     or 969,408, 1,140,480, 1,311,552 and 1,508,285 shares at the minimum,
     midpoint, maximum and 15% above the maximum of the Estimated Price Range,
     respectively, will be reserved for future issuance upon the exercise of
     options to be granted under the Stock-Based Incentive Plan. The issuance of
     Common Stock pursuant to the exercise of options under the Stock-Based
     Incentive Plan will result in the dilution of existing stockholders'
     interests. Assuming all options were exercised at the end of the period at
     an exercise price of $10.00 per share, the pro forma net earnings per share
     would be $0.43, $0.38, $0.34 and $0.31, respectively, and the pro forma
     stockholders' equity per share would be $16.13, $14.99, $14.14 and $13.40,
     respectively. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."
(6)  The retained earnings of the Bank will continue to be substantially
     restricted after the Conversion. See "Dividend Policy," "The Conversion--
     Liquidation Rights" and "Regulation--Federal Savings Institution 
     Regulation--Limitation on Capital Distributions."
(7)  The number of shares used in the calculation of historical and pro forma
     stockholders' equity per share was 9,694,080, 11,404,800, 13,115,520 and
     15,082,848 shares at the minimum, midpoint, maximum and 15% above the
     maximum of the Estimated Price Range, respectively.
(8)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.

                                       24
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                          At or For the Year Ended December 31, 1997
                                                           ------------------------------------------------------------------------
                                                                                                                   13,965,600
                                                            8,976,000          10,560,000       12,144,000         Shares Sold
                                                           Shares Sold         Shares Sold      Shares Sold         at $10.00
                                                            at $10.00          at $10.00        at $10.00           Per Share      
                                                           Per Share           Per Share        Per Share          (15% above
                                                          (Minimum             (Midpoint        (Maximum           Maximum of
                                                          of Estimated         of Estimated     of Estimated        Estimated   
                                                          Price Range)         Price Range)     Price Range)       Price Range)(8)
                                                          -------------        ------------     -----------        ----------------
                                                                        (In thousands, except per share amounts)
<S>                                                        <C>                <C>                <C>                <C> 
Gross proceeds..........................................   $    89,760        $   105,600        $  121,440         $    139,656
Plus:    Shares issued to Foundation (equal to 8%
  of the stock sold in the Conversion)..................         7,181              8,448             9,715               11,172
                                                           -----------        -----------        ----------         ------------
  Pro forma market capitalization.......................   $    96,941        $   114,048        $  131,155         $    150,828
                                                           ===========        ===========        ==========         ============
Gross proceeds..........................................   $    89,760        $   105,600        $  121,440         $    139,656
  Less:    Offering expenses and commission.............        (2,000)            (2,000)           (2,000)              (2,000)
    Estimated net proceeds..............................        87,760            103,600           119,440              137,656
  Less:    Common Stock acquired by the ESOP............        (7,755)            (9,124)          (10,492)             (12,066)
           Common Stock to be acquired by Stock-Based
            Incentive Plan..............................        (3,878)            (4,562)           (5,246)              (6,033)
                                                           -----------        -----------        ----------         ------------
    Estimated net proceeds, as adjusted.................   $    76,127        $    89,914        $  103,702         $    119,557
                                                           ===========        ===========        ==========         ============
Consolidated net earnings(1):
  Historical............................................   $     6,425        $     6,425        $    6,425         $      6,425
  Pro forma earnings on net proceeds....................         2,550              3,012             3,474                4,005
  Less:    Pro forma ESOP adjustment(2).................          (240)              (283)             (325)                (374)
           Pro forma Stock-Based Incentive Plan
            adjustment(3)...............................          (481)              (566)             (651)                (748)
                                                           -----------        -----------        ----------         ------------
     Pro forma net earnings.............................   $     8,254        $     8,588        $    8,923         $      9,308
                                                           ===========        ===========        ==========         ============
Per share net earnings(1)(4):
  Historical............................................   $      0.72        $      0.61        $     0.53         $       0.46
  Pro forma earnings on net proceeds....................          0.28               0.29              0.29                 0.29
  Less:  Pro forma ESOP adjustment(2)...................         (0.03)             (0.03)            (0.03)               (0.03)
         Pro forma Stock-Based Incentive Plan
          adjustment(3).................................         (0.05)             (0.05)            (0.05)               (0.05)
                                                           -----------        -----------        ----------         ------------
     Pro forma net earnings per share...................   $      0.92        $      0.82        $     0.74         $       0.67
                                                           ===========        ===========        ==========         ============
Stockholders' equity:
  Historical............................................   $    80,073        $    80,073        $   80,073         $     80,073
  Estimated net proceeds................................        87,760            103,600           119,440              137,656
  Plus:    Tax benefit of Foundation(1).................         2,729              3,210             3,692                4,245
  Less:    Common Stock acquired by ESOP(2).............        (7,755)            (9,124)          (10,492)             (12,066)
           Common Stock to be acquired by Stock-Based
            Incentive Plan(3)...........................        (3,878)            (4,562)           (5,246)              (6,033)
                                                           -----------        -----------        ----------         ------------
     Pro forma stockholders' equity(3)(5)(6)............   $   158,929        $   173,197        $  187,467         $    203,875
                                                           ===========        ===========        ==========         ============
Stockholders' equity per share(7):
  Historical............................................   $      8.26        $      7.02        $     6.11         $       5.31
  Estimated net proceeds................................          9.05               9.08              9.11                 9.13
  Plus:    Tax benefit of Foundation....................          0.28               0.28              0.28                 0.28
  Less:    Common Stock acquired by ESOP(2).............         (0.80)             (0.80)            (0.80)               (0.80)
           Common Stock to be acquired by Stock-Based
            Incentive Plan(3)...........................         (0.40)             (0.40)            (0.40)               (0.40)
                                                           -----------        -----------        ----------         ------------
     Pro forma stockholders' equity per share(3)(5)(6)..   $     16.39        $     15.18        $    14.30         $      13.52
                                                           ===========        ===========        ==========         ============
Offering price as a percentage of pro forma
 stockholders' equity per share.........................         61.01%             65.88%            69.93%               73.96%
Offering price to pro forma net earnings
  per share.............................................         10.87              12.20             13.51                14.93
</TABLE> 

                                                        (Footnotes on next page)

                                       25
<PAGE>
 
--------------
(1)  Does not give effect to the non-recurring expense that will be recognized
     in the fourth quarter of 1998 if the establishment of the Foundation is
     approved. In that event, the Company will recognize an after-tax expense
     for the amount of the contribution to the Foundation which is expected to
     be $4.5 million, $5.2 million, $6.0 million and $6.9 million at the
     minimum, midpoint, maximum, and maximum as adjusted, of the Estimated Price
     Range, respectively, based on an effective tax rate of 38%.

(2)  It is assumed that 8% of the shares of Common Stock issued in the
     Conversion, including shares issued to the Foundation, will be purchased by
     the ESOP. For purposes of this table, the funds used to acquire such shares
     are assumed to have been borrowed by the ESOP from the Company. See "Use of
     Proceeds." The amount to be borrowed is reflected as a reduction of
     stockholders' equity. The Bank intends to make annual contributions to the
     ESOP in an amount at least equal to the principal and interest requirement
     of the debt. The Bank's total annual payment of the ESOP debt is based upon
     20 equal annual installments of principal, with an assumed interest rate at
     8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
     to the ESOP is equivalent to the debt service requirement for the year
     ended December 31, 1997 and was made at the end of the period; (ii) that
     38,776, 45,619, 52,462 and 60,331 shares at the minimum, the midpoint,
     maximum and 15% above the maximum of the Estimated Price Range,
     respectively, were committed to be released during the year ended December
     31, 1997 at an average fair value of $10.00 per share in accordance with
     Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
     committed to be released were considered outstanding for purposes of the
     net earnings per share calculations. A tax rate of 38% was used for all
     calculations. See "Management of the Bank--Benefits--Employee Stock
     Ownership Plan and Trust."

(3)  Gives effect to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion, and assumes any necessary stockholder
     or regulatory approval of the Stock-Based Incentive Plan has been received.
     The Stock-Based Incentive Plan intends to acquire an amount of Common Stock
     equal to 4% of the shares of Common Stock issued in the Conversion,
     including shares issued to the Foundation, or 387,763, 456,192, 524,621 and
     603,314 shares of Common Stock at the minimum, midpoint, maximum and 15%
     above the maximum of the Estimated Price Range, respectively, either
     through open market purchases, if permissible, or from authorized but
     unissued shares of Common stock or treasury stock of the Company, if any.
     Funds used by the Stock-Based Incentive Plan to purchase the shares will be
     contributed to the Stock-Based Incentive Plan by the Bank. In calculating
     the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
     the shares were acquired by the Stock-Based Incentive Plan at the beginning
     of the period presented in open market purchases at the Purchase Price and
     that 20% of the amount contributed was an amortized expense during such
     period. The issuance of authorized but unissued shares of the Company's
     Common Stock to the Stock-Based Incentive Plan instead of open market
     purchases would dilute the voting interests of existing stockholders by
     approximately 3.8% and pro forma net earnings per share would be $0.90,
     $0.80, $0.72 and $0.65 at the minimum, midpoint, maximum and 15% above the
     maximum of the range, respectively, and pro forma stockholders' equity per
     share would be $15.76, $14.60, $13.74 and $13.00 at the minimum, midpoint,
     maximum, and 15% above the maximum of the range, respectively. There can be
     no assurance that stockholder approval of the Stock-Based Incentive Plan
     will be obtained, or that the actual purchase price of the shares will be
     equal to the Purchase Price. A tax rate of 38% was used for all
     calculations. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."

(4)  The number of shares used in the calculation of historical and pro forma
     earnings per share was 8,957,330, 10,538,035, 12,118,740 and 13,936,551
     shares at the minimum, midpoint, maximum and 15% above the maximum of the
     Estimated Price Range, respectively.

(5)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion. An amount equal to 10% of the Common
     Stock issued in the Conversion, including shares issued to the Foundation,
     or 969,408, 1,140,480, 1,311,552 and 1,508,285 shares at the minimum,
     midpoint, maximum and 15% above the maximum of the Estimated Price Range,
     respectively, will be reserved for future issuance upon the exercise of
     options to be granted under the Stock-Based Incentive Plan. The issuance of
     Common Stock pursuant to the exercise of options under the Stock-Based
     Incentive Plan will result in the dilution of existing stockholders'
     interests. Assuming all options were exercised at the end of the period at
     an exercise price of $10.00 per share, the pro forma net earnings per share
     would be $0.83, $0.74, $0.66 and $0.60, respectively, and the pro forma
     stockholders' equity per share would be $15.81, $14.71, $13.90 and $13.20,
     respectively. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."

(6)  The retained earnings of the Bank will continue to be substantially
     restricted after the Conversion. See "Dividend Policy," "The Conversion--
     Liquidation Rights" and "Regulation--Federal Savings Institution 
     Regulation--Limitation on Capital Distributions."

(7)  The number of shares used in the calculation of historical and pro forma
     stockholders' equity per share was 9,694,080, 11,404,800, 13,115,520 and
     15,082,848 shares at the minimum, midpoint, maximum and 15% above the
     maximum of the Estimated Price Range, respectively.

(8)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.

                                       26
<PAGE>
 
     COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION


         If the Foundation were not being established as part of the Conversion,
FinPro has estimated that the pro forma market capitalization of the Bank would
be approximately $122.0 million at the midpoint, which is approximately $8.0
million greater than the pro forma market capitalization of the Bank if the
Foundation is approved by members of the Bank and would result in approximately
a $16.4 million increase, or 15.5%, in the amount of Common Stock offered for
sale in the Conversion. The pro forma price to book ratio and pro forma price to
earnings ratio would be approximately the same under both the current appraisal
and the estimate of the value of the Company without the Foundation. Further,
assuming the midpoint of the Estimated Price Range, pro forma stockholders'
equity per share and pro forma earnings per share would be essentially the same
with the Foundation as without the Foundation. This estimate by FinPro was
prepared at the request of the OTS and is solely for purposes of providing
members with sufficient information with which to make an informed decision on
the Foundation. There is no assurance that in the event the Foundation is not
approved at the Special Meeting of Members that the appraisal prepared at that
time would conclude that the pro forma market value of the Company would be the
same as that estimated herein. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.

         For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at June 30, 1998.

<TABLE> 
<CAPTION> 
                                                                                                                  AT THE MAXIMUM,
                                               AT THE MINIMUM         AT THE MIDPOINT        AT THE MAXIMUM         AS ADJUSTED
                                           ---------------------  --------------------- ---------------------  ---------------------
                                               WITH       NO         WITH        NO        WITH        NO         WITH        NO 
                                           FOUNDATION FOUNDATION  FOUNDATION FOUNDATION FOUNDATION FOUNDATION  FOUNDATION FOUNDATION
                                           ---------- ----------  ---------- ---------- ---------- ----------  ---------- ----------
<S>                                        <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
                                                                           (DOLLARS IN THOUSANDS)
                                                                                                                                  
Estimated offering amount..................  $ 89,760   $103,700    $105,600   $122,000   121,440    $140,300   $139,656   $161,345
Pro forma market capitalization............    96,941    103,700     114,048    122,000   131,155     140,300    150,828    161,345
Total assets...............................   551,136    561,536     565,404    577,640   579,674     593,744    596,082    612,263
Total liabilities..........................   388,780    388,780     388,780    388,780   388,780     388,780    388,780    388,780
Pro forma stockholders' equity.............   162,356    172,756     176,624    188,860   190,894     204,964    207,302    223,483
Pro forma consolidated
   net earnings............................     4,235      4,429       4,402      4,631     4,569       4,833      4,762      5,065
Pro forma stockholders' equity
  per share................................     16.74      16.66       15.48      15.48     14.56       14.61      13.75      13.86
Pro forma consolidated net
  earnings per share.......................      0.47       0.47        0.42       0.42      0.37        0.38       0.34       0.34
Pro Forma Pricing Ratios:
  Offering price as a percentage
    of pro forma stockholders'
    equity per share.......................     59.74%     60.02%      64.60%     64.60%    68.68%      68.45%     72.73%     72.15%

  Offering price to pro forma net
    earnings per share.....................     10.64x     10.64x      11.90x     11.90x    13.51x      13.16x     14.71x     14.71x

  Pro forma market capitalization
    to total assets........................     17.59%     18.47%      20.17%     21.12%    22.63%      23.63%     25.30%     26.35%

Pro Forma Financial Ratios:
  Return on total assets...................      1.54%      1.58%       1.56%      1.60%     1.58%       1.63%      1.60%      1.65%

  Return on stockholders' equity
    (annualized)...........................      5.22%      5.13%       4.98%      4.90%     4.79%       4.72%      4.59%      4.53%

  Stockholders' equity to total assets.....     29.46%     30.76%      31.24%     32.70%    32.93%      34.52%     34.78%     36.50%

</TABLE> 

                                       27
<PAGE>
 
                            FREDERICKSBURG SAVINGS
                             STATEMENTS OF INCOME


         The following Statements of Income for each of the years in the
three-year period ended December 31, 1997 have been audited by Cherry Bekaert &
Holland, L.L.P. independent certified public accountants, whose report thereon
is included elsewhere in this Prospectus. With respect to the information for
the six months ended June 30, 1998 and 1997, which is unaudited, in the opinion
of management, all adjustments necessary for a fair presentation of such interim
periods have been included and are of a normal recurring nature. Results for the
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. These Statements of
Income should be read in conjunction with the Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.


<TABLE> 
<CAPTION> 
                                                             FOR THE SIX MONTHS                 FOR THE YEAR              
                                                               ENDED JUNE 30,                 ENDED DECEMBER 31,         
                                                          ----------------------    -----------------------------------  
                                                             1998         1997          1997         1996       1995        
                                                          ------------ ---------    ------------- --------- ------------   
                                                                (UNAUDITED)          (IN THOUSANDS)                        
<S>                                                       <C>          <C>          <C>           <C>          <C>         
Interest income:                                                                                                           
   Loans receivable:                                                                                                       
      Mortgage loans...................................      $15,621     $15,814        $31,820     $31,402     $30,832 
      Consumer and other loans.........................          383         330            696         543         611 
   Investment securities...............................        1,388       1,442          2,929       3,285       4,133 
                                                            --------    --------       --------    --------    -------- 
      Total interest income............................       17,392      17,586         35,445      35,230      35,576   
                                                            --------    --------       --------    --------    --------   
Interest expense:                                                                                                         
   Deposit accounts....................................        9,375       9,262         18,816      19,076      18,432 
   FHLB advances and other borrowings..................          245         306            602         459         565
                                                            --------    --------       --------    --------    --------  
      Total interest expense...........................        9,620       9,568         19,418      19,535      18,997  
                                                            --------    --------       --------    --------    --------  
      Net interest and dividend income before
        provision for loan losses......................        7,772       8,018         16,027      15,695      16,579
Provision for loan losses..............................          269         241            375         325         412    
                                                            --------    --------       --------    --------    --------  
      Net interest and dividend income after                                                                               
        provision for loan losses......................        7,503       7,777         15,652      15,370      16,167 
                                                            --------    --------       --------    --------    -------- 
Noninterest income:                                                                                                    
   Loan origination fees and other service charges.....        1,174         734          1,592       1,241       1,184     
   Other income........................................          102          50            142         169          85     
                                                            --------    --------       --------    --------    --------    
      Total noninterest income.........................        1,276         784          1,734       1,410       1,269     
                                                            --------    --------       --------    --------    --------    
Noninterest expense:                                                                                                   
   Compensation and benefits...........................        1,637       1,782          3,726       3,949       3,602     
   Occupancy and equipment.............................          343         343            717         762         608     
   Federal deposit insurance premiums..................          172         129            349       3,391         864     
   Net cost of foreclosed real estate operations.......           25          21            163         130         185     
   Other expense.......................................        1,067         877          2,054       1,566       1,449     
                                                            --------    --------       --------    --------    --------    
      Total noninterest expense........................        3,244       3,152          7,009       9,798       6,708     
                                                            --------    --------       --------    --------    --------    
      Income before income tax expense.................        5,535       5,409         10,377       6,982      10,728     
                                                            --------    --------       --------    --------    --------    
Income tax expense:                                                                                                    
   Current.............................................        2,280       2,527          3,990       2,943       4,508     
   Deferred............................................          (65)       (377)           (38)       (542)       (438)  
                                                            --------    --------       --------    --------    --------    
      Net income.......................................     $  3,320    $  3,259       $  6,425    $  4,581    $  6,658     
                                                            ========    ========       ========    ========    ========    
</TABLE>

                                       28
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


GENERAL

          The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses and loan fees and service charges. The Bank's
noninterest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums, the
cost of foreclosed real estate operations, data processing, advertising and
business promotion and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the Bank.

MANAGEMENT STRATEGY

          Traditionally, management's primary goal has been to control growth
and maintain the Bank's profitability, market share, asset quality and its
capital position by: (i) investing primarily in one- to four-family loans
secured by properties located in its primary market area; (ii) investing in non-
residential, construction and development and multi-family loans secured by
properties located in the Bank's primary market area, to the extent that such
loans meet the Bank's general underwriting criteria including, but not limited
to, satisfaction of certain loan-to-value ("LTV") and debt service coverage
ratios and satisfaction that the borrower is experienced in these types of real
estate projects; (iii) investing in consumer loans; (iv) investing funds not
utilized for loan investments in short-term U.S. Treasury and agency
obligations, including mortgage-backed and mortgage-related securities as well
as highly rated corporate notes and municipal bonds; and (v) building capital
while controlling operating expenses. See "Business of the Bank--Lending
Activities" and "--Securities Investment Activities." In the future, management
intends to seek growth opportunities and intends to seek means of lessening its
exposure to interest rate risk while avoiding investments the Bank believes bear
risks inconsistent with the Bank's investment policies. Management intends to
grow by expanding the products and services it offers, as necessary, in order to
improve its market share in its primary market area as well as seeking
opportunities to expand its market share and product line through acquisitions,
including, possibly, the acquisition of a commercial bank, although management
has no current plans in that regard. Currently, the Bank is seeking means to
increase its total deposits, particularly checking accounts, and has begun to
implement 24 hour banking services and, in the future, may expand its consumer
retail products. Other products and services are also being reviewed, including
products that would attract more local business to the Bank. Emphasis has been
placed on increasing the number of transaction accounts the Bank has through
aggressive advertising and expanding the variety of savings and checking
accounts available. The Bank will also seek to expand consumer loans, including
home equity loan originations. Finally, depending upon market conditions,
management may implement leverage strategies to enhance income. Such strategies
would be to increase borrowings and invest the borrowed funds in secured
investments to enhance income from the spread between the cost of the borrowed
funds and the investment yield.

MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS

          The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates, while
not subjecting the Bank to undue credit or investment risk. The Bank monitors
its interest rate risk as such risk relates to its operating strategies. The
Bank's Board of Directors has established an Asset/Liability Committee,
responsible for reviewing its asset/liability policies and interest rate risk
position, which meets on a regular basis, and reports trends and interest rate
risk position to the 

                                       29
<PAGE>
 
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Bank. See "Risk Factors--Sensitivity to Changes in Interest Rates."

          In recent years, the Bank has become subject to increasing risk in the
event interest rates begin to rise due to the substantial levels of fixed-rate
loans the Bank has been originating due to high customer demand for such
products in the Bank's primary market area. As discussed above, the Bank has
sought to offset the interest rate risk associated with originating primarily
fixed-rate loans in a low interest rate environment by investing in short-term
U.S. Treasury and agency obligations to enable the Bank to reinvest relatively
quickly in higher yielding investments if interest rates rise. In the future,
depending upon market conditions, the Bank intends to seek opportunities to
increase its investment in short-term adjustable rate mortgage-backed securities
and may evaluate opportunities to sell long-term fixed-rate loans in the
secondary market. Currently, management believes that its high capital and level
of liquidity coupled with low operating expenses would enable the Bank to
continue operating profitably in the event of a rapid rise in interest rates, as
it would be positioned to invest in higher yielding investments to offset the
negative impact its high fixed-rate loan portfolio would have on the Bank's
earnings; however, depending upon the magnitude of any change in interest rates,
the Bank may not be able to react quickly enough to reinvest such funds and
therefore may not be able to continue to be profitable following a significant
increase in rates. The Bank may also increase borrowings which would further
enable it to invest in higher yielding instruments in an increasing rate
environment.

          Gap Analysis. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At June 30, 1998, the Bank's cumulative one year interest rate gap
(which is the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year) as a percentage of total assets, was negative 35.53%.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of rising
interest rates, an institution with a negative gap position would be in a worse
position to invest in higher yielding assets as compared to an institution with
a positive gap position which, consequently, may result in the cost of its
interest-bearing liabilities increasing at a rate faster than its yield on
interest-earning assets than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap position would tend
to have its interest-bearing liabilities repricing downward at a faster rate
than its interest-earning assets as compared to an institution with a positive
gap which, consequently, may tend to positively affect the growth of its net
interest income.

          The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "Gap Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 1998, on the basis of contractual maturities, and scheduled rate
adjustments within a one year period and subsequent selected time intervals. The
loan amounts in the table reflect principal balances expected to be redeployed
and/or repriced as a result of contractual amortization of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Mortgage-backed securities were assumed to prepay at 30%
annually. Savings and certificate accounts were assumed to decay at 20%, 20%,
20%, 20%, 20% and 0%, and money market savings accounts were assumed to decay at
50%, 25%, 25%, 0%, 0% and 0%, for the periods of one year or less, more than one
year to two years, more than two years to three years, more than three years to
four years, more than four years to five years, and more than five years,
respectively. These assumptions are generally based on the FDIC's deposit decay
guidelines and the Bank's historical experience. Prepayment and deposit decay
rates can have a significant impact on the Bank's estimated gap. While the Bank
believes such assumptions to be reasonable, there can be no assurance that
assumed prepayment rates and decay rates 

                                       30
<PAGE>
 
will approximate actual future loan prepayment and deposit withdrawal activity.
See "Business of the Bank -- Lending Activities," "-- Securities Investment
Activities" and "-- Sources of Funds."

<TABLE> 
<CAPTION> 
                                                       MORE                               MORE                                  
                                                       THAN        MORE        MORE       THAN
                                                      1 YEAR       THAN        THAN      4 YEARS      MORE
                                          1 YEAR        TO      2 YEARS TO  3 YEARS TO      TO        THAN       TOTAL
                                          OR LESS    2 YEARS     3 YEARS     4 YEARS     5 YEARS     5 YEARS     AMOUNT
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                      <C>        <C>         <C>         <C>        <C>         <C>          <C>
INTEREST-EARNING ASSETS:
   Mortgage loans(1)....................   $27,846    $136,398   $   4,395     $ 4,459     $ 6,596    $245,455  $425,149
   Consumer and other loans.............     3,791       1,282       1,122       1,893       1,085          --     9,173
   Mortgage-backed and related
     securities.........................       357         357         357         119          --          --     1,190
   Overnight and short term
      investments.......................     8,248          --          --          --          --          --     8,248
   Investments and interest-
      earning deposits(2)...............    19,012       3,535       3,307       2,305          --       6,308    34,467
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
      Total interest-earning assets.....  $ 59,254    $141,572   $   9,181    $  8,776    $  7,681    $251,763  $478,227
                                         ========== =========== =========== ========== =========== ===========  ========

INTEREST-BEARING LIABILITIES:
   Money market deposit accounts
      and other transaction accounts....    22,810      11,406      11,406          --          --          --    45,622
   Savings accounts.....................     7,563       7,563       7,564       7,564       7,564          --    37,818
   Certificate accounts.................   196,666      48,743      23,783       8,988      12,099          --   290,279
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
Total interest-bearing deposits.........   227,039      67,712      42,753      16,552      19,663          --   350,908
   FHLB advances........................        --       3,000          --          --       5,000          --     8,000
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
   Total interest-bearing liabilities...  $227,039  $   70,712   $  42,753  $   16,552  $   24,663 $        --  $381,722
                                         ========== =========== =========== ========== =========== ===========  ========
Interest sensitivity gap................ $(167,785) $   70,860  $ (33,572)  $   (7,776) $  (16,982)   $251,763  $ 96,506
                                         ========== =========== =========== ========== =========== ===========  ========
Cumulative interest-rate
  sensitivity gap....................... $(167,785) $  (96,925) $ (130,497) $ (138,273) $ (155,255)  $  96,508
                                         ========== ==========  ==========  ==========  ==========   =========
Cumulative interest-rate
sensitivity gap as a percentage of
  total assets..........................    (35.53)%    (20.52)%    (27.63)%    (29.28)%    (32.87)%    20.43%
Cumulative interest-rate gap as
  a percentage of total
  interest-earning assets...............    (35.08)%    (20.27)%    (27.29)%    (28.91)%    (32.46)%    20.18%
Cumulative interest-earning
  assets as a percentage of
  cumulative interest-bearing
   liabilities..........................    (43.96)%    (25.39)%    (34.19)%    (36.22)%    (40.67)%    25.28%
</TABLE> 

_______________________________
(1)  Excludes nonaccrual loans.

(2)  Includes investment securities available-for-sale and stock in 
     FHLB-Atlanta.

          Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react to different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.

                                       31
<PAGE>
 
          NET PORTFOLIO VALUE. As part of its interest rate risk analysis, the
Bank uses an interest rate sensitivity model which generates estimates of the
change in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios and which is prepared by the OTS on a quarterly basis. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation--Federal Savings Institution Regulation." The following table sets
forth the Bank's NPV as of June 30, 1998 (the latest NPV analysis prepared by
the OTS), as calculated by the OTS.

<TABLE> 
<CAPTION> 
     CHANGE IN INTEREST RATES IN                                           NPV AS % OF PORTFOLIO         
     BASIS POINTS (RATE SHOCK)             NET PORTFOLIO VALUE                VALUE OF ASSETS            
     ---------------------------   ------------------------------------   -----------------------      
                                                                             NPV                       
                                     AMOUNT     $ CHANGE     % CHANGE       RATIO      CHANGE(1)        
                                   ----------  -----------  -----------   ----------  -----------      
                                           (DOLLARS IN THOUSANDS)                                          
     <S>                           <C>         <C>          <C>           <C>         <C> 
      +400.......................    $39,029    $(42,383)     (52.06)%        9.25%      (803)      
      +300.......................     50,125     (31,287)     (38.43)        11.53       (574)      
      +200.......................     61,264     (20,148)     (24.75)        13.69       (358)      
      +100.......................     72,073      (9,339)     (11.47)        15.66       (161)      
     Static......................     81,412          --          --         17.27         --       
     --100.......................     88,138       6,726        8.26         18.35        108       
     --200.......................     91,203       9,791       12.03         18.75        148       
     --300.......................     94,588      13,176       16.18         19.19        192       
     --400.......................     99,342      17,930       22.02         19.84        257        
</TABLE> 

_____________________
(1)   Expressed in basis points.

          As is the case with the Gap Table, certain shortcomings are inherent
in the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.

ANALYSIS OF NET INTEREST INCOME

          Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.

          AVERAGE BALANCE SHEETS. The following tables set forth certain
information relating to the Bank at and for the six months ended June 30, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.

                                       32
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                  FOR THE SIX MONTHS ENDED JUNE 30,               
                                                                     ------------------------------------------------------------- 
                                                   AT JUNE 30, 1998               1998                          1997               
                                                  ------------------ ----------------------------- -------------------------------
                                                                                           AVERAGE                       AVERAGE   
                                                              YIELD/   AVERAGE              YIELD/   AVERAGE              YIELD/   
                                                   BALANCE     COST    BALANCE   INTEREST   COST     BALANCE    INTEREST   COST    
                                                  ---------- ------- ----------  --------- ------- ------------ -------- --------- 
                                                                              (DOLLARS IN THOUSANDS)                               
<S>                                               <C>        <C>     <C>          <C>      <C>     <C>          <C>      <C>        

ASSETS:                                                                                                                            
  Interest-earning assets:                                                                                                         
    Mortgage loans, net.........................   $406,890    7.68%   $402,658   $15,621    7.76%   $397,809   $15,814     7.96%
    Consumer and other loans, net...............      9,096    8.42       8,899       383    8.60       8,256       330     8.00
    Mortgage-backed and related securities......      1,190    9.71       1,243       103   16.58       1,438       118    16.40
    Overnight and short-term deposits...........      9,031    4.71      13,848       329    4.76      12,970       294     4.54
    Investment securities(1)....................     34,467    4.96      34,234       956    5.58      35,158     1,030     5.86
                                                   --------   -----    --------   -------   -----    --------   -------    -----
        Total interest-earning assets...........    460,674    7.44%    460,882   $17,392    7.54%    455,634   $17,586     7.72%
                                                              -----               -------   -----               -------    -----
  Noninterest-earning assets....................     11,606              13,127                        13,186              
                                                   --------            --------                      --------              
        Total assets............................   $472,280            $474,009                      $468,817              
                                                   ========            ========                      ========              
LIABILITIES AND EQUITY:                                                                                                    
  Interest-bearing liabilities:                                                                                            
    Transaction accounts........................   $  2,481    0.32%   $  3,524   $     5    0.28%   $  3,113   $     4     0.26%
    Savings accounts............................     80,959    3.25      83,136     1,320    3.18      88,135     1,417     3.22
    Certificates of deposit.....................    290,279    5.71     288,687     8,050    5.58     283,856     7,841     5.52
                                                   --------   -----    --------   -------   -----    --------   -------    -----
         Total deposits.........................    373,719    5.16     375,347     9,375    5.00     375,104     9,262     4.94
    FHLB advances...............................      8,000    6.19       8,000       245    6.12      10,000       306     6.12
                                                   --------   -----    --------   -------   -----    --------   -------    -----
         Total interest-bearing liabilities.....    381,719    5.16%    383,347   $ 9,620    5.02%    385,104   $ 9,568     4.96%
                                                              -----               -------   -----               -------    -----
  Other liabilities.............................      7,061               8,902                         8,839              
                                                   --------            --------                      --------              
         Total liabilities......................    388,780             392,249                       393,944              
  Equity capital................................     83,500              81,760                        74,874              
                                                   --------            --------                      --------              
         Total liabilities and equity capital...   $472,280            $474,009                      $468,817              
                                                   ========            ========                      ========              
  Net interest income/Net interest                                                                                         
    rate spread(2)..............................               2.28%              $ 7,772    2.52%              $ 8,018    2.76%
                                                               ====               =======    ====               =======    ====
  Net earning assets/Net interest margin(3).....   $ 38,955    3.42%   $ 77,535              3.36%    $70,527              3.52%
                                                   ========    ====    ========              ====     =======              ====
  Ratio of interest-earning assets to                                                                          
   interest-bearing liabilities.................     120.68%             120.23%                       118.31% 
                                                     ======              ======                        ======   
</TABLE> 

_________________________
(1) Includes investment securities available-for-sale and stock in FHLB-Atlanta.

(2) Net interest rate spread represents the difference between the weighted
    average yield on interest-earning assets and the weighted average cost of
    interest-bearing liabilities.

(3) Net interest margin represents net interest income as a percentage of
    average interest-earning assets.

                                       33
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                       FOR THE YEARS ENDED DECEMBER 31,                            
                                       ---------------------------------------------------------------------------------------------
                                                  1997                               1996                            1995         
                                       ------------------------------   ------------------------------  ----------------------------
                                                             AVERAGE                           AVERAGE                       AVERAGE
                                        AVERAGE               YIELD/     AVERAGE                YIELD/   AVERAGE              YIELD/
                                        BALANCE    INTEREST    COST      BALANCE    INTEREST     COST    BALANCE   INTEREST    COST
                                       ---------- ----------  -------   ---------- ---------- --------- --------- ---------- -------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>       <C>       <C>        <C>
ASSETS:                                                                                                                            
  Interest-earning assets:                                                                                                         
    Mortgage loans, net...............  $399,924   $ 31,820     7.96%    $388,751   $ 31,402     8.08%   $368,361  $ 30,832    8.37%
    Consumer and other loans, net.....     8,495        696     8.19        9,271        543     5.86      10,703       611    5.71
    Mortgage-backed and related                                                                                                  
      securities......................     1,396        237    16.98        1,652        277    16.77       2,009       320   15.93 
    Overnight and short-term                                                                                                     
      deposits........................    13,076        623     4.76       14,685        661     4.50      12,304       659    5.36 
    Investment securities(1)..........    34,851      2,069     5.94       40,868      2,347     5.74      53,907     3,154    5.85
                                        --------   --------    -----     --------   --------    -----    --------  --------   -----
        Total interest-earning                                                                                                    
          assets......................   457,742   $ 35,445     7.74%     455,226   $ 35,230     7.74%    447,283  $ 35,576    7.95%
                                                   --------    -----                --------    -----              --------   -----
  Noninterest-earning assets..........    13,052                           13,724                          11,649         
                                        --------                         --------                        --------        
        Total assets..................  $470,794                         $468,950                        $458,932        
                                        ========                         ========                        ========        
                                                                                                                                  
LIABILITIES AND EQUITY:                                                                                                           
  Interest-bearing liabilities:                                                                                                   
    Transaction accounts..............  $  3,329   $      7     0.21%    $  3,609   $      6     0.17%   $    891  $      8    0.90%
    Savings accounts..................    86,907      2,818     3.24       94,856      2,977     3.14     101,574     3,329    3.28
    Certificates of deposit...........   285,410     15,991     5.60      283,944     16,093     5.67     275,907    15,095    5.47
                                        --------   --------     ----     --------   --------     ----    --------  --------    ----
      Total deposits..................   375,646     18,816     5.01      382,409     19,076     4.99     378,372    18,432    4.87
    FHLB advances and other borrowings     9,667        602     6.23        7,417        459     6.19       8,000       565    7.06
                                        --------   --------     ----     --------   --------     ----    --------  --------    ---- 
      Total interest-bearing             
        liabilities...................   385,313   $ 19,418     5.04%     389,826   $ 19,535     5.01%    386,372  $ 18,997    4.92%
                                                   --------    -----                --------    -----              --------   -----
    Other liabilities.................     8,897                            7,719                           7,062
                                        --------                         --------                        --------
      Total liabilities...............   394,210                          397,545                         393,434 
    Equity capital....................    76,584                           71,405                          65,498 
                                        --------                         --------                        --------         
      Total liabilities and equity       
        capital.......................  $470,794                         $468,950                        $458,932
                                        ========                         ========                        ========                 
  Net interest income/Net interest 
    rate spread(2)....................             $ 16,027     2.70%               $ 15,695     2.73%             $ 16,579    3.03%
                                                   ========     ====                ========     ====              ========    ====
  Net earning assets/Net interest 
    margin(3).........................  $ 72,429                3.50%    $ 65,400                3.45%   $ 60,916              3.71%
                                        ========                ====     ========                ====    ========              ====
  Ratio of interest-earning assets
    to interest-bearing liabilities...    118.80%                          116.78%                         115.77%             
                                         =======                          =======                         =======              
</TABLE> 
-----------
(1)  Includes investment securities available-for-sale and stock in 
     FHLB-Atlanta.
(2)  Net interest rate spread represents the difference between the weighted 
     average yield on interest-earning assets and the weighted average cost of  
     interest-bearing liabilities.
(3)  Net interest margin represents net interest income as a percentage of 
     average interest-earning assets.

                                      34
<PAGE>
 
     RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.

<TABLE>
<CAPTION>
                                             SIX MONTHS ENDED                  YEAR ENDED                   YEAR ENDED
                                               JUNE 30, 1998                DECEMBER 31, 1997             DECEMBER 31, 1996
                                                COMPARED TO                    COMPARED TO                   COMPARED TO
                                              SIX MONTHS ENDED                  YEAR ENDED                    YEAR ENDED
                                                JUNE 30, 1997                DECEMBER 31, 1996             DECEMBER 31, 1995
                                        ------------------------------  ----------------------------  ----------------------------
                                        INCREASE (DECREASE)             INCREASE (DECREASE)           INCREASE (DECREASE)
                                             DUE TO                           DUE TO                        DUE TO
                                        -------------------             -------------------           -------------------
                                         VOLUME      RATE       NET      VOLUME      RATE      NET     VOLUME      RATE      NET
                                        --------   --------   --------  --------   --------  -------  --------   --------  -------
                                                                           (IN THOUSANDS)
<S>                                     <C>        <C>        <C>       <C>        <C>       <C>      <C>        <C>       <C>
INTEREST-EARNING ASSETS:
  Mortgage loans, net................    $ 386      $(579)    $(193)     $ 903      $(485)    $ 418    $1,707    $(1,137)   $ 570   
  Consumer and other loans...........       51          2        53        (45)       198       153       (82)        14      (68)  
  Mortgage-backed and related                                                                                                       
    securities.......................      (32)        17       (15)       (43)         3       (40)      (57)        14      (43)  
  Overnight and short term                                                                                                          
    deposits.........................       40         (5)       35        (72)        34       (38)      128       (126)       2   
  Investment and interest-earning                                                                                                   
    deposits.........................      (54)       (20)      (74)       345         67      (278)     (763)       (44)    (807)  
                                         -----      -----     -----      -----      -----     -----    ------    -------    -----   
      Total interest-earning                                                                                                        
        assets.......................    $ 391      $(585)    $(194)     $ 397      $(182)    $ 215       933    $(1,279)   $(346)  
                                         =====      =====     =====      =====      =====     =====    ======    =======    =====   
                                                                                                                                    
INTEREST-BEARING LIABILITIES:                                                                                                       
  Transaction accounts...............    $   1      $  --     $   1      $  --      $   1     $   1    $   24    $   (26)   $  (2)  
  Savings accounts...................     (161)        64       (97)      (250)        91      (159)     (220)      (132)    (352)  
  Certificate of deposits............      267        (58)      209         83       (185)     (102)      440        558      998   
      Total interest-bearing                                                                                                        
        deposits.....................      107          6       113       (167)       (93)     (260)      244        400      644   
  FHLB advances......................     (122)        61       (61)       139          4       143       (41)       (65)    (106)  
                                         -----      -----     -----      -----      -----     -----    ------    -------    -----   
      Total interest-bearing                                                                                                        
        liabilities..................    $ (16)     $  68     $  52      $ (28)     $ (89)    $(117)   $  203    $   335    $ 538   
                                         =====      =====     =====       =====      =====    =====    ======    =======    =====   
</TABLE>

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997

     Assets totalled $472.3 million at June 30, 1998, an increase of $360,000,
or .08% from total assets of $471.9 million at December 31, 1997. The increase
in assets during the six month period was due primarily to a $3.0 million
increase in the Bank's loan portfolio, which was substantially offset by
reductions in cash and cash equivalents of $2.3 million, investment securities
of $223,000 and $101,000 in mortgage-backed securities.

     LOANS. The increase in total loans was primarily due to increases in real
estate mortgage and consumer installment loans, which were partially offset by a
decrease in non-residential real estate and an increase in undisbursed loan
funds. Although total mortgage loans increased $5.9 million, the level of total
real estate mortgage loans, as a percentage of total loans, remained relatively
stable at 97.90%, up slightly from 97.93% at December 31, 1997. The growth in
the Bank's real estate mortgage loan portfolio is primarily a result of the
Bank's decision to continue to originate and retain real estate loans in its
portfolio. Real estate construction loans increased from $16.0 million (3.72% of
the portfolio) at December 31, 1997 to $20.0 million (4.57% of the portfolio) at
June 30, 1998. Non-residential real estate loans decreased by $5.6 million from
$41.0 million at December 31, 1997 to $35.3 million at June 30, 1998. This was
the result of large loan payoffs in this portfolio. Undisbursed loan funds
increased from $5.0 million at December 31, 1997 to $8.7 million at June 30,
1998. This was due to the increase in these balances awaiting funding of
construction loans.

     ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$5.5 million at December 31, 1997 to $5.6 million at June 30, 1998, an increase
of $161,000. This increase reflects the economic stability in the market area as
well as improvement in net charged off loans. The adequacy of the allowance for
loan losses is evaluated monthly by management based upon a review of
significant loans, with particular emphasis on nonperforming and delinquent
loans that management believes warrant special attention. At June 30, 1998, the

                                       35
<PAGE>
 
allowance for loan losses provided coverage of 174.85% of total nonperforming
loans, down slightly from 194.60% at December 31, 1997. The balance of the
allowance is maintained at a level which is, in management's judgment,
representative of the amount of risk inherent in the loan portfolio. See
"Business -- Allowance for Loan Losses."

     INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.3 million and $31.2 million, respectively,
at December 31, 1997 to $1.2 million and $30.9 million, respectively, at 
June 30, 1998. These decreases were primarily due to redemptions and principal
payments of these securities totalling approximately $4.1 million during the six
months ended June 30, 1998. These repayments were offset by purchases of
securities totalling $3.7 million. Currently, management intends to continue
allowing its investment securities to mature and paydown and to reinvest the
proceeds primarily in the securities classified by the Bank as available-for-
sale and in new loans.

     DEPOSITS. Total deposits decreased $3.4 million, or 0.9%, from $377.1
million at December 31, 1997 to $373.7 million at June 30, 1998. While time
deposits increased $1.0 million, or 0.27%, during the period, savings accounts
decreased $900,000, or 0.24%, money market accounts decreased $2.7 million, or
0.72%, and non-interest-bearing accounts decreased $800,000, or 0.21%.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996

     Assets totalled $471.9 million at December 31, 1997, up $2.0 million, or
0.43%, from $469.9 million at December 31, 1996. Most of the increase was
concentrated in the loan portfolio which increased $7.9 million for the year
ending December 31, 1997 to $413.0 million, which increase was partially offset
by a reduction in cash and cash equivalents of $4.7 million. Total deposits
increased by $1.4 million, from $375.7 million at December 31, 1996 to $377.1 at
December 31, 1997. FHLB advances decreased $7.0 million from $15.0 million at
December 31, 1996 to $8.0 million at December 31, 1997.

     LOANS.  The increase in total loans was primarily due to increases in non-
residential real estate loans and consumer loans, which were partially offset by
decreases in the Bank's construction and development loans.  Although, total
real estate mortgage loans increased $2.9 million, or 0.67%, the level of total
mortgage loans as a percentage of total loans decreased from 98.12% at 
December 31, 1996 to 97.93% at December 31, 1997 due to the increase in consumer
loans.  Real estate construction loans declined from $21.3 million, or 4.98% of
the portfolio, at December 31, 1996 to $16.0 million, or 3.72% of the portfolio,
at December 31, 1997.  The decline in real estate construction loans resulted
from large payoffs for this type of borrowing.

     ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses decreased by
$65,000 to $5.5 million at December 31, 1997 from December 31, 1996. This slight
reduction reflects the economic stability in the market area as well as
improvements in net charged off loans. The adequacy of the allowance for loan
losses is evaluated monthly by management based upon a review of significant
loans, with particular emphasis on nonperforming and delinquent loans that
management believes warrant special attention. At December 31, 1997, the
allowance for loan losses provided coverage of 194.60% of total nonperforming
loans, up from 63.33% at December 31, 1996.

     INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.5 million and $32.0 million, respectively,
at December 31, 1996 to $1.3 million and $31.2 million, respectively, at
December 31, 1997. These decreases were driven by redemptions and principal
payments of these securities, totalling approximately $3.0 million during the
year ended December 31, 1997. The repayments were offset by purchases of
securities totalling $2.8 million.

     DEPOSITS. Total deposits increased $1.5 million, or 0.40%, from $375.7
million at December 31, 1996 to $377.1 million at December 31, 1997. Of this
total increase, certificates of deposit increased $6.4 million, or 2.2%, and 
non-interest-bearing accounts increased $815,000. These increases were partially
offset by decreases in money market accounts of $4.8 million and passbook
accounts of $952,000. FHLB advances decreased from $15.0 million at December 31,
1996 to $8.0 million at December 31, 1997, which was funded through net cash
provided by operations.

                                       36
<PAGE>
 
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997

     GENERAL. Net income for the six months ended June 30, 1998 increased
$61,000 compared to the six months ended June 30, 1997. This increase was
primarily a result of higher non-interest income, which increased $492,000
during the period. This increased income was partially offset by a decrease of
$246,000 in net interest income, an increase in the provision for loan losses of
$28,000, an increase in non-interest expense of $92,000 and an increase of
income tax expense of $65,000. The Bank's return on average assets (ROA) was
1.40% for the six months ended June 30, 1998, up from 1.39% for the same period
in 1997. The Bank's return on average equity (ROE) was 8.12% for the six months
ended June 30, 1998, down from 8.71% for the six months ended June 30, 1997.

     INTEREST INCOME. Interest income for the six months ended June 30, 1998
decreased $194,000 to $17.4 million, from $17.6 million for the comparable
period in 1997 primarily due to a decrease in the rates on loans originated. The
average balance of mortgage loans increased $4.8 million, as compared to the
same period in 1997; however, the average yield on mortgage loans decreased from
7.96% to 7.76%. The decrease in interest income was further impacted by a
decrease in interest on investment securities of $54,000.

     INTEREST EXPENSE. Interest expense increased by $52,000 during the six
months ended June 30, 1998 to $9.6 million. Interest paid on certificates of
deposit for the six months ended June 30, 1998 was $8.0 million, up from $7.8
million in 1997, which was due primarily to an increase in the average balance
of time deposits, from $283.9 million for the six months ended June 30, 1997 to
$288.7 million for the six months ended June 30, 1998.

     NET INTEREST INCOME. Net interest income for the six months ended June 30,
1998 decreased $246,000 to $7.8 million from $8.0 million for the six months
ended June 30, 1997, which was primarily due to a decrease in the yield on
average interest-earning assets from 7.72% for the six months ended June 30,
1997 to 7.54% for the same period in 1998, resulting in a decrease in interest
income of approximately $194,000, which was partially offset by an increase in
average interest-earning assets of $5.2 million and a decrease in average
interest-bearing liabilities of $1.8 million during the six months ended June
30, 1998 compared to the same period in 1997. The Bank's net interest margin for
the six months ended June 30, 1998 was 3.42%, down from 3.52% for the six months
ended June 30, 1997. The yield on average earning assets decreased from 7.72% to
7.54%, while the rate paid on interest-bearing liabilities increased slightly
from 4.96% to 5.02% for the six months ended June 30, 1997 and June 30, 1998,
respectively. As a result, the Bank's interest rate spread decreased from 2.76%
to 2.52%.

     PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$241,000 for the six months ended June 30, 1997 to $269,000 for the six months
ended June 30, 1998. This increase is primarily the result of increases in
specific reserves for commercial mortgage loans during the six months ended June
30, 1998 due to several individual lending relationships in addition to
continued growth in the Bank's loan portfolio. Although management believes the
current level of provision for loan losses is adequate, there can be no
assurance that future losses will not exceed estimated amounts or that the
provision for loan losses will not increase in future periods. See "Business of
the Bank -- Allowance for Loan Losses.

     NONINTEREST INCOME. Total noninterest income increased $492,000 for the six
months ended June 30, 1998 as compared to the same period in 1997. Noninterest
income is composed primarily of loan origination and servicing fees, and deposit
account service charges. Income from loan origination fees increased from
$457,000 for the six months ended June 30, 1997 to $902,000 for the six months
ended June 30, 1998, which is primarily attributable to the overall increase in
the Bank's loan originations during this period. These fees are the income
recognized as an offset to the amount of loan origination costs incurred by the
Bank. Origination fees in excess of these costs are deferred and recognized as 
income over the life of the loan. This increase was partially offset by 
decreases in construction loan fees and late charges.

     NONINTEREST EXPENSE. Total noninterest expense increased by $92,000 to $3.3
million for the six months ended June 30, 1998, up from $3.2 million for the
same period in 1997. Decreases in compensation and benefits of $145,000 were
offset by increases in Federal examination fees of $43,000, and other expenses
totalling $194,000. The decrease in compensation expense is directly related to
the Bank's attempts to increase the efficiencies in branch

                                       37
<PAGE>
 
and other operations. The increase in other expenses is the result of increased
legal and accounting fees related to litigation involving an employment matter
which was settled in 1998.

     INCOME TAXES. Income tax expense increased by $65,000 to $2.2 million for
the six months ended June 30, 1998. The increase is primarily the result of the
increase of $126,000 in income before income tax expense to $5.5 million in 1998
from $5.4 million in 1997.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

     GENERAL. Net income for the year ended December 31, 1997 increased by 
$1.8 million, or 39%, to $6.4 million for the year ended December 31, 1997
compared to $4.6 million for the year ended December 31, 1996. Net interest
income for the years ended December 31, 1997 and 1996 was $16.0 million and
$15.7 million, respectively, due to an increase of $215,000 in interest income
for 1997 coupled by a decrease in interest expense of $117,000. Additionally,
noninterest income increased by $324,000 in 1997. In addition, noninterest
expense decreased by $2.8 million to $7.0 million for the year ended December
31, 1997 compared to $9.8 million for the prior year, reflecting the one-time
special SAIF assessment paid in 1996. The Bank's return on average assets
increased from 0.98% for the year ended December 31, 1996 to 1.36% for the year
ended December 31, 1997. The Bank's return on average equity also increased from
6.42% for the year ended December 31, 1996 to 8.39% for the year ended 
December 31, 1997.

     INTEREST INCOME. Interest income for the year ended December 31, 1997 was
$35.4 million, up from $35.2 million for the same period in 1996. The largest
component of interest income, as well as the increase from 1996 to 1997, is
interest on loans. Interest on loans increased from $31.9 million for the year
ended December 31, 1996 to $32.5 million for the year ended December 31, 1997.
This increase of $600,000 is primarily the result of volume increases. The
average balance of loans increased $10.4 million to $408.4 million, while the
yield on mortgage loans decreased 7 basis points from 8.08% to 7.96%, partially
offsetting the increase due to volume. The increase in interest on loans was
offset by a decrease in interest on investment securities. Interest income on
investment securities decreased $356,000. Substantially all of the decrease in
interest income on investment securities is attributed to lower volume. The
average balance of investment securities decreased from $40.9 million for the
year ended December 31, 1996 to $34.9 million for the year ended December 31,
1997.

     INTEREST EXPENSE. Interest expense decreased during the year ended 
December 31, 1997 to $19.4 million, from $19.5 million for the comparable period
in 1996. Substantially all of the Bank's interest expense is from interest-
bearing deposits. The largest category of interest-bearing deposits is
certificates of deposits. Interest on certificates of deposits for the year
ended December 31, 1997 was $16.0 million, down $88,000 from $16.0 million in
1996. This decrease is the result of an increase in the average balance of
certificates of deposits, from $283.9 million in 1996 to $285.4 million in 1997,
offset by a decrease of 7 basis points in the rates paid on these deposits from
5.67% in 1996 to 5.60% in 1997. Interest expense on savings accounts decreased
$159,000, from $3.0 million for the year ended December 31, 1996 to $2.8 million
for the year ended December 31, 1997. This decrease is attributable to a
decrease in the average balance of savings accounts, which decreased $7.9
million during 1997, as well as an increase of 10 basis points in the rates paid
on these savings accounts, from 3.14% to 3.24%. Interest expense on FHLB
advances increased $143,000 from $459,000 for the year ended December 31, 1996
to $602,000 for the year ended December 31, 1997. This increase is primarily
attributable to the increase in average advances outstanding from $7.4 million
for the year ended December 31, 1996 to $9.7 million for the year ended 
December 31, 1997. This decrease was slightly offset by a 4 basis point increase
in the average cost of FHLB advances.

     NET INTEREST INCOME.  Net interest income for the year ended December 31,
1997 was $16.0 million, compared to $15.7 million for the year ended 
December 31, 1996. The increase was primarily due to a decrease in average
interest-bearing liabilities of $4.5 million in conjunction with an increase in
average interest-earning assets of $2.5 million. The yield on average interest-
earning assets remained stable, while the average yield on interest-bearing
liabilities increased from 5.01% for the year ended December 31, 1996 to 5.04%
for the year ended December 31, 1997.

                                       38
<PAGE>
 
     PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$325,000 for the year ended December 31, 1996 to $375,000 for the year ended
December 31, 1997. This increase is primarily the result of increases in net
charge-offs from $263,000 for the year ended December 31, 1996 to $440,000 for
the year ended December 31, 1997. The average impairment of loans decreased from
$11.9 million for the year ended December 31, 1996 to $9.8 million for the year
ended December 31, 1997, mitigating the need for additional provisions for loan
losses. See "Business of the Bank -- Allowance for Loan Losses."

     NONINTEREST INCOME. Total noninterest income increased $324,000 to 
$1.7 million for the year ended December 31, 1997, compared to $1.4 million for
the same period in 1996. Income from loan origination fees, loan servicing and
service charges increased $351,000 from $1.2 million for the year ended 
December 31, 1996 to $1.6 million for the year ended December 31, 1997. This
increase is attributed to the overall increase in the Bank's loan demand during
this time period. Other income decreased $27,000 to $142,000 for the year ended
December 31, 1997, compared to $169,000 for the same period in 1996. This
decrease was primarily the result of a decline in income recognized on the
assets funding the management deferred compensation plan of $83,000, partially
offset by increases in credit life insurance premiums of $19,000.

     NONINTEREST EXPENSE. Total noninterest expense decreased $2.8 million to
$7.0 million for the year ended December 31, 1997, down from $9.8 million for
the comparable period in 1996. Decreases in compensation and benefits of
$223,000, occupancy and equipment of $45,000, and federal deposit insurance
premium of $3.1 million were offset by an increase in the net cost of foreclosed
real estate operations of $33,000 and increases in other expenses of $488,000.

     The decrease in compensation expense is directly related to the Bank's
efforts to increase efficiencies in branch-banking and other operations. The
decrease in occupancy and equipment expenses reflects the reduction in
depreciation expense for fully depreciated assets. No significant acquisitions
of hardware or software were made in the year ended December 31, 1997. The
increase in the net cost of foreclosed real estate operations is the result of
several factors. During the year ended December 31, 1997, the Bank experienced a
slight narrowing of the cost of foreclosed property and the realized sale price.
At the same time, the condition of foreclosed property required additional
reserves for deferred maintenance, offset by decreased expenses in preparing
foreclosed properties for sale. The resulting net effect increased these
expenses by $33,000 over those experienced for the year ended December 31, 1996.
The decrease in federal deposit premiums was due primarily to the special SAIF
assessment of $2.5 million paid in 1996. The increase in other expenses is the
result of increased legal and accounting fees related to litigation regarding an
employment matter. This litigation has been settled and no further expenses will
be incurred.

     INCOME TAXES. Income tax expense increased from $2.4 million for the year
ended December 31, 1996 to $3.9 million for the comparable period in 1997. The
increase is primarily the result of a change in deferred income tax from
$542,000 for the year ended December 31, 1996 to $38,000 for the year ended
December 31, 1997, offset by additional income before income tax expense of $3.4
million in 1997 compared to 1996.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

     GENERAL. Net income for the year ended December 31, 1996 decreased by $2.1
million to $4.6 million from $6.7 million for the year ended December 31, 1995.
This increase was primarily a result of an increase in interest expense of
$538,000 and an increase in noninterest expense of $3.1 million. The substantial
increase in noninterest expense was primarily due to the $2.5 million SAIF
assessment paid by the Bank in 1996.

     INTEREST INCOME. Interest income for the year ended December 31, 1996
decreased $346,000 to $35.2 million, from $35.6 million for the same period in
1995. The largest component of interest income is interest on loans. Interest on
loans increased by $502,000 from $31.4 million for the year ended December 31,
1995 to $31.9 million for the year ended December 31, 1996. Interest income
increased primarily due to an increase in the average balance of interest-
earning assets, the effect of which was partially offset by a decrease in the
average yield on such assets. The average balance of mortgage loans increased
$20.4 million to $388.7 million, while the average yield on mortgage loans
decreased 29 basis points from 8.37% to 8.08%. This decrease in the yield earned
on mortgage loans was driven primarily by decreases in the rates on the fixed
rate mortgage portfolio as refinances of higher rate mortgages

                                       39
<PAGE>
 
were experienced. See "Business of the Bank -- Mortgage Lending." The effect of
the decrease in interest on mortgage loans was further compounded by decreases
in interest on investment securities coupled with a decrease in the balance of
investment securities. Interest income on investment securities declined
$807,000. In addition, the average balance of such securities declined by $13.0
million. In addition, the average balance of mortgage-backed securities
decreased from $2.0 million for the year ended December 31, 1995 to $1.7 million
for the year ended December 31, 1996. This decrease was partially offset by an
increase in the average yield on mortgage-backed securities from 15.9% to 16.8%.

     INTEREST EXPENSE. Interest expense increased during the year ended December
31, 1996 by $538,000 to $19.5 million from $19.0 million for the comparable
period in 1995. The largest category of interest-bearing deposits is
certificates of deposit. Interest on certificates of deposits for the year ended
December 31, 1996 was $16.1 million, up $1.0 million from the $15.1 million in
1995. This increase is the result of an increase in the average balance of
certificates of deposit, from $275.9 million in 1995 to $283.9 million in 1996,
combined with an increase of 20 basis points in the rates paid on these deposits
from 5.47% in 1995 to 5.67% in 1996. Interest on savings accounts decreased
$352,000 from $3.3 million in 1995 to $3.0 million in 1996. This decrease
resulted almost entirely from a $6.7 million decrease in the average balances of
savings accounts during this period from $101.6 million in 1995 to $94.9 million
in 1996. Interest expense on FHLB advances decreased $108,000 from 1995 to 1996,
which was primarily attributed to lower interest rates during the period.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.

     NET INTEREST INCOME. Net interest income for the year ended December 31,
1996 was $15.7 million, down $900,000 from the year ended December 31, 1995. The
decrease was primarily the result of the effects of a 21 basis point decrease in
the rates earned on earning assets from 7.95% in 1995 to 7.74% in 1996. This
reduction in yield was compounded by the effects of a 9 basis point increase in
the rates paid on average interest-bearing liabilities, from 4.92% in 1995 to
5.01% in 1996. The Bank's net interest margin for the year ended December 31,
1996 was 3.45%, down from 3.71% for the year ended December 31, 1995. The effect
of the changes in rates were partially offset by increases in volume. These
increases were composed of an increase in average interest-earning assets of
$8.0 million, offset by a $3.4 million increase in average interest-bearing
liabilities from $386.4 million for the year ended December 31, 1995 to $389.8
million for the same period in 1996.

     PROVISION FOR LOAN LOSSES. The provision for loan losses of $325,000 for
the year ended December 31, 1996 decreased $87,000 from the $412,000 provision
in the year ended December 31, 1995. This decrease resulted from reduced
chargeoffs of loan balances and an improving economy in the Bank's market area.

     NONINTEREST INCOME. Total noninterest income for the year ended December
31, 1996 was $1.4 million, an increase of $141,000 over the $1.3 million for the
same period in 1995. Income increases from loan origination fees and customer 
service charge increases aggregating $106,000 contributed to the increases in 
noninterest income.

     NONINTEREST EXPENSE. Total noninterest expenses increased $3.1 million to
$9.8 million for the year ended December 31, 1996, up from $6.7 million for the
comparable period in 1995. Increases in compensation and benefits of $347,000,
occupancy and equipment of $154,000, special SAIF assessment of $2.5 million,
and other expenses of $117,000 were partially offset by reductions in net cost
of foreclosed real estate operations of $55,000. The increase in compensation
and benefits is the result of a nonfunded termination agreement with the Bank's
former chief executive officer completed during the year ended December 31,
1996. The increase in occupancy and equipment was the result of transferring
data processing from an in-house system to a service bureau during 1996. The
conversion was completed in mid-year. The increase in the FDIC assessment is the
result of legislation which mandated that all thrift institutions pay a special
SAIF assessment.

     INCOME TAXES. Income tax expense decreased from $4.1 million for the year
ended December 31, 1995 to $2.4 million for the comparable period in 1996. The
decrease is primarily the result of lower net income before income tax expense
of $3.7 million in 1996 compared to 1995 and an increase in deferred taxes of
$104,000.

                                       40
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.00%. At June 30, 1998 and December 31, 1997, the Bank's liquidity
ratios were 8.58% and 9.58%, respectively. Management's current strategy is to 
maintain liquidity as close as possible to the minimum regulatory requirement
and to invest any excess liquidity in higher yielding interest-earning assets.
The Bank manages its liquidity position and demands for funding primarily by
investing excess funds in short-term investments and utilizing FHLB advances in
periods when the Bank's demands for liquidity exceed funding from deposit
inflows.

     The Bank's most liquid assets are cash and cash equivalents and securities
available for sale. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At June 30, 1998, cash and cash equivalents and securities totalled $41.1
million, or 8.70% of total assets.

     The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1998, the Bank had $8.0 million in
advances outstanding from the FHLB and, at June 30, 1998, had an additional
overall borrowing capacity from the FHLB of $37.0 million. Depending on market
conditions, the pricing of deposit products and FHLB advances, the Bank may
continue to rely on FHLB borrowings to fund asset growth.

     At June 30, 1998, the Bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $36.2 million. The Bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from June 30, 1998, totalled
$196.7 million. Based upon historical experience, management believes the
majority of maturing certificates of deposit will remain with the Bank. In
addition, management of the Bank believes that it can adjust the offering rates
offered on certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the Bank, the Bank would be able to utilize FHLB advances to fund
deposit withdrawals, which would result in an increase in interest expense to
the extent that the average rate paid on such advances exceeds the average rate
paid on deposits of similar duration.

     At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $81.6 million, or 17.28%, of total
adjusted assets, which is above the required level of $7.1 million, or 1.5%;
core capital of $81.6 million, or 17.28%, of total adjusted assets, which is
above the required level of $14.1 million, or 3.00%; and risk-based capital of
$85.1 million, or 30.20%, of risk-weighted assets, which is above the required
level of $22.5 million, or 8.00%. See "Regulatory Capital Compliance."

YEAR 2000 COMPLIANCE

     The Bank has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Bank's data
processing is performed under agreements with a service bureau, consequently the
Bank is very dependent on this service bureau to conduct its business. The Bank
has already contacted the service bureau, as well as each of its other vendors
to request time tables for Year 2000 compliance and expected costs, if any, to
be passed along to the Bank. To date, the Bank has been informed that its
service bureau and other primary service providers anticipate that all
reprogramming efforts will be completed by December 31, 1998, allowing the Bank
adequate time for testing. Certain other vendors have not yet responded,
however, the Bank will pursue other options if it appears that these vendors
will be unable to comply. The Bank believes that its costs related to Year 2000
will be approximately $200,000. Management does not expect these costs to have a
significant impact on its financial position or results of operations. However,
there can be no assurance that the vendors' systems will be Year 2000 compliant,
consequently, the Bank could incur incremental costs to convert to another
vendor.

                                       41
<PAGE>
 
     The risks associated with this issue go beyond the Bank's own ability to
solve Year 2000 problems. Should significant commercial customers fail to
address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge offs. In addition, should suppliers of critical
services fail in their efforts to be Year 2000 compliant, it could have
significant adverse financial results for the Bank.

IMPACT OF INFLATION AND CHANGING PRICES

     The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

     REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and displaying comprehensive income and its components within the
financial statements. Comprehensive income is defined in FASB Concepts Statement
6 as the "change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is effective
for fiscal years beginning after December 15, 1997 and its implementation had no
impact on financial conditions or operations.

     DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" which establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. This Statement requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This Statement
is effective for financial statements for periods beginning after December 15,
1997 and its implementation had no impact on financial conditions or operations.

     EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits. This Statement
supersedes FASB Statements No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting
for Postretirement Benefits other than Pensions." This Statement is effective
for fiscal years beginning after December 15, 1997 and its implementation had no
impact on financial conditions or operations.

     ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. This Statement amends FASB Statement No. 52, "Foreign Currency
Translation" to permit special accounting for a hedge of a foreign currency
forecasted transaction with a derivative. It supersedes FASB Statements No. 80,
"Accounting for Futures Contracts," No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." It amends
Statement No. 107, "Disclosures about Fair Value of Financial Instruments" to
include in Statement 107 the disclosure provisions about concentrations of
credit risk from

                                       42
<PAGE>
 
Statement 105. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999 and is not expected to have a material
impact on the Company.


                             BUSINESS OF THE BANK

GENERAL

     The Bank is a community oriented savings association whose principal
business has been and continues to be attracting retail deposits from the
general public in the areas surrounding its branch offices and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans. In recent years,
the Bank has originated primarily fixed-rate one- to four-family loans with
terms of 15 to 30 years. To a lesser extent, the Bank invests in non-residential
real estate loans, including loans to local churches, construction and
development loans, land and land development loans, multi-family loans and
consumer loans. The Bank operates through its four full service banking offices
located in the City of Fredericksburg and Stafford and Spotsylvania Counties,
Virginia. The Bank originates loans for investment. The Bank's revenues are
derived principally from interest on its mortgage loans and, to a lesser extent,
interest on its investments, which generally include short-term U.S. Treasury
bonds and U.S. Government Agency obligations, short-term, highly rated corporate
debt securities and municipal bonds and from loan fee income. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
investments.

MARKET AREA AND COMPETITION

     The Bank is headquartered in Fredericksburg, Virginia and has been, and
intends to continue to be, a community oriented financial institution. The
Bank's primary market area is comprised of the City of Fredericksburg and
Spotsylvania, Stafford and King George Counties, Virginia, which are serviced
through the Bank's main office and three other full service banking offices. The
Bank's main office is located in Fredericksburg, two branch offices are located
in Spotsylvania County and one is in Stafford County. Based on the most recent
information available, the Bank had approximately one-third of the total bank
and thrift deposits in its market area.

     The Bank's primary market area consists principally of suburban and rural
communities with service, wholesale/retail trade, government and manufacturing
serving as the basis of the local economy. Service jobs represent the largest
type of employment in the Bank's primary market area, with jobs in
wholesale/retail trade accounting for the second largest employment sector.
Fredericksburg and surrounding communities are located between Richmond,
Virginia and Washington, D.C. and are easily accessible from Interstate 95, a
major Interstate running north to south along the Eastern seaboard. The easy
accessability to the Fredericksburg area and its close proximity to these large
cities has resulted in the Fredericksburg area being among one of the fastest
growing areas in the country in recent years. Businesses that have moved to the
area in recent years and invested substantial capital into their new locations
include Capital One Financial Corp., Intuit, Inc., Dongsung America, Inc., Mapei
Corporation, Vulcan Materials Company, SEI Birchwood, Inc. and Greenhost, Inc.
In addition, GEICO insurance has significantly expanded its presence in the area
and currently employs over 2,000 people at its Stafford County location.
Management believes that its market area continues to show economic growth with
stable to moderately increasing real estate values.

     The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings, cooperative
and commercial banks and credit unions. In addition, the Bank faces significant
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. The Bank

                                       43
<PAGE>
 
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.

LENDING ACTIVITIES

     LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences. At June 30,
1998, gross loans totalled $437.2 million, of which $367.0 million, or 83.94%
were one- to four-family, residential mortgage loans and home equity loans. At
such date, the remainder of the loan portfolio consisted of: $35.3 million of
non-residential loans, including church loans totalling $12.1 million or 8.08%
of total loans; $20.0 million of construction and development loans, including
unadvanced loan amounts, or 4.57% of total loans; $2.3 million of land and land
development loans or 0.53% of total loans; $3.4 of multi-family loans, or 0.78%
of total loans; and $9.2 million of consumer loans, or 2.10% of total loans.

     The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board ("FRB") and legislative tax policies.

                                       44
<PAGE>
 
         The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.

<TABLE> 
<CAPTION> 
                                                                                                 AT DECEMBER 31,
                                                                        ---------------------------------------------------------- 
                                                      AT JUNE 30, 1998        1997               1996                1995  
                                                    ------------------- ------------------  ------------------  ------------------
                                                              PERCENT             PERCENT            PERCENT              PERCENT   
                                                     AMOUNT   OF TOTAL   AMOUNT   OF TOTAL   AMOUNT  OF TOTAL    AMOUNT   OF TOTAL  
                                                    --------  --------- --------- --------  -------  ---------  -------   -------- 
                                                                                   (DOLLARS IN THOUSANDS)           
<S>                                                 <C>       <C>       <C>       <C>       <C>      <C>        <C>       <C>   
Mortgage loans:                                                                                                                     
  Residential:                                                                                                                      
    One- to four-family (1).......................  $367,041     83.94% $358,561     83.19% $345,799     80.94% $329,589    79.69%
    Multi-family..................................     3,396      0.78     3,455      0.80     3,453      0.81     2,340     0.57
  Non-residential real estate(2)..................    35,316      8.08    40,951      9.50    44,528     10.42    44,520    10.77
  Land and land development.......................     2,321      0.53     3,091      0.72     4,136      0.97     6,398     1.55
  Construction and development....................    19,960      4.57    16,046      3.72    21,285      4.98    23,545     5.69
                                                    --------    ------  --------    ------  --------    ------  --------   ------
      Total mortgage loans........................   428,034     97.90   422,104     97.93   419,201     98.12   406,392    98.27
                                                    --------    ------  --------    ------  --------    ------  --------   ------
  Consumer and other loans........................     9,192      2.10     8,913      2.07     8,046      1.88     7,159     1.73
                                                    --------    ------  --------    ------  --------    ------  --------   ------
Total loans.......................................   437,226    100.00%  431,017    100.00%  427,247    100.00%  413,551   100.00%
                                                                ======              ======              ======             ======
Less:
  Participating interests.........................     3,319               4,217               5,450               6,543
  Undisbursed loan funds..........................     8,743               4,978               8,064               8,132
  Unearned discounts and deferred loan fees.......     3,539               3,312               3,045               2,855

  Allowance for loan losses.......................     5,639               5,478               5,543               5,480
                                                    --------            --------            --------            --------
  Loans receivable, net...........................  $415,986            $413,032            $405,145            $390,541
                                                    ========            ========            ========            ========

<CAPTION> 
                                                    ----------------------------------------
                                                           1994               1993
                                                    ------------------   -------------------
                                                              Percent               Percent
                                                     Amount   of Total    Amount    of Total
                                                    --------  --------   --------   --------
<S>                                                 <C>       <C>        <C>        <C> 
Mortgage loans:                                                        
  Residential:                                                         
    One- to four-family (1).......................  $312,933     79.09%  $315,739     79.08%
    Multi-family..................................     4,407      1.11      9,315      2.33
  Non-residential real estate(2)..................    39,950     10.10     38,830      9.72
  Land and land development.......................     4,375      1.12      5,454      1.37
  Construction and development....................    27,259      6.89     23,537      5.89
                                                    --------    ------   --------    ------
      Total mortgage loans........................   388,924     98.31    392,875     98.39
                                                    --------    ------   --------    ------
  Consumer and other loans........................     6,601      1.69      6,409      1.61
                                                                ------               ------
Total loans.......................................   395,525    100.00%   399,284    100.00%
                                                                ======               ======
Less:
  Participating interests.........................     8,126                9,261
  Undisbursed loan funds..........................     7,829                6,539
  Unearned discounts and deferred loan fees.......     2,764                2,900

  Allowance for loan losses
                                                       5,537                5,355
                                                     -------             --------
  Loans receivable, net...........................  $371,269             $375,229
                                                    ========             ========
</TABLE> 

_______________________________________ 

(1)  Includes home equity lines of credit.
(2)  Includes 36 loans to local churches totalling $12.1 million at June 30,
     1998.

                                       45
<PAGE>
 
       LOAN MATURITY. The following table shows the remaining contractual
maturity of the Bank's loans at June 30, 1998. The table does not include the
effect of future principal prepayments.

<TABLE>
<CAPTION>
                                                                           AT JUNE 30, 1998
                                           -------------------------------------------------------------------------------------

                                            ONE- TO                             CONSTRUCTION     LAND AND
                                            FOUR-       MULTI-       NON-          AND             LAND                    TOTAL
                                            FAMILY      FAMILY    RESIDENTIAL   DEVELOPMENT    DEVELOPMENT   CONSUMER      LOANS
                                           ---------    ------    -----------   -----------    -----------   --------      -----
<S>                                       <C>          <C>        <C>           <C>            <C>           <C>        <C>
                                                                            (IN THOUSANDS)
Amounts due:
 One year or less.......................  $   2,168    $    --    $      7      $  19,960(1)   $   1,651     $ 2,417    $  26,203
 After one year:
 More than one year to three years......      3,939         --          49             --             23       2,674        6,685
 More than three years to five years....      6,111         --         603             --            130       3,340       10,184
 More than five years to ten years......     46,811        809       6,940             --            314         608       55,482
 More than ten years to twenty years....    153,263        975      21,103             --            135         153      175,629
 More than twenty years.................    154,749      1,612       6,614             --             68          --      163,043
                                          ---------    -------    --------      ---------      ---------     -------      -------
      Total amount due..................  $ 367,041    $ 3,396    $ 35,316      $  19,960      $   2,321     $ 9,192      437,226
                                          =========    =======    ========      =========      =========     =======
Less:
  Participating interests............................................................................................       3,319
  Allowance for loan losses..........................................................................................       8,743
  Undisbursed loan funds.............................................................................................       3,539
  Allowance for loan losses..........................................................................................       5,639
                                                                                                                        ---------
Loans, net...........................................................................................................   $ 415,986
                                                                                                                        =========
</TABLE>

_______________
(1)  Includes construction and development loans which will convert to one- to
     four-family mortgage loans upon the completion of the construction.

     The following tables set forth at June 30, 1998, the dollar amount of loans
contractually due after June 30, 1999 and whether such loans have fixed interest
rates or adjustable interest rates.

<TABLE>
<CAPTION>
                                                               DUE AFTER JUNE 30, 1999
                                                        --------------------------------------
                                                          FIXED      ADJUSTABLE       TOTAL
                                                        ---------   ------------    ----------
<S>                                                     <C>         <C>             <C>
                                                                   (IN THOUSANDS)
Real estate loans:
  One- to four-family..............................     $ 266,152   $    98,721     $ 364,873
  Multi-family.....................................         1,898         1,498         3,396
  Non-residential..................................        20,335        14,974        35,309
  Construction and development.....................            --            --            --
  Land and land development........................           557           113           670
                                                        ---------   -----------     ---------
    Total real estate loans........................       288,942       115,306       404,248
Consumer and other loans...........................         6,775            --         6,775
                                                        ---------   -----------     ---------
Total loans........................................     $ 295,717   $   115,306     $ 411,023
                                                        =========   ===========     =========
</TABLE>

       ORIGINATION, SALE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its four
offices. In-market loan originations are generated by the Bank's marketing
efforts, which include print, radio and television advertising, lobby displays
and direct contact with local civic and religious organizations, as well as by
the Bank's present customers, walk-in customers and referrals from real estate
agents, brokers and builders. Loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures and are generally
underwritten in accordance with FNMA/FHLMC underwriting standards. The Bank
originates both adjustable-rate and fixed-rate loans. The Bank's ability to
originate fixed- or adjustable-rate loans is dependent upon the relative
customer demand for such loans, which is affected by the current and expected
future level of interest rates. In recent years, the Bank has originated
primarily fixed-rate loans as a result of low customer demand for adjustable-
rate loans given the prevailing low interest rate environment.

       Generally, all loans originated by the Bank are held for investment,
although currently the Bank is exploring opportunities to sell fixed-rate loans
originated by the Bank through the secondary market. The Bank generally does not
originate mortgage loans insured by the FHA and VA.

                                       46
<PAGE>
 
       During the years ended December 31, 1997 and December 31, 1996, the Bank
originated $85.1 million and $55.7 million of one- to four-family mortgage
loans, respectively, all of which were retained by the Bank. In the six months
ended June 30, 1998, the Bank originated $67.2 million of one- to four-family
mortgage loans. On January 1, 1996, the Bank implemented SFAS No. 122 pursuant
to which the value of servicing rights may be recognized as an asset of the
Bank. In the six months ended June 30, 1998 and in the year ended December 31,
1997, the fair value of servicing rights under SFAS No. 122 and SFAS No. 125
were not material and were not recognized in the financial statements for those
periods.

       The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:

<TABLE>
<CAPTION>
                                                                   FOR THE SIX MONTHS
                                                                     ENDED JUNE 30,            FOR THE YEAR ENDED DECEMBER 31,
                                                                  ----------------------    ------------------------------------
                                                                    1998         1997         1997         1996         1995
                                                                  ---------    ---------    ---------    ---------    ----------
                                                                                         (IN THOUSANDS)
<S>                                                               <C>          <C>          <C>          <C>          <C>
Mortgage loans (gross):
  Beginning balance..........................................     $ 422,104     $ 419,201   $ 419,201    $ 406,392    $  388,924
  Mortgage loans originated:
    One- to four-family......................................        67,249        35,948      85,099       55,724        43,807
    Multi-family.............................................            --            --          --        1,440            --
    Non-residential real estate..............................           138           733       1,763        2,384           628
    Construction and development.............................         9,225        11,930      19,333       21,772        24,386
    Land and land development................................            --            --          --          503         3,473
                                                                  ---------     ---------   ---------    ---------    ----------
      Total mortgage loans originated........................        76,612        48,611     106,195       81,823        72,294
    Transfer of mortgage loans to foreclosed real estate.....          (604)          479        (937)      (4,815)           --
    Principal repayments.....................................       (70,078)      (44,127)   (102,355)     (64,199)      (54,826)
                                                                  ---------     ---------   ---------    ---------      --------
    Ending balance...........................................     $ 428,034     $ 424,164   $ 422,104    $ 419,201    $  406,392
                                                                  =========     =========   =========    =========      ========
Consumer and other loans (gross):
  Beginning balance..........................................     $   8,913     $   8,046   $   8,046     $  7,159    $    6,601

    Consumer and other loans originated......................         3,098         3,288       6,323        6,130         7,512
    Principal repayments
                                                                     (2,819)       (2,570)     (5,456)      (5,243)       (6,954)
                                                                  ---------     ---------   ---------     --------    ----------
    Ending balance...........................................     $   9,192     $   8,764   $   8,913     $  8,046    $    7,159
                                                                  =========     =========   =========     ========    ==========
</TABLE>
                                                                                
       ONE-TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences. Most of such loans are located in the Bank's
primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives, from existing
or past customers, and through referrals from members of the Bank's local
communities. At June 30, 1998, the Bank's one- to four-family mortgage loans
totalled $367.0 million, or 84.85%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 73.10% were fixed-rate mortgage loans
and 26.90% were ARM loans.

       The Bank currently offers fixed-rate mortgage loans with terms from ten
to 30 years. The Bank retains all of the fixed-rate residential loans that it
originates. The Bank is considering selling fixed-rate loans originated by the
Bank, but to date has not established a policy for such sales. The Bank does not
purchase one- to four-family mortgage loans.

       The Bank currently offers one-year residential ARM loans with an interest
rate that adjusts annually based on the change in the relevant United States
Treasury index. The Bank also offers loans that bear fixed rates of interest for
specified periods of time and, thereafter, adjust on an annual basis. These
loans provide for up to a 2.0% periodic cap and a lifetime cap of 6.0% over the
initial rate. As a consequence of using caps, the interest rates on these loans
may not be as rate sensitive as the Bank's cost of funds. Borrowers of one-year
residential ARM loans are generally qualified at a rate of 2.0% above the
initial interest rate. The Bank also offers ARM loans that are convertible into
fixed-rate loans with interest rates based upon the then current market rates.
ARM loans generally pose greater credit risks than fixed-rate loans, primarily
because as interest rates rise, the required periodic payment by the borrower
rises, increasing the potential for default. However, as of June 30, 1998, the
Bank had not experienced higher default rates on these loans relative to its
other loans.

                                       47
<PAGE>
 
       All one- to four-family mortgage loans are underwritten according to the
Bank's policies and guidelines. Generally, the Bank originates one- to four-
family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include 
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. The Bank requires fire,
casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Bank.

       Included in the Bank's one- to-four family loan portfolio are home equity
loans. The Bank originates home equity loans that are secured by a lien on the
borrower's residence and generally do not exceed $250,000. The Bank uses the
same underwriting standards for home equity loans as it uses for one- to four-
family residential mortgage loans. Home equity loans are generally originated in
amounts which, together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans either float at a stated margin over the prime rate or
have fixed interest rates. As of June 30, 1998, the Bank had $2.8 million, or
0.64% of the Bank's total loan portfolio outstanding, in home equity loans.

       NON-RESIDENTIAL AND MULTI-FAMILY LENDING. The Bank originates non-
residential real estate loans that are generally secured by properties used for
business purposes such as office buildings, schools, nursing homes, retail
stores and churches located in the Bank's primary market area. The Bank lends to
local churches to fund construction of or renovations to church facilities. Such
loans are generally fixed-rate loans with a maximum loan to value ratio of 80%.
The Bank currently has 36 church loans totalling $12.1 million in the aggregate.
All such loans are performing in accordance with their terms. Multi-family loans
are generally secured by 5 or more unit apartment buildings located in the
Bank's primary market area. The Bank's multi-family and non-residential real
estate underwriting policies provide that such real estate loans may be made in
amounts up to 75% of the appraised value of the property, subject to the Bank's
current internal loan-to-one-borrower limit, which at June 30, 1998 was $2.5
million.

       Non-residential real estate loans and multi-family loans generally have
adjustable rates and terms to maturity that do not exceed 25 years. The Bank's
current lending guidelines generally require that the property securing
commercial real estate loans and multi-family loans generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not to exceed 75% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some non-residential real estate loans and multi-
family loans in the Bank's portfolio may exceed the initial loan-to-value ratio
and the current debt service ratio may exceed the initial debt service ratio.
Adjustable-rate non-residential real estate loans and multi-family loans provide
for interest at a margin over a designated index, often a designated prime rate,
with periodic adjustments, generally at frequencies of up to five years. In
underwriting non-residential real estate loans and multi-family loans, the Bank
analyzes the financial condition of the borrower, the borrower's credit history,
the reliability and predictability of the net income generated by the property
securing the loan and the value of the property itself. The Bank generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing non-
residential real estate loans and multi-family loans originated by the Bank are
performed by independent appraisers approved by the Board of Directors. At June
30, 1998, the Bank's largest non-residential real estate loan was a $1.9 million
loan secured by a local church and was performing in accordance with its terms.
At June 30, 1998, the Bank's largest multi-family loan was a $1.4 million loan
secured by an apartment complex and was performing in accordance with its terms.

       Non-residential real estate loans and multi-family loans generally
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate and multi-
family properties is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed, or a bankruptcy court modifies a
lease term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced. The Bank seeks to minimize these risks through its
underwriting standards.

                                       48
<PAGE>
 
       CONSTRUCTION AND DEVELOPMENT AND LAND LENDING. The Bank originates
construction loans for the development of residential and commercial property.
Construction loans are offered primarily to experienced local developers
operating in the Bank's market area. The majority of the Bank's construction
loans are originated to finance the construction by developers of one- to four-
family residential real estate and, to a lesser extent, multi-family and
commercial real estate properties located in the Bank's primary market area.
Construction loans are generally offered with terms of up to 12 months and may
be made in amounts up to 75% of the appraised value of the property on multi-
family and commercial real estate construction and 80% on one- to four-family
residential construction. Land loans are made in amounts up to 60% of the
appraised value of the land securing the loan. Construction loan proceeds are
disbursed periodically in increments as construction progresses and as
inspections by the Bank's inspecting officers warrant. At June 30, 1998, the
Bank's largest construction and development loan was a performing loan with a
$1.0 million outstanding principal balance secured by 19 units of single family
construction located in Stafford and Spotsylvania Counties.

       Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. If the estimated value proves to be inaccurate, the Bank may be
confronted with a property, when completed, having a value which is insufficient
to assure full repayment.

       CONSUMER AND OTHER LENDING. Consumer loans at June 30, 1998 amounted to
$9.2 million, or 2.1%, of the Bank's total loans and consisted primarily of
automobile loans (new and used) and loans secured by savings accounts. Such
loans are generally originated in the Bank's primary market area and generally
are secured by deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans. Historically, the Bank has not advertised its 
consumer loans and has made these loans only to existing customers.

       Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At June 30, 1998, the Bank
had 30 consumer loans 90 days or more delinquent, whose balances totalled
$113,000.

       LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors of the
Bank establishes the lending policies of the Bank. Such policies provide that
the Bank's President, Executive Vice President and Senior Lending Officer may
approve consumer loans up to $50,000. The Loan Committee approves all
residential loans up to $500,000. The Board approves loans in excess of
$500,000. All loans are submitted to the full Board of Directors for
ratification on a monthly basis.

DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED

       DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 60 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and cause of delinquency and whether the borrower is habitually delinquent. When
a borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. The Bank's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be attempted
to ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
usually attempts to obtain full payment, work out a repayment schedule with the
borrower to avoid foreclosure or, in some instances, accept a deed in lieu of
foreclosure. In the event payment is not then received or the loan not otherwise
satisfied, additional letters and telephone calls generally are made. If the
loan is still not brought current or satisfied and it becomes necessary for the
Bank to take legal action, which typically occurs after a loan is 60 days or
more delinquent, the Bank will commence foreclosure proceedings against any real
property that secures the loan. If a foreclosure action is instituted and the
loan

                                       49
<PAGE>
 
is not brought current, paid in full, or refinanced before the foreclosure sale,
the property securing the loan generally is sold at foreclosure and, if
purchased by the Bank, becomes real estate owned and is sold by the Bank as soon
as possible.

       Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."

       When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.

       A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.

       The Bank's Asset/Liability Committee reviews and classifies the Bank's
assets on a regular basis and the Board of Directors reviews the results of the
reports on a quarterly basis. The Bank classifies assets in accordance with the
management guidelines described above. At June 30, 1998, the Bank had $7.8
million, or 1.65% of total assets, designated as Substandard. At such date, no
assets were classified as Doubtful or Loss (in accordance with OTS regulations).
As of June 30, 1998, the Bank had a total of $1.7 million, or 0.36% of total
assets, classified loans designated as Special Mention. At June 30, 1998, all of
the Bank's classified and Special Mention assets totalled $9.5 million,
representing 2.17% of loans.

                                       50
<PAGE>
 
       The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.

<TABLE> 
<CAPTION> 
                                                         AT JUNE 30, 1998                         AT DECEMBER 31, 1997           
                                             ------------------------------------------   ----------------------------------------
                                                  60-89 DAYS        90 DAYS OR MORE         60-89 DAYS         90 DAYS OR MORE   
                                             -------------------  ---------------------   -----------------  ---------------------
                                                        PRINCIPAL             PRINCIPAL             PRINCIPAL             PRINCIPAL
                                              NUMBER    BALANCE    NUMBER     BALANCE     NUMBER    BALANCE     NUMBER    BALANCE
                                              OF LOANS  OF LOANS   OF LOANS   OF LOANS    OF LOANS  OF LOANS    OF LOANS  OF LOANS
                                             ---------  --------   --------   --------    --------  --------   --------  ---------
                                                                            (DOLLARS IN THOUSANDS)                               
<S>                                          <C>        <C>        <C>        <C>         <C>       <C>         <C>       <C>    
Mortgage loans:                                                                                                                  
  One- to four-family......................      11     $   865        24     $  1,253       13      $  841        31    $ 1,596 
  Multi-family.............................      --          --        --           --       --          --        --         -- 
  Non-residential real estate..............      --          --        --           --       --          --         1        488 
  Construction and development.............      --          --         3          580       --          --         3        604 
  Land and land development................      --          --        --           --       --          --         1          1 
                                               ----     -------      ----     --------     ----      ------      ----    ------- 
    Total mortgage loans...................      11         865        27        1,833       13         841        36      2,689 
Consumer and other loans...................      13          72        30          113       15          87        33        111 
                                               ----     -------      ----     --------     ----      ------      ----    ------- 
Total loans................................      24     $   937        57     $  1,946       28      $  928        69    $ 2,800 
                                               ====     =======      ====     ========     ====      ======      ====    ======= 
Delinquent loans to total loans............    0.35%       0.21%     0.83%        0.45%    0.41%       0.22%     1.01%      0.65% 
                                               ====     =======      ====     ========     ====      ======      ====    ======= 
</TABLE> 

<TABLE> 
<CAPTION>  
 
                                                         AT DECEMBER 31, 1996                         AT DECEMBER 31, 1995        
                                             ------------------------------------------   ----------------------------------------
                                                  60-89 DAYS          90 DAYS OR MORE         60-89 DAYS        90 DAYS OR MORE   
                                             -------------------  ---------------------   -----------------   --------------------
                                                       PRINCIPAL             PRINCIPAL             PRINCIPAL             PRINCIPAL
                                              NUMBER    BALANCE    NUMBER     BALANCE      NUMBER    BALANCE    NUMBER    BALANCE
                                              OF LOANS  OF LOANS   OF LOANS   OF LOANS    OF LOANS  OF LOANS    OF LOANS  OF LOANS
                                             ---------  --------   --------   --------    -------- ---------   --------  ---------
                                                                            (DOLLARS IN THOUSANDS)                               
<S>                                          <C>       <C>         <C>       <C>          <C>      <C>         <C>       <C> 
Mortgage loans:                                                                                                                  
  One- to four-family......................      17     $  1,578       74    $  3,827         22    $ 1,464         8     $   681
  Multi-family.............................      --           --        2         389         --         --        --          --
  Non-residential real estate..............       2          516        3         710         --         --         2         265
  Construction and development.............      --           --        4         839          1        143         4         529
  Land and land development................       1          301        1          37          1        179         1         237
                                               ----      -------     ----    --------       ----    -------      ----     -------
    Total mortgage loans...................      20        2,395       84       5,802         24      1,786        15       1,712
 Consumer and other loans..................      13          111       32         343         13        108        23         326
                                               ----      -------     ----    --------       ----    -------      ----     -------
Total loans................................      33      $ 2,506      116    $  6,145         37    $ 1,894        38     $ 2,038
                                               ====      =======     ====    ========       ====    =======      ====     =======
Delinquent loans to total loans............    0.49%        0.59%    1.71%       1.44%      0.52%      0.46%     0.54%       0.49%
                                               ====      =======     ====    ========       ====    =======      ====     =======  
</TABLE> 

                                       51
<PAGE>
 
         NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets
forth information regarding non-accrual loans and REO. At June 30, 1998, the
Bank had $1.9 million of REO in its portfolio. It is the policy of the Bank to
cease accruing interest on loans 90 days or more past due and to charge off all
accrued interest. For the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996, no interest income was recorded on non-accrual
loans. For the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996, the amount of additional interest income that would have been
recognized on non-accrual loans if such loans had continued to perform in
accordance with their contractual terms was $114,000, $193,000 and $438,000,
respectively. In 1993, the Bank adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No. 118. There
were $8.5 million that met the definition of impaired loans, per SFAS 114 at
June 30, 1998. This compares to $10.7 million, $9.8 million, $11.9 million and
$10.8 million for June 30, 1997, December 31, 1997, 1996 and 1995, respectively.

<TABLE> 
<CAPTION> 
                                                        At June 30,                             At December 31,
                                                ----------------------- ----------------------------------------------------------
                                                   1998        1997        1997        1996        1995        1994        1993   
                                                ----------- ----------- ----------- ----------- ----------- ----------- ----------
Non-accrual loans(1):                                                         (Dollars in thousands)                              
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>         <C> 
  Mortgage loans:                                                                                                                 
    One- to four-family.......................      $1,508      $2,526      $1,648      $5,366      $3,959    $  5,211      $2,143
    Non-residential real estate...............         837         577         628       1,920       1,389       3,634       3,004
    Construction and development..............          --          --          --         774         529          84         203
    Land and development......................         540         494         488         558         653       1,332       1,165
  Consumer and other loans....................          19          79          51         135         269         284         207
                                                   -------    --------    --------    --------    --------    --------    --------
    Total non-accrual loans...................       2,904       3,676       2,815       8,753       6,799      10,545       6,722
  Loans 90 days or more past due 
    and accruing:                                                                                    
     Construction and development                      186          --          --          --          --          --          --
     Land and land development................         135          --          --          --          --          --          --  
                                                   -------    --------    --------    --------    --------    --------    --------
     Total accruing loans 90                                                                                                        
       days or more past due..................         321          --          --          --          --          --          --
                                                   -------    --------    --------    --------    --------    --------    --------
     Total non-performing loans...............       3,225       3,676       2,815       8,753       6,799      10,545       6,722
Total foreclosed real estate..................       1,883       1,882       1,959       1,650       2,195       1,124       2,281
                                                   -------    --------    --------    --------    --------    --------    --------
Total non-performing assets...................      $5,108      $5,558      $4,774     $10,403      $8,994     $11,669      $9,003
                                                   =======    ========    ========    ========    ========    ========    ========
Restructured loans............................      $3,923      $2,914      $3,660     $ 2,546      $3,768     $ 2,239     $   784 
                                                   =======    ========    ========    ========    ========    ========    ========
Non-performing loans to                                                                                                            
  total loans.................................        0.74%       0.89%       0.65%       2.05%       1.64%       2.67%       1.68% 
                                                      ====        ====        ====        ====        ====        ====        ====  
Total non-performing assets                          
  to total assets.............................        1.08%       1.18%       1.01%       2.21%       1.92%       2.60%       2.01%
                                                      ====        ====        ====        ====        ====        ====        ====  
</TABLE> 

(1) Loans are presented before allowance for loan losses.

                                       52
<PAGE>
 
         Restructured loans totalled $3.9 million at June 30, 1998. Restructured
loans include loans that were modified while delinquent. Although the amount due
under these loans has not been modified from the terms of the loans when
originated, certain adjustments were made to these loans to help the borrower
make payments while the loans were delinquent and to enable the Bank to avoid
foreclosure proceedings. All outstanding restructured loans are single-family
loans with balances of less than $196,000 per loan. All restructured loans are
currently performing in accordance with their terms, however, there can be no
assurance that such loans will continue to be performing loans or that the Bank
will not experience losses on such loans in the future.

         ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of June
30, 1998, the Bank's allowance for loan losses was 1.33% of total loans as
compared to 1.33% as of December 31, 1997. The Bank had non-performing loans of
$3.2 million and $2.8 million at June 30, 1998 and December 31, 1997,
respectively. The Bank will continue to monitor and modify its allowances for
loan losses as conditions dictate. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.

                                       53
<PAGE>
 
         The following table sets forth activity in the Bank's allowance for
loan losses for the periods as indicated.

<TABLE> 
<CAPTION> 
                                        AT OR FOR THE SIX            
                                           MONTHS ENDED
                                             JUNE 30,                AT OR FOR THE YEAR ENDED DECEMBER 31,
                                       --------------------- -------------------------------------------------------
                                         1998       1997       1997       1996       1995        1994       1993
                                       ---------- ---------- ---------- ---------- ----------  ---------  ----------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                    <C>        <C>        <C>        <C>        <C>         <C>        <C> 
Balance at beginning of period .....      $5,478     $5,543     $5,543     $5,480     $5,537     $5,355      $4,668
Provision for loan losses ..........         269        241        375        325        412      1,010       1,129
Charge-offs:
  Mortgage loans:
    One- to four-family ............         (79)      (148)      (260)      (244)       (17)      (197)       (412)
    Non-residential real estate ....          --         --         --         --         --       (619)         --
    Construction and development ...          --        (32)      (148)        --       (469)        --          --
  Consumer loans ...................         (29)        (7)       (32)       (19)        (3)       (12)        (38)
                                          ------     ------     ------     ------     ------     ------      ------
      Total charge-offs ............        (108)      (187)      (440)      (263)      (489)      (828)       (450)
Recoveries .........................          --         --         --          1         20         --           8
                                          ------     ------     ------     ------     ------     ------      ------
Balance at end of period ...........      $5,639     $5,597     $5,478     $5,543     $5,480     $5,537      $5,355
                                          ======     ======     ======     ======     ======     ======      ======
Ratio of net charge-offs during the                                                                                  
  period to average net loans 
  outstanding during the period ....        0.03%      0.05%      0.11%      0.07%      0.13%      0.22%       0.12%  
                                            ====       ====       ====       ====       ====       ====        ====    
Ratio of allowance for loan losses to      
  net loans receivable at the end of
  the period .......................        1.33%      1.34%      1.33%      1.37%      1.40%      1.49%       1.43% 
                                            ====       ====       ====       ====       ====       ====        ====   
Ratio of allowance for loan losses to    
  non-performing loans at the end of
  the period .......................      174.85%    152.26%    194.60%     63.33%     80.60%     52.46%      79.66% 
                                          ======     ======     ======      =====      =====      =====       =====   
</TABLE> 


         The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.

<TABLE> 
<CAPTION> 
                                                                           AT JUNE 30,
                                           ---------------------------------------------------------------------------
                                                          1998                                   1997
                                           ------------------------------------  -------------------------------------
                                                                     PERCENT                                PERCENT
                                                                     OF LOANS                               OF LOANS
                                                      PERCENT OF     IN EACH                 PERCENT OF     IN EACH
                                                       ALLOWANCE     CATEGORY                ALLOWANCE      CATEGORY
                                                        TO TOTAL     TO TOTAL                 TO TOTAL      TO TOTAL
                                            AMOUNT     ALLOWANCE      LOANS       AMOUNT     ALLOWANCE       LOANS
                                           ---------  -----------   -----------  ----------  -----------   -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                        <C>        <C>           <C>          <C>         <C>           <C> 
One-to four-family                          $   120         2.13%        83.94%     $  119         2.13%        81.73%
Multi-family                                     --           --          0.78          --           --          0.79
Non-residential real estate                     410         7.27          8.08         411         7.34         10.24
Construction and development                     --           --          4.57          --           --          4.08
Land and land development                        --           --          0.53          10         0.18          0.86
Consumer and other loans                         80         1.42          2.10          80         1.43          2.30
Unallocated general reserves                  5,029        89.18            --       4,977        88.92            --
                                             ------      -------       -------       -----       ------         -----   

    Total allowance                          $5,639       100.00%       100.00%     $5,597       100.00%       100.00%
                                             ======       ======        ======      ======       ======        ======
</TABLE> 

                                       54
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                            AT DECEMBER 31,
                               -------------------------------------------------------------------------------- 
                                         1997                      1996                      1995               
                               -------------------------  -------------------------- -------------------------- 
                                                 PERCENT                    PERCENT                    PERCENT  
                                                   OF                         OF                         OF     
                                                  LOANS                      LOANS                      LOANS   
                                       PERCENT   IN EACH          PERCENT   IN EACH          PERCENT   IN EACH  
                                          OF     CATEGORY            OF     CATEGORY            OF     CATEGORY 
                                       ALLOWANCE   TO             ALLOWANCE   TO             ALLOWANCE   TO     
                                       TO TOTAL   TOTAL           TO TOTAL   TOTAL           TO TOTAL   TOTAL   
                                AMOUNT ALLOWANCE  LOANS   AMOUNT  ALLOWANCE  LOANS   AMOUNT  ALLOWANCE  LOANS   
                                ------ --------- -------  ------  --------- -------- ------  --------- -------- 
                                                                         (DOLLARS IN THOUSANDS)                 
<S>                            <C>     <C>       <C>      <C>     <C>       <C>      <C>     <C>       <C>      
One-to four-family(1).........  $  191    3.48%   83.19% $    82     1.48%   80.94%  $  361     6.59%    79.69%  
Multi-family..................      --      --     0.80      226     4.08     0.81      226     4.12      0.57   
Non-residential real estate...     220    4.02     9.50      311     5.61    10.42       92     1.68     10.77   
Construction and development..      --      --     3.72       --       --     4.98       --       --      5.69   
Land and land development.....      67    1.22     0.72       10     0.18     0.97       11     0.20      1.55   
Consumer and other loans......      65    1.19     2.07       61     1.10     1.88       57     1.04      1.73   
Unallocated general reserves..   4,935   90.09       --    4,853    87.55       --    4,733    86.37        --   
                                ------ -------   ------   ------  -------   ------   ------  -------   -------   
  Total allowance.............  $5,478  100.00%  100.00%  $5,543   100.00%  100.00%  $5,480   100.00%   100.00%  
                                ====== =======   ======   ======  =======   ======   ======  =======   =======    


<CAPTION> 
                                                  AT DECEMBER 31,
                               ----------------------------------------------------
                                      1994                         1993
                               -------------------------  -------------------------
                                                 PERCENT                   PERCENT 
                                                   OF                        OF    
                                                  LOANS                     LOANS  
                                      PERCENT    IN EACH         PERCENT   IN EACH 
                                         OF      CATEGORY           OF     CATEGORY
                                      ALLOWANCE    TO            ALLOWANCE   TO    
                                      TO TOTAL    TOTAL          TO TOTAL   TOTAL  
                               AMOUNT ALLOWANCE   LOANS   AMOUNT ALLOWANCE  LOANS  
                               ------ ---------  --------  ------ --------- --------  
                                                       (DOLLARS IN THOUSANDS)                                 
<S>                            <C>    <C>       <C>       <C>    <C>       <C> 
One-to four-family(1)......... $  224     4.05%    79.09%  $  195     3.64%   79.08%
Multi-family..................    634    11.45      1.11      957    17.87%    2.33
Non-residential real estate...    506     9.14     10.10      250     4.67%    9.72   
Construction and development..     --       --      6.89       --       --     5.89   
Land and land development.....     10     0.18      1.12       --       --     1.37   
Consumer and other loans......     55     0.99      1.69       56     1.05     1.61   
Unallocated general reserves..  4,108    74.19        --    3,897    72.77       --  
                               ------ --------   -------   ------ --------  -------    
  Total allowance............. $5,537   100.00%   100.00%  $5,355   100.00%  100.00%
                               ====== ========   =======   ====== ========  =======   
</TABLE> 

________________________
(1)  Includes home equity lines of credit.

 

                                       55
<PAGE>
 
         REAL ESTATE OWNED. At December 31, 1997 and June 30, 1998, the Bank had
$2.0 million and $1.9 million of REO, respectively. At June 30, 1998, REO
consisted of 25 one- to four-family properties, one parcel of land, one
non-residential property and one multi-family property. When the Bank acquires
property through foreclosure or by deed in lieu of foreclosure, it is initially
recorded at the lower of the recorded investment in the corresponding loan or
the fair value of the related assets at the date of foreclosure, less costs to
sell. Thereafter, if there is a further deterioration in value, the Bank
provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of the Bank to have obtained an appraisal
on all real estate subject to foreclosure proceedings prior to the time of
foreclosure. It is the Bank's policy to require appraisals on a periodic basis
on foreclosed properties and conduct inspections on foreclosed properties. The
Bank seeks to sell its REO properties to the tenants of those properties and
encourages tenants to take advantage of this opportunity by selling the
properties at a favorable market value and with favorable loan terms, including
100% financing. Management believes this type of lending enhances the Bank's CRA
performance.

INVESTMENT ACTIVITIES

         The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations with terms of five years or less,
U.S. Agency obligations, including mortgage-backed securities with terms of five
years or less, municipal bonds with terms of five years or less rated by a
highly regarded rating service, such as Standard & Poors, as AA or better and
certain certificates of deposit of insured banks and savings institutions,
corporate obligations up to a maximum of 1% of the Bank's total assets that have
terms of five years or less and are rated by a highly regarded rating service,
such as Standard & Poors, as AA or better. The Bank is also authorized to invest
in mutual funds whose assets conform to the investments that the Bank is
otherwise authorized to make directly.

         Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily U.S. Treasury obligations, federal agency obligations and high
grade corporate debt securities) with short and intermediate terms (five years
or less) to maturity. At June 30, 1998, the weighted average term to maturity
for investment securities available-for-sale and mortgage-backed and related
securities held-to-maturity were 1.93 years and 11.12 years, respectively. See
Notes to Financial Statements for information regarding the maturities of the
Bank's securities.

         At June 30, 1998 the Bank had dual indexed consolidated bonds with a
fair value of $1.9 million, which was $587,000 below the Bank's amortized cost.
These instruments were purchased in 1993 and do not comply with the Bank's
current investment policy. The Bank does not intend to invest in this type of
instrument in the future and, based upon market conditions, intends to evaluate
opportunities to divest itself of these instruments. See "Notes to Financial
Statements" for information regarding dual indexed consolidated bonds.

         Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of
Atlanta, the Bank is required to hold FHLB of Atlanta stock which is carried at
cost since there is no readily available market value. Historically, the Bank
has not held any securities considered to be trading securities.

                                       56
<PAGE>
 
      The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.

<TABLE> 
<CAPTION> 
                                                                                         AT DECEMBER 31,                           
                                                AT JUNE 30,       ---------------------------------------------------------------- 
                                                   1998                   1997                1996                   1995   
                                            -------------------   -----------------    ------------------    --------------------- 
                                              AMORTIZED   FAIR     AMORTIZED   FAIR     AMORTIZED   FAIR      AMORTIZED   FAIR     
                                                COST      VALUE      COST      VALUE      COST      VALUE       COST      VALUE    
                                            -----------  -------  ----------  -------  ----------  -------   ----------  --------- 
                                                                                (IN THOUSANDS)
<S>                                         <C>          <C>      <C>         <C>      <C>         <C>       <C>         <C>    
Investment securities,                                                                                                             
  available-for-sale:(1)                                                                                                           
U.S. Treasury and agency                                                                                                           
  obligations............................   $16,814      $16,875    $19,812   $19,836   $20,823    $20,803    $30,943     $31,147
Corporate obligations....................     4,856        4,906      3,345     3,414     3,995      4,094      6,514       6,694
Other debt securities....................     5,007        5,966      3,946     4,713     3,744      3,983      3,465       3,669
Mutual funds.............................     1,293        1,268      1,262     1,242     1,199      1,175      1,136       1,104
Duel indexed consolidated bonds..........     2,500        1,913      2,500     1,946     2,500      1,924      7,500       6,643
                                            -------      -------    -------   -------   -------    -------    -------     -------
Total investment securities..............   $30,470      $30,928    $30,865   $31,151   $32,261    $31,979    $49,558     $49,257
                                            =======      =======    =======   =======   =======    =======    =======     =======   
</TABLE> 

__________________
(1)   On December 31, 1995, the Bank transferred all investment securities that
      were classified as held-to-maturity to the available-for-sale category.
      The amortized costs of the amounts transferred was $49.6 million with an
      unrealized gain of $684,000, and an unrealized loss of $985,026. The Bank
      made this transfer in response to a one-time reassessment opportunity
      granted in a special report regarding the implementation of SFAS 115.

      The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed and mortgage-related
securities, all of which were classified as held-to-maturity at the dates
indicated.

<TABLE> 
<CAPTION> 
                                                AT JUNE 30,                              AT DECEMBER 31,                           
                                                                  -----------------------------------------------------------      
                                                   1998                   1997                1996                1995             
                                            -------------------   -----------------    ------------------    ----------  --------- 
                                              AMORTIZED   FAIR     AMORTIZED   FAIR     AMORTIZED   FAIR      AMORTIZED   FAIR     
                                                COST      VALUE      COST      VALUE      COST      VALUE       COST      VALUE    
                                            -----------  -------  ----------  -------  ----------  -------   ----------  --------- 
                                                                                (IN THOUSANDS)                              
<S>                                         <C>          <C>      <C>         <C>      <C>         <C>       <C>         <C>  
Mortgage-backed and related 
securities held-to-maturity:
  Fixed rate:
    FNMA pass through securities.........     $  768      $  768   $   838    $   838    $1,008    $1,008    $1,197       $1,197
    GNMA certificates....................        422         458       453        497       494       537       682          741
                                              ------      ------   -------    -------    ------    ------    ------       ------
Total mortgage-backed                      
  and related securities.................     $1,190      $1,226    $1,291     $1,335    $1,502    $1,545    $1,879       $1,938
                                              ======      ======    ======     ======    ======    ======    ======       ======
</TABLE> 

      The following table sets forth the Bank's mortgage-backed and mortgage-
related securities activities for the periods indicated.

<TABLE> 
<CAPTION> 
                                                           FOR THE SIX MONTHS                                       
                                                             ENDED JUNE 30,         FOR THE YEAR ENDED DECEMBER 31, 
                                                          ----------------------   -----------------------------------
                                                            1998        1997         1997        1996         1995
                                                          ----------  ----------   ----------  ----------   ----------
                                                                                (IN THOUSANDS)
<S>                                                       <C>         <C>          <C>         <C>          <C>  
Mortgage-backed securities:
At beginning of period..............................         $1,291      $1,502       $1,502      $1,879       $2,109
  Mortgage-backed securities purchased..............             --          --           --          --           --
  Mortgage-backed securities sold...................             --          --           --          --           --
  Amortization and repayments.......................           (101)        (98)        (211)       (377)        (230)
                                                             ------      ------       ------      ------       ------
Balance of mortgage-backed and related                                                                                
 securities at end of period........................         $1,190      $1,404       $1,291      $1,502       $1,879
                                                             ======      ======       ======      ======       ======
</TABLE> 

                                       57
<PAGE>
 
          The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of the Bank's
investment securities, and mortgage-related securities as of June 30, 1998.

<TABLE> 
<CAPTION> 
                                                                               AT JUNE 30, 1998
                                -------------------------------------------------------------------------------------------------- 
                                                              ONE                THREE TO             MORE THAN                    
                                 ONE YEAR OR LESS       TO THREE YEARS          FIVE YEARS            FIVE YEARS                   
                                --------------------  --------------------  --------------------  -------------------       
                                                                                                                         AVERAGE   
                                           WEIGHTED              WEIGHTED              WEIGHTED             WEIGHTED    REMAINING 
                                CARRYING   AVERAGE    CARRYING   AVERAGE    CARRYING   AVERAGE    CARRYING  AVERAGE     YEARS TO  
                                 AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT    YIELD      MATURITY  
                                ---------  ---------  ---------  ---------  --------   ---------  --------  ---------   ----------
                                                                 (DOLLARS IN THOUSANDS)                                           
<S>                             <C>        <C>        <C>        <C>        <C>        <C>        <C>       <C>         <C>    
Investment securities,                                                                                                            
 available-for-sale:                                                                                                              
  U.S. Treasury and agency       
   obligations.................  $ 9,514      5.80%     $6,300      6.16%   $   500        6.49%  $   500       6.14%        1.15
  Corporate obligations........    1,000       9.75      2,500      6.08      1,356        6.40        --       4.93         1.79 
  Other debt securities........    3,717       1.96         --        --        940        9.71       350       4.93         1.79 
  Mutual funds.................    1,293       2.40         --        --         --          --        --         --         0.25 
  Duel indexed consolidated            
   bonds.......................       --         --         --        --                     --     2,500       2.92         7.18   
                                 -------    -------     ------    ------     ------       -----    ------      -----              
    Total investment             
   securities..................  $15,524       4.85%    $8,800      6.14%    $2,796        7.53%   $3,350       3.61%        1.93
                                 =======       ====     ======      ====     ======        ====    ======      =====              
Mortgage-backed and related                                                                                                      
   securities held-to-maturity:  
   FNMA pass through             
   securities..................  $    --                $   --               $   --                $  768       9.60%        7.50
   GNMA certificates...........       --                    --                   --                   422       9.91        17.71 
                                 -------                ------               ------                ------      -----              
  Total mortgage-backed and      
   related securities..........  $    --                $   --               $   --                $1,190       9.71%       11.12
                                 =======                ======               ======                ======       ====              
<CAPTION> 

                                            AT JUNE 30, 1998                    
                                   ---------------------------------            
                                                 TOTAL                          
                                    --------------------------------           
                                                            WEIGHTED           
                                    CARRYING     MARKET     AVERAGE            
                                    AMOUNT        VALUE      YIELD             
                                    --------     --------   --------           
<S>                                 <C>          <C>        <C>                
Investment securities,                                                         
 available-for-sale:                                                           
  U.S. Treasury and agency                                                     
    obligations.................    $16,814      $16,875        5.97%           
  Corporate obligations.........      4,856        4,906        6.93           
  Other debt securities.........      5,007        5,966        3.63           
  Mutual funds..................      1,293        1,268        2.40           
  Duel indexed consolidated                                                    
    bonds.......................      2,500        1,913        2.92           
                                    -------      -------        ----           
   Total investment                                                            
    securities..................    $30,470      $30,928        5.33%          
                                    =======      =======        ====           
Mortgage-backed and related                                                    
    securities held-to-maturity:                                               
   FNMA pass through                                                           
    securities..................    $   768      $   768        9.60%          
   GNMA certificates............        422          458        9.91           
                                    -------      -------        ----           
  Total mortgage-backed and                                                    
    related securities..........    $ 1,190      $ 1,226        9.71%          
                                    =======      =======        ====           
</TABLE> 
                                                                             

                                       58
<PAGE>
 
Sources of Funds

          General. Deposits, loan repayments and prepayments, maturities of
securities and cash flows generated from operations are the primary sources of
the Bank's funds for use in lending, investing and for other general purposes.

          Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of passbook and
statement savings accounts, money market accounts, transaction accounts and time
deposits currently ranging in terms from one to five years. For the six months
ended June 30, 1998, the balance of core deposits (savings and money market
accounts) represented 22.3% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Bank's deposits are
obtained predominantly from the areas surrounding its branch offices. The Bank
has historically relied primarily on providing a higher level of customer
service and long-standing relationships with customers to attract and retain
these deposits and also relies on competitive pricing policies and advertising;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. The Bank has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. The Bank
manages the pricing of its deposits in keeping with its asset/liability
management, liquidity and profitability objectives. Based on its experience, the
Bank believes that its passbook and statement savings, money market accounts and
transaction accounts are relatively stable sources of deposits. The Bank's time
deposits have been a relatively stable source of funds as well, including the
$196.7 million of certificates of deposit maturing in one year or less; however,
the ability of the Bank to attract and maintain time deposits and the rates paid
on these deposits has been and will continue to be significantly affected by
market conditions. The Bank is seeking opportunities to grow its transaction
accounts through aggressive advertising, offering ATM services, and offering
interest on such accounts. The Bank also intends to expand its product line to
attract more customers, including local businesses.

          The following table presents the deposit activity of the Bank for the
periods indicated:

<TABLE> 
<CAPTION> 
                                                                    FOR THE                 FOR THE YEAR ENDED
                                                                SIX MONTHS ENDED               DECEMBER 31,
                                                                    JUNE 30,
                                                              ---------------------  ---------------------------------
                                                                1998       1997        1997       1996        1995
                                                              ---------- ----------  ---------- ---------- -----------
                                                                                  (In thousands)
<S>                                                           <C>         <C>        <C>        <C>         <C> 
Net increase (decrease) before interest credited...........   $(12,770)    $(7,266)   $(17,354)  $(29,800)    $(8,139)
Interest credited..........................................      9,375       9,262      18,816     19,076      18,432
                                                              ---------    -------   ---------  ---------    --------
Net increase (decrease) in savings deposits................   $ (3,395)    $ 1,996    $  1,462   $(10,724)    $10,293
                                                              =========     ======   =========  =========     =======
</TABLE> 

          At June 30, 1998, the Bank had $45.3 million in certificate accounts
in amounts of $100,000 or more maturing as follows:

<TABLE> 
<CAPTION> 
MATURITY PERIOD                                                     AMOUNT
-----------------                                             ------------------
                                                                (IN THOUSANDS)
<S>                                                           <C> 
3 months or less..........................................         $ 8,590
Over 3 through 6 months...................................           8,190
Over 6 through 12 months..................................          14,500
Over 12 months............................................          14,066
                                                                   -------
      Total...............................................         $45,346
                                                                   =======
</TABLE> 

                                       59
<PAGE>
 
          The following table sets forth the distribution of the Bank's deposit
accounts for all of the dates indicated and the weighted average interest rates
on each category of deposits presented.

<TABLE> 
<CAPTION> 
                                                                                             At December 31, 
                                                      At               ------------------------------------------------------------
                                                June 30, 1998                      1997                         1996               
                                         ----------------------------- ------------------------------------------------------------
                                                   Percent   Weighted            Percent  Weighted             Percent  Weighted   
                                                   of Total  Average            of Total   Average            of Total   Average   
                                          Balance  Deposits    Rate     Balance Deposits    Rate     Balance  Deposits    Rate     
                                         --------- --------  --------  -------- --------  --------   -------  --------  --------  
                                                                           (Dollars in thousands)                     
<S>                                      <C>       <C>       <C>       <C>      <C>       <C>        <C>      <C>       <C> 
Transaction accounts................         2,481     0.66      0.32     3,266     0.87        --     2,451      0.65        --  
Savings.............................        80,959    21.66      3.25    84,547    22.42      3.25    90,255     24.03      3.25  
                                         ---------  -------            --------  -------             -------  --------            
    Total...........................        83,440    22.33      3.16    87,813    23.29      3.13    92,706     24.68      3.16  
                                         ---------  -------            --------  -------             -------  --------            
Certificate accounts(1)(2):                                                                                                        
  Within 12 months..................       196,666    52.62      5.60   192,592    51.07      5.74   206,995     55.10      5.57  
  Over 12 through 36 months.........        72,526    19.41      5.84    82,054    21.76      5.81    73,143     19.47      6.03  
  Over 36 months....................        21,087     5.64      6.29    14,655     3.88      6.32     2,808      0.75      6.21  
                                         ---------  -------            --------  -------             -------  --------            
    Total certificate accounts......       290,279    77.67      5.71   289,301    76.71      5.79   282,946     75.32      5.70 
                                         ---------  -------            --------  -------             -------  --------            
    Total average deposits..........      $373,719   100.00%     5.16  $377,114   100.00%     5.17  $375,652    100.00%     5.07 
                                         =========  =======            ========  =======             =======  ========            

<CAPTION> 
                                                At December 31, 
                                          -----------------------------
                                                      1995
                                          -----------------------------
                                                    Percent  Weighted
                                                    of Total  Average
                                           Balance  Deposits   Rate  
                                          --------  -------- --------  
                                            (Dollars in thousands) 
<S>                                       <C>       <C>      <C> 
Transaction accounts................          2,716     0.70       --
Savings.............................         97,696    25.29     3.25
                                          --------- --------  
    Total...........................        100,412    25.99     3.16
                                          --------- --------             
Certificate accounts(1)(2):                                            
  Within 12 months..................        193,460    50.07     5.63
  Over 12 through 36 months.........         92,504    23.94     5.60
  Over 36 months....................             --       --     5.62    
                                          --------- --------  
    Total certificate accounts......        285,964    74.01     5.62    
                                          --------- --------           
    Total average deposits..........       $386,376   100.00%    4.98                                     
                                          ========= ========              
</TABLE> 
                                          
______________________________
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.

                                       60
<PAGE>
 
     The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1998.

<TABLE> 
<CAPTION> 
                                                      PERIOD TO MATURITY FROM JUNE 30, 1998
                                                     ---------------------------------------
                                                         LESS          ONE  
                                                         THAN          TO           OVER                AT DECEMBER 31, 
                                                                                               ----------------------------------
                                     AT JUNE 30,         ONE          THREE         THREE                                        
                                        1998             YEAR         YEARS         YEARS        1997        1996        1995
                                   ---------------   -----------   -----------   -----------   ----------  ----------  ----------
                                                                                (IN THOUSANDS)
   <S>                             <C>               <C>           <C>           <C>           <C>         <C>         <C>
   Certificate accounts:
     0 to 4.00%................        $     --         $     --      $     --      $     --     $     --    $     18    $    575
     4.01% to 5.00%............          19,299           19,299            --            --       17,304      42,404      40,990
     5.01% to 6.00%............         243,579          166,483        72,486         4,610      233,582     183,490     139,919
     6.01% to 7.00%............          24,239            7,722            40        16,477       32,589      51,217      99,017
     7.01% to 8.00%............           3,162            3,162            --            --        5,827       5,817       5,386
     8.01% to 9.00%............              --               --            --            --           --          --          77
     Over 9.01%................              --               --            --            --           --          --          --
                                       --------         --------      --------      --------     --------    --------    --------
       Total...................        $290,279         $196,666      $ 72,526      $ 21,087     $289,302    $282,946    $285,964
                                       ========         ========      ========      ========     ========    ========    ========
</TABLE>

     BORROWINGS. As part of its operating strategy, the Bank has utilized
advances from the FHLB as an alternative to retail deposits to fund its
operations when borrowings are less costly and can be invested at a positive
interest rate spread or when the Bank needs additional funds to satisfy loan
demand. By utilizing FHLB advances, which possess varying stated maturities, the
Bank can meet its liquidity needs without otherwise being dependent upon retail
deposits and revising its deposit rates to attract retail deposits, which have
no stated maturities (except for certificates of deposit), which are interest
rate sensitive and which are subject to withdrawal from the Bank at any time.
These FHLB advances are collateralized primarily by certain of the Bank's
mortgage loans and secondarily by the Bank's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions, including the Bank,
fluctuates from time-to-time in accordance with the policies of the FHLB. See
"Regulation--Federal Home Loan Bank System." At June 30, 1998, the Bank had $8.0
million in outstanding advances from the FHLB as compared to $8.0 million at
December 31, 1997. The Bank has overnight borrowing capacity at the FHLB of
$45.0 million and additional borrowing capacity at June 30, 1998 of $37.0
million.

     The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:

<TABLE> 
<CAPTION> 
                                                                    AT OR FOR THE SIX           AT OR FOR THE YEAR ENDED
                                                                  MONTHS ENDED JUNE 30,                DECEMBER 31,
                                                                 -----------------------    ----------------------------------
                                                                    1998         1997          1997        1996        1995
                                                                 ----------   ----------    ----------  ----------  ----------
                                                                                     (DOLLARS IN THOUSANDS)
<S>                                                              <C>          <C>           <C>         <C>         <C>
FHLB advances:
   Average balance outstanding (monthly)....................        $8,000      $10,000       $ 9,667     $ 7,417     $ 8,000
   Maximum amount outstanding at any
      month-end during the period...........................         8,000       10,000        10,000      15,000       8,000
   Balance outstanding at end of period.....................         8,000       10,000         8,000      15,000       8,000
   Weighted average interest rate during the period.........          6.14%        6.14%         6.23%       6.18%       6.95%
   Weighted average interest rate at end of period..........          6.19%        6.19%         6.19%       6.23%       7.16%
</TABLE>

                                       61
<PAGE>
 
PROPERTIES

     The Bank currently conducts its business through its four full service
banking offices including its main banking office. The Bank owns all four
branches. The following table sets forth information regarding the Bank's
properties.

<TABLE> 
<CAPTION> 
                                               ORIGINAL        NET BOOK VALUE       TOTAL DEPOSITS
                                                 YEAR          OF PROPERTY AT             AT
LOCATION                                        ACQUIRED        JUNE 30, 1998        JUNE 30, 1998
----------------------------------------     -------------    -----------------    -----------------
                                                                           (IN THOUSANDS)
<S>                                          <C>              <C>                  <C>
EXECUTIVE/BRANCH OFFICE:
400 George Street......................          1962              $1,007               $244,106
Fredericksburg, VA  22404

BRANCH OFFICES:
Route Three Branch.....................          1983                 735                 42,239
3600 Plank Road
Fredericksburg, VA  22407

Four Mile Fork Branch..................          1972                 483                 60,531
4535 Lafayette Boulevard
Fredericksburg, VA  22408

Aquia Branch...........................          1978                 401                 26,843
117 Garrisonville Road
P.O. Box 382
Stafford, VA  22555
</TABLE>

     The Bank also owns property for possible branch expansion located on Route
17 North, in Stafford County. The net book value of this property, as of June
30, 1998, was $____________.

LEGAL PROCEEDINGS

     The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.

PERSONNEL

     As of June 30, 1998, the Bank had 50 full-time employees and six part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Benefits" for a description of certain compensation and
benefit programs offered to the Bank's employees.

                                       62
<PAGE>
 
                          FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     GENERAL. The Company and the Bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS or the Virginia
Department of Revenue ("DOR") in the past five years.

     BAD DEBT RESERVE. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interests in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.

     In August 1996, provisions repealing the current thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.

     DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). See "Regulation"
and "Dividend Policy" for limits on the payment of dividends of the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve.

                                       63
<PAGE>
 
     CORPORATE ALTERNATIVE MINIMUM TAX ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.

     DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.

STATE AND LOCAL TAXATION

     COMMONWEALTH OF VIRGINIA. The Commonwealth of Virginia imposes a tax at the
rate of 6.0% on the "Virginia taxable income" of the Bank and the Company.
Virginia taxable income is equal to federal taxable income of interest or
dividends on obligations or securities of the United States that are exempt from
state income taxes, and a recomputation of the bad debt reserve deduction on
reduced modified taxable income. Since the Bank and the Company will recognize
no taxable gain for federal tax purposes as a result of the Conversion, the Bank
and the Company will recognize no Virginia taxable income as a result of the
Conversion.

                                  REGULATION

GENERAL

     The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to test the Bank's
compliance with various regulatory requirements. In addition, the FDIC may also
conduct examinations of the Bank, at the FDIC's discretion. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with and otherwise comply with the
rules and regulations of the OTS and of the Securities and Exchange Commission
(the "SEC") under the federal securities laws.

     Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress has been considering the elimination of the federal thrift charter and
abolishment of the OTS. The results of such consideration, including possible
enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."

     Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.

                                       64
<PAGE>
 
FEDERAL SAVINGS INSTITUTION REGULATION

     BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. In particular, certain lending authority for federal
savings associations, e.g., commercial, non-residential real property loans and
consumer loans, is limited to a specified percentage of the institution's
capital or assets.

     LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. At June 30, 1998, the Bank's general limit on loans-to-one borrower
was $20.9 million. At June 30, 1998, the Bank's largest aggregate amount of
loans-to-one borrower consisted of one mortgage loan and two installment loans
to a local church with a combined carrying balance of $2.1 million, of which
$2.0 million was secured by real estate and $75,044 was unsecured. Management
believes that the Bank is in compliance with all applicable loans-to-one
borrower limitations.

     QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to either qualify as a "domestic
building and loan association," as defined in the Code, or maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of June 30, 1998,
the Bank maintained 99.99% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."

     LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Institution") and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior notice
to, but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below its
capital requirements or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.

     LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (recently lowered to 4%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations formerly required each savings
institution to maintain an average daily balance of short-term liquid assets at
1% of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. However, this requirement was recently eliminated. Monetary
penalties may be imposed for failure to meet the liquidity requirements. The
Bank's average liquidity ratio for the six months ended June 30, 1998 was
8.70%%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

                                       65
<PAGE>
 
     ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, as reported in the Bank's latest quarterly Thrift Financial Report. The
assessments paid by the Bank for the year ended December 31, 1997 totalled
$________.

     BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of proposed legislation, see "Risk Factors--Financial
Institution Regulation and Possible Legislation."

     TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Section 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans to insiders made pursuant to a benefit or compensation program that are
widely available to all employees of the institution and do not give preference
to insiders over other employees. Regulation O also places individual and
aggregate limits on the amounts of loans the Bank may make to insiders based, in
part, on the Bank's capital position and requires that certain board approval
procedures be followed.

     ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.

     STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness ("Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.

                                       66
<PAGE>
 
     CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital to total assets) ratio and an 8% risk based capital
standard. Core capital is generally defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and certain purchased credit card relationships. The OTS regulations
require that, in meeting the leverage ratio, tangible and risk-based capital
standards institutions generally must deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4% (3%
for institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."

     The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed above. The
components of supplementary capital generally include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the 
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their 
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed indefinitely the date that the
component will first be deducted from an institution's total capital.

     At June 30, 1998, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a table
which sets forth in terms of dollars and percentages the OTS tangible, leverage
and risk-based capital requirements, the Bank's historical amounts and
percentages at June 30, 1998 and pro forma amounts and percentages based upon
the issuance of the shares within the Estimated Price Range and assuming that a
portion of the net proceeds are retained by the Company.

PROMPT CORRECTIVE REGULATORY ACTION

     Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital ratio of
less than 8.0% or a leverage ratio or a Tier 1 capital to risk-based assets
ratio that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital ratio less than 6.0%, a Tier 1
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow

                                       67
<PAGE>
 
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.

INSURANCE OF DEPOSIT ACCOUNTS

     The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.

     Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance assessments of between 24 and 25 basis points. The BIF
met the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.

     In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.

     On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended September 30, 1996 and was generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to $2.4
million on a pre-tax basis and $1.5 on an after-tax basis.

     The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.

     As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. Most recently, the FDIC determined to continue the 0 to 27
basis point range for the second half of 1998. SAIF members will also continue
to make the FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an on-going basis, whether the federal thrift
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.

                                       68
<PAGE>
 
     The Bank's assessment rate for 1997 ranged from 6.32 to 6.50 basis points
and the regular premium paid for this period was $240,000.

     The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.

     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1998 of $3.5 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance. At June 30, 1998, the Bank had $8.0 million in FHLB advances.

     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Bank amounted to approximately $247,000, $232,000
and $240,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Bank.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.43 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.

HOLDING COMPANY REGULATION

     The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries.

     As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See

                                       69
<PAGE>
 
"--Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities authorized for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. No multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
Proposed legislation would, subject to certain grandfathering, limit the
activities of unitary savings and loan companies to those permissible for
multiple savings and loan holding companies. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS, and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.

     The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.

     Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described above. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.

THRIFT RECHARTERING

     The Funds Act provides that the BIF and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in Congress that would eliminate the federal thrift charter
and the OTS. A bill originally reported by the House Banking Committee would
have regained federal thrifts to become national banks or state banks within two
years of enactment or they would have become national banks by operation of law.
OTS would have been abolished and its functions transferred to the bank
regulatory agencies. The bill as passed by the House of Representatives,
however, did not provide for the elimination of the federal thrift charter or
OTS, but did provide that unitary stock savings and loan holding companies
existing or applied for after March 31, 1998 would not have the ability to
engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
stock holding companies existing or applied for before 1998 would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Bank is
unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and BIF
will eventually be merged or the federal thrift charter eliminated, and what
effect, if any, such legislation would have on the Bank.

                                       70
<PAGE>
 
FEDERAL SECURITIES LAWS

     The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.

     The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.

                           MANAGEMENT OF THE COMPANY

     The Board of Directors' of the Company currently consists of nine members
each of whom is also a director of the Bank. The Board of Directors is divided
into three classes, each of which contains approximately one-third of the Board.
The directors shall be elected by the stockholders of the Company for staggered
three year terms, or until their successors are elected and qualified. One class
of directors, consisting of Messrs. Anderson, Beck and Donahoe has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Ashby, Harding and Rowe has a term of office expiring at
the second annual meeting of stockholders and a third class, consisting of
Messrs. Hicks and McKann and Ms. Newman has a term of office expiring at the
third annual meeting of stockholders. Their names and biographical information
are set forth under "Management of the Bank--Directors."

     The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.

<TABLE> 
<CAPTION> 
        Executive                               Position(s) Held With Company
        ----------                    --------------------------------------------------
        <S>                           <C> 
        Samuel C. Harding, Jr.....    President
        Peggy J. Newman...........    Executive Vice President, Secretary and Treasurer
</TABLE> 

     The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.

     Except for directors' meeting fees, since the formation of the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Company. Information concerning the principal occupations,
employment and other information concerning the directors and officers of the
Company during the past five years is set forth under "Management of the Bank--
Biographical Information."

                                       71
<PAGE>
 
                            MANAGEMENT OF THE BANK

DIRECTORS AND EXECUTIVE OFFICERS

     The following table sets forth certain information regarding the Board of
Directors of the Bank.

<TABLE> 
<CAPTION> 
                                                                                                DIRECTOR    TERM
NAME                               AGE(1)            POSITION(S) HELD WITH THE BANK               SINCE    EXPIRES
----                               ------    ------------------------------------------------   --------   -------
<S>                                <C>       <C>                                                <C>        <C> 
H. Smith McKann                      84      Chairman of the Board                                 1955      2001
Ronald G. Beck                       62      Vice Chairman of the Board                            1988      1999
Samuel C. Harding, Jr.               56      Director and President                                1987      2000
Peggy J. Newman                      57      Director, Executive Vice President, Secretary         1988      2001
                                             and Treasurer
William M. Anderson, Jr.             56      Director                                              1988      1999
O'Conor Ashby                        51      Director                                              1992      2000
Ernest N. Donahoe, Jr.               61      Director                                              1982      1999
DuVal Q. Hicks, Jr.                  78      Director                                              1958      2001
Charles S. Rowe                      73      Director                                              1956      2000
</TABLE> 

__________________________
(1) As of June 30, 1998.

     Each of the executive officers of the Bank will retain his or her office
after the Conversion until his or her re-election at the annual meeting of the
Board of Directors of the Bank, held immediately after the first annual meeting
of stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.

BIOGRAPHICAL INFORMATION

DIRECTORS AND EXECUTIVE OFFICERS

     H. Smith McKann is the President and owner of General Products Company,
Fredericksburg, Virginia. Mr. McKann has served as a director of the Bank since
1955 and has been Chairman since 1996.

     Ronald G. Beck is the President of Clayborne C. Beck & Sons, Inc.,
Fredericksburg, Virginia, which sells furniture grade lumber worldwide. Mr. Beck
has served as a director of the Bank since 1988 and currently serves as Vice
Chairman of the Board.

     Samuel C. Harding, Jr. serves as President of the Bank and has held that
position since 1992. Mr. Harding has been with the Bank since 1972 and was
elected director in 1987.

     Peggy J. Newman serves as Executive Vice President, Secretary and Treasurer
of the Bank and has held these positions since 1992.  Ms. Newman has been with
the Bank for 33 years and was elected director in 1988.

     William M. Anderson, Jr. was elected to the Board in 1988 and is currently
the President of Mary Washington College, Fredericksburg, Virginia. He has
served in that position since 1982.

     O'Conor Ashby is a partner in the law firm of Willis & Ashby. He has been a
partner with that firm since 1975. Mr. Ashby, who has served on the Board of the
Bank since 1992 also is currently on the Board of Medicorp Services, Inc.

                                       72
<PAGE>
 
     Ernest N. Donahoe, Jr. Is an engineer and has been a partner with Sullivan,
Donahoe & Ingalls, P.C. since 1968.  Mr. Donahoe has been a Board member of the
Bank since 1982.

     DuVal Q. Hicks, Jr. is a retired attorney, formerly with Hicks, Baker and 
Peterson.  Mr. Hicks has been a director of the Bank since 1958.

     Charles S. Rowe is a retired Editor and Co-publisher of the Free Lance-
Star, Fredericksburg, Virginia, and a former director of the Associated Press.
He has served as a director of the Bank since 1956.

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY

     The Bank's Board of Directors meets twice per month and may have additional
special meetings called in the manner specified in the Bylaws. During 1997, no
current Director attended less than 75% of the aggregate of the total number of
Board meetings and the total number of committee meetings of the Board of
Directors on which they served.

     The Board of Directors of the Bank has established the following
committees:

     The Executive Committee consists of Messrs. McKann, Beck and Harding, and
Ms. Newman. The purposes of this committee are to evaluate issues of major
importance to the Bank between regularly scheduled Board meetings. The Executive
Committee meets as the members deem necessary and met one time in 1997.

     The Audit Committee consists of Messrs. Andersen, Ashby and Rowe. The
purpose of this committee is to oversee both internal and external audit
activities. The Audit Committee meets as the members deem necessary and met one
time in 1997.

     The Loan Committee consists of Messrs. Beck, Donahoe and Harding.  The 
purpose of this committee is to review and approve all loan requests of less 
than $500,000.  The Loan Committee meets once a week.

     Additionally, the Bank has a number of other management committees
including the Asset/Liability Committee, Advertising Committee, the Compensation
Committee, the Investment Committee, the Pension Committee and the Proxy
Committee.

     The Board of Directors of the Company has established the following
committees: the Audit and Compliance Committee consisting of Messrs. Anderson,
Rowe and Ashby; the Pricing Committee consisting of the entire Board of
Directors; and the Compensation Committee consisting of Messrs. Beck, Hicks and
Harding.

COMPENSATION OF DIRECTORS OF THE BANK AND COMPANY

     All directors of the Bank receive a fee of $1,700 for each regularly
scheduled monthly meeting attended. Effective August 1, 1998, such fees were
increased to $2,000 for each regularly scheduled monthly meeting attended.
Messrs. Beck and Donahoe additionally receive $400 per month for Loan Committee
meetings attended.

                                       73
<PAGE>
 
EXECUTIVE COMPENSATION

     SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the year ended December 31, 1997, to
the Chief Executive Officer and the highest paid executive officer of the Bank
who received salary and bonus in excess of $100,000 ("Named Executive
Officers").

<TABLE> 
<CAPTION> 
                                                                       ANNUAL COMPENSATION(1)
                                                                 -----------------------------------
                                                                                           OTHER                      
                                                                                           ANNUAL       ALL OTHER    
NAME AND                                                           SALARY      BONUS    COMPENSATION   COMPENSATION  
PRINCIPAL POSITIONS                                      YEAR       ($)         ($)        ($)(2)         ($)(3)      
---------------------------------------------          --------  ----------  ---------  ------------   ------------
<S>                                                    <C>       <C>         <C>        <C>            <C>   
Samuel C. Harding, Jr......................              1997      $204,800    $20,000        --          $33,109
  President (principal
  executive officer)

Peggy J. Newman............................              1997       199,800     20,000        --           37,884
  Executive Vice President,
  Secretary and Treasurer
  (principal financial officer)
</TABLE> 

_______________
(1)  Under Annual Compensation, the column titled "Salary" includes directors'
     fees for Mr. Harding and Ms. Newman.
(2)  For 1997, there were no (a) perquisites over the lesser of $50,000 or 10%
     of the individual's total salary and bonus for the year; (b) payments of
     above-market preferential earnings on deferred compensation; (c) payments
     of earnings with respect to long-term incentive plans prior to settlement
     or maturation; (d) tax payment reimbursements; or (e) preferential
     discounts on stock. For 1997, the Bank had no restricted stock or stock
     related plans in existence.
(3)  Includes deferred compensation of 28,612 and 33,387 for Mr. Harding and Ms.
     Newman, respectively under the Management Security Plan. Also includes
     matching contributions of 4,497 and 4,497 to the accounts of Mr. Harding
     and Ms. Newman, respectively, under the Bank's 401(k) Plan.

EMPLOYMENT AGREEMENTS

     Upon consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with Mr. Harding and Ms. Newman (individually, the "Executive"). The Employment
Agreements are subject to the review and approval of the OTS and may be amended
as a result of such OTS review. Review of compensation arrangements by the OTS
does not indicate, and should not be construed to indicate, that the OTS has
passed upon the merits of such arrangements. The Employment Agreements are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of both Mr. Harding and Ms. Newman.

     The Employment Agreements provide for a three-year term for each Executive
and shall become effective upon consummation of the Conversion. The Bank
Employment Agreements provide that, commencing on the first anniversary date of
the agreement and continuing each anniversary date thereafter, the Board of
Directors of the Bank may extend each of the agreements for an additional year
so that the remaining term shall be three years unless written notice of non-
renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The terms of the Company Employment Agreements
shall be extended on a daily basis unless written notice of non-renewal is given
by the Board of Directors of the Company. The Bank and the Company Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries, which will be effective for such Employment Agreements for
Mr. Harding and Ms. Newman will be $________ and $________, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, participation in various employee benefit plans and stock-based
compensation programs, as well as furnishing certain fringe benefits available
to similarly situated executive personnel. The Employment Agreements provide for
termination by the Bank or the Company for cause (as described in the
agreements) at any time. In the event the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation

                                       74
<PAGE>
 
from the Bank and the Company upon (i) the failure to re-elect the Executive to
his/her current offices; (ii) a material change in the Executive's functions,
duties or responsibilities; (iii) a relocation of the Executive's principal
place of employment by more than 25 miles; (iv) liquidation or dissolution of
the Bank or the Company; or (v) a breach of the Employment Agreements by the
Bank or the Company; the Executive or, in the event of death, the Executive's
beneficiary would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreements. In addition,
the Executive would receive a payment attributable to the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Bank or the Company during the remaining term of the Employment Agreements,
together with the value of certain stock-based incentives previously awarded to
the Executive. The Bank and the Company would also continue and pay for the
Executive's life and disability coverage for the remaining term of the
Employment Agreement, as well as provide medical and hospitalization coverage
until the Executive at least attains eligible Medicare age. Upon any termination
of the Executive, the Executive is subject to a covenant not to compete with the
Company or the Bank for one year.

     Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event of
the Executive's death, the Executive's beneficiary would be entitled to a
severance payment generally equal to the greater of: (i) the payments due for
the remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded to the Executive; or (ii) three times the average
of the five preceding taxable years' annual compensation. The Bank and the
Company would also continue the Executive's life, health, and disability
coverage for thirty-six months (except medical and hospitalization would be
provided at least until the Executive attains eligible Medicare age).
Notwithstanding that both Employment Agreements provide for a severance payment
in the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on the base salaries to be paid to Mr. Harding and Ms.
Newman effective upon the consummation of the Conversion, and excluding any
benefits under any employee benefit plan which may be payable, would equal
approximately $_____ million.

     Payments to the Executive under the Bank Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company Employment Agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Virginia law, respectively.

EMPLOYEE SEVERANCE COMPENSATION PLAN

     Upon consummation of the Conversion, the Bank's Board of Directors intends
to, upon consummation of the Conversion, establish the Fredericksburg Savings
Bank Employee Severance Compensation Plan (the "Severance Plan") which will
provide eligible employees with severance pay benefits in the event of a change
in control of the Bank or the Company. Management personnel with Employment
Agreements are not eligible to participate in the Severance Plan. Generally,
employees are eligible to participate in the Severance Plan if they have
completed at least six months of service with the Bank. Under the Severance
Plan, in the event of a change in control of the Bank or the Company, eligible
employees who are terminated from or terminate their employment within one year
after the change in control (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. A participant, whose employment
has terminated, will be entitled to a cash severance payment equal to one-
twelfth of his or her current annual compensation for each year of service up to
a maximum of 199% of current annual compensation. In the event the provisions of
the Severance Plan were triggered, the total amount of payments that would be
due thereunder, based solely upon current salary levels, would equal
approximately $____ million.

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<PAGE>
 
INSURANCE PLANS

     All full-time employees of the Bank, upon completion of the applicable
introductory period, may elect coverage for comprehensive hospitalization,
including major medical, and are covered with long-term disability insurance.

BENEFITS

     401(K) PLAN. The Bank maintains the Fredericksburg Savings and Loan
Association, F.A. Salary Savings Plan (the "401(k) Plan"), a tax-qualified
profit sharing plan with a qualified cash or deferred arrangement under Section
401(k) of the Code. The 401(k) Plan currently provides participants with savings
and retirement benefits based on employee deferrals of compensation, as well as
matching and other discretionary contributions made by the Bank. Eligible
employees may begin participating in the 401(k) Plan upon the completion of one-
half of one "Year of Service" (as defined in the 401(k) Plan) and attainment of
age 21. Participants currently may make salary reduction contributions to the
401(k) Plan up to the lesser of 20% of their compensation or the legally
permissible limit ($10,000 for 1998). A participant is always 100% vested in his
or her salary reduction contributions to the 401(k) Plan. Participants become
vested in employer contributions to the 401(k) Plan at the rate of 33 1/3% per
each completed year of service. Participants also become 100% vested in their
accounts under the 401(k) Plan upon death or incurring disability (as described
in the 401(k) Plan) or attainment of their "Normal Retirement Age" (as defined
in the 401(k) Plan).

     Currently, participants may invest their accounts under the 401(k) Plan in
and among four funds. The Bank may add or eliminate investment options available
under the 401(k) Plan in the future.

     Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service, death, or disability. However,
participants may request hardship withdrawals from the 401(k) Plan under certain
circumstances. Distributions from the 401(k) Plan are generally subject to
federal and state income taxes and distributions made prior to a participant
attaining age 59 1/2 are also generally subject to a federal excise tax.

     PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Eligible employees begin
participating in the Pension Plan following the completion of one year of
service (as describe in the Plan) and attainment of the age 21. A participant in
the Pension Plan generally becomes vested in his accrued benefit under the plan
upon completing five years of service. Participants also become 100% vested in
their accrual benefit under the Pension Plan upon incurring a disability (as
described in the plan) and upon the attainment of their "normal retirement age"
(as described in the Plan). The Pension Plan is funded solely through
contributions made by the Bank.

     A participant's accrued benefit under the Pension Plan is actuarially
determined based on his or her years of service with the Bank and his or her
average monthly compensation (as described in the Plan), including average
monthly compensation in excess of an integration to the Social Security Taxable
Wage Base.

     The table below reflects the annual pension benefit payable to a
participant in the Pension Plan, assuming various levels of "Average Monthly
Compensation" (as defined in the Pension Plan) and years of service credited as
of the participant's normal retirement age. As of January 1, 1998, Mr. Harding
and Ms. Newman had ___ and ___ years of service with the Bank, respectively, for
purposes of the Pension Plan.

                                       76
<PAGE>
 
                           Years of Credited Service
                 ----------------------------------------------------------
  Average Annual     15           20          25          30          35
    Earnings(1)
 -------------   ---------- ----------   ---------   ----------   ---------  
     $ 50,000     $19,833     $26,444     $33,055      $33,055     $33,055
     $ 75,000     $31,271     $41,694     $52,118      $52,118     $52,118
     $100,000     $42,708     $56,944     $71,180      $71,180     $71,180
     $125,000     $54,146     $72,194     $90,243      $90,243     $90,243
     $150,000     $65,583     $87,444    $109,305     $109,305    $109,305
     $175,000     $77,021    $102,694    $128,368     $128,368    $128,368
     $200,000     $88,458    $117,944    $147,430     $147,430    $147,430
     $250,000    $111,333    $148,444    $185,555     $185,555    $185,555
     $300,000    $134,208    $178,944    $223,680     $223,680    $223,680
     $350,000    $157,083    $209,444    $261,805     $261,805    $261,805
     $400,000    $179,958    $239,944    $299,930     $299,930    $299,930


__________________________________
(1)      Code Section 401(a)(17) limits the amount of compensation the Bank may
         consider in computing benefits under the Pension Plan to $150,000,
         effective with respect to the Pension Plan for plan years beginning on
         or after January 1, 1994, as periodically adjusted ($160,000 for 1998).

         EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to establish
a tax-qualified employee stock ownership plan (the "ESOP") in connection with
the Conversion. Generally, eligible employees will become participants in the
ESOP upon the completion of one-half of one year of service with the Bank (with
credit given for service with the Bank prior to adoption of the plan) and
attainment of age 21. With the consent of the Bank, an affiliate of the Bank may
also adopt the ESOP for the benefit of its employees.

         The Bank expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the "ESOP Committee"). The ESOP Committee
will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the related trust agreement. The Bank expects
the ESOP to purchase 8% of the Common Stock issued in the Conversion. As part of
the Conversion, and in order to fund the ESOP's purchase of the Common Stock
issued in the Conversion, the ESOP will borrow 100% of the aggregate purchase
price of the Common Stock from either the Company or a third-party lender.

         The trustee of the ESOP will repay the loan principally from the Bank's
annual contributions to the ESOP over an expected period of 20 years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since some participants in
the ESOP will be employees of the Bank or, alternatively, the Bank may reimburse
the Company for contributions made by the Company with respect to employees of
the Bank. The Bank expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date of
Conversion.

         The trustee of the ESOP will pledge the shares of Common Stock
purchased by the ESOP in connection with the Conversion as collateral for the
loan and will hold the shares in a suspense account under the plan. As the
trustee repays the loan, the trustee will release a portion of the shares from
the suspense account and allocate them to the accounts of active participants in
the ESOP based on each participant's compensation (as determined under the terms
of the plan) relative to all participants' compensation for the plan year. In
the event of a change in control of the Bank or the Company prior to complete
repayment of the loan, the ESOP trustee, in accordance with the terms of the
plan document, will sell enough shares of Common Stock held in the suspense
account to repay the loan in full. Upon repayment of the loan, the ESOP trustee
will then allocate all remaining shares of Common Stock held in the suspense
account to the accounts of active participants based on each participant's
account balance as of a specific date or based on some other method set forth in
the plan document.

                                       77
<PAGE>
 
         Participants will become vested in contributions made to the ESOP by
the Bank at the rate of 33a% per year of service with the Bank (with credit
given for service with the Bank prior to its adoption of the ESOP). Accordingly,
participants will become fully vested in their accounts under the ESOP after
completing three years of vesting service. The Bank expects that participants
will also become fully vested in their accounts under the ESOP upon the
attainment of their normal retirement age while an employee of the Bank, upon
their death or incurring a disability, upon a change in control of the Bank or
the Company, or upon termination of the plan. Benefits generally become
distributable under the ESOP and potentially become subject to income tax upon
death, retirement, disability or other separation from service.

         The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most accurately
reflect the instructions it receives from participants regarding the allocated
stock. In the event no shares have been allocated under the ESOP at the time
such shares are to be voted, each participant shall be deemed to have one share
allocated to his or her account for voting purposes.

         SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of benefit accruals and annual contributions
under such plans on behalf of any employee. The Bank has previously taken action
to separately provide benefits to Mr. Harding and Ms. Newman that would have
accrued under the Pension Plan but for the limitation on compensation the Bank
may consider under the Pension Plan less benefits that actually accrue under the
Pension Plan for the benefit of Mr. Harding and Ms. Newman. Upon Conversion, the
Bank also intends to provide for similar benefits with respect to the 401(k)
Plan and ESOP, as well as benefits otherwise limited by other provisions of the
Code or the terms of the ESOP loan.

         To provide for such benefits, the Bank intends to implement a
non-qualified deferred compensation arrangement known as a "Supplemental
Executive Retirement Plan" ("SERP"). The SERP will generally provide benefits to
eligible individuals (designated by the Board of Directors of the Bank or its
affiliates) that cannot be provided under the Pension Plan, 401(k) Plan and/or
ESOP as a result of the limitations imposed by the Code, but that would have
been provided under the Pension Plan, 401(k) Plan and/or ESOP but for such
limitations. In addition to providing for benefits lost under tax-qualified
plans as a result of limitations imposed by the Code, the SERP will also make up
lost ESOP benefits to designated individuals who retire, who terminate
employment in connection with a change in control, or whose participation in the
ESOP ends due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete scheduled repayment of the ESOP loan. Generally, upon the retirement of
an eligible individual or upon a change in control of the Bank or the Company
prior to complete repayment of the ESOP Loan, the SERP will provide the
individual with a benefit equal to what the individual would have received under
the ESOP had he remained employed throughout the term of the ESOP or had the
ESOP not been terminated prior to the scheduled repayment of the ESOP loan less
the benefits actually provided under the ESOP on behalf of such individual. An
individual's benefits under the SERP will generally become payable upon the
participant's retirement (in accordance with the standard retirement policies of
the Bank), upon the change in control of the Bank or the Company or as
determined under the applicable tax-qualified retirement plans sponsored by the
Bank.

         The Bank may establish a grantor trust in connection with the SERP to
satisfy the obligations of the Bank with respect to the SERP. The assets of the
grantor trust would remain subject to the claims of the Bank's general creditors
in the event of the Bank's insolvency until paid to the individual pursuant to
the terms of the SERP.

         MANAGEMENT SECURITY PLAN. The Bank currently sponsors a non-tax
qualified deferred compensation arrangement for approximately ten employees,
including Mr. Harding and Ms. Newman, known as the Fredericksburg Savings and
Loan Association, F.A. Management Security Plan (the "Management Security
Plan"). The Management Security Plan generally provides a payment to each
covered individual upon his or her death, disability, retirement, or termination
of employment after five or more years of service. Benefits under the Management
Security Plan are based on a flat dollar amount (specified for each individual
in a separate "Benefit Agreement") multiplied by the

                                       78
<PAGE>
 
individual's years of service with the Bank. Participants become fully vested in
benefits under the Management Security Plan after the completion of five years
of service with the Bank. The annual benefits for Mr. Harding and Ms. Newman are
$3,685 and $4,000, respectively, multiplied by each individual's respective
years of service with the Bank. As of January 1, 1998, Mr. Harding and Ms.
Newman had completed 27 and 33 years of service, respectively.

         STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of the Company and
Bank. The Company may provide such stock based benefits under the Stock-Based
Incentive Plan or may establish one or more separate plans which would provide
for the benefits described herein.

         In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount equal to 10% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (1,311,552 shares
based upon the maximum of the Estimated Price Range), and intends to grant Stock
Awards in an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (524,621 shares based upon
the maximum of the Estimated Price Range). Any Common Stock awarded under the
Stock-Based Incentive Plan will be awarded at no cost to the recipients. The
plan may be funded through the purchase of Common Stock by a trust established
in connection with the Stock-Based Incentive Plan (or any separate plan(s)) or
from authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."

         The grants of Stock Options and Stock Awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether Stock Options will be Incentive or Non-Statutory Stock
Options, as defined below, the number of shares subject to each stock option and
Stock Award, the exercise price of each Non-Statutory Stock Option, whether
Stock Options may be exercised by delivering other shares of Common Stock, and
when Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan, directors may receive only grants of Non-Statutory Stock
Options. If such plan is adopted within one year after conversion, OTS
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). OTS regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors).

         The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (iii) limited option rights ("Limited
Option Rights"). Limited Option Rights are exercisable only upon a change in
control of the Bank or the Company. Subject to OTS regulations, upon exercise of
Limited Option Rights, the recipient will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of any unexercised
Stock Option, whether exercisable or unexercisable at such

                                       79
<PAGE>
 
time, and the fair market value of the shares of Common Stock subject to the
Stock Option on the date of exercise of the right in lieu of purchasing the
Common Stock underlying the Stock Option. It is anticipated that all Stock
Options granted contemporaneously with stockholder approval of the Stock-Based
Incentive Plan will qualify as Incentive Stock Options to the extent permitted
under Section 422 of the Code. Unless sooner terminated, the Stock-Based
Incentive Plan will be in effect for a period of ten years from the earlier of
adoption by the Board of Directors or approval by the Company's Stockholders.
Subject to stockholder approval, the Company intends to grant Stock Options with
Limited Option Rights under the plan at an exercise price equal to at least the
fair market value of the underlying Common Stock on the date of grant.

         An individual will not be deemed to have received taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.

         The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards and Limited Stock Rights to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.

         When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.

         The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and, thereafter, vest at a rate of no more than 20% per
year and may not be accelerated except in the case of death or disability. Stock
Options could be exercisable for three months following the date on which the
employee or director ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. In the case of death or disability,
Stock Options may

                                       80
<PAGE>
 
be exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant or
director. In the event of death, disability or normal retirement, the Company,
if requested by the optionee, or the optionee's beneficiary, could elect, in
exchange for vested options, to pay the optionee, or the optionee's beneficiary
in the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.

         Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Bank. A change in control
would generally be considered to occur when a person or group of persons acting
in concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.

TRANSACTIONS WITH CERTAIN RELATED PERSONS

         The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.

         Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of interest
charged by the Bank on such loans were the Bank's cost of funds. Pursuant to
FIRREA, in 1989, the Bank discontinued its practice of making such preferential
loans to its officers and Directors. However, all such pre-FIRREA preferential
loans were "grandfathered" under FIRREA. Since the enactment of FIRREA, the Bank
has not made any preferential loans to its executive officers or Directors. 
The Bank intends to implement a policy whereby it will begin to again offer
loans to executive officers and Directors. Such loans, as well as loans made to
Bank employees, will be made on the same terms and conditions offered to the
general public. If the Bank implements a policy of extending credit to executive
officers and Directors, such policy will provide that all such loans will be
made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of June 30, 1998, the
Bank had $572,673 of loans to executive officers and Directors all of which had
balances of less than $60,000 as of June 30, 1998 or were made by the Bank in
the ordinary course of business with no favorable terms and do not involve more
than the normal risk of collectibility or present unfavorable features.

         The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.

                                       81
<PAGE>
 
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS

         The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares of
Common Stock are issued at the minimum and maximum of the Estimated Price Range,
including the effect of shares issued to the Foundation, and that sufficient
shares will be available to satisfy their subscriptions. The table also sets
forth the total expected beneficial ownership of Common Stock as to all
directors and executive officers as a group.

<TABLE> 
<CAPTION> 
                                                                  AT                         AT
                                                              THE MINIMUM                THE MAXIMUM
                                                            OF THE ESTIMATED          OF THE ESTIMATED
                                                              PRICE RANGE                PRICE RANGE   
                                                         -----------------------   -----------------------
                                                                        AS A                     AS A
                                                          NUMBER       PERCENT      NUMBER      PERCENT
                                                            OF        OF SHARES       OF       OF SHARES
NAME                                         AMOUNT       SHARES        ISSUED      SHARES       ISSUED
----                                      ------------   ----------   ----------   ---------   -----------
<S>                                       <C>            <C>          <C>          <C>         <C>  
H. Smith McKann.........................     $300,000      $30,000       0.31%       30,000        0.23%
Ronald G. Beck..........................      300,000       30,000       0.31        30,000        0.23
Samuel C. Harding, Jr...................      300,000       30,000       0.31        30,000        0.23
Peggy J. Newman.........................      300,000       30,000       0.31        30,000        0.23
O'Conor Ashby...........................      100,000       10,000       0.10        10,000        0.23
Ernest N. Donahoe, Jr...................      100,000       10,000       0.10        10,000        0.23
DuVal Q. Hicks, Jr......................      300,000       30,000       0.31        30,000        0.23
Charles S. Rowe.........................      300,000       30,000       0.31        30,000        0.23
William M. Anderson, Jr.................       *             *             *            *             *
                                           ----------     --------     ------       -------      ------
All Directors and Executive Officers                                                            
    as a Group (9 persons)..............   $2,001,000     $200,100       2.06%      200,100        1.53%
                                           ==========     ========     ======       =======      ======  
</TABLE> 

__________________________
*    Less than 0.01% of the shares of Common Stock issued.

                                      82

<PAGE>
 
                                THE CONVERSION

     THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL,
HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH
AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT OF THE
FOUNDATION.

GENERAL

     On July 14, 1998, the Bank's Board of Directors unanimously adopted the
Plan, pursuant to which the Bank will be converted from a federally-chartered
mutual savings and loan association to a federally-chartered capital stock
savings bank. It is currently intended that all of the outstanding capital stock
of the Bank will be held by the Company, which is incorporated under Virginia
law. The Plan was approved by the OTS, subject to, among other things, approval
of the Plan by the Bank's members. A special meeting of members has been called
for this purpose to be held on ___________, 199_.

     The Company has applied for and expects to receive approval from the OTS to
become a savings and loan holding company and to acquire all of the common stock
of the Bank to be issued in the Conversion. The Company plans to purchase the
shares of issued and outstanding capital stock of the Bank in exchange for up to
50% of the net proceeds and retain the remaining net proceeds. The Conversion
will be effected only upon completion of the sale of all of the shares of Common
Stock of the Company to be issued pursuant to the Plan.

     The Plan provides generally that (i) the Bank will convert from a mutual
savings and loan association to a capital stock savings bank and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Bank's Eligible Account Holders, the ESOP, Supplemental Eligible Account
Holders and Other Members. Upon completion of the Subscription Offering, the
Company will offer any shares of Common Stock not subscribed for in the
Subscription Offering in a Community Offering with preference given to natural
persons residing in the Bank's Local Community. It is anticipated that shares
not subscribed for in the Subscription and Community Offerings will be offered
for sale by the Company to the general public in a Syndicated Community
Offering. The Bank has the right to accept or reject, in whole or in part, any
orders to purchase shares of the Common Stock received in the Community Offering
or in the Syndicated Community Offering. See "--Community Offering" and "--
Syndicated Community Offering."

                                       83
<PAGE>
 
     The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$89.8 million and $121.4 million, will be determined based upon an independent
appraisal of the estimated pro forma market value of the Common Stock of the
Company. All shares of Common Stock to be issued and sold in the Conversion will
be sold at the same price. The independent appraisal will be affirmed or, if
necessary, updated at the completion of the Subscription Offering, if all shares
are subscribed for, or at the completion of the Community and/or the Syndicated
Community Offerings. The appraisal has been performed by FinPro, a consulting
firm experienced in the valuation and appraisal of savings institutions. See "--
Stock Pricing" for additional information as to the determination of the
estimated pro forma market value of the Common Stock.

     THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL ASPECTS OF THE CONVERSION.
THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE
PLAN. A COPY OF THE PLAN IS AVAILABLE FOR INSPECTION AT EACH OFFICE OF THE BANK
AND AT THE SOUTHEAST REGIONAL AND WASHINGTON, D.C. OFFICES OF THE OTS.

PURPOSES OF CONVERSION

     The Bank, as a federally-chartered mutual savings and loan association,
does not have shareholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Bank will be
structured in the form used by commercial banks, other business entities and a
growing number of savings institutions. The Conversion will enhance the Bank's
ability to access capital markets, expand its current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation.

     The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.

     The potential impact of the Conversion upon the Bank's capital base is
significant. At June 30, 1998, the Bank had retained earnings, determined in
accordance with GAAP, of $83.5 million, or 17.7% of total assets. Assuming that
the Company uses 50% of the net proceeds at the maximum of the Estimated Price
Range to purchase the capital stock of the Bank, the Bank's GAAP capital will
increase to $127.5 million or a ratio of GAAP capital to adjusted assets, on a
pro forma basis, of 27.0% after the Conversion. The investment of the net
proceeds from the sale of the Common Stock is expected to provide the Bank with
additional income to increase further its capital position.

     After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Articles of Incorporation will permit the Company,
subject to market conditions and regulatory approval of an offering, to raise
additional equity capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the present time, the
Company has no plans with respect to additional offerings of securities, other
than the issuance of additional shares upon exercise of stock options under the
Stock-Based Incentive Plan or the possible issuance of authorized but unissued
shares to fund the Stock-Based Incentive Plan. Following the Conversion, the
Company will also be able to use stock-based incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Executive Compensation."

ESTABLISHMENT OF THE CHARITABLE FOUNDATION

     GENERAL. In furtherance of the Bank's long-standing commitment to its local
community, the Bank's Plan of Conversion provides for the establishment of a
charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which will
be incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock of the Company, as further described below. The
Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and the communities in which the Bank

                                       84
<PAGE>
 
operates and thereby enables such communities to share in the potential growth
and success of the Company and the Bank over the long term. By further enhancing
the Bank's visibility and reputation in the communities in which it operates,
the Bank believes that the Foundation will enhance the long-term value of the
Bank's community banking franchise.

     The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-profit
medical facilities, community groups and other types of organizations or
projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. See "Comparison of Valuation and Pro Forma Information With
No Foundation." In such an event, the Bank may establish a new Estimated Price
Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."

     PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a "Satisfactory" Community Reinvestment
Act ("CRA") rating. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. The
Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes and may be able to support such activities in ways that are not presently
available to the Bank. The Bank believes that the Foundation will enable the
Company and the Bank to assist their local community in areas beyond community
development and lending. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Boards of Directors of the Bank and Company
also believe that the funding of the Foundation with Common Stock of the Company
is a means of enabling the communities in which the Bank operates to share in
the potential growth and success of the Company long after completion of the
Conversion. The Foundation accomplishes that goal by providing for continued
ties between the Foundation and Bank, thereby forming a partnership with the
Bank's community. The establishment of the Foundation would also enable the
Company and the Bank to develop a unified charitable donation strategy and would
centralize the responsibility for administration and allocation of corporate
charitable funds. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending and
charitable activities. The Bank expects in future periods to continue making its
ordinary charitable contributions within its communities. Such ordinary
contributions typically range between $20,000 and $30,000 per year.

     Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of four members, all of
whom must be officers of, or members of the Board of Directors of, the Company
or the Bank or an affiliate or subsidiary of the Company or the Bank. A person
who is a director, officer or employee of the Bank, or has the power to direct
its management or policies, or otherwise owes a fiduciary duty to the Bank, and
who will also serve as a director or employee of the Foundation would be subject
to the requirements of OTS Conflicts of Interest Regulations. The initial board
of directors of the Foundation will be comprised of Messrs. Anderson, Harding
and Hicks and Ms. Newman. Such persons intend to purchase 100, 30,000, 30,000
and 30,000 shares of Common Stock in the Conversion, respectively. At the
maximum of the Estimated Price Range, such purchases equal 0.00%, 0.23%, 0.23%
and 0.23%, respectively, or 0.69% in the aggregate, of the total number of
shares to be issued in the Conversion, including shares issued to the
Foundation. On an on-going basis, a Nominating Committee of the board of
directors of the Foundation, will nominate individuals eligible for election to
the board of directors of the Foundation. The members of the Foundation, who are
comprised of its board members, will elect the directors at the annual meeting
of the Foundation from those nominated by the Nominating Committee. Only persons
serving as directors of the Foundation qualify as members of the Foundation with
voting authority. Directors will be divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Foundation

                                       85
<PAGE>
 
provides that the corporation is organized exclusively for charitable purposes
as set forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members.

     The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (i), (ii) or (iii) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
legal opinion(s) by the Company or the Foundation. In the event that the OTS
waived the voting restriction, the directors would direct the voting of the
Common Stock held by the Foundation. However, a condition to the OTS approval of
the Conversion provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that time
may impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control of
the Common Stock held by the Foundation, any of which could limit the ability of
the board of directors of the Foundation to control the voting of the Common
Stock held by the Foundation. There will be no agreements or understandings with
directors of the Foundation regarding the exercise of control, directly or
indirectly, over the management or policies of the Company or the Bank,
including agreements related to voting, acquisition or disposition of the
Company's stock. As directors of a nonprofit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established.

     The Company will provide office space and administrative support services
to the Foundation. Initially, the Foundation is expected to have no employees.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Bank and the Foundation will comply with
the affiliate transaction restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act, as amended.

     The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because it desired to form a bond with its community in a
manner that would allow the community to share in the potential growth and
success of the Company and the Bank over the long term. The funding of the
Foundation with stock also provides the Foundation with a potentially larger
endowment than if the Company contributed cash to the Foundation since, as a
shareholder, the Foundation will share in the potential growth and success of
the Company. As such, the contribution of stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock contribution,
would have to contribute to the Foundation in future years in order to maintain
a level amount of charitable grants and donations.

     The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future and, subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time-to-time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average

                                       86
<PAGE>
 
market value of the assets held by the Foundation, except where the board of
directors of the Foundation determines that the failure to sell an amount of
Common Stock greater than such amount would result in a long-term reduction of
the value of the Foundation's assets or would otherwise jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may be
greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's directors to sell more than 5% of its stock in such
circumstances. Upon completion of the Conversion and the contribution of shares
to the Foundation immediately following the Conversion, the Company would have
9,694,080, 11,404,800 and 13,115,520 shares issued and outstanding at the
minimum, midpoint and maximum, respectively, of the Estimated Price Range.
Because the Company will have an increased number of shares outstanding, the
voting and ownership interests of shareholders in the Company's common stock
would be diluted by 7.4%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Pro Forma Data."

     COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to capitalize the
Foundation with Common Stock in an amount up to 8% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the contribution
to the Foundation would equal 718,080, 844,800, 971,520 and 1,117,248 shares,
respectively, which would have a market value of $7.2 million, $8.4 million,
$9.7 million and $11.2 million, respectively, based on the Purchase Price of
$10.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. As a result of the establishment of the Foundation, the
Estimated Price Range, as estimated by FinPro, has decreased and the amount of
stock available for sale in the Offerings has also correspondingly decreased.
The amount of the decrease is 1,394,000, 1,640,000, 1,886,000 and 2,168,900
shares, or $13.9 million, $16.4 million, $18.9 million and $21.7 million, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, respectively. See "Pro Forma Data" and "Comparison of Valuation and Pro
Forma Data Information with No Foundation."

     TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code and will be classified
as a private foundation rather than a public charity. A private foundation
typically receives its support from one person or one corporation whereas a
public charity receives its support from the public. The Foundation will submit
a request to the IRS to be recognized as an exempt organization after approval
of the Foundation by the Bank's members at the Special Meeting being held to
consider the Conversion. As long as the Foundation files its application for 
tax-exempt status within 15 months from the date of its organization and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization.

     A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
Under the Code, the Company may deduct up to 10% of its taxable income in any
one year and any contributions made by the Company in excess of the deductible
amount will be deductible for federal tax purposes over each of the five
succeeding taxable years. The Company and the Bank believe that the Conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
Conversion. In making such a determination, the Company and the Bank considered
the dilutive impact of the Foundation on the amount of Common Stock available to
be offered for sale in the Conversion. See "Comparison of Valuation and Pro
Forma Information with No Foundation." Based on such consideration, the Company
and Bank believe that the contribution to the Foundation in excess of the 10%
annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Bank's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Price Range, the Company would have pro forma consolidated capital of $176.6
million, or 31.2%, of consolidated assets and the Bank's pro forma tangible,
core and risk-based capital ratios would be 23.5%, 23.5% and 40.96%,
respectively. See "Regulatory Capital Compliance," "Capitalization" and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial condition
of the Company and the Bank. The Company and the Bank therefore believe that the
amount of the charitable contribution is reasonable given the Company's and the
Bank's pro forma

                                       87
<PAGE>
 
capital positions. As such, the Company and the Bank believe that the
contribution does not raise safety and soundness concerns.

     The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing and that the Company will be entitled
to a deduction in the amount of the fair market value of the stock at the time
of the contribution, subject to a limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal tax purposes. Thus, while the Company expects
to receive a charitable contribution deduction of approximately $850,000 in
1998, the Company is permitted under the Code to carry over the excess
contribution over a five-year period for federal income tax purposes. Assuming
the close of the Offerings at the midpoint of the Estimated Price Range, the
Company estimates that substantially all of the deduction should be deductible
over the six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five year period following the year
in which the contribution is made to fully utilize the carryover related to the
excess contribution. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank and the financial condition and operations of the
Foundation.

     Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. See "Risk Factors--
Establishment of the Charitable Foundation." In cases of willful, flagrant or
repeated acts or failures to act which result in violations of the IRS rules
governing private foundations, a private foundation's status as a private
foundation may be involuntarily terminated by the IRS. In such event, the
managers of a private foundation could be liable for excise taxes based on such
violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.

     As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.

     REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of common stock by the Foundation following the Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by

                                       88
<PAGE>
 
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
opinion(s) by the Company or the Foundation. There can be no assurances that
either a legal or tax opinion addressing these issues will be rendered, or if
rendered, that the OTS will grant an unconditional waiver of the voting
restriction. In this regard, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or his designees, at that time may
impose conditions on the composition of the board of directors of the Foundation
or such other conditions or restrictions relating to the control of the Common
Stock held by the Foundation, any of which could limit the ability of the board
of directors of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.

     In addition, establishment of the Foundation is subject to the approval of
a majority of the total outstanding votes of the Bank's members eligible to be
cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan of
Conversion. If the Bank's members approve the Plan of Conversion, but not the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
for sale in the Offerings since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
See "Comparison of Valuation and Pro Forma Information With No Foundation."

EFFECTS OF CONVERSION

     GENERAL. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject to
applicable regulations of the OTS. However, this ownership interest is tied to
the depositor's account and has no tangible market value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.

     Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors, subject
to applicable regulations of the OTS. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
after other claims, including claims of depositors to the amounts of their
deposits, are paid.

     When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.

     CONTINUITY. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS and
the FDIC. After the Conversion, the Bank will continue to provide services for
depositors and borrowers under current policies by its present management and
staff.

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<PAGE>
 
     The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board of
Directors of the Bank. All officers of the Bank at the time of Conversion will
retain their positions immediately after Conversion.

     EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.

     EFFECT ON LOANS. No loan outstanding from the Bank will be affected by the
Conversion and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.

     EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of the Bank
are members of, and have voting rights in, the Bank as to all matters requiring
membership action. Upon Conversion, depositors will cease to be members and will
no longer be entitled to vote at meetings of the Bank. Upon Conversion, all
voting rights in the Bank will be vested in the Company as the sole stockholder
of the Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors of the Bank will not have voting
rights after the Conversion except to the extent that they become stockholders
of the Company through the purchase of Common Stock.

     TAX EFFECTS. The Bank has received an opinion from Muldoon, Murphy &
Faucette with regard to federal income taxation and an opinion from Cherry
Bekaert & Holland with regard to Virginia taxation which provide that the
adoption and implementation of the Plan of Conversion set forth herein will not
be taxable for federal or Virginia tax purposes to the Bank, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See "--Tax Aspects."

     EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.

STOCK PRICING

     The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Bank and the
Company have retained FinPro to make such valuation. For its services in making
such appraisal, FinPro will receive a fee of $31,000, plus reasonable expenses.
The Bank and the Company have agreed to indemnify FinPro and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where FinPro liability results from its negligence or willful
misconduct.

     An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Financial Statements . FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Bank and the
economic and demographic conditions in the Bank's existing marketing area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly-traded savings banks and savings
institutions located in the Bank's primary market area; the aggregate

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<PAGE>
 
size of the offering of the Common Stock; the impact of the Conversion on the
Bank's net worth and earnings potential; the proposed dividend policy of the
Company and the Bank; and the trading market for securities of comparable
institutions and general conditions in the market for such securities.

     On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion, dated September 9, 1998, the estimated pro forma market
value of the Common Stock being sold in connection with the Conversion ranged
from a minimum of $89.8 million to a maximum of $121.4 million with a midpoint
of $105.6 million. Based upon the Valuation Range and the Purchase Price of
$10.00 per share for the Common Stock established by the Board of Directors, the
Board of Directors has established the Estimated Price Range of $89.8 million to
$121.4 million, with a midpoint of $105.6 million, based on the issuance of
8,976,000 to 12,144,000 shares of Common Stock. The Board of Directors of the
Company and the Bank have reviewed the appraisal of FinPro and in determining
the reasonableness and adequacy of such appraisal consistent with OTS
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by FinPro in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if required),
if necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally.

     SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE OFFERINGS. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO VALUE INDEPENDENTLY THE
ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE BANK AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME-TO-TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL COMMON STOCK AT
PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION
OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR
COMMON STOCK."

     Prior to the completion of the Conversion, the maximum of the Estimated
Price Range may be increased up to 15% and the number of shares of Common Stock
to be issued in the Conversion may be increased to 13,965,600 shares due to
regulatory considerations, changes in the market and general financial and
economic conditions, without the resolicitation of subscribers. See "--
Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.

     No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and the OTS that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause FinPro to conclude that the value of the
Common Stock at the price so determined is incompatible with its estimate of the
pro forma market value of the Common Stock at the conclusion of the Conversion.

     If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the OTS,
may terminate the Plan and return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, bank draft or money order,
extend or hold a new Subscription and/or Community Offering, establish a new
Estimated Price Range, commence a resolicitation of subscribers or take such
other actions as permitted by the OTS in order to complete the Conversion. In
the event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription Offering would not exceed 45 days unless further
extended by the OTS for periods of up to 90 days not to extend beyond ________,
2000.

     If the minimum number of shares of Common Stock are not sold through the
Subscription Offering or Community Offering, then the Bank and the Company
expect to offer the remaining shares in a Syndicated Community Offering which
would occur as soon as practicable following the close of the Community
Offering. All shares of Common Stock will be sold at the same price per share in
the Syndicated Community Offering as in the Subscription and Community
Offerings. See "--Syndicated Community Offering."

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<PAGE>
 
     No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, the Company and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, including those which would be involved in a
cancellation of the Syndicated Community Offering, would cause FinPro to
conclude that the aggregate value of the Common Stock at the Purchase Price is
incompatible with its estimate of the pro forma market value of the Common Stock
of the Company at the time of the Syndicated Community Offering. Any change
which would result in an aggregate purchase price which is below or more than
15% above the Estimated Price Range would be subject to OTS approval. If such
confirmation is not received, the Bank may extend the Conversion, extend, reopen
or commence new Subscription Offering, Community Offering or Syndicated
Community Offering, establish a new Estimated Price Range and commence a
resolicitation of all subscribers with the approval of the OTS or take such
other actions as permitted by the OTS in order to complete the Conversion, or
terminate the Plan and cancel the Subscription and Community Offerings and/or
the Syndicated Community Offering. In the event market or financial conditions
change so as to cause the aggregate purchase price of the shares to be below the
minimum of the Estimated Price Range or more than 15% above the maximum of such
range and the Company and the Bank determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to decrease or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. A resolicitation, if any,
following the conclusion of the Subscription Offering would not exceed 45 days,
or if following the Syndicated Community Offering, 90 days, unless further
extended by the OTS for periods up to 90 days not to extend beyond ____________.
If such resolicitation is not effected, the Bank will return all funds promptly
with interest at the Bank's passbook rate of interest on payments made by check,
bank draft or money order.

     Copies of the appraisal report of FinPro, including any amendments thereto
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."

NUMBER OF SHARES TO BE ISSUED

     Depending upon market or financial conditions following the commencement of
the Subscription Offering, the total number of shares to be issued in the
Conversion may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and FinPro's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $89.8 million to a maximum,
as increased by 15%, of $139.7 million, the number of shares of Common Stock
expected to be issued in the Conversion is between a minimum of 8,976,000 shares
and a maximum, as adjusted by 15%, of 13,965,600 shares. The actual number of
shares issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.

     In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."

     In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares up to 8% of the Common
Stock sold in the Conversion to fund the Foundation. Assuming the sale of shares
in the Offerings at the

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<PAGE>
 
maximum of the Estimated Price Range, the Company will issue 971,520 shares of
its Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 13,115,520 shares.
Of that amount, the Foundation will own 7.4%. Funding the Foundation with
authorized but unissued shares will have the effect of diluting the ownership
and voting interests of persons purchasing shares in the Conversion by 7.4%
since a greater number of shares will be outstanding upon completion of the
Conversion than would be if the Foundation were not established. See "Pro Forma
Data."

     An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."

SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS

     In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts (as more particularly described in the Plan and herein) in the
Bank with a balance of $50 or more as of June 30, 1997 ("Eligible Account
Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance of $50
or more as of __________, 199_ ("Supplemental Eligible Account Holders"); and
(4) members of the Bank, consisting of depositors of the Bank as of
_____________, 199_, the Voting Record Date, other than Eligible Account Holders
and Supplemental Eligible Account Holders ("Other Members"). All subscriptions
received will be subject to the availability of Common Stock after satisfaction
of all subscriptions of all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in the
Plan of Conversion and as described below under "--Limitations on Common Stock
Purchases."

     Deposit accounts which will provide subscription rights to holders thereof
consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan and federal regulation,
certain deposits do not qualify as "savings accounts" including, but not limited
to, noninterest-bearing demand accounts (primarily noninterest-bearing checking
accounts) and mortgage escrow deposits.

     PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering (currently $300,000
of Common Stock), one-tenth of one percent (.10%) of the total offering of 
shares of Common Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the Eligible
Account Holder's Qualifying Deposit (defined by the Plan as any deposit account
in the Bank with a balance of $50 or more as of June 30, 1997) and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders ($________), in each case on the Eligibility Record Date, subject to the
overall purchase limitation and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See "--
Limitations on Common Stock Purchases."

     In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible

                                       93
<PAGE>
 
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.

     To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding June 30, 1997.

     PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to purchase
8% of the shares to be issued in the Conversion, including shares issued to the
Foundation, or 775,526 shares and 1,049,242 shares, based on the issuance of
9,694,080 shares and 13,115,520 shares, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
and Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See "Management of the 
Bank--Benefits--Employee Stock Ownership Plan and Trust."

     PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering (currently $300,000 of Common Stock), one-tenth of one 
percent (.10%) of the total offering of shares of Common Stock or fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."

     In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.

     To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights
received by Eligible Account Holders will be applied in partial satisfaction to
the subscription rights to be received as a Supplemental Eligible Account
Holder.

     PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the

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<PAGE>
 
Community Offering (currently $300,000 of Common Stock), or one-tenth of one
percent (.10%) of the total offering of shares of Common Stock, subject to the
overall purchase limitation and exclusive of an increase in shares issued
pursuant to an increase in the Estimated Price Range of up to 15%.

     In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.

     EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on ___________, 199_, at __________, Eastern time, unless extended
for up to 45 days by the Bank or such additional periods with the approval of
the OTS. Subscription rights which have not been exercised prior to the
Expiration Date will become void.

     The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Expiration Date, unless such period is extended
with the consent of the OTS, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45 day period following the Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions and have their funds returned promptly with
interest and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond ______________.

COMMUNITY OFFERING

     To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the Supplemental
Eligible Account Holders and Other Members, the Bank has determined to offer
shares pursuant to the Plan to certain members of the general public. The
Community Offering, if conducted, may begin concurrently with, during or
promptly after the Subscription Offering. In the event a community offering is
held, a preference will be given to natural persons residing in the City of
Fredericksburg and Stafford and Spotsylvania Counties, subject to the right of
the Company to accept or reject any such orders, in whole or in part, in their
sole discretion. Persons purchasing stock in the Community Offering, together
with associates of and persons acting in concert with such persons, may purchase
up to $300,000 of Common Stock subject to the maximum purchase limitation and
exclusive of shares issued pursuant to an increase in the Estimated Price Range
by up to 15%. See "--Limitations on Common Stock Purchases." This amount may be
increased to up to a maximum of 5% or decreased to less than $170,000 at the
sole discretion of the Company and the Bank. THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE
RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT
ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR
AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.

     Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the Subscription
Offering and Community Offering, such stock will be allocated first to each
Preferred Subscriber whose order is accepted by the Bank, in an amount equal to
the lesser of 100 shares or the number of shares subscribed for by each such
Preferred Subscriber, if possible. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose order remains unsatisfied on a
100 shares per order basis

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<PAGE>
 
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to other
persons of the general public who purchase in the Community Offering applying
the same allocation described above for Preferred Subscribers.

PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES

     The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Plan provides that
the Bank and the Company are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country or resides in a state of
the United States with respect to which both of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares of Common Stock
reside in such state; and (ii) the Company or the Bank determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request that the
Company and the Bank or their officers, directors or trustees register as a
broker, dealer, salesman or selling agent, under the securities laws of such
state, or a request to register or otherwise qualify the subscription rights or
Common Stock for sale or submit any filing with respect thereto in such state.
Where the number of persons eligible to subscribe for shares in one state is
small, the Bank and the Company will base their decision as to whether or not to
offer the Common Stock in such state on a number of factors, including the size
of accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers, salesmen or selling agents.

MARKETING AND UNDERWRITING ARRANGEMENTS

     The Bank and the Company have engaged Trident as a consultant and financial
advisor in connection with the offering of the Common Stock and Trident has
agreed to use its best efforts to solicit subscriptions and purchase orders for
shares of Common Stock in the Offerings. Based upon negotiations between the
Bank and the Company concerning the fee structure, Trident will receive a fixed
fee of $525,000. In the event that a selected dealers agreement is entered into
in connection with a Syndicated Community Offering, the Bank will pay a fee (to
be negotiated at such time under such agreement) to such selected dealers, any
sponsoring dealers fees and a management fee to Trident of ___% for shares sold
by a National Association of Securities Dealers, Inc. member firms pursuant to a
selected dealers agreement; provided, however, that any fees payable to Trident
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed ____% of the Purchase Price and provided further, however, that
the aggregate fees payable to Trident and the selected dealers will not exceed
7% of the aggregate Purchase Price of the Common Stock sold by selected dealers.
Fees to Trident and to any other broker-dealer may be deemed to be underwriting
fees and Trident and such broker-dealers may be deemed to be underwriters.
Trident will also be reimbursed for its reasonable out-of-pocket expenses
incurred in its capacity as consultant and financial advisor, as well as
conversion agent, including legal fees, in an amount not to exceed $55,000.
Notwithstanding the foregoing, in the event the Offerings are not consummated or
Trident ceases, under certain circumstances after the subscription solicitation
activities are commenced, to provide assistance to the Company, Trident will be
reimbursed for its reasonable out-of-pocket expenses as described above. The
Company and the Bank have agreed to indemnify Trident for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Trident has received advances towards its
fees totaling $10,000. See "Pro Forma Data" for the assumptions used to arrive
at these estimates.

     _____________ will perform proxy solicitation services, conversion agent
services and records management services for the Bank in the Conversion and will
receive a fee for these services of $_______.

     Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
Other employees of the Bank may participate in the Offering in ministerial
capacities or provide clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. The Company will rely on
Rule 3a4-1 under the Exchange Act and sales of Common Stock will be conducted
within the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Common Stock. No officer, director or

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<PAGE>
 
employee of the Company or the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.

PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING

     To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.

     To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be received by the Bank at any of its offices by _________, Eastern
Time, on ___________, 1998, with respect to the Subscription Offering, or by the
date set for the termination of the Community Offering, which date shall be
within 45 days after the close of the Subscription Offering, or ___________,
1998, unless extended by the Bank and the Company with the approval of the OTS,
if necessary. Stock order forms which are not received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. Certificates
representing shares of Common Stock purchased in the Subscription Offering must
be registered in the name of Eligible Account Holder or Supplemental Eligible
Account Holder, as the case may be. Joint stock registration will be allowed
only if the qualifying deposit account is so registered. In addition, the Bank
and Company are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the foregoing,
the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Conversion. The Company and the Bank have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of the Bank unless the Conversion has not been completed within 45 days after
the end of the Subscription Offering, unless such period has been extended.

     In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1997) and/or the Supplemental Eligibility Record Date (____________, 199_)
and/or the Voting Record Date (____________, 199_) must list all accounts on the
stock order form giving all names in each account and the account number.

     Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. Orders for Common Stock submitted by subscribers in the Subscription
Offering which aggregate $50,000 or more must be paid by official bank or
certified check, a check issued by a NASD-registered broker-dealer or by
withdrawal authorization from a deposit account of the Bank. No wire transfers
will be accepted. Interest will be paid on payments made by cash, check, bank
draft or money order at the Bank's passbook rate of interest from the date
payment is received until the completion or termination of the Conversion. If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion.

     If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate

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<PAGE>
 
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.

     If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.

     Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained at the Bank. Persons with IRAs and Qualified Plans maintained at the
Bank must have their accounts transferred to an unaffiliated institution or
broker to purchase shares of Common Stock in the Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and ten
percent shareholders who use self-directed IRA funds and Qualified Plans to
purchase shares of Common Stock in the Offerings, make such purchases for the
exclusive benefit of the IRAs and Qualified Plans.

     Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.  Shares sold prior to the receipt of a stock 
certificate are the responsibility of the purchaser.

RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES

     Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Bank, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising such subscription rights will be
required to certify that he is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion. For a discussion on post-Conversion restrictions of directors and
executive officers of the Bank, see "--Certain Restrictions on Purchase or
Transfer of Shares After Conversion."

     THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.

SYNDICATED COMMUNITY OFFERING

     As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Trident acting as agent of the Company to assist the
Company and the Bank in the sale of the Common Stock. The Company and the Bank
have the right to reject orders in whole or in part in their sole discretion in
the Syndicated Community Offering. Neither Trident nor any registered broker-
dealer shall have any obligation to take or purchase any shares of the Common
Stock in the Syndicated Community Offering, however, Trident has agreed to use
its best efforts in the sale of shares in the Syndicated Community Offering.

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<PAGE>
 
     The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $300,000 of the Common Stock; provided,
however, that shares of Common Stock purchased in the Community Offering by any
persons, together with associates of or persons acting in concert with such
persons, will be aggregated with purchases in the Syndicated Community Offering
and be subject to an overall maximum purchase limitation of 1.0% of the shares
offered, exclusive of an increase in shares issued pursuant to an increase in
the Estimated Price Range by up to 15%.

     Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.

     In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.

     Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.

     The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the approval
of the OTS. Such extensions may not be beyond _____________. See "--Stock
Pricing" above for a discussion of rights of subscribers, if any, in the event
an extension is granted.

LIMITATIONS ON COMMON STOCK PURCHASES

     The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:

     (1)  No less than 25 shares;

     (2)  Each Eligible Account Holder may subscribe for and purchase in the
          Subscription Offering up to the greater of the amount permitted to be
          purchased in the Community Offering, currently $300,000 of Common
          Stock, one-tenth of one percent (.10%) of the total offering of shares
          of Common Stock or fifteen times the product (rounded down to the next
          whole number) obtained by multiplying the total number of shares of
          Common Stock to be issued by a fraction of which the numerator is the
          amount of the Qualifying Deposit of the Eligible Account Holder and
          the denominator is the total amount of Qualifying Deposits of all
          Eligible Account Holders in each case on the Eligibility Record Date
          subject to the overall maximum purchase limitation in (8) below;

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<PAGE>
 
     (3)  The ESOP is permitted to purchase in the aggregate up to 10% of the
          shares of Common Stock issued in the Conversion, including shares
          issued to the Foundation, including shares issued in the event of an
          increase in the Estimated Price Range of 15% and intends to purchase
          8% of the shares of Common Stock issued in the Conversion, including
          shares issued to the Foundation;

     (4)  Each Supplemental Eligible Account Holder may subscribe for and
          purchase in the Subscription Offering up to the greater of the amount
          permitted to be purchased in the Community Offering, currently
          $300,000 of Common Stock, one-tenth of one percent (.10%) of the total
          offering of shares of Common Stock or fifteen times the product
          (rounded down to the next whole number) obtained by multiplying the
          total number of shares of Common Stock to be issued by a fraction of
          which the numerator is the amount of the Qualifying Deposit of the
          Supplemental Eligible Account Holder and the denominator is the total
          amount of Qualifying Deposits of all Supplemental Eligible Account
          Holders in such case on the Supplemental Eligibility Record Date
          subject to the overall maximum purchase limitation in (8) below;

     (5)  Each Other Member may subscribe for and purchase in the Subscription
          Offering up to the greater of the amount permitted to be purchased in
          the Community Offering, currently $300,000 of Common Stock, or one-
          tenth of one percent (.10%) of the total offering of shares of Common
          Stock subject to the overall maximum purchase limitation in (8) below;

     (6)  Persons purchasing shares of Common Stock in the Community Offering,
          together with associates of groups of persons acting in concert with
          such persons, may purchase in the Community Offering up to $300,000 of
          Common Stock subject to the overall maximum purchase limitation in (8)
          below;

     (7)  Persons purchasing shares of Common Stock in the Syndicated Community
          Offering, together with associates of or persons acting in concert
          with such persons, may purchase in the Syndicated Community Offering
          up to $300,000 of Common Stock subject to the overall maximum purchase
          limitation in (8) below, provided further that shares of Common Stock
          purchased in the Community Offering by any persons, together with
          associates of and persons acting in concert with such persons, will be
          aggregated with purchases in the Syndicated Community Offering in
          applying the $300,000 purchase limitation;

     (8)  Eligible Account Holders, Supplemental Eligible Account Holders and
          Other Members may purchase stock in the Community Offering and
          Syndicated Community Offering subject to the purchase limitations
          described in (6) and (7) above, provided that, except for the ESOP,
          the overall maximum number of shares of Common Stock subscribed for or
          purchased in all categories of the Conversion by any person, together
          with associates of or groups of persons acting in concert with such
          persons, shall not exceed 1.0% of the shares of Common Stock offered
          in the Conversion and exclusive of an increase in the total number of
          shares issued due to an increase in the Estimated Price Range of up to
          15%; and

     (9)  No more than 25% of the total number of shares offered for sale in the
          Conversion may be purchased by directors and officers of the Bank and
          their associates in the aggregate, excluding purchases by the ESOP.

     Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offering in the Subscription
Offering shall not exceed, in the aggregate, 10% of the shares being offered in
the Subscription Offering. Requests to purchase additional shares of Common
Stock under this

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<PAGE>
 
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.

     The overall maximum purchase limitation may not be reduced to less than
1.0% but the individual amount permitted to be subscribed for may be reduced by
the Bank to less than 0.10%, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.

     In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion at the
Adjusted Maximum number of shares, including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unsatisfied subscriptions of Eligible Account Holders, exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unsatisfied subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unsatisfied subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unsatisfied subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum, with preference to
institutional investors then a preference to Preferred Subscribers.

     The term "associate" of a person is defined to mean: (i) any corporation or
organization (other than the Bank or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or directly or indirectly a 10%
stockholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity; provided, however, such term shall not include any employee stock
benefit plan of the Bank in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank. Directors are not treated as associates of each other solely because of
their Board membership. For a further discussion of limitations on purchases of
a converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Bank--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."

     The term "Acting in Concert" means: (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; (ii) a combination or pooling
of voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; or (iii) a person or company which
acts in concert with another person or company ("other party") shall also be
deemed to be acting in concert with any person or company who is also acting in
concert with that other party, except that any tax-qualified employee stock
benefit plan will not be deemed to be acting in concert with its trustee or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be aggregated.

LIQUIDATION RIGHTS

     In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.

                                      101
<PAGE>
 
     The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts and certificates of deposit, with a balance of $50 or more held
in the Bank on June 30, 1997 and __________, 199_, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For deposit accounts in existence at both
dates separate subaccounts shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such respective record dates.

     If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time-to-time by the proportion of any
such reduction and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.

TAX ASPECTS

     Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to federal income taxation and an opinion of an independent accountant
with respect to Virginia taxation, to the effect that the Conversion will not be
a taxable transaction to the Company, the Bank, Eligible Account Holders, or
Supplemental Eligible Account Holders except as noted below. The federal and
Virginia tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.

     No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. Cherry Bekaert &
Holland has opined that the Conversion will not be a taxable transaction to the
Company, the Bank, Eligible Account Holders or Supplemental Eligible Account
Holders for Virginia income and/or franchise tax purposes. Certain portions of
both

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the federal and the state and local tax opinions are based upon the assumption
that the subscription rights issued in connection with the Conversion will have
no economic value at the time of distribution or at the time the subscriptions
are exercised.

     Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or DOR and the IRS or DOR could
disagree with conclusions reached therein. In the event of such disagreement,
there can be no assurance that the IRS or DOR would not prevail in a judicial or
administrative proceeding.

     FinPro has issued an opinion stating that, pursuant to its valuation,
FinPro is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS or DOR. If the subscription rights granted to Eligible Account Holders
or Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account Holders
or Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.

INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION

     To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. This
includes any and all interpretations, applications and determinations made by
the Board of Directors on the basis of such information and assistance as was
then reasonably available for such purpose.

     The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.

     The establishment of the Foundation will be considered as a separate matter
from approval of the Plan of Conversion. If the Bank's members approve the Plan
of Conversion, but not the creation of the Foundation, the Bank intends to
complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See "--
Stock Pricing."

CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION

     All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer and instructions will be issued to the effect that any
transfer within such time period of any certificate or record ownership of such
shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued at a later date as a stock dividend, stock split,

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or otherwise, with respect to such restricted stock will be subject to the same
restrictions. The directors and executive officers of the Bank will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act
and any other applicable requirements of the federal securities laws.

     Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1.0% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to any stock option plan to be
established after the Conversion.

     Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion the Company
may repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Company to become undercapitalized; and (iii) the
Company provides to the Regional Director of the OTS no later than 10 days prior
to the commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. In addition, under current OTS policies, repurchases
may be allowed in the first year following Conversion and in amounts greater
than 5% in the second and third years following Conversion, provided there are
valid and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.

                  RESTRICTIONS ON ACQUISITION OF THE COMPANY
                                 AND THE BANK

GENERAL

     The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a new
Federal Stock Charter and Bylaws to be adopted by members of the Bank. The Plan
also provides for the concurrent formation of a holding company, which form of
organization may or may not be utilized at the option of the Board of Directors
of the Bank. See "The Conversion--General." In the event that the holding
company form of organization is utilized, as described below, certain provisions
in the Company's Articles of Incorporation and Bylaws and in its management
remuneration entered into in connection with the Conversion, together with
provisions of Virginia corporate law, may have anti-takeover effects. In the
event that the holding company form of organization is not utilized, the Bank's
Stock Charter and Bylaws and management remuneration entered into in connection
with the Conversion may have anti-takeover effects as described below. In
addition, regulatory restrictions may make it difficult for persons or companies
to acquire control of either the Company or the Bank.

RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS

     A number of provisions of the Company's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Articles of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Articles of Incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to such

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Articles of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.

     LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common Stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act and includes shares beneficially owned by such person or any of his
affiliates (as defined in the Articles of Incorporation), shares which such
person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Articles of Incorporation of the
Company further provides that this provision limiting voting rights may only be
amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).

     BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Articles of Incorporation and Bylaws provide that the size
of the Board shall be determined by a majority of the directors. The Articles of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Articles of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.

     In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.

     CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Articles of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.

     AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance of
75,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The
shares of Common Stock and Preferred Stock were authorized in an amount greater
than that to be issued in the Conversion to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates and liquidation preferences. As
a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of shares in the Conversion,
including shares contributed to the Foundation, and the issuance of additional
shares pursuant to the terms of the Stock-Based Incentive Plan and upon exercise
of stock options to be issued pursuant to the terms of the Stock-Based Incentive
Plan or Master Stock-Based Benefit Plan, which are to be established and
presented to stockholders at the first annual meeting after the Conversion.

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<PAGE>
 
     STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation requires the approval of the holders
of at least 80% of the Company's outstanding shares of voting stock to approve
certain "Business Combinations," as defined therein, and related transactions.
Under Virginia law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only two-thirds of the votes entitled to be cast. Under the Articles
of Incorporation, at least 80% approval of shareholders is required in
connection with any transaction involving an Interested Stockholder (as defined
below) except (i) in cases where the proposed transaction has been approved in
advance by a majority of those members of the Company's Board of Directors who
are unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder or (ii) if
the proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The term
"Interested Stockholder" is defined to include any individual, a group acting in
concert, corporation, partnership or other entity (other than the Company or its
subsidiaries) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This provision
of the Articles of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Articles of Incorporation) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class of
equity or convertible securities of the Company owned directly or indirectly by
an Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 1.53% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the Stock-
Based Incentive Plan and expects to issue an amount equal to 10% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, under the Stock-Based Incentive Plan or Master Stock-Based Benefit
Plan to directors, officers and employees. As a result, assuming the Stock-Based
Incentive Plan is approved by Stockholders, directors, officers and employees
have the potential to control the voting of approximately ____% of the Company's
Common Stock, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described hereinabove.

     EVALUATION OF OFFERS. The Articles of Incorporation of the Company further
provides that the Board of Directors of the Company, when evaluating any offer
of another "Person" (as defined therein) to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity, or (iii) purchase or otherwise acquire all
or substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company, the Bank and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, the social
and economic effects of acceptance of such offer on the Company's customers and
the Bank's present and future account holders and employees; on the communities
in which the Company and the Bank operate or are located; and on the ability of
the Company to fulfill its corporate objectives as a savings and loan holding
company and on the ability of the Bank to fulfill the objectives of a federally-
chartered stock savings and loan association under applicable statutes and
regulations. By having these standards in the Articles of Incorporation of the
Company, the Board of Directors may be in a stronger position to oppose such a
transaction if the Board concludes that the transaction would not be in the best
interest of the Company, even if the price offered is significantly greater than
the then market price of any equity security of the Company.

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<PAGE>
 
     AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the
Company's Articles of Incorporation must be approved by a majority vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Articles of Incorporation. The Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a duly
constituted meeting of stockholders.

     CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.

ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
MANAGEMENT REMUNERATION ADOPTED IN CONVERSION

     The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, Employee Severance Compensation Plan,
Stock-Based Incentive Plan, Stock-Based Incentive Plan to be established may
also discourage takeover attempts by increasing the costs to be incurred by the
Bank and the Company in the event of a takeover. See "Management of the Bank--
Employment Agreements" and "--Benefits--Stock-Based Incentive Plan."

     The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.

VIRGINIA CORPORATE LAW

     The Commonwealth of Virginia has a statute designed to provide Virginia
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Article 14 of the Virginia Stock Corporation Act
("Article 14"), is intended to discourage certain takeover practices by impeding
the ability of a hostile acquiror to engage in certain transactions with the
target company.

     In general, Article 14 provides that a "Person" (as defined therein) who
owns 10% or more of the outstanding voting stock of a Virginia corporation (an
"Interested Shareholder") may not consummate a merger or other affiliated
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Shareholder. The term
"affiliated transaction" is defined broadly to cover a wide range of corporate
transactions including mergers, share exchanges, dispositions of corporate
assets with an aggregate fair market value in excess of 5% of the corporation's
net worth, disposition of voting shares of the corporation with an aggregate
fair market value in excess of 5% of the aggregate fair market value of all
outstanding voting stock of the corporation, and any reclassification of
securities, including a reverse stock split, recapitalization or merger of the
corporation with its subsidiaries which increases the percentage of voting
shares owned beneficially by an Interested Shareholder by more than 5%.

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<PAGE>
 
     The statute exempts the following transactions from the requirements of
Article 14: (i) any affiliated transaction that is approved by a majority of the
disinterested directors (as defined therein) and by two-thirds of the voting
shares other than those shares beneficially owned by the Interested Shareholder;
or (ii) any affiliated transaction with an Interested Shareholder whose
acquisition of shares making such person an Interested Shareholder receive prior
approval of a majority of the corporation's disinterested directors (as defined
therein). A corporation may exempt itself from the requirements of the statute
by adopting an amendment to its Articles of Incorporation or Bylaws electing not
to be governed by Article 14. At the present time, the Board of Directors does
not intend to propose any such amendment.

     In addition, Virginia Stock Corporation Act, Article 14.1 ("Article 14.1")
limits the voting rights of shares acquired in "Control Share Acquisitions" by
providing that shares acquired in a transaction that would cause the acquiring
person's voting strength to meet or exceed any of three thresholds (one-fifth,
one-third or a majority of voting shares) have no voting rights unless granted
by a majority vote of shares not owned by the acquiring person or any officer or
employee-director of the Virginia corporation. A Virginia corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Articles of Incorporation or Bylaws electing not to be governed by Article 14.1.
At the present time, the Board of Directors does not intend to propose any such
amendment.

RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS

     Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by federal regulations to protect the interests of the converted Bank and its
stockholders from any hostile takeover. Such provisions may, indirectly, inhibit
a change in control of the Company, as the Bank's sole stockholder. See "Risk
Factors--Certain Anti-Takeover Provisions Which May Discourage Takeover
Attempts."

     The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event that
holders of revocable proxies for more than 10% of the shares of the Common Stock
of the Company seek, among other things, to elect one-third or more of the
Company's Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors of
the Bank is not currently able to determine when and if it would assert this
provision of the Bank's Federal Stock Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of the Bank, the Company and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Bank in the years immediately following the Conversion.

     Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting

                                      108
<PAGE>
 
other corporate needs which may arise. In the event of a proposed merger, tender
offer or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.

REGULATORY RESTRICTIONS

     The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.

     For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to a
vote of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion of
such proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of the
Company or the Bank which have not received prior regulatory approval.

     In addition, the Change in Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings and loan holding company unless the OTS has
been given 60 days' prior written notice and has not objected to the
transaction. The HOLA provides that no company may acquire "control of a savings
and loan holding company without the prior approval of the OTS." Any company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination, and regulation by the OTS. Pursuant to federal
regulations, "control" of a savings and loan holding company is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock of the company or irrevocable proxies
representing more than 25% of any class of voting stock of the company or the
ability to control the election of a majority of the directors. The regulations
also establish a rebuttable presumption of "control" upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock, of a savings and loan holding company, where certain enumerated "control
factors" are also present in the acquisition. The OTS may prohibit an
acquisition by a person of "control" if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person or (iv) the proposed acquisition would
have an adverse effect on the deposit insurance funds. Applications by a company
to acquire "control" of a savings and loan holding company are evaluated by OTS
based upon factors such as the financial and managerial resources and future
prospects of the acquirer and the institution involved, competitive factors and
the convenience and needs of the community involved. The foregoing restrictions
do not apply to the

                                      109
<PAGE>
 
acquisition of the Company's capital stock by one or more tax-qualified employee
stock benefit plans, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Company.

                  DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

GENERAL

     The Company is authorized to issue 75,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). Based on the sale of Common
Stock in connection with the Conversion and issuance of authorized but unissued
Common Stock in an amount up to 8% of the Common Stock issued in the
Conversion to the Foundation, the Company currently expects to issue up to
13,115,520 shares of Common Stock (or 15,082,848 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restriction on Acquisition of the
Company and the Bank," each share of the Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan, all such stock will be duly authorized, fully paid
and non-assessable.

     THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.

COMMON STOCK

     DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.

     VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Virginia law or the Company's Articles of Incorporation
or as are otherwise presented to them by the Board of Directors. Except as
discussed in "Restrictions on Acquisition of the Company and the Bank," each
holder of Common Stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. If the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
Certain matters require an 80% shareholder vote. See "Restrictions on
Acquisition of the Company and the Bank."

     As a federal mutual savings and loan association, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.

     LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion--
Liquidation Rights"), all assets of the Bank available for distribution. In the
event of liquidation, dissolution or winding up of the Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.

     PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.

                                      110
<PAGE>
 
PREFERRED STOCK

     None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time-to-time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.

                   DESCRIPTION OF CAPITAL STOCK OF THE BANK

GENERAL

     The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 18,000,000 shares of
common stock, par value $1.00 per share, and 2,000,000 shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in series
and classes having such rights, preferences, privileges and restrictions as the
Board of Directors may determine. Each share of common stock of the Bank will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. After the Conversion, the Board of Directors
will be authorized to approve the issuance of common stock up to the amount
authorized by the Federal Stock Charter without the approval of the Bank's
stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.

COMMON STOCK

     DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.

     VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held, subject
to the right of shareholders to cumulate their votes for the election of
directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the Company's
Articles of Incorporation and Bylaws and Management Remuneration Adopted in
Conversion."

     LIQUIDATION. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after payment
of all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon) and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.

     PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.

                         TRANSFER AGENT AND REGISTRAR

     The transfer agent and registrar for the Common Stock is _________________.

                                      111
<PAGE>
 
                                    EXPERTS

     The financial statements of the Bank and its subsidiary as of December 31,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, have been included in this Prospectus, in reliance upon the report of
Cherry Bekaert & Holland, independent certified public accountants, appearing
elsewhere herein, and given on the authority of said firm as experts in
accounting and auditing.

     FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Conversion and its valuation with respect
to subscription rights.

                            LEGAL AND TAX OPINIONS

     The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Muldoon,
Murphy & Faucette, Washington, D.C., special counsel to the Bank and the
Company. The Commonwealth of Virginia tax consequences of the Conversion and
certain matters related to the Foundation will be passed upon for the Bank and
the Company by Cherry Bekaert & Holland. Certain legal matters will be passed
upon for Trident Securities, Inc. by Breyer & Aguggia LLP, Washington, D.C.

                            ADDITIONAL INFORMATION

     The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.

     The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 1475 Peachtree Street, NE, Atlanta, Georgia 30309.

     In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(g) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.

     A copy of the Articles of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank and the proposed Articles of
Incorporation and Bylaws of the Foundation are available without charge from the
Bank.

                                      112
<PAGE>
 
                        FREDERICKSBURG SAVINGS AND LOAN
                               ASSOCIATION, F.A.


<TABLE>
<CAPTION>
                                   Contents

                                                                            Page
<S>                                                                   <C>
Report of Independent Auditors                                               F-l
 
Balance Sheets                                                               F-2
 
Statements of Income                                                          28
 
Statements of Comprehensive Income                                           F-3
 
Statements of Changes in Equity Capital                                      F-4
 
Statements of Cash Flows                                                 F-5-F-6
 
Notes to Financial Statements                                           F-7-F-27
 
</TABLE>

       Certain schedules required by OTS regulations and by Regulation 
       S-X are not included because they are not applicable or the 
       required information has been disclosed elsewhere.

       Financial statements related to Virginia Capital, Inc. are not
       included as it has not begun operations.
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Members
Fredericksburg Savings and Loan
 Association, F.A.
Fredericksburg, Virginia


We have audited the accompanying balance sheets of Fredericksburg Savings and
Loan Association, F.A. as of December 31, 1997 and 1996, and the related
statements of income, comprehensive income, changes in equity capital, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Association's
management.  Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the  financial statements referred to above present fairly, in
all material respects, the financial position of Fredericksburg Savings and Loan
Association, F.A. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.



                                           /s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
January 29, 1998, except to Note 16,
for which the date is August 14, 1998
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-2
ASSOCIATION, F.A.

 
BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

ASSETS
                                                                                             December 31,
                                                                          June 30,        -------------------
                                                                            1998           1997         1996
                                                                           -------        -------     -------
                                                                         (Unaudited)  
<S>                                                                      <C>             <C>         <C>
Cash and cash equivalents (includes interest-bearing deposits of                      
 $8,248 at June 30, 1998; $10,634 in 1997; $15,177 in 1996)               $  9,031       $ 11,287    $ 15,937
Investment securities                                                                 
 Held-to-maturity (fair value $1,226 at June 30, 1998; $1,335 in                      
  1997; $1,545 in 1996)                                                      1,190          1,291       1,502
 Available-for-sale (cost $30,470 at June 30, 1998; $30,865 in                        
  1997; $32,261 in 1996)                                                    30,928         31,151      31,979
Federal Home Loan Bank stock, restricted, at cost                            3,539          3,448       3,232
Loans receivable, net                                                      415,986        413,032     405,145
Accrued interest receivable                                                           
 Loans                                                                       2,206          2,054       1,858
 Investment securities                                                         508            543         588
Foreclosed real estate for sale, net                                         1,883          1,959       1,611
Property and equipment                                                                
 Land                                                                        1,115          1,115       1,120
 Office properties and equipment, at cost, less accumulated                           
  depreciation ($4,119 at June 30, 1998; $3,999 in 1997;                              
  $4,593 in 1996)                                                            2,398          2,393       2,504
Other assets                                                                   183            269         813
Deferred tax asset                                                           3,313          3,378       3,628
                                                                           -------        -------     -------
                                                                          $472,280       $471,920    $469,917
                                                                           =======        =======     =======
LIABILITIES AND RETAINED EARNINGS                                                     

LIABILITIES                                                                           
 Deposits                                                                 $373,719       $377,114    $375,652
 Advances from Federal Home Loan Bank                                        8,000          8,000      15,000
 Retirement obligations                                                      5,593          5,480       4,934
 Advances from borrowers for taxes and insurance                             1,234            936         844
 Accrued expenses and other liabilities                                        234            317         191
                                                                           -------        -------     -------
   TOTAL LIABILITIES                                                      $388,780        391,847     396,621
                                                                           -------        -------     -------
RETAINED EARNINGS, SUBSTANTIALLY RESTRICTED                                 83,216         79,896      73,471
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE,                           
 NET OF TAX                                                                    284            177        (175)
                                                                           -------        -------     -------
                                                                            83,500         80,073      73,296
                                                                           -------        -------     -------
                                                                          $472,280       $471,920    $469,917
                                                                           =======        =======     =======
</TABLE>

See notes to financial statements.
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-3
ASSOCIATION, F.A.

STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          Six Months Ended
                                                              June 30,                      Year Ended December 31,
                                                       ----------------------        ------------------------------------
                                                        1998            1997          1997          1996            1995
                                                       ------          ------        ------        ------          ------
                                                            (Unaudited)
<S>                                                    <C>             <C>           <C>           <C>             <C> 
                                                                                                               
Net income                                             $3,320          $3,259        $6,425        $4,581          $6,658
                                                        -----           -----         -----         -----           -----
Other comprehensive income-net of tax:                                                                         
    Unrealized gains (losses) on securities                                                                    
        available for sale                                 55            (199)          285           150            (192)
    Less: reclassification adjustment for                                                                      
        gains (losses) included in net income             (52)            (19)          (67)          138             (19)
                                                        -----           -----         -----         -----           -----
                                                                                                               
          Total other comprehensive income                107            (180)          352            12            (173)
                                                        -----           -----         -----         -----           -----
                                                                                                               
Comprehensive income                                   $3,427          $3,079        $6,777        $4,593          $6,485
                                                        =====           =====         =====         =====           =====
</TABLE>

See notes to financial statements.
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-4
ASSOCIATION, F.A.

STATEMENTS OF CHANGES IN EQUITY CAPITAL
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                            Unrealized
                                                                                           Holding Gains
                                                                                            (Losses) or
                                                                               Retained    Available for
                                                                               Earnings   Sale Securities      Total
                                                                               --------   ---------------     -------
<S>                                                                            <C>        <C>                 <C>    
Balances at December 31, 1994                                                   $62,232        $ (14)         $62,218
                                                                                                           
 Net income                                                                       6,658            -            6,658
 Changes in net unrealized gains/(losses) on securities held                                               
  available for sale, net of reclassification adjustment                              -         (173)            (173)
                                                                                 ------         ----           ------
                                                                                                           
Balances at December 31, 1995                                                    68,890         (187)          68,703
                                                                                                           
 Net income                                                                       4,581            -            4,581
 Changes in net unrealized gains/(losses) on securities held                                               
  available for sale, net of reclassification adjustment                              -           12               12
                                                                                 ------         ----           ------
                                                                                                           
Balances at December 31, 1996                                                    73,471         (175)          73,296
                                                                                                           
 Net income                                                                       6,425            -            6,425
 Changes in net unrealized gains/(losses) on securities held                                               
  available for sale, net of reclassification adjustment                              -          352              352
                                                                                 ------         ----           ------
                                                                                                           
Balances at December 31, 1997                                                    79,896          177           80,073
                                                                                                           
 Net income (unaudited)                                                           3,320            -            3,320
 Changes in net unrealized gains/(losses) on securities                                                    
  held available for sale, net of reclassification                                                         
  adjustment (unaudited)                                                              -          107              107
                                                                                 ------         ----           ------
                                                                                                           
Balances at June 30, 1998 (unaudited)                                           $83,216        $ 284          $83,500
                                                                                 ======         ====           ======
</TABLE>

See notes to financial statements.
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-5
ASSOCIATION, F.A.
 
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   Six Months Ended                          Year Ended
                                                        June 30,                             December 31,
                                                -----------------------         ---------------------------------------  
                                                 1998             1997            1997            1996           1995
                                                -------         -------         -------         -------        --------  
                                                     (Unaudited)
<S>                                             <C>             <C>             <C>             <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                     $ 3,320         $ 3,259         $ 6,425         $ 4,581        $  6,658
 Adjustments to reconcile net income to
  net cash provided by operating activities
   Depreciation                                     172             181             371             377             385
   Provision for loan losses                       (269)           (241)           (375)           (325)           (412)
   Increase (decrease) in provision for
    loss on real estate owned                        54             (10)             87             (21)             18
   Discount on mortgage-backed securities           (32)            (29)            (70)            (79)            (99)
   Premium/discount on investment securities          9             (10)              4             (29)             40
   Loan fees deferred, net                          110             226             266             192              90
   (Increase) decrease in deferred income taxes       8             (14)             34            (537)           (332)
   Loss on sale of property and equipment            29               5              16               7               5
   (Gain) loss on sale of real estate owned           2             (66)             (5)             34              87
   (Increase) decrease in accrued interest
    receivable                                     (117)           (244)           (150)            358            (276)
   (Increase) decrease in other assets               84             549             543            (590)            (67)
   Increase (decrease) in advances by borrowers
    for taxes and insurance                         298             143              92             (35)            136
   Increase in retirement obligations               113              80             547             657             541
   Increase (decrease) in other liabilities         (85)            163             125            (333)            269
                                                -------         -------         -------         -------        --------  
     NET CASH PROVIDED BY OPERATING 
       ACTIVITIES                                 3,696           3,992           7,910           4,257           7,043
                                                -------         -------         -------         -------        --------  
 
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from maturities of securities
  held-to-maturity                                    -               -               -               -          15,450
 Proceeds from sale of securities 
  available-for-sale                                  -               -               -          25,673               -
 Proceeds from redemption of securities 
  available for sale                              4,000           2,829           6,812               -               -
 Purchases FHLB stock                               (91)           (215)           (215)           (158)              -
 Proceeds from redemption of FHLB stock               -               -               -               -           1,015
 Purchase of securities held-to-maturity              -               -               -               -         (12,593)
 Purchase of securities available-for-sale       (3,595)         (2,621)         (5,420)         (8,347)            (73)
 Principal payments on mortgage-backed
  securities held to maturity                       130             131             281             456             329
 Loan originations and principal payments, net   (4,214)         (7,640)        (11,422)        (17,487)        (21,421)
 Capital expenditures                              (181)           (127)           (271)           (241)           (464)
 Proceeds from sale of real estate owned          1,392           1,781           3,214           3,528           1,313
                                                -------         -------         -------         -------        --------  
     NET CASH PROVIDED BY (USED IN)
       INVESTING ACTIVITIES                      (2,559)         (5,862)         (7,021)          3,424         (16,444)
                                                -------         -------         -------         -------        --------  
</TABLE>

                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-6
ASSOCIATION, F.A.
 
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        Six Months Ended            Year Ended
                                                             June 30,               December 31,
                                                        -----------------   ----------------------------
                                                         1998       1997      1997     1996        1995
                                                        -------   -------   -------   -------    -------
                                                           (Unaudited)
<S>                                                     <C>       <C>       <C>       <C>       <C>      
CASH FLOWS FROM FINANCING ACTIVITIES
 Net decrease in savings accounts                       $(4,370)  $(1,001)  $(4,894)  $(7,706)  $(11,253)
 Net increase (decrease) in advance from
  Federal Home Loan Bank                                      -    (5,000)   (7,000)    7,000          -
 Net increase (decrease) in certificates of deposit         977     2,998     6,355    (3,018)    21,546
                                                        -------   -------   -------   -------    -------
    NET CASH PROVIDED BY (USED IN)
     FINANCING ACTIVITIES                                (3,393)   (3,003)   (5,539)   (3,724)    10,293
                                                        -------   -------   -------   -------    -------
 
NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                    (2,256)   (4,873)   (4,650)    3,957        892
 
CASH AND CASH EQUIVALENTS
 AT BEGINNING OF PERIOD                                  11,287    15,937    15,937    11,980     11,088
                                                        -------   -------   -------   -------    -------
 
CASH AND CASH EQUIVALENTS
 AT END OF PERIOD                                       $ 9,031   $11,064   $11,287   $15,937    $11,980
                                                        =======   =======   =======   =======    =======
 
SUPPLEMENTAL DISCLOSURE OF
 CASH FLOW INFORMATION
  Cash paid during the period for interest              $ 9,620   $ 9,569   $19,419   $19,534    $18,978
                                                        =======   =======   =======   =======    =======
 
  Cash paid during the period for income taxes          $ 2,165   $ 1,674   $ 3,591   $ 3,623    $ 4,166
                                                        =======   =======   =======   =======    =======
 
SUPPLEMENTAL SCHEDULE OF NON-CASH
 INVESTING ACTIVITIES
  Loans transferred to real estate owned                $ 1,326   $ 1,779   $ 3,209   $ 3,512    $ 1,400
                                                        =======   =======   =======   =======    =======
 
 Investment securities transferred to
  available-for-sale, at fair value                     $     -   $     -   $     -   $     -    $49,257
                                                        =======   =======   =======   =======    =======
 
 Change in unrealized gain (loss) in value
  of  securities available-for-sale,
  net of tax effect                                     $   107   $  (180)  $   352   $    12    $  (173)
                                                        =======   =======   =======   =======    =======
</TABLE>

See notes to financial statements.
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-7
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Fredericksburg Savings & Loan
Association, F.A., "the Bank", are in accordance with generally accepted
accounting principles and conform to the general practices within the savings
institutions industry.  The more significant of the principles used in preparing
the financial statements are briefly described below.

NATURE OF OPERATIONS

The Bank is a mutual savings and loan association with the primary business of
granting residential, commercial real estate and installment loans.  As a
federally chartered savings institution, the Bank is subject to the regulation
of the Office of Thrift Supervision as well as the Federal Deposit Insurance
Corporation.  The area served by the Bank is Fredericksburg, Virginia and the
surrounding counties.  Services are provided at four business locations.

RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION

Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentation.  Such
reclassifications had no effect on net income or retained earnings as previously
reported.

ESTIMATES

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

CASH EQUIVALENTS

For purposes of reporting cash flows, the Bank considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.

INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

The Bank classifies its investment securities and its mortgage-backed securities
in one of three categories: held-to-maturity, available-for-sale, and trading.

Securities held-to-maturity are purchased with the intent and ability to hold to
their maturity or call date.  They are carried and reported at amortized cost.
The amortization of premium and accretion of discount are recognized as
adjustments to interest income.  Securities available-for-sale are those needed
to meet liquidity needs, assist in portfolio restructuring, or minimize interest
rate market risk.  They are carried at their fair value, with unrealized gains
and losses reported as a separate component of capital.  Securities that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities.  The Bank as a matter of policy does not trade
securities and, therefore, does not have trading securities.  Gains or losses on
disposition of securities are computed on the specific identification of the
cost of each security.


                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-8
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES

Loans receivable are stated at the amount of unpaid principal, net of
participation or whole-loan interests owned by others, less the allowance for
loan losses, undisbursed loans in process, and net deferred loan origination
fees and discounts.  The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).  Management's periodic
determination of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the  portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.

Impaired loans are measured based on the present value of expected cash flows
discounted at the loan's effective interest rate, or as a practical expedient at
the loan's observable market price or fair value of the collateral if the loan
is collateral dependent.  Any change in fair value is reported as bad debt
expense in the same manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be reported.

Uncollectible interest on loans is charged off, or an allowance is established
based on management's periodic evaluation.  The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is restored, in which case the loan is returned
to accrual status.

LOAN SALES

The Bank  periodically generates additional funds for lending by selling whole
and/or participating interests in real estate loans.  Gains or losses on such
sales are recognized at the time of sale and are determined by the difference
between the net sales proceeds and the unpaid principal balance of the loans
sold adjusted for any yield differential, servicing fees and servicing cost
applicable to future years.

LOAN ORIGINATION FEES AND RELATED COSTS

Fees charged on the origination of real estate loans and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
the related loan's yield.  Unamortized fees on loans sold are recognized as
adjustments to the basis of those loans in the year of sale.

FORECLOSED REAL ESTATE

Real estate acquired in settlement of loans is classified as held for sale and
initially recorded at the lower of cost or fair value less estimated selling
costs at the date of foreclosure. Costs relating to development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed.  The portion of interest costs relating to the development of real
estate is capitalized.

Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.

                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                              F-9
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND DEPRECIATION

The various classes of property and equipment are stated at cost less
accumulated depreciation computed principally by the straight-line method.  The
costs of major improvements are capitalized, while the costs of maintenance and
repairs, which do not improve or extend the life of the respective properties,
are expensed currently.  The cost and accumulated depreciation on property are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income.

<TABLE> 
<CAPTION> 
                                                 Estimated
                                                Useful Lives
                                                ------------
                                                  (Years)
        <S>                                     <C> 
        Land                                         -
        Buildings                                  5 - 39
        Furniture, fixtures and equipment          5 -  7
</TABLE> 

INCOME TAXES

The Bank accounts for certain income and expense items differently for financial
reporting purposes than for purposes of computing income taxes currently
payable.  Provisions for deferred taxes are made in recognition of such timing
differences.

The Bank has qualified under the provisions of the Internal Revenue Code which
permit it to deduct from taxable income an annual addition to the reserve for
bad debts based on the experience method.  The tax bad debt reserve is
includible in taxable income of later years only if the bad debt reserves are
used subsequently for purposes other than to absorb bad debt losses.  The
cumulative bad debt reserve, upon which no taxes have been paid, amounted to
$9,700 at June 30, 1998 and December 31, 1997.

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 on 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.


NEW ACCOUNTING PRONOUNCEMENTS

The Statement of Financial Accounting Standards No. 131 - Disclosure about
Segments of an Enterprise and Related Information

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".  SFAS No. 131 establishes standards for
reporting by public companies about operating segments of their business.  SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers.  This Statement is effective for
periods beginning after December 15, 1997.  At this time, management does
anticipate that the adoption of this Statement will significantly impact the
Bank's financial reporting.



                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                             F-10
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)

The Statement of Financial Accounting Standards No. 132 -Employers' Disclosures
about Pensions and Other Postretirement Benefits -an amendment of FASB
Statements No. 87, 88, and 106

In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106".  SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair value plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as when Statements No. 87, 88, and 106
were originally issued.  SFAS 132 does not change the measurement recognition of
the plans. This statement is effective for the periods beginning after December
15, 1997. At this time, management does anticipate that the adoption of this
Statement will significantly impact the Bank's financial reporting.

The Statement of Financial Accounting Standards No. 133 - Accounting for
Derivative Instruments and Hedging Activities

This Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The bank is evaluating the
potential impact of adopting SFAS No. 133.  Management does not expect the
adoption of SFAS No. 133 to have a material adverse impact on financial
condition or results of operation.  The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999.
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                         F-11
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 2 - INVESTMENT SECURITIES

The amortized cost and estimated fair values of mortgage-backed securities and
investment securities are as follows as of June 30, 1998, and December 31, 1997
and 1996:

<TABLE>
<CAPTION>
                                                              Gross            Gross         Estimated
                                             Amortized      Unrealized       Unrealized         Fair
                                                Cost           Gain             Loss           Value
                                           ------------     -----------      ----------      ----------
<S>                                         <C>              <C>            <C>             <C> 
SECURITIES HELD-TO-MATURITY
 June 30, 1998 (unaudited)
   Mortgage Backed Securities
     FNMA pass-through securities        $         768    $          -      $          -    $       768
     GNMA certificates                             422              36                 -            458
                                           -----------      ----------        ----------       --------
                                         $       1,190    $         36      $          -     $    1,226
                                           ===========      ==========        ==========       ========
 December 31, 1997                        
   Mortgage Backed Securities             
     FNMA pass-through securities        $         838    $          -      $          -     $      838
     GNMA certificates                             453              44                 -            497
                                           -----------      ----------        ----------       --------
                                         $       1,291    $         44      $          -     $    1,335
                                           ===========      ==========        ==========       ========
 December 31, 1996
   Mortgage Backed Securities
     FNMA pass-through securities        $       1,008    $          -      $          -     $    1,008
     GNMA certificates                             494              43                 -            537
                                           -----------      ----------        ----------       --------
                                         $       1,502    $         43      $          -     $    1,545
                                           ===========      ==========        ==========       ========
</TABLE>

FNMA pass-through securities are valued at net carrying value for fair value
purposes.  Mortgage backed securities are not deemed to have a single maturity
date and no maturity grouping information has been presented.

<TABLE>
<CAPTION>
                                                                Gross            Gross         Estimated
                                              Amortized       Unrealized      Unrealized         Fair
                                                 Cost            Gain            Loss            Value
                                            -------------     -----------     -----------      ----------               
<S>                                          <C>               <C>             <C>              <C>    
SECURITIES AVAILABLE-FOR-SALE
 June 30, 1998 (unaudited)
  U.S. Treasury and agency obligations       $     16,814     $        73     $        12       $   16,875
  Corporate securities                              4,856              62              12            4,906
  Other securities                                  5,007             982              23            5,966
  Mutual fund                                       1,293               -              25            1,268
  Dual Index Consolidated Bonds                     2,500               -             587            1,913
                                               ----------       ---------       ---------         --------
                                             $     30,470     $     1,117     $       659       $   30,928
                                               ==========       =========       =========         ========
</TABLE>

                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                             F-12
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
 
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                             Gross           Gross         Estimated
                                              Amortized    Unrealized      Unrealized         Fair
                                                Cost         Gain            Loss            Value
                                             -----------   ----------    -------------     ---------
<S>                                          <C>           <C>           <C>               <C>
SECURITIES AVAILABLE-FOR-SALE (CONCLUDED)
 December 31, 1997
  U.S. Treasury and agency obligations       $   19,812      $     82      $     58       $  19,836
  Corporate securities                            3,345            70             2           3,414
  Other securities                                3,946           791            23           4,713
  Mutual fund                                     1,262             -            20           1,242
  Dual Index Consolidated Bonds                   2,500             -           554           1,946
                                               --------        ------        ------         -------
                                             $   30,865      $    943      $    657       $  31,151
                                               ========        ======        ======         =======
                                                                                           
 December 31, 1996                                                                         
  U.S. Treasury and agency obligations       $   20,823      $     84      $    104       $  20,803
  Corporate securities                            3,995            99             -           4,094
  Other securities                                3,744           283            44           3,983
  Mutual fund                                     1,199             -            24           1,175
  Dual Index Consolidated Bonds                   2,500             -           576           1,924
                                               --------        ------        ------         -------
                                             $   32,261      $    466      $    748       $  31,979
                                               ========        ======        ======         =======
</TABLE>

The mutual fund investments are in funds that invest primarily in obligations of
the U.S. Government or its agencies.

The amortized cost and estimated fair value of investment securities at June 30,
1998 and December 31, 1997 by contractual maturity, are shown below.  Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
                                                     June 30, 1998                           December 31, 1997
                                          --------------------------------------     -------------------------------
                                                      (Unaudited)
                                                                   Estimated                            Estimated
                                               Amortized              Fair             Amortized            Fair
                                                 Cost                Value               Cost              Value
                                          -----------------    ---------------       -------------     -------------
<S>                                        <C>                  <C>                   <C>               <C>
SECURITIES HELD-TO-MATURITY
Due after five years through ten years    $            768     $           768        $        838     $         838
Due after ten years                                    422                 458                 453               497
                                            --------------       -------------          ----------       -----------
                                          $          1,190     $         1,226        $      1,291     $       1,335
                                            ==============       =============          ==========       ===========
 
SECURITIES AVAILABLE-FOR-SALE
Equity securities                         $          1,293     $         1,268        $      1,262     $       1,242
Due in one year or less                             11,720              12,717              14,593            15,351
Due after one year through five years               14,100              14,172              11,651            11,778
Due after five years through ten years               2,998               2,401               2,997             2,409
Due after ten years                                    359                 370                 362               371
                                            --------------       -------------          ----------       -----------
                                          $         30,470     $        30,928        $     30,865     $      31,151
                                            ==============       =============          ==========       ===========
 </TABLE>

                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                             F-13
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 2 - INVESTMENT SECURITIES (CONCLUDED)

During 1993, the Bank acquired Dual Indexed Consolidated Bonds ("DICBs") issued
by the Federal Home Loan Bank ("FHLB").  DICBs' coupon rates are determined by
the difference between the designated Constant Maturity Treasury ("CMT") and the
designated London Interbank Borrowing Rate ("LIBOR"). Interest rates on  DICBs
are subject to reset annually at specified dates.  This reset may result in an
interest rate less than those payable on conventional fixed rate debt securities
issued at the same time. These investments were acquired as part of the interest
rate risk management of the Bank.

The Secondary market for DICBs is affected by factors other than the credit
worthiness of the issuer. Such factors include other interest rates, volatility
of the two indices utilized, time remaining to maturity and the amount of the
outstanding bonds.

DICBs are classified by the Bank as available for sale and are recorded at fair
value with unrealized gains and losses included in Retained Earnings
Substantially Restricted.  The DICBs were acquired at their face amount.  The
consensus reached by the Emerging Issues Task Force ("EITF") Issue number 96-12
requires interest income recognition for these instruments based upon the
retrospective interest method. The Bank  recognizes interest income based on the
actual interest payments received.  The difference between the retrospective
interest method and the method utilized is immaterial.

Disclosed below are the characteristics of each issue of DICBs, the indices
utilized and period-end coupon rates and market value.  The Bank's exposure to
credit risk, on these instruments, is limited to the amount paid for each DICB,
if the FHLB fails to perform.
<TABLE>
<CAPTION>
 
                                                                                 June 30, 1998
                                                                              -------------------
                                                                                  (Unaudited)
                                 Face               Indexing                              Market
 Issuer       Maturity          Amount               Formula                    Coupon    Value
--------     ----------        --------      ----------------------------     ---------  --------
<S>          <C>               <C>           <C>                              <C>        <C>     
 FHLB        08/17/05          $  1,000      (10 yr CMT+3.00%)-6 mo LIBOR         2.93%  $    766
                                                                                      
 FHLB        08/26/05             1,000      (10 yr CMT+3.00%)-6 mo LIBOR         3.03        772
                                                                                      
 FHLB        11/18/05               500      (10 yr CMT+2.75%)-6 mo LIBOR         2.68        375
                               --------                                                  --------
                                                                                     
                               $  2,500                                                  $  1,913
                               ========                                                  ========
 
<CAPTION>
 
                                                                                           December 31,
                                                                              ----------------------------------------
                                                                                     1997                 1996
                                                                              -------------------  -------------------  
                                 Face               Indexing                    Market               Market   
 Issuer       Maturity          Amount               Formula                    Coupon    Value      Coupon    Value    
--------     ----------        --------      ----------------------------     ---------  --------  ---------  --------  
<S>          <C>               <C>           <C>                              <C>        <C>       <C>        <C>        
 FHLB         08/17/05         $  1,000      (10 yr CMT+3.00%)-6 mo LIBOR       3.408%   $   786     3.853%   $   765
                                                                                                   
 FHLB         08/26/05            1,000      (10 yr CMT+3.00%)-6 mo LIBOR       3.472        788     3.940        771
                                                                                                   
 FHLB         11/18/05              500      (10 yr CMT+2.75%)-6  mo LIBOR      2.764        372     3.499        369
                               --------                                                    -----               ------
                                                                                                   
                                                                                                   
                               $  2,500                                                  $ 1,946             $ 1,905
                               ========                                                  =======             =======
 
</TABLE>
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                             F-14
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
 
 
NOTE 3 - LOANS RECEIVABLE

Loans receivable consisted of the following:
<TABLE>
<CAPTION>
                                                                                 December 31,
                                                           June 30,      ---------------------------
                                                            1998            1997            1996
                                                        -----------      -----------     -----------
                                                       (Unaudited) 

<S>                                                     <C>              <C>             <C>           
 Real estate mortgage loans                                          
   One to four family                                   $  367,041       $  358,561      $  345,799
   Multi-family                                              3,396            3,455           3,453
   Non-residential real estate                              35,316           40,951          44,528
   Land and land development                                 2,321            3,091           4,136
                                                        -----------      -----------     -----------
        Total real estate mortgage loans                   408,074          406,058         397,916
 Less: Amounts owned by holders                                      
      of participating interests, net                       (3,319)          (4,217)         (5,450)
                                                        -----------      -----------     -----------
                                                                     
        Net real estate mortgage loans                     404,755          401,841         392,466
                                                        -----------      -----------     -----------
                                                                     
 Real estate construction and development loans             19,960           16,046          21,285
 Less:  Undisbursed loan funds                              (8,743)          (4,978)         (8,064)
                                                        -----------      -----------     -----------
                                                                     
        Net real estate construction loans                  11,217           11,068          13,221
                                                        -----------      -----------     -----------
 Other loans                                                         
  Consumer and other installment loans                       9,192            8,913           8,046
                                                        -----------      -----------     -----------
                                                                     
        Total other loans                                    9,192            8,913           8,046
                                                        -----------      -----------     -----------
                                                                     
                                                           425,164          421,822         413,733
                                                                     
 Less:  Deferred loan fees                                  (3,539)          (3,312)         (3,045)
        Allowance for loan losses                           (5,639)          (5,478)         (5,543)
                                                        -----------      -----------     -----------
                                               
        Net loans receivable                            $  415,986       $  413,032      $  405,145
                                                        ===========      ===========     ===========
</TABLE>
Amounts owned by holders of participating interests are not included in the
balance sheets. The unpaid principal balances of these loans are summarized as
follows:

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                           June 30,      ---------------------------
                                                            1998            1997            1996
                                                        -----------      -----------     -----------
                                                       (Unaudited) 
<S>                                                          <C>           <C>              <C>
FNMA, net of discount                                   $    1,512       $    2,222      $    2,638
FHLMC                                                          750              872           1,130
Other                                                        1,057            1,123           1,682
                                                        -----------      -----------     -----------
                                                        $    3,319       $    4,217      $    5,450
                                                        ===========      ===========     ===========
 
</TABLE>
                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                           F-15
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 3 - LOANS RECEIVABLE (CONCLUDED)

Custodial escrow balances maintained in connection with the foregoing loan
servicing were $294 and $364 at June 30, 1998 and 1997, and $215,  $130 and $284
at December 31, 1997, 1996 and 1995, respectively.

Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
 
                                                   June 30,                      December 31,
                                           -----------------------     -------------------------------
                                               1998         1997         1997       1996        1995
                                                  (Unaudited)
<S>                                       <C>              <C>         <C>        <C>          <C>
 
Balance, beginning of period               $ 5,478         $ 5,543     $ 5,543    $ 5,480      $ 5,537
   Provision charged to operations             269             241         375        325          412
   Loans charged off                          (108)           (187)       (440)      (263)        (489)
   Recoveries                                   -               -           -           1           20
                                           -------         -------     -------     -------   ---------
Balance, end of period                     $ 5,639         $ 5,597     $ 5,478    $ 5,543      $ 5,480
                                           =======         =======     =======     ======     ========
</TABLE>

Impairment of loans having recorded investments of $8,476  at June 30, 1998,
$9,801 at December 31, 1997, $11,880 at December 31, 1996, and $10,756 at
December 31, 1995 have been recognized in conformity with FASB No. 114, as
amended by FASB No. 118.  The average recorded investment in impaired loans
during 1998, 1997, 1996, and 1995  was $8,860,  $10,466, $13,257, and $12,205,
respectively.  The total allowance for loan losses related to these loans was
$659 on June 30, 1998, $669 and $729 on December 31, 1997 and 1996, and $807 on
December 31, 1995, respectively.  Interest income foregone associated with these
loans was $114 for 1998, $193 for 1997 and $438 for 1996, and $198 for 1995.

Loans having carrying values of $1,326,  $3,209 , $3,512, and $2,471 were
transferred to foreclosed real estate in 1998, 1997, 1996, and 1995,
respectively.

The Bank is not committed to lend additional funds to debtors whose loans have
been modified.

Unspecified residential loans of approximately $208,000 at June 30, 1998 and
December 31, 1997, and approximately $199,000 at December 31, 1996 have been
pledged to the Federal Home Loan Bank under a floating blanket lien as
collateral for advances from that bank.  See Note 6.

NOTE 4 - FORECLOSED REAL ESTATE FOR SALE

Foreclosed real estate consisted of the following:
<TABLE>
<CAPTION>
                                                                              December 31,
                                                  June 30,             ---------------------------
                                                   1998                   1997              1996
                                              --------------           ----------        ---------
                                               (Unaudited)
<S>                                             <C>                     <C>               <C>   
Foreclosed real estate                           $ 2,062                $ 2,085           $ 1,650   
   Less allowance for losses                        (179)                  (126)              (39)
                                                 -------                ------            -------
 
                                                 $ 1,883                $ 1,959           $ 1,611
                                                 =======                =======           =======
</TABLE>
                                                 (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                            F-16
ASSOCIATION, F.A.
<TABLE>
<CAPTION>
 
NOTES TO FINANCIAL STATEMENTS
 (DOLLARS IN THOUSANDS)
 
NOTE 4 - FORECLOSED REAL ESTATE FOR SALE (CONCLUDED)

A summary of the foreclosed real estate operations is as follows:
                                         
                                         June 30,                        December 31,
                                   -------------------         ------------------------------
                                    1998       1997             1997       1996        1995
                                  -------    -------           -------    -------     -------
                                      (Unaudited)
<S>                               <C>        <C>               <C>        <C>         <C>      
Foreclosed real estate
   Foreclosed real estate
   sales                          $ 1,392    $ 1,781           $ 3,214    $ 3,528     $ 1,313
   Cost of sales                    1,326      1,779             3,209      3,512       1,400
   Increase (decrease) in
   reserve                             54        (11)               87        (21)         18
   Selling and other expenses          37         34                81        167          79
                                  -------    -------           -------    -------     ------- 
        Net loss                  $   (25)   $   (21)          $  (163)   $  (130)    $  (184)
                                  =======    =======           =======    =======     =======  
</TABLE> 
Activity in the allowance for losses for real estate owned is summarized as
 follows:
<TABLE> 
<CAPTION> 
                                         June 30,                        December 31,
                                   -------------------         ------------------------------
                                    1998       1997             1997       1996        1995
                                  -------    -------           -------    -------     -------
                                      (Unaudited)
<S>                               <C>        <C>               <C>        <C>         <C>      
Balance, beginning of
period                            $   126    $    39           $    39    $    60     $    42
Provision for losses                   95          3               167         72         112
Charge-offs                           (41)       (13)              (80)      (143)        (94)
Transfers                               -          -                 -         50           -
                                  -------    -------           -------    -------     -------
Balance, end of period            $   180    $    29           $   126    $    39     $    60
                                  =======    =======           =======    =======     =======  
</TABLE> 
NOTE 5 - DEPOSITS
 
Deposits summarized by interest rates were as follows:
<TABLE> 
<CAPTION> 

                                     June 30,                      December 31,
                              -------------------   ----------------------------------------
                                        1998                 1997                1996
                              -------------------   ------------------   -------------------
                                    (Unaudited)
                                Amount    Percent     Amount    Percent   Amount     Percent
                              ---------   -------   ---------   ------   --------    -------
<S>                          <C>         <C>       <C>         <C>      <C>         <C>      
Passbook accounts                                           
 (weighted average rate                                     
   of 3.25% and 3.24%)        $  37,818   10.10%    $  38,707    10.26%  $ 39,659     10.56%
Non-interest bearing                                        
 deposits                         2,481     0.70        3,266     0.87      2,451      0.65
Money market accounts                                       
 (weighted  average rate                                    
   of 3.25% and 3.26%)           43,141    11.50       45,839    12.16     50,596     13.47
                              ---------   ------    ---------   ------   --------    ------ 
                                 83,440    22.30       87,812    23.29     92,706     24.68
                              ---------   ------    ---------   ------   --------    ------ 
Certificates:                                               
   Up to 4.00%                        -        -            -        -         18      0.01
4.01% to 5.00%                   19,299     6.60       17,304     4.58     42,404     11.28
5.01% to 6.00%                  243,579     61.6      233,582    61.94    183,490     48.85
6.01% to 7.00%                   24,239     8.40       32,589     8.64     51,217     13.63
7.01% to 8.00%                    3,162     1.10        5,827     1.55      5,817      1.55
                              ---------   ------    ---------   ------   --------    ------ 
                                290,279    77.70      289,302    76.71    282,946     75.32
                              ---------   ------    ---------   ------   --------    ------ 
  Total deposits              $ 373,719   100.00%   $ 377,114   100.00%  $375,652    100.00%
                              =========   ======    =========   ======   ========    ======
</TABLE>
                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                            F-17
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 5 - DEPOSITS (CONCLUDED)

The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100 was approximately $45,346 at June 30, 1998, and $21,270 and
$39,805 at December 31, 1997 and 1996, respectively.  Deposits in excess of $100
are not federally insured.

The  scheduled maturities of certificates of deposit are as follows:

<TABLE>
<CAPTION>
 
                                            June 30, 1998    December 31,1997
                                            -------------    ----------------
                                             (Unaudited)     
      <S>                                   <C>              <C>     
      One Year or Less                        $ 196,666          $ 192,592
      Over One Through Two Years                 48,743             56,227
      Over Two Through Three Years               23,760             25,827
      Over Three Through Four Years               8,988              3,645
      Over Four Through Five Years               12,099             10,988
      Over Five Years                                23                 23
                                              ---------          ---------
                                              $ 290,279          $ 289,302
                                              =========          ========= 
</TABLE> 

Interest expense on deposits is summarized as follows:
 
<TABLE> 
<CAPTION> 
                                   June 30,                December 31,    
                               ---------------     --------------------------
                                1998     1997        1997      1996     1995
                               ------   ------     -------   -------   -------
                                   (Unaudited)        
<S>                            <C>         <C>     <C>       <C>       <C>    
Passbook savings               $  614   $  614     $ 1,237   $ 1,336   $ 1,408
Money market                      726      822       1,619     1,692     1,921
NOW                                 4        3           6         7         7
Certificates of deposit         8,031    7,823      15,954    16,041    15,096
                                -----   ------     -------   -------   -------
                               $9,375   $9,262     $18,816   $19,076   $18,432
                               ======   ======     =======   =======   =======
</TABLE> 
 
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
 
The advances to the Bank consist of the following:
 
<TABLE> 
<CAPTION> 
                                                                 December 31,
                              Interest       June 30,        --------------------
 Maturity Date                  Rate           1998            1997        1996
 -------------                --------      -----------      -------      -------
                                            (Unaudited)                   
 <S>                          <C>           <C>               <C>         <C>      
 January 6, 1997                6.53%          $    -         $    -      $ 5,000
 November 24, 1997              5.66%               -              -        2,000
 November 22, 1999              6.09%           3,000          3,000        3,000
 November 28, 2001              6.25%           5,000          5,000        5,000
                                               ------        -------      -------
                                               $8,000         $8,000      $15,000
                                               ======         ======      =======
</TABLE>

The Bank had approved borrowing capacity at the FHLB for $45 million as of 
June 30, 1998, December 31, 1997 and 1996. The unused portion of this facility
aggregated $37 million at June 30, 1998 and December 31, 1997 and $30 million at
December 31, 1996.

<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                     F-18
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 7 - RETIREMENT OBLIGATIONS

PENSION PLAN

The Bank has a qualified, noncontributory defined benefit plan covering
substantially all of its full-time employees.  The benefits are based upon the
employee's average compensation during the last five years of employment.  To
qualify initially, employees must have worked 1,000 hours in a twelve month
period.  An employee becomes fully vested upon completion of 5 years of
qualifying service.  The amounts of retirement plan expense recognized in the
Bank's statements of income for this plan totaled $169, and $108 for the six
months ended June 30, 1998 and 1997, respectively, $226 for 1997,  $136 for
1996, and $426 for 1995.  The Bank contributes to the plan the maximum allowable
amount in accordance with ERISA funding standards.

The Plan's assets are invested in managed stock and bond investment accounts
held by the Plan trustee and in certificates of deposit of $2,447 at June 30,
1998, $2,137 in 1997 and $2,055 in 1996 with the Bank.

The discount rate and rate of future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 7.5% and 5.5%,
respectively, and the expected long-term rates of return on assets used in the
computations was 7.00% at June 30, 1998, and 7.75% for 1997 and 1996.

The following sets forth the plan's funded status and amounts recognized in 
the Bank's financial statements as of the actuarial dates of June 30, 1998,
December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                   December 31,
                                               June 30,    ---------------------------- 
                                                 1998          1997            1996
                                             -----------   ------------    ------------ 
                                             (Unaudited)
<S>                                          <C>           <C>             <C>     
Accumulated benefit obligation,             
 fully vested                                $     2,709   $       2,509   $      2,627
                                             ===========   =============   ============ 
Projected benefit obligation                 $     4,361   $       4,061   $      4,094
Market value of plan assets                        4,902           4,761          4,712
                                             -----------   -------------   ------------ 
Excess of projected benefit obligation                                        
 over market value of plan assets                    541             700            618
Unrecognized net transition amount                   627             668            752
Unrecognized prior service cost                     (210)           (219)          (237)
Unrecognized net (gain) loss                      (1,192)         (1,573)        (1,781)
                                             -----------   -------------   ------------ 
Accrued pension liability (included in      
 retirement obligations)                     $      (234)  $        (424)  $       (648)
                                             ===========   =============   ============ 
</TABLE> 

The components of net pension expense are as follows:

<TABLE> 
<CAPTION> 
                                                 June 30,                            December 31,
                                        ---------------------------   ------------------------------------------ 
                                           1998            1997           1997           1996           1995
                                        -----------   -------------   -----------   -------------   ------------ 
                                               (Unaudited)
<S>                                     <C>           <C>             <C>           <C>             <C>           
Service cost - benefits earned          
 during the period                      $       113   $         106   $       212   $         201   $        209
Interest cost on projected benefit                                                                          
 obligation                                     137             138           277             313            268
Expected return on plan assets                 (181)           (170)         (341)           (306)          (516)
Net amortization and deferral                     -              (6)          (12)             28            301
                                        -----------   -------------   -----------   -------------   ------------ 
Net pension expense                     $        69   $          68   $       136   $         236   $        261
                                        ===========   =============   ===========   =============   ============ 
</TABLE>

                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                     F-19
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 7 - RETIREMENT OBLIGATIONS (CONCLUDED)

MANAGEMENT SECURITY PLAN

The Bank established a non-qualified deferred compensation plan in 1986 for
certain management personnel, known as the Fredericksburg Savings and Loan
Association, F.A. Management Security Plan.  This plan is structured to provide
benefits upon retirement based on years of service to the Bank.  Participants
are to receive benefits for life and are eligible for retirement at age 55.  If
the participant passes away before the age of 80, the benefits shall continue to
be paid to the named beneficiary until such time the participant would have
reached such age.  Deferred compensation expense amounted to $216 for the six
months ended June 30, 1998 and 1997, respectively, and $432, $297, and $426 for
the years ended December 31, 1997, 1996, and 1995, respectively.  At June 30,
1998, December 31, 1997 and 1996, the balance of their management security trust
plan was approximately $5,958, $4,342 and $3,376, respectively, which is
included  in investment securities classified as available-for-sale.  The use of
these funds is restricted to fulfilling the deferred compensation obligation,
subject to the claims of creditors in a bankruptcy proceeding.  The Bank has
recorded the assets and liabilities for the non-qualified deferred compensation
plan as gross amounts in the  balance sheet.

SUPPLEMENTAL RETIREMENT AGREEMENT

During 1996, the Bank entered into a non-funded supplemental retirement
agreement with its former chairman of the board.  Deferred compensation expense
related to this agreement amounted to $56 for the six months ended June 30, 1998
and 1997, $112 for 1997, and $0 for 1996.

401(K) PLAN

The Bank maintains the Fredericksburg Savings and Loan Association, F.A. Salary
Savings Plan (the "401(k) Plan"), a tax-qualified profit sharing plan with a
qualified cash or deferred arrangement under Section 401(k) of the Code.
Eligible employees may begin participating in the 401(k) Plan upon the
completion of one-half of one "Year of Service" and attainment of age 21.
Participants may make contributions to the plan during the year, with certain
limitations placed on such contributions.  The Bank  is required to contribute
to the plan an amount equal to one-half the basic contribution made by a
participant to a maximum of 6% per participant.  Expenses of the plan totaled
$31 and $25 for the six months ended June 30, 1998 and 1997, $58 for the year
ended December 31, 1997,  $67 for the year ended December 31, 1996, and $62  for
the year ended December 31, 1995.

NOTE 8 - RELATED PARTY TRANSACTIONS

The Bank has made loans to various officers and directors, collateralized by the
personal residences of the borrowers or their deposits in the Bank.  Loans
outstanding to officers and directors totaled $2,136 at June 30, 1998, $2,302 at
December 31, 1997 and $2,350 at December 31, 1996.  New loans to officers and
directors for the first six months in 1998 were approximately $331 and $225 in
1997.

Loans to executive officers and directors are generally made on the same terms
and conditions as for other loans.  The Bank does not expect to incur any losses
with respect to these loans.
<TABLE>
<CAPTION>       
                                                     December 31,
                        June 30,  ------------------------------------------------   
                         1998          1997             1996             1995
                     ----------   ------------     -------------      ------------
                     (Unaudited)
<S>                  <C>           <C>             <C>                <C>   
Beginning balance    $      493    $      543      $         690      $        612
Additions                   214             -                  -               157
Repayments                 (134)          (50)              (147)              (79)
                      ---------     ---------        -----------        ---------- 
                             
Ending balance       $      573    $      493      $         543      $        690
                      =========     =========        ===========        ==========  
 
</TABLE>
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                     F-20
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 9 - REGULATORY MATTERS

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

Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of June 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.

As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for corrective action.  To be categorized as well capitalized, the
Bank must maintain minimum total core capital, tangible capital, and risk-based
capital leverage ratios as set forth in the table.  There are no conditions or
events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
 
The Bank's actual capital amounts and ratios are also presented in the table.
                                                                                               Well
                                                                                         Capitalized Under     
                                                                   For Capital           Prompt Corrective
                                           Actual               Adequacy Purposes        Action Provisions
                                --------------------------   -----------------------    --------------------
                                    Amount        Ratio         Amount      Ratio         Amount     Ratio
                                -------------  -----------   ----------- -----------    ---------   --------
<S>                             <C>            <C>           <C>         <C>            <C>         <C>
As of June 30, 1998            
  Core Capital         
    (To total assets)           $    81,588       17.28      $  18,888      4.00        $ 23,610      5.00
  Tangible Capital     
    (To total assets)                81,588       17.28          7,083      1.50          14,166      3.00
  Risk-Based Capital   
    (To risk weighted  
     assets)                         85,131       30.20         22,549      8.00          28,186     10.00
As of December 31, 1997
 Core Capital          
   (To total assets)                 78,272       16.59         14,109      3.00          23,515      5.00
 Tangible Capital      
   (To total assets)                 78,272       16.59          7,054      1.50          14,109      3.00
 Risk-Based Capital
   (To risk weighted assets)         81,810       28.60         22,878      8.00          28,597     10.00
As of December 31, 1996     
 Core Capital               
   (To total assets)                 71,843       15.29         14,049      3.00          23,414      5.00
 Tangible Capital           
   (To total assets)                 71,843       15.29          7,024      1.50          14,049      3.00
 Risk-Based Capital         
   (To risk weighted assets)         75,280       27.50         21,905      8.00          27,381     10.00
</TABLE>
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                     F-21
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 10 - OFF BALANCE SHEET RISKS

Financial instruments with off-balance sheet risk include commitments to extend
credit made in the normal course of business.  These commitments to extend
credit are not shown in the accompanying financial statements.  The Bank uses
the same credit policies in making commitments, evaluates each customers' credit
worthiness on a case-by-case basis and requires collateral to support financial
instruments with credit risk.  Collateral held varies, but generally includes
real estate, primarily single-family homes, and in some cases, income-producing
commercial properties.  At June 30, 1998, the Bank had commitments to originate
loans of approximately $23,896 and $20,038 at December 31, 1997.

Standby letters of credit are conditional commitments issued by the Bank.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.  At June 30, 1998, the Bank was
conditionally committed under standby letters of credit aggregating
approximately $836 and at December 31, 1997 approximately $1,077.  The Bank does
not expect to fund any of the letters of credit.

The amount of unfunded lines of credit for home equity loans was approximately
$3,020 at June 30, 1998 and $3,005 at December 31, 1997.

In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying  financial
statements.  In addition, the Bank is a defendant in certain claims and legal
actions arising in the ordinary course of business.  In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
financial condition of the Bank.

NOTE 11 - MARKET CONCENTRATION

The Bank has a diversified loan portfolio consisting of commercial and
residential real estate and installment loans.  Substantially all of the Bank's
customers are residents or operate business ventures in its market area
consisting of the Fredericksburg Standard Metropolitan Statistical Area (SMSA).
Therefore, a substantial portion of its debtors' ability to honor their
contracts is influenced by the economic conditions in this market area.

NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
financial instruments.

CASH AND CASH EQUIVALENTS

Fair value of cash and cash equivalents is assumed to be book value.

INVESTMENT SECURITIES

For U.S. Treasury and Agency securities, fair values are based on market prices
or dealer quotes.  For other investment securities, fair value equals quoted
market price if available.

MORTGAGE-BACKED SECURITIES

Fair value of mortgage securities is assumed to be net book value for FNMA pass-
through securities and quoted market prices for GNMA certificates.


                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                        F-22
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)

LOANS

Fair values are estimated for portfolios of loans with similar financial
characteristics.  Loans are segregated by type such as commercial, residential
mortgage and consumer.  Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan.


DEPOSITS

Fair value of passbook and money market accounts is defined as the amounts
payable on demand at the reporting date.  The fair value of fixed maturity
certificates of deposit is estimated based on the rates currently offered for
deposits of similar maturities

ADVANCES

Fair value of advances outstanding is estimated based on the rates currently
available for advances of similar maturities.

Commitments to extend credit and standby letters of credit

The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counter parties.  All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis.  The fair value of these instruments is not
material.

The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
 
                                                                                   December 31,
                                      June 30,                 ------------------------------------------------------
                                        1998                             1997                           1996
                                -------------------------      ------------------------       -----------------------
                                      (Unaudited)                                                           
                                 Carrying      Est. Fair        Carrying      Est. Fair        Carrying     Est. Fair
                                  Value          Value           Value          Value           Value         Value
                                ----------   ------------      -----------   -----------      -----------   ---------
<S>                              <C>         <C>               <C>           <C>              <C>           <C>    
Financial assets                                                                                            
   Cash                          $   9,031     $   9,031        $  11,287     $  11,287        $  15,937    $  15,937
   Investment securities            30,470        30,928           30,865        31,151           32,261       31,979
   Mortgage-backed securities        1,190         1,226            1,291         1,335            1,502        1,545
   Loans                           415,986       421,646          413,032       416,508          405,145      405,540
                                                                                                            
Financial liabilities                                                                                       
   Deposits                        373,719        372,237         377,114       376,181          375,652      374,753
   Advances                          8,000          7,965           8,000         7,995           15,000       15,060
</TABLE>
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                F-23
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 13 - INCOME TAXES

Deferred income taxes result from timing differences in the recognition of
income and expense for income tax and financial reporting purposes.  The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at June 30, 1998 and December
31, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
                                                    June 30,                December 31,
                                                  ------------      ------------------------------------
                                                     1998               1997                1996
                                                  ------------      --------------      ----------------
                                                   (Unaudited)
<S>                                               <C>                <C>                <C>
Deferred tax assets
   Allowance for loan losses                      $      2,270      $         2,116    $           2,108
   Deferred compensation                                 2,125                2,082                1,875
   Other                                                    31                   31                  361
                                                    ----------        -------------      ---------------
           Total gross deferred tax assets               4,426                4,229                4,344
                                                    ----------        -------------      ---------------
 
Deferred tax liabilities
   FHLB stock dividends                                    480                  480                  480
   Depreciation                                            250                  250                  236
   Other                                                   383                  121                    -
                                                    ----------         ------------      ---------------
          Total gross deferred tax liabilities           1,113                  851                  716
                                                    ----------         ------------      ---------------
          Net deferred tax asset                  $      3,313       $        3,378    $           3,628
                                                    ==========         ============      ===============
</TABLE>

The following is a reconciliation of the differences between the statutory
Federal income tax rate and the effective income tax rate for the six months
ended June 30, 1998 and the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
 
                                                      June 30,                   December 31,
                                                   ---------------  -------------------------------------
                                                     1998              1997         1996         1995
                                                   ---------------  ---------    ---------    -----------
                                                    (Unaudited)
<S>                                                <C>               <C>          <C>          <C>
Tax at expected rates                                        34.0%      34.0%        34.0%          34.0%
Increases (decreases) in taxes resulting from
   Tax exempt interest income                                (2.2)      (2.0)        (2.8)          (2.0)
   State income tax, net of federal tax benefit               3.7        3.5          3.5            3.9
   Other                                                      4.5        2.6          4.8            2.0
                                                        ----------   --------     --------        -------
                                                             40.0%      38.1%        39.5%          37.9%
                                                        ==========   ========     ========        =======
</TABLE>

                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                             F-24
ASSOCIATION, F.A.
<TABLE>
<CAPTION>
 
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
 
NOTE 13 - INCOME TAXES (CONCLUDED)
 
The provision for income taxes consisted of the following:
 
                                                June 30,                                   December 31,
                                      -----------------------------   --------------------------------------------------------
                                          1998            1997             1997               1996                 1995
                                      ------------   --------------   ---------------    ----------------    -----------------
                                              (Unaudited)
<S>                                   <C>            <C>              <C>                <C>                 <C>      
Current tax expense                                                                                      
 U.S. Federal                         $      2,143   $       2,375    $        3,437     $        2,568      $           4,093
 State                                         137             152               553                375                    415
                                      ------------   -------------    --------------     --------------      -----------------
  Total current                              2,280           2,527             3,990              2,943                  4,508
                                      ------------   -------------    --------------     --------------      -----------------

Deferred tax expense
 U.S. Federal                                  (61)           (354)              (36)              (509)                  (412)
  State                                         (4)            (23)               (2)               (33)                   (26)
                                      ------------   -------------    --------------     --------------      -----------------
  Total deferred                               (65)           (377)              (38)              (542)                  (438)
                                      ------------   -------------    --------------     --------------      -----------------
  Total expense                       $      2,215    $      2,150    $        3,952     $        2,401      $           4,070
                                      ============    ============    ==============     ==============      =================
 
</TABLE>
NOTE 14 - COMPREHENSIVE INCOME

Effective January 1, 1998, the Bank adopted SFAS No. 130, "Reporting
Comprehensive Income".  Statement No. 130 required the reporting of
comprehensive income in addition to net income from operations.  Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.

The Bank holds securities as "Available for Sale" and will sell securities, or
have securities redeemed, which give rise to comprehensive income.



                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                            F-25
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)


NOTE 14 - COMPREHENSIVE INCOME (CONCLUDED)

The components of comprehensive income are detailed below, indicating the tax
effect to each item.
<TABLE>
<CAPTION>
 
                                                                                                    Tax               Net of
                                                                            Before                 Expense              Tax
                                                                             Tax                  (Benefit)            Amount
                                                                          -------------       -------------       -------------
<S>                                                                       <C>                  <C>                <C>   
For the period ended:
 
1995
   Unrealized holding gains (losses) arising during the period             $      (310)          $      (118)      $      (192)
   Less: reclassification adjustment for gains (losses) realized
      in net income                                                                (31)                  (12)              (19)
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses)                                           (279)                 (106)             (173)
                                                                           -----------           -----------       -----------
 
Other comprehensive income                                                 $      (279)          $      (106)      $      (173)
                                                                           ===========           ===========       ===========
 
1996
   Unrealized holding gains (losses) arising during the period             $       242           $        92       $       150
   Less: reclassification adjustment for gains (losses) realized
      in net income                                                                223                    85               138
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses)                                             19                     7                12
                                                                           -----------           -----------       -----------
 
Other comprehensive income                                                 $        19           $         7       $        12
                                                                           ===========           ===========       ===========
 
1997
   Unrealized holding gains (losses) arising during period                 $       460           $       175       $       285
   Less: reclassification adjustment for gains (losses) realized
      in net income                                                                108                    41                67
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses)                                            568                   216               352
                                                                           -----------           -----------       -----------
 
Other comprehensive income                                                 $       568           $       216       $       352
                                                                           ===========           ===========       ===========
 
June 30, 1997 (unaudited)
   Unrealized holding gains (losses) arising during period (unaudited)     $      (321)          $      (122)      $      (199)
   Less: reclassification adjustment for gains (losses) realized
      in net income (unaudited)                                                    (31)                  (12)              (19)
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses) (unaudited)                               (290)                 (110)             (180)
                                                                           -----------           -----------       -----------
 
Other comprehensive income (unaudited)                                     $      (290)          $      (110)      $      (180)
                                                                           ===========           ===========       ===========
 
June 30, 1998 (unaudited)
   Unrealized holding gains (losses) arising during period (unaudited)     $        89           $        34       $         55
   Less: reclassification adjustment for gains (losses) realized
      in net income (unaudited)                                                    (84)                  (32)               (52)
                                                                           -----------           -----------        -----------
          Net unrealized gains (losses) (unaudited)                                173                    66                107
                                                                           -----------           -----------        -----------
 
Other comprehensive income (unaudited)                                     $       173           $        66        $       107
                                                                           ===========           ===========        ===========
 
</TABLE>
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                       F-26
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 15 - SUBSEQUENT EVENTS

On January 12, 1998, agreement was reached with an individual borrower to accept
deeds in lieu of foreclosure on sixteen properties collateralizing mortgage
loans.  The outstanding principal balance of these loans aggregated
approximately $627 as of December 31, 1997. During the month of January 1998,
management obtained appraisals on the above referenced properties.  These
appraisals indicated that sufficient loan to value of the underlying properties
existed to not require an addition to the allowance for losses.

On January 13, 1998,  the Board of Directors granted approval to borrow an
additional $10,000 from the Federal Home Loan Bank at a 10 year term.  Such
advances would be collateralized by certain qualifying real estate mortgage
loans under a blanket floating lien.

NOTE 16 - PLAN OF CONVERSION

On July 14, 1998, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank.  All
of the outstanding common stock of the Bank will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding company
formed expressly for such purpose (the "Company").  All of the stock to be
issued in the Conversion is being offered to eligible account holders as of June
30, 1997.

The Bank plans to establish an ESOP for the benefit of eligible employees, to
become effective upon the Conversion.  The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion utilizing proceeds of a loan from the
Company or a third party lender.  The loan will be repaid over a period of 20
years and the collateral for the loan will be the common stock purchased by the
ESOP.

Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion.  The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be sold in the
Conversion.  The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities.  Establishment of the Foundation is subject to the
approval of the Bank's members at the special meeting being held to vote upon
the Conversion.

The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation.  A contribution of common stock to the Foundation by the
Company would be tax deductible, under Federal regulations, subject to a
limitation based on 10 percent of the Company's taxable income.  The Company,
however, would be able to carry forward any unused portion of the deduction for
five years following the contribution.  Upon funding the Foundation, the Company
will recognize an expense in the full amount of the contribution, offset in part
by the corresponding benefit for the tax deduction, during the quarter in which
the contribution is made.

The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support.  The Bank
expects to provide these services without compensation, however, expenses
incurred on behalf of the Foundation are not expected to be significant to the
operations of the Bank.

At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
final conversion prospectus.  The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account holders
who continue to maintain their accounts at the Bank after the Conversion.  The
liquidation account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date.  Subsequent increases will not restore an
eligible account holder's or supplemental account holder's interest in the
liquidation account.  In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.


                                  (continued)
<PAGE>
 
FREDERICKSBURG SAVINGS AND LOAN                                           F-27
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 16 - PLAN OF CONVERSION (CONCLUDED)

The costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock.  In the event the Conversion
is not consummated, costs incurred will be charged to expense.  At June 30,
1998, there were no deferred conversion costs.

After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.

NOTE 17 - OTHER NONINTEREST EXPENSE
<TABLE>
<CAPTION>
                                                     June 30,                          December 31,
                                          --------------------------    ------------------------------------------
                                              1998           1997           1997           1996            1995
                                          -----------    -----------    -----------    -----------    ------------    
                                                   (Unaudited)
<S>                                       <C>            <C>            <C>             <C>           <C>   
Professional fees                         $       261    $        55    $       433    $        19    $        29
Other non-interest expense                        806            822          1,621          1,547          1,420
                                          -----------    -----------    -----------    -----------    -----------     
                                          $     1,067    $       877    $     2,054    $     1,566    $     1,449
                                          ===========    ===========    ===========    ===========    ===========     
 
</TABLE>
<PAGE>
 
================================================================================
         NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIRGINIA CAPITAL BANCSHARES, INC., THE bANK OR TRIDENT SECURITIES,
INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS pROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF VIRGINIA CAPITAL BANCSHARES, INC. OR THE BANK SINCE ANY
OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
                 ______________________________



                       TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
                                                                    Page
                                                                    ----
<S>                                                                 <C> 
Summary.................................................................
Selected Financial and
   Other Data of the Bank...............................................
Risk Factors............................................................
Virginia Capital Bancshares, Inc........................................
Fredericksburg Savings..................................................
Regulatory Capital Compliance...........................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Market for the Common Stock.............................................
Capitalization..........................................................
Pro Forma Data..........................................................
Comparison of Valuation and Pro Forma Information Wit
   No Foundation........................................................
Fredericksburg Savings..................................................
   Statements of Income.................................................
Management's Discussion and Analysis of Financial
   Condition and Results of Operations..................................
Business of the Bank....................................................
Federal and State Taxation..............................................
Regulation..............................................................
Management of the Company...............................................
Management of the Bank..................................................
The Conversion..........................................................
Restrictions on Acquisition of the Company
   and the Bank.........................................................
Description of Capital Stock of the Company.............................
Description of Capital Stock of the Bank................................
Transfer Agent and Registrar............................................
Experts.................................................................
Legal and Tax Opinions..................................................
Additional Information..................................................
Index of Financial Statements...........................................
</TABLE> 
                        ------------------------------



          UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.



                            Up to 13,965,600 Shares



                               VIRGINIA CAPITAL
                               BANCSHARES, INC.



                         (Proposed Holding Company for
                         Fredericksburg Savings Bank)



                                 COMMON STOCK


                                ______________

                                  PROSPECTUS
                                ______________



                              _____________, 199_




                           TRIDENT SECURITIES, INC.

================================================================================
<PAGE>
 
                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

<TABLE>
<CAPTION>
<S>                                                                    <C>
  SEC filing fee.....................................................  $   44,495
  OTS filing fee.....................................................      14,400
  NASD filing fee....................................................      15,583
  Nasdaq listing fee.................................................      90,500
  Printing, postage and mailing......................................     500,000
  Legal fees and expenses (including underwriter's counsel fees).....     400,000
  Accounting fees and expenses.......................................     150,000
  Appraisers' fees and expenses (including business plan)............      31,000
  Marketing fees and selling commissions and Underwriter's expenses..     580,000
  Conversion agent fees..............................................      50,000
  Transfer agent fees and expenses...................................      15,000
  Certificate printing...............................................       5,000
  Telephone, temporary help and other equipment......................      50,000
  Blue Sky fees and expenses.........................................      10,000
  Miscellaneous......................................................      44,022
                                                                       ----------
  TOTAL..............................................................  $2,000,000
                                                                       ==========
</TABLE>

______________________
(1)  Unless otherwise noted, based upon the registration and issuance of
     15,082,848 shares at $10.00 per share.

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.

In accordance with the Virginia Stock Corporation Act (being Chapter 9 of Title
13.1 of the Virginia Code), Articles 10 and 11 of the registrant's Articles of
Incorporation provide as follows:

     TENTH:
     ----- 

     A.   Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Virginia Stock Corporation Act, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.

     B.   The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
<PAGE>
 
(hereinafter an "advancement of expenses"); provided, however, that, if the
Virginia Stock Corporation Act requires, an advancement of expenses incurred by
an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise.  The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.

     C.   If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim.  If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit.  In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Virginia Stock Corporation Act.  Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Virginia Stock Corporation Act, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit.  In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.

     D.   The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Articles of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.

     E.   The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Virginia Stock Corporation Act.

     F.   The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.

     ELEVENTH: A Director of this Corporation shall not be personally liable to
     --------                                                                  
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability:  (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 13.1-692 of the Virginia Stock 
<PAGE>
 
Corporation Act; or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Virginia Stock Corporation Act is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Virginia
Stock Corporation Act, as so amended.

     Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.

ITEM 15.    RECENT SALES OF UNREGISTERED SECURITIES

None.
<PAGE>
 
 ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 The exhibits and financial statement schedules filed as a part of this
 registration statement are as follows:

 (a)  List of Exhibits (filed herewith unless otherwise noted)

 1.1  Engagement Letter between Fredericksburg Savings and Loan Association,
      F.A. and Trident Securities, Inc.
 1.2  Draft Form of Agency Agreement between Fredericksburg Savings and Loan
      Association, F.A. and Trident Securities, Inc.*
 2.1  Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
      of Fredericksburg Savings Bank)
 3.1  Articles of Incorporation of Virginia Capital Bancshares, Inc.
 3.2  Bylaws of Virginia Capital Bancshares, Inc.
 3.3  Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
      (See Exhibit 2.1 hereto)
 4.1  Draft Stock Certificate of Virginia Capital Bancshares, Inc.
 5.1  Draft Opinion of Muldoon, Murphy & Faucette re: legality
 8.1  Draft Opinion of Muldoon, Murphy & Faucette re:  Federal Tax Matters
 8.2  Draft Opinion of Cherry Bekaert & Holland re:  State Tax Matters
10.1  Form of Fredericksburg Savings Bank Employee Stock Ownership Trust
      Agreement
10.2  Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3  Form of Proposed Employment Agreement between Fredericksburg Savings Bank
      and certain executive officers
10.4  Form of Proposed Employment Agreement between Virginia Capital Bancshares,
      Inc. and certain executive officers
10.5  Form of Proposed Fredericksburg Savings Bank Employee Severance
      Compensation Plan
10.6  Form of Fredericksburg Savings Bank Supplemental Executive Retirement
      Plan
23.1  Consent of Cherry Bekaert & Holland
23.2  Consent of Muldoon, Murphy & Faucette
23.3  Consent and Subscription Rights Opinion of FinPro, Inc.
24.1  Powers of Attorney
27.1  Financial Data Schedule
99.1  Appraisal Report of FinPro, Inc. (P)
99.2  Draft of Fredericksburg Savings Charitable Foundation Gift Instrument

__________________
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
 
(b)  Financial Statement Schedules

All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.

ITEM 17.  UNDERTAKINGS.

          The undersigned registrant hereby undertakes:

          (1)  To file, during any period in which offers or sales are being
               made, a post-effective amendment to this registration statement:

               (i)    To include any prospectus required by Section 10(a)(3) of
                      the Securities Act of 1933;

               (ii)   To reflect in the prospectus any facts or events arising
                      after the effective date of the registration statement (or
                      the most recent post-effective amendment thereof) which,
                      individually or in the aggregate, represent a fundamental
                      change in the information set forth in the registration
                      statement;

               (iii)  To include any material information with respect to the
                      plan of distribution not previously disclosed in the
                      registration statement or any material change to such
                      information in the registration statement;

          (2)  That, for the purpose of determining any liability under the
               Securities Act of 1933, each such post-effective amendment shall
               be deemed to be a new registration statement relating to the
               securities offered therein, and the offering of such securities
               at that time shall be deemed to be the initial bona fide offering
               thereof.

          (3)  To remove from registration by means of a post-effective
               amendment any of the securities being registered which remain
               unsold at the termination of the offering.

          Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
 
CONFORMED
                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fredericksburg,
Commonwealth of Virginia, on September 11, 1998.

VIRGINIA CAPITAL BANCSHARES, INC.


By:  /s/ Samuel C. Harding, Jr.
     --------------------------------
     Samuel C. Harding, Jr.
     President and Director
 
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE> 
<CAPTION> 

             Name                                Title                                           Date
             ----                                -----                                           ----
<S>                                     <C>                                              <C>   
/s/ Samuel C. Harding, Jr.              President and Director                           September 11, 1998
-------------------------------
Samuel C. Harding, Jr.                  (principal executive officer)


/s/ Peggy J. Newman                     Executive Vice President, Treasurer,             September 11, 1998
-------------------------------
Peggy J. Newman                         Secretary and Director
                                        (principal accounting and financial officer)      


/s/ H. Smith McKann                     Chairman of the Board                            September 11, 1998
-------------------------------
H. Smith McKann


/s/ Ronald G. Beck                      Vice Chairman of the Board                       September 11, 1998
-------------------------------
Ronald G. Beck


/s/ William M. Anderson, Jr.            Director                                         September 11, 1998
-------------------------------
William M. Anderson, Jr.


/s/ O'Conor Ashby                       Director                                         September 11, 1998
-------------------------------
O'Conor Ashby


/s/ Ernest N. Donahoe, Jr.              Director                                         September 11, 1998
-------------------------------
Ernest N. Donahoe, Jr.


/s/ DuVal Q. Hicks, Jr.                 Director                                         September 11, 1998
-------------------------------
DuVal Q. Hicks, Jr.


/s/ Charles S. Rowe                     Director                                         September 11, 1998
-------------------------------
Charles S. Rowe
</TABLE> 
<PAGE>
 
                               TABLE OF CONTENTS


LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)

 1.1  Engagement Letter between Fredericksburg Savings and Loan Association,
      F.A. and Trident Securities, Inc.
 1.2  Draft Form of Agency Agreement between Fredericksburg Savings and Loan
      Association, F.A. and Trident Securities, Inc.*
 2.1  Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
      of Fredericksburg Savings Bank
 3.1  Articles of Incorporation of Virginia Capital Bancshares, Inc.
 3.2  Bylaws of Virginia Capital Bancshares, Inc.
 3.3  Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
      (See Exhibit 2.1 hereto)
 4.1  Draft Stock Certificate of Virginia Capital Bancshares, Inc.
 5.1  Draft Opinion of Muldoon, Murphy & Faucette re: legality
 8.1  Draft Opinion of Muldoon, Murphy & Faucette re:  Federal Tax Matters
 8.2  Draft Opinion of Cherry Bekaert & Holland re:  State Tax Matters
10.1  Form of Fredericksburg Savings Bank Employee Stock Ownership
      Trust Agreement
10.2  Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3  Form of Proposed Employment Agreement between Fredericksburg Savings Bank
      and certain executive officers
10.4  Form of Proposed Employment Agreement between Virginia Capital Bancshares,
      Inc. and certain executive officers
10.5  Form of Proposed Fredericksburg Savings Bank Employee Severance
      Compensation Plan
10.6  Form of Fredericksburg Savings Bank Supplemental Executive Retirement Plan
23.1  Consent of Cherry Bekaert & Holland
23.2  Consent of Muldoon, Murphy & Faucette
23.3  Consent and Subscription Rights Opinion of FinPro, Inc.
24.1  Powers of Attorney
27.1  Financial Data Schedule
99.1  Appraisal Report of FinPro, Inc. (P)
99.2  Draft of Fredericksburg Savings Charitable Foundation Gift Instrument

______________________
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 739310}]
{"company-data": {"conformed-name": "VIRGINIA CAPITAL BANCSHARES INC", "cik": "0001069669", "assigned-sic": ""}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-63309", "film-number": "98708343"}, "business-address": {"street1": "C/O FREDERICKSBURG SAVINGS & LOAN ASSOC", "street2": "400 GEORGE ST", "city": "FREDERICKSBURG", "state": "VA", "zip": "22404", "phone": "5408995500"}, "mail-address": {"street1": "C/O FREDERICKSBURG SAVINGS & LOAN ASSOC", "street2": "400 GEORGE ST", "city": "FREDERICKSBURG", "state": "VA", "zip": "22404"}}
As filed with the Securities and Exchange Commission on September 11, 1998
                                                 Registration No. 333-__________
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                    FORM S-1
                             REGISTRATION STATEMENT
                        UNDER THE SECURITIES ACT OF 1933

                       VIRGINIA CAPITAL BANCSHARES, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA                         6035                        BEING APPLIED FOR
(State or Other Jurisdiction of    (Primary Standard Industrial       (IRS Employer Identification No.)
 Incorporation or Organization)    Classification Code Number)
400 GEORGE STREET
                         FREDERICKSBURG, VIRGINIA 22404
                                 (540) 899-5500
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)

                             SAMUEL C. HARDING, JR.
                                   PRESIDENT
               FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
                               400 GEORGE STREET
                         FREDERICKSBURG, VIRGINIA 22404
                                 (540) 899-5500
           (Name, Address, Including Zip Code, and Telephone Number,
                   Including Area Code, of Agent for Service)

                                   Copies to:
                        JOSEPH A. MULDOON, JR., ESQUIRE
                           LORI M. BERESFORD, ESQUIRE
                           MULDOON, MURPHY & FAUCETTE
                          5101 WISCONSIN AVENUE, N.W.
                             WASHINGTON, D.C. 20016
                                 (202) 362-0840

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:  As soon as
practicable after this Registration Statement becomes effective.

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
                               ---- 

     If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /   /
                                              ---- 

     If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.   /   /
            ---- 

     If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.   /   /
            ---- 
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434, 
please check the following box. /   /
                                ----
================================================================================================== 
                                      CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------- 
Title of each Class of           Amount to     Proposed Maximum   Proposed Maximum     Amount of
Securities to be Registered    be Registered   Offering Price    Aggregate Offering   Registration
                                                  Per Unit           Price (2)           Fee
--------------------------------------------------------------------------------------------------
Common Stock
$.01 par value(1)               15,082,848         $10.00           $150,828,480         $44,495
==================================================================================================
(1) Includes shares of Common Stock to be issued to the Fredericksburg Savings
    Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
[To be used in connection with the Syndicated Community Offering only ]

SYNDICATED PROSPECTUS SUPPLEMENT

                       VIRGINIA CAPITAL BANCSHARES, INC.
                  (PROPOSED HOLDING COMPANY FOR FREDERICKSBURG
                             SAVINGS BANK, F.S.B.)

                       __________ SHARES OF COMMON STOCK

     Virginia Capital Bancshares, Inc. (the "Company"), a Virginia corporation,
is offering for sale in a syndicated community offering (the "Syndicated
Community Offering") __________ shares, at a per share price of $10.00, of its
common stock, par value $.01 per share (the "Common Stock"), to be sold upon the
conversion (the "Conversion") of Fredericksburg Savings and Loan Association,
F.A., Fredericksburg, Virginia from a federally chartered mutual savings bank to
a federally chartered stock savings bank ( Fredericksburg Savings and Loan
Association, F.A. and Fredericksburg Savings Bank, F.S.B. are hereafter referred
to as the "Bank") and the issuance of the Bank's outstanding capital stock to
the Company pursuant to a plan of conversion, (the "Plan of Conversion").  The
remaining __________ shares of the Common Stock to be sold in the Conversion
have been subscribed for in subscription and community offerings (the
"Subscription and Community Offerings") by holders of deposit accounts with the
Bank with a balance of $50 or more as of June 30, 1997, by the Fredericksburg
Savings Bank, F.S.B. Employee Stock Ownership Plan, a tax-qualified employee
benefit plan, and related trust (the "ESOP"), by holders of deposit accounts
with the Bank with a balance of $50 or more as of ______________, 1997, by
certain other account holders and borrowers of the Bank and, then, by certain
members of the general public.  See "The Conversion - General."  Contained
herein is the Prospectus in the form used in the Subscription and Community
Offerings.  The purchase price for all shares sold in the Syndicated Community
Offering will be the same as the price paid by subscribers in the Subscription
and Community Offerings (the "Purchase Price").  The Purchase Price of $10.00
per share is the amount to be paid for each share at the time a purchase order
is submitted.  See the cover page of the Prospectus and the table below for
information as to the method by which the range within which the number of
shares offered may vary and the method of subscribing for shares of the Common
Stock.

     Funds submitted to the Bank with purchase orders will earn interest at the
Bank's passbook rate of interest from the date of receipt until completion or
termination of the Conversion.  The Syndicated Community Offering will expire no
later than _______________, 199_, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 199_.  If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription.  If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds will be returned promptly with
interest.  The minimum number of shares which may be purchased
is 25 shares. Except for the ESOP, which may purchase up to 10% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $170,000 at the
Purchase Price and no person, together with associates of and persons acting in
concert with such person, may purchase more than $300,000 in the Conversion. See
"Plan of Conversion -Subscription Rights and Limitations on Common Stock
Purchases." The Company reserves the right, in its absolute discretion, to
accept or reject, in whole or in part, any or all subscriptions in the
Syndicated Community Offering.

     The Company and the Bank have engaged Trident Securities, Inc. ("Trident")
as financial advisors to assist them in the sale of the Common Stock in the
Syndicated Community Offering. It is anticipated that Trident will use the
services of other registered broker-dealers ("Selected Dealers") and that fees
to Trident and such Selected Dealers will not exceed ____% of the aggregate
Purchase Price of the shares sold in the Syndicated Community Offering.  Neither
Trident nor any Selected Dealer shall have any obligation to take or purchase
any shares of Common Stock in the Syndicated Community Offering.

     The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market ("NASDAQ") under the symbol "VCAP."  Prior
to this offering, there has not been a public market for the Common Stock, and
there can be no assurance that an active and liquid trading market for the
Common Stock will develop.  The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the stock.

     FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES ____ TO ____ OF THE PROSPECTUS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.  ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.

                                       2
Estimated                      Estimated Net Pro-
                                                  Underwriting    Estimated Net    ceeds of Subscrip-
                                                   Commissions     Proceeds of      tion, Community
                                   Syndicated       and Other      Syndicated        and Syndicated
                                   Community        Fees and        Community          Community
                                 Offering Price    Expenses(1)      Offering        Offerings(2)(3)
===================================================================================================
Minimum Per Share                $10.00          $                $              $
 
Midpoint Per Share               $10.00          $                $              $
 
Maximum Per Share                $10.00          $                $              $
 
Total Minimum(4)                 $               $                $              $
 
Total Midpoint                   $               $                $              $
 
Total Maximum(4)                 $               $                $              $

Total Maximum, As Adjusted(5)    $               $                $              $
===================================================================================================
______________________________
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
    Company in connection with the Conversion (other than estimated fees to be
    paid to Trident for services in connection with the Subscription and
    Community Offerings) and estimated compensation of Trident and Selected
    Dealers in connection with the sale of the remaining shares in the
    Syndicated Community Offering which fees are estimated to be $__________ and
    $__________ at the minimum and the maximum of the estimated price range and
    may be deemed to be underwriting fees.  The information under "Pro Forma
    Data" in the Prospectus was based on the assumptions stated therein, which
    may differ from the estimates used for this table.  See "The Conversion -
    Marketing and Underwriting Arrangements" for a more detailed discussion of
    fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds.  The balance of
    the net proceeds will be transferred to the Bank in exchange for all of the
    capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon the
    sale of the __________ shares subscribed for at a price of $_____ per share
    and after allocation of a pro rata portion of the estimated expenses
    relating to the Conversion) are estimated to be $__________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
    per share (the "Estimated Price Range").  The Total Minimum reflects the
    sale of __________ shares at a per share price of $_____, leaving a total of
    __________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due to
    an increase in the Estimated Price Range of up to 15% to reflect changes in
    market and financial conditions following commencement of the offerings.
    See "The Conversion - Stock Pricing."  For a discussion of the distribution
    and allocation of the additional shares, see "The Conversion - Subscription
    Rights and Limitations on Common Stock Purchases."

                            TRIDENT SECURITIES, INC.
                                        
                       _________________________________

        The date of this Prospectus Supplement is _______________, 1997.

                                       3
PROSPECTUS

                       VIRGINIA CAPITAL BANCSHARES, INC.
                         (Proposed Holding Company for
                         Fredericksburg Savings Bank)

                    UP TO 13,965,600 SHARES OF COMMON STOCK

       This offering is made as part of the plan of conversion of Fredericksburg
Savings and Loan Association, F.A., Fredericksburg, Virginia from a federally
chartered mutual savings and loan association to a federally chartered stock
savings bank to be known as Fredericksburg Savings Bank (Fredericksburg Savings
and Loan Association, F.A. and Fredericksburg Savings Bank are both referred to
herein as either the "Bank" or "Fredericksburg Savings"). In this conversion,
the Bank will become a wholly-owned subsidiary of Virginia Capital Bancshares,
Inc. (the "Company"). No shares will be sold if the minimum number of shares are
not subscribed for or if the necessary approvals from the banking regulatory
authorities and the members of the Bank are not received.

       There is currently no public market for the common stock. The Company has
received conditional approval for the common stock to be listed on the Nasdaq
National Market ("Nasdaq") under the symbol "VCAP" upon completion of the
conversion.

       INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.

       THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY, NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

       THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY. THE COMMON STOCK IS
SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
MAXIMUM
                                                                             MINIMUM                   AS ADJUSTED
                                                                            8,976,000                   13,965,600
                                                       PER SHARE              SHARES                     SHARES
                                                    -----------------    -----------------     -----------------------
Offering price......................................   $10.00               $89,760,000                $139,656,000
Estimated underwriting commissions
    and other expenses..............................       --                 2,000,000                   2,000,000
Estimated proceeds to Company.......................       --                87,760,000                 137,656,000
The shares are offered first in a Subscription Offering to persons who have
specified priorities of subscription rights based on their relationship with the
Bank. IN ORDER TO PURCHASE SHARES PURSUANT TO A SUBSCRIPTION RIGHT, YOU MUST
SUBMIT A PROPERLY COMPLETED SUBSCRIPTION ORDER FORM AND CERTIFICATION, TOGETHER
WITH FULL PAYMENT FOR THE SHARES, TO THE BANK PRIOR TO THE EXPIRATION DATE,
____________, EASTERN TIME, ON _______________, 1998, UNLESS EXTENDED. All funds
received from subscribers will be held in an interest-bearing savings account at
the Bank until the completion or termination of the Conversion. Funds will be
returned promptly if the Conversion is terminated. If the Conversion is not
completed by __________, 1998 and the Office of Thrift Supervision consents to
an extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their orders. No single extension may
exceed 90 days and such extensions may not go beyond ____________, 2000.

     To the extent sufficient shares to complete the conversion are not sold in
the Subscription Offering, the remaining shares will be offered for sale in a
Community Offering and, if necessary, other public offering.

     Trident Securities, Inc. has agreed to assist the Company in selling the
shares, but does not guarantee that at least the minimum number of shares will
be sold.

             =====================================================
                           TRIDENT SECURITIES, INC.
             =====================================================

              The date of this Prospectus is _____________, 1998.
--------------------------------------------------------------------------------

                             INSERT MAP PAGE HERE
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                                       2
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                                    SUMMARY

         This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you should
read carefully this entire Prospectus, including the financial statements and
the notes to the financial statements of Fredericksburg Savings.. References in
this document to the "Bank" or "Fredericksburg Savings" refer to Fredericksburg
Savings and Loan Association, F.A. when in mutual form and to Fredericksburg
Savings Bank upon conversion to stock form References in this document to the
"Company" refer to Virginia Capital Bancshares, Inc.

VIRGINIA CAPITAL 
 BANCSHARES, INC....................    The Company was recently organized as a
                                        Virginia corporation to become a savings
                                        and loan holding company and own all of
                                        the capital stock of Fredericksburg
                                        Savings Bank to be issued upon its
                                        conversion from mutual to stock form. To
                                        date, the Company has not engaged in any
                                        business.

                                        The Company's office is located at 400
                                        George Street, Fredericksburg, Virginia
                                        and its telephone number is (540) 899-
                                        5500. The Bank's executive office has
                                        the same address and phone number.

FREDERICKSBURG SAVINGS
 BANK...............................    The Bank which is currently a federally
                                        chartered mutual savings and loan
                                        association, will become a federally
                                        chartered stock savings bank known as
                                        Fredericksburg Savings Bank in
                                        connection with its conversion from
                                        mutual to stock form. At June 30, 1998,
                                        the Bank had total assets of $472.3
                                        million, total deposits of $373.7
                                        million and total equity capital of
                                        $83.5 million.

                                        The Bank operates four banking offices,
                                        one in the City of Fredericksburg, one
                                        in Stafford County and two in
                                        Spotsylvania County, Virginia. The Bank
                                        historically has operated as a 
                                        community-oriented banking institution
                                        primarily providing one- to four-family
                                        residential mortgage loans and consumer
                                        loans and a variety of retail deposit
                                        products in its primary market area,
                                        which consists of the City of
                                        Fredericksburg, and Stafford,
                                        Spotsylvania and King George Counties,
                                        Virginia.

THE CONVERSION......................    The Bank has adopted a Plan of
                                        Conversion which is subject to
                                        requirements of the Office of Thrift
                                        Supervision (the "OTS"), the primary
                                        federal banking regulator of the Bank.
                                        The conversion, which hereafter is
                                        referred to as the "Conversion," is
                                        governed by the Plan and has three major
                                        components, as follows:

                                        (i)   The conversion of the Bank from
                                        mutual to stock form;

                                        (ii)  The acquisition by the Company of
                                        all of the outstanding capital stock of
                                        the Bank;

                                        (iii) The sale by the Company of common
                                        stock.

                                        The Conversion is subject to the
                                        approval of the OTS, and approval of
                                        members of the Bank eligible to vote at
                                        a special meeting to be held on
                                        _____________, 1998 (the "Special
                                        Meeting").

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

                                       3
--------------------------------------------------------------------------------

FREDERICKSBURG SAVINGS
  CHARITABLE FOUNDATION.............    The Bank has established a charitable
                                        foundation, Fredericksburg Savings
                                        Charitable Foundation, or the
                                        "Foundation." The Company intends to
                                        contribute to the Foundation common
                                        stock up to 8% of the common stock
                                        sold in the Conversion. The authority
                                        for the affairs of the Foundation is
                                        vested in its Board of Directors, all of
                                        whom are existing Directors or officers
                                        of the Company and the Bank.

TERMS OF THE OFFERING...............    The shares of common stock are offered
                                        at a fixed price of $10.00 per share in
                                        the Subscription Offering pursuant to
                                        subscription rights in the following
                                        order of priority to:

                                        (i)   Eligible Account Holders -holders
                                              of deposit accounts at the Bank
                                              totalling $50 or more as of June
                                              30, 1997;

                                        (ii)  the Employee Stock Ownership Plan
                                              of the Company and the Bank (the
                                              "ESOP");

                                        (iii) Supplemental Eligible Account
                                              Holders - holders of deposit
                                              accounts at the Bank totalling $50
                                              or more as of ____ who are not
                                              entitled to a first priority
                                              subscription right; and

                                        (iv)  Other Members - holders of deposit
                                              accounts at the Bank as of ______
                                              who are not entitled to a higher
                                              priority subscription right.

                                        Shares of common stock not subscribed
                                        for by persons having priority
                                        subscription rights will be offered to
                                        certain members of the general public in
                                        a Community Offering with preference 
                                        given to natural persons residing in the
                                        City of Fredericksburg and Stafford and
                                        Spotsylvania and King George Counties.

EXPIRATION DATE OF
  SUBSCRIPTION OFFERING.............    Subscription rights will expire if not
                                        exercised and all orders to purchase
                                        common stock in the Subscription
                                        Offering must be received by __:__ ____,
                                        Eastern time, on ________, 1998, unless
                                        extended, which is the "Expiration
                                        Date."

NONTRANSFERABILITY OF
  SUBSCRIPTION RIGHTS...............    The subscription rights are not
                                        transferable. Persons found to be
                                        transferring such rights will be subject
                                        to the forfeiture of such rights and
                                        possible further sanctions and penalties
                                        imposed by the OTS.

NUMBER OF SHARES OFFERED............    The Company is offering between a
                                        minimum of 8,976,000 shares and a
                                        maximum of 12,144,000 shares of common
                                        stock, or up to an adjusted maximum of
                                        13,965,600 shares if the maximum number
                                        of shares is increased.

                                        The number of shares offered is based
                                        upon an independent appraisal prepared
                                        by FinPro, Inc. ("FinPro") dated as of
                                        ____________, 1998, which estimates that
                                        the aggregate pro forma market value of
                                        the Company ranged from $89.8 million to
                                        $121.4 million. (This range is referred
                                        to as the "Estimated Price Range").
                                        FinPro is an independent appraisal firm
                                        experienced in appraisals of savings
                                        institutions. Establishing the
                                        Foundation in connection with the
                                        Conversion will result in a lower
                                        aggregate market valuation than if the
                                        Conversion was completed without the
                                        Foundation.

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

                                       4
--------------------------------------------------------------------------------

                                        The final aggregate estimated pro forma
                                        market value of the Company will be
                                        determined at the time of closing of the
                                        Subscription Offering, or if all shares
                                        are not sold in the Subscription
                                        Offering, the closing of the Community
                                        Offering or other subsequent offering.
                                        Such estimated aggregate pro forma
                                        market value is subject to change due to
                                        changes in market and general financial
                                        and economic conditions.

                                        The maximum number of shares to be sold
                                        may be increased up to the adjusted
                                        maximum, a 15% increase over the
                                        maximum, if the aggregate estimated pro
                                        forma market value of the common stock
                                        to be sold is increased.

HOW TO ORDER STOCK..................    If you have a subscription right, you
                                        may order shares in the Subscription
                                        Offering by delivering to the Bank a
                                        properly executed stock order and
                                        certification form together with full
                                        payment for the shares ordered on or
                                        prior to the Expiration Date. ONCE
                                        TENDERED, SUBSCRIPTION ORDERS CANNOT BE
                                        REVOKED OR MODIFIED WITHOUT THE CONSENT
                                        OF THE BANK. Please make sure you review
                                        the Prospectus carefully. To ensure that
                                        each purchaser receives a prospectus at
                                        least 48 hours prior to the Expiration
                                        Date in accordance with Rule 15c2-8 of
                                        the Securities Exchange Act of 1934, no
                                        prospectus will be mailed any later than
                                        five days prior to the Expiration Date
                                        or hand delivered any later than two
                                        days prior to such date. The Bank is not
                                        obligated to accept subscriptions not
                                        submitted on an original stock order
                                        form. To ensure that subscription rights
                                        are properly identified, persons must
                                        list all qualifying savings accounts, as
                                        of the respective qualifying dates, on
                                        the stock order form. Persons who do not
                                        list all qualifying savings accounts may
                                        be subject to reduction or rejection of
                                        their subscription.

                                        Persons wishing to order shares offered
                                        in the Community Offering also must
                                        submit a properly executed stock order
                                        and certification form prior to the
                                        expiration date to be set for the
                                        Community Offering.

FORM OF PAYMENT FOR SHARES..........    Payment for subscriptions may be made:

                                        (i)   in cash (if delivered in person);
                                        (ii)  by check, bank draft or money
                                              order; or
                                        (iii) by authorization of withdrawal
                                              from deposit accounts maintained
                                              at the Bank.

                                        Orders for common stock in the
                                        Subscription Offering which aggregate
                                        $50,000 or more must be paid by official
                                        bank or certified check or by withdrawal
                                        authorization from a deposit account at
                                        the Bank. No wire transfers will be
                                        accepted.

NUMBER OF SHARES THAT MAY
    BE ORDERED......................    Minimum:  25 shares ($250).

                                        Maximum:

                                        .     No Eligible Account Holder,
                                              Supplemental Eligible Account
                                              Holder or Other Member may
                                              purchase in the Subscription
                                              Offering more than $300,000 of
                                              common stock.

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

                                       5
--------------------------------------------------------------------------------

                                        .    No person, together with associates
                                             or persons acting in concert with
                                             such person, may purchase in the
                                             Community Offering more than
                                             $300,000 of common stock.

                                        .    No person, together with associates
                                             or persons acting in concert with
                                             such person, may purchase in the
                                             aggregate more than the overall
                                             maximum purchase limitation of 1%
                                             of the total number of shares of
                                             Common Stock sold. However, the
                                             ESOP may purchase up to 10% of the
                                             Common Stock to be issued in
                                             connection with the Conversion,
                                             including shares issued to the
                                             Foundation. It is intended that the
                                             ESOP will purchase 8% of the Common
                                             Stock issued, including shares
                                             issued to the Foundation.

USE OF PROCEEDS.....................    The Company will use 50% of the net
                                        proceeds from the sale of common stock
                                        to purchase all of the common stock of
                                        the Bank to be issued in the Conversion.
                                        The portion of net proceeds retained by
                                        the Company will be used for general
                                        business activities, including the loan
                                        of funds to the ESOP (to the extent such
                                        loan is not funded by a third party) to
                                        enable the ESOP to purchase up to 8% of
                                        the stock issued in connection with the
                                        Conversion, including shares issued to
                                        the Foundation. The Company intends
                                        initially to invest the remaining net
                                        proceeds primarily in short-term U.S.
                                        Government and Agency obligations,
                                        including adjustable-rate mortgage-
                                        backed securities with terms of less
                                        than five years. The Bank intends to
                                        utilize the net proceeds from the sale
                                        of its stock to the Company for general
                                        business purposes, including investment
                                        in loans and to expand its products and
                                        services.

DIVIDEND POLICY.....................    Upon Conversion, the Board of Directors
                                        of the Company will have authority to
                                        declare dividends on the Common Stock,
                                        subject to statutory and regulatory
                                        requirements. Depending on market
                                        conditions, the Company's Board of
                                        Directors intends to pay cash dividends
                                        on the Common Stock; however, no
                                        decision has been made regarding the
                                        level of dividends or when they will be
                                        paid, and no assurance can be given that
                                        dividends will actually be paid.
                                        In addition, from time to time in an 
                                        effort to manage capital to a reasonable
                                        level, the Board of Directors may
                                        determine to pay periodic special cash
                                        dividends in addition to, or in lieu of,
                                        regular cash dividends. Additionally, in
                                        connection with the Conversion, the
                                        Company and the Bank have committed to
                                        the OTS that during the one-year period
                                        following the Conversion, the Company
                                        will not make any distribution to
                                        stockholders that, for federal tax
                                        purposes, would be treated as a return
                                        of capital without prior approval of 
                                        the OTS.

BENEFITS OF THE CONVERSION TO
  MANAGEMENT........................    Among the benefits to the Bank and the
                                        Company anticipated from the Conversion
                                        is the ability to attract and retain
                                        personnel through the use of stock
                                        options and other stock related benefit
                                        programs. Subsequent to the Conversion,
                                        the Company intends to adopt a Stock-
                                        Based Incentive Plan for the benefit of
                                        directors, officers and employees of the
                                        Company and Bank. If the Stock-Based
                                        Incentive Plan is adopted within one
                                        year after the Conversion, the plan will
                                        be subject to stockholders' approval at
                                        a meeting of stockholders which may not
                                        be held earlier than six months after
                                        the Conversion. If adopted and approved
                                        by stockholders, it is expected the
                                        benefits set forth in the table below
                                        would be available for distribution to
                                        employees and directors pursuant to that
                                        plan.

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                                       6
--------------------------------------------------------------------------------
 
                                        Additionally, an ESOP, which is a tax
                                        qualified plan, will be established to
                                        provide retirement benefits to
                                        employees. Benefits under that plan will
                                        be distributed to eligible employees
                                        over an approximate twenty year period.
                                        See the table below for the estimated
                                        value of such benefits.
ESTIMATED         PERCENTAGE OF SHARES ISSUED,  
                                                                   VALUE OF           INCLUDING SHARES ISSUED      
                                                                  SHARES(1)            TO THE FOUNDATION(2)          
                                                                  --------------    ----------------------------
Employee Stock Ownership Plan ...................       $ 9,123,840             8.0%
          Stock-Based Incentive Plan:                        
           Stock Awards(2).................................         4,561,920             4.0
           Stock Options...................................               --(3)          10.0
-------------------

          (1)   Assumes shares are allocated to participants at $10.00 per share
                and that shares are issued in the Conversion at the midpoint of
                the Estimated Price Range.
          (2)   Any Common Stock awarded under the Stock-Based Incentive Plan
                will be awarded at no cost to the recipients.
          (3)   Stock options will be granted with an exercise price equal to
                the fair market value of the Company's Common Stock on the day
                of grant. Recipients of stock options realize value only in the
                event of an increase in the price of the Common Stock of the
                Company following the date of grant of the stock options.

                                        In addition, the Company and Bank will
                                        enter into employment agreements with
                                        the Company's and Bank's two executive
                                        officers. Benefits under such agreements
                                        would only be paid if the officer were
                                        terminated without cause or if the
                                        officer voluntarily retired under
                                        certain circumstances following a Change
                                        in Control. The amounts payable under
                                        these agreements will depend upon the
                                        compensation paid to the officer in
                                        recent years prior to termination. See
                                        "Management of the Bank--Executive
                                        Compensation."

                                        See "Management of the Bank" for more
                                        detail regarding these benefits.

PURCHASES BY OFFICERS
  AND DIRECTORS.....................    Directors and executive officers of the
                                        Bank and the Company expect to purchase
                                        approximately 2.06% or 1.53% of shares
                                        of common stock to be issued in the
                                        Conversion, including shares issued to
                                        the Foundation, based on the estimated
                                        minimum and maximum of such shares,
                                        respectively.

MARKET FOR STOCK....................    As a mutual institution, the Bank has
                                        never issued capital stock and,
                                        consequently, there is no existing
                                        market for the Common Stock. The Company
                                        has received conditional approval to
                                        have its Common Stock listed on the
                                        Nasdaq under the symbol "VCAP" subject
                                        to the completion of the Conversion and
                                        compliance with certain conditions.

NO BOARD RECOMMENDATIONS............    The Bank's Board of Directors and the
                                        Company's Board of Directors make no
                                        recommendation to depositors or other
                                        potential investors regarding whether
                                        such persons should purchase the common
                                        stock. An investment in the common stock
                                        must be made pursuant to each investor's
                                        evaluation of his or her best interests.

STOCK INFORMATION CENTER............    If you have any questions regarding the
                                        Conversion, please call the Stock
                                        Information Center at (___) ___-____.

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                                       7
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                 SELECTED FINANCIAL AND OTHER DATA OF THE BANK

     The selected financial and other data of the Bank set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Bank and Notes thereto presented elsewhere in this Prospectus.
AT
                                              JUNE 30,                          AT DECEMBER 31,
                                             ----------   ----------------------------------------------------------
                                               1998(1)       1997       1996(2)      1995        1994        1993
                                             ----------   ----------  ----------  ----------  ----------  ----------
                                                                         (IN THOUSANDS)
SELECTED FINANCIAL DATA:
  Total Assets............................    $472,280      $471,920    $469,917    $468,759    $451,035    $447,706
  Loans receivable, net(3)................     415,986       413,032     405,145     390,541     371,269     375,229
  Mortgage-backed securities..............       1,190         1,291       1,502       1,879       2,109       2,640
  Investment securities(4)................      30,928        31,151      31,979      49,257      52,361      49,629
  Cash and cash equivalents...............       9,031        11,287      15,937      11,980      11,088       6,772
  Deposits................................     373,719       377,114     375,652     386,376     376,083     380,977
  FHLB advances...........................       8,000         8,000      15,000       8,000       8,000       8,000
  Equity capital..........................      83,500        80,073      73,296      68,703      62,217      54,905
FOR THE SIX MONTHS
                                                 ENDED JUNE 30,                     FOR THE YEAR ENDED DECEMBER 31,
                                             ----------------------   ----------------------------------------------------------
                                               1998(1)     1997(1)       1997       1996(2)      1995        1994        1993
                                             ----------  ----------   ----------  ----------  ----------  ----------  ----------
                                                                                (IN THOUSANDS)
SELECTED OPERATING DATA:
  Interest income.........................      $17,392     $17,586      $35,445     $35,230     $35,576     $32,338     $34,015
  Interest expense........................        9,620       9,568       19,418      19,535      18,997      16,620      17,978
                                                -------     -------      -------     -------     -------     -------     -------
    Net interest income...................        7,772       8,018       16,027      15,695      16,579      15,718      16,037
  Provision for loan losses...............          269         241          375         325         412       1,010       1,129
                                                -------     -------      -------     -------     -------     -------     -------
    Net interest income after
      provision for loan losses...........        7,503       7,777       15,652      15,370      16,167      14,708      14,908
  Total noninterest income................        1,276         784        1,734       1,410       1,269       1,152       1,037
  Total noninterest expense...............        3,244       3,152        7,009       9,798       6,708       6,850       7,326
                                                -------     -------      -------     -------     -------     -------     -------
  Income before income taxes and
    cumulative effect of change in
    accounting principle..................        5,535       5,409       10,377       6,982      10,728       9,010       8,619
  Income tax expense......................        2,215       2,150        3,952       2,401       4,070       1,687       3,935
                                                -------     -------      -------     -------     -------     -------     -------
    Net income before cumulative effect of
     change in accounting principle.......         3,320       3,259        6,425       4,581       6,658       7,323       4,684
  Cumulative effect of change in
    accounting principle(5)...............           --          --           --          --          --          --         680
                                                -------     -------      -------     -------     -------     -------     -------
     Net income...........................      $ 3,320     $ 3,259      $ 6,425     $ 4,581     $ 6,658     $ 7,323     $ 5,364
                                                =======     =======      =======     =======     =======     =======     =======
--------------------------------------------------------------------------------

                                       8
--------------------------------------------------------------------------------
AT OR FOR THE SIX
                                                                    MONTHS ENDED
                                                                       JUNE 30,               FOR THE YEAR ENDED DECEMBER 31,
                                                                 -------------------  ---------------------------------------------
                                                                  1998(1)   1997(1)     1997    1996(2)    1995     1994     1993
                                                                 --------- ---------  -------- --------- -------- -------- --------
SELECTED FINANCIAL RATIOS AND OTHER DATA(6)
PERFORMANCE RATIOS:
  Return on average assets....................................       1.40%     1.39%     1.36%     0.98%    1.45%    1.62%    1.19%
  Return on average equity....................................       8.12      8.71      8.39      6.42    10.17    12.61    10.26
  Average interest rate spread(7).............................       2.58      2.76      2.71      2.73     3.04     3.04     3.20
  Net interest margin(8)......................................       3.37      3.52      3.50      3.45     3.71     3.55     3.64
  Net yield on average-interest earning assets................       7.60      7.72      7.74      7.74     7.96     7.31     7.73
  Net interest income after provisions for loan
    losses, to total non-interest expenses....................     231.29    246.73    223.31    156.86   241.05   214.72   203.49
  Total noninterest expense to average assets.................       1.37      1.34      1.49      2.09     1.46     1.52     1.62
  Efficiency ratio(9).........................................      35.85     35.81     39.46     57.28    37.58    40.60    42.91

REGULATORY CAPITAL RATIOS(10):
  Tangible capital............................................      17.28%    17.63%    16.59%    15.29%   14.46%   13.61%   12.26%
  Core capital................................................      17.28     17.63     16.59     15.29    14.46    13.61    12.26
  Risk-based capital..........................................      30.20     30.60     28.60     27.50    24.20    25.24    23.12

ASSET QUALITY RATIOS:
  Non-performing loans to total assets(11)(12)................       0.61%     0.78%     0.60%     1.86%    1.45%    2.34%    1.50%
  Non-performing loans to total loans(11)(12).................       0.66      0.89      0.65      2.05     1.64     2.67     1.68
  Non-performing assets to total assets(12)...................       1.01      1.18      1.01      2.21     1.92     2.59     2.01
  Allowance for loan losses to non-performing
    loans(12).................................................     174.85%   152.26%   194.60%    63.33%   80.60%   52.46%   79.66%
NUMBER OF FULL-SERVICE BANKING FACILITIES.....................        4         4         4         4        4        4        4
_____________
(1)  The data presented for the six months ended June 30, 1998 and 1997 was
     derived from unaudited financial statements and reflect, in the opinion of
     management, all adjustments (consisting only of normal recurring
     adjustments) which are necessary to present fairly the results for such
     interim periods. Interim results at and for the six months ended June 30,
     1998 are not necessarily indicative of the results that may be expected for
     the year ended December 31, 1998.
(2)  Includes effect of the one-time special assessment of $2.5 million, on a
     pre-tax basis, to recapitalize the SAIF, which was recorded by the Bank in
     1996.
(3)  Loans receivable, net, consist of loans receivable minus the allowance for
     loan losses, deferred loan fees and unadvanced loan funds. The allowance
     for loan losses at June 30, 1998 and December 31, 1997, 1996, 1995, 1994
     and 1993 was $5.6 million, $5.5 million, $5.5 million, $5.5 million, $5.5
     million and $5.4 million, respectively.
(4)  The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
     115, "Accounting for Certain Investments in Debt and Equity Securities"
     ("SFAS No. 115"), as of January 1, 1995. On December 31, 1995, a majority
     of the Bank's portfolio was classified as "available-for-sale." Securities
     do not include Federal Home Loan Bank of Atlanta ("FHLB-Atlanta") stock of
     $3.5 million, $3.4 million, $3.2 million, $3.1 million, $4.1 million and
     $4.1 million at June 30, 1998 and December 31, 1997, 1996, 1995, 1994 and
     1993, respectively.
(5)  Represents the cumulative effect, as of January 1, 1993, of the initial
     application of Financial Accounting Standards Board Statement 109,
     "Accounting for Income Taxes."
(6)  Asset Quality Ratios and Regulatory Capital Ratios are end of period
     ratios. With the exception of end of period ratios, all ratios are based on
     average monthly balances during the indicated periods and are annualized
     where appropriate.
(7)  The average interest rate spread represents the difference between the
     weighted average yield on average interest-earning assets (which includes
     FHLB-Atlanta stock and other equity securities) and the weighted average
     cost of average interest-bearing liabilities.
(8)  The net interest margin represents net interest income as a percent of
     average interest-earning assets.
(9)  The efficiency ratio represents the ratio of noninterest expenses divided
     by the sum of net interest income and noninterest income.
(10) For definitions and further information relating to the Bank's regulatory
     capital compliance requirements, see "Regulation--Federal Savings
     Institution Regulation--Capital Requirements." See "Regulatory Capital
     Compliance" for the Bank's pro forma capital levels as a result of the
     Offerings.
(11) Loans include total loans before the allowance for loan losses.
(12) Non-performing assets consist of non-performing loans and real estate owned
     ("REO"). Non-performing loans consist of all loans 90 days or more past due
     and other loans which have been identified by the Bank as presenting
     uncertainty with respect to the collectibility of interest or principal. It
     is the Bank's policy to cease accruing interest on all such loans. See
     "Business of the Bank."

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

                                       9
RISK FACTORS

         Investors should consider the following risk factors, in addition to
those discussed elsewhere in this Prospectus before deciding whether to purchase
the Common Stock offered hereby.

SENSITIVITY TO CHANGES IN INTEREST RATES

         The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.

         The Bank attempts to manage its interest rate risk by seeking to
originate and retain adjustable-rate and shorter-term fixed-rate loans, and by
originating shorter-term, higher yielding consumer loans and investing in
securities with shorter stated or estimated maturities. However, in recent years
the Bank has originated primarily fixed-rate mortgage loans with terms of 15 to
30 years, which the Bank retains in its portfolio. The Bank has done this in
response to very low customer demand for adjustable-rate loans and the Bank's
concern that failure to continue to originate loans in its primary market area
would adversely affect the Bank's ability to compete against other financial
services companies in its market area over the long term. Most recently, while
the Bank has continued to emphasize 15 year fixed-rate loans, the Bank has
primarily originated 30 year fixed-rate loans due to market demand. This has
resulted in the Bank becoming significantly vulnerable to changes in interest
rates. At June 30, 1998, the Bank's gross total loans had an average weighted
maturity of 13.4 years. At such date, $117.1 million, or 26.8% of the Bank's
loans had adjustable interest rates with a weighted average maturity of 20.0
years. At June 30, 1998, the Bank had $196.7 million of certificates of deposit
with maturities of less than one year and $45.3 million of certificates of
deposit over $100,000 ("jumbo certificates of deposit"). Such jumbo certificates
of deposit tend to be less stable sources of funding as compared to money
market, savings and retail checking. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management of Interest Rate
Risk and Market Risk Analysis." At June 30, 1998, the Bank's total interest-
bearing liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $167.8
million, representing a cumulative one-year interest sensitivity gap as a
percentage of total assets of negative 35.5%. To date, the Bank's policy of
remaining competitive, notwithstanding the potentially negative effects this
strategy may have, has not adversely affected the Bank. However, in a rapidly
rising interest rate environment, the cost of the Bank's interest-bearing
liabilities will generally increase at a rate faster than the yield on its
interest-earning assets thereby likely adversely affecting the Bank's net
interest income. The Bank's high level of capital and liquid assets could limit
the effect of such a change in interest rates, but the Bank would also be
subject to other risks. Specifically, increases in interest rates also could
adversely affect the type (fixed-rate or adjustable-rate) and amount of loans
originated by the Bank which, in turn, could adversely impact the yields earned
on the Bank's loan portfolios as well as the amount of secondary market activity
in which the Bank may engage.

         Furthermore, increases in market interest rates would result in an
increase in the interest rates on the Bank's adjustable-rate loans, thereby
causing higher loan payment amounts by the borrowers which, in turn, may result
in elevated delinquencies on such loans. Increases in the level of interest
rates may also adversely affect the value of the Bank's investment securities
and other interest-earning assets and, in turn, its results of operations or
retained earnings. At June 30, 1998, the Bank's securities available-for-sale
had an estimated fair value of $30.9 million, which was $458,000 greater than
the amortized cost of $30.5 million. At the same date, the Bank's mortgage-
backed securities held-to-maturity had an estimated fair value of $1.2 million,
which was $36,000 greater than their amortized cost. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis," "Business of Bank--
Lending Activities--One- to Four-Family Lending" and "--Investment Activities."

POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION

         At June 30, 1998, the Bank's ratio of equity capital to total assets
was 17.68%. The Company's equity position will be significantly increased as a
result of the Conversion. On a pro forma basis as of June 30, 1998, assuming the
sale of Common Stock at the midpoint of the Estimated Price Range, the Company's
ratio of 

                                       10
stockholders' equity to total assets would have been 37.4%. The Company's
ability to deploy this new capital through investments in interest-earning
assets, such as loans and securities, which bear rates of return comparable to
its current investments, will be significantly affected by industry competition
for such investments. The Company currently anticipates that it will take time
to prudently deploy such capital. In addition, although the Bank has operated
extremely efficiently in the past and management intends to continue to control
costs, the Bank will incur additional expenses operating as a public company.
Furthermore, the addition of new products and services may result in increased
expense, including the hiring of additional personnel. As a result of these
factors, the Company's return on equity initially is expected to be below its
historical return on equity and may be below peer group institutions after the
Conversion. Additionally, due to the implementation of stock-based benefit plans
such as the ESOP and the Stock-Based Incentive Plan, the Company's future
compensation expense will be increased, thereby, adversely affecting its net
income and return on equity.

LENDING RISKS ASSOCIATED WITH NON-RESIDENTIAL REAL ESTATE, CONSTRUCTION AND
DEVELOPMENT, MULTI-FAMILY, LAND AND LAND DEVELOPMENT AND CONSUMER LOANS

         At June 30, 1998, the Bank's non-residential real estate, construction
and development, land and land development, multi-family and consumer loan
portfolios totalled $70.2 million, or 16.06%, of total loans. Of this amount,
$3.4 million, or 0.78%, consisted of multi-family loans, $20.0 million, or
4.57%, consisted of construction and development loans, $35.3 million, or 8.08%,
consisted of non-residential real estate loans, which includes $12.1 million in
loans to local churches, $2.3 million or 0.53% consisted of land and land
development and $9.2 million, or 2.10%, consisted of consumer loans. These types
of loans are generally viewed as exposing the lender to greater risk of loss
than one- to four-family residential loans and, with the exception of consumer
loans, frequently have higher principal amounts. The specific risks associated
with these types of loans are discussed in "Business of the Bank -- Lending
Activities."

ESTABLISHMENT OF THE FOUNDATION

         The Company intends to establish the Foundation and to contribute to it
shares of common stock equal to 8% of the shares to be sold in the Conversion.
Establishment of the Foundation is subject to the approval of the Bank's members
at a Special Meeting. If approved by members, the establishment of the
Foundation will be dilutive to the voting and ownership interests of
stockholders and will have an adverse impact on the operating results of the
Company for its year ending December 31, 1998, possibly resulting in an
operating loss for that year.

         DILUTION OF STOCKHOLDERS' INTERESTS. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
be 718,080, 844,800, and 971,520 shares, with a value of $7,180,800, $8,448,000,
and $9,715,200, respectively, based on the public offering price of $10.00 per
share for the shares of common stock to be sold in the Conversion (the "Purchase
Price"). Upon completion of the Conversion and establishment of the Foundation,
the Company will have 12,144,000 shares issued and outstanding at the maximum of
the Estimated Price Range, of which the Foundation will own 971,520 shares, or
7.4% AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."

         NEGATIVE IMPACT ON EARNINGS. The Company will recognize an expense in
the amount of the contribution to the Foundation in the quarter in which it
occurs, which is expected to be the fourth quarter of 1998. Such expense will
reduce earnings and have a material adverse impact on the Company's earnings for
the fiscal year. The amount of the contribution will range from $7.2 million to
$9.7 million, depending on the amount of common stock sold in the Conversion.
The contribution expense will be partially offset by the tax deductibility of
the expense. The Company has been advised by its independent accountants that
the contribution to the Foundation will be deductible for federal income tax
purposes, subject to a limitation based on 10% of the Company's annual taxable
income. Assuming a contribution of $8.4 million in common stock, based on the
mid-point of the Estimated Price Range, the Company estimates a net tax effected
expense of $5.2 million. If the Foundation had been established at June 30,
1998, the Bank would have reported a net loss of $1.9 million for the first six
months of 1998 rather than reporting net income of $3.3 million. In addition to
the contribution to the Foundation, the Bank may in the future continue to make
ordinary charitable contributions within its community.

                                       11
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. The Company estimates
that substantially all of the contribution to the Foundation should be
deductible for federal tax purposes over the permissible six-year period.
However, no assurance can be made that the Company will have sufficient pre-tax
income over the five-year period following the year in which the contribution is
initially made to fully utilize the carryover related to the excess
contribution. Furthermore, although the Company and the Bank have received an
opinion of their independent accountants that the Company will be entitled to
the deduction for the contribution to the Foundation, there can be no assurance
that the IRS will recognize the Foundation as a Section 501(c)(3) exempt
organization or that the deduction will be permitted. In such event, there would
be no tax benefit related to the Foundation.

         POTENTIAL ANTI-TAKEOVER EFFECT. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's common stock outstanding. However, pursuant to the terms of the
contribution as mandated by the OTS, the shares of common stock held by the
Foundation must be voted in the same ratio as all other shares of the Company's
common stock on all proposals considered by the stockholders of the Company. As
a result, the Company does not believe the Foundation will have an anti-takeover
effect on the Company. In the event, however, that the OTS were to waive this
voting restriction and not impose other restrictions and requirements with
respect to the Foundation, the Foundation's board of directors would exercise
sole voting power over such shares. See "The Conversion--Establishment of the
Charitable Foundation--Regulatory Conditions Imposed on the Foundation." If the
Foundation's shares are combined with shares purchased directly by officers and
directors of the Company, shares held by proposed stock benefit plans, if
approved by stockholders, and shares held in the Bank's ESOP, the aggregate of
such shares could exceed 20% of the Company's outstanding common stock, which
could enable management to defeat stockholder proposals requiring 80% approval.
Consequently, in the event the voting restriction was waived, this potential
voting control might preclude takeover attempts that certain stockholders deem
to be in their best interest, and might tend to perpetuate management. Since the
ESOP shares are allocated to all eligible employees of the Bank, and any
unallocated shares will be voted by an independent trustee, and because awards
under the proposed stock benefit plans may be granted to employees other than
executive officers and directors, management of the Company does not expect to
have voting control of all shares held or allocated by the ESOP or other stock
benefit plans. See "--Certain Anti-Takeover Provisions Which May Discourage
Takeover Attempts--Voting Control of Officers and Directors."

          There will be no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Company by the Foundation which may discourage takeover
attempts, including agreements related to voting, acquisition or disposition of
the Company's common stock. Finally, as the Foundation sells its shares of
common stock over time, its ownership interest and voting power in the Company
are expected to decrease.

         POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in only a
limited number of instances. As such, the Foundation may be subject to potential
challenges notwithstanding that the Boards of Directors of the Company and the
Bank have carefully considered the various factors involved in the establishment
of the Foundation. See "The Conversion--Establishment of the Charitable
Foundation--Purpose of the Foundation." If anyone were to institute an action
seeking to require that the Bank eliminate establishment of the Foundation, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Conversion or that any objecting persons would
not be ultimately successful in obtaining the elimination of the Foundation or
other equitable relief or monetary damages against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.

         APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at a Special Meeting. The Foundation will be considered as a
separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the
aggregate pro forma market value of the common stock to be sold in the
Conversion since the estimate of such amount takes into account the dilutive
impact of the issuance of shares to the Foundation. If the aggregate pro forma
market value of the common stock without the Foundation is either greater than
$139.7 million or less than $89.8 million, the Bank will establish a new

                                       12
Estimated Price Range and commence a resolicitation of subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscriptions funds will be promptly
refunded with interest at the Bank's passbook rate of interest, or be permitted
to increase, decrease, or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. See "The Conversion--Stock
Pricing." A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond ________, 2000.

FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION

         The Bank is subject to extensive regulation and supervision as a
federal savings association. In addition, the Company, as a savings and loan
holding company, is subject to regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the Federal Deposit Insurance Corporation
("FDIC") or the Congress, could have a material impact on the Company, the Bank,
its operations or the Bank's Conversion. See "Regulation."

THRIFT RECHARTERING

         The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance fund
that covers most commercial bank deposits) and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill originally reported by the House Banking
Committee would have required federal thrifts to become national banks or state
banks within two years of enactment or they would have become national banks by
operation of law. OTS would have been abolished and its functions transferred to
the bank regulatory agencies. The bill as passed by the House of
Representatives, however, did not provide for the elimination of the federal
thrift charter or OTS, but did provide that unitary savings and loan holding
companies existing or applied for after March 31, 1998 would not have the
ability to engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
holding companies existing or applied for before such date would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Senate
has not acted on the legislation but if such legislation were enacted, the
Company would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Bank is unable to predict whether the legislation will be enacted
or, given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Bank is also unable to predict whether
the SAIF and BIF will eventually be merged or the federal thrift charter
eliminated, and what effect, if any, such legislation would have on the Bank.

EXPENSES ASSOCIATED WITH ESOP AND THE STOCK-BASED INCENTIVE PLAN

         If the ESOP and the Stock-Based Incentive Plan are implemented, the
Bank will recognize additional material employee compensation and benefit
expenses that stem from the shares purchased or granted to employees and
executives under those plans. The Bank cannot predict the actual amount of these
new expenses because applicable accounting practices require that they be based
on the fair market value of the shares of common stock when the expenses are
recognized. Expenses for the ESOP would be recognized when shares are committed
to be released to participants' accounts, and expenses for the Stock-Based
Incentive Plan would be recognized over the vesting period of awards made to
recipients. These expenses have been reflected in the pro forma financial
information under "Pro Forma Data" assuming the $10.00 per share purchase price
as fair market value. Actual expenses, however, will be based on the fair market
value of the common stock at the time of recognition, which may be higher or
lower than $10.00. For further discussion of these plans, see "Management of the
Bank -- Benefits -- Employee Stock Ownership Plan and Trust" and "-- Benefits --
Stock-Based Incentive Plan."

                                       13
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN

         Following the Conversion, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of common stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of common
stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted stock options
under the Stock-Based Incentive Plan in an amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation. The
exercise of such Stock Options may be satisfied by the issuance of authorized
but unissued shares. If all of the Stock Options were to be exercised using
authorized but unissued common stock and the Stock Awards granted under the
Stock-Based Incentive Plan were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted at that
time by 12.3%.

VOTING CONTROL OF EXECUTIVE OFFICERS AND DIRECTORS.

         Directors and executive officers of the Bank and the Company expect to
purchase approximately 2.06% or 1.53% of the shares of Common Stock to be issued
in the Conversion, including shares issued to the Foundation, based upon the
minimum and the maximum of the Estimated Price Range, respectively. The ESOP may
be viewed as giving directors, officers and employees the potential to control
the voting of an additional 8% of the Company's common stock. In addition, the
Foundation will be funded with a contribution by the Company up to 8% of the
common stock sold in the Conversion. If a waiver of the voting restriction
imposed on such common stock is obtained from the OTS and the OTS does not
impose other restrictions, the Foundation shares may be voted as determined by
the directors of the Foundation who also will be directors or officers of the
Company and Bank. Management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders. As a result, this potential voting control may
preclude takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's Articles
of Incorporation and Bylaws."

CERTAIN ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING
INSTRUMENTS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS

         Certain provisions of the Company's Articles of Incorporation and
Bylaws and the Bank's Stock Articles of Incorporation and Bylaws, as well as
certain federal regulations and state laws, may assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of outstanding shares, and certain uniform price provisions for certain
business combinations. These provisions in the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate existing management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisitions of
the Company and the Bank."

ABSENCE OF MARKET FOR COMMON STOCK

         The Company and the Bank have never issued capital stock. The Company
has received conditional approval to have its common stock listed on Nasdaq
under the symbol "VCAP" upon completion of the Conversion. However, there can be
no assurance that an active and liquid trading market for the common stock will
develop or, once developed, will continue, nor can there be any assurances that
purchasers of the common stock will be able to sell their shares at or above the
purchase price. The absence or discontinuance of a market for the common stock
would have an adverse impact on both the price and liquidity of the common
stock. See "Market for the Common Stock."

                                       14
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED

         The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 13,965,600 shares of common stock for
an aggregate purchase price of up to $139.7 million. An increase in the number
of shares issued will decrease a subscriber's pro forma net earnings per share
and stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the purchase price as a percentage of pro forma stockholders' equity
per share and net earnings per share.

YEAR 2000 COMPLIANCE

         As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Bank has conducted a comprehensive review of its
systems to identify applications that could be affected by the "Year 2000" issue
and has developed an implementation plan to address the issue. The Bank has
already begun testing on its own systems. The Bank has been told that its
primary service providers anticipate all reprogramming efforts will be complete
by December 31, 1998, allowing the Bank significant time for testing. The Bank
believes that its costs related to Year 2000 will be approximately $200,000.
There can be no assurances, however, that the performance by the Bank's vendors
will be effective to remedy all potential problems. To the extent the Company's
systems are not fully Year 2000 compliant, there can be no assurance that
potential systems interruptions or the cost necessary to update software would
not have a materially adverse effect on the Company's business, financial
condition, results of operations and business prospects.

COMPETITION

         Due to the significant growth in the Fredericksburg area in recent
years, the Bank has encountered a significant increase in competition for both
loan origination and attracting deposits. The Bank's primary market area is
highly competitive and the Bank faces direct competition from a significant
number of financial institutions, many with a state-wide or regional presence
and, in some cases, a national presence. Many of these financial institutions
are significantly larger and have greater financial resources than the Bank. The
Bank's competition for loans comes principally from commercial banks, savings
banks, credit unions, mortgage brokers, mortgage banking companies, and
insurance companies, and most recently, from one- to four-family home builders
who not only finance their own projects, but also arrange permanent financing
for purchasers. Its most direct competition for deposits has historically come
from savings, cooperative and commercial banks and credit unions. In addition,
the Bank faces significant competition for deposits from non-bank institutions
such as brokerage firms and insurance companies in such instruments as
short-term money market funds, corporate and government securities funds, mutual
funds and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. The Bank
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.

                       VIRGINIA CAPITAL BANCSHARES, INC.

         The Company was organized under Virginia law in September 1998 at the
direction of the Board of Directors of the Bank for the purpose of acquiring all
of the capital stock to be issued by the Bank in the Conversion. The Company has
applied to the OTS to become a savings and loan holding company and, upon
approval, will be subject to regulation by the OTS. Upon consummation of the
Conversion, the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation--Holding Company Regulation." After
completion of the Conversion, the Company's assets will consist of all of the
outstanding shares of the Bank's capital stock issued to the Company in the
Conversion and that portion of the net proceeds of the Offerings retained by the
Company. The Company intends to use part of the net proceeds it retains to loan
funds to the ESOP to enable the ESOP to 

                                       15
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. Based on certain regulatory and market conditions, the
Company and Bank may, however, alternatively choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The Company
intends to initially invest any remaining proceeds in federal funds and short-
term U.S. Government and agency obligations. See "Use of Proceeds." Immediately
after the Conversion, the Company will have no significant liabilities.
Initially, the Company will neither own nor lease any property, but will instead
use the premises, equipment and furniture of the Bank. The management of the
Company is set forth under "Management of the Company." At the present time, the
Company does not intend to employ any persons other than officers of the Company
who are also officers of the Bank, but will utilize the support staff of the
Bank from time to time. Additional employees will be hired as appropriate to the
extent the Company expands its business in the future.

         Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities, should
it decide to do so, through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.

         The Company's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.

                            FREDERICKSBURG SAVINGS

         The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences. To
a lesser extent, the Bank invests in multi-family, construction and development,
commercial real estate and consumer loans. The Bank originates one- to
four-family loans primarily for investment. At June 30, 1998, the Bank's loans,
net, totalled $415.9 million, or 88.0% of total assets. To a significantly
lesser extent, the Bank also invests in securities, primarily consisting of U.S.
Government and agency obligations and highly rated corporate bonds. At June 30,
1998, the Bank's securities portfolio totalled $32.1 million, or 0.74% of total
assets, of which $30.9 million, or 96.6%, were classified as available-for-sale.
For the six months ended June 30, 1998, the Bank's deposit accounts averaged
$375.3 million, or 95.69% of total liabilities, of which $83.1 million, or
21.45%, were savings, money market and negotiable order of withdrawal ("NOW")
accounts (collectively, "core deposits"). The Bank also uses advances from the
FHLB-Atlanta as a source of funds. At June 30, 1998, such advances totalled $8.0
million, or 2.06% of total liabilities. See "Business of the Bank."

         The Bank's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.

                                       16
REGULATORY CAPITAL COMPLIANCE

         At June 30, 1998, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." Set forth below is a summary of the Bank's compliance with the
regulatory capital standards as of June 30, 1998, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Stock-Based Incentive Plan are deducted from pro
forma regulatory capital.
Fredericksburg Savings                            
                                                                  Pro Forma at June 30, 1998 Based Upon the Sale                
                                                                       of Common Stock at $10.00 Per Share                      
                                                      -----------------------------------------------------------------------   
                                                                                                                   13,965,600     
                                                             8,976,000          10,560,000         12,144,000        Shares     
                                                               Shares             Shares             Shares        (15% Above   
                                                            (Minimum of        (Midpoint of       (Maximum of      Maximum of   
                                      Historical at          Estimated          Estimated          Estimated        Estimated   
                                      June 30, 1998         Price Range)       Price Range)       Price Range)   Price Range)(1)
                                    -----------------   ------------------   ---------------    ---------------  ---------------
                                             Percent              Percent            Percent            Percent           Percent
                                               of                   of                 of                 of                of 
                                     Amount  Assets(2)   Amount   Assets(2)  Amount  Assets(2)  Amount  Assets(2) Amount  Assets(2)
                                    -------  --------   --------  --------   ------  --------   ------  --------  ------  ---------
(Dollars in thousands) 
GAAP Capital...................     $83,500   17.68%    $115,747   22.94%   $121,614  23.83%    $127,482  24.69%  $134,229  25.66%  
                                                                          
Tangible Capital:                                                                                                                   
  Capital Level................     $81,588   17.28%    $113,835   22.65%   $119,702  23.54%    $125,570  24.41%  $132,317  25.39%  
  Requirement..................       7,056    1.50        7,540    1.50       7,628   1.50        7,728   1.50      7,817   1.50  
                                    -------   -----     --------   -----    --------  -----     --------  -----   --------  -----
  Excess.......................     $74,532   15.78%    $106,295   21.15%   $112,074  22.04%    $117,752  22.91%  $124,500  23.89%  
                                    =======   =====     ========   =====    ========  =====     ========  =====   ========  =====   
Tier I Capital:                                                                                                                     
   Capital Level...............     $81,588   17.28%    $113,835   22.65%   $119,702  23.54%    $125,570  24.41%  $132,317  25.39%  
   Requirement(3)..............      14,112    3.00       15,080    3.00      15,256   3.00       15,432   3.00     15,634   3.00  
                                    -------   -----     --------   -----    --------  -----     --------  -----   --------  -----   
   Excess......................     $67,476   14.28%    $ 98,755   19.65%   $104,446  20.54%    $110,138  21.41%  $116,683  22.39%  
                                    =======   =====     ========   =====    ========  =====     ========  =====   ========  =====   
Risk-Based Capital:                                                                                                                 
  Capital Level(4)(5)..........     $85,131   30.20%    $117,378   39.39%   $123,245  40.96%    $129,113  42.49%  $135,860  44.22%  
  Requirement..................      22,549    8.00       23,839    8.00      24,073   8.00       24,308   8.00     24,578   8.00   
                                    -------   -----     --------   -----    --------  -----     --------  -----   --------  -----   
  Excess.......................     $62,582   22.20%    $ 93,539   31.39%   $ 99,172  32.96%    $104,805  34.49%  $111,282  36.22%  
                                    =======   =====     ========   =====    ========  =====     ========  =====   ========  =====
____________________                                  
(1)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.

(2)  Tangible capital levels are shown as a percentage of tangible assets. Tier
     I capital levels are shown as a percentage of total adjusted assets. Risk-
     based capital levels are shown as a percentage of risk-weighed assets.

(3)  The current OTS core capital requirement for savings associations is 3% of
     total adjusted assets. The OTS has proposed core capital requirements which
     would require a core capital ratio of 3% of total adjusted assets for
     thrifts that receive the highest supervisory rating for safety and
     soundness and a 4% to 5% core capital ratio requirement for all other
     thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
     Requirements."

(4)  Assumes net proceeds are invested in assets that carry a 50% risk-
     weighting.

(5)  The difference between equity under generally accepted accounting
     principles ("GAAP") and regulatory risk-based capital is attributable to a
     portion of the general valuation allowance of $3.5 million and any
     unrealized gains on available-for-sale securities at June 30, 1998.

                                       17
USE OF PROCEEDS

         Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $87.8 million and $119.4 million (or $137.7 million if the Estimated
Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion--Stock Pricing" as to the assumptions used to arrive at such amounts.
The Company will be unable to utilize any of the net proceeds of the Offerings
until the consummation of the Conversion.

         The Company will purchase all of the outstanding capital stock of the
Bank to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings, with the remaining net proceeds to be retained by the Company. Based
on net proceeds of $103.6 million, the Company expects to utilize $51.8 million
of net proceeds to purchase the common stock of the Bank. Such portion of net
proceeds will be added to the Bank's general funds which the Bank currently
intends to utilize for general corporate purposes, including: investment in
loans, particularly residential, commercial real estate, construction and
consumer loans; investment primarily in U.S. Treasury and Agency obligations,
including one year adjustable-rate mortgage-backed securities; the repayment of
FHLB advances; funding of stock-based benefit plans; and, to a lesser extent,
investment in short-term high quality investments, such as highly rated
corporate bonds and municipal bonds. The Bank also intends to seek opportunities
to expand its products and services and intends to examine opportunities to
expand its facilities and operations through acquisitions of other financial
institutions, branch offices or other financial services companies, however, the
Bank has no specific acquisition plans at this time.

         The Company intends to use a portion of the net proceeds it retains to
loan funds to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation.
Alternatively, the Company and Bank may choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The remaining
net proceeds retained by the Company will initially be invested in short-term
U.S. Treasury and Agency obligations. Based upon the sale of 8,976,000 shares or
12,144,000 shares at the minimum and maximum of the Estimated Price Range and
the issuance of shares to the Foundation, the amount of the loan to the ESOP
would be $7.8 million or $10.5 million, respectively (or $12.1 million if the
Estimated Price Range is increased by 15%) to be repaid approximately over a
twenty year period at the prevailing prime rate of interest, which currently is
8.5%. See "Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust."

         The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of financial institutions or
their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. The Company has no
current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender
("QTL"). See "Regulation--Holding Company Regulation" for a description of
certain regulations applicable to the Company.

         Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to conduct stock repurchases, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except (i) for an offer to all stockholders on
a pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a 12-month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 10 days prior to the
commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. See "Regulation--Prompt Corrective Regulatory Action."
In addition, under current OTS policies, repurchases may be allowed in the first
year following Conversion and in amounts greater than 5% in the second and third
years following Conversion provided there are valid and compelling business
reasons for such repurchases and the OTS does not object to such repurchases.

                                       18
Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but not
be limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
Although the Company has no current plans to repurchase its stock, in the event
the Company does determine to repurchase stock, such repurchases may be made at
market prices which may be in excess of the Purchase Price in the Conversion.

         Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Conversion--Certain
Restrictions on Purchase or Transfer of Shares after Conversion."

                                DIVIDEND POLICY

         Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Depending on market conditions, the Company's Board of
Directors intends to pay cash dividends on the Comon Stock; however no decision
has been made regarding the level of dividends that will actually be paid. In
addition, from time to time, in an effort to manage capital to a reasonable
level, the Board of Directors may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends. Declarations of
dividends by the Board of Directors, if any, will depend upon a number of
factors, including the amount of net proceeds retained by the Company in the
Conversion, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.

         The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
For information concerning federal regulations which apply to the Bank in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation--Distributions" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."

         Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Virginia law,
which generally provide that a Virginia corporation may make distributions to
its stockholders unless, after giving effect to the distribution, (i) the
corporation would not be able to pay its debts as they become due in the usual
course of business, or (ii) the corporation's total assets would be less than
the sum of its total liabilities plus (unless the articles of incorporation
permit otherwise, which in the case of the Company they do not) the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.

         Additionally, in connection with the Conversion, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the OTS.

                                       19
MARKET FOR THE COMMON STOCK

         The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on Nasdaq
under the symbol "VCAP" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on Nasdaq or that an active and liquid trading market will
develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the purchase price of the Common Stock after the Conversion.

                                       20
CAPITALIZATION

         The following table presents the unaudited historical consolidated
capitalization of the Bank at June 30, 1998 and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
Company Pro Forma Based Upon Sale of Common Stock    
                                                                                             at $10.00 Per Share                   
                                                                              ---------------------------------------------------  
                                                                              8,976,000    10,560,000   12,144,000   13,965,600    
                                                                                Shares       Shares       Shares       Shares      
                                                                              (Minimum of   (Midpoint    (Maximum    (15% Above    
                                                                              (Minimum of       of           of       Maximum of    
                                                                               Estimated     Estimated    Estimated    Estimated    
                                                                     Bank       Price          Price        Price        Price
                                                                   Historical   Range)        Range)       Range)      Range)(1)    
                                                                   ---------- ------------ ------------ ------------ ------------
(In thousands)                      
                                                                                                                                   
Deposits(2)...................................................      $373,719     $373,719     $373,719     $373,719     $373,719
FHLB borrowings...............................................         8,000        8,000        8,000        8,000        8,000
                                                                   ---------     --------    ---------    --------      --------
Total deposits and borrowings.................................      $381,719     $381,719     $381,719     $381,719     $381,719
                                                                    ========     ========     ========     ========     ========
Stockholders' equity:
  Preferred Stock, $.01 par value, 5,000,000
    shares authorized; none to be issued......................     $      --    $      --   $       --   $       --   $       --
  Common Stock, $.01 par value, 75,000,000 shares
    authorized; shares to be issued as reflected..............            --           97          114          131          151
  Additional paid-in capital(3)...............................            --       87,663      103,486      119,309      137,505
  Retained earnings(4)........................................        83,216       83,216       83,216       83,216       83,216
  Net unrealized gain on available-for-sale securities........           284          284          284          284          284
  Less:  Expense of contribution to the Foundation,
             net of taxes(5)..................................            --       (4,452)      (5,238)      (6,023)      (6,927)
  Plus:  Shares issued to the Foundation......................            --        7,181        8,448        9,715       11,172
  Less:  Common Stock acquired by the ESOP(6).................            --       (7,755)      (9,124)     (10,492)     (12,066)
         Common Stock acquired by the Stock-Based
            Incentive Plan(7).................................            --       (3,878)      (4,562)      (5,246)      (6,033)
                                                                   ---------  -----------  -----------  -----------  -----------

Total stockholders' equity....................................       $83,500     $162,356     $176,624     $190,894     $207,302
                                                                     =======     ========     ========     ========     ========
________________
(1)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.
(2)  Does not reflect withdrawals from deposit accounts for the purchase of
     Common Stock in the Conversion. Such withdrawals would reduce pro forma
     deposits by the amount of such withdrawals.
(3)  No effect has been given to the issuance of additional shares of Common
     Stock to the Foundation at a value of $10.00 per share or to the issuance
     of additional shares pursuant to the Company's Stock-Based Incentive Plan
     intended to be adopted by the Company. An amount equal to 10% of the shares
     of Common Stock issued in the Conversion, including shares issued to the
     Foundation, will be reserved for issuance upon the exercise of options to
     be granted under the Stock-Based Incentive Plan. See "Risk Factors--
     Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote 4 to the
     tables under "Pro Forma Data" and "Management of the Bank--Benefits--Stock-
     Based Incentive Plan."
(4)  The retained earnings of the Bank will be substantially restricted after
     the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
     Federal Savings Institution Regulation--Limitations on Capital
     Distributions."
(5)  Represents the value of the contribution of Common Stock to the Foundation
     at $10.00 per share reduced by the associated tax benefits $2.7 million,
     $3.2 million, $3.7 million and $4.2 million at the minimum, midpoint,
     maximum and 15% above the maximum of the Estimated Price Range,
     respectively, based on an effective tax rate of 38%. The realization of the
     federal tax benefit is limited annually to 10% of the Company's annual
     taxable income, subject to the ability of the Company to carry forward any
     unused portion of the deduction for five years following the year in which
     the contribution is made. For state income tax purposes, the Bank will not
     be able to utilize any such carry forward.
(6)  Assumes that 8% of the shares issued in connection with the Conversion,
     including shares issued to the Foundation, will be purchased by the ESOP
     and that the funds used to acquire such shares will be borrowed from the
     Company. See "Use of Proceeds." The Common Stock acquired by the ESOP is
     reflected as a reduction of stockholders' equity. See "Management of the
     Bank--Benefits--Employee Stock Ownership Plan and Trust."
(7)  Assumes that subsequent to the Conversion, an amount equal to 4% of the
     shares of Common Stock issued in the Conversion, including shares issued to
     the Foundation, is purchased by the Stock-Based Incentive Plan through open
     market purchases at the offering price of $10.00 per share. The Common
     Stock purchased by the Stock-Based Incentive Plan is reflected as a
     reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
     Effect of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro
     Forma Data" and "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."

                                       21
PRO FORMA DATA
 
          The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $87.8 million and $119.4 million (or $137.7
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) Trident will receive a fee of $525,000 for its
marketing services and financial advisory role in connection with the
Conversion; and (ii) other Conversion expenses, excluding the marketing fees
paid to Trident, will be approximately $1.5 million. Actual Conversion expenses
may vary from those estimated.

          Pro forma consolidated net income of the Company for the six months
ended June 30, 1998, and for the year ended December 31, 1997, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.41% and 5.41%
which is equivalent to the one year Treasury rate at June 30, 1998. The
calculations have been based on the one year Treasury rate, as opposed to the
Bank's yield on average assets, because the Bank will initially invest the
proceeds in short-term assets, at a lower yield, and will more effectively
invest the proceeds over time.. The tables below do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock or the effect
of any possible use of the net Conversion proceeds. The pro forma after-tax
yields for the Company and the Bank are assumed to be 3.35% and 3.35% for the
six months ended June 30, 1998 and for the year ended December 31, 1997,
respectively. All calculations were based on an effective combined federal and
state income tax rate of 38%. Historical and pro forma net earnings per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, as adjusted to give effect to unallocated and
uncommitted shares held by the ESOP. Historical and pro forma stockholders'
equity per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock issued in the
Conversion, including the issuance of shares to the Foundation.

          The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Pro forma consolidated stockholders' equity represents the difference between
the stated amount of assets and liabilities of the Company. The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be stated in an amount greater than amounts that would be
available for distribution to stockholders in the event of liquidation.

          The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the six months ended June 30, 1998 and at or
for the year ended December 31, 1997, based on the assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give effect
to the Stock-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion and presented to stockholders for approval at a
meeting of stockholders. See Footnote 3 to the tables and "Management of the
Bank--Benefits--Stock-Based Incentive Plan." No effect has been given in the
tables to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock-Based Incentive Plan to be adopted by the Board
of Directors of the Company and presented to stockholders for approval at a
meeting of stockholders, nor does book value give any effect to the liquidation
account to be established for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders or, in the event of liquidation of the
Bank, to the tax effect of the bad debt reserve and other factors. See Footnote
3 to the tables below, "The Conversion--Liquidation Rights" and "Management of
the Bank--Benefits--Stock-Based Incentive Plan." THE FOLLOWING TABLES ASSUME
THAT THE FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVE
EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON
STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE
VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLES BELOW, TAKES INTO ACCOUNT
THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.

                                       22
At or For the Six Months Ended June 30, 1998
                                                            -------------------------------------------------------------------
                                                                                                               13,965,600
                                                                  8,976,000      10,560,000     12,144,000    Shares Sold
                                                                 Shares Sold    Shares Sold    Shares Sold     at $10.00
                                                                  at $10.00      at $10.00      at $10.00      Per Share
                                                                  Per Share      Per Share      Per Share      (15% above
                                                                  (Minimum       (Midpoint      (Maximum       Maximum of
                                                                of Estimated   of Estimated   of Estimated     Estimated
                                                                Price Range)   Price Range)   Price Range)  Price Range)(8)
                                                                ------------   ------------   -----------   ---------------
                                                                          (In thousands, except per share amounts)
Gross proceeds.............................................         $89,760       $105,600      $121,440        $139,656
Plus: Shares issued to Foundation (equal to 8% of the
  stock sold in the Conversion)............................           7,181          8,448         9,715          11,172
                                                                   --------       --------      --------        --------
 Pro forma market capitalization...........................         $96,941       $114,048      $131,155        $150,828
                                                                   ========       ========      ========        ========
Gross proceeds.............................................         $89,760       $105,600      $121,440        $139,656
 Less: Offering expenses and commission....................          (2,000)        (2,000)       (2,000)         (2,000)
                                                                   --------       --------      --------        --------
   Estimated net proceeds..................................          87,760        103,600       119,440         137,656
 Less: Common Stock acquired by the ESOP...................          (7,755)        (9,124)      (10,492)        (12,066)
       Common Stock to be acquired by Stock-Based
        Incentive Plan.....................................          (3,878)        (4,562)       (5,246)         (6,033)
                                                                   --------       --------      --------        --------
   Estimated net proceeds, as adjusted.....................         $76,127        $89,914      $103,702        $119,557
                                                                   ========       ========      ========        ========
Consolidated net earnings(1):
 Historical................................................          $3,320         $3,320        $3,320          $3,320
 Pro forma earnings on net proceeds........................           1,275          1,506         1,737           2,003
 Less: Pro forma ESOP adjustment(2)........................            (120)          (141)         (163)           (187)
       Pro forma Stock-Based Incentive Plan
        adjustment(3)......................................            (240)          (283)         (325)           (374)
                                                                   --------       --------      --------        --------
   Pro forma net earnings..................................          $4,235         $4,402        $4,569          $4,762
                                                                   ========       ========      ========        ========
Per share net earnings(1)(4):
 Historical................................................          $ 0.37         $ 0.32        $ 0.27          $ 0.24
 Pro forma earnings on net proceeds........................            0.14           0.14          0.14            0.14
 Less: Pro forma ESOP adjustment(2)........................           (0.01)         (0.01)        (0.01)          (0.01)
       Pro forma Stock-Based Incentive Plan
        adjustment(3)......................................           (0.03)         (0.03)        (0.03)          (0.03)
                                                                   --------       --------      --------        --------
   Pro forma net earnings per share........................          $ 0.47         $ 0.42        $ 0.37          $ 0.34
                                                                   ========       ========      ========        ========
Stockholders' equity:
 Historical................................................       $  83,500      $  83,500     $  83,500       $  83,500
 Estimated net proceeds....................................          87,760        103,600       119,440         137,656
 Plus: Tax benefit of Foundation(1)........................           2,729          3,210         3,692           4,245
 Less: Common Stock acquired by ESOP(2)....................          (7,755)        (9,124)      (10,492)        (12,066)
       Common Stock to be acquired by Stock-Based
        Incentive Plan(3)..................................          (3,878)        (4,562)       (5,246)         (6,033)
                                                                   --------       --------      --------        --------
   Pro forma stockholders' equity(3)(5)(6).................        $162,356       $176,624      $190,894        $207,302
                                                                   ========       ========      ========        ========
Stockholders' equity per share(7):
 Historical................................................         $  8.61        $  7.32       $  6.37         $  5.54
 Estimated net proceeds....................................            9.05           9.08          9.11            9.13
 Plus: Tax benefit of Foundation...........................            0.28           0.28          0.28            0.28
 Less: Common Stock acquired by ESOP(2)....................           (0.80)         (0.80)        (0.80)          (0.80)
       Common Stock to be acquired by Stock-Based
        Incentive Plan(3)..................................           (0.40)         (0.40)        (0.40)          (0.40)
                                                                   --------       --------      --------        --------
   Pro forma stockholders' equity per share(3)(5)(6).......          $16.74         $15.48        $14.56          $13.75
                                                                   ========       ========      ========        ========
Offering price as a percentage of pro forma stockholders'
 equity per share..........................................           59.74%         64.60%        68.68%          72.73%
Offering price to pro forma net earnings
 per share (annualized)....................................           10.64          11.90         13.51           14.71
(Footnotes on next page)

                                       23
_____________________
(1)  Does not give effect to the non-recurring expense that is expected to be
     recognized in the fourth quarter of 1998 if the establishment of the
     Foundation is approved. In that event, the Company will recognize an after-
     tax expense for the amount of the contribution to the Foundation which is
     expected to be $4.5 million, $5.2 million, $6.0 million and $6.9 million at
     the minimum, midpoint, maximum, and maximum as adjusted, of the Estimated
     Price Range, respectively, based on an effective tax rate of 38%.
(2)  It is assumed that 8% of the shares of Common Stock issued in the
     Conversion, including shares issued to the Foundation, will be purchased by
     the ESOP. For purposes of this table, the funds used to acquire such shares
     are assumed to have been borrowed by the ESOP from the Company. See "Use of
     Proceeds." The amount to be borrowed is reflected as a reduction of
     stockholders' equity. The Bank intends to make annual contributions to the
     ESOP in an amount at least equal to the principal and interest requirement
     of the debt. The Bank's total annual payment of the ESOP debt is based upon
     20 equal annual installments of principal, with an assumed interest rate at
     8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
     to the ESOP is equivalent to the debt service requirement for the six
     months ended June 30, 1998 and was made at the end of the period; (ii) that
     19,388, 22,810, 26,231 and 30,166 shares at the minimum, midpoint, maximum
     and 15% above the maximum of the Estimated Price Range, respectively, were
     committed to be released during the six months ended June 30, 1998 at an
     average fair value of $10.00 per share in accordance with Statement of
     Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
     released were considered outstanding for purposes of the net earnings per
     share calculations. A tax rate of 38% was used for all calculations. See
     "Management of the Bank--Benefits--Employee Stock Ownership Plan and
     Trust."
(3)  Gives effect to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion, and assumes any necessary stockholder
     or regulatory approval of the Stock-Based Incentive Plan has been received.
     The Stock-Based Incentive Plan intends to acquire an amount of Common Stock
     equal to 4% of the shares of Common Stock issued in the Conversion,
     including shares issued to the Foundation, or 387,763, 456,192, 524,621 and
     603,314 shares of Common Stock at the minimum, midpoint, maximum and 15%
     above the maximum of the Estimated Price Range, respectively, either
     through open market purchases, if permissible, or from authorized but
     unissued shares of Common stock or treasury stock of the Company, if any.
     Funds used by the Stock-Based Incentive Plan to purchase the shares will be
     contributed to the Stock-Based Incentive Plan by the Bank. In calculating
     the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
     the shares were acquired by the Stock-Based Incentive Plan at the beginning
     of the period presented in open market purchases at the Purchase Price and
     that 10% of the amount contributed was an amortized expense during such
     period. The issuance of authorized but unissued shares of the Company's
     Common Stock to the Stock-Based Incentive Plan instead of open market
     purchases would dilute the voting interests of existing stockholders by
     approximately 3.8% and pro forma net earnings per share would be $0.46,
     $0.41, $0.37 and $0.34 at the minimum, midpoint, maximum and 15% above the
     maximum of the range, respectively, and pro forma shareholders' equity per
     share would be $16.10, $14.89, $13.99 and $13.22 at the minimum, midpoint,
     maximum and 15% above the maximum of the range, respectively. There can be
     no assurance that stockholder approval of the Stock-Based Incentive Plan
     will be obtained, or that the actual purchase price of the shares will be
     equal to the Purchase Price. A tax rate of 38% was used for all
     calculations. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."
(4)  The number of shares used in the calculation of historical and pro forma
     earnings per share was 8,937,942, 10,515,226, 12,092,509 and 13,906,386
     shares at the minimum, midpoint, maximum and 15% above the maximum of the
     Estimated Price Range, respectively.
(5)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion. An amount equal to 10% of the Common
     Stock issued in the Conversion, including shares issued to the Foundation,
     or 969,408, 1,140,480, 1,311,552 and 1,508,285 shares at the minimum,
     midpoint, maximum and 15% above the maximum of the Estimated Price Range,
     respectively, will be reserved for future issuance upon the exercise of
     options to be granted under the Stock-Based Incentive Plan. The issuance of
     Common Stock pursuant to the exercise of options under the Stock-Based
     Incentive Plan will result in the dilution of existing stockholders'
     interests. Assuming all options were exercised at the end of the period at
     an exercise price of $10.00 per share, the pro forma net earnings per share
     would be $0.43, $0.38, $0.34 and $0.31, respectively, and the pro forma
     stockholders' equity per share would be $16.13, $14.99, $14.14 and $13.40,
     respectively. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."
(6)  The retained earnings of the Bank will continue to be substantially
     restricted after the Conversion. See "Dividend Policy," "The Conversion--
     Liquidation Rights" and "Regulation--Federal Savings Institution 
     Regulation--Limitation on Capital Distributions."
(7)  The number of shares used in the calculation of historical and pro forma
     stockholders' equity per share was 9,694,080, 11,404,800, 13,115,520 and
     15,082,848 shares at the minimum, midpoint, maximum and 15% above the
     maximum of the Estimated Price Range, respectively.
(8)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.

                                       24
At or For the Year Ended December 31, 1997
                                                           ------------------------------------------------------------------------
                                                                                                                   13,965,600
                                                            8,976,000          10,560,000       12,144,000         Shares Sold
                                                           Shares Sold         Shares Sold      Shares Sold         at $10.00
                                                            at $10.00          at $10.00        at $10.00           Per Share      
                                                           Per Share           Per Share        Per Share          (15% above
                                                          (Minimum             (Midpoint        (Maximum           Maximum of
                                                          of Estimated         of Estimated     of Estimated        Estimated   
                                                          Price Range)         Price Range)     Price Range)       Price Range)(8)
                                                          -------------        ------------     -----------        ----------------
                                                                        (In thousands, except per share amounts)
Gross proceeds..........................................   $    89,760        $   105,600        $  121,440         $    139,656
Plus:    Shares issued to Foundation (equal to 8%
  of the stock sold in the Conversion)..................         7,181              8,448             9,715               11,172
                                                           -----------        -----------        ----------         ------------
  Pro forma market capitalization.......................   $    96,941        $   114,048        $  131,155         $    150,828
                                                           ===========        ===========        ==========         ============
Gross proceeds..........................................   $    89,760        $   105,600        $  121,440         $    139,656
  Less:    Offering expenses and commission.............        (2,000)            (2,000)           (2,000)              (2,000)
    Estimated net proceeds..............................        87,760            103,600           119,440              137,656
  Less:    Common Stock acquired by the ESOP............        (7,755)            (9,124)          (10,492)             (12,066)
           Common Stock to be acquired by Stock-Based
            Incentive Plan..............................        (3,878)            (4,562)           (5,246)              (6,033)
                                                           -----------        -----------        ----------         ------------
    Estimated net proceeds, as adjusted.................   $    76,127        $    89,914        $  103,702         $    119,557
                                                           ===========        ===========        ==========         ============
Consolidated net earnings(1):
  Historical............................................   $     6,425        $     6,425        $    6,425         $      6,425
  Pro forma earnings on net proceeds....................         2,550              3,012             3,474                4,005
  Less:    Pro forma ESOP adjustment(2).................          (240)              (283)             (325)                (374)
           Pro forma Stock-Based Incentive Plan
            adjustment(3)...............................          (481)              (566)             (651)                (748)
                                                           -----------        -----------        ----------         ------------
     Pro forma net earnings.............................   $     8,254        $     8,588        $    8,923         $      9,308
                                                           ===========        ===========        ==========         ============
Per share net earnings(1)(4):
  Historical............................................   $      0.72        $      0.61        $     0.53         $       0.46
  Pro forma earnings on net proceeds....................          0.28               0.29              0.29                 0.29
  Less:  Pro forma ESOP adjustment(2)...................         (0.03)             (0.03)            (0.03)               (0.03)
         Pro forma Stock-Based Incentive Plan
          adjustment(3).................................         (0.05)             (0.05)            (0.05)               (0.05)
                                                           -----------        -----------        ----------         ------------
     Pro forma net earnings per share...................   $      0.92        $      0.82        $     0.74         $       0.67
                                                           ===========        ===========        ==========         ============
Stockholders' equity:
  Historical............................................   $    80,073        $    80,073        $   80,073         $     80,073
  Estimated net proceeds................................        87,760            103,600           119,440              137,656
  Plus:    Tax benefit of Foundation(1).................         2,729              3,210             3,692                4,245
  Less:    Common Stock acquired by ESOP(2).............        (7,755)            (9,124)          (10,492)             (12,066)
           Common Stock to be acquired by Stock-Based
            Incentive Plan(3)...........................        (3,878)            (4,562)           (5,246)              (6,033)
                                                           -----------        -----------        ----------         ------------
     Pro forma stockholders' equity(3)(5)(6)............   $   158,929        $   173,197        $  187,467         $    203,875
                                                           ===========        ===========        ==========         ============
Stockholders' equity per share(7):
  Historical............................................   $      8.26        $      7.02        $     6.11         $       5.31
  Estimated net proceeds................................          9.05               9.08              9.11                 9.13
  Plus:    Tax benefit of Foundation....................          0.28               0.28              0.28                 0.28
  Less:    Common Stock acquired by ESOP(2).............         (0.80)             (0.80)            (0.80)               (0.80)
           Common Stock to be acquired by Stock-Based
            Incentive Plan(3)...........................         (0.40)             (0.40)            (0.40)               (0.40)
                                                           -----------        -----------        ----------         ------------
     Pro forma stockholders' equity per share(3)(5)(6)..   $     16.39        $     15.18        $    14.30         $      13.52
                                                           ===========        ===========        ==========         ============
Offering price as a percentage of pro forma
 stockholders' equity per share.........................         61.01%             65.88%            69.93%               73.96%
Offering price to pro forma net earnings
  per share.............................................         10.87              12.20             13.51                14.93
(Footnotes on next page)

                                       25
--------------
(1)  Does not give effect to the non-recurring expense that will be recognized
     in the fourth quarter of 1998 if the establishment of the Foundation is
     approved. In that event, the Company will recognize an after-tax expense
     for the amount of the contribution to the Foundation which is expected to
     be $4.5 million, $5.2 million, $6.0 million and $6.9 million at the
     minimum, midpoint, maximum, and maximum as adjusted, of the Estimated Price
     Range, respectively, based on an effective tax rate of 38%.

(2)  It is assumed that 8% of the shares of Common Stock issued in the
     Conversion, including shares issued to the Foundation, will be purchased by
     the ESOP. For purposes of this table, the funds used to acquire such shares
     are assumed to have been borrowed by the ESOP from the Company. See "Use of
     Proceeds." The amount to be borrowed is reflected as a reduction of
     stockholders' equity. The Bank intends to make annual contributions to the
     ESOP in an amount at least equal to the principal and interest requirement
     of the debt. The Bank's total annual payment of the ESOP debt is based upon
     20 equal annual installments of principal, with an assumed interest rate at
     8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
     to the ESOP is equivalent to the debt service requirement for the year
     ended December 31, 1997 and was made at the end of the period; (ii) that
     38,776, 45,619, 52,462 and 60,331 shares at the minimum, the midpoint,
     maximum and 15% above the maximum of the Estimated Price Range,
     respectively, were committed to be released during the year ended December
     31, 1997 at an average fair value of $10.00 per share in accordance with
     Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
     committed to be released were considered outstanding for purposes of the
     net earnings per share calculations. A tax rate of 38% was used for all
     calculations. See "Management of the Bank--Benefits--Employee Stock
     Ownership Plan and Trust."

(3)  Gives effect to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion, and assumes any necessary stockholder
     or regulatory approval of the Stock-Based Incentive Plan has been received.
     The Stock-Based Incentive Plan intends to acquire an amount of Common Stock
     equal to 4% of the shares of Common Stock issued in the Conversion,
     including shares issued to the Foundation, or 387,763, 456,192, 524,621 and
     603,314 shares of Common Stock at the minimum, midpoint, maximum and 15%
     above the maximum of the Estimated Price Range, respectively, either
     through open market purchases, if permissible, or from authorized but
     unissued shares of Common stock or treasury stock of the Company, if any.
     Funds used by the Stock-Based Incentive Plan to purchase the shares will be
     contributed to the Stock-Based Incentive Plan by the Bank. In calculating
     the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
     the shares were acquired by the Stock-Based Incentive Plan at the beginning
     of the period presented in open market purchases at the Purchase Price and
     that 20% of the amount contributed was an amortized expense during such
     period. The issuance of authorized but unissued shares of the Company's
     Common Stock to the Stock-Based Incentive Plan instead of open market
     purchases would dilute the voting interests of existing stockholders by
     approximately 3.8% and pro forma net earnings per share would be $0.90,
     $0.80, $0.72 and $0.65 at the minimum, midpoint, maximum and 15% above the
     maximum of the range, respectively, and pro forma stockholders' equity per
     share would be $15.76, $14.60, $13.74 and $13.00 at the minimum, midpoint,
     maximum, and 15% above the maximum of the range, respectively. There can be
     no assurance that stockholder approval of the Stock-Based Incentive Plan
     will be obtained, or that the actual purchase price of the shares will be
     equal to the Purchase Price. A tax rate of 38% was used for all
     calculations. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."

(4)  The number of shares used in the calculation of historical and pro forma
     earnings per share was 8,957,330, 10,538,035, 12,118,740 and 13,936,551
     shares at the minimum, midpoint, maximum and 15% above the maximum of the
     Estimated Price Range, respectively.

(5)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
     the Company following the Conversion. An amount equal to 10% of the Common
     Stock issued in the Conversion, including shares issued to the Foundation,
     or 969,408, 1,140,480, 1,311,552 and 1,508,285 shares at the minimum,
     midpoint, maximum and 15% above the maximum of the Estimated Price Range,
     respectively, will be reserved for future issuance upon the exercise of
     options to be granted under the Stock-Based Incentive Plan. The issuance of
     Common Stock pursuant to the exercise of options under the Stock-Based
     Incentive Plan will result in the dilution of existing stockholders'
     interests. Assuming all options were exercised at the end of the period at
     an exercise price of $10.00 per share, the pro forma net earnings per share
     would be $0.83, $0.74, $0.66 and $0.60, respectively, and the pro forma
     stockholders' equity per share would be $15.81, $14.71, $13.90 and $13.20,
     respectively. See "Management of the Bank--Benefits--Stock-Based Incentive
     Plan."

(6)  The retained earnings of the Bank will continue to be substantially
     restricted after the Conversion. See "Dividend Policy," "The Conversion--
     Liquidation Rights" and "Regulation--Federal Savings Institution 
     Regulation--Limitation on Capital Distributions."

(7)  The number of shares used in the calculation of historical and pro forma
     stockholders' equity per share was 9,694,080, 11,404,800, 13,115,520 and
     15,082,848 shares at the minimum, midpoint, maximum and 15% above the
     maximum of the Estimated Price Range, respectively.

(8)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Price Range of up to 15% as
     a result of regulatory considerations or changes in market or general
     financial and economic conditions following the commencement of the
     Subscription Offering.

                                       26
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION

         If the Foundation were not being established as part of the Conversion,
FinPro has estimated that the pro forma market capitalization of the Bank would
be approximately $122.0 million at the midpoint, which is approximately $8.0
million greater than the pro forma market capitalization of the Bank if the
Foundation is approved by members of the Bank and would result in approximately
a $16.4 million increase, or 15.5%, in the amount of Common Stock offered for
sale in the Conversion. The pro forma price to book ratio and pro forma price to
earnings ratio would be approximately the same under both the current appraisal
and the estimate of the value of the Company without the Foundation. Further,
assuming the midpoint of the Estimated Price Range, pro forma stockholders'
equity per share and pro forma earnings per share would be essentially the same
with the Foundation as without the Foundation. This estimate by FinPro was
prepared at the request of the OTS and is solely for purposes of providing
members with sufficient information with which to make an informed decision on
the Foundation. There is no assurance that in the event the Foundation is not
approved at the Special Meeting of Members that the appraisal prepared at that
time would conclude that the pro forma market value of the Company would be the
same as that estimated herein. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.

         For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at June 30, 1998.
AT THE MAXIMUM,
                                               AT THE MINIMUM         AT THE MIDPOINT        AT THE MAXIMUM         AS ADJUSTED
                                           ---------------------  --------------------- ---------------------  ---------------------
                                               WITH       NO         WITH        NO        WITH        NO         WITH        NO 
                                           FOUNDATION FOUNDATION  FOUNDATION FOUNDATION FOUNDATION FOUNDATION  FOUNDATION FOUNDATION
                                           ---------- ----------  ---------- ---------- ---------- ----------  ---------- ----------
(DOLLARS IN THOUSANDS)
                                                                                                                                  
Estimated offering amount..................  $ 89,760   $103,700    $105,600   $122,000   121,440    $140,300   $139,656   $161,345
Pro forma market capitalization............    96,941    103,700     114,048    122,000   131,155     140,300    150,828    161,345
Total assets...............................   551,136    561,536     565,404    577,640   579,674     593,744    596,082    612,263
Total liabilities..........................   388,780    388,780     388,780    388,780   388,780     388,780    388,780    388,780
Pro forma stockholders' equity.............   162,356    172,756     176,624    188,860   190,894     204,964    207,302    223,483
Pro forma consolidated
   net earnings............................     4,235      4,429       4,402      4,631     4,569       4,833      4,762      5,065
Pro forma stockholders' equity
  per share................................     16.74      16.66       15.48      15.48     14.56       14.61      13.75      13.86
Pro forma consolidated net
  earnings per share.......................      0.47       0.47        0.42       0.42      0.37        0.38       0.34       0.34
Pro Forma Pricing Ratios:
  Offering price as a percentage
    of pro forma stockholders'
    equity per share.......................     59.74%     60.02%      64.60%     64.60%    68.68%      68.45%     72.73%     72.15%

  Offering price to pro forma net
    earnings per share.....................     10.64x     10.64x      11.90x     11.90x    13.51x      13.16x     14.71x     14.71x

  Pro forma market capitalization
    to total assets........................     17.59%     18.47%      20.17%     21.12%    22.63%      23.63%     25.30%     26.35%

Pro Forma Financial Ratios:
  Return on total assets...................      1.54%      1.58%       1.56%      1.60%     1.58%       1.63%      1.60%      1.65%

  Return on stockholders' equity
    (annualized)...........................      5.22%      5.13%       4.98%      4.90%     4.79%       4.72%      4.59%      4.53%

  Stockholders' equity to total assets.....     29.46%     30.76%      31.24%     32.70%    32.93%      34.52%     34.78%     36.50%
27
FREDERICKSBURG SAVINGS
                             STATEMENTS OF INCOME

         The following Statements of Income for each of the years in the
three-year period ended December 31, 1997 have been audited by Cherry Bekaert &
Holland, L.L.P. independent certified public accountants, whose report thereon
is included elsewhere in this Prospectus. With respect to the information for
the six months ended June 30, 1998 and 1997, which is unaudited, in the opinion
of management, all adjustments necessary for a fair presentation of such interim
periods have been included and are of a normal recurring nature. Results for the
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. These Statements of
Income should be read in conjunction with the Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.
FOR THE SIX MONTHS                 FOR THE YEAR              
                                                               ENDED JUNE 30,                 ENDED DECEMBER 31,         
                                                          ----------------------    -----------------------------------  
                                                             1998         1997          1997         1996       1995        
                                                          ------------ ---------    ------------- --------- ------------   
                                                                (UNAUDITED)          (IN THOUSANDS)
Interest income:                                                                                                           
   Loans receivable:                                                                                                       
      Mortgage loans...................................      $15,621     $15,814        $31,820     $31,402     $30,832 
      Consumer and other loans.........................          383         330            696         543         611 
   Investment securities...............................        1,388       1,442          2,929       3,285       4,133 
                                                            --------    --------       --------    --------    -------- 
      Total interest income............................       17,392      17,586         35,445      35,230      35,576   
                                                            --------    --------       --------    --------    --------   
Interest expense:                                                                                                         
   Deposit accounts....................................        9,375       9,262         18,816      19,076      18,432 
   FHLB advances and other borrowings..................          245         306            602         459         565
                                                            --------    --------       --------    --------    --------  
      Total interest expense...........................        9,620       9,568         19,418      19,535      18,997  
                                                            --------    --------       --------    --------    --------  
      Net interest and dividend income before
        provision for loan losses......................        7,772       8,018         16,027      15,695      16,579
Provision for loan losses..............................          269         241            375         325         412    
                                                            --------    --------       --------    --------    --------  
      Net interest and dividend income after                                                                               
        provision for loan losses......................        7,503       7,777         15,652      15,370      16,167 
                                                            --------    --------       --------    --------    -------- 
Noninterest income:                                                                                                    
   Loan origination fees and other service charges.....        1,174         734          1,592       1,241       1,184     
   Other income........................................          102          50            142         169          85     
                                                            --------    --------       --------    --------    --------    
      Total noninterest income.........................        1,276         784          1,734       1,410       1,269     
                                                            --------    --------       --------    --------    --------    
Noninterest expense:                                                                                                   
   Compensation and benefits...........................        1,637       1,782          3,726       3,949       3,602     
   Occupancy and equipment.............................          343         343            717         762         608     
   Federal deposit insurance premiums..................          172         129            349       3,391         864     
   Net cost of foreclosed real estate operations.......           25          21            163         130         185     
   Other expense.......................................        1,067         877          2,054       1,566       1,449     
                                                            --------    --------       --------    --------    --------    
      Total noninterest expense........................        3,244       3,152          7,009       9,798       6,708     
                                                            --------    --------       --------    --------    --------    
      Income before income tax expense.................        5,535       5,409         10,377       6,982      10,728     
                                                            --------    --------       --------    --------    --------    
Income tax expense:                                                                                                    
   Current.............................................        2,280       2,527          3,990       2,943       4,508     
   Deferred............................................          (65)       (377)           (38)       (542)       (438)  
                                                            --------    --------       --------    --------    --------    
      Net income.......................................     $  3,320    $  3,259       $  6,425    $  4,581    $  6,658     
                                                            ========    ========       ========    ========    ========
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

          The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses and loan fees and service charges. The Bank's
noninterest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums, the
cost of foreclosed real estate operations, data processing, advertising and
business promotion and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the Bank.

MANAGEMENT STRATEGY

          Traditionally, management's primary goal has been to control growth
and maintain the Bank's profitability, market share, asset quality and its
capital position by: (i) investing primarily in one- to four-family loans
secured by properties located in its primary market area; (ii) investing in non-
residential, construction and development and multi-family loans secured by
properties located in the Bank's primary market area, to the extent that such
loans meet the Bank's general underwriting criteria including, but not limited
to, satisfaction of certain loan-to-value ("LTV") and debt service coverage
ratios and satisfaction that the borrower is experienced in these types of real
estate projects; (iii) investing in consumer loans; (iv) investing funds not
utilized for loan investments in short-term U.S. Treasury and agency
obligations, including mortgage-backed and mortgage-related securities as well
as highly rated corporate notes and municipal bonds; and (v) building capital
while controlling operating expenses. See "Business of the Bank--Lending
Activities" and "--Securities Investment Activities." In the future, management
intends to seek growth opportunities and intends to seek means of lessening its
exposure to interest rate risk while avoiding investments the Bank believes bear
risks inconsistent with the Bank's investment policies. Management intends to
grow by expanding the products and services it offers, as necessary, in order to
improve its market share in its primary market area as well as seeking
opportunities to expand its market share and product line through acquisitions,
including, possibly, the acquisition of a commercial bank, although management
has no current plans in that regard. Currently, the Bank is seeking means to
increase its total deposits, particularly checking accounts, and has begun to
implement 24 hour banking services and, in the future, may expand its consumer
retail products. Other products and services are also being reviewed, including
products that would attract more local business to the Bank. Emphasis has been
placed on increasing the number of transaction accounts the Bank has through
aggressive advertising and expanding the variety of savings and checking
accounts available. The Bank will also seek to expand consumer loans, including
home equity loan originations. Finally, depending upon market conditions,
management may implement leverage strategies to enhance income. Such strategies
would be to increase borrowings and invest the borrowed funds in secured
investments to enhance income from the spread between the cost of the borrowed
funds and the investment yield.

MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS

          The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates, while
not subjecting the Bank to undue credit or investment risk. The Bank monitors
its interest rate risk as such risk relates to its operating strategies. The
Bank's Board of Directors has established an Asset/Liability Committee,
responsible for reviewing its asset/liability policies and interest rate risk
position, which meets on a regular basis, and reports trends and interest rate
risk position to the 

                                       29
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Bank. See "Risk Factors--Sensitivity to Changes in Interest Rates."

          In recent years, the Bank has become subject to increasing risk in the
event interest rates begin to rise due to the substantial levels of fixed-rate
loans the Bank has been originating due to high customer demand for such
products in the Bank's primary market area. As discussed above, the Bank has
sought to offset the interest rate risk associated with originating primarily
fixed-rate loans in a low interest rate environment by investing in short-term
U.S. Treasury and agency obligations to enable the Bank to reinvest relatively
quickly in higher yielding investments if interest rates rise. In the future,
depending upon market conditions, the Bank intends to seek opportunities to
increase its investment in short-term adjustable rate mortgage-backed securities
and may evaluate opportunities to sell long-term fixed-rate loans in the
secondary market. Currently, management believes that its high capital and level
of liquidity coupled with low operating expenses would enable the Bank to
continue operating profitably in the event of a rapid rise in interest rates, as
it would be positioned to invest in higher yielding investments to offset the
negative impact its high fixed-rate loan portfolio would have on the Bank's
earnings; however, depending upon the magnitude of any change in interest rates,
the Bank may not be able to react quickly enough to reinvest such funds and
therefore may not be able to continue to be profitable following a significant
increase in rates. The Bank may also increase borrowings which would further
enable it to invest in higher yielding instruments in an increasing rate
environment.

          Gap Analysis. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At June 30, 1998, the Bank's cumulative one year interest rate gap
(which is the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year) as a percentage of total assets, was negative 35.53%.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of rising
interest rates, an institution with a negative gap position would be in a worse
position to invest in higher yielding assets as compared to an institution with
a positive gap position which, consequently, may result in the cost of its
interest-bearing liabilities increasing at a rate faster than its yield on
interest-earning assets than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap position would tend
to have its interest-bearing liabilities repricing downward at a faster rate
than its interest-earning assets as compared to an institution with a positive
gap which, consequently, may tend to positively affect the growth of its net
interest income.

          The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "Gap Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 1998, on the basis of contractual maturities, and scheduled rate
adjustments within a one year period and subsequent selected time intervals. The
loan amounts in the table reflect principal balances expected to be redeployed
and/or repriced as a result of contractual amortization of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Mortgage-backed securities were assumed to prepay at 30%
annually. Savings and certificate accounts were assumed to decay at 20%, 20%,
20%, 20%, 20% and 0%, and money market savings accounts were assumed to decay at
50%, 25%, 25%, 0%, 0% and 0%, for the periods of one year or less, more than one
year to two years, more than two years to three years, more than three years to
four years, more than four years to five years, and more than five years,
respectively. These assumptions are generally based on the FDIC's deposit decay
guidelines and the Bank's historical experience. Prepayment and deposit decay
rates can have a significant impact on the Bank's estimated gap. While the Bank
believes such assumptions to be reasonable, there can be no assurance that
assumed prepayment rates and decay rates 

                                       30
will approximate actual future loan prepayment and deposit withdrawal activity.
See "Business of the Bank -- Lending Activities," "-- Securities Investment
Activities" and "-- Sources of Funds."
MORE                               MORE                                  
                                                       THAN        MORE        MORE       THAN
                                                      1 YEAR       THAN        THAN      4 YEARS      MORE
                                          1 YEAR        TO      2 YEARS TO  3 YEARS TO      TO        THAN       TOTAL
                                          OR LESS    2 YEARS     3 YEARS     4 YEARS     5 YEARS     5 YEARS     AMOUNT
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
                                                                      (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
   Mortgage loans(1)....................   $27,846    $136,398   $   4,395     $ 4,459     $ 6,596    $245,455  $425,149
   Consumer and other loans.............     3,791       1,282       1,122       1,893       1,085          --     9,173
   Mortgage-backed and related
     securities.........................       357         357         357         119          --          --     1,190
   Overnight and short term
      investments.......................     8,248          --          --          --          --          --     8,248
   Investments and interest-
      earning deposits(2)...............    19,012       3,535       3,307       2,305          --       6,308    34,467
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
      Total interest-earning assets.....  $ 59,254    $141,572   $   9,181    $  8,776    $  7,681    $251,763  $478,227
                                         ========== =========== =========== ========== =========== ===========  ========

INTEREST-BEARING LIABILITIES:
   Money market deposit accounts
      and other transaction accounts....    22,810      11,406      11,406          --          --          --    45,622
   Savings accounts.....................     7,563       7,563       7,564       7,564       7,564          --    37,818
   Certificate accounts.................   196,666      48,743      23,783       8,988      12,099          --   290,279
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
Total interest-bearing deposits.........   227,039      67,712      42,753      16,552      19,663          --   350,908
   FHLB advances........................        --       3,000          --          --       5,000          --     8,000
                                         ---------- ----------- ----------- ---------- ----------- -----------  --------
   Total interest-bearing liabilities...  $227,039  $   70,712   $  42,753  $   16,552  $   24,663 $        --  $381,722
                                         ========== =========== =========== ========== =========== ===========  ========
Interest sensitivity gap................ $(167,785) $   70,860  $ (33,572)  $   (7,776) $  (16,982)   $251,763  $ 96,506
                                         ========== =========== =========== ========== =========== ===========  ========
Cumulative interest-rate
  sensitivity gap....................... $(167,785) $  (96,925) $ (130,497) $ (138,273) $ (155,255)  $  96,508
                                         ========== ==========  ==========  ==========  ==========   =========
Cumulative interest-rate
sensitivity gap as a percentage of
  total assets..........................    (35.53)%    (20.52)%    (27.63)%    (29.28)%    (32.87)%    20.43%
Cumulative interest-rate gap as
  a percentage of total
  interest-earning assets...............    (35.08)%    (20.27)%    (27.29)%    (28.91)%    (32.46)%    20.18%
Cumulative interest-earning
  assets as a percentage of
  cumulative interest-bearing
   liabilities..........................    (43.96)%    (25.39)%    (34.19)%    (36.22)%    (40.67)%    25.28%
_______________________________
(1)  Excludes nonaccrual loans.

(2)  Includes investment securities available-for-sale and stock in 
     FHLB-Atlanta.

          Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react to different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.

                                       31
NET PORTFOLIO VALUE. As part of its interest rate risk analysis, the
Bank uses an interest rate sensitivity model which generates estimates of the
change in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios and which is prepared by the OTS on a quarterly basis. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation--Federal Savings Institution Regulation." The following table sets
forth the Bank's NPV as of June 30, 1998 (the latest NPV analysis prepared by
the OTS), as calculated by the OTS.
CHANGE IN INTEREST RATES IN                                           NPV AS % OF PORTFOLIO         
     BASIS POINTS (RATE SHOCK)             NET PORTFOLIO VALUE                VALUE OF ASSETS            
     ---------------------------   ------------------------------------   -----------------------      
                                                                             NPV                       
                                     AMOUNT     $ CHANGE     % CHANGE       RATIO      CHANGE(1)        
                                   ----------  -----------  -----------   ----------  -----------      
                                           (DOLLARS IN THOUSANDS)
+400.......................    $39,029    $(42,383)     (52.06)%        9.25%      (803)      
      +300.......................     50,125     (31,287)     (38.43)        11.53       (574)      
      +200.......................     61,264     (20,148)     (24.75)        13.69       (358)      
      +100.......................     72,073      (9,339)     (11.47)        15.66       (161)      
     Static......................     81,412          --          --         17.27         --       
     --100.......................     88,138       6,726        8.26         18.35        108       
     --200.......................     91,203       9,791       12.03         18.75        148       
     --300.......................     94,588      13,176       16.18         19.19        192       
     --400.......................     99,342      17,930       22.02         19.84        257
_____________________
(1)   Expressed in basis points.

          As is the case with the Gap Table, certain shortcomings are inherent
in the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.

ANALYSIS OF NET INTEREST INCOME

          Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.

          AVERAGE BALANCE SHEETS. The following tables set forth certain
information relating to the Bank at and for the six months ended June 30, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.

                                       32
FOR THE SIX MONTHS ENDED JUNE 30,               
                                                                     ------------------------------------------------------------- 
                                                   AT JUNE 30, 1998               1998                          1997               
                                                  ------------------ ----------------------------- -------------------------------
                                                                                           AVERAGE                       AVERAGE   
                                                              YIELD/   AVERAGE              YIELD/   AVERAGE              YIELD/   
                                                   BALANCE     COST    BALANCE   INTEREST   COST     BALANCE    INTEREST   COST    
                                                  ---------- ------- ----------  --------- ------- ------------ -------- --------- 
                                                                              (DOLLARS IN THOUSANDS)
ASSETS:                                                                                                                            
  Interest-earning assets:                                                                                                         
    Mortgage loans, net.........................   $406,890    7.68%   $402,658   $15,621    7.76%   $397,809   $15,814     7.96%
    Consumer and other loans, net...............      9,096    8.42       8,899       383    8.60       8,256       330     8.00
    Mortgage-backed and related securities......      1,190    9.71       1,243       103   16.58       1,438       118    16.40
    Overnight and short-term deposits...........      9,031    4.71      13,848       329    4.76      12,970       294     4.54
    Investment securities(1)....................     34,467    4.96      34,234       956    5.58      35,158     1,030     5.86
                                                   --------   -----    --------   -------   -----    --------   -------    -----
        Total interest-earning assets...........    460,674    7.44%    460,882   $17,392    7.54%    455,634   $17,586     7.72%
                                                              -----               -------   -----               -------    -----
  Noninterest-earning assets....................     11,606              13,127                        13,186              
                                                   --------            --------                      --------              
        Total assets............................   $472,280            $474,009                      $468,817              
                                                   ========            ========                      ========              
LIABILITIES AND EQUITY:                                                                                                    
  Interest-bearing liabilities:                                                                                            
    Transaction accounts........................   $  2,481    0.32%   $  3,524   $     5    0.28%   $  3,113   $     4     0.26%
    Savings accounts............................     80,959    3.25      83,136     1,320    3.18      88,135     1,417     3.22
    Certificates of deposit.....................    290,279    5.71     288,687     8,050    5.58     283,856     7,841     5.52
                                                   --------   -----    --------   -------   -----    --------   -------    -----
         Total deposits.........................    373,719    5.16     375,347     9,375    5.00     375,104     9,262     4.94
    FHLB advances...............................      8,000    6.19       8,000       245    6.12      10,000       306     6.12
                                                   --------   -----    --------   -------   -----    --------   -------    -----
         Total interest-bearing liabilities.....    381,719    5.16%    383,347   $ 9,620    5.02%    385,104   $ 9,568     4.96%
                                                              -----               -------   -----               -------    -----
  Other liabilities.............................      7,061               8,902                         8,839              
                                                   --------            --------                      --------              
         Total liabilities......................    388,780             392,249                       393,944              
  Equity capital................................     83,500              81,760                        74,874              
                                                   --------            --------                      --------              
         Total liabilities and equity capital...   $472,280            $474,009                      $468,817              
                                                   ========            ========                      ========              
  Net interest income/Net interest                                                                                         
    rate spread(2)..............................               2.28%              $ 7,772    2.52%              $ 8,018    2.76%
                                                               ====               =======    ====               =======    ====
  Net earning assets/Net interest margin(3).....   $ 38,955    3.42%   $ 77,535              3.36%    $70,527              3.52%
                                                   ========    ====    ========              ====     =======              ====
  Ratio of interest-earning assets to                                                                          
   interest-bearing liabilities.................     120.68%             120.23%                       118.31% 
                                                     ======              ======                        ======
_________________________
(1) Includes investment securities available-for-sale and stock in FHLB-Atlanta.

(2) Net interest rate spread represents the difference between the weighted
    average yield on interest-earning assets and the weighted average cost of
    interest-bearing liabilities.

(3) Net interest margin represents net interest income as a percentage of
    average interest-earning assets.

                                       33
FOR THE YEARS ENDED DECEMBER 31,                            
                                       ---------------------------------------------------------------------------------------------
                                                  1997                               1996                            1995         
                                       ------------------------------   ------------------------------  ----------------------------
                                                             AVERAGE                           AVERAGE                       AVERAGE
                                        AVERAGE               YIELD/     AVERAGE                YIELD/   AVERAGE              YIELD/
                                        BALANCE    INTEREST    COST      BALANCE    INTEREST     COST    BALANCE   INTEREST    COST
                                       ---------- ----------  -------   ---------- ---------- --------- --------- ---------- -------
                                                                        (DOLLARS IN THOUSANDS)
ASSETS:                                                                                                                            
  Interest-earning assets:                                                                                                         
    Mortgage loans, net...............  $399,924   $ 31,820     7.96%    $388,751   $ 31,402     8.08%   $368,361  $ 30,832    8.37%
    Consumer and other loans, net.....     8,495        696     8.19        9,271        543     5.86      10,703       611    5.71
    Mortgage-backed and related                                                                                                  
      securities......................     1,396        237    16.98        1,652        277    16.77       2,009       320   15.93 
    Overnight and short-term                                                                                                     
      deposits........................    13,076        623     4.76       14,685        661     4.50      12,304       659    5.36 
    Investment securities(1)..........    34,851      2,069     5.94       40,868      2,347     5.74      53,907     3,154    5.85
                                        --------   --------    -----     --------   --------    -----    --------  --------   -----
        Total interest-earning                                                                                                    
          assets......................   457,742   $ 35,445     7.74%     455,226   $ 35,230     7.74%    447,283  $ 35,576    7.95%
                                                   --------    -----                --------    -----              --------   -----
  Noninterest-earning assets..........    13,052                           13,724                          11,649         
                                        --------                         --------                        --------        
        Total assets..................  $470,794                         $468,950                        $458,932        
                                        ========                         ========                        ========        
                                                                                                                                  
LIABILITIES AND EQUITY:                                                                                                           
  Interest-bearing liabilities:                                                                                                   
    Transaction accounts..............  $  3,329   $      7     0.21%    $  3,609   $      6     0.17%   $    891  $      8    0.90%
    Savings accounts..................    86,907      2,818     3.24       94,856      2,977     3.14     101,574     3,329    3.28
    Certificates of deposit...........   285,410     15,991     5.60      283,944     16,093     5.67     275,907    15,095    5.47
                                        --------   --------     ----     --------   --------     ----    --------  --------    ----
      Total deposits..................   375,646     18,816     5.01      382,409     19,076     4.99     378,372    18,432    4.87
    FHLB advances and other borrowings     9,667        602     6.23        7,417        459     6.19       8,000       565    7.06
                                        --------   --------     ----     --------   --------     ----    --------  --------    ---- 
      Total interest-bearing             
        liabilities...................   385,313   $ 19,418     5.04%     389,826   $ 19,535     5.01%    386,372  $ 18,997    4.92%
                                                   --------    -----                --------    -----              --------   -----
    Other liabilities.................     8,897                            7,719                           7,062
                                        --------                         --------                        --------
      Total liabilities...............   394,210                          397,545                         393,434 
    Equity capital....................    76,584                           71,405                          65,498 
                                        --------                         --------                        --------         
      Total liabilities and equity       
        capital.......................  $470,794                         $468,950                        $458,932
                                        ========                         ========                        ========                 
  Net interest income/Net interest 
    rate spread(2)....................             $ 16,027     2.70%               $ 15,695     2.73%             $ 16,579    3.03%
                                                   ========     ====                ========     ====              ========    ====
  Net earning assets/Net interest 
    margin(3).........................  $ 72,429                3.50%    $ 65,400                3.45%   $ 60,916              3.71%
                                        ========                ====     ========                ====    ========              ====
  Ratio of interest-earning assets
    to interest-bearing liabilities...    118.80%                          116.78%                         115.77%             
                                         =======                          =======                         =======
-----------
(1)  Includes investment securities available-for-sale and stock in 
     FHLB-Atlanta.
(2)  Net interest rate spread represents the difference between the weighted 
     average yield on interest-earning assets and the weighted average cost of  
     interest-bearing liabilities.
(3)  Net interest margin represents net interest income as a percentage of 
     average interest-earning assets.

                                      34
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
SIX MONTHS ENDED                  YEAR ENDED                   YEAR ENDED
                                               JUNE 30, 1998                DECEMBER 31, 1997             DECEMBER 31, 1996
                                                COMPARED TO                    COMPARED TO                   COMPARED TO
                                              SIX MONTHS ENDED                  YEAR ENDED                    YEAR ENDED
                                                JUNE 30, 1997                DECEMBER 31, 1996             DECEMBER 31, 1995
                                        ------------------------------  ----------------------------  ----------------------------
                                        INCREASE (DECREASE)             INCREASE (DECREASE)           INCREASE (DECREASE)
                                             DUE TO                           DUE TO                        DUE TO
                                        -------------------             -------------------           -------------------
                                         VOLUME      RATE       NET      VOLUME      RATE      NET     VOLUME      RATE      NET
                                        --------   --------   --------  --------   --------  -------  --------   --------  -------
                                                                           (IN THOUSANDS)
INTEREST-EARNING ASSETS:
  Mortgage loans, net................    $ 386      $(579)    $(193)     $ 903      $(485)    $ 418    $1,707    $(1,137)   $ 570   
  Consumer and other loans...........       51          2        53        (45)       198       153       (82)        14      (68)  
  Mortgage-backed and related                                                                                                       
    securities.......................      (32)        17       (15)       (43)         3       (40)      (57)        14      (43)  
  Overnight and short term                                                                                                          
    deposits.........................       40         (5)       35        (72)        34       (38)      128       (126)       2   
  Investment and interest-earning                                                                                                   
    deposits.........................      (54)       (20)      (74)       345         67      (278)     (763)       (44)    (807)  
                                         -----      -----     -----      -----      -----     -----    ------    -------    -----   
      Total interest-earning                                                                                                        
        assets.......................    $ 391      $(585)    $(194)     $ 397      $(182)    $ 215       933    $(1,279)   $(346)  
                                         =====      =====     =====      =====      =====     =====    ======    =======    =====   
                                                                                                                                    
INTEREST-BEARING LIABILITIES:                                                                                                       
  Transaction accounts...............    $   1      $  --     $   1      $  --      $   1     $   1    $   24    $   (26)   $  (2)  
  Savings accounts...................     (161)        64       (97)      (250)        91      (159)     (220)      (132)    (352)  
  Certificate of deposits............      267        (58)      209         83       (185)     (102)      440        558      998   
      Total interest-bearing                                                                                                        
        deposits.....................      107          6       113       (167)       (93)     (260)      244        400      644   
  FHLB advances......................     (122)        61       (61)       139          4       143       (41)       (65)    (106)  
                                         -----      -----     -----      -----      -----     -----    ------    -------    -----   
      Total interest-bearing                                                                                                        
        liabilities..................    $ (16)     $  68     $  52      $ (28)     $ (89)    $(117)   $  203    $   335    $ 538   
                                         =====      =====     =====       =====      =====    =====    ======    =======    =====
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997

     Assets totalled $472.3 million at June 30, 1998, an increase of $360,000,
or .08% from total assets of $471.9 million at December 31, 1997. The increase
in assets during the six month period was due primarily to a $3.0 million
increase in the Bank's loan portfolio, which was substantially offset by
reductions in cash and cash equivalents of $2.3 million, investment securities
of $223,000 and $101,000 in mortgage-backed securities.

     LOANS. The increase in total loans was primarily due to increases in real
estate mortgage and consumer installment loans, which were partially offset by a
decrease in non-residential real estate and an increase in undisbursed loan
funds. Although total mortgage loans increased $5.9 million, the level of total
real estate mortgage loans, as a percentage of total loans, remained relatively
stable at 97.90%, up slightly from 97.93% at December 31, 1997. The growth in
the Bank's real estate mortgage loan portfolio is primarily a result of the
Bank's decision to continue to originate and retain real estate loans in its
portfolio. Real estate construction loans increased from $16.0 million (3.72% of
the portfolio) at December 31, 1997 to $20.0 million (4.57% of the portfolio) at
June 30, 1998. Non-residential real estate loans decreased by $5.6 million from
$41.0 million at December 31, 1997 to $35.3 million at June 30, 1998. This was
the result of large loan payoffs in this portfolio. Undisbursed loan funds
increased from $5.0 million at December 31, 1997 to $8.7 million at June 30,
1998. This was due to the increase in these balances awaiting funding of
construction loans.

     ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$5.5 million at December 31, 1997 to $5.6 million at June 30, 1998, an increase
of $161,000. This increase reflects the economic stability in the market area as
well as improvement in net charged off loans. The adequacy of the allowance for
loan losses is evaluated monthly by management based upon a review of
significant loans, with particular emphasis on nonperforming and delinquent
loans that management believes warrant special attention. At June 30, 1998, the

                                       35
allowance for loan losses provided coverage of 174.85% of total nonperforming
loans, down slightly from 194.60% at December 31, 1997. The balance of the
allowance is maintained at a level which is, in management's judgment,
representative of the amount of risk inherent in the loan portfolio. See
"Business -- Allowance for Loan Losses."

     INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.3 million and $31.2 million, respectively,
at December 31, 1997 to $1.2 million and $30.9 million, respectively, at 
June 30, 1998. These decreases were primarily due to redemptions and principal
payments of these securities totalling approximately $4.1 million during the six
months ended June 30, 1998. These repayments were offset by purchases of
securities totalling $3.7 million. Currently, management intends to continue
allowing its investment securities to mature and paydown and to reinvest the
proceeds primarily in the securities classified by the Bank as available-for-
sale and in new loans.

     DEPOSITS. Total deposits decreased $3.4 million, or 0.9%, from $377.1
million at December 31, 1997 to $373.7 million at June 30, 1998. While time
deposits increased $1.0 million, or 0.27%, during the period, savings accounts
decreased $900,000, or 0.24%, money market accounts decreased $2.7 million, or
0.72%, and non-interest-bearing accounts decreased $800,000, or 0.21%.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996

     Assets totalled $471.9 million at December 31, 1997, up $2.0 million, or
0.43%, from $469.9 million at December 31, 1996. Most of the increase was
concentrated in the loan portfolio which increased $7.9 million for the year
ending December 31, 1997 to $413.0 million, which increase was partially offset
by a reduction in cash and cash equivalents of $4.7 million. Total deposits
increased by $1.4 million, from $375.7 million at December 31, 1996 to $377.1 at
December 31, 1997. FHLB advances decreased $7.0 million from $15.0 million at
December 31, 1996 to $8.0 million at December 31, 1997.

     LOANS.  The increase in total loans was primarily due to increases in non-
residential real estate loans and consumer loans, which were partially offset by
decreases in the Bank's construction and development loans.  Although, total
real estate mortgage loans increased $2.9 million, or 0.67%, the level of total
mortgage loans as a percentage of total loans decreased from 98.12% at 
December 31, 1996 to 97.93% at December 31, 1997 due to the increase in consumer
loans.  Real estate construction loans declined from $21.3 million, or 4.98% of
the portfolio, at December 31, 1996 to $16.0 million, or 3.72% of the portfolio,
at December 31, 1997.  The decline in real estate construction loans resulted
from large payoffs for this type of borrowing.

     ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses decreased by
$65,000 to $5.5 million at December 31, 1997 from December 31, 1996. This slight
reduction reflects the economic stability in the market area as well as
improvements in net charged off loans. The adequacy of the allowance for loan
losses is evaluated monthly by management based upon a review of significant
loans, with particular emphasis on nonperforming and delinquent loans that
management believes warrant special attention. At December 31, 1997, the
allowance for loan losses provided coverage of 194.60% of total nonperforming
loans, up from 63.33% at December 31, 1996.

     INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.5 million and $32.0 million, respectively,
at December 31, 1996 to $1.3 million and $31.2 million, respectively, at
December 31, 1997. These decreases were driven by redemptions and principal
payments of these securities, totalling approximately $3.0 million during the
year ended December 31, 1997. The repayments were offset by purchases of
securities totalling $2.8 million.

     DEPOSITS. Total deposits increased $1.5 million, or 0.40%, from $375.7
million at December 31, 1996 to $377.1 million at December 31, 1997. Of this
total increase, certificates of deposit increased $6.4 million, or 2.2%, and 
non-interest-bearing accounts increased $815,000. These increases were partially
offset by decreases in money market accounts of $4.8 million and passbook
accounts of $952,000. FHLB advances decreased from $15.0 million at December 31,
1996 to $8.0 million at December 31, 1997, which was funded through net cash
provided by operations.

                                       36
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997

     GENERAL. Net income for the six months ended June 30, 1998 increased
$61,000 compared to the six months ended June 30, 1997. This increase was
primarily a result of higher non-interest income, which increased $492,000
during the period. This increased income was partially offset by a decrease of
$246,000 in net interest income, an increase in the provision for loan losses of
$28,000, an increase in non-interest expense of $92,000 and an increase of
income tax expense of $65,000. The Bank's return on average assets (ROA) was
1.40% for the six months ended June 30, 1998, up from 1.39% for the same period
in 1997. The Bank's return on average equity (ROE) was 8.12% for the six months
ended June 30, 1998, down from 8.71% for the six months ended June 30, 1997.

     INTEREST INCOME. Interest income for the six months ended June 30, 1998
decreased $194,000 to $17.4 million, from $17.6 million for the comparable
period in 1997 primarily due to a decrease in the rates on loans originated. The
average balance of mortgage loans increased $4.8 million, as compared to the
same period in 1997; however, the average yield on mortgage loans decreased from
7.96% to 7.76%. The decrease in interest income was further impacted by a
decrease in interest on investment securities of $54,000.

     INTEREST EXPENSE. Interest expense increased by $52,000 during the six
months ended June 30, 1998 to $9.6 million. Interest paid on certificates of
deposit for the six months ended June 30, 1998 was $8.0 million, up from $7.8
million in 1997, which was due primarily to an increase in the average balance
of time deposits, from $283.9 million for the six months ended June 30, 1997 to
$288.7 million for the six months ended June 30, 1998.

     NET INTEREST INCOME. Net interest income for the six months ended June 30,
1998 decreased $246,000 to $7.8 million from $8.0 million for the six months
ended June 30, 1997, which was primarily due to a decrease in the yield on
average interest-earning assets from 7.72% for the six months ended June 30,
1997 to 7.54% for the same period in 1998, resulting in a decrease in interest
income of approximately $194,000, which was partially offset by an increase in
average interest-earning assets of $5.2 million and a decrease in average
interest-bearing liabilities of $1.8 million during the six months ended June
30, 1998 compared to the same period in 1997. The Bank's net interest margin for
the six months ended June 30, 1998 was 3.42%, down from 3.52% for the six months
ended June 30, 1997. The yield on average earning assets decreased from 7.72% to
7.54%, while the rate paid on interest-bearing liabilities increased slightly
from 4.96% to 5.02% for the six months ended June 30, 1997 and June 30, 1998,
respectively. As a result, the Bank's interest rate spread decreased from 2.76%
to 2.52%.

     PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$241,000 for the six months ended June 30, 1997 to $269,000 for the six months
ended June 30, 1998. This increase is primarily the result of increases in
specific reserves for commercial mortgage loans during the six months ended June
30, 1998 due to several individual lending relationships in addition to
continued growth in the Bank's loan portfolio. Although management believes the
current level of provision for loan losses is adequate, there can be no
assurance that future losses will not exceed estimated amounts or that the
provision for loan losses will not increase in future periods. See "Business of
the Bank -- Allowance for Loan Losses.

     NONINTEREST INCOME. Total noninterest income increased $492,000 for the six
months ended June 30, 1998 as compared to the same period in 1997. Noninterest
income is composed primarily of loan origination and servicing fees, and deposit
account service charges. Income from loan origination fees increased from
$457,000 for the six months ended June 30, 1997 to $902,000 for the six months
ended June 30, 1998, which is primarily attributable to the overall increase in
the Bank's loan originations during this period. These fees are the income
recognized as an offset to the amount of loan origination costs incurred by the
Bank. Origination fees in excess of these costs are deferred and recognized as 
income over the life of the loan. This increase was partially offset by 
decreases in construction loan fees and late charges.

     NONINTEREST EXPENSE. Total noninterest expense increased by $92,000 to $3.3
million for the six months ended June 30, 1998, up from $3.2 million for the
same period in 1997. Decreases in compensation and benefits of $145,000 were
offset by increases in Federal examination fees of $43,000, and other expenses
totalling $194,000. The decrease in compensation expense is directly related to
the Bank's attempts to increase the efficiencies in branch

                                       37
and other operations. The increase in other expenses is the result of increased
legal and accounting fees related to litigation involving an employment matter
which was settled in 1998.

     INCOME TAXES. Income tax expense increased by $65,000 to $2.2 million for
the six months ended June 30, 1998. The increase is primarily the result of the
increase of $126,000 in income before income tax expense to $5.5 million in 1998
from $5.4 million in 1997.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

     GENERAL. Net income for the year ended December 31, 1997 increased by 
$1.8 million, or 39%, to $6.4 million for the year ended December 31, 1997
compared to $4.6 million for the year ended December 31, 1996. Net interest
income for the years ended December 31, 1997 and 1996 was $16.0 million and
$15.7 million, respectively, due to an increase of $215,000 in interest income
for 1997 coupled by a decrease in interest expense of $117,000. Additionally,
noninterest income increased by $324,000 in 1997. In addition, noninterest
expense decreased by $2.8 million to $7.0 million for the year ended December
31, 1997 compared to $9.8 million for the prior year, reflecting the one-time
special SAIF assessment paid in 1996. The Bank's return on average assets
increased from 0.98% for the year ended December 31, 1996 to 1.36% for the year
ended December 31, 1997. The Bank's return on average equity also increased from
6.42% for the year ended December 31, 1996 to 8.39% for the year ended 
December 31, 1997.

     INTEREST INCOME. Interest income for the year ended December 31, 1997 was
$35.4 million, up from $35.2 million for the same period in 1996. The largest
component of interest income, as well as the increase from 1996 to 1997, is
interest on loans. Interest on loans increased from $31.9 million for the year
ended December 31, 1996 to $32.5 million for the year ended December 31, 1997.
This increase of $600,000 is primarily the result of volume increases. The
average balance of loans increased $10.4 million to $408.4 million, while the
yield on mortgage loans decreased 7 basis points from 8.08% to 7.96%, partially
offsetting the increase due to volume. The increase in interest on loans was
offset by a decrease in interest on investment securities. Interest income on
investment securities decreased $356,000. Substantially all of the decrease in
interest income on investment securities is attributed to lower volume. The
average balance of investment securities decreased from $40.9 million for the
year ended December 31, 1996 to $34.9 million for the year ended December 31,
1997.

     INTEREST EXPENSE. Interest expense decreased during the year ended 
December 31, 1997 to $19.4 million, from $19.5 million for the comparable period
in 1996. Substantially all of the Bank's interest expense is from interest-
bearing deposits. The largest category of interest-bearing deposits is
certificates of deposits. Interest on certificates of deposits for the year
ended December 31, 1997 was $16.0 million, down $88,000 from $16.0 million in
1996. This decrease is the result of an increase in the average balance of
certificates of deposits, from $283.9 million in 1996 to $285.4 million in 1997,
offset by a decrease of 7 basis points in the rates paid on these deposits from
5.67% in 1996 to 5.60% in 1997. Interest expense on savings accounts decreased
$159,000, from $3.0 million for the year ended December 31, 1996 to $2.8 million
for the year ended December 31, 1997. This decrease is attributable to a
decrease in the average balance of savings accounts, which decreased $7.9
million during 1997, as well as an increase of 10 basis points in the rates paid
on these savings accounts, from 3.14% to 3.24%. Interest expense on FHLB
advances increased $143,000 from $459,000 for the year ended December 31, 1996
to $602,000 for the year ended December 31, 1997. This increase is primarily
attributable to the increase in average advances outstanding from $7.4 million
for the year ended December 31, 1996 to $9.7 million for the year ended 
December 31, 1997. This decrease was slightly offset by a 4 basis point increase
in the average cost of FHLB advances.

     NET INTEREST INCOME.  Net interest income for the year ended December 31,
1997 was $16.0 million, compared to $15.7 million for the year ended 
December 31, 1996. The increase was primarily due to a decrease in average
interest-bearing liabilities of $4.5 million in conjunction with an increase in
average interest-earning assets of $2.5 million. The yield on average interest-
earning assets remained stable, while the average yield on interest-bearing
liabilities increased from 5.01% for the year ended December 31, 1996 to 5.04%
for the year ended December 31, 1997.

                                       38
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$325,000 for the year ended December 31, 1996 to $375,000 for the year ended
December 31, 1997. This increase is primarily the result of increases in net
charge-offs from $263,000 for the year ended December 31, 1996 to $440,000 for
the year ended December 31, 1997. The average impairment of loans decreased from
$11.9 million for the year ended December 31, 1996 to $9.8 million for the year
ended December 31, 1997, mitigating the need for additional provisions for loan
losses. See "Business of the Bank -- Allowance for Loan Losses."

     NONINTEREST INCOME. Total noninterest income increased $324,000 to 
$1.7 million for the year ended December 31, 1997, compared to $1.4 million for
the same period in 1996. Income from loan origination fees, loan servicing and
service charges increased $351,000 from $1.2 million for the year ended 
December 31, 1996 to $1.6 million for the year ended December 31, 1997. This
increase is attributed to the overall increase in the Bank's loan demand during
this time period. Other income decreased $27,000 to $142,000 for the year ended
December 31, 1997, compared to $169,000 for the same period in 1996. This
decrease was primarily the result of a decline in income recognized on the
assets funding the management deferred compensation plan of $83,000, partially
offset by increases in credit life insurance premiums of $19,000.

     NONINTEREST EXPENSE. Total noninterest expense decreased $2.8 million to
$7.0 million for the year ended December 31, 1997, down from $9.8 million for
the comparable period in 1996. Decreases in compensation and benefits of
$223,000, occupancy and equipment of $45,000, and federal deposit insurance
premium of $3.1 million were offset by an increase in the net cost of foreclosed
real estate operations of $33,000 and increases in other expenses of $488,000.

     The decrease in compensation expense is directly related to the Bank's
efforts to increase efficiencies in branch-banking and other operations. The
decrease in occupancy and equipment expenses reflects the reduction in
depreciation expense for fully depreciated assets. No significant acquisitions
of hardware or software were made in the year ended December 31, 1997. The
increase in the net cost of foreclosed real estate operations is the result of
several factors. During the year ended December 31, 1997, the Bank experienced a
slight narrowing of the cost of foreclosed property and the realized sale price.
At the same time, the condition of foreclosed property required additional
reserves for deferred maintenance, offset by decreased expenses in preparing
foreclosed properties for sale. The resulting net effect increased these
expenses by $33,000 over those experienced for the year ended December 31, 1996.
The decrease in federal deposit premiums was due primarily to the special SAIF
assessment of $2.5 million paid in 1996. The increase in other expenses is the
result of increased legal and accounting fees related to litigation regarding an
employment matter. This litigation has been settled and no further expenses will
be incurred.

     INCOME TAXES. Income tax expense increased from $2.4 million for the year
ended December 31, 1996 to $3.9 million for the comparable period in 1997. The
increase is primarily the result of a change in deferred income tax from
$542,000 for the year ended December 31, 1996 to $38,000 for the year ended
December 31, 1997, offset by additional income before income tax expense of $3.4
million in 1997 compared to 1996.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

     GENERAL. Net income for the year ended December 31, 1996 decreased by $2.1
million to $4.6 million from $6.7 million for the year ended December 31, 1995.
This increase was primarily a result of an increase in interest expense of
$538,000 and an increase in noninterest expense of $3.1 million. The substantial
increase in noninterest expense was primarily due to the $2.5 million SAIF
assessment paid by the Bank in 1996.

     INTEREST INCOME. Interest income for the year ended December 31, 1996
decreased $346,000 to $35.2 million, from $35.6 million for the same period in
1995. The largest component of interest income is interest on loans. Interest on
loans increased by $502,000 from $31.4 million for the year ended December 31,
1995 to $31.9 million for the year ended December 31, 1996. Interest income
increased primarily due to an increase in the average balance of interest-
earning assets, the effect of which was partially offset by a decrease in the
average yield on such assets. The average balance of mortgage loans increased
$20.4 million to $388.7 million, while the average yield on mortgage loans
decreased 29 basis points from 8.37% to 8.08%. This decrease in the yield earned
on mortgage loans was driven primarily by decreases in the rates on the fixed
rate mortgage portfolio as refinances of higher rate mortgages

                                       39
were experienced. See "Business of the Bank -- Mortgage Lending." The effect of
the decrease in interest on mortgage loans was further compounded by decreases
in interest on investment securities coupled with a decrease in the balance of
investment securities. Interest income on investment securities declined
$807,000. In addition, the average balance of such securities declined by $13.0
million. In addition, the average balance of mortgage-backed securities
decreased from $2.0 million for the year ended December 31, 1995 to $1.7 million
for the year ended December 31, 1996. This decrease was partially offset by an
increase in the average yield on mortgage-backed securities from 15.9% to 16.8%.

     INTEREST EXPENSE. Interest expense increased during the year ended December
31, 1996 by $538,000 to $19.5 million from $19.0 million for the comparable
period in 1995. The largest category of interest-bearing deposits is
certificates of deposit. Interest on certificates of deposits for the year ended
December 31, 1996 was $16.1 million, up $1.0 million from the $15.1 million in
1995. This increase is the result of an increase in the average balance of
certificates of deposit, from $275.9 million in 1995 to $283.9 million in 1996,
combined with an increase of 20 basis points in the rates paid on these deposits
from 5.47% in 1995 to 5.67% in 1996. Interest on savings accounts decreased
$352,000 from $3.3 million in 1995 to $3.0 million in 1996. This decrease
resulted almost entirely from a $6.7 million decrease in the average balances of
savings accounts during this period from $101.6 million in 1995 to $94.9 million
in 1996. Interest expense on FHLB advances decreased $108,000 from 1995 to 1996,
which was primarily attributed to lower interest rates during the period.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.

     NET INTEREST INCOME. Net interest income for the year ended December 31,
1996 was $15.7 million, down $900,000 from the year ended December 31, 1995. The
decrease was primarily the result of the effects of a 21 basis point decrease in
the rates earned on earning assets from 7.95% in 1995 to 7.74% in 1996. This
reduction in yield was compounded by the effects of a 9 basis point increase in
the rates paid on average interest-bearing liabilities, from 4.92% in 1995 to
5.01% in 1996. The Bank's net interest margin for the year ended December 31,
1996 was 3.45%, down from 3.71% for the year ended December 31, 1995. The effect
of the changes in rates were partially offset by increases in volume. These
increases were composed of an increase in average interest-earning assets of
$8.0 million, offset by a $3.4 million increase in average interest-bearing
liabilities from $386.4 million for the year ended December 31, 1995 to $389.8
million for the same period in 1996.

     PROVISION FOR LOAN LOSSES. The provision for loan losses of $325,000 for
the year ended December 31, 1996 decreased $87,000 from the $412,000 provision
in the year ended December 31, 1995. This decrease resulted from reduced
chargeoffs of loan balances and an improving economy in the Bank's market area.

     NONINTEREST INCOME. Total noninterest income for the year ended December
31, 1996 was $1.4 million, an increase of $141,000 over the $1.3 million for the
same period in 1995. Income increases from loan origination fees and customer 
service charge increases aggregating $106,000 contributed to the increases in 
noninterest income.

     NONINTEREST EXPENSE. Total noninterest expenses increased $3.1 million to
$9.8 million for the year ended December 31, 1996, up from $6.7 million for the
comparable period in 1995. Increases in compensation and benefits of $347,000,
occupancy and equipment of $154,000, special SAIF assessment of $2.5 million,
and other expenses of $117,000 were partially offset by reductions in net cost
of foreclosed real estate operations of $55,000. The increase in compensation
and benefits is the result of a nonfunded termination agreement with the Bank's
former chief executive officer completed during the year ended December 31,
1996. The increase in occupancy and equipment was the result of transferring
data processing from an in-house system to a service bureau during 1996. The
conversion was completed in mid-year. The increase in the FDIC assessment is the
result of legislation which mandated that all thrift institutions pay a special
SAIF assessment.

     INCOME TAXES. Income tax expense decreased from $4.1 million for the year
ended December 31, 1995 to $2.4 million for the comparable period in 1996. The
decrease is primarily the result of lower net income before income tax expense
of $3.7 million in 1996 compared to 1995 and an increase in deferred taxes of
$104,000.

                                       40
LIQUIDITY AND CAPITAL RESOURCES

     The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.00%. At June 30, 1998 and December 31, 1997, the Bank's liquidity
ratios were 8.58% and 9.58%, respectively. Management's current strategy is to 
maintain liquidity as close as possible to the minimum regulatory requirement
and to invest any excess liquidity in higher yielding interest-earning assets.
The Bank manages its liquidity position and demands for funding primarily by
investing excess funds in short-term investments and utilizing FHLB advances in
periods when the Bank's demands for liquidity exceed funding from deposit
inflows.

     The Bank's most liquid assets are cash and cash equivalents and securities
available for sale. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At June 30, 1998, cash and cash equivalents and securities totalled $41.1
million, or 8.70% of total assets.

     The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1998, the Bank had $8.0 million in
advances outstanding from the FHLB and, at June 30, 1998, had an additional
overall borrowing capacity from the FHLB of $37.0 million. Depending on market
conditions, the pricing of deposit products and FHLB advances, the Bank may
continue to rely on FHLB borrowings to fund asset growth.

     At June 30, 1998, the Bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $36.2 million. The Bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from June 30, 1998, totalled
$196.7 million. Based upon historical experience, management believes the
majority of maturing certificates of deposit will remain with the Bank. In
addition, management of the Bank believes that it can adjust the offering rates
offered on certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the Bank, the Bank would be able to utilize FHLB advances to fund
deposit withdrawals, which would result in an increase in interest expense to
the extent that the average rate paid on such advances exceeds the average rate
paid on deposits of similar duration.

     At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $81.6 million, or 17.28%, of total
adjusted assets, which is above the required level of $7.1 million, or 1.5%;
core capital of $81.6 million, or 17.28%, of total adjusted assets, which is
above the required level of $14.1 million, or 3.00%; and risk-based capital of
$85.1 million, or 30.20%, of risk-weighted assets, which is above the required
level of $22.5 million, or 8.00%. See "Regulatory Capital Compliance."

YEAR 2000 COMPLIANCE

     The Bank has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Bank's data
processing is performed under agreements with a service bureau, consequently the
Bank is very dependent on this service bureau to conduct its business. The Bank
has already contacted the service bureau, as well as each of its other vendors
to request time tables for Year 2000 compliance and expected costs, if any, to
be passed along to the Bank. To date, the Bank has been informed that its
service bureau and other primary service providers anticipate that all
reprogramming efforts will be completed by December 31, 1998, allowing the Bank
adequate time for testing. Certain other vendors have not yet responded,
however, the Bank will pursue other options if it appears that these vendors
will be unable to comply. The Bank believes that its costs related to Year 2000
will be approximately $200,000. Management does not expect these costs to have a
significant impact on its financial position or results of operations. However,
there can be no assurance that the vendors' systems will be Year 2000 compliant,
consequently, the Bank could incur incremental costs to convert to another
vendor.

                                       41
The risks associated with this issue go beyond the Bank's own ability to
solve Year 2000 problems. Should significant commercial customers fail to
address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge offs. In addition, should suppliers of critical
services fail in their efforts to be Year 2000 compliant, it could have
significant adverse financial results for the Bank.

IMPACT OF INFLATION AND CHANGING PRICES

     The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

     REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and displaying comprehensive income and its components within the
financial statements. Comprehensive income is defined in FASB Concepts Statement
6 as the "change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is effective
for fiscal years beginning after December 15, 1997 and its implementation had no
impact on financial conditions or operations.

     DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" which establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. This Statement requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This Statement
is effective for financial statements for periods beginning after December 15,
1997 and its implementation had no impact on financial conditions or operations.

     EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits. This Statement
supersedes FASB Statements No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting
for Postretirement Benefits other than Pensions." This Statement is effective
for fiscal years beginning after December 15, 1997 and its implementation had no
impact on financial conditions or operations.

     ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. This Statement amends FASB Statement No. 52, "Foreign Currency
Translation" to permit special accounting for a hedge of a foreign currency
forecasted transaction with a derivative. It supersedes FASB Statements No. 80,
"Accounting for Futures Contracts," No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." It amends
Statement No. 107, "Disclosures about Fair Value of Financial Instruments" to
include in Statement 107 the disclosure provisions about concentrations of
credit risk from

                                       42
Statement 105. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999 and is not expected to have a material
impact on the Company.

                             BUSINESS OF THE BANK

GENERAL

     The Bank is a community oriented savings association whose principal
business has been and continues to be attracting retail deposits from the
general public in the areas surrounding its branch offices and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans. In recent years,
the Bank has originated primarily fixed-rate one- to four-family loans with
terms of 15 to 30 years. To a lesser extent, the Bank invests in non-residential
real estate loans, including loans to local churches, construction and
development loans, land and land development loans, multi-family loans and
consumer loans. The Bank operates through its four full service banking offices
located in the City of Fredericksburg and Stafford and Spotsylvania Counties,
Virginia. The Bank originates loans for investment. The Bank's revenues are
derived principally from interest on its mortgage loans and, to a lesser extent,
interest on its investments, which generally include short-term U.S. Treasury
bonds and U.S. Government Agency obligations, short-term, highly rated corporate
debt securities and municipal bonds and from loan fee income. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
investments.

MARKET AREA AND COMPETITION

     The Bank is headquartered in Fredericksburg, Virginia and has been, and
intends to continue to be, a community oriented financial institution. The
Bank's primary market area is comprised of the City of Fredericksburg and
Spotsylvania, Stafford and King George Counties, Virginia, which are serviced
through the Bank's main office and three other full service banking offices. The
Bank's main office is located in Fredericksburg, two branch offices are located
in Spotsylvania County and one is in Stafford County. Based on the most recent
information available, the Bank had approximately one-third of the total bank
and thrift deposits in its market area.

     The Bank's primary market area consists principally of suburban and rural
communities with service, wholesale/retail trade, government and manufacturing
serving as the basis of the local economy. Service jobs represent the largest
type of employment in the Bank's primary market area, with jobs in
wholesale/retail trade accounting for the second largest employment sector.
Fredericksburg and surrounding communities are located between Richmond,
Virginia and Washington, D.C. and are easily accessible from Interstate 95, a
major Interstate running north to south along the Eastern seaboard. The easy
accessability to the Fredericksburg area and its close proximity to these large
cities has resulted in the Fredericksburg area being among one of the fastest
growing areas in the country in recent years. Businesses that have moved to the
area in recent years and invested substantial capital into their new locations
include Capital One Financial Corp., Intuit, Inc., Dongsung America, Inc., Mapei
Corporation, Vulcan Materials Company, SEI Birchwood, Inc. and Greenhost, Inc.
In addition, GEICO insurance has significantly expanded its presence in the area
and currently employs over 2,000 people at its Stafford County location.
Management believes that its market area continues to show economic growth with
stable to moderately increasing real estate values.

     The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings, cooperative
and commercial banks and credit unions. In addition, the Bank faces significant
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. The Bank

                                       43
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.

LENDING ACTIVITIES

     LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences. At June 30,
1998, gross loans totalled $437.2 million, of which $367.0 million, or 83.94%
were one- to four-family, residential mortgage loans and home equity loans. At
such date, the remainder of the loan portfolio consisted of: $35.3 million of
non-residential loans, including church loans totalling $12.1 million or 8.08%
of total loans; $20.0 million of construction and development loans, including
unadvanced loan amounts, or 4.57% of total loans; $2.3 million of land and land
development loans or 0.53% of total loans; $3.4 of multi-family loans, or 0.78%
of total loans; and $9.2 million of consumer loans, or 2.10% of total loans.

     The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board ("FRB") and legislative tax policies.

                                       44
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
AT DECEMBER 31,
                                                                        ---------------------------------------------------------- 
                                                      AT JUNE 30, 1998        1997               1996                1995  
                                                    ------------------- ------------------  ------------------  ------------------
                                                              PERCENT             PERCENT            PERCENT              PERCENT   
                                                     AMOUNT   OF TOTAL   AMOUNT   OF TOTAL   AMOUNT  OF TOTAL    AMOUNT   OF TOTAL  
                                                    --------  --------- --------- --------  -------  ---------  -------   -------- 
                                                                                   (DOLLARS IN THOUSANDS)
Mortgage loans:                                                                                                                     
  Residential:                                                                                                                      
    One- to four-family (1).......................  $367,041     83.94% $358,561     83.19% $345,799     80.94% $329,589    79.69%
    Multi-family..................................     3,396      0.78     3,455      0.80     3,453      0.81     2,340     0.57
  Non-residential real estate(2)..................    35,316      8.08    40,951      9.50    44,528     10.42    44,520    10.77
  Land and land development.......................     2,321      0.53     3,091      0.72     4,136      0.97     6,398     1.55
  Construction and development....................    19,960      4.57    16,046      3.72    21,285      4.98    23,545     5.69
                                                    --------    ------  --------    ------  --------    ------  --------   ------
      Total mortgage loans........................   428,034     97.90   422,104     97.93   419,201     98.12   406,392    98.27
                                                    --------    ------  --------    ------  --------    ------  --------   ------
  Consumer and other loans........................     9,192      2.10     8,913      2.07     8,046      1.88     7,159     1.73
                                                    --------    ------  --------    ------  --------    ------  --------   ------
Total loans.......................................   437,226    100.00%  431,017    100.00%  427,247    100.00%  413,551   100.00%
                                                                ======              ======              ======             ======
Less:
  Participating interests.........................     3,319               4,217               5,450               6,543
  Undisbursed loan funds..........................     8,743               4,978               8,064               8,132
  Unearned discounts and deferred loan fees.......     3,539               3,312               3,045               2,855

  Allowance for loan losses.......................     5,639               5,478               5,543               5,480
                                                    --------            --------            --------            --------
  Loans receivable, net...........................  $415,986            $413,032            $405,145            $390,541
                                                    ========            ========            ========            ========
----------------------------------------
                                                           1994               1993
                                                    ------------------   -------------------
                                                              Percent               Percent
                                                     Amount   of Total    Amount    of Total
                                                    --------  --------   --------   --------
Mortgage loans:                                                        
  Residential:                                                         
    One- to four-family (1).......................  $312,933     79.09%  $315,739     79.08%
    Multi-family..................................     4,407      1.11      9,315      2.33
  Non-residential real estate(2)..................    39,950     10.10     38,830      9.72
  Land and land development.......................     4,375      1.12      5,454      1.37
  Construction and development....................    27,259      6.89     23,537      5.89
                                                    --------    ------   --------    ------
      Total mortgage loans........................   388,924     98.31    392,875     98.39
                                                    --------    ------   --------    ------
  Consumer and other loans........................     6,601      1.69      6,409      1.61
                                                                ------               ------
Total loans.......................................   395,525    100.00%   399,284    100.00%
                                                                ======               ======
Less:
  Participating interests.........................     8,126                9,261
  Undisbursed loan funds..........................     7,829                6,539
  Unearned discounts and deferred loan fees.......     2,764                2,900

  Allowance for loan losses
                                                       5,537                5,355
                                                     -------             --------
  Loans receivable, net...........................  $371,269             $375,229
                                                    ========             ========
_______________________________________ 

(1)  Includes home equity lines of credit.
(2)  Includes 36 loans to local churches totalling $12.1 million at June 30,
     1998.

                                       45
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Bank's loans at June 30, 1998. The table does not include the
effect of future principal prepayments.
AT JUNE 30, 1998
                                           -------------------------------------------------------------------------------------

                                            ONE- TO                             CONSTRUCTION     LAND AND
                                            FOUR-       MULTI-       NON-          AND             LAND                    TOTAL
                                            FAMILY      FAMILY    RESIDENTIAL   DEVELOPMENT    DEVELOPMENT   CONSUMER      LOANS
                                           ---------    ------    -----------   -----------    -----------   --------      -----
(IN THOUSANDS)
Amounts due:
 One year or less.......................  $   2,168    $    --    $      7      $  19,960(1)   $   1,651     $ 2,417    $  26,203
 After one year:
 More than one year to three years......      3,939         --          49             --             23       2,674        6,685
 More than three years to five years....      6,111         --         603             --            130       3,340       10,184
 More than five years to ten years......     46,811        809       6,940             --            314         608       55,482
 More than ten years to twenty years....    153,263        975      21,103             --            135         153      175,629
 More than twenty years.................    154,749      1,612       6,614             --             68          --      163,043
                                          ---------    -------    --------      ---------      ---------     -------      -------
      Total amount due..................  $ 367,041    $ 3,396    $ 35,316      $  19,960      $   2,321     $ 9,192      437,226
                                          =========    =======    ========      =========      =========     =======
Less:
  Participating interests............................................................................................       3,319
  Allowance for loan losses..........................................................................................       8,743
  Undisbursed loan funds.............................................................................................       3,539
  Allowance for loan losses..........................................................................................       5,639
                                                                                                                        ---------
Loans, net...........................................................................................................   $ 415,986
                                                                                                                        =========
_______________
(1)  Includes construction and development loans which will convert to one- to
     four-family mortgage loans upon the completion of the construction.

     The following tables set forth at June 30, 1998, the dollar amount of loans
contractually due after June 30, 1999 and whether such loans have fixed interest
rates or adjustable interest rates.
DUE AFTER JUNE 30, 1999
                                                        --------------------------------------
                                                          FIXED      ADJUSTABLE       TOTAL
                                                        ---------   ------------    ----------
(IN THOUSANDS)
Real estate loans:
  One- to four-family..............................     $ 266,152   $    98,721     $ 364,873
  Multi-family.....................................         1,898         1,498         3,396
  Non-residential..................................        20,335        14,974        35,309
  Construction and development.....................            --            --            --
  Land and land development........................           557           113           670
                                                        ---------   -----------     ---------
    Total real estate loans........................       288,942       115,306       404,248
Consumer and other loans...........................         6,775            --         6,775
                                                        ---------   -----------     ---------
Total loans........................................     $ 295,717   $   115,306     $ 411,023
                                                        =========   ===========     =========
ORIGINATION, SALE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its four
offices. In-market loan originations are generated by the Bank's marketing
efforts, which include print, radio and television advertising, lobby displays
and direct contact with local civic and religious organizations, as well as by
the Bank's present customers, walk-in customers and referrals from real estate
agents, brokers and builders. Loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures and are generally
underwritten in accordance with FNMA/FHLMC underwriting standards. The Bank
originates both adjustable-rate and fixed-rate loans. The Bank's ability to
originate fixed- or adjustable-rate loans is dependent upon the relative
customer demand for such loans, which is affected by the current and expected
future level of interest rates. In recent years, the Bank has originated
primarily fixed-rate loans as a result of low customer demand for adjustable-
rate loans given the prevailing low interest rate environment.

       Generally, all loans originated by the Bank are held for investment,
although currently the Bank is exploring opportunities to sell fixed-rate loans
originated by the Bank through the secondary market. The Bank generally does not
originate mortgage loans insured by the FHA and VA.

                                       46
During the years ended December 31, 1997 and December 31, 1996, the Bank
originated $85.1 million and $55.7 million of one- to four-family mortgage
loans, respectively, all of which were retained by the Bank. In the six months
ended June 30, 1998, the Bank originated $67.2 million of one- to four-family
mortgage loans. On January 1, 1996, the Bank implemented SFAS No. 122 pursuant
to which the value of servicing rights may be recognized as an asset of the
Bank. In the six months ended June 30, 1998 and in the year ended December 31,
1997, the fair value of servicing rights under SFAS No. 122 and SFAS No. 125
were not material and were not recognized in the financial statements for those
periods.

       The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
FOR THE SIX MONTHS
                                                                     ENDED JUNE 30,            FOR THE YEAR ENDED DECEMBER 31,
                                                                  ----------------------    ------------------------------------
                                                                    1998         1997         1997         1996         1995
                                                                  ---------    ---------    ---------    ---------    ----------
                                                                                         (IN THOUSANDS)
Mortgage loans (gross):
  Beginning balance..........................................     $ 422,104     $ 419,201   $ 419,201    $ 406,392    $  388,924
  Mortgage loans originated:
    One- to four-family......................................        67,249        35,948      85,099       55,724        43,807
    Multi-family.............................................            --            --          --        1,440            --
    Non-residential real estate..............................           138           733       1,763        2,384           628
    Construction and development.............................         9,225        11,930      19,333       21,772        24,386
    Land and land development................................            --            --          --          503         3,473
                                                                  ---------     ---------   ---------    ---------    ----------
      Total mortgage loans originated........................        76,612        48,611     106,195       81,823        72,294
    Transfer of mortgage loans to foreclosed real estate.....          (604)          479        (937)      (4,815)           --
    Principal repayments.....................................       (70,078)      (44,127)   (102,355)     (64,199)      (54,826)
                                                                  ---------     ---------   ---------    ---------      --------
    Ending balance...........................................     $ 428,034     $ 424,164   $ 422,104    $ 419,201    $  406,392
                                                                  =========     =========   =========    =========      ========
Consumer and other loans (gross):
  Beginning balance..........................................     $   8,913     $   8,046   $   8,046     $  7,159    $    6,601

    Consumer and other loans originated......................         3,098         3,288       6,323        6,130         7,512
    Principal repayments
                                                                     (2,819)       (2,570)     (5,456)      (5,243)       (6,954)
                                                                  ---------     ---------   ---------     --------    ----------
    Ending balance...........................................     $   9,192     $   8,764   $   8,913     $  8,046    $    7,159
                                                                  =========     =========   =========     ========    ==========
ONE-TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences. Most of such loans are located in the Bank's
primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives, from existing
or past customers, and through referrals from members of the Bank's local
communities. At June 30, 1998, the Bank's one- to four-family mortgage loans
totalled $367.0 million, or 84.85%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 73.10% were fixed-rate mortgage loans
and 26.90% were ARM loans.

       The Bank currently offers fixed-rate mortgage loans with terms from ten
to 30 years. The Bank retains all of the fixed-rate residential loans that it
originates. The Bank is considering selling fixed-rate loans originated by the
Bank, but to date has not established a policy for such sales. The Bank does not
purchase one- to four-family mortgage loans.

       The Bank currently offers one-year residential ARM loans with an interest
rate that adjusts annually based on the change in the relevant United States
Treasury index. The Bank also offers loans that bear fixed rates of interest for
specified periods of time and, thereafter, adjust on an annual basis. These
loans provide for up to a 2.0% periodic cap and a lifetime cap of 6.0% over the
initial rate. As a consequence of using caps, the interest rates on these loans
may not be as rate sensitive as the Bank's cost of funds. Borrowers of one-year
residential ARM loans are generally qualified at a rate of 2.0% above the
initial interest rate. The Bank also offers ARM loans that are convertible into
fixed-rate loans with interest rates based upon the then current market rates.
ARM loans generally pose greater credit risks than fixed-rate loans, primarily
because as interest rates rise, the required periodic payment by the borrower
rises, increasing the potential for default. However, as of June 30, 1998, the
Bank had not experienced higher default rates on these loans relative to its
other loans.

                                       47
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and guidelines. Generally, the Bank originates one- to four-
family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include 
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. The Bank requires fire,
casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Bank.

       Included in the Bank's one- to-four family loan portfolio are home equity
loans. The Bank originates home equity loans that are secured by a lien on the
borrower's residence and generally do not exceed $250,000. The Bank uses the
same underwriting standards for home equity loans as it uses for one- to four-
family residential mortgage loans. Home equity loans are generally originated in
amounts which, together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans either float at a stated margin over the prime rate or
have fixed interest rates. As of June 30, 1998, the Bank had $2.8 million, or
0.64% of the Bank's total loan portfolio outstanding, in home equity loans.

       NON-RESIDENTIAL AND MULTI-FAMILY LENDING. The Bank originates non-
residential real estate loans that are generally secured by properties used for
business purposes such as office buildings, schools, nursing homes, retail
stores and churches located in the Bank's primary market area. The Bank lends to
local churches to fund construction of or renovations to church facilities. Such
loans are generally fixed-rate loans with a maximum loan to value ratio of 80%.
The Bank currently has 36 church loans totalling $12.1 million in the aggregate.
All such loans are performing in accordance with their terms. Multi-family loans
are generally secured by 5 or more unit apartment buildings located in the
Bank's primary market area. The Bank's multi-family and non-residential real
estate underwriting policies provide that such real estate loans may be made in
amounts up to 75% of the appraised value of the property, subject to the Bank's
current internal loan-to-one-borrower limit, which at June 30, 1998 was $2.5
million.

       Non-residential real estate loans and multi-family loans generally have
adjustable rates and terms to maturity that do not exceed 25 years. The Bank's
current lending guidelines generally require that the property securing
commercial real estate loans and multi-family loans generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not to exceed 75% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some non-residential real estate loans and multi-
family loans in the Bank's portfolio may exceed the initial loan-to-value ratio
and the current debt service ratio may exceed the initial debt service ratio.
Adjustable-rate non-residential real estate loans and multi-family loans provide
for interest at a margin over a designated index, often a designated prime rate,
with periodic adjustments, generally at frequencies of up to five years. In
underwriting non-residential real estate loans and multi-family loans, the Bank
analyzes the financial condition of the borrower, the borrower's credit history,
the reliability and predictability of the net income generated by the property
securing the loan and the value of the property itself. The Bank generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing non-
residential real estate loans and multi-family loans originated by the Bank are
performed by independent appraisers approved by the Board of Directors. At June
30, 1998, the Bank's largest non-residential real estate loan was a $1.9 million
loan secured by a local church and was performing in accordance with its terms.
At June 30, 1998, the Bank's largest multi-family loan was a $1.4 million loan
secured by an apartment complex and was performing in accordance with its terms.

       Non-residential real estate loans and multi-family loans generally
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate and multi-
family properties is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed, or a bankruptcy court modifies a
lease term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced. The Bank seeks to minimize these risks through its
underwriting standards.

                                       48
CONSTRUCTION AND DEVELOPMENT AND LAND LENDING. The Bank originates
construction loans for the development of residential and commercial property.
Construction loans are offered primarily to experienced local developers
operating in the Bank's market area. The majority of the Bank's construction
loans are originated to finance the construction by developers of one- to four-
family residential real estate and, to a lesser extent, multi-family and
commercial real estate properties located in the Bank's primary market area.
Construction loans are generally offered with terms of up to 12 months and may
be made in amounts up to 75% of the appraised value of the property on multi-
family and commercial real estate construction and 80% on one- to four-family
residential construction. Land loans are made in amounts up to 60% of the
appraised value of the land securing the loan. Construction loan proceeds are
disbursed periodically in increments as construction progresses and as
inspections by the Bank's inspecting officers warrant. At June 30, 1998, the
Bank's largest construction and development loan was a performing loan with a
$1.0 million outstanding principal balance secured by 19 units of single family
construction located in Stafford and Spotsylvania Counties.

       Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. If the estimated value proves to be inaccurate, the Bank may be
confronted with a property, when completed, having a value which is insufficient
to assure full repayment.

       CONSUMER AND OTHER LENDING. Consumer loans at June 30, 1998 amounted to
$9.2 million, or 2.1%, of the Bank's total loans and consisted primarily of
automobile loans (new and used) and loans secured by savings accounts. Such
loans are generally originated in the Bank's primary market area and generally
are secured by deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans. Historically, the Bank has not advertised its 
consumer loans and has made these loans only to existing customers.

       Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At June 30, 1998, the Bank
had 30 consumer loans 90 days or more delinquent, whose balances totalled
$113,000.

       LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors of the
Bank establishes the lending policies of the Bank. Such policies provide that
the Bank's President, Executive Vice President and Senior Lending Officer may
approve consumer loans up to $50,000. The Loan Committee approves all
residential loans up to $500,000. The Board approves loans in excess of
$500,000. All loans are submitted to the full Board of Directors for
ratification on a monthly basis.

DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED

       DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 60 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and cause of delinquency and whether the borrower is habitually delinquent. When
a borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. The Bank's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be attempted
to ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
usually attempts to obtain full payment, work out a repayment schedule with the
borrower to avoid foreclosure or, in some instances, accept a deed in lieu of
foreclosure. In the event payment is not then received or the loan not otherwise
satisfied, additional letters and telephone calls generally are made. If the
loan is still not brought current or satisfied and it becomes necessary for the
Bank to take legal action, which typically occurs after a loan is 60 days or
more delinquent, the Bank will commence foreclosure proceedings against any real
property that secures the loan. If a foreclosure action is instituted and the
loan

                                       49
is not brought current, paid in full, or refinanced before the foreclosure sale,
the property securing the loan generally is sold at foreclosure and, if
purchased by the Bank, becomes real estate owned and is sold by the Bank as soon
as possible.

       Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."

       When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.

       A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.

       The Bank's Asset/Liability Committee reviews and classifies the Bank's
assets on a regular basis and the Board of Directors reviews the results of the
reports on a quarterly basis. The Bank classifies assets in accordance with the
management guidelines described above. At June 30, 1998, the Bank had $7.8
million, or 1.65% of total assets, designated as Substandard. At such date, no
assets were classified as Doubtful or Loss (in accordance with OTS regulations).
As of June 30, 1998, the Bank had a total of $1.7 million, or 0.36% of total
assets, classified loans designated as Special Mention. At June 30, 1998, all of
the Bank's classified and Special Mention assets totalled $9.5 million,
representing 2.17% of loans.

                                       50
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
AT JUNE 30, 1998                         AT DECEMBER 31, 1997           
                                             ------------------------------------------   ----------------------------------------
                                                  60-89 DAYS        90 DAYS OR MORE         60-89 DAYS         90 DAYS OR MORE   
                                             -------------------  ---------------------   -----------------  ---------------------
                                                        PRINCIPAL             PRINCIPAL             PRINCIPAL             PRINCIPAL
                                              NUMBER    BALANCE    NUMBER     BALANCE     NUMBER    BALANCE     NUMBER    BALANCE
                                              OF LOANS  OF LOANS   OF LOANS   OF LOANS    OF LOANS  OF LOANS    OF LOANS  OF LOANS
                                             ---------  --------   --------   --------    --------  --------   --------  ---------
                                                                            (DOLLARS IN THOUSANDS)
Mortgage loans:                                                                                                                  
  One- to four-family......................      11     $   865        24     $  1,253       13      $  841        31    $ 1,596 
  Multi-family.............................      --          --        --           --       --          --        --         -- 
  Non-residential real estate..............      --          --        --           --       --          --         1        488 
  Construction and development.............      --          --         3          580       --          --         3        604 
  Land and land development................      --          --        --           --       --          --         1          1 
                                               ----     -------      ----     --------     ----      ------      ----    ------- 
    Total mortgage loans...................      11         865        27        1,833       13         841        36      2,689 
Consumer and other loans...................      13          72        30          113       15          87        33        111 
                                               ----     -------      ----     --------     ----      ------      ----    ------- 
Total loans................................      24     $   937        57     $  1,946       28      $  928        69    $ 2,800 
                                               ====     =======      ====     ========     ====      ======      ====    ======= 
Delinquent loans to total loans............    0.35%       0.21%     0.83%        0.45%    0.41%       0.22%     1.01%      0.65% 
                                               ====     =======      ====     ========     ====      ======      ====    =======
AT DECEMBER 31, 1996                         AT DECEMBER 31, 1995        
                                             ------------------------------------------   ----------------------------------------
                                                  60-89 DAYS          90 DAYS OR MORE         60-89 DAYS        90 DAYS OR MORE   
                                             -------------------  ---------------------   -----------------   --------------------
                                                       PRINCIPAL             PRINCIPAL             PRINCIPAL             PRINCIPAL
                                              NUMBER    BALANCE    NUMBER     BALANCE      NUMBER    BALANCE    NUMBER    BALANCE
                                              OF LOANS  OF LOANS   OF LOANS   OF LOANS    OF LOANS  OF LOANS    OF LOANS  OF LOANS
                                             ---------  --------   --------   --------    -------- ---------   --------  ---------
                                                                            (DOLLARS IN THOUSANDS)
Mortgage loans:                                                                                                                  
  One- to four-family......................      17     $  1,578       74    $  3,827         22    $ 1,464         8     $   681
  Multi-family.............................      --           --        2         389         --         --        --          --
  Non-residential real estate..............       2          516        3         710         --         --         2         265
  Construction and development.............      --           --        4         839          1        143         4         529
  Land and land development................       1          301        1          37          1        179         1         237
                                               ----      -------     ----    --------       ----    -------      ----     -------
    Total mortgage loans...................      20        2,395       84       5,802         24      1,786        15       1,712
 Consumer and other loans..................      13          111       32         343         13        108        23         326
                                               ----      -------     ----    --------       ----    -------      ----     -------
Total loans................................      33      $ 2,506      116    $  6,145         37    $ 1,894        38     $ 2,038
                                               ====      =======     ====    ========       ====    =======      ====     =======
Delinquent loans to total loans............    0.49%        0.59%    1.71%       1.44%      0.52%      0.46%     0.54%       0.49%
                                               ====      =======     ====    ========       ====    =======      ====     =======
51
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets
forth information regarding non-accrual loans and REO. At June 30, 1998, the
Bank had $1.9 million of REO in its portfolio. It is the policy of the Bank to
cease accruing interest on loans 90 days or more past due and to charge off all
accrued interest. For the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996, no interest income was recorded on non-accrual
loans. For the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996, the amount of additional interest income that would have been
recognized on non-accrual loans if such loans had continued to perform in
accordance with their contractual terms was $114,000, $193,000 and $438,000,
respectively. In 1993, the Bank adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No. 118. There
were $8.5 million that met the definition of impaired loans, per SFAS 114 at
June 30, 1998. This compares to $10.7 million, $9.8 million, $11.9 million and
$10.8 million for June 30, 1997, December 31, 1997, 1996 and 1995, respectively.
At June 30,                             At December 31,
                                                ----------------------- ----------------------------------------------------------
                                                   1998        1997        1997        1996        1995        1994        1993   
                                                ----------- ----------- ----------- ----------- ----------- ----------- ----------
Non-accrual loans(1):                                                         (Dollars in thousands)
Mortgage loans:                                                                                                                 
    One- to four-family.......................      $1,508      $2,526      $1,648      $5,366      $3,959    $  5,211      $2,143
    Non-residential real estate...............         837         577         628       1,920       1,389       3,634       3,004
    Construction and development..............          --          --          --         774         529          84         203
    Land and development......................         540         494         488         558         653       1,332       1,165
  Consumer and other loans....................          19          79          51         135         269         284         207
                                                   -------    --------    --------    --------    --------    --------    --------
    Total non-accrual loans...................       2,904       3,676       2,815       8,753       6,799      10,545       6,722
  Loans 90 days or more past due 
    and accruing:                                                                                    
     Construction and development                      186          --          --          --          --          --          --
     Land and land development................         135          --          --          --          --          --          --  
                                                   -------    --------    --------    --------    --------    --------    --------
     Total accruing loans 90                                                                                                        
       days or more past due..................         321          --          --          --          --          --          --
                                                   -------    --------    --------    --------    --------    --------    --------
     Total non-performing loans...............       3,225       3,676       2,815       8,753       6,799      10,545       6,722
Total foreclosed real estate..................       1,883       1,882       1,959       1,650       2,195       1,124       2,281
                                                   -------    --------    --------    --------    --------    --------    --------
Total non-performing assets...................      $5,108      $5,558      $4,774     $10,403      $8,994     $11,669      $9,003
                                                   =======    ========    ========    ========    ========    ========    ========
Restructured loans............................      $3,923      $2,914      $3,660     $ 2,546      $3,768     $ 2,239     $   784 
                                                   =======    ========    ========    ========    ========    ========    ========
Non-performing loans to                                                                                                            
  total loans.................................        0.74%       0.89%       0.65%       2.05%       1.64%       2.67%       1.68% 
                                                      ====        ====        ====        ====        ====        ====        ====  
Total non-performing assets                          
  to total assets.............................        1.08%       1.18%       1.01%       2.21%       1.92%       2.60%       2.01%
                                                      ====        ====        ====        ====        ====        ====        ====
(1) Loans are presented before allowance for loan losses.

                                       52
Restructured loans totalled $3.9 million at June 30, 1998. Restructured
loans include loans that were modified while delinquent. Although the amount due
under these loans has not been modified from the terms of the loans when
originated, certain adjustments were made to these loans to help the borrower
make payments while the loans were delinquent and to enable the Bank to avoid
foreclosure proceedings. All outstanding restructured loans are single-family
loans with balances of less than $196,000 per loan. All restructured loans are
currently performing in accordance with their terms, however, there can be no
assurance that such loans will continue to be performing loans or that the Bank
will not experience losses on such loans in the future.

         ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of June
30, 1998, the Bank's allowance for loan losses was 1.33% of total loans as
compared to 1.33% as of December 31, 1997. The Bank had non-performing loans of
$3.2 million and $2.8 million at June 30, 1998 and December 31, 1997,
respectively. The Bank will continue to monitor and modify its allowances for
loan losses as conditions dictate. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.

                                       53
The following table sets forth activity in the Bank's allowance for
loan losses for the periods as indicated.
AT OR FOR THE SIX            
                                           MONTHS ENDED
                                             JUNE 30,                AT OR FOR THE YEAR ENDED DECEMBER 31,
                                       --------------------- -------------------------------------------------------
                                         1998       1997       1997       1996       1995        1994       1993
                                       ---------- ---------- ---------- ---------- ----------  ---------  ----------
                                                                  (DOLLARS IN THOUSANDS)
Balance at beginning of period .....      $5,478     $5,543     $5,543     $5,480     $5,537     $5,355      $4,668
Provision for loan losses ..........         269        241        375        325        412      1,010       1,129
Charge-offs:
  Mortgage loans:
    One- to four-family ............         (79)      (148)      (260)      (244)       (17)      (197)       (412)
    Non-residential real estate ....          --         --         --         --         --       (619)         --
    Construction and development ...          --        (32)      (148)        --       (469)        --          --
  Consumer loans ...................         (29)        (7)       (32)       (19)        (3)       (12)        (38)
                                          ------     ------     ------     ------     ------     ------      ------
      Total charge-offs ............        (108)      (187)      (440)      (263)      (489)      (828)       (450)
Recoveries .........................          --         --         --          1         20         --           8
                                          ------     ------     ------     ------     ------     ------      ------
Balance at end of period ...........      $5,639     $5,597     $5,478     $5,543     $5,480     $5,537      $5,355
                                          ======     ======     ======     ======     ======     ======      ======
Ratio of net charge-offs during the                                                                                  
  period to average net loans 
  outstanding during the period ....        0.03%      0.05%      0.11%      0.07%      0.13%      0.22%       0.12%  
                                            ====       ====       ====       ====       ====       ====        ====    
Ratio of allowance for loan losses to      
  net loans receivable at the end of
  the period .......................        1.33%      1.34%      1.33%      1.37%      1.40%      1.49%       1.43% 
                                            ====       ====       ====       ====       ====       ====        ====   
Ratio of allowance for loan losses to    
  non-performing loans at the end of
  the period .......................      174.85%    152.26%    194.60%     63.33%     80.60%     52.46%      79.66% 
                                          ======     ======     ======      =====      =====      =====       =====
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
AT JUNE 30,
                                           ---------------------------------------------------------------------------
                                                          1998                                   1997
                                           ------------------------------------  -------------------------------------
                                                                     PERCENT                                PERCENT
                                                                     OF LOANS                               OF LOANS
                                                      PERCENT OF     IN EACH                 PERCENT OF     IN EACH
                                                       ALLOWANCE     CATEGORY                ALLOWANCE      CATEGORY
                                                        TO TOTAL     TO TOTAL                 TO TOTAL      TO TOTAL
                                            AMOUNT     ALLOWANCE      LOANS       AMOUNT     ALLOWANCE       LOANS
                                           ---------  -----------   -----------  ----------  -----------   -----------
                                                                      (DOLLARS IN THOUSANDS)
One-to four-family                          $   120         2.13%        83.94%     $  119         2.13%        81.73%
Multi-family                                     --           --          0.78          --           --          0.79
Non-residential real estate                     410         7.27          8.08         411         7.34         10.24
Construction and development                     --           --          4.57          --           --          4.08
Land and land development                        --           --          0.53          10         0.18          0.86
Consumer and other loans                         80         1.42          2.10          80         1.43          2.30
Unallocated general reserves                  5,029        89.18            --       4,977        88.92            --
                                             ------      -------       -------       -----       ------         -----   

    Total allowance                          $5,639       100.00%       100.00%     $5,597       100.00%       100.00%
                                             ======       ======        ======      ======       ======        ======
54
AT DECEMBER 31,
                               -------------------------------------------------------------------------------- 
                                         1997                      1996                      1995               
                               -------------------------  -------------------------- -------------------------- 
                                                 PERCENT                    PERCENT                    PERCENT  
                                                   OF                         OF                         OF     
                                                  LOANS                      LOANS                      LOANS   
                                       PERCENT   IN EACH          PERCENT   IN EACH          PERCENT   IN EACH  
                                          OF     CATEGORY            OF     CATEGORY            OF     CATEGORY 
                                       ALLOWANCE   TO             ALLOWANCE   TO             ALLOWANCE   TO     
                                       TO TOTAL   TOTAL           TO TOTAL   TOTAL           TO TOTAL   TOTAL   
                                AMOUNT ALLOWANCE  LOANS   AMOUNT  ALLOWANCE  LOANS   AMOUNT  ALLOWANCE  LOANS   
                                ------ --------- -------  ------  --------- -------- ------  --------- -------- 
                                                                         (DOLLARS IN THOUSANDS)
One-to four-family(1).........  $  191    3.48%   83.19% $    82     1.48%   80.94%  $  361     6.59%    79.69%  
Multi-family..................      --      --     0.80      226     4.08     0.81      226     4.12      0.57   
Non-residential real estate...     220    4.02     9.50      311     5.61    10.42       92     1.68     10.77   
Construction and development..      --      --     3.72       --       --     4.98       --       --      5.69   
Land and land development.....      67    1.22     0.72       10     0.18     0.97       11     0.20      1.55   
Consumer and other loans......      65    1.19     2.07       61     1.10     1.88       57     1.04      1.73   
Unallocated general reserves..   4,935   90.09       --    4,853    87.55       --    4,733    86.37        --   
                                ------ -------   ------   ------  -------   ------   ------  -------   -------   
  Total allowance.............  $5,478  100.00%  100.00%  $5,543   100.00%  100.00%  $5,480   100.00%   100.00%  
                                ====== =======   ======   ======  =======   ======   ======  =======   =======
AT DECEMBER 31,
                               ----------------------------------------------------
                                      1994                         1993
                               -------------------------  -------------------------
                                                 PERCENT                   PERCENT 
                                                   OF                        OF    
                                                  LOANS                     LOANS  
                                      PERCENT    IN EACH         PERCENT   IN EACH 
                                         OF      CATEGORY           OF     CATEGORY
                                      ALLOWANCE    TO            ALLOWANCE   TO    
                                      TO TOTAL    TOTAL          TO TOTAL   TOTAL  
                               AMOUNT ALLOWANCE   LOANS   AMOUNT ALLOWANCE  LOANS  
                               ------ ---------  --------  ------ --------- --------  
                                                       (DOLLARS IN THOUSANDS)
One-to four-family(1)......... $  224     4.05%    79.09%  $  195     3.64%   79.08%
Multi-family..................    634    11.45      1.11      957    17.87%    2.33
Non-residential real estate...    506     9.14     10.10      250     4.67%    9.72   
Construction and development..     --       --      6.89       --       --     5.89   
Land and land development.....     10     0.18      1.12       --       --     1.37   
Consumer and other loans......     55     0.99      1.69       56     1.05     1.61   
Unallocated general reserves..  4,108    74.19        --    3,897    72.77       --  
                               ------ --------   -------   ------ --------  -------    
  Total allowance............. $5,537   100.00%   100.00%  $5,355   100.00%  100.00%
                               ====== ========   =======   ====== ========  =======
________________________
(1)  Includes home equity lines of credit.

 

                                       55
REAL ESTATE OWNED. At December 31, 1997 and June 30, 1998, the Bank had
$2.0 million and $1.9 million of REO, respectively. At June 30, 1998, REO
consisted of 25 one- to four-family properties, one parcel of land, one
non-residential property and one multi-family property. When the Bank acquires
property through foreclosure or by deed in lieu of foreclosure, it is initially
recorded at the lower of the recorded investment in the corresponding loan or
the fair value of the related assets at the date of foreclosure, less costs to
sell. Thereafter, if there is a further deterioration in value, the Bank
provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of the Bank to have obtained an appraisal
on all real estate subject to foreclosure proceedings prior to the time of
foreclosure. It is the Bank's policy to require appraisals on a periodic basis
on foreclosed properties and conduct inspections on foreclosed properties. The
Bank seeks to sell its REO properties to the tenants of those properties and
encourages tenants to take advantage of this opportunity by selling the
properties at a favorable market value and with favorable loan terms, including
100% financing. Management believes this type of lending enhances the Bank's CRA
performance.

INVESTMENT ACTIVITIES

         The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations with terms of five years or less,
U.S. Agency obligations, including mortgage-backed securities with terms of five
years or less, municipal bonds with terms of five years or less rated by a
highly regarded rating service, such as Standard & Poors, as AA or better and
certain certificates of deposit of insured banks and savings institutions,
corporate obligations up to a maximum of 1% of the Bank's total assets that have
terms of five years or less and are rated by a highly regarded rating service,
such as Standard & Poors, as AA or better. The Bank is also authorized to invest
in mutual funds whose assets conform to the investments that the Bank is
otherwise authorized to make directly.

         Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily U.S. Treasury obligations, federal agency obligations and high
grade corporate debt securities) with short and intermediate terms (five years
or less) to maturity. At June 30, 1998, the weighted average term to maturity
for investment securities available-for-sale and mortgage-backed and related
securities held-to-maturity were 1.93 years and 11.12 years, respectively. See
Notes to Financial Statements for information regarding the maturities of the
Bank's securities.

         At June 30, 1998 the Bank had dual indexed consolidated bonds with a
fair value of $1.9 million, which was $587,000 below the Bank's amortized cost.
These instruments were purchased in 1993 and do not comply with the Bank's
current investment policy. The Bank does not intend to invest in this type of
instrument in the future and, based upon market conditions, intends to evaluate
opportunities to divest itself of these instruments. See "Notes to Financial
Statements" for information regarding dual indexed consolidated bonds.

         Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of
Atlanta, the Bank is required to hold FHLB of Atlanta stock which is carried at
cost since there is no readily available market value. Historically, the Bank
has not held any securities considered to be trading securities.

                                       56
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
AT DECEMBER 31,                           
                                                AT JUNE 30,       ---------------------------------------------------------------- 
                                                   1998                   1997                1996                   1995   
                                            -------------------   -----------------    ------------------    --------------------- 
                                              AMORTIZED   FAIR     AMORTIZED   FAIR     AMORTIZED   FAIR      AMORTIZED   FAIR     
                                                COST      VALUE      COST      VALUE      COST      VALUE       COST      VALUE    
                                            -----------  -------  ----------  -------  ----------  -------   ----------  --------- 
                                                                                (IN THOUSANDS)
Investment securities,                                                                                                             
  available-for-sale:(1)                                                                                                           
U.S. Treasury and agency                                                                                                           
  obligations............................   $16,814      $16,875    $19,812   $19,836   $20,823    $20,803    $30,943     $31,147
Corporate obligations....................     4,856        4,906      3,345     3,414     3,995      4,094      6,514       6,694
Other debt securities....................     5,007        5,966      3,946     4,713     3,744      3,983      3,465       3,669
Mutual funds.............................     1,293        1,268      1,262     1,242     1,199      1,175      1,136       1,104
Duel indexed consolidated bonds..........     2,500        1,913      2,500     1,946     2,500      1,924      7,500       6,643
                                            -------      -------    -------   -------   -------    -------    -------     -------
Total investment securities..............   $30,470      $30,928    $30,865   $31,151   $32,261    $31,979    $49,558     $49,257
                                            =======      =======    =======   =======   =======    =======    =======     =======
__________________
(1)   On December 31, 1995, the Bank transferred all investment securities that
      were classified as held-to-maturity to the available-for-sale category.
      The amortized costs of the amounts transferred was $49.6 million with an
      unrealized gain of $684,000, and an unrealized loss of $985,026. The Bank
      made this transfer in response to a one-time reassessment opportunity
      granted in a special report regarding the implementation of SFAS 115.

      The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed and mortgage-related
securities, all of which were classified as held-to-maturity at the dates
indicated.
AT JUNE 30,                              AT DECEMBER 31,                           
                                                                  -----------------------------------------------------------      
                                                   1998                   1997                1996                1995             
                                            -------------------   -----------------    ------------------    ----------  --------- 
                                              AMORTIZED   FAIR     AMORTIZED   FAIR     AMORTIZED   FAIR      AMORTIZED   FAIR     
                                                COST      VALUE      COST      VALUE      COST      VALUE       COST      VALUE    
                                            -----------  -------  ----------  -------  ----------  -------   ----------  --------- 
                                                                                (IN THOUSANDS)
Mortgage-backed and related 
securities held-to-maturity:
  Fixed rate:
    FNMA pass through securities.........     $  768      $  768   $   838    $   838    $1,008    $1,008    $1,197       $1,197
    GNMA certificates....................        422         458       453        497       494       537       682          741
                                              ------      ------   -------    -------    ------    ------    ------       ------
Total mortgage-backed                      
  and related securities.................     $1,190      $1,226    $1,291     $1,335    $1,502    $1,545    $1,879       $1,938
                                              ======      ======    ======     ======    ======    ======    ======       ======
The following table sets forth the Bank's mortgage-backed and mortgage-
related securities activities for the periods indicated.
FOR THE SIX MONTHS                                       
                                                             ENDED JUNE 30,         FOR THE YEAR ENDED DECEMBER 31, 
                                                          ----------------------   -----------------------------------
                                                            1998        1997         1997        1996         1995
                                                          ----------  ----------   ----------  ----------   ----------
                                                                                (IN THOUSANDS)
Mortgage-backed securities:
At beginning of period..............................         $1,291      $1,502       $1,502      $1,879       $2,109
  Mortgage-backed securities purchased..............             --          --           --          --           --
  Mortgage-backed securities sold...................             --          --           --          --           --
  Amortization and repayments.......................           (101)        (98)        (211)       (377)        (230)
                                                             ------      ------       ------      ------       ------
Balance of mortgage-backed and related                                                                                
 securities at end of period........................         $1,190      $1,404       $1,291      $1,502       $1,879
                                                             ======      ======       ======      ======       ======
57
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of the Bank's
investment securities, and mortgage-related securities as of June 30, 1998.
AT JUNE 30, 1998
                                -------------------------------------------------------------------------------------------------- 
                                                              ONE                THREE TO             MORE THAN                    
                                 ONE YEAR OR LESS       TO THREE YEARS          FIVE YEARS            FIVE YEARS                   
                                --------------------  --------------------  --------------------  -------------------       
                                                                                                                         AVERAGE   
                                           WEIGHTED              WEIGHTED              WEIGHTED             WEIGHTED    REMAINING 
                                CARRYING   AVERAGE    CARRYING   AVERAGE    CARRYING   AVERAGE    CARRYING  AVERAGE     YEARS TO  
                                 AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT    YIELD      MATURITY  
                                ---------  ---------  ---------  ---------  --------   ---------  --------  ---------   ----------
                                                                 (DOLLARS IN THOUSANDS)
Investment securities,                                                                                                            
 available-for-sale:                                                                                                              
  U.S. Treasury and agency       
   obligations.................  $ 9,514      5.80%     $6,300      6.16%   $   500        6.49%  $   500       6.14%        1.15
  Corporate obligations........    1,000       9.75      2,500      6.08      1,356        6.40        --       4.93         1.79 
  Other debt securities........    3,717       1.96         --        --        940        9.71       350       4.93         1.79 
  Mutual funds.................    1,293       2.40         --        --         --          --        --         --         0.25 
  Duel indexed consolidated            
   bonds.......................       --         --         --        --                     --     2,500       2.92         7.18   
                                 -------    -------     ------    ------     ------       -----    ------      -----              
    Total investment             
   securities..................  $15,524       4.85%    $8,800      6.14%    $2,796        7.53%   $3,350       3.61%        1.93
                                 =======       ====     ======      ====     ======        ====    ======      =====              
Mortgage-backed and related                                                                                                      
   securities held-to-maturity:  
   FNMA pass through             
   securities..................  $    --                $   --               $   --                $  768       9.60%        7.50
   GNMA certificates...........       --                    --                   --                   422       9.91        17.71 
                                 -------                ------               ------                ------      -----              
  Total mortgage-backed and      
   related securities..........  $    --                $   --               $   --                $1,190       9.71%       11.12
                                 =======                ======               ======                ======       ====
AT JUNE 30, 1998                    
                                   ---------------------------------            
                                                 TOTAL                          
                                    --------------------------------           
                                                            WEIGHTED           
                                    CARRYING     MARKET     AVERAGE            
                                    AMOUNT        VALUE      YIELD             
                                    --------     --------   --------
Investment securities,                                                         
 available-for-sale:                                                           
  U.S. Treasury and agency                                                     
    obligations.................    $16,814      $16,875        5.97%           
  Corporate obligations.........      4,856        4,906        6.93           
  Other debt securities.........      5,007        5,966        3.63           
  Mutual funds..................      1,293        1,268        2.40           
  Duel indexed consolidated                                                    
    bonds.......................      2,500        1,913        2.92           
                                    -------      -------        ----           
   Total investment                                                            
    securities..................    $30,470      $30,928        5.33%          
                                    =======      =======        ====           
Mortgage-backed and related                                                    
    securities held-to-maturity:                                               
   FNMA pass through                                                           
    securities..................    $   768      $   768        9.60%          
   GNMA certificates............        422          458        9.91           
                                    -------      -------        ----           
  Total mortgage-backed and                                                    
    related securities..........    $ 1,190      $ 1,226        9.71%          
                                    =======      =======        ====
58
Sources of Funds

          General. Deposits, loan repayments and prepayments, maturities of
securities and cash flows generated from operations are the primary sources of
the Bank's funds for use in lending, investing and for other general purposes.

          Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of passbook and
statement savings accounts, money market accounts, transaction accounts and time
deposits currently ranging in terms from one to five years. For the six months
ended June 30, 1998, the balance of core deposits (savings and money market
accounts) represented 22.3% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Bank's deposits are
obtained predominantly from the areas surrounding its branch offices. The Bank
has historically relied primarily on providing a higher level of customer
service and long-standing relationships with customers to attract and retain
these deposits and also relies on competitive pricing policies and advertising;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. The Bank has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. The Bank
manages the pricing of its deposits in keeping with its asset/liability
management, liquidity and profitability objectives. Based on its experience, the
Bank believes that its passbook and statement savings, money market accounts and
transaction accounts are relatively stable sources of deposits. The Bank's time
deposits have been a relatively stable source of funds as well, including the
$196.7 million of certificates of deposit maturing in one year or less; however,
the ability of the Bank to attract and maintain time deposits and the rates paid
on these deposits has been and will continue to be significantly affected by
market conditions. The Bank is seeking opportunities to grow its transaction
accounts through aggressive advertising, offering ATM services, and offering
interest on such accounts. The Bank also intends to expand its product line to
attract more customers, including local businesses.

          The following table presents the deposit activity of the Bank for the
periods indicated:
FOR THE                 FOR THE YEAR ENDED
                                                                SIX MONTHS ENDED               DECEMBER 31,
                                                                    JUNE 30,
                                                              ---------------------  ---------------------------------
                                                                1998       1997        1997       1996        1995
                                                              ---------- ----------  ---------- ---------- -----------
                                                                                  (In thousands)
Net increase (decrease) before interest credited...........   $(12,770)    $(7,266)   $(17,354)  $(29,800)    $(8,139)
Interest credited..........................................      9,375       9,262      18,816     19,076      18,432
                                                              ---------    -------   ---------  ---------    --------
Net increase (decrease) in savings deposits................   $ (3,395)    $ 1,996    $  1,462   $(10,724)    $10,293
                                                              =========     ======   =========  =========     =======
At June 30, 1998, the Bank had $45.3 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
MATURITY PERIOD                                                     AMOUNT
-----------------                                             ------------------
                                                                (IN THOUSANDS)
3 months or less..........................................         $ 8,590
Over 3 through 6 months...................................           8,190
Over 6 through 12 months..................................          14,500
Over 12 months............................................          14,066
                                                                   -------
      Total...............................................         $45,346
                                                                   =======
59
The following table sets forth the distribution of the Bank's deposit
accounts for all of the dates indicated and the weighted average interest rates
on each category of deposits presented.
At December 31, 
                                                      At               ------------------------------------------------------------
                                                June 30, 1998                      1997                         1996               
                                         ----------------------------- ------------------------------------------------------------
                                                   Percent   Weighted            Percent  Weighted             Percent  Weighted   
                                                   of Total  Average            of Total   Average            of Total   Average   
                                          Balance  Deposits    Rate     Balance Deposits    Rate     Balance  Deposits    Rate     
                                         --------- --------  --------  -------- --------  --------   -------  --------  --------  
                                                                           (Dollars in thousands)
Transaction accounts................         2,481     0.66      0.32     3,266     0.87        --     2,451      0.65        --  
Savings.............................        80,959    21.66      3.25    84,547    22.42      3.25    90,255     24.03      3.25  
                                         ---------  -------            --------  -------             -------  --------            
    Total...........................        83,440    22.33      3.16    87,813    23.29      3.13    92,706     24.68      3.16  
                                         ---------  -------            --------  -------             -------  --------            
Certificate accounts(1)(2):                                                                                                        
  Within 12 months..................       196,666    52.62      5.60   192,592    51.07      5.74   206,995     55.10      5.57  
  Over 12 through 36 months.........        72,526    19.41      5.84    82,054    21.76      5.81    73,143     19.47      6.03  
  Over 36 months....................        21,087     5.64      6.29    14,655     3.88      6.32     2,808      0.75      6.21  
                                         ---------  -------            --------  -------             -------  --------            
    Total certificate accounts......       290,279    77.67      5.71   289,301    76.71      5.79   282,946     75.32      5.70 
                                         ---------  -------            --------  -------             -------  --------            
    Total average deposits..........      $373,719   100.00%     5.16  $377,114   100.00%     5.17  $375,652    100.00%     5.07 
                                         =========  =======            ========  =======             =======  ========
At December 31, 
                                          -----------------------------
                                                      1995
                                          -----------------------------
                                                    Percent  Weighted
                                                    of Total  Average
                                           Balance  Deposits   Rate  
                                          --------  -------- --------  
                                            (Dollars in thousands)
Transaction accounts................          2,716     0.70       --
Savings.............................         97,696    25.29     3.25
                                          --------- --------  
    Total...........................        100,412    25.99     3.16
                                          --------- --------             
Certificate accounts(1)(2):                                            
  Within 12 months..................        193,460    50.07     5.63
  Over 12 through 36 months.........         92,504    23.94     5.60
  Over 36 months....................             --       --     5.62    
                                          --------- --------  
    Total certificate accounts......        285,964    74.01     5.62    
                                          --------- --------           
    Total average deposits..........       $386,376   100.00%    4.98                                     
                                          ========= ========
______________________________
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.

                                       60
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1998.
PERIOD TO MATURITY FROM JUNE 30, 1998
                                                     ---------------------------------------
                                                         LESS          ONE  
                                                         THAN          TO           OVER                AT DECEMBER 31, 
                                                                                               ----------------------------------
                                     AT JUNE 30,         ONE          THREE         THREE                                        
                                        1998             YEAR         YEARS         YEARS        1997        1996        1995
                                   ---------------   -----------   -----------   -----------   ----------  ----------  ----------
                                                                                (IN THOUSANDS)
Certificate accounts:
     0 to 4.00%................        $     --         $     --      $     --      $     --     $     --    $     18    $    575
     4.01% to 5.00%............          19,299           19,299            --            --       17,304      42,404      40,990
     5.01% to 6.00%............         243,579          166,483        72,486         4,610      233,582     183,490     139,919
     6.01% to 7.00%............          24,239            7,722            40        16,477       32,589      51,217      99,017
     7.01% to 8.00%............           3,162            3,162            --            --        5,827       5,817       5,386
     8.01% to 9.00%............              --               --            --            --           --          --          77
     Over 9.01%................              --               --            --            --           --          --          --
                                       --------         --------      --------      --------     --------    --------    --------
       Total...................        $290,279         $196,666      $ 72,526      $ 21,087     $289,302    $282,946    $285,964
                                       ========         ========      ========      ========     ========    ========    ========
BORROWINGS. As part of its operating strategy, the Bank has utilized
advances from the FHLB as an alternative to retail deposits to fund its
operations when borrowings are less costly and can be invested at a positive
interest rate spread or when the Bank needs additional funds to satisfy loan
demand. By utilizing FHLB advances, which possess varying stated maturities, the
Bank can meet its liquidity needs without otherwise being dependent upon retail
deposits and revising its deposit rates to attract retail deposits, which have
no stated maturities (except for certificates of deposit), which are interest
rate sensitive and which are subject to withdrawal from the Bank at any time.
These FHLB advances are collateralized primarily by certain of the Bank's
mortgage loans and secondarily by the Bank's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions, including the Bank,
fluctuates from time-to-time in accordance with the policies of the FHLB. See
"Regulation--Federal Home Loan Bank System." At June 30, 1998, the Bank had $8.0
million in outstanding advances from the FHLB as compared to $8.0 million at
December 31, 1997. The Bank has overnight borrowing capacity at the FHLB of
$45.0 million and additional borrowing capacity at June 30, 1998 of $37.0
million.

     The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE SIX           AT OR FOR THE YEAR ENDED
                                                                  MONTHS ENDED JUNE 30,                DECEMBER 31,
                                                                 -----------------------    ----------------------------------
                                                                    1998         1997          1997        1996        1995
                                                                 ----------   ----------    ----------  ----------  ----------
                                                                                     (DOLLARS IN THOUSANDS)
FHLB advances:
   Average balance outstanding (monthly)....................        $8,000      $10,000       $ 9,667     $ 7,417     $ 8,000
   Maximum amount outstanding at any
      month-end during the period...........................         8,000       10,000        10,000      15,000       8,000
   Balance outstanding at end of period.....................         8,000       10,000         8,000      15,000       8,000
   Weighted average interest rate during the period.........          6.14%        6.14%         6.23%       6.18%       6.95%
   Weighted average interest rate at end of period..........          6.19%        6.19%         6.19%       6.23%       7.16%
61
PROPERTIES

     The Bank currently conducts its business through its four full service
banking offices including its main banking office. The Bank owns all four
branches. The following table sets forth information regarding the Bank's
properties.
ORIGINAL        NET BOOK VALUE       TOTAL DEPOSITS
                                                 YEAR          OF PROPERTY AT             AT
LOCATION                                        ACQUIRED        JUNE 30, 1998        JUNE 30, 1998
----------------------------------------     -------------    -----------------    -----------------
                                                                           (IN THOUSANDS)
EXECUTIVE/BRANCH OFFICE:
400 George Street......................          1962              $1,007               $244,106
Fredericksburg, VA  22404

BRANCH OFFICES:
Route Three Branch.....................          1983                 735                 42,239
3600 Plank Road
Fredericksburg, VA  22407

Four Mile Fork Branch..................          1972                 483                 60,531
4535 Lafayette Boulevard
Fredericksburg, VA  22408

Aquia Branch...........................          1978                 401                 26,843
117 Garrisonville Road
P.O. Box 382
Stafford, VA  22555
The Bank also owns property for possible branch expansion located on Route
17 North, in Stafford County. The net book value of this property, as of June
30, 1998, was $____________.

LEGAL PROCEEDINGS

     The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.

PERSONNEL

     As of June 30, 1998, the Bank had 50 full-time employees and six part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Benefits" for a description of certain compensation and
benefit programs offered to the Bank's employees.

                                       62
FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     GENERAL. The Company and the Bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS or the Virginia
Department of Revenue ("DOR") in the past five years.

     BAD DEBT RESERVE. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interests in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.

     In August 1996, provisions repealing the current thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.

     DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). See "Regulation"
and "Dividend Policy" for limits on the payment of dividends of the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve.

                                       63
CORPORATE ALTERNATIVE MINIMUM TAX ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.

     DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.

STATE AND LOCAL TAXATION

     COMMONWEALTH OF VIRGINIA. The Commonwealth of Virginia imposes a tax at the
rate of 6.0% on the "Virginia taxable income" of the Bank and the Company.
Virginia taxable income is equal to federal taxable income of interest or
dividends on obligations or securities of the United States that are exempt from
state income taxes, and a recomputation of the bad debt reserve deduction on
reduced modified taxable income. Since the Bank and the Company will recognize
no taxable gain for federal tax purposes as a result of the Conversion, the Bank
and the Company will recognize no Virginia taxable income as a result of the
Conversion.

                                  REGULATION

GENERAL

     The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to test the Bank's
compliance with various regulatory requirements. In addition, the FDIC may also
conduct examinations of the Bank, at the FDIC's discretion. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with and otherwise comply with the
rules and regulations of the OTS and of the Securities and Exchange Commission
(the "SEC") under the federal securities laws.

     Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress has been considering the elimination of the federal thrift charter and
abolishment of the OTS. The results of such consideration, including possible
enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."

     Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.

                                       64
FEDERAL SAVINGS INSTITUTION REGULATION

     BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. In particular, certain lending authority for federal
savings associations, e.g., commercial, non-residential real property loans and
consumer loans, is limited to a specified percentage of the institution's
capital or assets.

     LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. At June 30, 1998, the Bank's general limit on loans-to-one borrower
was $20.9 million. At June 30, 1998, the Bank's largest aggregate amount of
loans-to-one borrower consisted of one mortgage loan and two installment loans
to a local church with a combined carrying balance of $2.1 million, of which
$2.0 million was secured by real estate and $75,044 was unsecured. Management
believes that the Bank is in compliance with all applicable loans-to-one
borrower limitations.

     QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to either qualify as a "domestic
building and loan association," as defined in the Code, or maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of June 30, 1998,
the Bank maintained 99.99% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."

     LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Institution") and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior notice
to, but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below its
capital requirements or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.

     LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (recently lowered to 4%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations formerly required each savings
institution to maintain an average daily balance of short-term liquid assets at
1% of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. However, this requirement was recently eliminated. Monetary
penalties may be imposed for failure to meet the liquidity requirements. The
Bank's average liquidity ratio for the six months ended June 30, 1998 was
8.70%%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

                                       65
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, as reported in the Bank's latest quarterly Thrift Financial Report. The
assessments paid by the Bank for the year ended December 31, 1997 totalled
$________.

     BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of proposed legislation, see "Risk Factors--Financial
Institution Regulation and Possible Legislation."

     TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Section 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans to insiders made pursuant to a benefit or compensation program that are
widely available to all employees of the institution and do not give preference
to insiders over other employees. Regulation O also places individual and
aggregate limits on the amounts of loans the Bank may make to insiders based, in
part, on the Bank's capital position and requires that certain board approval
procedures be followed.

     ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.

     STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness ("Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.

                                       66
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital to total assets) ratio and an 8% risk based capital
standard. Core capital is generally defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and certain purchased credit card relationships. The OTS regulations
require that, in meeting the leverage ratio, tangible and risk-based capital
standards institutions generally must deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4% (3%
for institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."

     The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed above. The
components of supplementary capital generally include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the 
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their 
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed indefinitely the date that the
component will first be deducted from an institution's total capital.

     At June 30, 1998, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a table
which sets forth in terms of dollars and percentages the OTS tangible, leverage
and risk-based capital requirements, the Bank's historical amounts and
percentages at June 30, 1998 and pro forma amounts and percentages based upon
the issuance of the shares within the Estimated Price Range and assuming that a
portion of the net proceeds are retained by the Company.

PROMPT CORRECTIVE REGULATORY ACTION

     Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital ratio of
less than 8.0% or a leverage ratio or a Tier 1 capital to risk-based assets
ratio that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital ratio less than 6.0%, a Tier 1
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow

                                       67
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.

INSURANCE OF DEPOSIT ACCOUNTS

     The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.

     Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance assessments of between 24 and 25 basis points. The BIF
met the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.

     In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.

     On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended September 30, 1996 and was generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to $2.4
million on a pre-tax basis and $1.5 on an after-tax basis.

     The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.

     As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. Most recently, the FDIC determined to continue the 0 to 27
basis point range for the second half of 1998. SAIF members will also continue
to make the FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an on-going basis, whether the federal thrift
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.

                                       68
The Bank's assessment rate for 1997 ranged from 6.32 to 6.50 basis points
and the regular premium paid for this period was $240,000.

     The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.

     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1998 of $3.5 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance. At June 30, 1998, the Bank had $8.0 million in FHLB advances.

     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Bank amounted to approximately $247,000, $232,000
and $240,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Bank.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.43 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.

HOLDING COMPANY REGULATION

     The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries.

     As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See

                                       69
"--Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities authorized for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. No multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
Proposed legislation would, subject to certain grandfathering, limit the
activities of unitary savings and loan companies to those permissible for
multiple savings and loan holding companies. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS, and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.

     The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.

     Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described above. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.

THRIFT RECHARTERING

     The Funds Act provides that the BIF and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in Congress that would eliminate the federal thrift charter
and the OTS. A bill originally reported by the House Banking Committee would
have regained federal thrifts to become national banks or state banks within two
years of enactment or they would have become national banks by operation of law.
OTS would have been abolished and its functions transferred to the bank
regulatory agencies. The bill as passed by the House of Representatives,
however, did not provide for the elimination of the federal thrift charter or
OTS, but did provide that unitary stock savings and loan holding companies
existing or applied for after March 31, 1998 would not have the ability to
engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
stock holding companies existing or applied for before 1998 would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Bank is
unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and BIF
will eventually be merged or the federal thrift charter eliminated, and what
effect, if any, such legislation would have on the Bank.

                                       70
FEDERAL SECURITIES LAWS

     The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.

     The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.

                           MANAGEMENT OF THE COMPANY

     The Board of Directors' of the Company currently consists of nine members
each of whom is also a director of the Bank. The Board of Directors is divided
into three classes, each of which contains approximately one-third of the Board.
The directors shall be elected by the stockholders of the Company for staggered
three year terms, or until their successors are elected and qualified. One class
of directors, consisting of Messrs. Anderson, Beck and Donahoe has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Ashby, Harding and Rowe has a term of office expiring at
the second annual meeting of stockholders and a third class, consisting of
Messrs. Hicks and McKann and Ms. Newman has a term of office expiring at the
third annual meeting of stockholders. Their names and biographical information
are set forth under "Management of the Bank--Directors."

     The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
Executive                               Position(s) Held With Company
        ----------                    --------------------------------------------------
Samuel C. Harding, Jr.....    President
        Peggy J. Newman...........    Executive Vice President, Secretary and Treasurer
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.

     Except for directors' meeting fees, since the formation of the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Company. Information concerning the principal occupations,
employment and other information concerning the directors and officers of the
Company during the past five years is set forth under "Management of the Bank--
Biographical Information."

                                       71
MANAGEMENT OF THE BANK

DIRECTORS AND EXECUTIVE OFFICERS

     The following table sets forth certain information regarding the Board of
Directors of the Bank.
DIRECTOR    TERM
NAME                               AGE(1)            POSITION(S) HELD WITH THE BANK               SINCE    EXPIRES
----                               ------    ------------------------------------------------   --------   -------
H. Smith McKann                      84      Chairman of the Board                                 1955      2001
Ronald G. Beck                       62      Vice Chairman of the Board                            1988      1999
Samuel C. Harding, Jr.               56      Director and President                                1987      2000
Peggy J. Newman                      57      Director, Executive Vice President, Secretary         1988      2001
                                             and Treasurer
William M. Anderson, Jr.             56      Director                                              1988      1999
O'Conor Ashby                        51      Director                                              1992      2000
Ernest N. Donahoe, Jr.               61      Director                                              1982      1999
DuVal Q. Hicks, Jr.                  78      Director                                              1958      2001
Charles S. Rowe                      73      Director                                              1956      2000
__________________________
(1) As of June 30, 1998.

     Each of the executive officers of the Bank will retain his or her office
after the Conversion until his or her re-election at the annual meeting of the
Board of Directors of the Bank, held immediately after the first annual meeting
of stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.

BIOGRAPHICAL INFORMATION

DIRECTORS AND EXECUTIVE OFFICERS

     H. Smith McKann is the President and owner of General Products Company,
Fredericksburg, Virginia. Mr. McKann has served as a director of the Bank since
1955 and has been Chairman since 1996.

     Ronald G. Beck is the President of Clayborne C. Beck & Sons, Inc.,
Fredericksburg, Virginia, which sells furniture grade lumber worldwide. Mr. Beck
has served as a director of the Bank since 1988 and currently serves as Vice
Chairman of the Board.

     Samuel C. Harding, Jr. serves as President of the Bank and has held that
position since 1992. Mr. Harding has been with the Bank since 1972 and was
elected director in 1987.

     Peggy J. Newman serves as Executive Vice President, Secretary and Treasurer
of the Bank and has held these positions since 1992.  Ms. Newman has been with
the Bank for 33 years and was elected director in 1988.

     William M. Anderson, Jr. was elected to the Board in 1988 and is currently
the President of Mary Washington College, Fredericksburg, Virginia. He has
served in that position since 1982.

     O'Conor Ashby is a partner in the law firm of Willis & Ashby. He has been a
partner with that firm since 1975. Mr. Ashby, who has served on the Board of the
Bank since 1992 also is currently on the Board of Medicorp Services, Inc.

                                       72
Ernest N. Donahoe, Jr. Is an engineer and has been a partner with Sullivan,
Donahoe & Ingalls, P.C. since 1968.  Mr. Donahoe has been a Board member of the
Bank since 1982.

     DuVal Q. Hicks, Jr. is a retired attorney, formerly with Hicks, Baker and 
Peterson.  Mr. Hicks has been a director of the Bank since 1958.

     Charles S. Rowe is a retired Editor and Co-publisher of the Free Lance-
Star, Fredericksburg, Virginia, and a former director of the Associated Press.
He has served as a director of the Bank since 1956.

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY

     The Bank's Board of Directors meets twice per month and may have additional
special meetings called in the manner specified in the Bylaws. During 1997, no
current Director attended less than 75% of the aggregate of the total number of
Board meetings and the total number of committee meetings of the Board of
Directors on which they served.

     The Board of Directors of the Bank has established the following
committees:

     The Executive Committee consists of Messrs. McKann, Beck and Harding, and
Ms. Newman. The purposes of this committee are to evaluate issues of major
importance to the Bank between regularly scheduled Board meetings. The Executive
Committee meets as the members deem necessary and met one time in 1997.

     The Audit Committee consists of Messrs. Andersen, Ashby and Rowe. The
purpose of this committee is to oversee both internal and external audit
activities. The Audit Committee meets as the members deem necessary and met one
time in 1997.

     The Loan Committee consists of Messrs. Beck, Donahoe and Harding.  The 
purpose of this committee is to review and approve all loan requests of less 
than $500,000.  The Loan Committee meets once a week.

     Additionally, the Bank has a number of other management committees
including the Asset/Liability Committee, Advertising Committee, the Compensation
Committee, the Investment Committee, the Pension Committee and the Proxy
Committee.

     The Board of Directors of the Company has established the following
committees: the Audit and Compliance Committee consisting of Messrs. Anderson,
Rowe and Ashby; the Pricing Committee consisting of the entire Board of
Directors; and the Compensation Committee consisting of Messrs. Beck, Hicks and
Harding.

COMPENSATION OF DIRECTORS OF THE BANK AND COMPANY

     All directors of the Bank receive a fee of $1,700 for each regularly
scheduled monthly meeting attended. Effective August 1, 1998, such fees were
increased to $2,000 for each regularly scheduled monthly meeting attended.
Messrs. Beck and Donahoe additionally receive $400 per month for Loan Committee
meetings attended.

                                       73
EXECUTIVE COMPENSATION

     SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the year ended December 31, 1997, to
the Chief Executive Officer and the highest paid executive officer of the Bank
who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
ANNUAL COMPENSATION(1)
                                                                 -----------------------------------
                                                                                           OTHER                      
                                                                                           ANNUAL       ALL OTHER    
NAME AND                                                           SALARY      BONUS    COMPENSATION   COMPENSATION  
PRINCIPAL POSITIONS                                      YEAR       ($)         ($)        ($)(2)         ($)(3)      
---------------------------------------------          --------  ----------  ---------  ------------   ------------
Samuel C. Harding, Jr......................              1997      $204,800    $20,000        --          $33,109
  President (principal
  executive officer)

Peggy J. Newman............................              1997       199,800     20,000        --           37,884
  Executive Vice President,
  Secretary and Treasurer
  (principal financial officer)
_______________
(1)  Under Annual Compensation, the column titled "Salary" includes directors'
     fees for Mr. Harding and Ms. Newman.
(2)  For 1997, there were no (a) perquisites over the lesser of $50,000 or 10%
     of the individual's total salary and bonus for the year; (b) payments of
     above-market preferential earnings on deferred compensation; (c) payments
     of earnings with respect to long-term incentive plans prior to settlement
     or maturation; (d) tax payment reimbursements; or (e) preferential
     discounts on stock. For 1997, the Bank had no restricted stock or stock
     related plans in existence.
(3)  Includes deferred compensation of 28,612 and 33,387 for Mr. Harding and Ms.
     Newman, respectively under the Management Security Plan. Also includes
     matching contributions of 4,497 and 4,497 to the accounts of Mr. Harding
     and Ms. Newman, respectively, under the Bank's 401(k) Plan.

EMPLOYMENT AGREEMENTS

     Upon consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with Mr. Harding and Ms. Newman (individually, the "Executive"). The Employment
Agreements are subject to the review and approval of the OTS and may be amended
as a result of such OTS review. Review of compensation arrangements by the OTS
does not indicate, and should not be construed to indicate, that the OTS has
passed upon the merits of such arrangements. The Employment Agreements are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of both Mr. Harding and Ms. Newman.

     The Employment Agreements provide for a three-year term for each Executive
and shall become effective upon consummation of the Conversion. The Bank
Employment Agreements provide that, commencing on the first anniversary date of
the agreement and continuing each anniversary date thereafter, the Board of
Directors of the Bank may extend each of the agreements for an additional year
so that the remaining term shall be three years unless written notice of non-
renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The terms of the Company Employment Agreements
shall be extended on a daily basis unless written notice of non-renewal is given
by the Board of Directors of the Company. The Bank and the Company Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries, which will be effective for such Employment Agreements for
Mr. Harding and Ms. Newman will be $________ and $________, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, participation in various employee benefit plans and stock-based
compensation programs, as well as furnishing certain fringe benefits available
to similarly situated executive personnel. The Employment Agreements provide for
termination by the Bank or the Company for cause (as described in the
agreements) at any time. In the event the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation

                                       74
from the Bank and the Company upon (i) the failure to re-elect the Executive to
his/her current offices; (ii) a material change in the Executive's functions,
duties or responsibilities; (iii) a relocation of the Executive's principal
place of employment by more than 25 miles; (iv) liquidation or dissolution of
the Bank or the Company; or (v) a breach of the Employment Agreements by the
Bank or the Company; the Executive or, in the event of death, the Executive's
beneficiary would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreements. In addition,
the Executive would receive a payment attributable to the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Bank or the Company during the remaining term of the Employment Agreements,
together with the value of certain stock-based incentives previously awarded to
the Executive. The Bank and the Company would also continue and pay for the
Executive's life and disability coverage for the remaining term of the
Employment Agreement, as well as provide medical and hospitalization coverage
until the Executive at least attains eligible Medicare age. Upon any termination
of the Executive, the Executive is subject to a covenant not to compete with the
Company or the Bank for one year.

     Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event of
the Executive's death, the Executive's beneficiary would be entitled to a
severance payment generally equal to the greater of: (i) the payments due for
the remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded to the Executive; or (ii) three times the average
of the five preceding taxable years' annual compensation. The Bank and the
Company would also continue the Executive's life, health, and disability
coverage for thirty-six months (except medical and hospitalization would be
provided at least until the Executive attains eligible Medicare age).
Notwithstanding that both Employment Agreements provide for a severance payment
in the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on the base salaries to be paid to Mr. Harding and Ms.
Newman effective upon the consummation of the Conversion, and excluding any
benefits under any employee benefit plan which may be payable, would equal
approximately $_____ million.

     Payments to the Executive under the Bank Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company Employment Agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Virginia law, respectively.

EMPLOYEE SEVERANCE COMPENSATION PLAN

     Upon consummation of the Conversion, the Bank's Board of Directors intends
to, upon consummation of the Conversion, establish the Fredericksburg Savings
Bank Employee Severance Compensation Plan (the "Severance Plan") which will
provide eligible employees with severance pay benefits in the event of a change
in control of the Bank or the Company. Management personnel with Employment
Agreements are not eligible to participate in the Severance Plan. Generally,
employees are eligible to participate in the Severance Plan if they have
completed at least six months of service with the Bank. Under the Severance
Plan, in the event of a change in control of the Bank or the Company, eligible
employees who are terminated from or terminate their employment within one year
after the change in control (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. A participant, whose employment
has terminated, will be entitled to a cash severance payment equal to one-
twelfth of his or her current annual compensation for each year of service up to
a maximum of 199% of current annual compensation. In the event the provisions of
the Severance Plan were triggered, the total amount of payments that would be
due thereunder, based solely upon current salary levels, would equal
approximately $____ million.

                                       75
INSURANCE PLANS

     All full-time employees of the Bank, upon completion of the applicable
introductory period, may elect coverage for comprehensive hospitalization,
including major medical, and are covered with long-term disability insurance.

BENEFITS

     401(K) PLAN. The Bank maintains the Fredericksburg Savings and Loan
Association, F.A. Salary Savings Plan (the "401(k) Plan"), a tax-qualified
profit sharing plan with a qualified cash or deferred arrangement under Section
401(k) of the Code. The 401(k) Plan currently provides participants with savings
and retirement benefits based on employee deferrals of compensation, as well as
matching and other discretionary contributions made by the Bank. Eligible
employees may begin participating in the 401(k) Plan upon the completion of one-
half of one "Year of Service" (as defined in the 401(k) Plan) and attainment of
age 21. Participants currently may make salary reduction contributions to the
401(k) Plan up to the lesser of 20% of their compensation or the legally
permissible limit ($10,000 for 1998). A participant is always 100% vested in his
or her salary reduction contributions to the 401(k) Plan. Participants become
vested in employer contributions to the 401(k) Plan at the rate of 33 1/3% per
each completed year of service. Participants also become 100% vested in their
accounts under the 401(k) Plan upon death or incurring disability (as described
in the 401(k) Plan) or attainment of their "Normal Retirement Age" (as defined
in the 401(k) Plan).

     Currently, participants may invest their accounts under the 401(k) Plan in
and among four funds. The Bank may add or eliminate investment options available
under the 401(k) Plan in the future.

     Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service, death, or disability. However,
participants may request hardship withdrawals from the 401(k) Plan under certain
circumstances. Distributions from the 401(k) Plan are generally subject to
federal and state income taxes and distributions made prior to a participant
attaining age 59 1/2 are also generally subject to a federal excise tax.

     PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Eligible employees begin
participating in the Pension Plan following the completion of one year of
service (as describe in the Plan) and attainment of the age 21. A participant in
the Pension Plan generally becomes vested in his accrued benefit under the plan
upon completing five years of service. Participants also become 100% vested in
their accrual benefit under the Pension Plan upon incurring a disability (as
described in the plan) and upon the attainment of their "normal retirement age"
(as described in the Plan). The Pension Plan is funded solely through
contributions made by the Bank.

     A participant's accrued benefit under the Pension Plan is actuarially
determined based on his or her years of service with the Bank and his or her
average monthly compensation (as described in the Plan), including average
monthly compensation in excess of an integration to the Social Security Taxable
Wage Base.

     The table below reflects the annual pension benefit payable to a
participant in the Pension Plan, assuming various levels of "Average Monthly
Compensation" (as defined in the Pension Plan) and years of service credited as
of the participant's normal retirement age. As of January 1, 1998, Mr. Harding
and Ms. Newman had ___ and ___ years of service with the Bank, respectively, for
purposes of the Pension Plan.

                                       76
Years of Credited Service
                 ----------------------------------------------------------
  Average Annual     15           20          25          30          35
    Earnings(1)
 -------------   ---------- ----------   ---------   ----------   ---------  
     $ 50,000     $19,833     $26,444     $33,055      $33,055     $33,055
     $ 75,000     $31,271     $41,694     $52,118      $52,118     $52,118
     $100,000     $42,708     $56,944     $71,180      $71,180     $71,180
     $125,000     $54,146     $72,194     $90,243      $90,243     $90,243
     $150,000     $65,583     $87,444    $109,305     $109,305    $109,305
     $175,000     $77,021    $102,694    $128,368     $128,368    $128,368
     $200,000     $88,458    $117,944    $147,430     $147,430    $147,430
     $250,000    $111,333    $148,444    $185,555     $185,555    $185,555
     $300,000    $134,208    $178,944    $223,680     $223,680    $223,680
     $350,000    $157,083    $209,444    $261,805     $261,805    $261,805
     $400,000    $179,958    $239,944    $299,930     $299,930    $299,930

__________________________________
(1)      Code Section 401(a)(17) limits the amount of compensation the Bank may
         consider in computing benefits under the Pension Plan to $150,000,
         effective with respect to the Pension Plan for plan years beginning on
         or after January 1, 1994, as periodically adjusted ($160,000 for 1998).

         EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to establish
a tax-qualified employee stock ownership plan (the "ESOP") in connection with
the Conversion. Generally, eligible employees will become participants in the
ESOP upon the completion of one-half of one year of service with the Bank (with
credit given for service with the Bank prior to adoption of the plan) and
attainment of age 21. With the consent of the Bank, an affiliate of the Bank may
also adopt the ESOP for the benefit of its employees.

         The Bank expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the "ESOP Committee"). The ESOP Committee
will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the related trust agreement. The Bank expects
the ESOP to purchase 8% of the Common Stock issued in the Conversion. As part of
the Conversion, and in order to fund the ESOP's purchase of the Common Stock
issued in the Conversion, the ESOP will borrow 100% of the aggregate purchase
price of the Common Stock from either the Company or a third-party lender.

         The trustee of the ESOP will repay the loan principally from the Bank's
annual contributions to the ESOP over an expected period of 20 years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since some participants in
the ESOP will be employees of the Bank or, alternatively, the Bank may reimburse
the Company for contributions made by the Company with respect to employees of
the Bank. The Bank expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date of
Conversion.

         The trustee of the ESOP will pledge the shares of Common Stock
purchased by the ESOP in connection with the Conversion as collateral for the
loan and will hold the shares in a suspense account under the plan. As the
trustee repays the loan, the trustee will release a portion of the shares from
the suspense account and allocate them to the accounts of active participants in
the ESOP based on each participant's compensation (as determined under the terms
of the plan) relative to all participants' compensation for the plan year. In
the event of a change in control of the Bank or the Company prior to complete
repayment of the loan, the ESOP trustee, in accordance with the terms of the
plan document, will sell enough shares of Common Stock held in the suspense
account to repay the loan in full. Upon repayment of the loan, the ESOP trustee
will then allocate all remaining shares of Common Stock held in the suspense
account to the accounts of active participants based on each participant's
account balance as of a specific date or based on some other method set forth in
the plan document.

                                       77
Participants will become vested in contributions made to the ESOP by
the Bank at the rate of 33a% per year of service with the Bank (with credit
given for service with the Bank prior to its adoption of the ESOP). Accordingly,
participants will become fully vested in their accounts under the ESOP after
completing three years of vesting service. The Bank expects that participants
will also become fully vested in their accounts under the ESOP upon the
attainment of their normal retirement age while an employee of the Bank, upon
their death or incurring a disability, upon a change in control of the Bank or
the Company, or upon termination of the plan. Benefits generally become
distributable under the ESOP and potentially become subject to income tax upon
death, retirement, disability or other separation from service.

         The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most accurately
reflect the instructions it receives from participants regarding the allocated
stock. In the event no shares have been allocated under the ESOP at the time
such shares are to be voted, each participant shall be deemed to have one share
allocated to his or her account for voting purposes.

         SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of benefit accruals and annual contributions
under such plans on behalf of any employee. The Bank has previously taken action
to separately provide benefits to Mr. Harding and Ms. Newman that would have
accrued under the Pension Plan but for the limitation on compensation the Bank
may consider under the Pension Plan less benefits that actually accrue under the
Pension Plan for the benefit of Mr. Harding and Ms. Newman. Upon Conversion, the
Bank also intends to provide for similar benefits with respect to the 401(k)
Plan and ESOP, as well as benefits otherwise limited by other provisions of the
Code or the terms of the ESOP loan.

         To provide for such benefits, the Bank intends to implement a
non-qualified deferred compensation arrangement known as a "Supplemental
Executive Retirement Plan" ("SERP"). The SERP will generally provide benefits to
eligible individuals (designated by the Board of Directors of the Bank or its
affiliates) that cannot be provided under the Pension Plan, 401(k) Plan and/or
ESOP as a result of the limitations imposed by the Code, but that would have
been provided under the Pension Plan, 401(k) Plan and/or ESOP but for such
limitations. In addition to providing for benefits lost under tax-qualified
plans as a result of limitations imposed by the Code, the SERP will also make up
lost ESOP benefits to designated individuals who retire, who terminate
employment in connection with a change in control, or whose participation in the
ESOP ends due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete scheduled repayment of the ESOP loan. Generally, upon the retirement of
an eligible individual or upon a change in control of the Bank or the Company
prior to complete repayment of the ESOP Loan, the SERP will provide the
individual with a benefit equal to what the individual would have received under
the ESOP had he remained employed throughout the term of the ESOP or had the
ESOP not been terminated prior to the scheduled repayment of the ESOP loan less
the benefits actually provided under the ESOP on behalf of such individual. An
individual's benefits under the SERP will generally become payable upon the
participant's retirement (in accordance with the standard retirement policies of
the Bank), upon the change in control of the Bank or the Company or as
determined under the applicable tax-qualified retirement plans sponsored by the
Bank.

         The Bank may establish a grantor trust in connection with the SERP to
satisfy the obligations of the Bank with respect to the SERP. The assets of the
grantor trust would remain subject to the claims of the Bank's general creditors
in the event of the Bank's insolvency until paid to the individual pursuant to
the terms of the SERP.

         MANAGEMENT SECURITY PLAN. The Bank currently sponsors a non-tax
qualified deferred compensation arrangement for approximately ten employees,
including Mr. Harding and Ms. Newman, known as the Fredericksburg Savings and
Loan Association, F.A. Management Security Plan (the "Management Security
Plan"). The Management Security Plan generally provides a payment to each
covered individual upon his or her death, disability, retirement, or termination
of employment after five or more years of service. Benefits under the Management
Security Plan are based on a flat dollar amount (specified for each individual
in a separate "Benefit Agreement") multiplied by the

                                       78
individual's years of service with the Bank. Participants become fully vested in
benefits under the Management Security Plan after the completion of five years
of service with the Bank. The annual benefits for Mr. Harding and Ms. Newman are
$3,685 and $4,000, respectively, multiplied by each individual's respective
years of service with the Bank. As of January 1, 1998, Mr. Harding and Ms.
Newman had completed 27 and 33 years of service, respectively.

         STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of the Company and
Bank. The Company may provide such stock based benefits under the Stock-Based
Incentive Plan or may establish one or more separate plans which would provide
for the benefits described herein.

         In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount equal to 10% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (1,311,552 shares
based upon the maximum of the Estimated Price Range), and intends to grant Stock
Awards in an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (524,621 shares based upon
the maximum of the Estimated Price Range). Any Common Stock awarded under the
Stock-Based Incentive Plan will be awarded at no cost to the recipients. The
plan may be funded through the purchase of Common Stock by a trust established
in connection with the Stock-Based Incentive Plan (or any separate plan(s)) or
from authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."

         The grants of Stock Options and Stock Awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether Stock Options will be Incentive or Non-Statutory Stock
Options, as defined below, the number of shares subject to each stock option and
Stock Award, the exercise price of each Non-Statutory Stock Option, whether
Stock Options may be exercised by delivering other shares of Common Stock, and
when Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan, directors may receive only grants of Non-Statutory Stock
Options. If such plan is adopted within one year after conversion, OTS
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). OTS regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors).

         The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (iii) limited option rights ("Limited
Option Rights"). Limited Option Rights are exercisable only upon a change in
control of the Bank or the Company. Subject to OTS regulations, upon exercise of
Limited Option Rights, the recipient will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of any unexercised
Stock Option, whether exercisable or unexercisable at such

                                       79
time, and the fair market value of the shares of Common Stock subject to the
Stock Option on the date of exercise of the right in lieu of purchasing the
Common Stock underlying the Stock Option. It is anticipated that all Stock
Options granted contemporaneously with stockholder approval of the Stock-Based
Incentive Plan will qualify as Incentive Stock Options to the extent permitted
under Section 422 of the Code. Unless sooner terminated, the Stock-Based
Incentive Plan will be in effect for a period of ten years from the earlier of
adoption by the Board of Directors or approval by the Company's Stockholders.
Subject to stockholder approval, the Company intends to grant Stock Options with
Limited Option Rights under the plan at an exercise price equal to at least the
fair market value of the underlying Common Stock on the date of grant.

         An individual will not be deemed to have received taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.

         The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards and Limited Stock Rights to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.

         When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.

         The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and, thereafter, vest at a rate of no more than 20% per
year and may not be accelerated except in the case of death or disability. Stock
Options could be exercisable for three months following the date on which the
employee or director ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. In the case of death or disability,
Stock Options may

                                       80
be exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant or
director. In the event of death, disability or normal retirement, the Company,
if requested by the optionee, or the optionee's beneficiary, could elect, in
exchange for vested options, to pay the optionee, or the optionee's beneficiary
in the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.

         Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Bank. A change in control
would generally be considered to occur when a person or group of persons acting
in concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.

TRANSACTIONS WITH CERTAIN RELATED PERSONS

         The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.

         Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of interest
charged by the Bank on such loans were the Bank's cost of funds. Pursuant to
FIRREA, in 1989, the Bank discontinued its practice of making such preferential
loans to its officers and Directors. However, all such pre-FIRREA preferential
loans were "grandfathered" under FIRREA. Since the enactment of FIRREA, the Bank
has not made any preferential loans to its executive officers or Directors. 
The Bank intends to implement a policy whereby it will begin to again offer
loans to executive officers and Directors. Such loans, as well as loans made to
Bank employees, will be made on the same terms and conditions offered to the
general public. If the Bank implements a policy of extending credit to executive
officers and Directors, such policy will provide that all such loans will be
made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of June 30, 1998, the
Bank had $572,673 of loans to executive officers and Directors all of which had
balances of less than $60,000 as of June 30, 1998 or were made by the Bank in
the ordinary course of business with no favorable terms and do not involve more
than the normal risk of collectibility or present unfavorable features.

         The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.

                                       81
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS

         The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares of
Common Stock are issued at the minimum and maximum of the Estimated Price Range,
including the effect of shares issued to the Foundation, and that sufficient
shares will be available to satisfy their subscriptions. The table also sets
forth the total expected beneficial ownership of Common Stock as to all
directors and executive officers as a group.
AT                         AT
                                                              THE MINIMUM                THE MAXIMUM
                                                            OF THE ESTIMATED          OF THE ESTIMATED
                                                              PRICE RANGE                PRICE RANGE   
                                                         -----------------------   -----------------------
                                                                        AS A                     AS A
                                                          NUMBER       PERCENT      NUMBER      PERCENT
                                                            OF        OF SHARES       OF       OF SHARES
NAME                                         AMOUNT       SHARES        ISSUED      SHARES       ISSUED
----                                      ------------   ----------   ----------   ---------   -----------
H. Smith McKann.........................     $300,000      $30,000       0.31%       30,000        0.23%
Ronald G. Beck..........................      300,000       30,000       0.31        30,000        0.23
Samuel C. Harding, Jr...................      300,000       30,000       0.31        30,000        0.23
Peggy J. Newman.........................      300,000       30,000       0.31        30,000        0.23
O'Conor Ashby...........................      100,000       10,000       0.10        10,000        0.23
Ernest N. Donahoe, Jr...................      100,000       10,000       0.10        10,000        0.23
DuVal Q. Hicks, Jr......................      300,000       30,000       0.31        30,000        0.23
Charles S. Rowe.........................      300,000       30,000       0.31        30,000        0.23
William M. Anderson, Jr.................       *             *             *            *             *
                                           ----------     --------     ------       -------      ------
All Directors and Executive Officers                                                            
    as a Group (9 persons)..............   $2,001,000     $200,100       2.06%      200,100        1.53%
                                           ==========     ========     ======       =======      ======
__________________________
*    Less than 0.01% of the shares of Common Stock issued.

                                      82
THE CONVERSION

     THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL,
HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH
AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT OF THE
FOUNDATION.

GENERAL

     On July 14, 1998, the Bank's Board of Directors unanimously adopted the
Plan, pursuant to which the Bank will be converted from a federally-chartered
mutual savings and loan association to a federally-chartered capital stock
savings bank. It is currently intended that all of the outstanding capital stock
of the Bank will be held by the Company, which is incorporated under Virginia
law. The Plan was approved by the OTS, subject to, among other things, approval
of the Plan by the Bank's members. A special meeting of members has been called
for this purpose to be held on ___________, 199_.

     The Company has applied for and expects to receive approval from the OTS to
become a savings and loan holding company and to acquire all of the common stock
of the Bank to be issued in the Conversion. The Company plans to purchase the
shares of issued and outstanding capital stock of the Bank in exchange for up to
50% of the net proceeds and retain the remaining net proceeds. The Conversion
will be effected only upon completion of the sale of all of the shares of Common
Stock of the Company to be issued pursuant to the Plan.

     The Plan provides generally that (i) the Bank will convert from a mutual
savings and loan association to a capital stock savings bank and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Bank's Eligible Account Holders, the ESOP, Supplemental Eligible Account
Holders and Other Members. Upon completion of the Subscription Offering, the
Company will offer any shares of Common Stock not subscribed for in the
Subscription Offering in a Community Offering with preference given to natural
persons residing in the Bank's Local Community. It is anticipated that shares
not subscribed for in the Subscription and Community Offerings will be offered
for sale by the Company to the general public in a Syndicated Community
Offering. The Bank has the right to accept or reject, in whole or in part, any
orders to purchase shares of the Common Stock received in the Community Offering
or in the Syndicated Community Offering. See "--Community Offering" and "--
Syndicated Community Offering."

                                       83
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$89.8 million and $121.4 million, will be determined based upon an independent
appraisal of the estimated pro forma market value of the Common Stock of the
Company. All shares of Common Stock to be issued and sold in the Conversion will
be sold at the same price. The independent appraisal will be affirmed or, if
necessary, updated at the completion of the Subscription Offering, if all shares
are subscribed for, or at the completion of the Community and/or the Syndicated
Community Offerings. The appraisal has been performed by FinPro, a consulting
firm experienced in the valuation and appraisal of savings institutions. See "--
Stock Pricing" for additional information as to the determination of the
estimated pro forma market value of the Common Stock.

     THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL ASPECTS OF THE CONVERSION.
THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE
PLAN. A COPY OF THE PLAN IS AVAILABLE FOR INSPECTION AT EACH OFFICE OF THE BANK
AND AT THE SOUTHEAST REGIONAL AND WASHINGTON, D.C. OFFICES OF THE OTS.

PURPOSES OF CONVERSION

     The Bank, as a federally-chartered mutual savings and loan association,
does not have shareholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Bank will be
structured in the form used by commercial banks, other business entities and a
growing number of savings institutions. The Conversion will enhance the Bank's
ability to access capital markets, expand its current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation.

     The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.

     The potential impact of the Conversion upon the Bank's capital base is
significant. At June 30, 1998, the Bank had retained earnings, determined in
accordance with GAAP, of $83.5 million, or 17.7% of total assets. Assuming that
the Company uses 50% of the net proceeds at the maximum of the Estimated Price
Range to purchase the capital stock of the Bank, the Bank's GAAP capital will
increase to $127.5 million or a ratio of GAAP capital to adjusted assets, on a
pro forma basis, of 27.0% after the Conversion. The investment of the net
proceeds from the sale of the Common Stock is expected to provide the Bank with
additional income to increase further its capital position.

     After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Articles of Incorporation will permit the Company,
subject to market conditions and regulatory approval of an offering, to raise
additional equity capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the present time, the
Company has no plans with respect to additional offerings of securities, other
than the issuance of additional shares upon exercise of stock options under the
Stock-Based Incentive Plan or the possible issuance of authorized but unissued
shares to fund the Stock-Based Incentive Plan. Following the Conversion, the
Company will also be able to use stock-based incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Executive Compensation."

ESTABLISHMENT OF THE CHARITABLE FOUNDATION

     GENERAL. In furtherance of the Bank's long-standing commitment to its local
community, the Bank's Plan of Conversion provides for the establishment of a
charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which will
be incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock of the Company, as further described below. The
Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and the communities in which the Bank

                                       84
operates and thereby enables such communities to share in the potential growth
and success of the Company and the Bank over the long term. By further enhancing
the Bank's visibility and reputation in the communities in which it operates,
the Bank believes that the Foundation will enhance the long-term value of the
Bank's community banking franchise.

     The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-profit
medical facilities, community groups and other types of organizations or
projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. See "Comparison of Valuation and Pro Forma Information With
No Foundation." In such an event, the Bank may establish a new Estimated Price
Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."

     PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a "Satisfactory" Community Reinvestment
Act ("CRA") rating. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. The
Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes and may be able to support such activities in ways that are not presently
available to the Bank. The Bank believes that the Foundation will enable the
Company and the Bank to assist their local community in areas beyond community
development and lending. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Boards of Directors of the Bank and Company
also believe that the funding of the Foundation with Common Stock of the Company
is a means of enabling the communities in which the Bank operates to share in
the potential growth and success of the Company long after completion of the
Conversion. The Foundation accomplishes that goal by providing for continued
ties between the Foundation and Bank, thereby forming a partnership with the
Bank's community. The establishment of the Foundation would also enable the
Company and the Bank to develop a unified charitable donation strategy and would
centralize the responsibility for administration and allocation of corporate
charitable funds. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending and
charitable activities. The Bank expects in future periods to continue making its
ordinary charitable contributions within its communities. Such ordinary
contributions typically range between $20,000 and $30,000 per year.

     Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of four members, all of
whom must be officers of, or members of the Board of Directors of, the Company
or the Bank or an affiliate or subsidiary of the Company or the Bank. A person
who is a director, officer or employee of the Bank, or has the power to direct
its management or policies, or otherwise owes a fiduciary duty to the Bank, and
who will also serve as a director or employee of the Foundation would be subject
to the requirements of OTS Conflicts of Interest Regulations. The initial board
of directors of the Foundation will be comprised of Messrs. Anderson, Harding
and Hicks and Ms. Newman. Such persons intend to purchase 100, 30,000, 30,000
and 30,000 shares of Common Stock in the Conversion, respectively. At the
maximum of the Estimated Price Range, such purchases equal 0.00%, 0.23%, 0.23%
and 0.23%, respectively, or 0.69% in the aggregate, of the total number of
shares to be issued in the Conversion, including shares issued to the
Foundation. On an on-going basis, a Nominating Committee of the board of
directors of the Foundation, will nominate individuals eligible for election to
the board of directors of the Foundation. The members of the Foundation, who are
comprised of its board members, will elect the directors at the annual meeting
of the Foundation from those nominated by the Nominating Committee. Only persons
serving as directors of the Foundation qualify as members of the Foundation with
voting authority. Directors will be divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Foundation

                                       85
provides that the corporation is organized exclusively for charitable purposes
as set forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members.

     The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (i), (ii) or (iii) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
legal opinion(s) by the Company or the Foundation. In the event that the OTS
waived the voting restriction, the directors would direct the voting of the
Common Stock held by the Foundation. However, a condition to the OTS approval of
the Conversion provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that time
may impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control of
the Common Stock held by the Foundation, any of which could limit the ability of
the board of directors of the Foundation to control the voting of the Common
Stock held by the Foundation. There will be no agreements or understandings with
directors of the Foundation regarding the exercise of control, directly or
indirectly, over the management or policies of the Company or the Bank,
including agreements related to voting, acquisition or disposition of the
Company's stock. As directors of a nonprofit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established.

     The Company will provide office space and administrative support services
to the Foundation. Initially, the Foundation is expected to have no employees.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Bank and the Foundation will comply with
the affiliate transaction restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act, as amended.

     The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because it desired to form a bond with its community in a
manner that would allow the community to share in the potential growth and
success of the Company and the Bank over the long term. The funding of the
Foundation with stock also provides the Foundation with a potentially larger
endowment than if the Company contributed cash to the Foundation since, as a
shareholder, the Foundation will share in the potential growth and success of
the Company. As such, the contribution of stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock contribution,
would have to contribute to the Foundation in future years in order to maintain
a level amount of charitable grants and donations.

     The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future and, subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time-to-time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average

                                       86
market value of the assets held by the Foundation, except where the board of
directors of the Foundation determines that the failure to sell an amount of
Common Stock greater than such amount would result in a long-term reduction of
the value of the Foundation's assets or would otherwise jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may be
greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's directors to sell more than 5% of its stock in such
circumstances. Upon completion of the Conversion and the contribution of shares
to the Foundation immediately following the Conversion, the Company would have
9,694,080, 11,404,800 and 13,115,520 shares issued and outstanding at the
minimum, midpoint and maximum, respectively, of the Estimated Price Range.
Because the Company will have an increased number of shares outstanding, the
voting and ownership interests of shareholders in the Company's common stock
would be diluted by 7.4%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Pro Forma Data."

     COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to capitalize the
Foundation with Common Stock in an amount up to 8% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the contribution
to the Foundation would equal 718,080, 844,800, 971,520 and 1,117,248 shares,
respectively, which would have a market value of $7.2 million, $8.4 million,
$9.7 million and $11.2 million, respectively, based on the Purchase Price of
$10.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. As a result of the establishment of the Foundation, the
Estimated Price Range, as estimated by FinPro, has decreased and the amount of
stock available for sale in the Offerings has also correspondingly decreased.
The amount of the decrease is 1,394,000, 1,640,000, 1,886,000 and 2,168,900
shares, or $13.9 million, $16.4 million, $18.9 million and $21.7 million, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, respectively. See "Pro Forma Data" and "Comparison of Valuation and Pro
Forma Data Information with No Foundation."

     TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code and will be classified
as a private foundation rather than a public charity. A private foundation
typically receives its support from one person or one corporation whereas a
public charity receives its support from the public. The Foundation will submit
a request to the IRS to be recognized as an exempt organization after approval
of the Foundation by the Bank's members at the Special Meeting being held to
consider the Conversion. As long as the Foundation files its application for 
tax-exempt status within 15 months from the date of its organization and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization.

     A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
Under the Code, the Company may deduct up to 10% of its taxable income in any
one year and any contributions made by the Company in excess of the deductible
amount will be deductible for federal tax purposes over each of the five
succeeding taxable years. The Company and the Bank believe that the Conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
Conversion. In making such a determination, the Company and the Bank considered
the dilutive impact of the Foundation on the amount of Common Stock available to
be offered for sale in the Conversion. See "Comparison of Valuation and Pro
Forma Information with No Foundation." Based on such consideration, the Company
and Bank believe that the contribution to the Foundation in excess of the 10%
annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Bank's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Price Range, the Company would have pro forma consolidated capital of $176.6
million, or 31.2%, of consolidated assets and the Bank's pro forma tangible,
core and risk-based capital ratios would be 23.5%, 23.5% and 40.96%,
respectively. See "Regulatory Capital Compliance," "Capitalization" and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial condition
of the Company and the Bank. The Company and the Bank therefore believe that the
amount of the charitable contribution is reasonable given the Company's and the
Bank's pro forma

                                       87
capital positions. As such, the Company and the Bank believe that the
contribution does not raise safety and soundness concerns.

     The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing and that the Company will be entitled
to a deduction in the amount of the fair market value of the stock at the time
of the contribution, subject to a limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal tax purposes. Thus, while the Company expects
to receive a charitable contribution deduction of approximately $850,000 in
1998, the Company is permitted under the Code to carry over the excess
contribution over a five-year period for federal income tax purposes. Assuming
the close of the Offerings at the midpoint of the Estimated Price Range, the
Company estimates that substantially all of the deduction should be deductible
over the six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five year period following the year
in which the contribution is made to fully utilize the carryover related to the
excess contribution. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank and the financial condition and operations of the
Foundation.

     Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. See "Risk Factors--
Establishment of the Charitable Foundation." In cases of willful, flagrant or
repeated acts or failures to act which result in violations of the IRS rules
governing private foundations, a private foundation's status as a private
foundation may be involuntarily terminated by the IRS. In such event, the
managers of a private foundation could be liable for excise taxes based on such
violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.

     As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.

     REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of common stock by the Foundation following the Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by

                                       88
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
opinion(s) by the Company or the Foundation. There can be no assurances that
either a legal or tax opinion addressing these issues will be rendered, or if
rendered, that the OTS will grant an unconditional waiver of the voting
restriction. In this regard, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or his designees, at that time may
impose conditions on the composition of the board of directors of the Foundation
or such other conditions or restrictions relating to the control of the Common
Stock held by the Foundation, any of which could limit the ability of the board
of directors of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.

     In addition, establishment of the Foundation is subject to the approval of
a majority of the total outstanding votes of the Bank's members eligible to be
cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan of
Conversion. If the Bank's members approve the Plan of Conversion, but not the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
for sale in the Offerings since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
See "Comparison of Valuation and Pro Forma Information With No Foundation."

EFFECTS OF CONVERSION

     GENERAL. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject to
applicable regulations of the OTS. However, this ownership interest is tied to
the depositor's account and has no tangible market value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.

     Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors, subject
to applicable regulations of the OTS. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
after other claims, including claims of depositors to the amounts of their
deposits, are paid.

     When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.

     CONTINUITY. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS and
the FDIC. After the Conversion, the Bank will continue to provide services for
depositors and borrowers under current policies by its present management and
staff.

                                       89
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board of
Directors of the Bank. All officers of the Bank at the time of Conversion will
retain their positions immediately after Conversion.

     EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.

     EFFECT ON LOANS. No loan outstanding from the Bank will be affected by the
Conversion and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.

     EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of the Bank
are members of, and have voting rights in, the Bank as to all matters requiring
membership action. Upon Conversion, depositors will cease to be members and will
no longer be entitled to vote at meetings of the Bank. Upon Conversion, all
voting rights in the Bank will be vested in the Company as the sole stockholder
of the Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors of the Bank will not have voting
rights after the Conversion except to the extent that they become stockholders
of the Company through the purchase of Common Stock.

     TAX EFFECTS. The Bank has received an opinion from Muldoon, Murphy &
Faucette with regard to federal income taxation and an opinion from Cherry
Bekaert & Holland with regard to Virginia taxation which provide that the
adoption and implementation of the Plan of Conversion set forth herein will not
be taxable for federal or Virginia tax purposes to the Bank, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See "--Tax Aspects."

     EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.

STOCK PRICING

     The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Bank and the
Company have retained FinPro to make such valuation. For its services in making
such appraisal, FinPro will receive a fee of $31,000, plus reasonable expenses.
The Bank and the Company have agreed to indemnify FinPro and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where FinPro liability results from its negligence or willful
misconduct.

     An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Financial Statements . FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Bank and the
economic and demographic conditions in the Bank's existing marketing area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly-traded savings banks and savings
institutions located in the Bank's primary market area; the aggregate

                                       90
size of the offering of the Common Stock; the impact of the Conversion on the
Bank's net worth and earnings potential; the proposed dividend policy of the
Company and the Bank; and the trading market for securities of comparable
institutions and general conditions in the market for such securities.

     On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion, dated September 9, 1998, the estimated pro forma market
value of the Common Stock being sold in connection with the Conversion ranged
from a minimum of $89.8 million to a maximum of $121.4 million with a midpoint
of $105.6 million. Based upon the Valuation Range and the Purchase Price of
$10.00 per share for the Common Stock established by the Board of Directors, the
Board of Directors has established the Estimated Price Range of $89.8 million to
$121.4 million, with a midpoint of $105.6 million, based on the issuance of
8,976,000 to 12,144,000 shares of Common Stock. The Board of Directors of the
Company and the Bank have reviewed the appraisal of FinPro and in determining
the reasonableness and adequacy of such appraisal consistent with OTS
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by FinPro in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if required),
if necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally.

     SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE OFFERINGS. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO VALUE INDEPENDENTLY THE
ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE BANK AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME-TO-TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL COMMON STOCK AT
PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION
OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR
COMMON STOCK."

     Prior to the completion of the Conversion, the maximum of the Estimated
Price Range may be increased up to 15% and the number of shares of Common Stock
to be issued in the Conversion may be increased to 13,965,600 shares due to
regulatory considerations, changes in the market and general financial and
economic conditions, without the resolicitation of subscribers. See "--
Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.

     No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and the OTS that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause FinPro to conclude that the value of the
Common Stock at the price so determined is incompatible with its estimate of the
pro forma market value of the Common Stock at the conclusion of the Conversion.

     If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the OTS,
may terminate the Plan and return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, bank draft or money order,
extend or hold a new Subscription and/or Community Offering, establish a new
Estimated Price Range, commence a resolicitation of subscribers or take such
other actions as permitted by the OTS in order to complete the Conversion. In
the event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription Offering would not exceed 45 days unless further
extended by the OTS for periods of up to 90 days not to extend beyond ________,
2000.

     If the minimum number of shares of Common Stock are not sold through the
Subscription Offering or Community Offering, then the Bank and the Company
expect to offer the remaining shares in a Syndicated Community Offering which
would occur as soon as practicable following the close of the Community
Offering. All shares of Common Stock will be sold at the same price per share in
the Syndicated Community Offering as in the Subscription and Community
Offerings. See "--Syndicated Community Offering."

                                       91
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, the Company and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, including those which would be involved in a
cancellation of the Syndicated Community Offering, would cause FinPro to
conclude that the aggregate value of the Common Stock at the Purchase Price is
incompatible with its estimate of the pro forma market value of the Common Stock
of the Company at the time of the Syndicated Community Offering. Any change
which would result in an aggregate purchase price which is below or more than
15% above the Estimated Price Range would be subject to OTS approval. If such
confirmation is not received, the Bank may extend the Conversion, extend, reopen
or commence new Subscription Offering, Community Offering or Syndicated
Community Offering, establish a new Estimated Price Range and commence a
resolicitation of all subscribers with the approval of the OTS or take such
other actions as permitted by the OTS in order to complete the Conversion, or
terminate the Plan and cancel the Subscription and Community Offerings and/or
the Syndicated Community Offering. In the event market or financial conditions
change so as to cause the aggregate purchase price of the shares to be below the
minimum of the Estimated Price Range or more than 15% above the maximum of such
range and the Company and the Bank determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to decrease or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. A resolicitation, if any,
following the conclusion of the Subscription Offering would not exceed 45 days,
or if following the Syndicated Community Offering, 90 days, unless further
extended by the OTS for periods up to 90 days not to extend beyond ____________.
If such resolicitation is not effected, the Bank will return all funds promptly
with interest at the Bank's passbook rate of interest on payments made by check,
bank draft or money order.

     Copies of the appraisal report of FinPro, including any amendments thereto
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."

NUMBER OF SHARES TO BE ISSUED

     Depending upon market or financial conditions following the commencement of
the Subscription Offering, the total number of shares to be issued in the
Conversion may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and FinPro's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $89.8 million to a maximum,
as increased by 15%, of $139.7 million, the number of shares of Common Stock
expected to be issued in the Conversion is between a minimum of 8,976,000 shares
and a maximum, as adjusted by 15%, of 13,965,600 shares. The actual number of
shares issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.

     In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."

     In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares up to 8% of the Common
Stock sold in the Conversion to fund the Foundation. Assuming the sale of shares
in the Offerings at the

                                       92
maximum of the Estimated Price Range, the Company will issue 971,520 shares of
its Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 13,115,520 shares.
Of that amount, the Foundation will own 7.4%. Funding the Foundation with
authorized but unissued shares will have the effect of diluting the ownership
and voting interests of persons purchasing shares in the Conversion by 7.4%
since a greater number of shares will be outstanding upon completion of the
Conversion than would be if the Foundation were not established. See "Pro Forma
Data."

     An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."

SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS

     In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts (as more particularly described in the Plan and herein) in the
Bank with a balance of $50 or more as of June 30, 1997 ("Eligible Account
Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance of $50
or more as of __________, 199_ ("Supplemental Eligible Account Holders"); and
(4) members of the Bank, consisting of depositors of the Bank as of
_____________, 199_, the Voting Record Date, other than Eligible Account Holders
and Supplemental Eligible Account Holders ("Other Members"). All subscriptions
received will be subject to the availability of Common Stock after satisfaction
of all subscriptions of all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in the
Plan of Conversion and as described below under "--Limitations on Common Stock
Purchases."

     Deposit accounts which will provide subscription rights to holders thereof
consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan and federal regulation,
certain deposits do not qualify as "savings accounts" including, but not limited
to, noninterest-bearing demand accounts (primarily noninterest-bearing checking
accounts) and mortgage escrow deposits.

     PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering (currently $300,000
of Common Stock), one-tenth of one percent (.10%) of the total offering of 
shares of Common Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the Eligible
Account Holder's Qualifying Deposit (defined by the Plan as any deposit account
in the Bank with a balance of $50 or more as of June 30, 1997) and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders ($________), in each case on the Eligibility Record Date, subject to the
overall purchase limitation and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See "--
Limitations on Common Stock Purchases."

     In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible

                                       93
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.

     To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding June 30, 1997.

     PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to purchase
8% of the shares to be issued in the Conversion, including shares issued to the
Foundation, or 775,526 shares and 1,049,242 shares, based on the issuance of
9,694,080 shares and 13,115,520 shares, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
and Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See "Management of the 
Bank--Benefits--Employee Stock Ownership Plan and Trust."

     PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering (currently $300,000 of Common Stock), one-tenth of one 
percent (.10%) of the total offering of shares of Common Stock or fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."

     In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.

     To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights
received by Eligible Account Holders will be applied in partial satisfaction to
the subscription rights to be received as a Supplemental Eligible Account
Holder.

     PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the

                                       94
Community Offering (currently $300,000 of Common Stock), or one-tenth of one
percent (.10%) of the total offering of shares of Common Stock, subject to the
overall purchase limitation and exclusive of an increase in shares issued
pursuant to an increase in the Estimated Price Range of up to 15%.

     In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.

     EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on ___________, 199_, at __________, Eastern time, unless extended
for up to 45 days by the Bank or such additional periods with the approval of
the OTS. Subscription rights which have not been exercised prior to the
Expiration Date will become void.

     The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Expiration Date, unless such period is extended
with the consent of the OTS, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45 day period following the Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions and have their funds returned promptly with
interest and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond ______________.

COMMUNITY OFFERING

     To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the Supplemental
Eligible Account Holders and Other Members, the Bank has determined to offer
shares pursuant to the Plan to certain members of the general public. The
Community Offering, if conducted, may begin concurrently with, during or
promptly after the Subscription Offering. In the event a community offering is
held, a preference will be given to natural persons residing in the City of
Fredericksburg and Stafford and Spotsylvania Counties, subject to the right of
the Company to accept or reject any such orders, in whole or in part, in their
sole discretion. Persons purchasing stock in the Community Offering, together
with associates of and persons acting in concert with such persons, may purchase
up to $300,000 of Common Stock subject to the maximum purchase limitation and
exclusive of shares issued pursuant to an increase in the Estimated Price Range
by up to 15%. See "--Limitations on Common Stock Purchases." This amount may be
increased to up to a maximum of 5% or decreased to less than $170,000 at the
sole discretion of the Company and the Bank. THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE
RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT
ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR
AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.

     Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the Subscription
Offering and Community Offering, such stock will be allocated first to each
Preferred Subscriber whose order is accepted by the Bank, in an amount equal to
the lesser of 100 shares or the number of shares subscribed for by each such
Preferred Subscriber, if possible. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose order remains unsatisfied on a
100 shares per order basis

                                       95
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to other
persons of the general public who purchase in the Community Offering applying
the same allocation described above for Preferred Subscribers.

PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES

     The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Plan provides that
the Bank and the Company are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country or resides in a state of
the United States with respect to which both of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares of Common Stock
reside in such state; and (ii) the Company or the Bank determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request that the
Company and the Bank or their officers, directors or trustees register as a
broker, dealer, salesman or selling agent, under the securities laws of such
state, or a request to register or otherwise qualify the subscription rights or
Common Stock for sale or submit any filing with respect thereto in such state.
Where the number of persons eligible to subscribe for shares in one state is
small, the Bank and the Company will base their decision as to whether or not to
offer the Common Stock in such state on a number of factors, including the size
of accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers, salesmen or selling agents.

MARKETING AND UNDERWRITING ARRANGEMENTS

     The Bank and the Company have engaged Trident as a consultant and financial
advisor in connection with the offering of the Common Stock and Trident has
agreed to use its best efforts to solicit subscriptions and purchase orders for
shares of Common Stock in the Offerings. Based upon negotiations between the
Bank and the Company concerning the fee structure, Trident will receive a fixed
fee of $525,000. In the event that a selected dealers agreement is entered into
in connection with a Syndicated Community Offering, the Bank will pay a fee (to
be negotiated at such time under such agreement) to such selected dealers, any
sponsoring dealers fees and a management fee to Trident of ___% for shares sold
by a National Association of Securities Dealers, Inc. member firms pursuant to a
selected dealers agreement; provided, however, that any fees payable to Trident
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed ____% of the Purchase Price and provided further, however, that
the aggregate fees payable to Trident and the selected dealers will not exceed
7% of the aggregate Purchase Price of the Common Stock sold by selected dealers.
Fees to Trident and to any other broker-dealer may be deemed to be underwriting
fees and Trident and such broker-dealers may be deemed to be underwriters.
Trident will also be reimbursed for its reasonable out-of-pocket expenses
incurred in its capacity as consultant and financial advisor, as well as
conversion agent, including legal fees, in an amount not to exceed $55,000.
Notwithstanding the foregoing, in the event the Offerings are not consummated or
Trident ceases, under certain circumstances after the subscription solicitation
activities are commenced, to provide assistance to the Company, Trident will be
reimbursed for its reasonable out-of-pocket expenses as described above. The
Company and the Bank have agreed to indemnify Trident for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Trident has received advances towards its
fees totaling $10,000. See "Pro Forma Data" for the assumptions used to arrive
at these estimates.

     _____________ will perform proxy solicitation services, conversion agent
services and records management services for the Bank in the Conversion and will
receive a fee for these services of $_______.

     Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
Other employees of the Bank may participate in the Offering in ministerial
capacities or provide clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. The Company will rely on
Rule 3a4-1 under the Exchange Act and sales of Common Stock will be conducted
within the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Common Stock. No officer, director or

                                       96
employee of the Company or the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.

PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING

     To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.

     To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be received by the Bank at any of its offices by _________, Eastern
Time, on ___________, 1998, with respect to the Subscription Offering, or by the
date set for the termination of the Community Offering, which date shall be
within 45 days after the close of the Subscription Offering, or ___________,
1998, unless extended by the Bank and the Company with the approval of the OTS,
if necessary. Stock order forms which are not received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. Certificates
representing shares of Common Stock purchased in the Subscription Offering must
be registered in the name of Eligible Account Holder or Supplemental Eligible
Account Holder, as the case may be. Joint stock registration will be allowed
only if the qualifying deposit account is so registered. In addition, the Bank
and Company are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the foregoing,
the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Conversion. The Company and the Bank have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of the Bank unless the Conversion has not been completed within 45 days after
the end of the Subscription Offering, unless such period has been extended.

     In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1997) and/or the Supplemental Eligibility Record Date (____________, 199_)
and/or the Voting Record Date (____________, 199_) must list all accounts on the
stock order form giving all names in each account and the account number.

     Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. Orders for Common Stock submitted by subscribers in the Subscription
Offering which aggregate $50,000 or more must be paid by official bank or
certified check, a check issued by a NASD-registered broker-dealer or by
withdrawal authorization from a deposit account of the Bank. No wire transfers
will be accepted. Interest will be paid on payments made by cash, check, bank
draft or money order at the Bank's passbook rate of interest from the date
payment is received until the completion or termination of the Conversion. If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion.

     If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate

                                       97
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.

     If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.

     Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained at the Bank. Persons with IRAs and Qualified Plans maintained at the
Bank must have their accounts transferred to an unaffiliated institution or
broker to purchase shares of Common Stock in the Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and ten
percent shareholders who use self-directed IRA funds and Qualified Plans to
purchase shares of Common Stock in the Offerings, make such purchases for the
exclusive benefit of the IRAs and Qualified Plans.

     Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.  Shares sold prior to the receipt of a stock 
certificate are the responsibility of the purchaser.

RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES

     Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Bank, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising such subscription rights will be
required to certify that he is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion. For a discussion on post-Conversion restrictions of directors and
executive officers of the Bank, see "--Certain Restrictions on Purchase or
Transfer of Shares After Conversion."

     THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.

SYNDICATED COMMUNITY OFFERING

     As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Trident acting as agent of the Company to assist the
Company and the Bank in the sale of the Common Stock. The Company and the Bank
have the right to reject orders in whole or in part in their sole discretion in
the Syndicated Community Offering. Neither Trident nor any registered broker-
dealer shall have any obligation to take or purchase any shares of the Common
Stock in the Syndicated Community Offering, however, Trident has agreed to use
its best efforts in the sale of shares in the Syndicated Community Offering.

                                       98
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $300,000 of the Common Stock; provided,
however, that shares of Common Stock purchased in the Community Offering by any
persons, together with associates of or persons acting in concert with such
persons, will be aggregated with purchases in the Syndicated Community Offering
and be subject to an overall maximum purchase limitation of 1.0% of the shares
offered, exclusive of an increase in shares issued pursuant to an increase in
the Estimated Price Range by up to 15%.

     Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.

     In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.

     Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.

     The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the approval
of the OTS. Such extensions may not be beyond _____________. See "--Stock
Pricing" above for a discussion of rights of subscribers, if any, in the event
an extension is granted.

LIMITATIONS ON COMMON STOCK PURCHASES

     The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:

     (1)  No less than 25 shares;

     (2)  Each Eligible Account Holder may subscribe for and purchase in the
          Subscription Offering up to the greater of the amount permitted to be
          purchased in the Community Offering, currently $300,000 of Common
          Stock, one-tenth of one percent (.10%) of the total offering of shares
          of Common Stock or fifteen times the product (rounded down to the next
          whole number) obtained by multiplying the total number of shares of
          Common Stock to be issued by a fraction of which the numerator is the
          amount of the Qualifying Deposit of the Eligible Account Holder and
          the denominator is the total amount of Qualifying Deposits of all
          Eligible Account Holders in each case on the Eligibility Record Date
          subject to the overall maximum purchase limitation in (8) below;

                                       99
(3)  The ESOP is permitted to purchase in the aggregate up to 10% of the
          shares of Common Stock issued in the Conversion, including shares
          issued to the Foundation, including shares issued in the event of an
          increase in the Estimated Price Range of 15% and intends to purchase
          8% of the shares of Common Stock issued in the Conversion, including
          shares issued to the Foundation;

     (4)  Each Supplemental Eligible Account Holder may subscribe for and
          purchase in the Subscription Offering up to the greater of the amount
          permitted to be purchased in the Community Offering, currently
          $300,000 of Common Stock, one-tenth of one percent (.10%) of the total
          offering of shares of Common Stock or fifteen times the product
          (rounded down to the next whole number) obtained by multiplying the
          total number of shares of Common Stock to be issued by a fraction of
          which the numerator is the amount of the Qualifying Deposit of the
          Supplemental Eligible Account Holder and the denominator is the total
          amount of Qualifying Deposits of all Supplemental Eligible Account
          Holders in such case on the Supplemental Eligibility Record Date
          subject to the overall maximum purchase limitation in (8) below;

     (5)  Each Other Member may subscribe for and purchase in the Subscription
          Offering up to the greater of the amount permitted to be purchased in
          the Community Offering, currently $300,000 of Common Stock, or one-
          tenth of one percent (.10%) of the total offering of shares of Common
          Stock subject to the overall maximum purchase limitation in (8) below;

     (6)  Persons purchasing shares of Common Stock in the Community Offering,
          together with associates of groups of persons acting in concert with
          such persons, may purchase in the Community Offering up to $300,000 of
          Common Stock subject to the overall maximum purchase limitation in (8)
          below;

     (7)  Persons purchasing shares of Common Stock in the Syndicated Community
          Offering, together with associates of or persons acting in concert
          with such persons, may purchase in the Syndicated Community Offering
          up to $300,000 of Common Stock subject to the overall maximum purchase
          limitation in (8) below, provided further that shares of Common Stock
          purchased in the Community Offering by any persons, together with
          associates of and persons acting in concert with such persons, will be
          aggregated with purchases in the Syndicated Community Offering in
          applying the $300,000 purchase limitation;

     (8)  Eligible Account Holders, Supplemental Eligible Account Holders and
          Other Members may purchase stock in the Community Offering and
          Syndicated Community Offering subject to the purchase limitations
          described in (6) and (7) above, provided that, except for the ESOP,
          the overall maximum number of shares of Common Stock subscribed for or
          purchased in all categories of the Conversion by any person, together
          with associates of or groups of persons acting in concert with such
          persons, shall not exceed 1.0% of the shares of Common Stock offered
          in the Conversion and exclusive of an increase in the total number of
          shares issued due to an increase in the Estimated Price Range of up to
          15%; and

     (9)  No more than 25% of the total number of shares offered for sale in the
          Conversion may be purchased by directors and officers of the Bank and
          their associates in the aggregate, excluding purchases by the ESOP.

     Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offering in the Subscription
Offering shall not exceed, in the aggregate, 10% of the shares being offered in
the Subscription Offering. Requests to purchase additional shares of Common
Stock under this

                                      100
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.

     The overall maximum purchase limitation may not be reduced to less than
1.0% but the individual amount permitted to be subscribed for may be reduced by
the Bank to less than 0.10%, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.

     In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion at the
Adjusted Maximum number of shares, including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unsatisfied subscriptions of Eligible Account Holders, exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unsatisfied subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unsatisfied subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unsatisfied subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum, with preference to
institutional investors then a preference to Preferred Subscribers.

     The term "associate" of a person is defined to mean: (i) any corporation or
organization (other than the Bank or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or directly or indirectly a 10%
stockholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity; provided, however, such term shall not include any employee stock
benefit plan of the Bank in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank. Directors are not treated as associates of each other solely because of
their Board membership. For a further discussion of limitations on purchases of
a converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Bank--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."

     The term "Acting in Concert" means: (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; (ii) a combination or pooling
of voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; or (iii) a person or company which
acts in concert with another person or company ("other party") shall also be
deemed to be acting in concert with any person or company who is also acting in
concert with that other party, except that any tax-qualified employee stock
benefit plan will not be deemed to be acting in concert with its trustee or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be aggregated.

LIQUIDATION RIGHTS

     In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.

                                      101
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts and certificates of deposit, with a balance of $50 or more held
in the Bank on June 30, 1997 and __________, 199_, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For deposit accounts in existence at both
dates separate subaccounts shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such respective record dates.

     If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time-to-time by the proportion of any
such reduction and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.

TAX ASPECTS

     Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to federal income taxation and an opinion of an independent accountant
with respect to Virginia taxation, to the effect that the Conversion will not be
a taxable transaction to the Company, the Bank, Eligible Account Holders, or
Supplemental Eligible Account Holders except as noted below. The federal and
Virginia tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.

     No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. Cherry Bekaert &
Holland has opined that the Conversion will not be a taxable transaction to the
Company, the Bank, Eligible Account Holders or Supplemental Eligible Account
Holders for Virginia income and/or franchise tax purposes. Certain portions of
both

                                      102
the federal and the state and local tax opinions are based upon the assumption
that the subscription rights issued in connection with the Conversion will have
no economic value at the time of distribution or at the time the subscriptions
are exercised.

     Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or DOR and the IRS or DOR could
disagree with conclusions reached therein. In the event of such disagreement,
there can be no assurance that the IRS or DOR would not prevail in a judicial or
administrative proceeding.

     FinPro has issued an opinion stating that, pursuant to its valuation,
FinPro is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS or DOR. If the subscription rights granted to Eligible Account Holders
or Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account Holders
or Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.

INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION

     To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. This
includes any and all interpretations, applications and determinations made by
the Board of Directors on the basis of such information and assistance as was
then reasonably available for such purpose.

     The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.

     The establishment of the Foundation will be considered as a separate matter
from approval of the Plan of Conversion. If the Bank's members approve the Plan
of Conversion, but not the creation of the Foundation, the Bank intends to
complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See "--
Stock Pricing."

CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION

     All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer and instructions will be issued to the effect that any
transfer within such time period of any certificate or record ownership of such
shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued at a later date as a stock dividend, stock split,

                                      103
or otherwise, with respect to such restricted stock will be subject to the same
restrictions. The directors and executive officers of the Bank will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act
and any other applicable requirements of the federal securities laws.

     Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1.0% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to any stock option plan to be
established after the Conversion.

     Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion the Company
may repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Company to become undercapitalized; and (iii) the
Company provides to the Regional Director of the OTS no later than 10 days prior
to the commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. In addition, under current OTS policies, repurchases
may be allowed in the first year following Conversion and in amounts greater
than 5% in the second and third years following Conversion, provided there are
valid and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.

                  RESTRICTIONS ON ACQUISITION OF THE COMPANY
                                 AND THE BANK

GENERAL

     The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a new
Federal Stock Charter and Bylaws to be adopted by members of the Bank. The Plan
also provides for the concurrent formation of a holding company, which form of
organization may or may not be utilized at the option of the Board of Directors
of the Bank. See "The Conversion--General." In the event that the holding
company form of organization is utilized, as described below, certain provisions
in the Company's Articles of Incorporation and Bylaws and in its management
remuneration entered into in connection with the Conversion, together with
provisions of Virginia corporate law, may have anti-takeover effects. In the
event that the holding company form of organization is not utilized, the Bank's
Stock Charter and Bylaws and management remuneration entered into in connection
with the Conversion may have anti-takeover effects as described below. In
addition, regulatory restrictions may make it difficult for persons or companies
to acquire control of either the Company or the Bank.

RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS

     A number of provisions of the Company's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Articles of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Articles of Incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to such

                                      104
Articles of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.

     LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common Stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act and includes shares beneficially owned by such person or any of his
affiliates (as defined in the Articles of Incorporation), shares which such
person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Articles of Incorporation of the
Company further provides that this provision limiting voting rights may only be
amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).

     BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Articles of Incorporation and Bylaws provide that the size
of the Board shall be determined by a majority of the directors. The Articles of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Articles of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.

     In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.

     CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Articles of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.

     AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance of
75,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The
shares of Common Stock and Preferred Stock were authorized in an amount greater
than that to be issued in the Conversion to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates and liquidation preferences. As
a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of shares in the Conversion,
including shares contributed to the Foundation, and the issuance of additional
shares pursuant to the terms of the Stock-Based Incentive Plan and upon exercise
of stock options to be issued pursuant to the terms of the Stock-Based Incentive
Plan or Master Stock-Based Benefit Plan, which are to be established and
presented to stockholders at the first annual meeting after the Conversion.

                                      105
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation requires the approval of the holders
of at least 80% of the Company's outstanding shares of voting stock to approve
certain "Business Combinations," as defined therein, and related transactions.
Under Virginia law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only two-thirds of the votes entitled to be cast. Under the Articles
of Incorporation, at least 80% approval of shareholders is required in
connection with any transaction involving an Interested Stockholder (as defined
below) except (i) in cases where the proposed transaction has been approved in
advance by a majority of those members of the Company's Board of Directors who
are unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder or (ii) if
the proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The term
"Interested Stockholder" is defined to include any individual, a group acting in
concert, corporation, partnership or other entity (other than the Company or its
subsidiaries) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This provision
of the Articles of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Articles of Incorporation) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class of
equity or convertible securities of the Company owned directly or indirectly by
an Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 1.53% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the Stock-
Based Incentive Plan and expects to issue an amount equal to 10% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, under the Stock-Based Incentive Plan or Master Stock-Based Benefit
Plan to directors, officers and employees. As a result, assuming the Stock-Based
Incentive Plan is approved by Stockholders, directors, officers and employees
have the potential to control the voting of approximately ____% of the Company's
Common Stock, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described hereinabove.

     EVALUATION OF OFFERS. The Articles of Incorporation of the Company further
provides that the Board of Directors of the Company, when evaluating any offer
of another "Person" (as defined therein) to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity, or (iii) purchase or otherwise acquire all
or substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company, the Bank and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, the social
and economic effects of acceptance of such offer on the Company's customers and
the Bank's present and future account holders and employees; on the communities
in which the Company and the Bank operate or are located; and on the ability of
the Company to fulfill its corporate objectives as a savings and loan holding
company and on the ability of the Bank to fulfill the objectives of a federally-
chartered stock savings and loan association under applicable statutes and
regulations. By having these standards in the Articles of Incorporation of the
Company, the Board of Directors may be in a stronger position to oppose such a
transaction if the Board concludes that the transaction would not be in the best
interest of the Company, even if the price offered is significantly greater than
the then market price of any equity security of the Company.

                                      106
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the
Company's Articles of Incorporation must be approved by a majority vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Articles of Incorporation. The Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a duly
constituted meeting of stockholders.

     CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.

ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
MANAGEMENT REMUNERATION ADOPTED IN CONVERSION

     The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, Employee Severance Compensation Plan,
Stock-Based Incentive Plan, Stock-Based Incentive Plan to be established may
also discourage takeover attempts by increasing the costs to be incurred by the
Bank and the Company in the event of a takeover. See "Management of the Bank--
Employment Agreements" and "--Benefits--Stock-Based Incentive Plan."

     The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.

VIRGINIA CORPORATE LAW

     The Commonwealth of Virginia has a statute designed to provide Virginia
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Article 14 of the Virginia Stock Corporation Act
("Article 14"), is intended to discourage certain takeover practices by impeding
the ability of a hostile acquiror to engage in certain transactions with the
target company.

     In general, Article 14 provides that a "Person" (as defined therein) who
owns 10% or more of the outstanding voting stock of a Virginia corporation (an
"Interested Shareholder") may not consummate a merger or other affiliated
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Shareholder. The term
"affiliated transaction" is defined broadly to cover a wide range of corporate
transactions including mergers, share exchanges, dispositions of corporate
assets with an aggregate fair market value in excess of 5% of the corporation's
net worth, disposition of voting shares of the corporation with an aggregate
fair market value in excess of 5% of the aggregate fair market value of all
outstanding voting stock of the corporation, and any reclassification of
securities, including a reverse stock split, recapitalization or merger of the
corporation with its subsidiaries which increases the percentage of voting
shares owned beneficially by an Interested Shareholder by more than 5%.

                                      107
The statute exempts the following transactions from the requirements of
Article 14: (i) any affiliated transaction that is approved by a majority of the
disinterested directors (as defined therein) and by two-thirds of the voting
shares other than those shares beneficially owned by the Interested Shareholder;
or (ii) any affiliated transaction with an Interested Shareholder whose
acquisition of shares making such person an Interested Shareholder receive prior
approval of a majority of the corporation's disinterested directors (as defined
therein). A corporation may exempt itself from the requirements of the statute
by adopting an amendment to its Articles of Incorporation or Bylaws electing not
to be governed by Article 14. At the present time, the Board of Directors does
not intend to propose any such amendment.

     In addition, Virginia Stock Corporation Act, Article 14.1 ("Article 14.1")
limits the voting rights of shares acquired in "Control Share Acquisitions" by
providing that shares acquired in a transaction that would cause the acquiring
person's voting strength to meet or exceed any of three thresholds (one-fifth,
one-third or a majority of voting shares) have no voting rights unless granted
by a majority vote of shares not owned by the acquiring person or any officer or
employee-director of the Virginia corporation. A Virginia corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Articles of Incorporation or Bylaws electing not to be governed by Article 14.1.
At the present time, the Board of Directors does not intend to propose any such
amendment.

RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS

     Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by federal regulations to protect the interests of the converted Bank and its
stockholders from any hostile takeover. Such provisions may, indirectly, inhibit
a change in control of the Company, as the Bank's sole stockholder. See "Risk
Factors--Certain Anti-Takeover Provisions Which May Discourage Takeover
Attempts."

     The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event that
holders of revocable proxies for more than 10% of the shares of the Common Stock
of the Company seek, among other things, to elect one-third or more of the
Company's Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors of
the Bank is not currently able to determine when and if it would assert this
provision of the Bank's Federal Stock Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of the Bank, the Company and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Bank in the years immediately following the Conversion.

     Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting

                                      108
other corporate needs which may arise. In the event of a proposed merger, tender
offer or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.

REGULATORY RESTRICTIONS

     The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.

     For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to a
vote of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion of
such proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of the
Company or the Bank which have not received prior regulatory approval.

     In addition, the Change in Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings and loan holding company unless the OTS has
been given 60 days' prior written notice and has not objected to the
transaction. The HOLA provides that no company may acquire "control of a savings
and loan holding company without the prior approval of the OTS." Any company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination, and regulation by the OTS. Pursuant to federal
regulations, "control" of a savings and loan holding company is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock of the company or irrevocable proxies
representing more than 25% of any class of voting stock of the company or the
ability to control the election of a majority of the directors. The regulations
also establish a rebuttable presumption of "control" upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock, of a savings and loan holding company, where certain enumerated "control
factors" are also present in the acquisition. The OTS may prohibit an
acquisition by a person of "control" if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person or (iv) the proposed acquisition would
have an adverse effect on the deposit insurance funds. Applications by a company
to acquire "control" of a savings and loan holding company are evaluated by OTS
based upon factors such as the financial and managerial resources and future
prospects of the acquirer and the institution involved, competitive factors and
the convenience and needs of the community involved. The foregoing restrictions
do not apply to the

                                      109
acquisition of the Company's capital stock by one or more tax-qualified employee
stock benefit plans, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Company.

                  DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

GENERAL

     The Company is authorized to issue 75,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). Based on the sale of Common
Stock in connection with the Conversion and issuance of authorized but unissued
Common Stock in an amount up to 8% of the Common Stock issued in the
Conversion to the Foundation, the Company currently expects to issue up to
13,115,520 shares of Common Stock (or 15,082,848 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restriction on Acquisition of the
Company and the Bank," each share of the Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan, all such stock will be duly authorized, fully paid
and non-assessable.

     THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.

COMMON STOCK

     DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.

     VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Virginia law or the Company's Articles of Incorporation
or as are otherwise presented to them by the Board of Directors. Except as
discussed in "Restrictions on Acquisition of the Company and the Bank," each
holder of Common Stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. If the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
Certain matters require an 80% shareholder vote. See "Restrictions on
Acquisition of the Company and the Bank."

     As a federal mutual savings and loan association, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.

     LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion--
Liquidation Rights"), all assets of the Bank available for distribution. In the
event of liquidation, dissolution or winding up of the Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.

     PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.

                                      110
PREFERRED STOCK

     None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time-to-time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.

                   DESCRIPTION OF CAPITAL STOCK OF THE BANK

GENERAL

     The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 18,000,000 shares of
common stock, par value $1.00 per share, and 2,000,000 shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in series
and classes having such rights, preferences, privileges and restrictions as the
Board of Directors may determine. Each share of common stock of the Bank will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. After the Conversion, the Board of Directors
will be authorized to approve the issuance of common stock up to the amount
authorized by the Federal Stock Charter without the approval of the Bank's
stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.

COMMON STOCK

     DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.

     VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held, subject
to the right of shareholders to cumulate their votes for the election of
directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the Company's
Articles of Incorporation and Bylaws and Management Remuneration Adopted in
Conversion."

     LIQUIDATION. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after payment
of all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon) and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.

     PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.

                         TRANSFER AGENT AND REGISTRAR

     The transfer agent and registrar for the Common Stock is _________________.

                                      111
EXPERTS

     The financial statements of the Bank and its subsidiary as of December 31,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, have been included in this Prospectus, in reliance upon the report of
Cherry Bekaert & Holland, independent certified public accountants, appearing
elsewhere herein, and given on the authority of said firm as experts in
accounting and auditing.

     FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Conversion and its valuation with respect
to subscription rights.

                            LEGAL AND TAX OPINIONS

     The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Muldoon,
Murphy & Faucette, Washington, D.C., special counsel to the Bank and the
Company. The Commonwealth of Virginia tax consequences of the Conversion and
certain matters related to the Foundation will be passed upon for the Bank and
the Company by Cherry Bekaert & Holland. Certain legal matters will be passed
upon for Trident Securities, Inc. by Breyer & Aguggia LLP, Washington, D.C.

                            ADDITIONAL INFORMATION

     The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.

     The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 1475 Peachtree Street, NE, Atlanta, Georgia 30309.

     In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(g) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.

     A copy of the Articles of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank and the proposed Articles of
Incorporation and Bylaws of the Foundation are available without charge from the
Bank.

                                      112
FREDERICKSBURG SAVINGS AND LOAN
                               ASSOCIATION, F.A.
Contents

                                                                            Page
Report of Independent Auditors                                               F-l
 
Balance Sheets                                                               F-2
 
Statements of Income                                                          28
 
Statements of Comprehensive Income                                           F-3
 
Statements of Changes in Equity Capital                                      F-4
 
Statements of Cash Flows                                                 F-5-F-6
 
Notes to Financial Statements                                           F-7-F-27
Certain schedules required by OTS regulations and by Regulation 
       S-X are not included because they are not applicable or the 
       required information has been disclosed elsewhere.

       Financial statements related to Virginia Capital, Inc. are not
       included as it has not begun operations.
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Members
Fredericksburg Savings and Loan
 Association, F.A.
Fredericksburg, Virginia

We have audited the accompanying balance sheets of Fredericksburg Savings and
Loan Association, F.A. as of December 31, 1997 and 1996, and the related
statements of income, comprehensive income, changes in equity capital, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Association's
management.  Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the  financial statements referred to above present fairly, in
all material respects, the financial position of Fredericksburg Savings and Loan
Association, F.A. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

                                           /s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
January 29, 1998, except to Note 16,
for which the date is August 14, 1998
FREDERICKSBURG SAVINGS AND LOAN                                              F-2
ASSOCIATION, F.A.

 
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
                                                                                             December 31,
                                                                          June 30,        -------------------
                                                                            1998           1997         1996
                                                                           -------        -------     -------
                                                                         (Unaudited)
Cash and cash equivalents (includes interest-bearing deposits of                      
 $8,248 at June 30, 1998; $10,634 in 1997; $15,177 in 1996)               $  9,031       $ 11,287    $ 15,937
Investment securities                                                                 
 Held-to-maturity (fair value $1,226 at June 30, 1998; $1,335 in                      
  1997; $1,545 in 1996)                                                      1,190          1,291       1,502
 Available-for-sale (cost $30,470 at June 30, 1998; $30,865 in                        
  1997; $32,261 in 1996)                                                    30,928         31,151      31,979
Federal Home Loan Bank stock, restricted, at cost                            3,539          3,448       3,232
Loans receivable, net                                                      415,986        413,032     405,145
Accrued interest receivable                                                           
 Loans                                                                       2,206          2,054       1,858
 Investment securities                                                         508            543         588
Foreclosed real estate for sale, net                                         1,883          1,959       1,611
Property and equipment                                                                
 Land                                                                        1,115          1,115       1,120
 Office properties and equipment, at cost, less accumulated                           
  depreciation ($4,119 at June 30, 1998; $3,999 in 1997;                              
  $4,593 in 1996)                                                            2,398          2,393       2,504
Other assets                                                                   183            269         813
Deferred tax asset                                                           3,313          3,378       3,628
                                                                           -------        -------     -------
                                                                          $472,280       $471,920    $469,917
                                                                           =======        =======     =======
LIABILITIES AND RETAINED EARNINGS                                                     

LIABILITIES                                                                           
 Deposits                                                                 $373,719       $377,114    $375,652
 Advances from Federal Home Loan Bank                                        8,000          8,000      15,000
 Retirement obligations                                                      5,593          5,480       4,934
 Advances from borrowers for taxes and insurance                             1,234            936         844
 Accrued expenses and other liabilities                                        234            317         191
                                                                           -------        -------     -------
   TOTAL LIABILITIES                                                      $388,780        391,847     396,621
                                                                           -------        -------     -------
RETAINED EARNINGS, SUBSTANTIALLY RESTRICTED                                 83,216         79,896      73,471
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE,                           
 NET OF TAX                                                                    284            177        (175)
                                                                           -------        -------     -------
                                                                            83,500         80,073      73,296
                                                                           -------        -------     -------
                                                                          $472,280       $471,920    $469,917
                                                                           =======        =======     =======
See notes to financial statements.
FREDERICKSBURG SAVINGS AND LOAN                                              F-3
ASSOCIATION, F.A.

STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
Six Months Ended
                                                              June 30,                      Year Ended December 31,
                                                       ----------------------        ------------------------------------
                                                        1998            1997          1997          1996            1995
                                                       ------          ------        ------        ------          ------
                                                            (Unaudited)
Net income                                             $3,320          $3,259        $6,425        $4,581          $6,658
                                                        -----           -----         -----         -----           -----
Other comprehensive income-net of tax:                                                                         
    Unrealized gains (losses) on securities                                                                    
        available for sale                                 55            (199)          285           150            (192)
    Less: reclassification adjustment for                                                                      
        gains (losses) included in net income             (52)            (19)          (67)          138             (19)
                                                        -----           -----         -----         -----           -----
                                                                                                               
          Total other comprehensive income                107            (180)          352            12            (173)
                                                        -----           -----         -----         -----           -----
                                                                                                               
Comprehensive income                                   $3,427          $3,079        $6,777        $4,593          $6,485
                                                        =====           =====         =====         =====           =====
See notes to financial statements.
FREDERICKSBURG SAVINGS AND LOAN                                              F-4
ASSOCIATION, F.A.

STATEMENTS OF CHANGES IN EQUITY CAPITAL
(DOLLARS IN THOUSANDS)
Unrealized
                                                                                           Holding Gains
                                                                                            (Losses) or
                                                                               Retained    Available for
                                                                               Earnings   Sale Securities      Total
                                                                               --------   ---------------     -------
Balances at December 31, 1994                                                   $62,232        $ (14)         $62,218
                                                                                                           
 Net income                                                                       6,658            -            6,658
 Changes in net unrealized gains/(losses) on securities held                                               
  available for sale, net of reclassification adjustment                              -         (173)            (173)
                                                                                 ------         ----           ------
                                                                                                           
Balances at December 31, 1995                                                    68,890         (187)          68,703
                                                                                                           
 Net income                                                                       4,581            -            4,581
 Changes in net unrealized gains/(losses) on securities held                                               
  available for sale, net of reclassification adjustment                              -           12               12
                                                                                 ------         ----           ------
                                                                                                           
Balances at December 31, 1996                                                    73,471         (175)          73,296
                                                                                                           
 Net income                                                                       6,425            -            6,425
 Changes in net unrealized gains/(losses) on securities held                                               
  available for sale, net of reclassification adjustment                              -          352              352
                                                                                 ------         ----           ------
                                                                                                           
Balances at December 31, 1997                                                    79,896          177           80,073
                                                                                                           
 Net income (unaudited)                                                           3,320            -            3,320
 Changes in net unrealized gains/(losses) on securities                                                    
  held available for sale, net of reclassification                                                         
  adjustment (unaudited)                                                              -          107              107
                                                                                 ------         ----           ------
                                                                                                           
Balances at June 30, 1998 (unaudited)                                           $83,216        $ 284          $83,500
                                                                                 ======         ====           ======
See notes to financial statements.
FREDERICKSBURG SAVINGS AND LOAN                                              F-5
ASSOCIATION, F.A.
 
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Six Months Ended                          Year Ended
                                                        June 30,                             December 31,
                                                -----------------------         ---------------------------------------  
                                                 1998             1997            1997            1996           1995
                                                -------         -------         -------         -------        --------  
                                                     (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                     $ 3,320         $ 3,259         $ 6,425         $ 4,581        $  6,658
 Adjustments to reconcile net income to
  net cash provided by operating activities
   Depreciation                                     172             181             371             377             385
   Provision for loan losses                       (269)           (241)           (375)           (325)           (412)
   Increase (decrease) in provision for
    loss on real estate owned                        54             (10)             87             (21)             18
   Discount on mortgage-backed securities           (32)            (29)            (70)            (79)            (99)
   Premium/discount on investment securities          9             (10)              4             (29)             40
   Loan fees deferred, net                          110             226             266             192              90
   (Increase) decrease in deferred income taxes       8             (14)             34            (537)           (332)
   Loss on sale of property and equipment            29               5              16               7               5
   (Gain) loss on sale of real estate owned           2             (66)             (5)             34              87
   (Increase) decrease in accrued interest
    receivable                                     (117)           (244)           (150)            358            (276)
   (Increase) decrease in other assets               84             549             543            (590)            (67)
   Increase (decrease) in advances by borrowers
    for taxes and insurance                         298             143              92             (35)            136
   Increase in retirement obligations               113              80             547             657             541
   Increase (decrease) in other liabilities         (85)            163             125            (333)            269
                                                -------         -------         -------         -------        --------  
     NET CASH PROVIDED BY OPERATING 
       ACTIVITIES                                 3,696           3,992           7,910           4,257           7,043
                                                -------         -------         -------         -------        --------  
 
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from maturities of securities
  held-to-maturity                                    -               -               -               -          15,450
 Proceeds from sale of securities 
  available-for-sale                                  -               -               -          25,673               -
 Proceeds from redemption of securities 
  available for sale                              4,000           2,829           6,812               -               -
 Purchases FHLB stock                               (91)           (215)           (215)           (158)              -
 Proceeds from redemption of FHLB stock               -               -               -               -           1,015
 Purchase of securities held-to-maturity              -               -               -               -         (12,593)
 Purchase of securities available-for-sale       (3,595)         (2,621)         (5,420)         (8,347)            (73)
 Principal payments on mortgage-backed
  securities held to maturity                       130             131             281             456             329
 Loan originations and principal payments, net   (4,214)         (7,640)        (11,422)        (17,487)        (21,421)
 Capital expenditures                              (181)           (127)           (271)           (241)           (464)
 Proceeds from sale of real estate owned          1,392           1,781           3,214           3,528           1,313
                                                -------         -------         -------         -------        --------  
     NET CASH PROVIDED BY (USED IN)
       INVESTING ACTIVITIES                      (2,559)         (5,862)         (7,021)          3,424         (16,444)
                                                -------         -------         -------         -------        --------
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                              F-6
ASSOCIATION, F.A.
 
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Six Months Ended            Year Ended
                                                             June 30,               December 31,
                                                        -----------------   ----------------------------
                                                         1998       1997      1997     1996        1995
                                                        -------   -------   -------   -------    -------
                                                           (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
 Net decrease in savings accounts                       $(4,370)  $(1,001)  $(4,894)  $(7,706)  $(11,253)
 Net increase (decrease) in advance from
  Federal Home Loan Bank                                      -    (5,000)   (7,000)    7,000          -
 Net increase (decrease) in certificates of deposit         977     2,998     6,355    (3,018)    21,546
                                                        -------   -------   -------   -------    -------
    NET CASH PROVIDED BY (USED IN)
     FINANCING ACTIVITIES                                (3,393)   (3,003)   (5,539)   (3,724)    10,293
                                                        -------   -------   -------   -------    -------
 
NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                    (2,256)   (4,873)   (4,650)    3,957        892
 
CASH AND CASH EQUIVALENTS
 AT BEGINNING OF PERIOD                                  11,287    15,937    15,937    11,980     11,088
                                                        -------   -------   -------   -------    -------
 
CASH AND CASH EQUIVALENTS
 AT END OF PERIOD                                       $ 9,031   $11,064   $11,287   $15,937    $11,980
                                                        =======   =======   =======   =======    =======
 
SUPPLEMENTAL DISCLOSURE OF
 CASH FLOW INFORMATION
  Cash paid during the period for interest              $ 9,620   $ 9,569   $19,419   $19,534    $18,978
                                                        =======   =======   =======   =======    =======
 
  Cash paid during the period for income taxes          $ 2,165   $ 1,674   $ 3,591   $ 3,623    $ 4,166
                                                        =======   =======   =======   =======    =======
 
SUPPLEMENTAL SCHEDULE OF NON-CASH
 INVESTING ACTIVITIES
  Loans transferred to real estate owned                $ 1,326   $ 1,779   $ 3,209   $ 3,512    $ 1,400
                                                        =======   =======   =======   =======    =======
 
 Investment securities transferred to
  available-for-sale, at fair value                     $     -   $     -   $     -   $     -    $49,257
                                                        =======   =======   =======   =======    =======
 
 Change in unrealized gain (loss) in value
  of  securities available-for-sale,
  net of tax effect                                     $   107   $  (180)  $   352   $    12    $  (173)
                                                        =======   =======   =======   =======    =======
See notes to financial statements.
FREDERICKSBURG SAVINGS AND LOAN                                              F-7
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Fredericksburg Savings & Loan
Association, F.A., "the Bank", are in accordance with generally accepted
accounting principles and conform to the general practices within the savings
institutions industry.  The more significant of the principles used in preparing
the financial statements are briefly described below.

NATURE OF OPERATIONS

The Bank is a mutual savings and loan association with the primary business of
granting residential, commercial real estate and installment loans.  As a
federally chartered savings institution, the Bank is subject to the regulation
of the Office of Thrift Supervision as well as the Federal Deposit Insurance
Corporation.  The area served by the Bank is Fredericksburg, Virginia and the
surrounding counties.  Services are provided at four business locations.

RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION

Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentation.  Such
reclassifications had no effect on net income or retained earnings as previously
reported.

ESTIMATES

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

CASH EQUIVALENTS

For purposes of reporting cash flows, the Bank considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.

INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

The Bank classifies its investment securities and its mortgage-backed securities
in one of three categories: held-to-maturity, available-for-sale, and trading.

Securities held-to-maturity are purchased with the intent and ability to hold to
their maturity or call date.  They are carried and reported at amortized cost.
The amortization of premium and accretion of discount are recognized as
adjustments to interest income.  Securities available-for-sale are those needed
to meet liquidity needs, assist in portfolio restructuring, or minimize interest
rate market risk.  They are carried at their fair value, with unrealized gains
and losses reported as a separate component of capital.  Securities that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities.  The Bank as a matter of policy does not trade
securities and, therefore, does not have trading securities.  Gains or losses on
disposition of securities are computed on the specific identification of the
cost of each security.

                                  (continued)
FREDERICKSBURG SAVINGS AND LOAN                                              F-8
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES

Loans receivable are stated at the amount of unpaid principal, net of
participation or whole-loan interests owned by others, less the allowance for
loan losses, undisbursed loans in process, and net deferred loan origination
fees and discounts.  The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).  Management's periodic
determination of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the  portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.

Impaired loans are measured based on the present value of expected cash flows
discounted at the loan's effective interest rate, or as a practical expedient at
the loan's observable market price or fair value of the collateral if the loan
is collateral dependent.  Any change in fair value is reported as bad debt
expense in the same manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be reported.

Uncollectible interest on loans is charged off, or an allowance is established
based on management's periodic evaluation.  The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is restored, in which case the loan is returned
to accrual status.

LOAN SALES

The Bank  periodically generates additional funds for lending by selling whole
and/or participating interests in real estate loans.  Gains or losses on such
sales are recognized at the time of sale and are determined by the difference
between the net sales proceeds and the unpaid principal balance of the loans
sold adjusted for any yield differential, servicing fees and servicing cost
applicable to future years.

LOAN ORIGINATION FEES AND RELATED COSTS

Fees charged on the origination of real estate loans and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
the related loan's yield.  Unamortized fees on loans sold are recognized as
adjustments to the basis of those loans in the year of sale.

FORECLOSED REAL ESTATE

Real estate acquired in settlement of loans is classified as held for sale and
initially recorded at the lower of cost or fair value less estimated selling
costs at the date of foreclosure. Costs relating to development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed.  The portion of interest costs relating to the development of real
estate is capitalized.

Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.

                                  (continued)
FREDERICKSBURG SAVINGS AND LOAN                                              F-9
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND DEPRECIATION

The various classes of property and equipment are stated at cost less
accumulated depreciation computed principally by the straight-line method.  The
costs of major improvements are capitalized, while the costs of maintenance and
repairs, which do not improve or extend the life of the respective properties,
are expensed currently.  The cost and accumulated depreciation on property are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income.
Estimated
                                                Useful Lives
                                                ------------
                                                  (Years)
Land                                         -
        Buildings                                  5 - 39
        Furniture, fixtures and equipment          5 -  7
INCOME TAXES

The Bank accounts for certain income and expense items differently for financial
reporting purposes than for purposes of computing income taxes currently
payable.  Provisions for deferred taxes are made in recognition of such timing
differences.

The Bank has qualified under the provisions of the Internal Revenue Code which
permit it to deduct from taxable income an annual addition to the reserve for
bad debts based on the experience method.  The tax bad debt reserve is
includible in taxable income of later years only if the bad debt reserves are
used subsequently for purposes other than to absorb bad debt losses.  The
cumulative bad debt reserve, upon which no taxes have been paid, amounted to
$9,700 at June 30, 1998 and December 31, 1997.

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 on 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.

NEW ACCOUNTING PRONOUNCEMENTS

The Statement of Financial Accounting Standards No. 131 - Disclosure about
Segments of an Enterprise and Related Information

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".  SFAS No. 131 establishes standards for
reporting by public companies about operating segments of their business.  SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers.  This Statement is effective for
periods beginning after December 15, 1997.  At this time, management does
anticipate that the adoption of this Statement will significantly impact the
Bank's financial reporting.

                                  (continued)
FREDERICKSBURG SAVINGS AND LOAN                                             F-10
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)

The Statement of Financial Accounting Standards No. 132 -Employers' Disclosures
about Pensions and Other Postretirement Benefits -an amendment of FASB
Statements No. 87, 88, and 106

In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106".  SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair value plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as when Statements No. 87, 88, and 106
were originally issued.  SFAS 132 does not change the measurement recognition of
the plans. This statement is effective for the periods beginning after December
15, 1997. At this time, management does anticipate that the adoption of this
Statement will significantly impact the Bank's financial reporting.

The Statement of Financial Accounting Standards No. 133 - Accounting for
Derivative Instruments and Hedging Activities

This Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The bank is evaluating the
potential impact of adopting SFAS No. 133.  Management does not expect the
adoption of SFAS No. 133 to have a material adverse impact on financial
condition or results of operation.  The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999.
FREDERICKSBURG SAVINGS AND LOAN                                         F-11
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 2 - INVESTMENT SECURITIES

The amortized cost and estimated fair values of mortgage-backed securities and
investment securities are as follows as of June 30, 1998, and December 31, 1997
and 1996:
Gross            Gross         Estimated
                                             Amortized      Unrealized       Unrealized         Fair
                                                Cost           Gain             Loss           Value
                                           ------------     -----------      ----------      ----------
SECURITIES HELD-TO-MATURITY
 June 30, 1998 (unaudited)
   Mortgage Backed Securities
     FNMA pass-through securities        $         768    $          -      $          -    $       768
     GNMA certificates                             422              36                 -            458
                                           -----------      ----------        ----------       --------
                                         $       1,190    $         36      $          -     $    1,226
                                           ===========      ==========        ==========       ========
 December 31, 1997                        
   Mortgage Backed Securities             
     FNMA pass-through securities        $         838    $          -      $          -     $      838
     GNMA certificates                             453              44                 -            497
                                           -----------      ----------        ----------       --------
                                         $       1,291    $         44      $          -     $    1,335
                                           ===========      ==========        ==========       ========
 December 31, 1996
   Mortgage Backed Securities
     FNMA pass-through securities        $       1,008    $          -      $          -     $    1,008
     GNMA certificates                             494              43                 -            537
                                           -----------      ----------        ----------       --------
                                         $       1,502    $         43      $          -     $    1,545
                                           ===========      ==========        ==========       ========
FNMA pass-through securities are valued at net carrying value for fair value
purposes.  Mortgage backed securities are not deemed to have a single maturity
date and no maturity grouping information has been presented.
Gross            Gross         Estimated
                                              Amortized       Unrealized      Unrealized         Fair
                                                 Cost            Gain            Loss            Value
                                            -------------     -----------     -----------      ----------
SECURITIES AVAILABLE-FOR-SALE
 June 30, 1998 (unaudited)
  U.S. Treasury and agency obligations       $     16,814     $        73     $        12       $   16,875
  Corporate securities                              4,856              62              12            4,906
  Other securities                                  5,007             982              23            5,966
  Mutual fund                                       1,293               -              25            1,268
  Dual Index Consolidated Bonds                     2,500               -             587            1,913
                                               ----------       ---------       ---------         --------
                                             $     30,470     $     1,117     $       659       $   30,928
                                               ==========       =========       =========         ========
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                             F-12
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
 
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
Gross           Gross         Estimated
                                              Amortized    Unrealized      Unrealized         Fair
                                                Cost         Gain            Loss            Value
                                             -----------   ----------    -------------     ---------
SECURITIES AVAILABLE-FOR-SALE (CONCLUDED)
 December 31, 1997
  U.S. Treasury and agency obligations       $   19,812      $     82      $     58       $  19,836
  Corporate securities                            3,345            70             2           3,414
  Other securities                                3,946           791            23           4,713
  Mutual fund                                     1,262             -            20           1,242
  Dual Index Consolidated Bonds                   2,500             -           554           1,946
                                               --------        ------        ------         -------
                                             $   30,865      $    943      $    657       $  31,151
                                               ========        ======        ======         =======
                                                                                           
 December 31, 1996                                                                         
  U.S. Treasury and agency obligations       $   20,823      $     84      $    104       $  20,803
  Corporate securities                            3,995            99             -           4,094
  Other securities                                3,744           283            44           3,983
  Mutual fund                                     1,199             -            24           1,175
  Dual Index Consolidated Bonds                   2,500             -           576           1,924
                                               --------        ------        ------         -------
                                             $   32,261      $    466      $    748       $  31,979
                                               ========        ======        ======         =======
The mutual fund investments are in funds that invest primarily in obligations of
the U.S. Government or its agencies.

The amortized cost and estimated fair value of investment securities at June 30,
1998 and December 31, 1997 by contractual maturity, are shown below.  Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
June 30, 1998                           December 31, 1997
                                          --------------------------------------     -------------------------------
                                                      (Unaudited)
                                                                   Estimated                            Estimated
                                               Amortized              Fair             Amortized            Fair
                                                 Cost                Value               Cost              Value
                                          -----------------    ---------------       -------------     -------------
SECURITIES HELD-TO-MATURITY
Due after five years through ten years    $            768     $           768        $        838     $         838
Due after ten years                                    422                 458                 453               497
                                            --------------       -------------          ----------       -----------
                                          $          1,190     $         1,226        $      1,291     $       1,335
                                            ==============       =============          ==========       ===========
 
SECURITIES AVAILABLE-FOR-SALE
Equity securities                         $          1,293     $         1,268        $      1,262     $       1,242
Due in one year or less                             11,720              12,717              14,593            15,351
Due after one year through five years               14,100              14,172              11,651            11,778
Due after five years through ten years               2,998               2,401               2,997             2,409
Due after ten years                                    359                 370                 362               371
                                            --------------       -------------          ----------       -----------
                                          $         30,470     $        30,928        $     30,865     $      31,151
                                            ==============       =============          ==========       ===========
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                             F-13
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 2 - INVESTMENT SECURITIES (CONCLUDED)

During 1993, the Bank acquired Dual Indexed Consolidated Bonds ("DICBs") issued
by the Federal Home Loan Bank ("FHLB").  DICBs' coupon rates are determined by
the difference between the designated Constant Maturity Treasury ("CMT") and the
designated London Interbank Borrowing Rate ("LIBOR"). Interest rates on  DICBs
are subject to reset annually at specified dates.  This reset may result in an
interest rate less than those payable on conventional fixed rate debt securities
issued at the same time. These investments were acquired as part of the interest
rate risk management of the Bank.

The Secondary market for DICBs is affected by factors other than the credit
worthiness of the issuer. Such factors include other interest rates, volatility
of the two indices utilized, time remaining to maturity and the amount of the
outstanding bonds.

DICBs are classified by the Bank as available for sale and are recorded at fair
value with unrealized gains and losses included in Retained Earnings
Substantially Restricted.  The DICBs were acquired at their face amount.  The
consensus reached by the Emerging Issues Task Force ("EITF") Issue number 96-12
requires interest income recognition for these instruments based upon the
retrospective interest method. The Bank  recognizes interest income based on the
actual interest payments received.  The difference between the retrospective
interest method and the method utilized is immaterial.

Disclosed below are the characteristics of each issue of DICBs, the indices
utilized and period-end coupon rates and market value.  The Bank's exposure to
credit risk, on these instruments, is limited to the amount paid for each DICB,
if the FHLB fails to perform.
June 30, 1998
                                                                              -------------------
                                                                                  (Unaudited)
                                 Face               Indexing                              Market
 Issuer       Maturity          Amount               Formula                    Coupon    Value
--------     ----------        --------      ----------------------------     ---------  --------
FHLB        08/17/05          $  1,000      (10 yr CMT+3.00%)-6 mo LIBOR         2.93%  $    766
                                                                                      
 FHLB        08/26/05             1,000      (10 yr CMT+3.00%)-6 mo LIBOR         3.03        772
                                                                                      
 FHLB        11/18/05               500      (10 yr CMT+2.75%)-6 mo LIBOR         2.68        375
                               --------                                                  --------
                                                                                     
                               $  2,500                                                  $  1,913
                               ========                                                  ========
December 31,
                                                                              ----------------------------------------
                                                                                     1997                 1996
                                                                              -------------------  -------------------  
                                 Face               Indexing                    Market               Market   
 Issuer       Maturity          Amount               Formula                    Coupon    Value      Coupon    Value    
--------     ----------        --------      ----------------------------     ---------  --------  ---------  --------
FHLB         08/17/05         $  1,000      (10 yr CMT+3.00%)-6 mo LIBOR       3.408%   $   786     3.853%   $   765
                                                                                                   
 FHLB         08/26/05            1,000      (10 yr CMT+3.00%)-6 mo LIBOR       3.472        788     3.940        771
                                                                                                   
 FHLB         11/18/05              500      (10 yr CMT+2.75%)-6  mo LIBOR      2.764        372     3.499        369
                               --------                                                    -----               ------
                                                                                                   
                                                                                                   
                               $  2,500                                                  $ 1,946             $ 1,905
                               ========                                                  =======             =======
FREDERICKSBURG SAVINGS AND LOAN                                             F-14
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
 
 
NOTE 3 - LOANS RECEIVABLE

Loans receivable consisted of the following:
December 31,
                                                           June 30,      ---------------------------
                                                            1998            1997            1996
                                                        -----------      -----------     -----------
                                                       (Unaudited)
Real estate mortgage loans                                          
   One to four family                                   $  367,041       $  358,561      $  345,799
   Multi-family                                              3,396            3,455           3,453
   Non-residential real estate                              35,316           40,951          44,528
   Land and land development                                 2,321            3,091           4,136
                                                        -----------      -----------     -----------
        Total real estate mortgage loans                   408,074          406,058         397,916
 Less: Amounts owned by holders                                      
      of participating interests, net                       (3,319)          (4,217)         (5,450)
                                                        -----------      -----------     -----------
                                                                     
        Net real estate mortgage loans                     404,755          401,841         392,466
                                                        -----------      -----------     -----------
                                                                     
 Real estate construction and development loans             19,960           16,046          21,285
 Less:  Undisbursed loan funds                              (8,743)          (4,978)         (8,064)
                                                        -----------      -----------     -----------
                                                                     
        Net real estate construction loans                  11,217           11,068          13,221
                                                        -----------      -----------     -----------
 Other loans                                                         
  Consumer and other installment loans                       9,192            8,913           8,046
                                                        -----------      -----------     -----------
                                                                     
        Total other loans                                    9,192            8,913           8,046
                                                        -----------      -----------     -----------
                                                                     
                                                           425,164          421,822         413,733
                                                                     
 Less:  Deferred loan fees                                  (3,539)          (3,312)         (3,045)
        Allowance for loan losses                           (5,639)          (5,478)         (5,543)
                                                        -----------      -----------     -----------
                                               
        Net loans receivable                            $  415,986       $  413,032      $  405,145
                                                        ===========      ===========     ===========
Amounts owned by holders of participating interests are not included in the
balance sheets. The unpaid principal balances of these loans are summarized as
follows:
December 31,
                                                           June 30,      ---------------------------
                                                            1998            1997            1996
                                                        -----------      -----------     -----------
                                                       (Unaudited)
FNMA, net of discount                                   $    1,512       $    2,222      $    2,638
FHLMC                                                          750              872           1,130
Other                                                        1,057            1,123           1,682
                                                        -----------      -----------     -----------
                                                        $    3,319       $    4,217      $    5,450
                                                        ===========      ===========     ===========
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                           F-15
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 3 - LOANS RECEIVABLE (CONCLUDED)

Custodial escrow balances maintained in connection with the foregoing loan
servicing were $294 and $364 at June 30, 1998 and 1997, and $215,  $130 and $284
at December 31, 1997, 1996 and 1995, respectively.

Activity in the allowance for loan losses is summarized as follows:
June 30,                      December 31,
                                           -----------------------     -------------------------------
                                               1998         1997         1997       1996        1995
                                                  (Unaudited)
Balance, beginning of period               $ 5,478         $ 5,543     $ 5,543    $ 5,480      $ 5,537
   Provision charged to operations             269             241         375        325          412
   Loans charged off                          (108)           (187)       (440)      (263)        (489)
   Recoveries                                   -               -           -           1           20
                                           -------         -------     -------     -------   ---------
Balance, end of period                     $ 5,639         $ 5,597     $ 5,478    $ 5,543      $ 5,480
                                           =======         =======     =======     ======     ========
Impairment of loans having recorded investments of $8,476  at June 30, 1998,
$9,801 at December 31, 1997, $11,880 at December 31, 1996, and $10,756 at
December 31, 1995 have been recognized in conformity with FASB No. 114, as
amended by FASB No. 118.  The average recorded investment in impaired loans
during 1998, 1997, 1996, and 1995  was $8,860,  $10,466, $13,257, and $12,205,
respectively.  The total allowance for loan losses related to these loans was
$659 on June 30, 1998, $669 and $729 on December 31, 1997 and 1996, and $807 on
December 31, 1995, respectively.  Interest income foregone associated with these
loans was $114 for 1998, $193 for 1997 and $438 for 1996, and $198 for 1995.

Loans having carrying values of $1,326,  $3,209 , $3,512, and $2,471 were
transferred to foreclosed real estate in 1998, 1997, 1996, and 1995,
respectively.

The Bank is not committed to lend additional funds to debtors whose loans have
been modified.

Unspecified residential loans of approximately $208,000 at June 30, 1998 and
December 31, 1997, and approximately $199,000 at December 31, 1996 have been
pledged to the Federal Home Loan Bank under a floating blanket lien as
collateral for advances from that bank.  See Note 6.

NOTE 4 - FORECLOSED REAL ESTATE FOR SALE

Foreclosed real estate consisted of the following:
December 31,
                                                  June 30,             ---------------------------
                                                   1998                   1997              1996
                                              --------------           ----------        ---------
                                               (Unaudited)
Foreclosed real estate                           $ 2,062                $ 2,085           $ 1,650   
   Less allowance for losses                        (179)                  (126)              (39)
                                                 -------                ------            -------
 
                                                 $ 1,883                $ 1,959           $ 1,611
                                                 =======                =======           =======
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                            F-16
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
 (DOLLARS IN THOUSANDS)
 
NOTE 4 - FORECLOSED REAL ESTATE FOR SALE (CONCLUDED)

A summary of the foreclosed real estate operations is as follows:
                                         
                                         June 30,                        December 31,
                                   -------------------         ------------------------------
                                    1998       1997             1997       1996        1995
                                  -------    -------           -------    -------     -------
                                      (Unaudited)
Foreclosed real estate
   Foreclosed real estate
   sales                          $ 1,392    $ 1,781           $ 3,214    $ 3,528     $ 1,313
   Cost of sales                    1,326      1,779             3,209      3,512       1,400
   Increase (decrease) in
   reserve                             54        (11)               87        (21)         18
   Selling and other expenses          37         34                81        167          79
                                  -------    -------           -------    -------     ------- 
        Net loss                  $   (25)   $   (21)          $  (163)   $  (130)    $  (184)
                                  =======    =======           =======    =======     =======
Activity in the allowance for losses for real estate owned is summarized as
 follows:
June 30,                        December 31,
                                   -------------------         ------------------------------
                                    1998       1997             1997       1996        1995
                                  -------    -------           -------    -------     -------
                                      (Unaudited)
Balance, beginning of
period                            $   126    $    39           $    39    $    60     $    42
Provision for losses                   95          3               167         72         112
Charge-offs                           (41)       (13)              (80)      (143)        (94)
Transfers                               -          -                 -         50           -
                                  -------    -------           -------    -------     -------
Balance, end of period            $   180    $    29           $   126    $    39     $    60
                                  =======    =======           =======    =======     =======
NOTE 5 - DEPOSITS
 
Deposits summarized by interest rates were as follows:
June 30,                      December 31,
                              -------------------   ----------------------------------------
                                        1998                 1997                1996
                              -------------------   ------------------   -------------------
                                    (Unaudited)
                                Amount    Percent     Amount    Percent   Amount     Percent
                              ---------   -------   ---------   ------   --------    -------
Passbook accounts                                           
 (weighted average rate                                     
   of 3.25% and 3.24%)        $  37,818   10.10%    $  38,707    10.26%  $ 39,659     10.56%
Non-interest bearing                                        
 deposits                         2,481     0.70        3,266     0.87      2,451      0.65
Money market accounts                                       
 (weighted  average rate                                    
   of 3.25% and 3.26%)           43,141    11.50       45,839    12.16     50,596     13.47
                              ---------   ------    ---------   ------   --------    ------ 
                                 83,440    22.30       87,812    23.29     92,706     24.68
                              ---------   ------    ---------   ------   --------    ------ 
Certificates:                                               
   Up to 4.00%                        -        -            -        -         18      0.01
4.01% to 5.00%                   19,299     6.60       17,304     4.58     42,404     11.28
5.01% to 6.00%                  243,579     61.6      233,582    61.94    183,490     48.85
6.01% to 7.00%                   24,239     8.40       32,589     8.64     51,217     13.63
7.01% to 8.00%                    3,162     1.10        5,827     1.55      5,817      1.55
                              ---------   ------    ---------   ------   --------    ------ 
                                290,279    77.70      289,302    76.71    282,946     75.32
                              ---------   ------    ---------   ------   --------    ------ 
  Total deposits              $ 373,719   100.00%   $ 377,114   100.00%  $375,652    100.00%
                              =========   ======    =========   ======   ========    ======
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                            F-17
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 5 - DEPOSITS (CONCLUDED)

The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100 was approximately $45,346 at June 30, 1998, and $21,270 and
$39,805 at December 31, 1997 and 1996, respectively.  Deposits in excess of $100
are not federally insured.

The  scheduled maturities of certificates of deposit are as follows:
June 30, 1998    December 31,1997
                                            -------------    ----------------
                                             (Unaudited)
One Year or Less                        $ 196,666          $ 192,592
      Over One Through Two Years                 48,743             56,227
      Over Two Through Three Years               23,760             25,827
      Over Three Through Four Years               8,988              3,645
      Over Four Through Five Years               12,099             10,988
      Over Five Years                                23                 23
                                              ---------          ---------
                                              $ 290,279          $ 289,302
                                              =========          =========
Interest expense on deposits is summarized as follows:
June 30,                December 31,    
                               ---------------     --------------------------
                                1998     1997        1997      1996     1995
                               ------   ------     -------   -------   -------
                                   (Unaudited)
Passbook savings               $  614   $  614     $ 1,237   $ 1,336   $ 1,408
Money market                      726      822       1,619     1,692     1,921
NOW                                 4        3           6         7         7
Certificates of deposit         8,031    7,823      15,954    16,041    15,096
                                -----   ------     -------   -------   -------
                               $9,375   $9,262     $18,816   $19,076   $18,432
                               ======   ======     =======   =======   =======
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
 
The advances to the Bank consist of the following:
December 31,
                              Interest       June 30,        --------------------
 Maturity Date                  Rate           1998            1997        1996
 -------------                --------      -----------      -------      -------
                                            (Unaudited)
January 6, 1997                6.53%          $    -         $    -      $ 5,000
 November 24, 1997              5.66%               -              -        2,000
 November 22, 1999              6.09%           3,000          3,000        3,000
 November 28, 2001              6.25%           5,000          5,000        5,000
                                               ------        -------      -------
                                               $8,000         $8,000      $15,000
                                               ======         ======      =======
The Bank had approved borrowing capacity at the FHLB for $45 million as of 
June 30, 1998, December 31, 1997 and 1996. The unused portion of this facility
aggregated $37 million at June 30, 1998 and December 31, 1997 and $30 million at
December 31, 1996.
FREDERICKSBURG SAVINGS AND LOAN                                     F-18
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 7 - RETIREMENT OBLIGATIONS

PENSION PLAN

The Bank has a qualified, noncontributory defined benefit plan covering
substantially all of its full-time employees.  The benefits are based upon the
employee's average compensation during the last five years of employment.  To
qualify initially, employees must have worked 1,000 hours in a twelve month
period.  An employee becomes fully vested upon completion of 5 years of
qualifying service.  The amounts of retirement plan expense recognized in the
Bank's statements of income for this plan totaled $169, and $108 for the six
months ended June 30, 1998 and 1997, respectively, $226 for 1997,  $136 for
1996, and $426 for 1995.  The Bank contributes to the plan the maximum allowable
amount in accordance with ERISA funding standards.

The Plan's assets are invested in managed stock and bond investment accounts
held by the Plan trustee and in certificates of deposit of $2,447 at June 30,
1998, $2,137 in 1997 and $2,055 in 1996 with the Bank.

The discount rate and rate of future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 7.5% and 5.5%,
respectively, and the expected long-term rates of return on assets used in the
computations was 7.00% at June 30, 1998, and 7.75% for 1997 and 1996.

The following sets forth the plan's funded status and amounts recognized in 
the Bank's financial statements as of the actuarial dates of June 30, 1998,
December 31, 1997 and 1996.
December 31,
                                               June 30,    ---------------------------- 
                                                 1998          1997            1996
                                             -----------   ------------    ------------ 
                                             (Unaudited)
Accumulated benefit obligation,             
 fully vested                                $     2,709   $       2,509   $      2,627
                                             ===========   =============   ============ 
Projected benefit obligation                 $     4,361   $       4,061   $      4,094
Market value of plan assets                        4,902           4,761          4,712
                                             -----------   -------------   ------------ 
Excess of projected benefit obligation                                        
 over market value of plan assets                    541             700            618
Unrecognized net transition amount                   627             668            752
Unrecognized prior service cost                     (210)           (219)          (237)
Unrecognized net (gain) loss                      (1,192)         (1,573)        (1,781)
                                             -----------   -------------   ------------ 
Accrued pension liability (included in      
 retirement obligations)                     $      (234)  $        (424)  $       (648)
                                             ===========   =============   ============
The components of net pension expense are as follows:
June 30,                            December 31,
                                        ---------------------------   ------------------------------------------ 
                                           1998            1997           1997           1996           1995
                                        -----------   -------------   -----------   -------------   ------------ 
                                               (Unaudited)
Service cost - benefits earned          
 during the period                      $       113   $         106   $       212   $         201   $        209
Interest cost on projected benefit                                                                          
 obligation                                     137             138           277             313            268
Expected return on plan assets                 (181)           (170)         (341)           (306)          (516)
Net amortization and deferral                     -              (6)          (12)             28            301
                                        -----------   -------------   -----------   -------------   ------------ 
Net pension expense                     $        69   $          68   $       136   $         236   $        261
                                        ===========   =============   ===========   =============   ============
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                     F-19
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 7 - RETIREMENT OBLIGATIONS (CONCLUDED)

MANAGEMENT SECURITY PLAN

The Bank established a non-qualified deferred compensation plan in 1986 for
certain management personnel, known as the Fredericksburg Savings and Loan
Association, F.A. Management Security Plan.  This plan is structured to provide
benefits upon retirement based on years of service to the Bank.  Participants
are to receive benefits for life and are eligible for retirement at age 55.  If
the participant passes away before the age of 80, the benefits shall continue to
be paid to the named beneficiary until such time the participant would have
reached such age.  Deferred compensation expense amounted to $216 for the six
months ended June 30, 1998 and 1997, respectively, and $432, $297, and $426 for
the years ended December 31, 1997, 1996, and 1995, respectively.  At June 30,
1998, December 31, 1997 and 1996, the balance of their management security trust
plan was approximately $5,958, $4,342 and $3,376, respectively, which is
included  in investment securities classified as available-for-sale.  The use of
these funds is restricted to fulfilling the deferred compensation obligation,
subject to the claims of creditors in a bankruptcy proceeding.  The Bank has
recorded the assets and liabilities for the non-qualified deferred compensation
plan as gross amounts in the  balance sheet.

SUPPLEMENTAL RETIREMENT AGREEMENT

During 1996, the Bank entered into a non-funded supplemental retirement
agreement with its former chairman of the board.  Deferred compensation expense
related to this agreement amounted to $56 for the six months ended June 30, 1998
and 1997, $112 for 1997, and $0 for 1996.

401(K) PLAN

The Bank maintains the Fredericksburg Savings and Loan Association, F.A. Salary
Savings Plan (the "401(k) Plan"), a tax-qualified profit sharing plan with a
qualified cash or deferred arrangement under Section 401(k) of the Code.
Eligible employees may begin participating in the 401(k) Plan upon the
completion of one-half of one "Year of Service" and attainment of age 21.
Participants may make contributions to the plan during the year, with certain
limitations placed on such contributions.  The Bank  is required to contribute
to the plan an amount equal to one-half the basic contribution made by a
participant to a maximum of 6% per participant.  Expenses of the plan totaled
$31 and $25 for the six months ended June 30, 1998 and 1997, $58 for the year
ended December 31, 1997,  $67 for the year ended December 31, 1996, and $62  for
the year ended December 31, 1995.

NOTE 8 - RELATED PARTY TRANSACTIONS

The Bank has made loans to various officers and directors, collateralized by the
personal residences of the borrowers or their deposits in the Bank.  Loans
outstanding to officers and directors totaled $2,136 at June 30, 1998, $2,302 at
December 31, 1997 and $2,350 at December 31, 1996.  New loans to officers and
directors for the first six months in 1998 were approximately $331 and $225 in
1997.

Loans to executive officers and directors are generally made on the same terms
and conditions as for other loans.  The Bank does not expect to incur any losses
with respect to these loans.
December 31,
                        June 30,  ------------------------------------------------   
                         1998          1997             1996             1995
                     ----------   ------------     -------------      ------------
                     (Unaudited)
Beginning balance    $      493    $      543      $         690      $        612
Additions                   214             -                  -               157
Repayments                 (134)          (50)              (147)              (79)
                      ---------     ---------        -----------        ---------- 
                             
Ending balance       $      573    $      493      $         543      $        690
                      =========     =========        ===========        ==========
FREDERICKSBURG SAVINGS AND LOAN                                     F-20
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 9 - REGULATORY MATTERS

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

Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of June 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.

As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for corrective action.  To be categorized as well capitalized, the
Bank must maintain minimum total core capital, tangible capital, and risk-based
capital leverage ratios as set forth in the table.  There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
                                                                                               Well
                                                                                         Capitalized Under     
                                                                   For Capital           Prompt Corrective
                                           Actual               Adequacy Purposes        Action Provisions
                                --------------------------   -----------------------    --------------------
                                    Amount        Ratio         Amount      Ratio         Amount     Ratio
                                -------------  -----------   ----------- -----------    ---------   --------
As of June 30, 1998            
  Core Capital         
    (To total assets)           $    81,588       17.28      $  18,888      4.00        $ 23,610      5.00
  Tangible Capital     
    (To total assets)                81,588       17.28          7,083      1.50          14,166      3.00
  Risk-Based Capital   
    (To risk weighted  
     assets)                         85,131       30.20         22,549      8.00          28,186     10.00
As of December 31, 1997
 Core Capital          
   (To total assets)                 78,272       16.59         14,109      3.00          23,515      5.00
 Tangible Capital      
   (To total assets)                 78,272       16.59          7,054      1.50          14,109      3.00
 Risk-Based Capital
   (To risk weighted assets)         81,810       28.60         22,878      8.00          28,597     10.00
As of December 31, 1996     
 Core Capital               
   (To total assets)                 71,843       15.29         14,049      3.00          23,414      5.00
 Tangible Capital           
   (To total assets)                 71,843       15.29          7,024      1.50          14,049      3.00
 Risk-Based Capital         
   (To risk weighted assets)         75,280       27.50         21,905      8.00          27,381     10.00
FREDERICKSBURG SAVINGS AND LOAN                                     F-21
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 10 - OFF BALANCE SHEET RISKS

Financial instruments with off-balance sheet risk include commitments to extend
credit made in the normal course of business.  These commitments to extend
credit are not shown in the accompanying financial statements.  The Bank uses
the same credit policies in making commitments, evaluates each customers' credit
worthiness on a case-by-case basis and requires collateral to support financial
instruments with credit risk.  Collateral held varies, but generally includes
real estate, primarily single-family homes, and in some cases, income-producing
commercial properties.  At June 30, 1998, the Bank had commitments to originate
loans of approximately $23,896 and $20,038 at December 31, 1997.

Standby letters of credit are conditional commitments issued by the Bank.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.  At June 30, 1998, the Bank was
conditionally committed under standby letters of credit aggregating
approximately $836 and at December 31, 1997 approximately $1,077.  The Bank does
not expect to fund any of the letters of credit.

The amount of unfunded lines of credit for home equity loans was approximately
$3,020 at June 30, 1998 and $3,005 at December 31, 1997.

In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying  financial
statements.  In addition, the Bank is a defendant in certain claims and legal
actions arising in the ordinary course of business.  In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
financial condition of the Bank.

NOTE 11 - MARKET CONCENTRATION

The Bank has a diversified loan portfolio consisting of commercial and
residential real estate and installment loans.  Substantially all of the Bank's
customers are residents or operate business ventures in its market area
consisting of the Fredericksburg Standard Metropolitan Statistical Area (SMSA).
Therefore, a substantial portion of its debtors' ability to honor their
contracts is influenced by the economic conditions in this market area.

NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
financial instruments.

CASH AND CASH EQUIVALENTS

Fair value of cash and cash equivalents is assumed to be book value.

INVESTMENT SECURITIES

For U.S. Treasury and Agency securities, fair values are based on market prices
or dealer quotes.  For other investment securities, fair value equals quoted
market price if available.

MORTGAGE-BACKED SECURITIES

Fair value of mortgage securities is assumed to be net book value for FNMA pass-
through securities and quoted market prices for GNMA certificates.

                                  (continued)
FREDERICKSBURG SAVINGS AND LOAN                                        F-22
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)

LOANS

Fair values are estimated for portfolios of loans with similar financial
characteristics.  Loans are segregated by type such as commercial, residential
mortgage and consumer.  Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan.

DEPOSITS

Fair value of passbook and money market accounts is defined as the amounts
payable on demand at the reporting date.  The fair value of fixed maturity
certificates of deposit is estimated based on the rates currently offered for
deposits of similar maturities

ADVANCES

Fair value of advances outstanding is estimated based on the rates currently
available for advances of similar maturities.

Commitments to extend credit and standby letters of credit

The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counter parties.  All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis.  The fair value of these instruments is not
material.

The estimated fair values of the Bank's financial instruments are as follows:
December 31,
                                      June 30,                 ------------------------------------------------------
                                        1998                             1997                           1996
                                -------------------------      ------------------------       -----------------------
                                      (Unaudited)                                                           
                                 Carrying      Est. Fair        Carrying      Est. Fair        Carrying     Est. Fair
                                  Value          Value           Value          Value           Value         Value
                                ----------   ------------      -----------   -----------      -----------   ---------
Financial assets                                                                                            
   Cash                          $   9,031     $   9,031        $  11,287     $  11,287        $  15,937    $  15,937
   Investment securities            30,470        30,928           30,865        31,151           32,261       31,979
   Mortgage-backed securities        1,190         1,226            1,291         1,335            1,502        1,545
   Loans                           415,986       421,646          413,032       416,508          405,145      405,540
                                                                                                            
Financial liabilities                                                                                       
   Deposits                        373,719        372,237         377,114       376,181          375,652      374,753
   Advances                          8,000          7,965           8,000         7,995           15,000       15,060
FREDERICKSBURG SAVINGS AND LOAN                F-23
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 13 - INCOME TAXES

Deferred income taxes result from timing differences in the recognition of
income and expense for income tax and financial reporting purposes.  The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at June 30, 1998 and December
31, 1997 and 1996 are summarized below:
June 30,                December 31,
                                                  ------------      ------------------------------------
                                                     1998               1997                1996
                                                  ------------      --------------      ----------------
                                                   (Unaudited)
Deferred tax assets
   Allowance for loan losses                      $      2,270      $         2,116    $           2,108
   Deferred compensation                                 2,125                2,082                1,875
   Other                                                    31                   31                  361
                                                    ----------        -------------      ---------------
           Total gross deferred tax assets               4,426                4,229                4,344
                                                    ----------        -------------      ---------------
 
Deferred tax liabilities
   FHLB stock dividends                                    480                  480                  480
   Depreciation                                            250                  250                  236
   Other                                                   383                  121                    -
                                                    ----------         ------------      ---------------
          Total gross deferred tax liabilities           1,113                  851                  716
                                                    ----------         ------------      ---------------
          Net deferred tax asset                  $      3,313       $        3,378    $           3,628
                                                    ==========         ============      ===============
The following is a reconciliation of the differences between the statutory
Federal income tax rate and the effective income tax rate for the six months
ended June 30, 1998 and the years ended December 31, 1997 and 1996.
June 30,                   December 31,
                                                   ---------------  -------------------------------------
                                                     1998              1997         1996         1995
                                                   ---------------  ---------    ---------    -----------
                                                    (Unaudited)
Tax at expected rates                                        34.0%      34.0%        34.0%          34.0%
Increases (decreases) in taxes resulting from
   Tax exempt interest income                                (2.2)      (2.0)        (2.8)          (2.0)
   State income tax, net of federal tax benefit               3.7        3.5          3.5            3.9
   Other                                                      4.5        2.6          4.8            2.0
                                                        ----------   --------     --------        -------
                                                             40.0%      38.1%        39.5%          37.9%
                                                        ==========   ========     ========        =======
(continued)
FREDERICKSBURG SAVINGS AND LOAN                                             F-24
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
 
NOTE 13 - INCOME TAXES (CONCLUDED)
 
The provision for income taxes consisted of the following:
 
                                                June 30,                                   December 31,
                                      -----------------------------   --------------------------------------------------------
                                          1998            1997             1997               1996                 1995
                                      ------------   --------------   ---------------    ----------------    -----------------
                                              (Unaudited)
Current tax expense                                                                                      
 U.S. Federal                         $      2,143   $       2,375    $        3,437     $        2,568      $           4,093
 State                                         137             152               553                375                    415
                                      ------------   -------------    --------------     --------------      -----------------
  Total current                              2,280           2,527             3,990              2,943                  4,508
                                      ------------   -------------    --------------     --------------      -----------------

Deferred tax expense
 U.S. Federal                                  (61)           (354)              (36)              (509)                  (412)
  State                                         (4)            (23)               (2)               (33)                   (26)
                                      ------------   -------------    --------------     --------------      -----------------
  Total deferred                               (65)           (377)              (38)              (542)                  (438)
                                      ------------   -------------    --------------     --------------      -----------------
  Total expense                       $      2,215    $      2,150    $        3,952     $        2,401      $           4,070
                                      ============    ============    ==============     ==============      =================
NOTE 14 - COMPREHENSIVE INCOME

Effective January 1, 1998, the Bank adopted SFAS No. 130, "Reporting
Comprehensive Income".  Statement No. 130 required the reporting of
comprehensive income in addition to net income from operations.  Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.

The Bank holds securities as "Available for Sale" and will sell securities, or
have securities redeemed, which give rise to comprehensive income.

                                  (continued)
FREDERICKSBURG SAVINGS AND LOAN                                            F-25
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 14 - COMPREHENSIVE INCOME (CONCLUDED)

The components of comprehensive income are detailed below, indicating the tax
effect to each item.
Tax               Net of
                                                                            Before                 Expense              Tax
                                                                             Tax                  (Benefit)            Amount
                                                                          -------------       -------------       -------------
For the period ended:
 
1995
   Unrealized holding gains (losses) arising during the period             $      (310)          $      (118)      $      (192)
   Less: reclassification adjustment for gains (losses) realized
      in net income                                                                (31)                  (12)              (19)
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses)                                           (279)                 (106)             (173)
                                                                           -----------           -----------       -----------
 
Other comprehensive income                                                 $      (279)          $      (106)      $      (173)
                                                                           ===========           ===========       ===========
 
1996
   Unrealized holding gains (losses) arising during the period             $       242           $        92       $       150
   Less: reclassification adjustment for gains (losses) realized
      in net income                                                                223                    85               138
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses)                                             19                     7                12
                                                                           -----------           -----------       -----------
 
Other comprehensive income                                                 $        19           $         7       $        12
                                                                           ===========           ===========       ===========
 
1997
   Unrealized holding gains (losses) arising during period                 $       460           $       175       $       285
   Less: reclassification adjustment for gains (losses) realized
      in net income                                                                108                    41                67
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses)                                            568                   216               352
                                                                           -----------           -----------       -----------
 
Other comprehensive income                                                 $       568           $       216       $       352
                                                                           ===========           ===========       ===========
 
June 30, 1997 (unaudited)
   Unrealized holding gains (losses) arising during period (unaudited)     $      (321)          $      (122)      $      (199)
   Less: reclassification adjustment for gains (losses) realized
      in net income (unaudited)                                                    (31)                  (12)              (19)
                                                                           -----------           -----------       -----------
          Net unrealized gains (losses) (unaudited)                               (290)                 (110)             (180)
                                                                           -----------           -----------       -----------
 
Other comprehensive income (unaudited)                                     $      (290)          $      (110)      $      (180)
                                                                           ===========           ===========       ===========
 
June 30, 1998 (unaudited)
   Unrealized holding gains (losses) arising during period (unaudited)     $        89           $        34       $         55
   Less: reclassification adjustment for gains (losses) realized
      in net income (unaudited)                                                    (84)                  (32)               (52)
                                                                           -----------           -----------        -----------
          Net unrealized gains (losses) (unaudited)                                173                    66                107
                                                                           -----------           -----------        -----------
 
Other comprehensive income (unaudited)                                     $       173           $        66        $       107
                                                                           ===========           ===========        ===========
FREDERICKSBURG SAVINGS AND LOAN                                       F-26
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 15 - SUBSEQUENT EVENTS

On January 12, 1998, agreement was reached with an individual borrower to accept
deeds in lieu of foreclosure on sixteen properties collateralizing mortgage
loans.  The outstanding principal balance of these loans aggregated
approximately $627 as of December 31, 1997. During the month of January 1998,
management obtained appraisals on the above referenced properties.  These
appraisals indicated that sufficient loan to value of the underlying properties
existed to not require an addition to the allowance for losses.

On January 13, 1998,  the Board of Directors granted approval to borrow an
additional $10,000 from the Federal Home Loan Bank at a 10 year term.  Such
advances would be collateralized by certain qualifying real estate mortgage
loans under a blanket floating lien.

NOTE 16 - PLAN OF CONVERSION

On July 14, 1998, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank.  All
of the outstanding common stock of the Bank will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding company
formed expressly for such purpose (the "Company").  All of the stock to be
issued in the Conversion is being offered to eligible account holders as of June
30, 1997.

The Bank plans to establish an ESOP for the benefit of eligible employees, to
become effective upon the Conversion.  The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion utilizing proceeds of a loan from the
Company or a third party lender.  The loan will be repaid over a period of 20
years and the collateral for the loan will be the common stock purchased by the
ESOP.

Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion.  The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be sold in the
Conversion.  The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities.  Establishment of the Foundation is subject to the
approval of the Bank's members at the special meeting being held to vote upon
the Conversion.

The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation.  A contribution of common stock to the Foundation by the
Company would be tax deductible, under Federal regulations, subject to a
limitation based on 10 percent of the Company's taxable income.  The Company,
however, would be able to carry forward any unused portion of the deduction for
five years following the contribution.  Upon funding the Foundation, the Company
will recognize an expense in the full amount of the contribution, offset in part
by the corresponding benefit for the tax deduction, during the quarter in which
the contribution is made.

The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support.  The Bank
expects to provide these services without compensation, however, expenses
incurred on behalf of the Foundation are not expected to be significant to the
operations of the Bank.

At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
final conversion prospectus.  The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account holders
who continue to maintain their accounts at the Bank after the Conversion.  The
liquidation account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date.  Subsequent increases will not restore an
eligible account holder's or supplemental account holder's interest in the
liquidation account.  In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.

                                  (continued)
FREDERICKSBURG SAVINGS AND LOAN                                           F-27
ASSOCIATION, F.A.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 16 - PLAN OF CONVERSION (CONCLUDED)

The costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock.  In the event the Conversion
is not consummated, costs incurred will be charged to expense.  At June 30,
1998, there were no deferred conversion costs.

After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.

NOTE 17 - OTHER NONINTEREST EXPENSE
June 30,                          December 31,
                                          --------------------------    ------------------------------------------
                                              1998           1997           1997           1996            1995
                                          -----------    -----------    -----------    -----------    ------------    
                                                   (Unaudited)
Professional fees                         $       261    $        55    $       433    $        19    $        29
Other non-interest expense                        806            822          1,621          1,547          1,420
                                          -----------    -----------    -----------    -----------    -----------     
                                          $     1,067    $       877    $     2,054    $     1,566    $     1,449
                                          ===========    ===========    ===========    ===========    ===========
================================================================================
         NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIRGINIA CAPITAL BANCSHARES, INC., THE bANK OR TRIDENT SECURITIES,
INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS pROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF VIRGINIA CAPITAL BANCSHARES, INC. OR THE BANK SINCE ANY
OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
                 ______________________________

                       TABLE OF CONTENTS
Page
                                                                    ----
Summary.................................................................
Selected Financial and
   Other Data of the Bank...............................................
Risk Factors............................................................
Virginia Capital Bancshares, Inc........................................
Fredericksburg Savings..................................................
Regulatory Capital Compliance...........................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Market for the Common Stock.............................................
Capitalization..........................................................
Pro Forma Data..........................................................
Comparison of Valuation and Pro Forma Information Wit
   No Foundation........................................................
Fredericksburg Savings..................................................
   Statements of Income.................................................
Management's Discussion and Analysis of Financial
   Condition and Results of Operations..................................
Business of the Bank....................................................
Federal and State Taxation..............................................
Regulation..............................................................
Management of the Company...............................................
Management of the Bank..................................................
The Conversion..........................................................
Restrictions on Acquisition of the Company
   and the Bank.........................................................
Description of Capital Stock of the Company.............................
Description of Capital Stock of the Bank................................
Transfer Agent and Registrar............................................
Experts.................................................................
Legal and Tax Opinions..................................................
Additional Information..................................................
Index of Financial Statements...........................................
------------------------------

          UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

                            Up to 13,965,600 Shares

                               VIRGINIA CAPITAL
                               BANCSHARES, INC.

                         (Proposed Holding Company for
                         Fredericksburg Savings Bank)

                                 COMMON STOCK

                                ______________

                                  PROSPECTUS
                                ______________

                              _____________, 199_

                           TRIDENT SECURITIES, INC.

================================================================================
PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC filing fee.....................................................  $   44,495
  OTS filing fee.....................................................      14,400
  NASD filing fee....................................................      15,583
  Nasdaq listing fee.................................................      90,500
  Printing, postage and mailing......................................     500,000
  Legal fees and expenses (including underwriter's counsel fees).....     400,000
  Accounting fees and expenses.......................................     150,000
  Appraisers' fees and expenses (including business plan)............      31,000
  Marketing fees and selling commissions and Underwriter's expenses..     580,000
  Conversion agent fees..............................................      50,000
  Transfer agent fees and expenses...................................      15,000
  Certificate printing...............................................       5,000
  Telephone, temporary help and other equipment......................      50,000
  Blue Sky fees and expenses.........................................      10,000
  Miscellaneous......................................................      44,022
                                                                       ----------
  TOTAL..............................................................  $2,000,000
                                                                       ==========
______________________
(1)  Unless otherwise noted, based upon the registration and issuance of
     15,082,848 shares at $10.00 per share.

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.

In accordance with the Virginia Stock Corporation Act (being Chapter 9 of Title
13.1 of the Virginia Code), Articles 10 and 11 of the registrant's Articles of
Incorporation provide as follows:

     TENTH:
     ----- 

     A.   Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Virginia Stock Corporation Act, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.

     B.   The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Virginia Stock Corporation Act requires, an advancement of expenses incurred by
an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise.  The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.

     C.   If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim.  If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit.  In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Virginia Stock Corporation Act.  Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Virginia Stock Corporation Act, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit.  In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.

     D.   The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Articles of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.

     E.   The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Virginia Stock Corporation Act.

     F.   The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.

     ELEVENTH: A Director of this Corporation shall not be personally liable to
     --------                                                                  
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability:  (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 13.1-692 of the Virginia Stock
Corporation Act; or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Virginia Stock Corporation Act is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Virginia
Stock Corporation Act, as so amended.

     Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.

ITEM 15.    RECENT SALES OF UNREGISTERED SECURITIES

None.
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 The exhibits and financial statement schedules filed as a part of this
 registration statement are as follows:

 (a)  List of Exhibits (filed herewith unless otherwise noted)

 1.1  Engagement Letter between Fredericksburg Savings and Loan Association,
      F.A. and Trident Securities, Inc.
 1.2  Draft Form of Agency Agreement between Fredericksburg Savings and Loan
      Association, F.A. and Trident Securities, Inc.*
 2.1  Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
      of Fredericksburg Savings Bank)
 3.1  Articles of Incorporation of Virginia Capital Bancshares, Inc.
 3.2  Bylaws of Virginia Capital Bancshares, Inc.
 3.3  Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
      (See Exhibit 2.1 hereto)
 4.1  Draft Stock Certificate of Virginia Capital Bancshares, Inc.
 5.1  Draft Opinion of Muldoon, Murphy & Faucette re: legality
 8.1  Draft Opinion of Muldoon, Murphy & Faucette re:  Federal Tax Matters
 8.2  Draft Opinion of Cherry Bekaert & Holland re:  State Tax Matters
10.1  Form of Fredericksburg Savings Bank Employee Stock Ownership Trust
      Agreement
10.2  Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3  Form of Proposed Employment Agreement between Fredericksburg Savings Bank
      and certain executive officers
10.4  Form of Proposed Employment Agreement between Virginia Capital Bancshares,
      Inc. and certain executive officers
10.5  Form of Proposed Fredericksburg Savings Bank Employee Severance
      Compensation Plan
10.6  Form of Fredericksburg Savings Bank Supplemental Executive Retirement
      Plan
23.1  Consent of Cherry Bekaert & Holland
23.2  Consent of Muldoon, Murphy & Faucette
23.3  Consent and Subscription Rights Opinion of FinPro, Inc.
24.1  Powers of Attorney
27.1  Financial Data Schedule
99.1  Appraisal Report of FinPro, Inc. (P)
99.2  Draft of Fredericksburg Savings Charitable Foundation Gift Instrument

__________________
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
(b)  Financial Statement Schedules

All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.

ITEM 17.  UNDERTAKINGS.

          The undersigned registrant hereby undertakes:

          (1)  To file, during any period in which offers or sales are being
               made, a post-effective amendment to this registration statement:

               (i)    To include any prospectus required by Section 10(a)(3) of
                      the Securities Act of 1933;

               (ii)   To reflect in the prospectus any facts or events arising
                      after the effective date of the registration statement (or
                      the most recent post-effective amendment thereof) which,
                      individually or in the aggregate, represent a fundamental
                      change in the information set forth in the registration
                      statement;

               (iii)  To include any material information with respect to the
                      plan of distribution not previously disclosed in the
                      registration statement or any material change to such
                      information in the registration statement;

          (2)  That, for the purpose of determining any liability under the
               Securities Act of 1933, each such post-effective amendment shall
               be deemed to be a new registration statement relating to the
               securities offered therein, and the offering of such securities
               at that time shall be deemed to be the initial bona fide offering
               thereof.

          (3)  To remove from registration by means of a post-effective
               amendment any of the securities being registered which remain
               unsold at the termination of the offering.

          Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
CONFORMED
                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fredericksburg,
Commonwealth of Virginia, on September 11, 1998.

VIRGINIA CAPITAL BANCSHARES, INC.

By:  /s/ Samuel C. Harding, Jr.
     --------------------------------
     Samuel C. Harding, Jr.
     President and Director
 
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name                                Title                                           Date
             ----                                -----                                           ----
/s/ Samuel C. Harding, Jr.              President and Director                           September 11, 1998
-------------------------------
Samuel C. Harding, Jr.                  (principal executive officer)

/s/ Peggy J. Newman                     Executive Vice President, Treasurer,             September 11, 1998
-------------------------------
Peggy J. Newman                         Secretary and Director
                                        (principal accounting and financial officer)      

/s/ H. Smith McKann                     Chairman of the Board                            September 11, 1998
-------------------------------
H. Smith McKann

/s/ Ronald G. Beck                      Vice Chairman of the Board                       September 11, 1998
-------------------------------
Ronald G. Beck

/s/ William M. Anderson, Jr.            Director                                         September 11, 1998
-------------------------------
William M. Anderson, Jr.

/s/ O'Conor Ashby                       Director                                         September 11, 1998
-------------------------------
O'Conor Ashby

/s/ Ernest N. Donahoe, Jr.              Director                                         September 11, 1998
-------------------------------
Ernest N. Donahoe, Jr.

/s/ DuVal Q. Hicks, Jr.                 Director                                         September 11, 1998
-------------------------------
DuVal Q. Hicks, Jr.

/s/ Charles S. Rowe                     Director                                         September 11, 1998
-------------------------------
Charles S. Rowe
TABLE OF CONTENTS

LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)

 1.1  Engagement Letter between Fredericksburg Savings and Loan Association,
      F.A. and Trident Securities, Inc.
 1.2  Draft Form of Agency Agreement between Fredericksburg Savings and Loan
      Association, F.A. and Trident Securities, Inc.*
 2.1  Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
      of Fredericksburg Savings Bank
 3.1  Articles of Incorporation of Virginia Capital Bancshares, Inc.
 3.2  Bylaws of Virginia Capital Bancshares, Inc.
 3.3  Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
      (See Exhibit 2.1 hereto)
 4.1  Draft Stock Certificate of Virginia Capital Bancshares, Inc.
 5.1  Draft Opinion of Muldoon, Murphy & Faucette re: legality
 8.1  Draft Opinion of Muldoon, Murphy & Faucette re:  Federal Tax Matters
 8.2  Draft Opinion of Cherry Bekaert & Holland re:  State Tax Matters
10.1  Form of Fredericksburg Savings Bank Employee Stock Ownership
      Trust Agreement
10.2  Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3  Form of Proposed Employment Agreement between Fredericksburg Savings Bank
      and certain executive officers
10.4  Form of Proposed Employment Agreement between Virginia Capital Bancshares,
      Inc. and certain executive officers
10.5  Form of Proposed Fredericksburg Savings Bank Employee Severance
      Compensation Plan
10.6  Form of Fredericksburg Savings Bank Supplemental Executive Retirement Plan
23.1  Consent of Cherry Bekaert & Holland
23.2  Consent of Muldoon, Murphy & Faucette
23.3  Consent and Subscription Rights Opinion of FinPro, Inc.
24.1  Powers of Attorney
27.1  Financial Data Schedule
99.1  Appraisal Report of FinPro, Inc. (P)
99.2  Draft of Fredericksburg Savings Charitable Foundation Gift Instrument

______________________
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.