U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-KSB
(Mark One)
[X]   Annual report under Section 13 or 15(d) of the Securities  Exchange Act of
      1934 (Fee required)

For the fiscal year ended June 30, 1997

|_|   Transition report under Section 13 or 15(d) of the Securities Exchange Ac
      of 1934 (No fee required)

For the transition period from                 to
                               ---------------    ---------------

Commission File Number:  0-24674
                         -------

                              SWVA BANCSHARES, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

               Virginia                                         54-1721629
-------------------------------------------------    ---------------------------
      (State or Other Jurisdiction of                        (I.R.S. Employer
      Incorporation or Organization)                         Identification No.)

      302 Second Street, S.W., Roanoke, Virginia                24011-1597
-------------------------------------------------    ---------------------------
      (Address of Principal Executive Offices)                  (Zip Code)

                                 (540) 343-0135
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

Securities  registered  under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

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

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

      State issuer's revenues for its most recent fiscal year.  $5.7 million

      The  aggregate  market  value of the voting  stock held by  non-affiliates
computed by  reference  to the average bid and asked  prices of such stock as of
September 9, 1997, was $8.2 million.

      As of September 9, 1997, the registrant had 510,984 shares of Common Stock
outstanding.

      Transitional Small Business Disclosure Format (check one)
Yes        No   X
    -----    -------

                       DOCUMENTS INCORPORATED BY REFERENCE

1.    Part II -- Portions of the registrant's  Annual Report to Stockholders for
      the fiscal year ended June 30, 1997.

2.    Part III --  Portions  of the  registrant's  Proxy  Statement  for  Annual
      Meeting of Stockholders to be held on October 7, 1997.


<PAGE>



                                     PART I

Item 1.  Description of Business.

Business of the Company

      SWVA Bancshares,  Inc. (the "Company") is a Virginia corporation organized
in June of 1994 at the direction of Southwest  Virginia  Savings Bank,  FSB (the
"Bank")  to  acquire  all of the  capital  stock  that  the Bank  issued  in its
conversion  from the mutual to stock form of ownership  (the  "Conversion").  On
October 7, 1994,  the Bank  completed the  Conversion  and became a wholly owned
subsidiary of the Company. In connection with the Conversion, the Company issued
570,590  shares of its  Common  Stock,  par value  $.10 per share  (the  "Common
Stock").  The Company is a unitary savings and loan holding company which, under
existing laws,  generally is not restricted in the types of business  activities
in which it may engage provided that the Bank retains a specified  amount of its
assets in housing-related  investments.  At June 30, 1997, the Company had total
assets of $70.8 million and stockholders' equity of $8.6 million.

      On August 14, 1995, the Company  received the necessary  approval from the
Office of Thrift  Supervision  ("OTS") to repurchase up to 5% (or 28,529 shares)
of the Company's Common Stock prior to October 7, 1995. The Company  repurchased
27,400 shares of its Common Stock in the open market,  at an aggregate  purchase
price  of   approximately   $466,000.   The   amount   repurchased   represented
approximately  4.8% of the  Company's  total  shares  outstanding  prior  to the
repurchase.

      On June 14, 1996,  the Company  announced  that its Board of Directors had
authorized  the  Company  to  repurchase  up to 5%  (or  27,160  shares)  of its
outstanding  common  stock in the open  market by October 7, 1996.  The  Company
repurchased  22,756  shares  of its  Common  Stock  in the  open  market,  at an
aggregate  purchase  price of  approximately  $341,000.  The amount  repurchased
represented  approximately  4.2% of the Company's total shares outstanding prior
to the repurchase.

      On March 19, 1997,  the Company  received the necessary  approval from the
Office of Thrift  Supervision  ("OTS") to repurchase up to 5% (or 26,021 shares)
the  Company's  Common Stock prior to October 7, 1997.  The Company  repurchased
9,450 shares of its Common Stock in the open  market,  at an aggregate  purchase
price  of   approximately   $154,000.   The   amount   repurchased   represented
approximately  1.8% of the  Company's  total  shares  outstanding  prior  to the
repurchase.



Business of the Bank

      General.  The Bank is primarily  engaged in  attracting  deposits from the
general  public and using those funds to originate  real estate loans on one- to
four-family residences and, to a lesser extent,  construction,  multi-family and
non-residential  real estate  loans,  commercial  loans and consumer  loans.  In
addition,   the  Bank  invests  in  investment  securities  and  mortgage-backed
securities.  The Bank offers its  customers  both ARMs and  fixed-rate  mortgage
loans.  ARMs are  originated  for retention in the Bank's  portfolio.  In recent
years, the Bank sold fixed rate mortgage loans upon origination in the secondary
market. Depending on the level of prevailing interest rates, the Bank may retain
fixed rate mortgage  loans in its portfolio.  Management of the Bank  determines
whether to retain  fixed rate  mortgage  loans in its  portfolio on the basis of
whether the interest rate  received on the loan would  possibly be beneficial to
the  profitability  of the Bank's loan  portfolio  over the average  life of the
loan. All consumer loans are retained in the Bank's portfolio.



<PAGE>



      The  principal  sources of funds for the  Bank's  lending  activities  are
deposits and the  amortization,  repayment and maturity of loans and  investment
and  mortgage-backed  securities.  The  Bank's  primary  sources  of income  are
interest and fees on loans and  investment  and  mortgage-backed  securities and
customer  service fees and  commissions.  The Bank's primary expense is interest
paid on deposits.

      Market Area. The Bank's  primary  market area consists of Roanoke  County,
the City of Salem, the City of Roanoke, and portions of Botetourt,  Bedford, and
Franklin  Counties.  The Bank regards this area as its "basic" lending area, but
loans are also made in other adjoining counties.

      The Bank's main office is located at 302 Second Street,  S.W., in the City
of  Roanoke,  Virginia.  The Bank has one branch  office  located in the City of
Roanoke.  The Bank has another  branch and a loan  production  office located in
Roanoke County, as well as branch offices in Vinton and Salem, Virginia.

      The Roanoke  Valley is  equidistant  from New York and Atlanta,  230 miles
south of  Washington,  D.C.  and 250 miles  west of the Port of  Hampton  Roads,
Virginia.  The  population  in the Roanoke  Valley area has remained  relatively
stable over the past thirty  years and was  269,100  according  to the 1990 U.S.
Census.  The Roanoke  Valley  area enjoys a  diversified  economy  comprised  of
services, retail,  manufacturing,  government offices, finance,  insurance, real
estate, wholesale trade,  transportation,  public utilities,  construction,  and
agriculture.

      The outlying  region of the Bank's  market area is rural in nature and may
represent  limited  opportunities  for lending and investment growth which could
adversely  affect the Bank's  ability to achieve asset  growth.  The Bank is the
only savings bank  headquartered  in the Roanoke Valley area.  This area is also
served by branch offices of regional commercial banks.

Lending Activities

      General.  The principal lending activity of the Bank is the origination of
adjustable-rate  mortgage loans,  fixed rate mortgage loans and short-term loans
secured by one- to four-family residences.  These fixed-rate and adjustable rate
loans are generally  underwritten to conform to standards  required for the sale
of such loans in the secondary  mortgage  market.  A majority of these loans are
sold  in the  secondary  market  at the  time  of  origination.  The  Bank  also
originates  some  nonconforming  first mortgage loans to serve  community  needs
which are retained in the Banks's portfolio.  Adjustable-rate  mortgage ("ARMs")
loans  comprised  65.15% of total loans  outstanding  on June 30, 1997.  For the
fiscal  year ended June 30, 1997  adjustable-rate  loans  represented  34.65% of
total mortgage loan  originations.  The Bank also originates  nonresidential and
multi-family  real estate  loans.  To a much lesser  extent,  the Bank  provides
financing for  construction  loans,  commercial  loans,  home equity loans,  and
consumer loans.  Mortgage loans over $350,000  require  approval of the Board of
Directors.  The Bank uses OTS guidelines as to loan limits.  See "- Loans to One
Borrower." The Bank will continue to strive to increase its consumer  lending on
a conservative  basis.  Consumer loans offer income  enhancement  through higher
yields  and  shorter  terms and tend to reprice  on a more  frequent  basis than
long-term  mortgage loans.  The Bank has made a limited amount of these types of
loans on what management  believes is a  conservatively  underwritten  basis and
intends to continue  these types of lending to meet the area's  credit  needs as
well  as to  provide  the  Bank  with  short-to  intermediate-term  investments.
Consumer loans over $200,000 require  approval of the Board of Directors.  As of
June 30, 1997, the Bank's total  portfolio of loans (the "loan  portfolio")  was
$52.9  million,  of which  $39.6  million,  or  74.86%,  was  secured by one- to
four-family  residential real estate loans, $5.0 million or 9.41% was made up of
multi-family   residential   loans,   $2.5  million  or  4.77%  was  secured  by
non-residential  real  estate  and land  loans,  and $3.5  million or 6.69% were
secured by  construction  loans.  At June 30, 1997, the Bank had $2.3 million in
consumer and other loans.

                                        2

<PAGE>



      The  following  table  sets  forth  the  composition  of the  Bank's  loan
portfolio in dollar amounts and in percent of the  respective  portfolios at the
dates indicated.

<TABLE>
<CAPTION>
                                                        At June 30,
                                     -------------------------------------------------
                                             1997                        1996
                                            ------                      -----
                                      Amount      Percent         Amount       Percent
                                     --------     -------        -------       -------
                                               (Dollars in Thousands)
Mortgage loans
  Residential, one to four
<S>                                  <C>           <C>           <C>            <C>
    family....................       $39,587        74.86%       $37,191         76.00%
  Residential, multifamily....         4,976         9.41          3,114          6.36
  Nonresidential and land.....         2,523         4.77          2,759          5.64
  Construction................         3,536         6.69          3,663          7.49

Non-mortgage loans
  Consumer loans
    Secured personal..........           862         1.63            783          1.60
    Unsecured personal........            10         0.02             20          0.04
    Auto......................            53         0.10            116          0.24
    Home Improvement..........            37         0.07             73          0.15
    Equity line...............         1,050         1.99            911          1.86
    Other.....................            87         0.16            169          0.35
  Commercial
    Secured...................            35         0.06             98          0.20
    Unsecured.................           128         0.24             35          0.07
                                     -------      ------         -------       -------
      Total loans receivable..       $52,884       100.00%       $48,932        100.00%
                                                   ======                       ======

Less
  Deferred loan fees..........            93                         100
  Undisbursed loans in process         1,592                       1,881
  Allowance for credit losses.           217                         194
                                     -------                     -------
  Undisbursed loans in process       $50,982                     $46,757
                                      ======                      ======
</TABLE>




                                        3

<PAGE>



      The following  table sets forth the maturity of the Bank's loan  portfolio
at June 30, 1997. The table does not include  prepayments or scheduled principal
repayments.  Prepayments  and scheduled  principal  repayments on loans totalled
$9.8  million and $11.6  million,  for the fiscal  years ended June 30, 1997 and
1996, respectively.  ARMs are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>
                               Residential
                                   1-4         Multi-  Non-residential                 Consumer and
                             Real Estate(1)    Family    and Land        Construction     Other         Total
                             --------------   -------  ---------------   ------------  ------------    --------
                                                             (Dollars in Thousands)

Amounts Due:
<S>                             <C>           <C>         <C>              <C>            <C>          <C>
Within 3 months ............    $     5       $     0     $     2          $ 1,829        $     6      $ 2,534
3 months to 1 Year .........         23             0         443            1,519             39        2,024
                                -------       -------     -------          -------        -------      -------
   Total due in one year or
    less....................         28             0         445            3,348            737        4,558
                                -------       -------     -------          -------        -------      -------

After 1 year:
  1 to 3 years .............        102             0          32              188            119          441
  3 to 5 years .............        405             0          81                0            174          660
  5 to 10 years ............      2,353           340         370                0            142        3,205
  10 to 20 years ...........     10,319         4,093       1,595                0          1,090       17,097
  Over 20 years ............     26,380           543           0                0              0       26,923
                                -------       -------     -------          -------        -------      -------
   Total due after one year      39,559         4,976       2,078              188          1,525       48,326
                                -------       -------     -------          -------        -------      -------
   Total amount due ........    $39,587       $ 4,976     $ 2,523          $ 3,536        $ 2,262      $52,884
                                =======       =======     =======          =======        =======      =======

Less:
Allowance for loan loss ....                                                                              217
Loans in process ...........                                                                            1,592
Deferred loan fees .........                                                                               93
                                                                                                      -------
  Loans receivable, net ....                                                                          $50,982
                                                                                                      =======
</TABLE>




      One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one- to four-family, owner-occupied,  residential
mortgage loans secured by property located in the Bank's primary market area. At
June 30, 1997,  the Bank had $39.6  million,  or 74.86%,  of its loan  portfolio
invested  in these  loans.  The Bank also  offers  home  equity  lines of credit
secured by one- to four-family  residential properties which are discussed below
under "-- Consumer and Other  Loans."  Management  believes  that this policy of
focusing on one- to four-family  lending has been effective in  contributing  to
net interest income while reducing credit risk by keeping loan delinquencies and
losses to a minimum.


                                        4

<PAGE>




      The Bank  offers  ARMs that  adjust  every year and have terms of up to 30
years.  Generally,  the interest rate  adjustments  on ARMs are based on the one
year  Treasury  bill index.  These ARMs have interest rate floors of 6%, so that
the interest rate on such loans cannot adjust below such floors. However, during
the fiscal year ended June 30, 1997, the Bank  originated  some ARMs at interest
rates up to .50% below such floors, although the initial rates are not below the
Bank's costs of funds and do not lead to negative amortization of the balance on
such loans.  The ARMs  originated for the Bank's  portfolio  carry interest rate
ceilings  up to 5.00%  above the initial  interest  rate on the loans.  The Bank
considers the market factors and  competitive  rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers.

      The retention of ARMs in the Bank's portfolio  greatly helps to reduce the
Bank's exposure to changes in interest rates. However,  there are unquantifiable
credit  risks  which  could  result  from  potential  increased  payments to the
borrower  as a result of the  repricing  of ARMs.  It is  possible  that  during
periods  of  rapidly  rising  interest  rates,  the risk of  default on ARMs may
increase  due to  the  upward  adjustment  of  interest  cost  to the  borrower.
Currently, the ARMs originated by the Bank provide for initial rates of interest
less than the fully  indexed  rates that would  prevail  were the index used for
repricing  applied  initially.  These  loans are  subject to  increased  risk of
delinquency  or  default  when  the  higher,   fully-indexed  rate  of  interest
subsequently comes into effect and replaces the lower initial rate.


      Generally, during periods of rising interest rates, the risk of default on
ARMs is considered  to be greater than the risk of default on a fixed-rate  loan
due to the upward  adjustment of interest costs to the borrower.  To help reduce
such risk,  the Bank  qualifies  loans  above 80%  loan-to-value  at the maximum
second year rate, as opposed to the original  interest rate. ARMs may be made at
up to 95% of the loan to value  ratio.  The Bank  does not  originate  ARMs with
negative amortization.

      The Bank also offers  conventional  fixed-rate  mortgage  loans with terms
from 15 to 30 years.  A majority of the 15 to 30 year  fixed-rate  mortgages are
sold in the secondary mortgage market.

      Regulations  limit  the  amount  which a savings  association  may lend in
relationship  to the  appraised  value of the real estate  securing the loan, as
determined  by an appraisal at the time of loan  origination.  Such  regulations
permit a maximum  loan-to-value  ratio of 100% for residential  property and 90%
for all other real estate loans. The Bank's lending policies, however, generally
limit  the  maximum  loan-to-value  ratio to 80% of the  appraised  value of the
property, based on an independent appraisal. When the Bank makes a mortgage loan
in excess of 80% of the  appraised  value or purchase  price,  private  mortgage
insurance  is  required  for at least the amount of the loan in excess of 80% of
the appraised value.

      The loan-to-value ratio,  maturity and other provisions of the residential
real estate loans made by the Bank reflect the policy of making loans  generally
below the  maximum  limits  permitted  under  applicable  regulations.  The Bank
requires an independent  appraisal,  title  insurance or an attorney's  opinion,
flood hazard insurance (if applicable),  and fire and casualty  insurance on all
properties  securing  real estate loans made by the Bank.  The Bank reserves the
right to approve the selection of which title insurance  companies' policies are
acceptable to insure the real estate title in the loan transactions.

      While one- to  four-family  residential  real  estate  loans are  normally
originated with 15-30 year terms,  such loans typically  remain  outstanding for
substantially  shorter  periods.  This is because  borrowers  often prepay their
loans in full upon sale of the property  pledged as security or upon refinancing
the original loan. In addition,  substantially  all of the mortgage loans in the
Bank's loan portfolio  contain  due-on-sale  clauses providing that the Bank may
declare the unpaid amount due and

                                        5

<PAGE>



payable upon the sale of the property securing the loan. The Bank enforces these
due-on-sale  clauses to the extent permitted by law. Thus, average loan maturity
is a function of, among other  factors,  the level of purchase and sale activity
in the real estate  market,  prevailing  interest  rates and the interest  rates
payable on outstanding loans.

      Multi-Family and  Non-residential  Real Estate Loans. The Bank in the past
has originated non-residential real estate and multi-family loans; however, this
type of lending  represents a small  portion of the Bank's  lending  activities.
There were no  non-residential  real estate loans  originated  during the fiscal
year ended June 30,  1997.  During the same  period,  the bank  originated  $2.1
million in multi-family loans At June 30, 1997 outstanding  non-residential real
estate  and  multi-family  loans  amounted  to $2.5  million  and $5.0  million,
respectively.

      Non-residential  real estate loans  consist of permanent  loans secured by
small office buildings,  churches,  shopping centers, and other  non-residential
buildings  secured by properties.  Non-residential  real estate and multi-family
secured  loans are  generally  originated  in amounts up to 75% of the appraised
value of the property.  Such  appraised  value is  determined by an  independent
appraiser which has been previously approved by the Bank. Multi-family loans are
generally secured by apartment buildings of 36 or fewer units.

      Non-residential   real  estate  and   multi-family   loans  are  generally
originated  on  an  adjustable-rate  basis  with  the  interest  rate  adjusting
annually.  Some of these  loans have an  interest  rate that is fixed for two to
three  years and then  adjusts  annually.  The Bank also  makes  some fixed rate
non-residential real estate and multi-family mortgages.

      Loans secured by multi-family  and  non-residential  real estate generally
involve a greater  degree of risk than one- to  four-family  mortgage  loans and
carry larger loan balances.  This  increased  credit risk is a result of several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects 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  non-residential  and
multi-family real estate is typically dependent upon the successful operation or
management of the related real estate project. If the cash flow from the project
is reduced,  the borrower's ability to repay the loan may be impaired.  The Bank
seeks to minimize these risks in a variety of ways,  including limiting the size
of such loans and strictly scrutinizing the financial condition of the borrower,
the quality of the collateral  and the  management of the property  securing the
loan.  The Bank  also  obtains  personal  guarantees.  Substantially  all of the
properties  securing the Bank's  non-residential  and  multi-family  real estate
loans are inspected by the Bank's lending personnel before the loan is made. The
Bank also obtains  appraisals  on each property in  accordance  with  applicable
regulations.  At June 30, 1997, the largest non-residential or multi-family real
estate  loan had a balance  of $1.1  million  and was  secured  by  multi-family
apartments and was performing. See "-- Loans to One Borrower."

      Construction  Lending.  The Bank engages in construction lending involving
loans to qualified borrowers for construction of one- to four-family residential
properties and, on a limited basis,  involving  non-residential and multi-family
properties. These properties are located in the Bank's market area.

      Construction  loans are made to  builders  on a  speculative  basis and to
owners  for  construction  of their  primary  residence.  Loans for  speculative
housing construction are made to area builders after a background check has been
made.  The  Bank  usually  will  have  no  more  than  four  construction  loans
outstanding  at any time to any single  builder.  Construction  loans on one- to
four-family properties are generally limited to a maximum loan-to-value ratio of
80%  and  have  a  maximum  maturity  of  12  months.   Construction   loans  on
non-residential and multi-family properties are generally limited to a maximum

                                        6

<PAGE>



loan-to-value  ratio of 75% and  have a  maximum  maturity  of 18  months.  Loan
proceeds are disbursed in increments as construction progresses and only after a
physical  inspection  of the  project is made by a  representative  of the Bank.
Accrued interest on loan  disbursements  is paid monthly.  At June 30, 1997, the
Bank had $1.3  million  in  construction  loans  outstanding  to  builders  on a
speculative  basis,  with $1.1 million in loans in process (funds being held for
construction progress) outstanding and attributed to these loans.

      Construction loans to owners have either fixed or adjustable rates and are
underwritten  in accordance  with the same terms and  requirements as the Bank's
permanent  mortgages on existing properties except that the builder must qualify
as an  approved  contractor  by the Bank,  and the loans  generally  provide for
disbursement  of loan  proceeds in stages  during the  construction  period.  An
approved  contractor is one who has been approved by a title  insurance  company
that will insure the Bank against  mechanics'  liens or whose credit,  financial
statements and experience have been approved by the Bank. Borrowers are required
to  pay  accrued  interest  on  the  outstanding   balance  monthly  during  the
construction  phase.  At June  30,  1997,  there  was  $819,000  outstanding  in
construction  loans to owners  with  $469,000  outstanding  in loans in  process
allocated to these  projects.  There were no  construction  loans  originated on
nonresidential and multi-family properties during the fiscal year ended June 30,
1997.  The  Bank  originated  $5.1  million  in  construction  loans  on one- to
four-family properties during the fiscal year ended June 30, 1997.

      Construction  financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a  construction  loan is  dependent  largely upon the accuracy of the
initial  estimate of the  property's  value at  completion  of  construction  or
development and the estimated cost (including interest) of construction.  During
the  construction  phase,  a number of factors  could  result in delays and cost
overruns.  If the estimate of construction cost proves to be inaccurate,  it may
be  necessary  for the  Bank to  advance  funds  beyond  the  amount  originally
committed to permit  completion  of the  construction.  If the estimate of value
proves to be inaccurate, the Bank may be confronted, at or prior to the maturity
of the loan, with collateral having a value which is insufficient to assure full
repayment. As a result of the foregoing, construction lending often involves the
disbursement  of  substantial  funds with repayment  dependent,  in part, on the
success of the project.  If the Bank is forced to foreclose on a property  prior
to or at completion  due to a default,  there can be no assurance  that the Bank
will be able to recover all of the unpaid  balance of, and accrued  interest on,
the loan as well as related  foreclosure and holding costs.  The Bank has sought
to minimize this risk by limiting construction lending to qualified borrowers in
the  Bank's  market  area and by  limiting  the  number  of  construction  loans
outstanding at any time.

      Consumer and Other Loans.  The Bank views consumer lending as an important
component  of its lending  operations  because  consumer  loans  generally  have
shorter terms and higher yields,  thus reducing  exposure to changes in interest
rates.  In addition,  the Bank believes that  offering  consumer  loans helps to
expand and create stronger ties to its customer base. Consequently, the Bank has
increased  its consumer  lending by marketing  home equity loans to existing and
potential customers. Regulations permit federally-chartered savings associations
to make secured and unsecured  consumer loans up to 35% of the Bank's assets. In
addition,  the Bank has  lending  authority  above  the 35%  limit  for  certain
consumer  loans,  such as home  improvement  loans and loans  secured by savings
accounts.

      Consumer   loans  consist  of  personal   secured  and  unsecured   loans,
automobile,  boat and recreational  vehicle loans,  savings account loans,  home
improvement  and home equity loans.  As of June 30, 1997,  these  consumer loans
totaled $2.1 million, or 3.97%, of the Bank's total loan portfolio.
The Bank makes fixed and adjustable rate consumer loans.


                                        7

<PAGE>



      The Bank also offers a home  equity  line of credit,  which is a revolving
line of credit secured by a first or second mortgage, and which is accessible to
the  customer  by either  writing a check or  requesting  an advance at a branch
office of the Bank. The rate on such loans is adjustable  monthly,  based on the
Wall Street  Journal  prime rate plus 1.5%,  with a floor of 6% and a ceiling of
18%.

      The underwriting standards employed by the Bank for consumer loans include
a  determination  of the  applicant's  payment  history  on other  debts  and an
assessment of ability to meet existing  obligations and payments on the proposed
loan. In addition,  the stability of the applicant's monthly income from primary
employment is considered during the underwriting  process.  Creditworthiness  of
the applicant is of primary  consideration;  however,  the underwriting  process
also includes a comparison of the value of the security,  if any, in relation to
the proposed loan amount.

      The  Bank  is   allowed  to  make   secured   and   unsecured   loans  for
nonresidential,  corporate,  business and agricultural  purposes,  including the
issuance  of  letters  of credit  secured by real  estate,  business  equipment,
inventories,  accounts  receivable and cash equivalents in amounts not exceeding
10% of the Bank's assets.  Non-real  estate  commercial  lending by the Bank has
been limited.  These loans have generally been made to building  contractors and
small  business  operations.  Letters of credit  have  mostly  been  provided to
contractors  for use in land  development.  The letters of credit have generally
been secured by real estate and contain personal guarantees of the principals of
the borrowing entity.

      The aggregate  amount of commercial  business  loans  outstanding  may not
exceed 10% of the Bank's assets. In addition, another 10% of total assets may be
invested in commercial  equipment leasing. As of June 30, 1997, $163,000 or .30%
of the Bank's loan portfolio was categorized as commercial business loans.

      Consumer  and  commercial   loans  entail  greater  credit  risk  than  do
residential mortgage loans,  particularly in the case of consumer and commercial
loans which are unsecured or secured by assets that depreciate rapidly, which in
the  case of  consumer  loans  include  automobiles,  mobile  homes,  boats  and
recreational  vehicles  and in the case of  commercial  loans  include  business
equipment,  inventories  and  accounts  receivable.  In such cases,  repossessed
collateral  for a  defaulted  consumer  or  commercial  loan may not  provide an
adequate  source  of  repayment  for the  outstanding  loan  and  the  remaining
deficiency often does not warrant further substantial collection efforts against
the borrower.  In  particular,  amounts  realizable  on the sale of  repossessed
automobiles or business  equipment may be  significantly  reduced based upon the
condition  of the  collateral  and the lack of demand  for used  automobiles  or
business equipment.

      Loan Solicitation, Approval and Processing. The Bank's sources of mortgage
loan  applications  are referrals from existing or past  customers,  real estate
brokers,  call-in and  walk-in  customers,  builders  and also are the result of
advertising.

      Any mortgage or construction  loan up to $250,000 is reviewed and approved
by the  Management  Loan  Committee.  Any  mortgage  or  construction  loan over
$250,000 up to $350,000 is reviewed and approved by the Board of Directors' Loan
Committee.  The Board of Directors'  Loan  Committee  reviews loans in excess of
$350,000 to be submitted to the Board of Directors for its approval.

      Consumer  and  commercial  loans  may  be  approved  by two  officers  for
unsecured loans up to $25,000 and for secured loans up to $100,000.  The maximum
consumer  or  commercial  loan to be  approved  by the Board of  Directors  Loan
Committee is $200,000 with any loans  exceeding that amount  requiring  Board of
Directors approval.


                                        8

<PAGE>



      The Bank  uses  independent  fee  appraisers  on all real  estate  related
transactions.  Each fee appraiser  used must be state  licensed or certified and
approved by the Bank's  Board of  Directors.  It is the Bank's  policy to obtain
title insurance or an attorney's opinion and certification of title and fire and
casualty  insurance  for all  mortgage  loans.  Flood  insurance is required for
properties located in flood zones.

      Loan  Originations,  Purchase,  Sales and Repayments.  The following table
sets forth the Bank's loan originations, sales, and principal repayments for the
periods indicated.

<TABLE>
<CAPTION>
                                              Year Ended June 30,
                                         -----------------------------
                                             1997             1996
                                         -----------        ----------
                                                 (In Thousands)
Total gross loans receivable at
<S>                                       <C>              <C>
  beginning of period...............      $  48,932        $  52,491

Loans originated:
  One- to four-family residential...         19,176           23,340
  Multi-family residential..........          2,102                0
  Non-residential and land..........              0                0
  Construction loans................          5,108            4,382
  Consumer loans....................          1,006            1,373
                                          ---------        ---------
    Total loans originated..........         27,392           29,095
                                          ---------        ---------

Loans purchased:
  One- to four-family residential...             11                0
  Multi-family residential..........              0                0
  Non-residential and land..........             11                0
                                          ---------        ---------
  Total loans purchased.............             22                0
                                          ---------        ---------

Loans sold..........................         10,071           19,601
                                          ---------        ---------

Other loan activity:
  Loan principal repayments.........         (9,780)         (11,673)
  Other (net).......................         (3,611)          (1,450)
                                          ---------        ---------
  Net other loan activity...........        (13,391)         (13,123)
                                          ---------        ---------

  Total gross loans receivable at
    end of period...................      $  52,884        $  48,932
                                          =========        =========
</TABLE>


      Loan  Purchases  and  Sales.  Prior to 1990 the  Bank's  loan  sales  were
insignificant.  Any loans  sold  were  individual  loans  with  other  financial
institutions.  The Bank began  originating loans to sell in the secondary market
in 1990. In March 1992, the Bank opened a loan  production  office separate from
its  banking  facilities  to  concentrate  more  activity  for loan sales in the
secondary  market.  The Bank originates  mostly fixed-rate loans for sale in the
secondary  market.  These  loans  include  15  to  30  year,  80%  loan-to-value
conventional  loans (the portion of the loans above 80% are insured with private
mortgage  insurance),  Federal  Housing  Administration  ("FHA")  and  Veteran's
Administration  ("VA") loans.  The Bank uses standard Federal Home Loan Mortgage
Corporation("FHLMC")/Federal     National    Mortgage    Association    ("FNMA")
documentation for its conventional  loans. During the fiscal year ended June 30,
1997, the Bank sold a total of $10.1 million of mortgage loans.


                                        9

<PAGE>



      Currently,  the Bank sells  loans to other  lenders  who sell  directly to
FHLMC, FNMA and Government  National  Mortgage  Association  ("GNMA").  The Bank
sells the majority of its loans with  servicing  released.  These loans are sold
without recourse.

      During the fiscal year ended June 30, 1997,  the Bank  purchased  loans in
the amount of $22,000.

      Loan Commitments. The Bank issues loan commitments for 60 days or less. No
points  are  normally  charged  for these  commitments.  The Bank will  consider
extended  commitment periods and may charge fees based on the length and type of
commitment.  At June 30,  1997,  the Bank had $3.0  million  of  commitments  to
finance real estate  acquisitions  and  construction  and had contracted to sell
$1.1 million of such loans.

      Loan  Processing  and Servicing  Fees.  In addition to interest  earned on
loans,  the Bank recognizes fees and service charges which consist  primarily of
fees  charged  for loan  originations  and loans  serviced  for  others and late
charges.  The Bank recognized loan servicing fees of $45,000 for the fiscal year
ended June 30,  1997.  As of June 30,  1997,  the Bank had  $14,000 of loan fees
deferred  under GAAP.  As of June 30,  1997,  loans  serviced  for the  Virginia
Housing Development  Authority ("VHDA") totalled $583,000 and loans serviced for
FHLMC totalled $379,000.

      Loans to One Borrower. Savings associations are subject to the same limits
as those  applicable to national banks,  which under current  regulations  limit
loans-to-one  borrower  in an  amount  equal to 15% of  unimpaired  capital  and
retained income on an unsecured  basis and an additional  amount equal to 10% of
unimpaired  capital  and  retained  income  if the loan is  secured  by  readily
marketable collateral  (generally,  financial  instruments,  not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.2 million as of June 30, 1997.

      The Bank's  largest  group of loans to one  borrower  at June 30, 1997 was
$1.2 million which consisted of loans secured by single family homes,  developed
building lots, land and a mobile home park. The second largest group of loans to
one borrower was $1.1 million which  consisted of loans secured by single family
homes, both completed and under  construction,  and developed building lots. The
next largest group of loans to one borrower was $1.1 million which  consisted of
loans secured by single family homes and apartments.

      Loan  Delinquencies.  Loans  past due more  than 90 days are  individually
examined  for  potential  losses and the ultimate  collectibility  of funds due.
Loans are deemed to have no loss exposure if the value of the property  securing
the loan exceeds the  receivable  balance on the loan or collection is probable.
Such loans are kept on an accruing status pending monthly review. Loans that are
deemed  to  contain  a  potential  loss  exposure  to the  Bank  are  placed  on
non-accrual  status  by the Bank  and all  interest  past  due on such  loans is
reserved.  Specific reserves are established to recognize losses on non-accruing
loans on a case-by-case basis.

      Real estate  acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure  is classified as foreclosed  real estate until such time as
it is sold. When foreclosed real estate is acquired, it is recorded at the lower
of fair value or cost.  Valuations are periodically  performed by management and
subsequent  charges to income are taken when it is determined  that the carrying
value of the property exceeds the fair value less estimated costs to sell.


                                       10

<PAGE>



      Non-Performing   Assets.   The  following  table  sets  forth  information
regarding  loans which are 90 days or more  delinquent  but on which the Bank is
accruing  interest at the dates  indicated.  At June 30, 1997,  the Bank had one
loan accounted for on a non-accrual  basis and no restructured  loans within the
meaning of SFAS 15.

<TABLE>
<CAPTION>
                                                                                    At June 30,
                                                                                  --------------
                                                                                   1997    1996
                                                                                  --------------
                                                                                  (In Thousands)

Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
<S>                                                                                <C>     <C>
  Permanent loans secured by one-to four- family dwelling units.................   $  0    $  0
  All other mortgage loans .....................................................      0       0
                                                                                   ----    ----
Total ..........................................................................   $  0    $  0
                                                                                   ====    ====
Total accruing loans past due 90 days or more ..................................   $  0    $  0
                                                                                   ----    ----
Foreclosed real estate .........................................................   $  0    $  0
                                                                                   ----    ----
Total non-performing assets ....................................................   $ 60    $  0
                                                                                   ====    ====
Total  non-performing  loans  past  due 90  days or more to total loans.........    .12%    .00%
Total non-performing loans past due 90 days or more to total assets.............    .08%    .00%
                                                                                   ====    ====
Total non-performing assets to total assets ....................................    .08%    .00%
                                                                                   ====    ====
</TABLE>



      Classified Assets. The Office of Thrift  Supervision  ("OTS")  regulations
provide for a classification  system for problem assets of insured  institutions
which  covers all problem  assets.  Under this  classification  system,  problem
assets of insured  institutions are classified as "substandard,"  "doubtful," or
"loss." 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
designated  "special  mention" by management  are assets  included on the Bank's
internal  watchlist  because of potential  weakness  but which do not  currently
warrant classification in one of the aforementioned categories.

      When  an  insured   institution   classifies   problem  assets  as  either
substandard or doubtful,  it may establish general  allowances for credit losses
in an amount deemed prudent by  management.  General  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
problem  assets as  "loss,"  it is  required  either  to  establish  a  specific
provision for losses equal to 100% of that portion of the asset so classified or
to  charge  off  such  amount.   An   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  may  recommend  the  establishment  of
additional  general or  specific  loss  allowances.  A portion  of general  loss
allowances  established to cover possible losses related to assets classified as
substandard  or  doubtful  may  be  included  in  determining  an  institution's
regulatory  capital,  while  specific  valuation  allowances  for credit  losses
generally do not qualify as regulatory  capital. At June 30, 1997 the Bank had a
general credit loss allowance of $217,000.


                                       11

<PAGE>



      On June 30, 1997,  the Bank had  approximately  $548,000 of problem loans,
$519,000 of which were reported as  "Substandard."  All of these were on one- to
four-family  residential loans. $23,000 of a loan on a duplex loan in the amount
of $46,000 was reported as "doubtful" and one $6,000 letter of credit secured by
one- to four-family residential loan was classified as "loss".

      The following  table  provides  further  information  regarding the Bank's
classified assets and allowances for credit losses at June 30, 1997.

<TABLE>
<CAPTION>

                                                (In Thousands)

<S>                                                <C>
                  Special Mention................  $       0
                  Substandard....................    519,000
                  Doubtful assets................     23,000
                  Loss assets....................      6,000
                  General loss allowance.........    217,000
                  Specific loss allowance........          0
                  Charge-offs....................          0

</TABLE>


      Foreclosed  Real Estate.  Real estate  acquired by the Bank as a result of
foreclosure,  judgment  or by  deed  in lieu of  foreclosure  is  classified  as
foreclosed  real  estate  until it is sold.  When  property  is  acquired  it is
recorded  at the lower of the cost or fair  value.  The Bank held no  foreclosed
real estate at June 30, 1997.

      Allowances for Credit Losses. The Bank provides  valuation  allowances for
estimated losses from uncollectible loans.  Management's  periodic evaluation of
the adequacy of the  allowance  for credit  losses is based on loss  experience,
known and inherent risk in the  portfolio,  prevailing  market  conditions,  and
management's  judgment as to collectibility.  The allowance for credit losses is
increased  by  charges  to  earnings  and  decreased  by  charge-offs   (net  of
recoveries).

      The following table sets forth the Bank's  allowance for credit losses and
related ratios.

<TABLE>
<CAPTION>

                                                                   At June 30,
                                                             ----------------------
                                                                 1997       1996
                                                             ----------------------
                                                             (Dollars in Thousands)

<S>                                                            <C>        <C>
Total loans ................................................   $52,884    $48,932
                                                               =======    =======

Allowance balances (at beginning of period) ................   $   194    $   194
Provision ..................................................        23          0
Net Charge-offs ............................................         0          0
                                                               -------    -------
Allowance balance (at end of period) .......................   $   217    $   194
                                                               =======    =======
Allowance for credit losses as a percentage of total lons...       .41%       .40%

</TABLE>


                                       12

<PAGE>



      Allocation  of Allowance for Loan Losses.  The following  table sets forth
the allocation of the Bank's  allowance for loan losses by loan category and the
percent of loans in each category to total loans  receivable,  net, at the dates
indicated.  The  portion  of the loan  loss  allowance  allocated  to each  loan
category  does not  represent  the total  available  for future losses which may
occur  within  the loan  category  since the  total  loan  loss  allowance  is a
valuation reserve applicable to the entire loan portfolio.

<TABLE>
<CAPTION>
                                                At June 30,
                             -------------------------------------------------
                                    1997                     1996
                             -------------------------------------------------
                                        Percent of                Percent of
                                       Loans in Each            Loans in Each
                                        Category to              Category to
                             Amount     Total Loans     Amount   Total Loans
                             -------------------------------------------------
                                           (Dollars in Thousands)
<S>                           <C>         <C>            <C>        <C>
Residential, one-four family  $  87        74.86%        $ 49        76.00%
Residential, multifamily ...     50         9.41           50         6.36
Nonresidential and land ....     46         4.77           39         5.64
Construction ...............     13         6.69           39         7.49
Consumer ...................     15         3.97           13         4.24
Commercial .................      6         0.30            4         0.27
                               ----       ------         ----       ------
                               $217       100.00%        $194       100.00%
                               ====       ======         ====       ======
</TABLE>


Investment and Mortgage-backed Securities Activities

      Investment  Securities.  The Bank is required under federal regulations to
maintain a minimum  amount of liquid  assets  which may be invested in specified
short-term  securities  and certain  other  investments.  The Bank has generally
maintained  a liquidity  portfolio  well in excess of  regulatory  requirements.
Liquidity  levels may be  increased or  decreased  depending  upon the yields on
investment  alternatives and upon management's judgment as to the attractiveness
of the  yields  then  available  in  relation  to  other  opportunities  and its
expectation of future yield levels,  as well as  management's  projections as to
the short-term  demand for funds to be used in the Bank's loan  origination  and
other  activities.  At June 30,  1997,  the Bank  had an  investment  securities
portfolio  of  approximately  $15.8  million,   consisting   primarily  of  U.S.
government and agency  obligations,  interest bearing deposits,  FHLB stock, and
marketable  equity  securities.  The Bank will  continue  to seek  high  quality
investment  securities  with short to  intermediate  maturities from one to five
years for liquidity purposes.  The Bank seeks high quality investment securities
up to 30 years in maturity.

      Effective July 1, 1994, the Bank adopted  Financial  Accounting  Standards
Board Statement 115 ("FASB 115"),  "Accounting  for certain  Investments in Debt
and Equity  Securities,"  which resulted in the  reclassification  of investment
securities  and  mortgage-backed  securities  into those which are available for
sale and those which are intended to be held to maturity. The unrealized gain or
loss on the securities classified as available for sale, along with those of the
marketable  equity  securities,  are recognized,  net of the expected income tax
effect, as a separate component of retained earnings.

      The  Financial  Accounting  Standards  Board  (FASB)  voted to allow  each
institution to reconsider the  classification  of investments per FASB 115 after
November 15, 1995 and before the presentation of the December 31, 1995 financial
reports,  without "tainting" any assets which remained in that category.  During
this  period,  the  Bank  removed  $1.2  million  from  "held to  maturity"  and
reclassified them to the "available for sale" category.

                                       13

<PAGE>




      Beginning  in  1992,  the  Bank  expanded  its  investment   portfolio  to
incorporate ARM Mutual Funds,  primarily  short-term  investments.  These funds,
which  primarily  invest in  adjustable  rate  mortgage-backed  securities,  are
available  for sale and  marked  to  market  at the end of each  month  with all
adjustments  in value  reported to the Board of Directors  monthly.  At June 30,
1997, the Bank had $1.0 million or 6.36% of its investment  portfolio in the ARM
Mutual Funds.


      Mortgage-backed   Securities.   The  Bank   has  in  the  past   purchased
mortgage-backed  securities  guaranteed by participation  certificates issued by
the FHLMC and secured by interests in pools of conventional mortgages originated
by the  Bank.  These  mortgage  backed  securities  are  classified  as "held to
maturity".

      Mortgage-backed   securities   are   secured  by   interest  in  pools  of
conventional  mortgages or government  backed mortgage loans originated by other
mortgage lenders.  The Bank may purchase  mortgage-backed  securities from FNMA,
GNMA and FHLMC and generally classifies them as "available for sale". During the
year  ended  June  30,   1997,   the  Bank   purchased   $2.0  million  in  FNMA
mortgage-backed securities.

      Mortgage-backed  securities  provide for monthly payments of principal and
interest and generally have contractual  maturities  ranging from five to thirty
years.  However,  due to expected repayment terms being  significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives of
these securities could be significantly shorter.

      As of June 30, 1997,  mortgage-backed  securities amounted to $2.3 million
or 3.27% of total assets.


                                       14

<PAGE>




Investment and Mortgage-Backed Securities Portfolio

      The following table sets forth the carrying value of the Bank's investment
securities portfolio,  short-term  investments,  FHLB stock, and mortgage backed
and related securities at the dates indicated.  At June 30, 1997, the fair value
of the Bank's investment portfolio was $9.1 million.

<TABLE>
<CAPTION>
                                                                  1997                  1996
                                                          -------------------  ------------------
                                                          Amortized    Fair    Amortized   Fair
                                                             Cost      Value     Cost      Value
                                                          ----------  -------  ---------- -------
                                                                  (Dollars in Thousands)
Available for sale securities:
<S>                                                        <C>       <C>       <C>       <C>
  Mutual Fund - AMF Adjustable Rate Securities Portfolio   $ 1,007   $ 1,006   $ 5,256   $ 5,215
  FHLB bond ............................................     5,750     5,751     1,245     1,222
  Federal Home Loan Bank of
    Atlanta Stock ......................................       961       961       961       961
  FNMA mortgage-backed securities ......................     1,946     1,991         0         0
  Financial Institution Insurance
    Group, LTD Stock ...................................        00        00        50        98
                                                           -------   -------   -------   -------
                                                             9,664     9,709     7,512     7,496
                                                           -------   -------   -------   -------
Held to maturity securities:
  Interest-bearing deposits (1) ........................     6,003     6,038     8,253     8,253
  FHLMC participation certificates .....................       365       374       433       445
                                                           -------   -------   -------   -------
                                                             6,074     6,412     8,696     8,698
                                                           -------   -------   -------   -------


                  Total investment securities ..........   $16,067   $16,121   $16,208   $16,194
                                                           =======   =======   =======   =======
</TABLE>


---------------------
(1) Includes time and overnight deposits which are also cash equivalents.


      The following table sets forth certain information  regarding the carrying
values,  weighted  average  yields  and  maturities  of  the  Bank's  investment
portfolio at June 30, 1997.

<TABLE>
<CAPTION>
                                   One Year or Less       One to Five Years   More than Five Years    Total Investment Portfolio
                                 ---------------------   -------------------  --------------------   -----------------------------
                                 Amortized     Average   Amortized   Average   Amortized   Average   Amortized   Average    Fair
                                    Cost        Yield      Cost       Yield      Cost       Yield      Cost       Yield     Value
                                 ----------   --------   ---------   -------  ----------  --------   ----------  --------  -------
                                                        (Dollars in Thousands)

<S>                                <C>           <C>     <C>           <C>     <C>           <C>     <C>           <C>     <C>
Interest-bearing deposits.......   $ 5,742       6.03%   $   296       6.33%   $     0          0%   $ 6,038       6.05%   $ 6,038
Federal agency
  obligations ..................         0          0      1,245       5.45      4,505       7.80      5,750       7.33      5,751
Mortgage-backed
  securities ...................         0          0          0          0      2,311       8.00      2,311       8.00      2,365
Mutual fund - AMF
  Adjustable Rate
  securities portfolio .........     1,007       6.06          0          0          0          0      1,007       6.06      1,006
FHLB Stock .....................       961       7.24          0          0          0          0        961       7.24        961
Other securities ...............         0          0          0          0          0          0          0          0          0
                                   -------    -------    -------    -------    -------    -------    -------       ----    -------
  Total ........................   $ 7,710       6.18%   $ 1,541       5.62%   $ 6,816       7.87%   $16,067       6.86%   $16,121
                                   =======    =======    =======    =======    =======    =======    =======       ====    =======
</TABLE>




                                       15

<PAGE>



Sources of Funds

   General.  The  major  source  of the  Bank's  funds  for  lending  and  other
investment  purposes are  deposits,  amortization  and  prepayment  of loans and
mortgage-backed securities,  maturities of investment securities and operations.
Scheduled  loan principal  repayments  are a relatively  stable source of funds,
while  deposit  inflows and  outflows  and loan  prepayments  are  significantly
influenced by general  interest rates and market  conditions.  The Bank has also
utilized advances from the FHLB of Atlanta.

   Deposits.  Customer deposits are attracted principally from within the Bank's
primary  market  area  through  the  offering  of a broad  selection  of deposit
instruments including  noninterest-bearing  demand deposit accounts,  negotiable
order of withdrawal  ("NOW")  accounts,  regular  savings,  money market deposit
accounts,  term certificate  accounts,  individual  retirement accounts ("IRAs")
with fixed and variable  rates of interest and club  accounts.  Deposit  account
terms vary according to the minimum balance required,  the time period the funds
must remain on deposit and the interest rate.

   The interest  rates paid by the Bank on deposits are set at the  direction of
the asset/liability committee which consists of senior management.  The interest
rates on deposit  account  products are  determined by evaluating  the following
factors: (i) the Bank's anticipated need for cash and the timing of that desired
cash  flow;   (ii)  the  interest   rates  offered  by  other  local   financial
institutions,  and the degree of competition the Bank wishes to maintain;  (iii)
the cost of borrowing  from other  sources  versus the cost of  acquiring  funds
through customer deposits;  and (iv) the Bank's  anticipation of future economic
conditions and related interest rates.

   The Bank relies primarily on its service and longstanding  relationship  with
customers to obtain  deposits and does not accept brokered  deposits.  It is not
the general policy of the Bank to offer premiums to attract deposits.  It is the
intent of the Bank's  management to increase  deposits  through  advertising and
marketing.  Products  emphasized  are  checking  accounts  and  certificates  of
deposit.

   Noninterest-bearing  demand  deposit  accounts,  NOW  accounts,  money market
accounts, regular savings and club accounts constituted $15.7 million, or 27.11%
of the Bank's deposit portfolio at June 30, 1997. At that date,  certificates of
deposit constituted $42.2 million or 72.89% of the deposit portfolio,  including
certificates  of deposit  with  principal  amounts of  $100,000  or more,  which
constituted $5.1 million or 8.84% of the deposit  portfolio.  The Bank generally
negotiates retail rates for certificates of deposit of $95,000 or more.


                                       16

<PAGE>




   The  following  table  sets  forth the  distribution  of the  Bank's  deposit
accounts for the periods  indicated and the weighted  average  interest rates on
each category presented.

<TABLE>
<CAPTION>
                                                                    At June 30,
                                       -------------------------------------------------------------------

                                                   1997                                  1996
                                       --------------------------------   --------------------------------
                                                              Weighted                           Weighted
                                                   Percent     Average                  Percent   Average
                                                   of Total    Nominal                  of Total  Nominal
                                        Amount     Deposits     Rate       Amount       Deposits    Rate
                                       -------     --------   --------    --------     ---------- --------
                                                              (Dollars in Thousands)
Demand accounts:
<S>                                    <C>          <C>         <C>       <C>            <C>       <C>
  Noninterest-bearing demand deposit   $   739        1.28%        0 %    $    791         1.37%      0 %
  NOW ..............................     4,118        7.11      2.15         5,467         9.48    2.15
  Money market .....................     3,477        6.00      2.96         3,607         6.26    2.96
  Regular savings ..................     7,305       12.61      3.00         7,319        12.70    3.00
  Club .............................        66        0.11      2.00            65         0.11    2.00
                                       -------      ------      ----       -------      ------     ----
     Total .........................    15,705       27.11                  17,249        29.92
                                       -------      ------                 -------      ------

  Certificate accounts:
  Fixed rates of interest:
     7 to 91 days ..................        77        0.13      3.00           115         .20     3.00
     Over 91 to 180 days ...........     3,756        6.49      4.63         5,091        8.83     4.56
     Over 181 to 365 days ..........    12,980       22.40      5.13        14,679       25.47     5.30
     Over 1 year to 3 years ........    10,220       17.64      5.16         8,517       14.78     5.18
     Over 3 years and up ...........       468         .81      5.03           945        1.64     5.13
     Other .........................     5,860       10.11      3.57         3,869        6.71     4.65
Variable rates of interest
     Up to 1 year ..................         0           0         0             0           0        0
     Over 1 year ...................     6,370       11.00      6.19         6,144       10.66     5.92
Negotiable rate ....................     2,497        4.31      5.11         1,034        1.79     5.09
                                       -------      ------      ----       -------      ------     ----
         Total .....................    42,228       72.89                  40,394       70.08
                                       -------      ------      ----       -------      ------     ----
         Total deposits ............   $57,933      100.00%     4.58%      $57,643      100.00%    4.22 %
                                       =======      ======      ====       =======      ======     ====
</TABLE>


      The following table presents,  by various rate  categories,  the amount of
certificate accounts outstanding at the dates indicated.

<TABLE>
<CAPTION>

                                    As of June 30,
                               ----------------------
                                   1997        1996
                               ----------------------
                                   (In Thousands)
Interest Rate:
<S>                              <C>         <C>
3.00-4.00%.................      $   109     $   407
4.01-5.00%.................       14,116      13,147
5.01-6.00%.................       21,430      26,702
6.01-7.00%.................        6,570         135
7.01-8.00%.................            3           3
                                 -------     -------
  Total....................      $42,228     $40,394
                                 =======     =======
</TABLE>

                                       17

<PAGE>

      The following  table sets forth the amount and maturities of time deposits
at June 30, 1997.

<TABLE>
<CAPTION>
                                          Amount Due
                  ------------------------------------------------------------
                                                           After
                    June 30,     June 30,     June 30,    June 30,
                      1998         1999         2000        2001      Total
                  ------------------------------------------------------------
                                         (In Thousands)

<S>                  <C>          <C>           <C>         <C>      <C>
3.00-4.00%........   $   109      $    0        $  0        $  0     $   109
4.01-5.00%........    13,880         236           0           0      14,116
5.01-6.00%........    19,141       1,884         295         110      21,430
6.01-7.00%........     4,810       1,560         200           0       6,570
7.01-8.00%........         0           3           0           0           3
                     -------      ------        ----        ----     -------
  Total...........   $37,940      $3,683        $495        $110     $42,228
                     =======      ======        ====        ====     =======

</TABLE>




      The following  table  indicates the amount of the Bank's  certificates  of
deposit  and  other  time  deposits  $100,000  or more by time  remaining  until
maturity as of June 30, 1997.

<TABLE>
<CAPTION>
                                     Certificates
                                     of Deposits
                                   --------------
                                   (In Thousands)


<S>                                    <C>
          Within three months......    $1,166
          Three through six months.     1,279
          Six through twelve months     1,954
          Over twelve months.......       722
                                       ------
                                       $5,121
                                       ======
</TABLE>


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

<TABLE>
<CAPTION>
                             Year Ended June 30,
                            --------------------
                               1997       1996
                            ---------   --------
                               (In Thousands)

Net increase (decrease)
<S>                          <C>        <C>
  before interest credited   $(1,680)   $ 1,253
Interest credited ........     1,970      1,748
                             -------    -------
Net increase (decrease)
  in savings deposits ....   $   290    $ 3,001
                             =======    =======
</TABLE>


      Borrowings. Deposits are the primary source of funds of the Bank's lending
and investment  activities and for its general business  purposes.  The Bank may
also obtain advances from the FHLB of

                                       18

<PAGE>



Atlanta to  supplement  its supply of lendable  funds and to use for  investment
activities.  Advances from the FHLB of Atlanta  would  typically be secured by a
pledge of the Bank's  stock in the FHLB of  Atlanta  and a portion of the Bank's
first mortgage loans and certain other assets. The Bank, if the need arises, may
also access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit  withdrawal  requirements.  At June 30, 1997,
the Bank had $3.5  million in  outstanding  advances  from FHLB.  The Bank had a
$850,000 note payable due to the Company at June 30, 1997.

Competition

      The Bank encounters strong  competition both in the attraction of deposits
and  origination of real estate and other loans.  Competition for deposits comes
primarily from numerous credit unions, commercial banks and savings institutions
with offices in the Bank's market area.  Competition  for loans comes  primarily
from branches of  commercial  banks and mortgage  companies  that operate in the
areas which comprise the Bank's primary market area. Due to their size,  many of
the Bank's competitors  possess greater financial and marketing  resources.  The
Bank competes for savings accounts by offering depositors  competitive  interest
rates  and a high  level of  personal  service.  The  Bank  competes  for  loans
primarily through the interest rates and loan fees it charges and the efficiency
and  quality  of  services  it  provides  borrowers,  real  estate  brokers  and
contractors.

      Thrift institutions can offer a wide range of services to the public, such
as demand deposits,  trust services and consumer and commercial  lending.  These
factors, combined with increasingly sophisticated depositors,  have dramatically
increased  competition for savings dollars among thrift  institutions  and other
types of  investment  entities,  as well as with  commercial  banks in regard to
loans,  checking  accounts and other types of financial  services.  In addition,
large  conglomerates  and  investment  banking  firms  compete in the market for
financial services.

Subsidiary Activity

      The Bank is  permitted  to  invest up to 2% of its  assets in the  capital
stock of, or secured or unsecured  loans to,  subsidiary  corporations,  with an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community development  purposes.  Under such limitations,
as of June 30, 1997, the Bank was authorized to invest up to approximately  $1.4
million in the stock of, or loans to,  service  corporations  (based upon the 2%
limitation). As of June 30, 1997, the net book value of the Bank's investment in
its service corporation was approximately $13,000.

      The Bank has one subsidiary,  Southwest Virginia Service Corporation, Inc.
which was incorporated in 1975 in the Commonwealth of Virginia and is engaged in
the sale of annuities.  The service  corporation  previously offered credit life
and  disability  insurance to the  borrowers  of the Bank.  The income from this
subsidiary was $1,000 for the fiscal year ended June 30, 1997.

Employees

      As of June 30, 1997, the Bank had 30 full-time employees and one part-time
employee.  None  of  the  Bank's  employees  are  represented  by  a  collective
bargaining  group. The Bank believes that its relationship with its employees is
good.

                                       19

<PAGE>
Regulation

      Set forth below is a brief  description  of certain laws which are related
to the  regulation of the Company and the Bank. The following  description  does
not purport to be complete  and is qualified in its entirety by reference to all
applicable laws and regulations.

Company Regulation

      General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary  savings  association.  This  regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.

      Qualified  Thrift  Lender  Test.  As a unitary  savings  and loan  holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the Qualified  Thrift  Lender  ("QTL") test. If the Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the  Company  and any of its  subsidiaries  (other  than the  Bank or any  other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies unless such other  associations  each also
qualify as a QTL and were acquired in a supervisory acquisition.

      Restrictions  on  Acquisitions.  The Company must obtain approval from the
OTS  before  acquiring  control  of any  other  SAIF-insured  association.  Such
acquisitions  are generally  prohibited if they result in a multiple savings and
loan holding company  controlling  savings  associations in more than one state.
However,  such  interstate  acquisitions  are permitted  based on specific state
authorization or in a supervisory acquisition of a failing savings association.

      Federal  law  generally  provides  that no  "person,"  acting  directly or
indirectly or through or in concert with one or more other persons,  may acquire
"control," as that term is defined in OTS  regulations,  of a federally  insured
savings  institution  without  giving at least 60 days written notice to the OTS
and providing the OTS an  opportunity  to disapprove  the proposed  acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things,  that (i) the acquisition would substantially  lessen competition;  (ii)
the financial  condition of the acquiring  person might jeopardize the financial
stability  of  the  savings  institution  or  prejudice  the  interests  of  its
depositors;  or (iii) the  competency,  experience or integrity of the acquiring
person or the proposed  management  personnel  indicates that it would not be in
the  interest  of the  depositors  or the public to permit the  acquisitions  of
control by such person.

      Subject to appropriate  regulatory  approvals,  a bank holding company can
acquire  control  of a  savings  association,  and  if  it  controls  a  savings
association,  merge or  consolidate  the assets and  liabilities  of the savings
association  with, or transfer  assets and  liabilities  to, any subsidiary bank
which  is a  member  of the BIF with the  approval  of the  appropriate  federal
banking  agency  and the  Federal  Reserve  Board.  Generally,  federal  savings
associations can acquire or be acquired by any insured depository institution.

                                       20
<PAGE>

      Federal  Securities  Law.  The Company is subject to filing and  reporting
requirement by virtue of having its common stock registered under the Securities
Exchange  Act of  1934.  Furthermore,  company  stock  held by  persons  who are
affiliates (generally officers,  directors,  and principal  stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain  resale  restrictions.  If the Company meets  specified  current  public
information  requirements,  each affiliate of the Company is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

Bank Regulation

      General. As a federally chartered,  SAIF-insured savings association,  the
Bank is  subject  to  extensive  regulation  by the OTS  and the  FDIC.  Lending
activities and other  investments must comply with various federal statutory and
regulatory   requirements.   The  Bank  is  also  subject  to  certain   reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("FRB").

      The OTS, in  conjunction  with the FDIC,  regularly  examines the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law,  especially in such matters as the ownership of savings  accounts
and the form and content of the Bank's mortgage documents.

      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 savings  institutions.  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 SAIF 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 regulations,  whether by the OTS, the FDIC, or the
U.S. Congress could have a material adverse impact on the Company, the Bank, and
their operations.

      Insurance of Deposit Accounts.  The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation).  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  institution's
primary regulator.

      As a member of the SAIF,  the Bank paid an  insurance  premium to the FDIC
equal to a minimum  of 0.23% of its  total  deposits.  The FDIC  also  maintains
another insurance fund, The Bank Insurance Fund ("BIF"), which primarily insures
commercial  bank deposits.  Effective  September  30,1995,  the FDIC lowered the
insurance  premium of BIF insured deposits to a range of between 0.04% and 0.31%
of deposits with the result that most commercial banks would pay the lowest rate
of 0.04%.  Effective  January 1, 1996, the annual insurance premium for most BIF
members was lowered to $2,000.  These  reductions in insurance  premiums for BIF
members placed SAIF members at a competitive disadvantage to BIF members.

                                       21

<PAGE>




     Effective September 30, 1996, federal law was revised to mandate a one-time
special  assessment on SAIF members such as the Bank of  approximately  .657% of
deposits held on March 31, 1995.  The Savings Bank  recorded a $355,000  pre-tax
expense for this  assessment  at September 30 1996.  Beginning  January 1, 1997,
deposit  insurance  assessments  for SAIF  members was reduced to  approximately
 .065% of deposits on an annual basis  through the end of 1999.  During this same
period, BIF members were assessed  approximately .013% of deposits.  After 1999,
assessments  for BIF and SAIF members  should be the same.  It is expected  that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding  Financing  Corporation  bond  obligations.  As a  result  of  these
changes,  beginning January 1, 1997, the rate of deposit insurance  assessed the
Bank declined by approximately 70%.

      Examination  Fees.  In addition  to federal  deposit  insurance  premiums,
savings  institutions  like the  Bank are  required  by OTS  regulations  to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a  semi-annual  basis and is  computed  based on total  assets of the
institution,  including subsidiaries.  The Bank's OTS assessment expense for the
fiscal year ended June 30, 1997 totalled approximately $24,000.

      Regulatory Capital  Requirements.  OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based  capital  requirement equal to
8.0% of total risk-weighted assets.

      Tangible  capital is defined as core  capital less all  intangible  assets
(including  supervisory  goodwill),  plus purchased  mortgage  servicing  rights
("PMSRs") valued at the lower of the maximum  percentage  established by the OTS
or the amount  includable  in core  capital.  Core  capital is defined as common
stockholders'  equity (including  retained  earnings),  noncumulative  perpetual
preferred stock,  and minority  interests in the equity accounts of consolidated
subsidiaries,  and qualifying supervisory goodwill, less nonqualifing intangible
assets.

      The OTS leverage ratio  regulation  establishes a core capital ratio of at
least  3%  for  those  savings  associations  in  the  strongest  financial  and
managerial condition.  In the future, other savings associations may be required
to maintain minimum core capital of at least 4% of total adjusted assets, with a
maximum  core  capital  ratio  requirement  of 5%. In  determining  the required
minimum core capital  ratio,  the OTS may assess the quality of risk  management
and the level of risk in each savings association on a case-by-case basis.

      The  risk-based  capital  standard for savings  institutions  requires the
maintenance of total  risk-based  capital (which is defined as core capital plus
supplementary  capital)  of 8.0% of  risk-weighted  assets.  The  portion of the
allowance  for loan and lease  losses  includable  in  supplementary  capital is
limited to a maximum of 1.25% of risk-weighted  assets.  Overall,  supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined  by the OTS,  which range from 0% for cash to
100% for delinquent  loans,  property acquired through  foreclosure,  commercial
loans and other assets.

      In  August  1993,   the  OTS  adopted  a  final  rule   incorporating   an
interest-rate risk component into the risk-based capital  regulation.  Under the
rule, an  association  with a greater than "normal"  level of interest rate risk
will be subject to a deduction of its interest  rate risk  component  from total
capital for purposes of calculating its risk-based capital. As a result, such an
association will be required to maintain

                                       22

<PAGE>
additional capital in order to comply with the risk-based  capital  requirement.
An association with a greater than "normal"  interest rate risk is defined as an
association  that would suffer a loss of net portfolio  value  exceeding 2.0% of
the  estimated  economic  value of its assets in the event of a 200 basis  point
increase or decrease  (with certain minor  exceptions)  in interest  rates.  The
interest  rate risk  component  will be  calculated,  on a quarterly  basis,  as
one-half of the difference between an association's  measured interest rate risk
and  2.0%  multiplied  by the  economic  value  of its  assets.  The  rule  also
authorizes  the  Director  of the  OTS,  or his  designee,  to waive or defer an
association's  interest rate risk component on a case-by-case  basis.  The final
rule was originally  effective as of January 1, 1994,  subject  however to a two
quarter "lag" time between the  reporting  date of the data used to calculate an
association's  interest  rate  risk  and the  effective  date of each  quarter's
interest rate risk component.  However,  in October 1994 the Director of the OTS
indicated that the OTS would waive the capital  deductions for associations with
a greater than "normal" risk until the OTS publishes an appeals process. The OTS
has indicated that no savings  association  will be required to make  deductions
from capital for interest rate risk until further notice.

      The Bank's  regulatory  capital  exceeded all minimum  regulatory  capital
requirements  applicable to it as of June 30, 1997.  See Note 13 to the Notes to
the Consolidated Financial Statements.

      Prompt Corrective Action.  Legislation  requires the banking regulators to
take certain  supervisory  actions against  undercapitalized  institutions,  the
severity of which depends upon the institution's degree of capitalization. Under
the OTS final rule  implementing the prompt  corrective  action  provisions,  an
institution  shall  be  deemed  to be (i)  "well  capitalized"  if it has  total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio (core
or leverage  capital to  risk-weighted  assets) of 6.0% or more,  has a leverage
capital  of 5.0% or more  and is not  subject  to any  order  or  final  capital
directive to meet and maintain a specific capital level for any capital measure,
(ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0%
or more,  a Tier I  risked-based  ratio of 4.0% or more and a  leverage  capital
ratio of 4.0% or more (3.0% under certain  circumstances)  and does not meet the
definition  of  well  capitalized,  (iii)  "undercapitalized"  if it has a total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio that is less than 4.0% or a leverage  capital ratio that is less than 4.0%
(3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has
a total  risk-based  capital  ratio that is less than 6.0%,  a Tier I risk-based
capital  ratio that is less than 3.0% or a leverage  capital  ratio that is less
than 3.0% and (v)  "critically  undercapitalized"  if it has a ratio of tangible
equity to total  assets  that is equal to or less than 2.0% In  addition,  under
certain   circumstances,   a  federal  banking  agency  may  reclassify  a  well
capitalized  institution as adequately capitalized and may require an adequately
capitalized  institution  or an  undercapitalized  institution  to  comply  with
supervisory  actions as if it were in the next lower  category  (except that the
FDIC  may  not  reclassify  a  significantly   undercapitalized  institution  as
critically undercapitalized).

      Dividend  and Other  Capital  Distribution  Limitations.  OTS  regulations
require  the  Bank  to  give  the OTS 30 days  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory  powers to prohibit  the payment of  dividends  to the  Company.  In
addition,  the Bank may not declare or pay a cash  dividend on its capital stock
if the  effect  thereof  would be to reduce the  regulatory  capital of the Bank
below the amount required for the liquidation  account established in connection
with the Conversion.

                                       23

<PAGE>
      OTS  regulations  impose  limitations  upon all capital  distributions  by
savings  institutions,  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,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   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 the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income 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 income over the most recent four  quarter  period.
Any additional capital  distributions  require prior regulatory approval.  As of
June 30,  1997,  the Bank was a Tier 1  institution.  In the  event  the  Bank's
capital fell below its fully  phased-in  requirement 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.

      Finally,  a  savings  association  is  prohibited  from  making a  capital
distribution if, after making the distribution, the savings association would be
undercapitalized   (not  meet  any  one  of  its  minimum   regulatory   capital
requirements).

      Qualified  Thrift  Lender Test.  The Home Owners'  Loan Act  ("HOLA"),  as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an  appropriate  level  of  Qualified  Thrift  Investments  ("QTIs")  (primarily
residential    mortgages   and   related    investments,    including    certain
mortgage-related  securities) and otherwise qualifies as a QTL, it will continue
to enjoy  full  borrowing  privileges  from the FHLB of  Atlanta.  The  required
percentage  of QTIs is 65% of  portfolio  assets  (defined  as all assets  minus
intangible  assets,  property used by the institution in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage  limitation  of  20%  of  portfolio  assets.  In  addition,   savings
associations  may  include  shares  of stock  of the  FHLBs,  FNMA and  FHLMC as
qualifying  QTIs. As of June 30, 1997,  the Bank was in compliance  with its QTL
requirement  with 75.29% of its assets  invested in QTIs. No  assurances  can be
given that the Bank will be able to maintain this level of QTIs or that the QTIs
will remain above 65% of portfolio assets.

      A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations:  (i)
the  savings  association  may not  engage in any new  activity  or make any new
investment,  directly or  indirectly,  unless such  activity  or  investment  is
permissible  for a  national  bank;  (ii) the  branching  powers of the  savings
association  shall be restricted to those of a national bank;  (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of  dividends by the savings  association  shall be subject to the rules
regarding  payment of dividends by a national bank. Upon the expiration of three
years from the date the  savings  association  ceases to be a QTL, it must cease
any activity and not retain any investment not  permissible  for a national bank
and  immediately  repay any  outstanding  FHLB  advances  (subject to safety and
soundness considerations).

      Community  Reinvestment.  Under the Community Reinvestment Act ("CRA"), as
implemented  by OTS  regulations,  a savings  association  has a continuing  and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire  community,  including  low and  moderate  income
neighborhoods. The CRA requires the OTS, in connection with its examination of a


                                       24

<PAGE>
savings  institution,  to assess the institution's  record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution. The OTS evaluates an institution's CRA
performance  utilizing a four-tiered  system. The Bank received a "satisfactory"
rating as a result of its last evaluation in January, 1997.

      Transactions With Affiliates. Generally, restrictions on transactions with
affiliates  require  that  transactions  between  a savings  association  or its
subsidiaries  and  its  affiliates  be on  terms  as  favorable  to the  Bank as
comparable  transactions  with  non-affiliates.  In  addition,  certain of these
transactions  are restricted to an aggregate  percentage of the Bank's  capital;
collateral  in  specified  amounts  must  usually be provided by  affiliates  to
receive loans from the Bank.  Affiliates of the Bank include the Company and any
company  which would be under  common  control  with the Bank.  In  addition,  a
savings  association  may not lend to any affiliate  engaged in  activities  not
permissible  for a  bank  holding  company  or  acquire  the  securities  of any
affiliate  that  is not a  subsidiary.  The  OTS has  the  discretion  to  treat
subsidiaries of savings associations as affiliates on a case-by-case basis.

      Branching by Federal Savings Associations. Through its Policy Statement on
Branching by Federal Savings Associations,  the OTS permits interstate branching
to the full  extent  permitted  by  statute  (which is  essentially  unlimited).
However, the OTS will evaluate a branching applicant's record of compliance with
the  CRA.  A poor  CRA  record  may be  the  basis  for  denial  of a  branching
application.

      Liquidity Requirements.  All savings associations are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At June 30, 1997, the required liquid asset
ratio was 5.00%.

      Liquid  assets for  purposes of this ratio  include  specified  short-term
assets (e.g.,  cash,  certain time deposits,  certain  banker's  acceptances and
short-term  U.S.  Government  obligations)  and  long-term  assets  (e.g.,  U.S.
Government  obligations  of more  than one and less  than  five  years and state
agency  obligations  with a  maximum  remaining  term  of 24  months).  Monetary
penalties  may  be  imposed  upon   associations  for  violations  of  liquidity
requirements.

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

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of  Atlanta  in an  amount  equal to at least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the  beginning  of each year.  At June 30,  1997,  the Bank had $961,000 in FHLB
stock, which was in compliance with this requirement.

      The FHLBs are  required to provide  funds for the  resolution  of troubled
savings  associations  and to contribute to affordable  housing programs through
direct loans or interest subsidies on advances targeted for community investment
and  low-  and  moderate-income  housing  projects.   These  contributions  have
adversely  affected the level of FHLB dividends paid and could continue to do so
in the future.  For

                                       25

<PAGE>

the fiscal year ended June 30,  1997,  dividends  paid by the FHLB of Atlanta to
the Bank totalled approximately $70,000.

      Federal  Reserve System.  The FRB requires all depository  institutions to
maintain  non-interest  bearing  reserves  at  specified  levels  against  their
transaction accounts (primarily checking, NOW, and

Super NOW  checking  accounts)  and  non-personal  time  deposits.  The balances
maintained  to meet the reserve  requirements  imposed by the FRB may be used to
satisfy  the  liquidity  requirements  that are  imposed by the OTS. At June 30,
1997, the Bank met the FRB reserve requirements.

      Savings  associations  have  authority  to borrow  from the FRB  "discount
window," but FRB policy generally  requires savings  associations to exhaust all
FHLB sources before borrowing from the FRB.
The Bank had no borrowings from the FRB at June 30, 1997.

      Subject to appropriate  regulatory  approvals,  a bank holding company can
acquire  control  of a  savings  association,  and  if  it  controls  a  savings
association,  merge or  consolidate  the assets and  liabilities  of the savings
association  with, or transfer  assets and  liabilities  to, any subsidiary bank
which  is a  member  of the BIF with the  approval  of the  appropriate  federal
banking agency and the FRB. Generally,  federal savings associations can acquire
or be acquired by any insured depository institution.

Executive Officers of the Company

      The following  individuals  hold the executive  offices in the Company set
forth below opposite their names.

<TABLE>
<CAPTION>

   Name              Age (1)   Positions Held With the Company
   ----              -------   -------------------------------

<S>                    <C>     <C>
   B.L. Rakes          64      Director and President

   Barbara C. Weddle   60      Director, Senior Vice President and Secretary

   Mary G. Staples     43      Controller/Treasurer

</TABLE>

------------------------
(1)   At June 30, 1997.

      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 by the Board of Directors.

      Since the formation of the Company,  none of the  executive  officers have
received remuneration from the Company.

Biographical Information

      The principal  occupation of each executive  officer of the Company is set
forth below. All executive  officers have held their present  positions with the
Company  since  June  1994  and  have  been  employed  by the  Bank in the  same
capacities for at least five years.

      B. L.  Rakes  has  been  President,  Chief  Executive  Officer  and  Chief
Financial Officer of the Bank since 1977 and has been employed by the Bank since
1959.  He served  as Vice  President  and  Treasurer

                                       26
<PAGE>

from 1973 to 1977,  and as Secretary  from 1974 to 1977. He is a member and past
President of the Rotary Club of Roanoke and an arbitrator for the Roanoke Better
Business Bureau.

      Barbara C. Weddle has been Senior Vice  President  of the Bank since 1985,
in  which   capacity  she  oversees  the  savings,   accounting   and  personnel
departments.  She has served as Secretary  of the Bank since 1977.  She has been
employed  by the Bank  since  1965 in  various  capacities  and served as a Vice
President from 1977 until 1985.

      Mary G. Staples has been Vice  President of Operations  for the Bank since
1997. She has served as  Controller/Treasurer  since 1990. She has been employed
by the Bank since 1972 in various capacities.

Item 2. Description of Property.

      (a)  Properties.

      The Bank conducts its business through a main office,  four branch offices
and one loan origination  office.  The Bank believes that the current facilities
are adequate to meet the present and immediately  foreseeable needs of the Bank.
The following table provides information regarding the Bank's offices as of June
30, 1997.

<TABLE>
<CAPTION>

                                    ORIGINAL DATE
                                      LEASED OR     OWNED OR
              LOCATION                ACQUIRED       LEASED
              --------              --------------  --------

<S>                                     <C>         <C>
              MAIN OFFICE
              -----------
              302 Second Street
              Roanoke, VA (2)           1970          OWN


              BRANCH OFFICES:
              --------------
              1006 Hardy Road
              Vinton, VA (3)            1992          OWN

              2133 Electric Road
              Roanoke, VA               1977          OWN

              1611 Hershberger Road
              Roanoke, VA               1979          OWN

              40 W. Main Street
              Salem, VA                 1981          OWN


              LOAN PRODUCTION OFFICE
              ----------------------
              Building D, Suite 101
              2847 Penn Forest Blvd
              Roanoke, VA (4)           1993        LEASE(1)

</TABLE>


------------------
(1)   Lease date - December 1, 1996.
      Lease Termination Date - November 30, 1999.

                                       27

<PAGE>

(2)   Bank  chartered as Southwest  Virginia  Building & Loan in 1927 at another
      location in the City of Roanoke.
(3)   Branch office originally opened in 1965 at another location in the Town of
      Vinton.
(4)   Loan  production  office  originally  opened  in  1992 in  another  leased
      building in the same area.

      The Bank obtains  rental  income  through the leasing of space in its main
office building.  During the fiscal year ended June 30, 1997, such rental income
was $98,000.

      In the opinion of the management of the Bank, the properties  listed above
are adequately covered by insurance.

      (b) Investment Policies. See "Item 1. Description of Business" above for a
general  description  of the Bank's  investment  policies and any  regulatory or
Board  of  Directors'   percentage  of  assets  limitations   regarding  certain
investments.  All of the Bank's investment policies are reviewed and approved by
the Board of Directors of the Bank,  and such  policies,  subject to  regulatory
restrictions (if any), can be changed without a vote of stockholders. The Bank's
investments are primarily acquired to produce income.

            (1)  Investments  in Real Estate or Interests  in Real  Estate.  See
"Item 1. Description of Business -- Lending Activities," "Item 1. Description of
Business -- Regulation -- Bank  Regulation" and "Item 2. Description of Property
-- (a) Properties" above.

            (2)  Investments in Real Estate Mortgages.  See "Item 1. Description
of  Business  -- Lending  Activities"  and "Item 1.  Description  of Business --
Regulation -- Bank Regulation."

            (3)  Investments in Securities of or Interests in Persons  Primarily
Engaged in Real  Estate  Activities.  See "Item 1.  Description  of  Business --
Lending  Activities,"  "Item 1.  Description  of Business --  Regulation -- Bank
Regulation" and "Item 1. Description of Business -- Subsidiary Activity."

      (c)  Description of Real Estate and Operating Data.

      Not Applicable.

Item 3. Legal Proceedings.

      The Bank,  from time to time, is a party to ordinary  routine  litigation,
which arises in the normal course of business,  such as claims to enforce liens,
condemnation  proceedings  on  properties  in  which  the  Bank  holds  security
interests,  claims involving the making and servicing of real property loans and
other issues incident to the business of the Bank. In the opinion of management,
the resolution of these lawsuits would not have a material adverse effect on the
financial condition or results of operations of the Bank or the Company.

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

      No matter was  submitted to a vote of security  holders  during the fourth
quarter of the fiscal year ended June 30, 1997.

                                       27

<PAGE>
                                    PART II

Item  5.  Market for Common Equity and Related Stockholder Matters.

      The  information  contained  under  the  section  captioned  "Stock  Price
Information" on pages 1 and 2 of the Company's Annual Report to Stockholders for
the fiscal  year ended June 30,  1997 (the  "Annual  Report"),  is  incorporated
herein by reference.

Item  6.  Management's Discussion and Analysis or Plan of Operation.

      The  information   contained  in  the  section   captioned   "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  on
pages 6-10 of the Annual Report is incorporated herein by reference.

Item  7.  Financial Statements.

      Financial  Statements of the Company are  incorporated by reference to the
following indicated pages of the Annual Report.
                                                                          PAGE
                                                                          ----
Report of Independent Auditors.....................................         14

Statement of Financial Condition as of the Fiscal Years Ended
  June 30, 1997 and 1996...........................................         15

Statement of Operations for the Fiscal Years Ended
  June 30, 1997, 1996 and 1995.....................................         17

Statement of Changes in Stockholders' Equity
  for the Fiscal Years Ended June 30, 1997, 1996 and 1995..........         16

Statement of Cash Flows for the Fiscal Years
  Ended June 30, 1997, 1996 and 1995...............................         18

Notes to Financial Statements......................................         20

      The remaining  information appearing in the Annual Report is not deemed to
be filed as part of this report, except as expressly provided herein.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

      There were no changes in or  disagreements  with accountants on accounting
and financial disclosure during the last fiscal year.

                                   PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

      The  information  contained  under the  section  captioned  "Proposal I --
Election of  Directors"  in the  Company's  definitive  proxy  statement for the
Company's  Annual  Meeting  of  Stockholders  to be held on October 7, 1997 (the
"Proxy Statement") is incorporated herein by reference.

                                       29
<PAGE>

      Additional  information  concerning executive officers is included in this
report under "Item 1. --  Description  of Business -- Executive  Officers of the
Company" and included in the Proxy Statement in the section captioned "Filing of
Beneficial Ownership Reports."

Item 10.  Executive Compensation.

      The information contained in the section captioned "Proposal I -- Election
of Directors -- Executive  Compensation"  in the Proxy Statement is incorporated
herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

      (a)   Security Ownership of Certain Beneficial Owners

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section captioned "Voting  Securities and Principal
            Holders Thereof" in the Proxy Statement.

      (b)   Security Ownership of Management

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the chart in the section captioned  "Voting  Securities
            and Principal Holders Thereof" and to the first chart in the section
            captioned  "Proposal  I --  Election  of  Directors"  in  the  Proxy
            Statement.

      (c)   Management  of the Company knows of no  arrangements,  including any
            pledge by any person of securities of the Company,  the operation of
            which may at a subsequent  date result in a change in control of the
            Company.

Item 12.  Certain Relationships and Related Transactions.

      The information  required by this item is incorporated herein by reference
to the  section  captioned  "Proposal  I --  Election  of  Directors  -- Certain
Relationships and Related Transactions" in the Proxy Statement.

                                       30
<PAGE>


Item 13. Exhibits, List and Reports on Form 8-K.

      (a)   Exhibits

             3.1  Articles of Incorporation of SWVA Bancshares, Inc.*
             3.2  Bylaws of SWVA Bancshares, Inc.*
            10.1  Employment Agreement with B.L. Rakes
            10.2  Supplemental Executive Retirement Plan for B.L. Rakes**
            10.3  Supplemental Executive Retirement Plan for Barbara C. Weddle**
            10.4  1994 Stock Option Plan
            10.5  Management Stock Bonus Plan
            13    Annual Report to  Stockholders  for the fiscal year ended June
                  30, 1997
            21    Subsidiaries of the Company**
            23    Consent of Cherry Bekaert & Holland L.L.P.
            27    Financial Data Schedule

---------------------------
*     Pursuant to Rule 12b-32  under the General  Rules and  Regulations  of the
      1934 Act,  these  documents  are  incorporated  herein by reference to the
      Registrant's  Form S-1 Registration  Statement No. 33-80434 filed with the
      SEC on June 17, 1994 (See Exhibits 3.1, 3.2, and 10).
**    Incorporated  herein by  reference to the  Registrant's  Form 10-KSB filed
      with the SEC for the fiscal year ended June 30, 1995.

      (b)   In the last quarter of the fiscal year ended June 30, 1997, a report
            on Form 8-K was filed by the Registrant with the SEC dated April 18,
            1997.


                                       31

<PAGE>




                                  SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          SWVA BANCSHARES, INC.



                                    By:   /s/ B.L. Rakes
                                          --------------------------------------
                                          B.L. Rakes
                                          President, Chief Executive Officer,
                                           Chief Financial Officer, and Director
                                          (Duly Authorized Representative)

      Pursuant to the  requirement of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated as of September 26, 1997.
                                                                



/s/ Barbara C. Weddle                     /s/ B.L. Rakes
-----------------------------------       -------------------------------------
Barbara C. Weddle                         B.L. Rakes
Senior Vice President and Secretary       President, Chief Executive Officer,
                                          Chief Financial Officer, and Director
                                          (Principal Executive and Financial
                                             Officer)


/s/ Mary G. Staples                       /s/ John L. Hart
-----------------------------------       -------------------------------------
Mary G. Staples                           John L. Hart
Principal Accounting Officer              Chairman of the Board



/s/ F. Courtney Hoge                      /s/ James H. Brock
-----------------------------------       -------------------------------------
F. Courtney Hoge                          James H. Brock
Director                                  Director



/s/ Glen C. Combs                         /s/ Michael M. Kessler
-----------------------------------       -------------------------------------
Glen C. Combs                             Michael M. Kessler
Director                                  Director