EXHIBIT 13


<PAGE>
                              SWVA BANCSHARES, INC.
                               1998 ANNUAL REPORT

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TABLE OF CONTENTS

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Corporate Profile and Related Information.....................................1


Stock Market Information......................................................1


Selected Financial and Other Data.............................................3


President's Message...........................................................4


Management's Discussion and Analysis of
  Financial Condition and Results of Operations...............................6


Report of Independent Auditors...............................................14


Consolidated Financial Statements............................................15


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


Office Locations.............................................................50


Directors and Executive Officers.............................................50


Other Corporate Information..................................................50

                                        i

<PAGE>

                              SWVA BANCSHARES, INC.


Corporate Profile and Related Information

         SWVA  Bancshares,  Inc.  (the  "Company")  is the  parent  company  for
Southwest  Virginia  Savings  Bank,  FSB  ("Southwest  Virginia  Savings" or the
"Savings Bank").  The Company was formed as a Virginia  corporation in June 1994
at the  direction of the Savings  Bank to acquire all of the capital  stock that
the Savings Bank issued upon its conversion from the mutual to the stock form of
ownership (the  "Conversion")  in connection  with a $5.7 million initial public
offering completed on October 7, 1994. 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 Savings
Bank retains a specified amount of its assets in housing-related investments. At
the present time,  since the Company does not conduct any active  business,  the
Company  does not intend to employ any person  other than  officers but utilizes
the support staff and facilities of the Savings Bank from time to time.

         Southwest Virginia Savings is a federally  chartered stock savings bank
headquartered  in Roanoke,  Virginia.  The  Savings  Bank was founded in 1927 as
Southwest Virginia Building and Loan Association and originally chartered by the
Commonwealth  of Virginia.  In 1990, a federal charter was obtained and the name
was changed to Southwest  Virginia  Savings  Bank,  FSB. Its deposits  have been
federally  insured since 1945. The Savings Bank is a community  oriented savings
institution  offering a variety of  financial  services to meet the needs of the
communities  that it serves.  Southwest  Virginia  Savings conducts its business
from its main office in Roanoke, Virginia, four full service branch offices, one
of which is also  located in the City of  Roanoke,  one in the City of Salem and
two in the County of Roanoke, and a loan production office in Roanoke County.

         The Savings  Bank is primarily  engaged in the  business of  attracting
deposits  from  the  general  public  and  originating  loans  secured  by first
mortgages on one- to  four-family  residences in the Savings Bank's market area.
The Savings Bank also makes  nonresidential  and multi-family real estate loans,
construction loans, consumer loans and other loans.


Stock Market Information

         Since its issuance in October 1994, the Company's common stock has been
traded  over-the-counter  with trades reported in the National  Quotation Bureau
"pink sheets" under the trading symbol of "SWVB".  The following  table reflects
stock  price  as  furnished  by  Wheat  First  Union,  Roanoke,  Virginia.  This
information reflects inter-dealer prices,  without retail mark-up,  mark-down or
commission, and may not represent actual trades.

                                                               HIGH       LOW
                                                               ----       ---
                  July 1 - September 30, 1996                 15.600     14.600
                  October 1 - December 31, 1996               15.300     14.250
                  January 1 - March 31, 1997                  17.250     14.500
                  April 1 - June 30, 1997                     17.000     15.000
                  July 1 - September 30, 1997                 21.000     16.000
                  October 1 - December 31, 1997               21.000     19.000
                  January 1 - March 31, 1998                  21.030     19.750
                  April 1 - June 30, 1998                     21.000     20.250


                                        1

<PAGE>

         The number of shareholders of record of common stock as of September 1,
1998 was  approximately  226.  This does not  reflect  the  number of persons or
entities who held stock in "street" name through  various  brokerage  firms.  At
September 1, 1998, there were 495,887 shares outstanding.

         Declarations  of  dividends  by the Board of  Directors  of the Company
depend upon a number of factors,  including the amount of cash and liquid assets
held by the Company,  investment  opportunities  available to the Company or the
Savings Bank, capital requirements,  regulatory  limitations,  the Company's and
the  Savings  Bank's  results  of  operations  and  financial   condition,   tax
considerations  and general economic  conditions.  Certain of these restrictions
are discussed in notes 12 and 14 to the consolidated financial statements.


                           Dividends Declared and Paid


                         Amount Per
Date Declared            Common Share   Record Date           Date Payable
-------------            ------------   -----------           ------------

February 1, 1995            $0.15       March 1, 1995         March 31, 1995

July 28, 1995               $0.15       August 31, 1995       September 30, 1995

February 21, 1996           $0.15       March 11, 1996        March 31, 1996

August 21, 1996             $0.15       September 9, 1996     September 30, 1996

February 19, 1997           $0.15       March 14, 1997        March 31, 1997

August 20, 1997             $0.15       September 15, 1997    September 30, 1997

September 3, 1997           $1.00       September 15, 1997    September 30, 1997

February 18, 1998           $0.15       March 20, 1998        March 31, 1998







                                        2

<PAGE>
<TABLE>
<CAPTION>

                        SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
At June 30,                                          1998            1997            1996               1995            1994

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

<S>                                                <C>              <C>            <C>                 <C>            <C>     
Total assets                                       $ 84,387         $70,753        $ 66,987            $ 66,265       $ 54,878
Loans receivable, net                                48,211          50,982          46,757              51,064         40,401
Mortgage-backed & investment securities              22,886          10,074           7,939               7,048          7,108
Interest-bearing deposits                             5,897           5,304           3,841               3,061          2,757
Cash and cash equivalents                             3,193           1,276           5,262                 830            874
Savings deposits                                     68,288          57,933          57,643              54,642         50,029
Borrowed funds                                        7,000           3,500              --               1,800             --
Equity capital/stockholders' equity                   8,327           8,602           8,675               9,313          4,169
--------------------------------------------------------------------------------------------------------------------------------

Summary of Operations (Dollars in Thousands)
Year Ended June 30,                                  1998            1997            1996               1995            1994

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

Interest income                                    $  5,808         $ 5,310        $  4,906            $  4,539       $  3,848
Interest expense                                      3,226           2,673           2,622               2,314          1,753
   Net interest income                                2,582           2,637           2,284               2,225          2,095
Provision for credit losses                              33              23              --                   1              2
                                                    -------         -------         -------             -------        -------
  Net interest income after provision for
  credit losses                                       2,549           2,614           2,284               2,224          2,093
Noninterest income                                      428             398             455                 315            545
                                                    -------         -------         -------             -------        -------
Noninterest expense                                   2,198           2,392           2,242               2,045          1,881
                                                    -------         -------         -------             -------        -------
Income before income taxes and
cumulative effect of change in
accounting principle                                    779             620             497                 494            757
Provision for income taxes                              318             206             191                 190            276
                                                    -------         -------         -------             -------        -------
  Net income before cumulative effect of
  change in accounting principle                        461             414             306                 304            481
Cumulative effect of change in
accounting principle                                     --              --              --                  --             87
                                                    -------         -------         -------             -------        -------
     Net income                                    $    461        $    414        $    306            $    304       $    568
                                                    =======         =======         =======             =======        =======

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

Other Selected Data
Year Ended June 30,                                  1998            1997            1996               1995            1994

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

Return on average assets                              0.59%           0.60%           0.46%               0.47%          0.87%
Return on average equity                              5.41            4.87            3.50                3.77          11.85
Interest rate spread                                  3.10            3.55            3.17                3.37           4.28
Non-performing loans to total loans                   0.00            0.10            0.00                0.12           0.73
Non-performing loans to total assets                  0.00            0.08            0.00                0.09           0.53
Allowance for credit losses to total loans            0.43            0.43            0.40                0.37           0.48
--------------------------------------------------------------------------------------------------------------------------------

Per share data
Year Ended June 30,                                  1998            1997            1996               1995            1994

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

Basic earnings per share                           $    .97         $   .85       $     .60                 .57            N/A
Diluted earnings per share                              .95             .85             .60                 .57            N/A
Stockholders' equity                                  16.76           16.83           15.97               16.32            N/A
Dividends                                              1.30             .30             .30                 .15            N/A
Dividend payout ratio                                  134%             35%             50%                 26%            N/A

</TABLE>


                                        3

<PAGE>





                               President's Message


Dear Shareholder:

         Fiscal 1998 marks the completion of your Savings Bank's third full year
of  operations as a federally  chartered  stock savings bank and I am pleased to
report that growth in assets and net income  continues.  During these past three
fiscal years, we have seen total assets grow from $66.3 million to $84.4 million
which is a 27.3%  increase.  $13.6 million or 75.1% of that growth occurred this
past fiscal year. Net income for the year was $461,000 or $0.97 per share.  This
was an  increase  of $0.12 or 14.1% per common  share over the  previous  fiscal
year.

         Net interest income decreased  modestly to $2.5 million for fiscal 1998
verses $2.6 million the previous  year while  interest  rate spread  declined to
3.10%.  Our interest  rate spread was  impacted  principally  by higher  funding
costs.  Improving  our spread is a primary  goal.  We hope to achieve our spread
improvement  objectives  with  increased  higher  yielding loans and by lowering
overall  deposits  costs by more active  solicitation  of personal  and business
demand accounts.

         Management's  strategy  for the  savings  bank is to  continue  to be a
traditional lender for one-to-four family residential loans.  However, we expect
to increase  consumer lending such as personal loans and home equity line loans.
Also, because of the number of banks being sold in our market area we feel there
is a need for small business  lending.  This strategy in lending should increase
interest income as it normally demands higher interest rates over first mortgage
home loans.  Although the envisioned  lending will increase  credit risk it will
reduce  interest  rate  risk  due to  the  short  term  maturity  of the  loans.
Management  feels  that the  Savings  bank has  adequate  capital  to manage the
increased risks.

         In today's  interest rate environment  fixed rate residential  mortgage
loans and fixed rate  commercial  real estate loans will yield  higher  returns.
However,  it has been the  philosophy of management not to lend heavily in these
loans for the bank  portfolio in order to protect  shareholder's  investment  by
virtue of maintaining a rate sensitive  portfolio -- although at times it may be
at the  risk  of  short-term  profitability.  Solid  aggressive  lending  in the
consumer and small business areas should offer the intermediate  returns that we
need to balance our long-term strategies.

         The Savings  Bank's  expertise in managing the above  strategy has been
enhanced by our adding a chief  operating  officer with over 27 years of banking
experience to the  management  team and hiring a branch manager who has begun to
revitalize one of our smallest branches.. We have placed a concentrated focus on
improving retail delivery of products and services.  In addition we have begun a
sales  culture in order to more  efficiently  cross sell  services,  and we have
begun a more aggressive  advertisement campaign to alert customers and potential
customers  to our services  and our desire to be their Bank.  These  changes are
expected  to result in better  use of the  branch  structure  of the Bank  which
should result in improvement in return on average assets and equity.

         I reported  last year that we expected  our Savings Bank to grow within
our market area as larger  institutions  are sold or  consolidated  in our area.
This year we have reported a growth in assets of 27%.

         In addition  to our  efforts to obtain  market  share,  management  has
managed the capital of the bank by leveraging the balance sheet,  paying regular
dividends,  paying a special dividend and stock  repurchases.  On June 30, 1995,
the end of the  fiscal  year in  which  Southwest  Virginia  Savings  Bank,  FSB
converted to a stock  Savings  Bank and SWVA  Bancshares,  Inc. was formed,  the
assets of the  company  were $66.2  million  and  stockholder's  equity was $9.3
million or 14.05% of total  assets.  For fiscal year ending June 30,  1998,  the
assets of the  company  were  $84.4  million  and  stockholders  equity was $8.3
million  or  9.86% of total  assets.  The  company  has paid  regular  dividends
totaling $1.05, a

                                        4

<PAGE>



special  dividend of $1.00 and repurchased  73,703 shares of stock.  The closing
price per  share of SWVA  Bancshares,  Inc.  common  stock on June 30,  1998 was
$20.375,  a 103.8% increase from the initial offering price of $10.00 per common
share. Stockholders who acquired the stock during the initial offering of $10.00
per share have realized a total return  (Dividends plus stock  appreciation)  of
124.3%.  The board has  declared a  semiannual  dividend of $.20 per share to be
paid on September 30, 1998 to stockholders of record on September 15, 1998. This
is an  increase  of 33% from prior  regular  dividends.  SWVA  Bancshares,  Inc.
directors  and  employees  own  over 23% of the  company's  common  stock.  This
emphasizes  added  desire to operate the company in a manner to increase  market
share and profitability  which in turn will enhance the shareholder value of all
stockholders.

         There  continues  to  be  many  changes  in  the  banking  industry  --
nationally,  statewide and locally.  However,  the basic  philosophy of our bank
remains steadfast. SWVA Bancshares,  Inc. is a customer oriented company and our
primary focus is to deliver quality service at all times on a one-on-one  basis.
As other  local  financial  institutions  loose  their  control  center to other
cities/states,  we feel strongly  that our closeness to our customer  gives us a
definite market advantage which will enhance shareholder value. Our challenge is
to improve our retail delivery service with innovation of new products,  through
our  enthusiastic  and highly  skilled  staff,  and our commitment to responsive
action. Our Board of Directors,  officers, and employees look forward to serving
our  community  through our banking  services and we thank you for your interest
and support.

                                             Sincerely yours,



                                              /s/B.L. Rakes
                                              ----------------------------------
                                              B.L. Rakes
                                              President




                                        5

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

         The  business  of the  Savings  Bank  consists  of  receiving  monetary
deposits from the general public and  reinvesting  those funds  primarily in its
primary market area in the form of mortgage loans secured by one- to four-family
residences.  To a lesser extent, the Savings Bank originates nonresidential real
estate, multi-family,  construction, commercial, and consumer loans. The Savings
Bank  also   purchases   U.S.   government   and  federal   agency   securities,
mortgage-backed and mortgage-related  securities and invests in interest-bearing
deposits with other insured financial institutions.

         Currently,  the Savings  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,  Virginia. The Savings Bank regards this area as
its "basic" lending area, but loans are also made in other adjoining counties.

         The largest  component of the Savings Bank's net income is net interest
income,  which is the difference  between interest income and interest  expense.
Consequently,  the Savings  Bank's  earnings  are  dependent on its net interest
income,  which is determined by the difference  ("interest rate spread") between
rates of interest earned on  interest-earning  assets and rates of interest paid
on  interest-bearing  liabilities,  and the relative amounts of interest-earning
assets and interest-bearing  liabilities.  The Savings Bank's net income is also
affected by its  provision for losses on loans and  investments,  as well as the
amount of noninterest income and noninterest  expense,  such as compensation and
related  expenses,  federal deposit insurance  premiums,  data processing costs,
occupancy  expenses,  and income  taxes.  Earnings of the Savings  Bank also are
affected   significantly  by  general   economic  and  competitive   conditions,
particularly  changes in market interest rates,  government policies and actions
of  regulatory  authorities  and demand for  financing  of real estate and other
types of loans.

Management Strategy

         The  Savings  Bank's  goal  is  to  serve  its  local  community  as an
independent  community  savings  bank.  Its   consumer-oriented   philosophy  is
dedicated to financing  home ownership and providing  financial  services to its
customers.  The principal  components of the Savings Bank's management strategy,
which are designed to achieve its goal, are discussed below.

         The Savings Bank has been a traditional  lender for one- to four-family
residential loans since its founding in 1927.  Financing homes for its community
continues to be the Savings Bank's primary goal.  These loans either are held in
the Savings  Bank's  portfolio or sold in the secondary  market.  These types of
loans make up 77.03% of the Savings Bank's total loan portfolio.

         The Savings Bank  historically  has maintained good asset quality.  Its
emphasis on one- to four-family  mortgages and its related underwriting policies
and  practices  are intended to maintain  this  quality.  At June 30, 1998,  the
Savings  Bank  had  no  non-performing  assets.  The  Savings  Bank's  ratio  of
non-performing loans to total assets at June 30, 1998 was .00%.

         One of the reasons the Savings Bank  converted to a stock  Savings Bank
was to support  growth in savings and lending  activities  as market  conditions
warrant, which would also leverage the Savings

                                        6

<PAGE>



Bank's existing branch network,  facilities, and personnel resources. The assets
of the Company  increased $29.5 million,  or 53.73%,  from $54.9 million at June
30, 1994, to $84.4  million at June 30, 1998.  The increase was due primarily to
the conversion and an increase in loans  receivable of $7.8 million,  from $40.4
million at June 30, 1994, to $48.2 million at June 30, 1998. Mortgage backed and
investment  securities  increased  $15.8 million,  from $7.1 million at June 30,
1994 to $22.9 million at June 30, 1998.
For fiscal year 1997-98, the Bank's asset growth was 19.27%.

         The  Bank  expects  to  continue  to put a  reasonable  portion  of its
originated fixed-rate loans in its portfolio and to purchase mortgage-backed and
related  securities during the fiscal year 1998-99 to enhance asset growth.  The
growth is expected to be funded with deposit growth or  borrowings.  The Savings
Bank  expects that its asset growth  policy of retaining  fixed-rate  loans will
increase its interest rate risk.

Asset and Liability Management

         The Savings Bank continues to manage interest rate risk. It has managed
this risk on the asset side of its balance sheet with  adjustable-rate  mortgage
("ARM") loans, mutual funds holding adjustable rate  mortgage-backed  securities
("ARM Mutual Funds") and  government-related  securities with maturities of five
years or less. On the liability side of its balance sheet,  the Savings Bank has
emphasized  certificates  of deposit  ("CDs")  with  terms of one year,  and has
managed  interest  rates paid for deposits.  Historically,  the Savings Bank has
limited its borrowings and relied primarily upon the cash flows from its savings
deposits and mortgage  repayments  as its primary  source of funds.  The Savings
Bank expects to continue  using  borrowings as a means to leverage its growth in
the future.


                                        7

<PAGE>

Average Balance Sheet

         The  following  table sets forth  certain  information  relating to the
Savings  Bank's  average  balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated and the average yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. Average balances are derived from daily average balances.

<TABLE>
<CAPTION>
                                                                                 For the Year Ended June 30
                                                         --------------------------------------------------------------------------
                                                                       1998                                    1997
                                                         --------------------------------      ------------------------------------
                                                         Average                 Average       Average                    Average
                                                         Balance    Interest   Yield/Cost      Balance     Interest     Yield/Cost
                                                         -------    --------   ----------      -------     --------     -----------

                                                                                    (Dollars in Thousands)
<S>                                                      <C>        <C>             <C>        <C>          <C>             <C>  
Interest-earning assets:
   Loans receivable, net (1)                              $49,531    $ 4,182          8.44%     $50,601      $4,318           8.53%
   Investments and mortgage-backed
securities:
      Held to maturity, at cost                               337         26          7.87          414          32           7.80
      Available for sale, FMV (2)                          15,079        986          6.54        8,510         567           6.66
   Other investments (3)                                    8,830        614          6.95        6,577         393           5.97
                                                          -------      -----                    -------      ------
      Total interest-earning assets                        73,777      5,808          7.87       66,102       5,310           8.03
                                                                       -----                                 ------
Non-interest earning assets                                 3,736                                 3,120
                                                          -------                                ------
      Total assets                                        $77,513                               $69,222
                                                          =======                               =======

Interest-bearing liabilities:
   Interest-bearing demand accounts                       $ 5,039         92          1.83      $ 5,222         102           1.95
   Regular savings & club accounts                          7,516        222          2.96        7,363         222           3.02
   Money market deposit accounts                            3,168         94          2.95        3,735         110           2.95
   Certificates of deposit                                 47,487      2,560          5.39       40,784       2,097           5.14
   Borrowed funds                                           4,400        258          5.87        2,448         142           5.79
                                                           ------      -----                     ------      ------
      Total interest-bearing liabilities                   67,610      3,226          4.77       59,552       2,673           4.49
                                                                       -----
Non-interest-bearing demand accounts                          450                                   201
Non-interest bearing liabilities                              945                                   984
Equity                                                      8,508                                 8,485
                                                           ------                                ------
      Total liabilities and equity                        $77,513                               $69,222
                                                          =======                                ======
Net-interest income                                                   $2,582                                $ 2,637
                                                                       =====                                 ======
Interest rate spread (4)                                                              3.10                                    3.55
Net yield on interest-earning assets (5)                                              3.50                                    3.99
Ratio of average interest-earning assets to
average interest-bearing liabilities                                                109.12                                  110.99
Average equity to average total assets                                               10.98                                   12.26

</TABLE>

(1)  Includes loans held for sale and non-accrual loans.
(2)  Calculations based on historical cost.
(3)  Includes FHLB Overnight Account.
(4)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the  average  cost  of  interest-   bearing
     liabilities.
(5)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.

                                        8

<PAGE>



Rate/Volume Analysis

         The table below sets forth  certain  information  regarding  changes in
interest  income  and  interest  expense  of the  Savings  Bank for the  periods
indicated.   For  each  category  of   interest-earning   and   interest-bearing
liabilities,  information is provided on changes  attributable to (i) changes in
volume (changes in average volume  multiplied by old rate); (ii) changes in rate
multiplied by old average volume);  (iii) and changes in rate volume (changes in
rate multiplied by the change in volume).

<TABLE>
<CAPTION>

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

                                                           For the Year Ended June 30,

                                   -------------------------------  -------------------------------------
                                             1998 vs. 1997                     1997 vs. 1996
                                                             (In Thousands)
                                                      Rate/                                Rate/
                                    Volume    Rate   Volume     Net     Volume   Rate     Volume    Net
                                    ------    ----   ------     ---     ------   ----     ------    ---
<S>                                 <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>  
Interest income:
  Loans receivable, net             $ (91)   $ (46)   $   1    $(136)   $  59    $ 185    $   3    $ 247
  Mortgage backed securities
   and investments:
    Held to maturity, at cost          (6)       0        0       (6)      (7)      (1)       0       (8)
    Available for sale, FMV           438      (10)      (8)     420      180       36       19      235
  Other investments                   134       64       22      220      (57)     (15)       2      (70)
                                    -----    -----    -----    -----    -----    -----    -----    -----
    Total interest-earning assets     475        8       15      498      175      205       24      404
                                    -----    -----    -----    -----    -----    -----    -----    -----

Interest expense:
  Deposits:
    Interest-bearing demand            (4)      (7)       0      (11)       8      (15)      (1)      (8)
     accounts
    Regular savings & club              5       (5)       0        0        3        3        0        6
     accounts
    Money market deposit              (17)       1        0      (16)      (1)       0        0       (1)
     accounts
    Certificates of deposit           345      102       17      464       33      (68)      (1)     (36)
  Borrowed funds                      113        2        1      116      117       (8)     (19)      90
                                    -----    -----    -----    -----    -----    -----    -----    -----
                                      442       93       18      553      160      (88)     (21)      51
                                    -----    -----    -----    -----    -----    -----    -----    -----

Net change in interest income       $  33    $ (85)   $  (3)   $ (55)   $  15    $ 293    $  45    $ 353
                                    =====    =====    =====    =====    =====    =====    =====    =====

</TABLE>








                                        9

<PAGE>
                        Comparison of Financial Condition
                          and Results of Operations for
               Fiscal Years Ended June 30, 1998 and June 30, 1997


         Total  assets at June 30, 1998 were $84.4  million as compared to $70.8
million at June 30, 1997, an increase of $13.6 million.  The increase was due to
an increase  in cash and cash  equivalents,  investments  and  interest  bearing
deposits,  offset by a decrease in loans  receivable.  Cash and cash equivalents
increased  from $1.3  million at June 30, 1997 to $3.2 million at June 30, 1998,
an increase of $1.9 million. Interest bearing deposits and investments increased
from  $15.4  million at June 30,  1997 to $28.8  million  at June 30,  1998,  an
increase  of $13.4  million.  The  increases  were due mainly to an  increase in
investment  securities  purchased using cash available and borrowed  funds.  Net
loans  receivable  decreased $2.8 million from $51.0 million at June 30, 1997 to
$48.2 million at June 30, 1998, due to decreased  origination of mortgage loans.
On the liability side, deposits increased $10.4 million to $68.3 million at June
30, 1998 from $57.9 million at June 30, 1997. At June 30, 1998,  there were $7.0
million in advances  outstanding from the Federal Home Loan Bank of Atlanta,  an
increase of $3.5  million  from June 30,  1997.  Advances  were used to leverage
investment purchases.

         The Savings Bank has generally  depended on higher rate certificates of
deposits of 12 months or less over lower rate core deposits in order to fund its
lending  operations.  This is done to manage  interest rate risk.  This trend is
likely to  continue  and could  have an  adverse  effect on the  Savings  Bank's
earnings and interest  rate spread  during  periods of rapidly  rising  interest
rates.  Management,  however,  may use borrowings  rather than  certificates  of
deposit to fund  operations if such borrowings are available at lower rates than
certificates of deposit.

         Net Income. Net income for the year ended June 30, 1998 was $461,000 as
compared to $414,000 for the year ended June 30,  1997,  an increase of $47,000.
Basic per share earnings for the year ended June 30, 1998 was $0.97.

         Interest Income.  Interest income increased  $500,000 from $5.3 million
at June 30, 1997 to $5.8  million at June 30,  1998.  The  increase was mainly a
result in the  increase  in  earnings  on a larger  investment  base offset by a
reduction in mortgage loans in the Bank's portfolio.

         Interest Expense. Interest expense for the year ended June 30, 1998 was
$3.2 million as compared to $2.7  million for the year ended June 30,  1997,  an
increase of $500,000. The increase was due mainly to an increase in deposits and
an increase in borrowed funds.

         Net  Interest  Income.  Net  interest  income  decreased  $55,000.  The
decrease  was mainly due to  increased  interest  paid on deposits  and borrowed
funds  offset by  decreased  income on mortgage  loans and  increased  income on
investment securities.

         Provision  for Credit  Losses.  The Bank made an addition of $33,000 to
the provision  for credit losses for the year ended June 30, 1998.  The addition
was made due to offset a loss on a  delinquent  real estate loan and to increase
the level of provision  for credit  losses.  The  allowance for credit losses is
$207,000  as of June 30,  1998.  $23,000 was added to the  provision  for credit
losses during the year ended June 30, 1997.

         Noninterest Income.  Noninterest income increased $30,000 from $398,000
for the year ended

                                       10

<PAGE>



June 30,  1997 to  $428,000  for the year  ended  June  30,  1998.  This was due
primarily  to a one time  gain on the sale of  Financial  Institution  Insurance
stock in the amount of $51,000 during the year ended June 30, 1997 and a gain on
sale of mortgage loans of $92,000 during the year ended June 30, 1998.

         Noninterest  Expense.  Noninterest  expense decreased from $2.4 million
for the year ended  June 30,  1997 to $2.2  million  for the year ended June 30,
1998,  an  decrease  of  $200,000.  This was mainly due to a decrease in Federal
Deposit Insurance premiums offset by an increase in data processing expenses and
personnel expenses. The increase of data processing expenses was due to the cost
of the ATM and Debit card programs.  The increase in personnel  costs was mainly
due to additions to the Bank's  management team as well as an adjustment  during
the  fourth  quarter  of  fiscal  year  ending  June 30,  1997 to  accruals  for
retirement  expenses  that reduced  non-interest  expense for fiscal year ending
June 30, 1997 by approximately $76,000.

         Provision for Income Taxes. The provision for income taxes for the year
ended June 30, 1998 was $318,000 as compared to $206,000 for the year ended June
30, 1997. The increase was due to increased net income for the year.

Liquidity and Capital Resources

         The Savings Bank's  primary  sources of funds are deposits and proceeds
from principal and interest  payments on loans and  mortgage-backed  securities.
Additional  sources of liquidity are advances from the FHLB of Atlanta and other
borrowings.  The Savings Bank has and may utilize  FHLB of Atlanta  borrowing in
the future during periods when management of the Savings Bank believes that such
borrowings  provide a lower cost source of funds than  deposit  accounts and the
Savings Bank desires  liquidity in order to help expand its lending  operations.
Borrowings are also used to purchase assets to leverage capital.

         The Savings  Bank's most liquid  assets are cash and  cash-equivalents,
which include  investments in highly  liquid,  short-term  investments,  such as
overnight  investments  in the Federal  Home Loan Bank of  Atlanta.  At June 30,
1998, cash and cash equivalents totaled $3.2 million.

         At June 30, 1998, the Savings Bank had $43.7 million in certificates of
deposits  due  within  one  year  and $8.2  million  due in two to three  years.
Management  estimates  that the Savings Bank will retain the deposits or replace
them with new deposits.  At June 30, 1998,  the Savings Bank had $4.1 million in
outstanding commitments to originate mortgages. The Savings Bank intends to fund
these  commitments with present  liquidity,  proceeds from loan repayments,  and
loan sales in the secondary market.

         The Savings  Bank is required  under  federal  regulations  to maintain
certain specified levels of "liquid  investments,"  which include certain United
States government obligations and other approved investments. During the quarter
ended  December  31,  1997,  a  change  in  regulations  changed  the  liquidity
requirements  for thrifts.  Some of these changes  included  reducing the liquid
asset  requirement  from 5% to 4% of the liquidity base and elimination of the 5
year maximum maturity limitation.

         The Savings Bank's regulatory liquidity at June 30, 1998 was 22.94%. At
June 30,  1997,  using the prior  regulations,  the  Savings  Bank's  regulatory
liquidity was 6.74%.

         The Savings Bank is required to maintain  specified  amounts of capital
pursuant to the Financial

                                       11

<PAGE>



Institutions  Reform,  Recovery  and  Enforcement  Act of  1989  ("FIRREA")  and
regulations  promulgated by the OTS. The capital standards generally require the
maintenance  of  regulatory  capital  sufficient  to  meet  a  tangible  capital
requirement, a core capital requirement and a risk-based capital requirement. At
June 30,  1998,  the Savings  Bank's  tangible  and core  capital  totaled  $7.7
million.  This amount exceeded the tangible capital  requirement of $1.3 million
by $6.4 million and the core capital requirement of $2.5 million by $5.1 million
on that date. At June 30, 1998, the Savings Bank's  risk-based  capital  totaled
$7.9 million,  which exceeded its risk-based capital requirement of $3.0 million
by $4.9 million.

Impact of Inflation and Changing Prices

         The  financial  statements  and  related  data  have been  prepared  in
accordance  with  generally  accepted  accounting  principles  which require the
measurement of financial  position and operating  results in terms of historical
dollars without  consideration  for changes in the relative  purchasing power of
money over time caused by inflation.

         Unlike industrial  companies,  nearly all of the assets and liabilities
of a financial  institution are monetary in nature. As a result,  interest rates
have a more  significant  impact on a financial  institution's  performance than
general levels of inflation.  Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services since such
goods and services  are  affected by  inflation.  In the current  interest  rate
environment,  liquidity and the maturity  structure of the Savings Bank's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.

The Year 2000 Issue

         The Bank's Board of Directors has adopted an action plan for addressing
the  computer-related  concerns  raised by Year 2000. An internal  committee has
been appointed by the Board to manage this effort. The year 2000 committee meets
on a regular  basis to review  and assess  the  current  status of the Year 2000
project. The committee then prepares a status report to Management and the Board
of Directors.

Equipment
---------
A process to identify all equipment  that may  potentially  be impacted has been
completed.  All outside servicers and major vendors have been contacted in order
to ascertain their individual  degrees of readiness for Year 2000. This includes
items such as the vault, heating,  ventilation and air conditioning controls and
telephones.  All of the  vendors  have  responded  to these  inquiries.  We have
received  certifications of year 2000 compliance for systems controlled by third
party  providers or  determined  that the systems  should not be impacted by the
year 2000. The only upgrade needed will be to our telephone system, at a cost of
approximately $1,000. This upgrade should be completed by December 31, 1998.

Internal Computers
------------------
All internal computers have been tested for the year 2000. At this time, we have
found no problems with the computers and software used on the  computers.  As we
begin testing with Bisys (our data services  provider which processes the Bank's
major  loan  and  deposit   applications)   we  will  evaluate  if  any  further
expenditures are necessary.


Computers used by our borrowers
-------------------------------
Large loan customers have been contacted in order to both instill  awareness and
to determine their state

                                       12

<PAGE>



of readiness for Year 2000.  All customers  contacted  have  responded.  At this
point,  the Bank has no reason to doubt the ability of any of these  customer to
continue to operate effectively in a Year 2000 environment. We believe that most
of our residential borrowers are not dependent on their computers for income and
that none of our  commercial  borrowers  are so large  that a year 2000  problem
would render them unable to collect revenue or rent and in turn continue to make
loan payments to the Bank.
We do not expect any material costs to address this risk area.

Cost
----
The  committee  has  presented  to the  Board of  Directors,  and the  Board has
approved, a Year 2000 budget totaling  approximately  $30,000. At June 30, 1998,
total  expenses  paid were  $9,500.  The major  cost is an upgrade  and  testing
surcharge paid to Bisys.  (Bisys is a data services provider which processes the
Bank's major loan and deposit applications.)

Contingency Plan
----------------
Our data  services  provider has sponsored  four meetings on their  progress and
test plans for the Year 2000.  Starting in November,  1998 and continuing  until
April,  1999,  a test  facility  will be set up to provide  for  formal  testing
between  the Bank and  Bisys.  At this time,  we find no reason to believe  that
Bisys will not be able to operate on January 3, 2000.

A Contingency  Plan has been prepared by the committee to facilitate the ability
of the Bank to continue  providing an acceptable  level of service to the Bank's
customers in the event that Bisys  encounters  problems on January 3, 2000 or we
are  unable to  communicate  with  Bisys.  Procedures  were  already in place to
accommodate interruptions of online service for periods of short duration. These
procedures have been  re-evaluated  for  effectiveness  over a longer  duration.
Appropriate  adjustments have been made and additional  procedures  required for
longer  duration  "down-time"  have been put into place. At the end of December,
1999, we will generate paper backup of all customer  accounts and general ledger
accounts.  Customer payments will be processed manually,  and due to the size of
the  Bank,  we  believe  that  we  would  be  able to  operate  in  this  manner
indefinitely,  until our existing data servicer,  or a  replacement,  is able to
again provide data processing services. This procedure could require changing of
schedules  and the hiring of  temporary  staff  during  this time,  which  would
increase  our cost.  Should it be  necessary  to change data  service  providers
during the beginning of the Year 2000, the cost could be material.


                                       13


<PAGE>

[LOGO GRAPHIC OMITTED]

-----------------
CHERRY
BEKAERT &
HOLLAND
CERTIFIED PUBLIC
ACCOUNTANTS &
CONSULTANTS                                                    
-----------------





                         Report of Independent Auditors





The Board of Directors and Stockholders
SWVA Bancshares, Inc.
Roanoke, Virginia


We have audited the accompanying  consolidated statements of financial condition
of SWVA Bancshares,  Inc. and Subsidiaries (the "Company"),  as of June 30, 1998
and  1997,  and the  related  consolidated  statements  of  income,  changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended June 30, 1998. These financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of SWVA Bancshares,
Inc. and  Subsidiaries,  as of June 30, 1998 and 1997,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended June 30, 1998 in conformity with generally accepted accounting principles.



                                        /s/Cherry, Bekaert & Holland, L.L.P.


Lynchburg, Virginia
July 22, 1998

                                       14
<PAGE>
                                    

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                 Consolidated Statements of Financial Condition
                             June 30, 1998 and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                    1998            1997
                                                                                -------------   -------------
<S>                                                                             <C>             <C>         
Assets
   Cash and cash equivalents                                                    $       3,193   $       1,276
   Interest-bearing deposits                                                            5,897           5,304
   Investment and mortgage-backed securities
      Held to maturity, at amortized cost                                                 318             365
      Available for sale, at fair value                                                21,607           8,748
      Restricted at cost                                                                  961             961
   Loans held for sale                                                                  1,608             727
   Loans receivable, net                                                               48,211          50,982
   Property and equipment, net                                                          1,662           1,666
   Accrued interest receivable                                                            565             437
   Prepaid expenses and other assets                                                      365             287
                                                                                  -----------     -----------

          Total assets                                                          $      84,387   $      70,753
                                                                                  ===========     ===========



Liabilities and stockholders' equity
Liabilities
   Deposits                                                                     $     68,288    $     57,933
   Advances from Federal Home Loan Bank                                                7,000           3,500
   Advances from borrowers for taxes and insurance                                       243             205
   Other liabilities and deferred income                                                 529             513
                                                                                  ----------      ----------

          Total liabilities                                                           76,060          62,151
                                                                                  ----------      ----------

Commitments and contingencies

Stockholders' equity
   Preferred stock, par value $.10.  Authorized 275,000 shares, none issued            -               -
   Common stock, par value $.10.  Authorized 2,225,000 shares, 496,887 and
      510,984 shares outstanding for 1998 and 1997, respectively                          50              51
   Additional paid-in capital                                                          4,050           4,286
   Retained earnings, substantially restricted                                         4,742           4,904
   Unrealized holding loss on securities, available for sale                              58              29
   Less unearned ESOP shares, 27,385 for 1998 and 31,951 shares for 1997          (      274)    (       319)
   Less unearned MSBP shares, 17,537 for 1998 and 20,145 shares for 1997          (      299)    (       349)
                                                                                  -----------     -----------

          Total stockholders' equity                                                   8,327           8,602
                                                                                  ----------      ----------

          Total liabilities and stockholders' equity                            $     84,387    $     70,753
                                                                                  ==========      ==========
</TABLE>




See notes to consolidated financial statements.

                                       15
<PAGE>
                                                                       

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Stockholders' Equity
                    Years ended June 30, 1998, 1997 and 1996
                    (In thousands, except shares outstanding)
<TABLE>
<CAPTION>
                                                                                 Unrealized
                                                                                 Holding
                                                                                 Gain (Loss)
                                               Common Stock      Additional      on Securities  Unearned   Unearned
                                  Shares                 Paid-in       Retained  Available      ESOP       MSBP
                                  Outstanding  Amount    Capital       Earnings  For Sale       Shares     Shares     Total
                                  -----------  ------    -------       --------  --------       ------     ------     -----

<S>                                <C>       <C>       <C>          <C>        <C>            <C>        <C>        <C>      
Balance at June 30, 1995           570,590   $    57   $    5,185   $  4,484   $ (       2)   $ ( 411)   $ -        $   9,313

   Net income                        -         -            -            306         -          -          -              306

   Change in unrealized loss on
      marketable equity securities   -         -            -          -         (      10)     -          -          (    10)

   Purchase of unearned MSBP
      shares                         -         -            -          -             -          -          ( 388)     (   388)

   Repurchase of common stock     ( 27,400)    (   3)    (    463)    -             -          -          -           (   466)

   Allocated/earned ESOP shares      -         -               28      -             -             46      -               74

   Dividends declared and paid
     ($.30 per share)                -         -            -          ( 154)        -          -          -          (   154)
                                  --------     -----     --------      ------    ---------      -----      -----      --------

Balance at June 30, 1996           543,190        54        4,750      4,636     (      12)    (  365)    (  388)       8,675

   Net income                        -         -            -            414         -          -           -             414

   Change in unrealized gain on
      marketable equity securities   -         -            -          -                41      -           -              41

   Repurchase of common stock     ( 32,206)    (   3)    (    492)     -             -          -           -         (   495)

   Allocated/earned ESOP shares      -         -               28      -             -             46       -              74

   Allocated/earned MSBP shares      -         -            -          -             -          -             39           39

   Dividends declared and paid
      ($.30 per share)               -         -            -          ( 146)        -          -          -          (   146)
                                  --------     -----     --------      ------    ---------      -----      -----      --------

Balance at June 30, 1997           510,984        51        4,286      4,904            29      ( 319)     ( 349)       8,602

   Net income                        -         -            -            461         -          -           -             461

   Change in unrealized gain on
      marketable equity securities   -         -            -          -                29      -           -              29

   Repurchase of common stock     ( 14,097)    (   1)    (    292)    -             -          -           -         (    293)

   Allocated/earned ESOP shares      -         -               47      -             -             45       -              92

   Allocated/earned MSBP shares      -         -                9      -             -          -             50           59

   Dividends declared and paid
      ($1.30 per share)              -         -            -          ( 623)        -          -          -          (   623)
                                  --------     -----     --------      ------    ---------      -----      -----      --------

Balance at June 30, 1998           496,887   $    50   $    4,050   $  4,742   $        58    $ ( 274)   $ ( 299)  $    8,327
                                  ========     =====     ========      =====     =========      ======     ======     ========
</TABLE>

See notes to consolidated financial statements.

                                       16
<PAGE>
                                                               
                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                        Consolidated Statements of Income
                    Years ended June 30, 1998, 1997 and 1996
                      (In thousands, except per-share data)
<TABLE>
<CAPTION>
                                                                                    1998           1997            1996
                                                                                 -------------  -------------   -------------
Interest income
<S>                                                                              <C>            <C>             <C>          
   Loans                                                                         $      4,182   $       4,318   $       4,071
   Mortgage-backed and related securities                                                 284             407             360
   U.S. government obligations including agencies                                         705             122              71
   Interest on municipal bonds                                                             23           -               -
   Other investments, including overnight deposits                                        614             463             404
                                                                                   ----------     -----------     -----------

          Total interest income                                                         5,808           5,310           4,906
                                                                                   ----------     -----------     -----------
Interest expense
   Deposits                                                                             2,968           2,531           2,570
   Borrowed funds                                                                         258             142              52
                                                                                   ----------     -----------     -----------

          Total interest expense                                                        3,226           2,673           2,622
                                                                                   ----------     -----------     -----------

          Net interest income                                                           2,582           2,637           2,284

Provision for credit losses                                                                33              23           -
                                                                                   ----------     -----------     -----------

          Net interest income after provision for credit losses                         2,549           2,614           2,284
                                                                                   ----------     -----------     -----------
Noninterest income
   Loan and other customer service fees                                                   137             142             154
   Gain on sale of mortgage loans                                                         210             118             208
   Gross rental income                                                                     98              98              93
   Other                                                                           (       17)             40           -
                                                                                   ----------     -----------     -----------

          Total noninterest income                                                        428             398             455
                                                                                   ----------     -----------     -----------
Noninterest expenses
   Personnel                                                                            1,285           1,155           1,258
   Office occupancy and equipment                                                         297             292             314
   Data processing                                                                        179             132             127
   Federal insurance of accounts                                                           38             431             126
   Advertising                                                                             63              64              74
   Other                                                                                  336             318             343
                                                                                   ----------     -----------     -----------

          Total noninterest expenses                                                    2,198           2,392           2,242
                                                                                   ----------     -----------     -----------

Income before income taxes                                                                779             620             497

Provision for income taxes                                                                318             206             191
                                                                                   ----------     -----------     -----------

          Net income                                                             $        461   $         414   $         306
                                                                                   ==========     ===========     ===========

Basic earnings per share                                                         $        .97   $         .85   $         .60
Diluted earnings per share                                                       $        .95   $         .85   $         .60
</TABLE>


See notes to consolidated financial statements.

                                       17
<PAGE>
                                                                        
                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                    Years ended June 30, 1998, 1997 and 1996
                                 (In thousands)
<TABLE>
<CAPTION>
                                           
                                                                                    1998           1997            1996
                                                                                 -------------  -------------   -------------
<S>                                                                              <C>            <C>             <C>         
Operating activities
   Net income                                                                    $        461   $        414    $        306
   Adjustments to reconcile net income to net cash provided by
     (used in) operating activities
         ESOP shares allocated                                                             92             74              74
         MSBP shares allocated                                                             59             39           -
         Provision for credit losses                                                       33             23           -
         Provision for depreciation and amortization                                       96             87             101
         Provision for deferred income tax                                         (       19)    (       85)     (        6)
         Loans originated for sale                                                 (   20,467)    (    9,695)     (   19,516)
         Proceeds from sales of loans originated for sale                              19,796         10,071          19,601
         Gain on sale of loans                                                     (      210)    (      118)     (      208)
         Loss on disposal of fixed assets                                                   1              3           -
         Net (increase) decrease in other assets                                   (      302)    (       77)            110
         Net increase in other liabilities                                                 35             49             159
         Gain on sale of investments, available for sale                           (       17)    (       43)          -
                                                                                   ----------     ----------      ----------

          Net cash provided by (used in) operating activities                      (      442)           742             621
                                                                                   ----------     ----------      ----------
Investing activities
   Proceeds from maturity of investments and interest-bearing deposits                  6,793          3,839           3,950
   Proceeds from sale of investments, available for sale                                6,257          4,300           -
   Purchase of investments and interest-bearing deposits                           (    6,887)    (    5,302)     (    4,730)
   Purchase of investments, available for sale                                     (   20,408)    (    6,488)          -
   Purchase of property and equipment                                              (       91)    (       94)     (       49)
   Net (increase) decrease in loans                                                     3,080     (    4,226)          4,304
   Purchase of loans                                                               (      343)    (       22)          -
   Principal repayments on mortgage-backed securities                                   1,018            116             143
                                                                                   ----------     ----------      ----------

          Net cash provided by (used in) investing activities                      (   10,581)    (    7,877)          3,618
                                                                                   ----------     ----------      ----------
Financing activities
   Proceeds from advances                                                               7,000          7,000             200
   Curtailment of advances and other borrowings                                    (    3,500)    (    3,500)     (    2,000)
   Net increase in savings deposits                                                    10,355            290           3,001
   Repurchase of stock                                                             (      293)    (      495)     (      466)
   Purchase of stock for MSBP                                                           -              -          (      388)
   Dividends paid                                                                  (      622)    (      146)     (      154)
                                                                                   ----------     ----------      ----------

          Net cash provided by financing activities                                    12,940          3,149             193
                                                                                   ----------     ----------      ----------

          Increase (decrease) in cash and cash equivalents                              1,917     (    3,986)          4,432

Cash and cash equivalents at beginning of year                                          1,276          5,262             830
                                                                                   ----------     ----------      ----------

Cash and cash equivalents at end of year                                         $      3,193   $      1,276    $      5,262
                                                                                   ==========     ==========      ==========
</TABLE>

                                   (continued)

                                       18
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                    Years ended June 30, 1998, 1997 and 1996
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                     1998           1997            1996
                                                                                 -------------  -------------   -------------
<S>                                                                              <C>            <C>             <C>         
Supplemental disclosures:
   Cash paid for
      Interest on deposits and borrowed funds                                    $      3,193   $      2,680    $      2,620
                                                                                   ==========     ==========      ==========

      Income taxes                                                               $        440   $        172    $        159
                                                                                   ==========     ==========      ==========


   Other non-cash activities
      Gross unrealized gain (loss) on securities, available for sale             $         93   $         62    $ (       16)
      Deferred income taxes                                                        (       35)    (       21)              6
                                                                                   ----------     ----------      ----------

             Net unrealized gain (loss)                                          $         58   $         41    $ (       10)
                                                                                   ==========     ==========      ==========


   Reclassification of investments from held to maturity to available
      for sale                                                                   $      -       $      -        $      1,245
                                                                                   ==========     ==========      ==========

</TABLE>

                                       19

See notes to consolidated financial statements.

<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


SWVA  Bancshares,  Inc.  (Parent  Company),  is a unitary thrift holding company
whose principal asset is its wholly-owned subsidiary, Southwest Virginia Savings
Bank,  FSB  (Bank).  The Bank is a federally  chartered  stock  savings  bank as
provided by the United States Home Owner's Loan Act. The Bank has five locations
in Roanoke, Virginia and the surrounding area. In these financial statements the
consolidated group is referred to collectively as the "Company".

The Office of Thrift  Supervision  (OTS) is the primary  regulator for federally
chartered savings  associations,  as well as savings and loan holding companies.
The  Federal  Deposit  Insurance  Corporation  (FDIC)  is  the  federal  deposit
insurance  administrator for both banks and savings  associations.  The FDIC has
specified  authority to prescribe  and enforce such  regulations  and issue such
orders  as it deems  necessary  to  prevent  actions  or  practices  by  savings
associations  that pose a serious  threat to the Savings  Association  Insurance
Fund (SAIF).

The  accounting  and reporting  policies of the Company  conform with  generally
accepted  accounting  principles  (GAAP).  A brief  description of the Company's
significant accounting policies is presented as follows.


Note 1 - Summary of significant accounting policies

Basis of consolidation

The consolidated  financial  statements include the accounts of SWVA Bancshares,
Inc.,  Southwest  Virginia  Savings  Bank,  its  wholly-owned  subsidiary,   and
Southwest Virginia Service Corporation, the wholly-owned subsidiary of the Bank.
All material  intercompany accounts and transactions have been eliminated in the
consolidation.  The  Company  also  presents  herein  condensed  Parent  Company
financial  information.  Prior year amounts are  reclassified  when necessary to
conform with current year classifications.

Estimates

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

Material  estimates that are  particularly  susceptible  to  significant  change
relate to the  determination  of the allowance  for credit losses on loans.  The
estimation process may include management obtaining  independent  appraisals for
significant collateral properties,  but the ultimate collectibility and recovery
of carrying  amounts are  susceptible to changes in local real estate market and
other local economic conditions.

Management  uses available  information to recognize  credit losses on loans and
real estate acquired in settlement of loans currently, while future additions to
the allowances may be necessary  based on changes in local economic  conditions.
In  addition,  regulatory  agencies,  as an integral  part of their  examination
process,  periodically  review the Bank's allowances for credit losses on loans.
Such  agencies  may require the Bank to recognize  additions  to the  allowances
based on their  judgments  about  information  available  to them at the time of
their examination.  Because of these factors, it is possible that the allowances
for credit losses on loans could change materially.

                                       20
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

Cash equivalents

For purposes of the statements of cash flows,  the Company  considers all highly
liquid debt  instruments  with original  maturities,  when  purchased,  of three
months or less to be cash  equivalents.  Cash and cash equivalents for the three
years  presented  include  cash on hand and  demand  deposits.  Certificates  of
deposit with initial  maturities  greater than three months are shown separately
as interest-bearing deposits.

Investment securities

Statement of Financial  Accounting  Standards  No. 115,  Accounting  for Certain
Investments  in  Debt  and  Equity  Securities  (SFAS  115),   requires  certain
securities to be classified as "held to maturity",  "trading" or "available  for
sale", according to management's intent and ability, at the time of purchase.

Debt securities  classified as "held to maturity" are carried at cost,  adjusted
for  amortization  of premium and  accretion  of discount  over the terms of the
securities,  as long as the Company has the ability and  maintains  the positive
intent to hold such securities to maturity. If such securities are sold prior to
maturity,  gains or losses are  recognized  in the year of sale by the  specific
identification method.

Trading securities, if any, are carried at fair value. Realized gains and losses
on sales and  unrealized  changes in fair  values are  included  in  noninterest
income.

Due to the nature of, and  restrictions  placed upon the Company's  common stock
investment in the Federal Home Loan Bank of Atlanta,  these securities have been
classified as restricted equity securities and carried at cost. These restricted
securities are not subject to the investment  security  classifications  of SFAS
115.

Marketable  equity  securities not classified as "trading" or  "restricted"  and
debt securities not classified as "trading" or "held to maturity" are carried at
fair value,  if  marketable,  with  unrealized  gains and losses  excluded  from
earnings and reported as a separate component of stockholders' equity.  Realized
gains and losses on sales are  included in  noninterest  income and are computed
under the specific identification method.

Mortgage-backed and related securities

Mortgage-backed securities, held to maturity,  represent participating interests
in pools of  long-term  first  mortgage  loans  originated  and  serviced by the
issuers of the  securities.  These  securities  are carried at unpaid  principal
balances,  adjusted for  unamortized  premiums and discounts as the Bank has the
ability and intent to hold such  securities to maturity.  Premiums and discounts
are amortized using the interest method over the remaining period to contractual
maturity,  adjusted for  anticipated  prepayments.  If such  securities are sold
prior  to  maturity,   gains  and  losses  are  determined  using  the  specific
identification method.

Securities  classified as available for sale are carried at their current market
value.  The difference  between the amortized cost and current market value, net
of deferred  income tax, is reflected  as a component  of equity  capital and is
designated as unrealized holding gain/loss on securities available for sale.

                                       21
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

Loans held for sale

Mortgage  loans  originated  and intended for sale in the  secondary  market are
carried  at the lower of cost or  estimated  fair  value in the  aggregate.  Net
unrealized  losses  are  recognized  in a  valuation  allowance  by  charges  to
noninterest income.

Loans and allowances for credit losses

The  Company  adopted the  provisions  of  Statements  of  Financial  Accounting
Standards  No.114,  Accounting by Creditors for Impairment of a Loan (SFAS 114),
and  Accounting by Creditors for Impairment of a Loan - Income  Recognition  and
Disclosures  (SFAS 118),  as of July 1, 1996.  The  adoption has had no material
effect on the financial position or operating results of the Company nor does it
have any effect on the comparability of financial statement information.

Loans  receivable  that  management  has the intent and  ability to hold for the
foreseeable  future,  or until maturity or pay off, are carried at their face or
par values,  net of unearned  discounts,  participation or whole-loan  interests
owned by  others,  unearned  loan fees,  undisbursed  loans in  process,  and an
allowance for credit losses.

Valuation  allowances  for estimated  credit losses on loans are  established by
charges to income when any material and estimable  decline in value is deemed to
have occurred.  The determination of the adequacy of the valuation  allowance is
based on a detailed  analysis  of  individual  loans  with known or  anticipated
adverse performance  characteristics,  and includes  consideration of historical
patterns,   industry  experience,   current  economic  conditions,   changes  in
composition and risk  characteristics  of the loan portfolio,  and other factors
deemed relevant to the collectibility of the loans currently outstanding. A loan
is considered  impaired when,  based on current  information  and events,  it is
probable  that all amounts due  according to the  contractual  terms of the loan
agreement will not be  collectible.  Allowances for impaired loans are generally
determined  based on collateral  values or the present  value of estimated  cash
flows.  The  allowance is increased by a provision for credit  losses,  which is
charged to expense, and reduced by charge-offs, net of recoveries.

Loans that are 90 days or more past due are  individually  reviewed for ultimate
collectibility.  Interest  determined  to be  uncollectible  on  loans  that are
contractually  past due is charged off, or an allowance is established  based on
management's  periodic  evaluation.  The allowance is established by a charge to
interest  income  equal  to all  interest  previously  accrued,  and  income  is
subsequently  recognized  only to the extent  that cash  payments  are  received
until,  in  management's  judgment,  the  borrower's  ability  to make  periodic
interest  and  principal  payments is back to normal,  in which case the loan is
returned to accrual status.

Foreclosed real estate

Foreclosed  real  estate  owned,  if  any,  consists  of  property  acquired  by
foreclosure on delinquent loans or by deed in lieu of foreclosure. Such property
is  recorded  initially  at the lower of cost or fair value and is  subsequently
maintained at the lower of cost or fair value minus the estimated costs to sell.

                                       22
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

Property, equipment and depreciation

The various  classes of property are stated at cost and are  depreciated  by the
straight-line  method over their  estimated  useful  lives of 10 to 50 years for
buildings  and  improvements  and 3 to 12 years  for  furniture,  fixtures,  and
equipment.   Repairs  are  expensed  as  incurred.   The  cost  and  accumulated
depreciation of property are eliminated from the accounts upon disposal, and any
resulting gain or loss is included in the determination of net income.

Income taxes

Deferred  income taxes are  recognized  for the tax  consequences  of "temporary
differences" by applying enacted  statutory tax rates applicable to future years
to  differences  between the financial  statement  carrying  amounts and the tax
bases of existing  assets and  liabilities.  The effect of a change in tax rates
upon  deferred  taxes is  recognized  in income in the period that  includes the
enactment date.

Prior to 1996,  savings  banks  that met  certain  definitional  tests and other
conditions  prescribed  by  the  Internal  Revenue  Code  were  allowed,  within
limitations,  to deduct from taxable  income an allowance for bad debts based on
actual  loss  experience,  a  percentage  of taxable  income  (8%)  before  such
deduction,  or an amount based on a percentage of eligible loans. The cumulative
bad debt  reserve,  upon  which no  taxes  have  been  paid,  was  approximately
$1,822,000 as of June 30, 1998.

As a result of 1996 tax  legislation,  the Company will compute its tax bad debt
deduction by use of the actual charge-off  method,  for tax years beginning with
July 1, 1996. According to the legislation, "applicable excess reserves" must be
recaptured as taxable  income over five years  beginning  with fiscal year 1997.
Thrifts can delay those payments by two years if they meet a residential lending
requirement.  The  amount to be  recaptured  is the  excess  of the  accumulated
reserves  since  1987 over the amount  allowed  by use of the actual  charge-off
method for those years.  Since the Bank has provided deferred taxes on those bad
debt  reserves  accumulated  since 1987,  management  does not believe  that the
legislation will have a material effect on the Company's financial statements.

Loan origination fees, costs, discounts and premiums

Loan  origination  fees  are  accounted  for in  accordance  with  Statement  of
Financial  Accounting  Standards No. 91, Accounting for  Nonrefundable  Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases  (SFAS 91).  Under SFAS 91,  loan  origination  and  commitment  fees and
certain  direct loan  origination  costs are  deferred.  Upon the  expiration of
unfunded commitments,  the related fees are recognized into income as loan fees.
Loan  origination  fees on  funded  commitments  and  related  direct  costs are
amortized into income on loans as yield adjustments over the contractual life of
related loans using the level-yield method.

Discounts  and premiums on loans  purchased are  recognized  in interest  income
using the level-yield method over the average life of the loan.

                                       23
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

Sales of mortgage loans, mortgage-related securities and foreclosed real estate

Gains and losses on the sales of loans,  participation  interest  in loans,  and
foreclosed real estate are accounted for by imputing gain or loss on those sales
where a yield  rate  guaranteed  to the buyer is more or less than the  contract
interest  rate  being  collected,  in the case of loans,  and  where  foreclosed
property is sold on financing  terms more or less  favorable than the prevailing
market terms for similar  property.  Such gains or losses are  recognized in the
financial  statements  for the year of sale.  The Bank services  loans that have
been sold with  servicing  retained.  Such loan balances are not included in the
accompanying consolidated statements of financial condition.

Advertising

The Company expenses most advertising costs as incurred. Such expenses are shown
in the  consolidated  statements  of income.  As of June 30, 1998 and 1997,  the
Company's  statements  of  financial  condition  included  $6,000  and $2,000 of
prepaid advertising, respectively.

Fair values of financial instruments

The  following  methods and  assumptions  were used by the Company in estimating
fair values of financial instruments as disclosed herein:

o    Cash  and  short-term  instruments  - The  carrying  amounts  of  cash  and
     short-term instruments approximate their fair value.

o    Available-for-sale  and  held-to-maturity  securities  -  Fair  values  for
     securities,  excluding  restricted equity  securities,  are based on quoted
     market  prices.   The  carrying  values  of  restricted  equity  securities
     approximate fair values.

o    Loans   receivable  -  Fair  values  are  based  on  carrying   values  for
     variable-rate  loans that reprice frequently and have no significant change
     in credit  risk.  Fair  values for  certain  mortgage  loans (for  example,
     one-to-four  family  residential)  and  other  consumer  loans are based on
     quoted   market  prices  of  similar   loans  sold  in   conjunction   with
     securitization    transactions,    adjusted   for   differences   in   loan
     characteristics.  Fair values for  commercial  real  estate and  commercial
     loans are estimated using  discounted cash flow analyses and interest rates
     currently  being  offered  for loans with  similar  terms to  borrowers  of
     similar credit quality.  Fair values for impaired loans are estimated using
     discounted  cash flow  analyses  or  underlying  collateral  values,  where
     applicable.

o    Deposit liabilities - The fair values disclosed for demand deposits are, by
     definition,  equal to the amount  payable on demand at the  reporting  date
     (that is, their carrying  amounts).  The carrying amounts of variable-rate,
     fixed-term   money-market   accounts  and  certificates  of  deposit  (CDS)
     approximate  their  fair  values at the  reporting  date.  Fair  values for
     fixed-rate CDS are estimated using a discounted cash flow  calculation that
     applies  interest  rates  currently  being  offered  on  certificates  to a
     schedule of aggregated expected monthly maturities on time deposits.

                                       24
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

o    Short-term  borrowings - The carrying  amounts of federal funds  purchased,
     borrowings under  repurchase  agreements,  and other short-term  borrowings
     maturing within 90 days approximate their fair values. Fair values of other
     short-term  borrowing are  estimated  using  discounted  cash flow analyses
     based on the  Company's  current  incremental  borrowing  rates for similar
     types of borrowing arrangements.

o    Long-term  debt - The  fair  values  of the  Company's  long-term  debt are
     estimated  using  discounted  cash  flow  analyses  based on the  Company's
     current  incremental   borrowing  rates  for  similar  types  of  borrowing
     arrangements.

o    Accrued  interest - The carrying  amounts of accrued  interest  approximate
     their fair values.

o    Off-balance-sheet  instruments - Fair values for off-balance-sheet  lending
     commitments  are based on fees  currently  charged  to enter  into  similar
     agreements,  taking into account the remaining  terms of the agreements and
     counterparties' credit standings.

Conversion to stock ownership

At a  special  meeting  on July 20,  1994,  the  members  of the  Bank  approved
management's plan to convert the Savings Bank from a Federal Mutual to a Federal
Stock Savings Bank. The plan called for the formation of SWVA  Bancshares,  Inc.
which  would own the stock of the Bank upon its  conversion  to a stock  form of
ownership.  The stock of the Parent  Company  would  then be  offered  through a
Subscription and Community Offering to the Bank's  tax-qualified  employee stock
plans, eligible account holders and others. The transaction was in the form of a
pooling of interests.

On October 7, 1994,  the Parent  Company issued 570,590 shares of $.10 par value
common  stock at $10 per share and became the  parent  company of the Bank.  Net
proceeds,  after deducting  conversion  expenses and underwriters'  discounts of
$469,000,  were  $5,242,000  and are  reflected as common  stock and  additional
paid-in  capital  in  the  accompanying  consolidated  statements  of  financial
condition.  The Parent  Company's  Articles  of  Incorporation  contain  certain
limitations on voting rights and other "anti-takeover" provisions.

As part of the  conversion  to stock form,  the Bank  formed an  Employee  Stock
Ownership Plan (ESOP) for eligible  employees.  The ESOP purchased 45,647 common
shares of the Parent Company issued in the conversion, which purchase was funded
by a loan  from the  Parent  Company.  In  accordance  with  generally  accepted
accounting  principles,  the unpaid balance of the ESOP loan has been eliminated
on the Company's consolidated  statements of financial condition.  Stockholders'
equity has been reduced by the aggregate  purchase  price of the shares owned by
the ESOP net of the shares  committed to be released.  Contributions to the ESOP
by the Savings Bank are made to fund the principal and interest  payments on the
debt of the  ESOP.  As of June 30,  1998,  a total  of  18,262  shares  had been
released.

                                       25
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

Impact of new accounting standards

In October 1995, FASB issued Accounting for Stock-Based Compensation (SFAS 123),
which became  effective for the Company  beginning July 1, 1996.  This statement
requires  increased  disclosure of compensation  expense arising from both fixed
and performance stock  compensation  plans. Such expense is measured as the fair
value of the award at the date it is granted using an option-pricing  model that
takes  into  account  the  exercise  price  and  expected  volatility,  expected
dividends on the stock and the expected risk-free rate of return during the term
of the option.  The  compensation  cost is recognized  over the service  period,
usually the period from the grant date to the vesting date. SFAS 123 encourages,
rather than  requires,  companies to adopt a new method that  accounts for stock
compensation  awards  based on their  estimated  fair value at the date they are
granted.  Companies  are  permitted,   however,  to  continue  accounting  under
Accounting  Principles  Board ("APB") Opinion No. 25. The Company has elected to
continue to apply APB Opinion No. 25 in their  financial  statements.  Pro forma
net  income  and  earnings  per  share  are  presented  in  accordance  with the
requirements of SFAS 123 (see Note 11).

In June 1996, the Financial  Accounting  Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125),  Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial  assets  and  extinguishments  of  liabilities.  After a  transfer  of
financial  assets,  an entity  recognizes the financial and servicing  assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished. In
addition,  a transfer of  financial  assets in which the  transferor  surrenders
control  over  those  assets  is  accounted  for as a sale  to the  extent  that
consideration  other  than  beneficial  interest  in the  transferred  assets is
received in  exchange.  SFAS 125 is effective  for  transfers  and  servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996,  and is to be  applied  prospectively.  Management  does  not  expect  the
application  of this  pronouncement  to have a material  effect on the financial
statements of the Company.


                                       26
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 1 - Summary of significant accounting policies (continued)

In February 1997, the FASB issued  Earnings per Share (SFAS 128). This statement
is effective for financial  statements,  including  interim  periods  issued for
periods ending after December 15, 1997. SFAS 128 provides for the calculation of
basic and diluted earnings per share, and requires  comparative  information for
prior periods to be restated to conform with this  standard.  Basic earnings per
share  includes no dilution  and is computed  by dividing  income  available  to
common shareholders by the weighted-average  number of common shares outstanding
for the period.  Diluted  earnings per share reflects the potential  dilution of
securities  that could share in earnings of an entity,  similar to fully diluted
earnings per share (see Note 14).  All  previously  reported  earnings per share
amounts have been restated to conform to the  provisions of this new  accounting
standard.

In June 1997, the FASB issued Reporting  Comprehensive  Income (SFAS 130), which
established  standards for reporting and display of  comprehensive  income,  its
components and accumulated balances.  Comprehensive income is defined to include
all changes in equity  except those  resulting  from  investments  by owners and
distributions  to owners.  Among other  disclosures,  SFAS 130 requires that all
items that are required to be recognized under current  accounting  standards as
components of comprehensive  income be reported in a financial statement that is
displayed with the same  prominence as other financial  statements.  SFAS 130 is
effective for financial  statements  for periods  beginning  after  December 15,
1997,  and requires  comparative  information  for earlier years to be restated.
Currently it is expected the only additional  component of comprehensive  income
to be  disclosed  under the  provisions  of this  statement  is the  changes  in
unrealized holding gains or losses on securities available for sale.

In June 1997, the FASB also issued  Disclosures  about Segments of an Enterprise
and Related  Information  (SFAS  131),  which  changes the way public  companies
report  information  about  segments  of  their  business  in  annual  financial
statements   and  requires   segment   information   in  quarterly   reports  to
shareholders.  It also requires that public business  enterprises report certain
information  about their products and services,  the  geographic  areas in which
they operate, and their major customers.  SFAS 131 is effective for fiscal years
beginning  after  December  15,  1997.  The  Company  has  not  determined  what
additional disclosures may be required by the provisions of this statement.

In February  1998,  the FASB issued  Employers'  Disclosures  about Pensions and
Other Postretirement  Benefits (SFAS 132), which revises employers'  disclosures
about pension and other  postretirement  benefit plans. SFAS 132 does not change
the  measurement  or  recognition  of  those  plans,  but  requires   additional
information  on changes in benefit  obligations  and fair values of plan assets,
and eliminates certain  disclosures  previously required by SFAS Nos. 87, 88 and
106. SFAS 132 is effective for fiscal years  beginning  after December 15, 1997.
The Company has not determined  what  additional  disclosures may be required by
the provisions of this statement.

Reclassifications

Certain items in the 1997 financial  statements have been reclassified to afford
comparability with the 1998 financial statements.

                                       27
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 2 - Investment securities

Investments consisting of U.S. government,  mortgage-backed and other securities
at June 30 of each year were as follows in thousands:

<TABLE>
<CAPTION>
                                                                                            1998
                                                                 ------------------------------------------------------------
                                                                                      Gross Unrealized
                                                                   Amortized    -----------------------------
                                                                     Cost           Gain           Loss           Fair Value
                                                                     ----           ----           ----           -----------
<S>                                                              <C>             <C>            <C>             <C>          
Securities, held to maturity             
   FHLMC participation certificates                              $          318  $           9  $      -        $         327
                                                                    -----------    -----------    -----------     -----------
                                                                 
Securities, available for sale                                   
   Municipal bonds                                                          930              6          -                 936
   U.S. Government and agency bonds                                       9,750             62          -               9,812
   GNMA mortgage-backed securities                                        9,509          -                 19           9,490
   FNMA mortgage-backed securities                                        1,324             45          -               1,369
                                                                    -----------    -----------    -----------     -----------
                                                                 
                                                                         21,513            113             19          21,607
                                                                    -----------    -----------    -----------     -----------
                                                                 
          Total securities                                       $       21,831  $         122  $          19   $      21,934
                                                                 ==============  =============  =============   =============
</TABLE>

<TABLE>
<CAPTION>
                                                                                              1997
                                                                 ------------------------------------------------------------
                                                                                      Gross Unrealized
                                                                   Amortized     --------------------------- 
                                                                     Cost           Gain           Loss           Fair Value
                                                                     ----           ----           ----           -----------
<S>                                                              <C>             <C>            <C>             <C>          
Securities, held to maturity
   FHLMC participation certificates                              $          365  $           9  $      -        $         374
                                                                    -----------    -----------    ----------      -----------

Securities, available for sale
   Mutual fund - AMF Adjustable Rate Securities Portfolio                 1,007          -        (         1)          1,006
   U.S. Government and agency bonds                                       5,750             18    (        17)          5,751
   FNMA mortgage-backed securities                                        1,946             45         -                1,991
                                                                    -----------    -----------    ----------      -----------

                                                                          8,703             63    (        18)          8,748
                                                                    -----------    -----------    -----------     -----------

          Total securities                                       $        9,068  $          72  $ (        18)  $       9,122
                                                                    ===========    ===========    ===========     ===========
</TABLE>
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996

The amortized cost and estimated fair value of debt securities at June 30, 1998,
by contractual  maturity,  were as follows in thousands.  Expected maturities of
mortgage-backed  securities  will differ  from  contractual  maturities  because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.  Values of mutual fund shares are not guaranteed by any
government agency.

<TABLE>
<CAPTION>
                                                                       Held to Maturity               Available for Sale
                                                                 -----------------------------    ---------------------------
                                                                    Amortized                     Amortized
                                                                     Cost          Fair Value      Cost           Fair Value
                                                                     ----          ----------      ----           -----------

<S>                                                              <C>             <C>            <C>             <C>          
        Due in one year or less                                  $        -      $       -      $       5,250   $       5,264
        Due after one year through five years                             -              -              5,030           5,080
        Due after five years through ten years                            -              -              -               -
        Due after ten years                                               -              -                400             405
        Mortgage-backed and related securities                              318            327         10,833          10,858
                                                                    -----------    -----------    -----------     -----------

                                                                 $          318  $         327  $      21,513   $      21,607
                                                                   ============    ===========    ===========     ===========
</TABLE>

Proceeds  from  maturities of  interest-bearing  deposits and  investments  were
$6,793,000 in 1998,  $3,839,000 in 1997, and $3,950,000 in 1996.  Gross realized
gains and losses on redemption of investments are summarized below in thousands:

<TABLE>
<CAPTION>
                                                                                    1998          1997             1996
                                                                                 -------------  -------------   ----------

<S>                                                                              <C>            <C>             <C>      
        Gross realized gains                                                     $       -      $         52    $       -
        Gross realized losses                                                      (        17)   (        9)           -
                                                                                   -----------    -----------     -------

                  Net realized gains (losses)                                    $ (        17) $         43    $       -
                                                                                   ===========    ==========      =======
</TABLE>

Cost was determined by the specific identification method.

                                       29
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 3 - Loans receivable

Loans receivable at June 30 of each year were as follows in thousands:

                                                       1998            1997
                                                  -------------   -------------
        Mortgage loans
           Residential, one to four family        $      38,596   $      39,587
           Residential, multifamily                       4,033           4,976
           Nonresidential and land                        2,513           2,523
           Construction                                   2,980           3,536
                                                    -----------     -----------

                                                         48,122          50,622
                                                    -----------     -----------

        Non-mortgage loans
           Consumer loans
              Secured personal                              725             862
              Unsecured personal                             39              10
              Auto                                           34              53
              Home improvement                               35              37
              Equity line                                 1,023           1,050
              Other                                          59              87
           Commercial
              Unsecured                                      26              35
              Secured                                        43             128
                                                    -----------     -----------

                                                          1,984           2,262
                                                    -----------     -----------

                  Total loans                            50,106          52,884
                                                    -----------     -----------

        Less
           Deferred loan fees                                71              93
           Undisbursed loans in process                   1,617           1,592
           Allowance for credit losses                      207             217
                                                    -----------     -----------

                                                          1,895           1,902
                                                    -----------     -----------

                  Loans receivable, net           $      48,211   $      50,982
                                                    ===========     ===========

Real estate loans  pledged as  collateral  for Federal Home Loan Bank of Atlanta
advances  totaled  $7,000,000  and  $4,700,000  as of June 30,  1998  and  1997,
respectively.

                                       30
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 3 - Loans receivable (continued)

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
statements of financial condition.  The unpaid principal balances of these loans
at June 30 of each year are summarized as follows in thousands:

<TABLE>
<CAPTION>
                                                                                    1998           1997            1996
                                                                                 -------------  -------------   -------------

<S>                                                                              <C>            <C>             <C>          
        Federal Home Loan Mortgage Corporation (FHLMC)                           $         321  $         379   $         459
        Virginia Housing Development Authority (VHDA)                                      614            583             729
                                                                                   -----------    -----------     -----------

                                                                                 $         935  $         962   $       1,188
                                                                                   ===========    ===========     ===========
</TABLE>

Custodial  escrow balances at June 30 of each year maintained in connection with
the foregoing loans serviced are summarized as follows in thousands:

<TABLE>
<CAPTION>
                                                                                                   1998            1997
                                                                                                -------------   -------------

<S>                                                                                             <C>             <C>          
        FHLMC                                                                                   $           6   $           5
        VHDA                                                                                                6               4
                                                                                                  -----------     -----------

                                                                                                $          12   $           9
                                                                                                  ===========     ===========
</TABLE>

Activity in the  allowance  for credit losses for the years ended June 30, 1998,
1997 and 1996 is summarized as follows in thousands:

<TABLE>
<CAPTION>
                                                                                     1998           1997           1996
                                                                                 -------------  -------------   -------------

<S>                                                                              <C>            <C>             <C>          
        Balance at beginning of year                                             $        217   $         194   $         194
        Provision charged to operations                                                    33              23           -
        Charge-offs                                                                (       43)          -               -
                                                                                   -----------    -----------     -----------

                  Balance at end of year                                         $        207   $         217   $         194
                                                                                   ==========     ===========     ===========
</TABLE>

                                       31
<PAGE>
                                                
                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 3 - Loans receivable (continued)

The  following  table sets forth the maturity of the loan  portfolio at June 30,
1998 in thousands. The table does not include prepayments or scheduled principal
repayments.

<TABLE>
<CAPTION>
                                          Residential
                                  --------------------------
                                    One to Four     Multi-       Nonresidential                     Consumer
                                     Family         Family        and Land         Construction    and Other         Total
                                     ------         ------        --------         ------------    ---------      -----------
<S>                               <C>            <C>          <C>                <C>             <C>            <C>          
Amounts due
   Within 3 months                $       -      $     -      $           -      $          478  $        419   $         897
   3 months to 1 year                        10        -                     10           1,735            55           1,810
                                    -----------    ---------    ---------------    ------------    ----------     -----------

          Total due within 1 year            10        -                     10           2,213           474           2,707
                                    -----------    ---------    ---------------    ------------    ----------     -----------

   After 1 year
      1 to 3 years                           57        -                     24             767           155           1,003
      3 to 5 years                          492        -                    306           -               119             917
      5 to 10 years                       2,768          948                578           -               151           4,445
      10 to 20 years                      9,429        2,444              1,595           -             1,085          14,553
      Over 20 years                      25,840          641              -               -             -              26,481
                                    -----------    ---------    ---------------    ------------    ----------     -----------

          Total due after 1 year         38,586        4,033              2,503             767         1,510          47,399
                                    -----------    ---------    ---------------    ------------    ----------     -----------

          Total due               $      38,596  $     4,033  $           2,513  $        2,980  $      1,984          50,106
                                    ===========    =========    ===============    ============    ==========     -----------

Less
   Allowance for loan loss                                                                                                207
   Loans in process                                                                                                     1,617
   Deferred loan fees                                                                                                      71
                                                                                                                  -----------

                                                                                                                        1,895

          Loans receivable, net                                                                                 $      48,211
                                                                                                                  ===========
</TABLE>

The following table sets forth the dollar amount (in thousands) of all loans due
after June 30,  1999,  which have  predetermined  interest  rates and which have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                                                  Floating or
                                                                                    Fixed         Adjustable
                                                                                    Rates          Rates            Total
                                                                                    -----         -----------   -------------

<S>                                                                              <C>            <C>             <C>          
      One to four family                                                         $       9,836  $      28,750   $      38,586
      Multifamily                                                                        2,197          1,836           4,033
      Nonresidential and land                                                            1,618            885           2,503
      Construction                                                                         767          -                 767
      Consumer and other                                                                   486          1,024           1,510
                                                                                   -----------    -----------     -----------

                                                                                 $      14,904  $      32,495   $      47,399
                                                                                   ===========    ===========     ===========
</TABLE>

                                       32
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 4 - Foreclosed real estate

Foreclosed  real estate acquired in settlement of loans, at the lower of cost or
fair value, totaled $-0- at June 30, 1998 and June 30, 1997, respectively.

The net loss on foreclosed  real estate at June 30 of each year consisted of the
following in thousands:

<TABLE>
<CAPTION>
                                                                                    1998           1997            1996
                                                                                 -------------  -------------   -----------

<S>                                                                              <C>            <C>             <C>      
        Net loss on sale of foreclosed real estate                               $          43  $       -       $       -
                                                                                   ===========    ===========     =========
</TABLE>


Note 5 - Property, equipment and depreciation

Property and equipment at June 30 of each year were as follows in thousands:

<TABLE>
<CAPTION>
                                                                                                     1998           1997
                                                                                                -------------   -------------

<S>                                                                                             <C>             <C>          
        Land                                                                                    $         575   $         575
        Office buildings and improvements                                                               1,788           1,783
        Furniture, fixtures and equipment                                                               1,017             935
                                                                                                  -----------     -----------

                                                                                                        3,380           3,293

        Less accumulated depreciation                                                                   1,718           1,627
                                                                                                  -----------     -----------

                     Property and equipment, net                                                $       1,662   $       1,666
                                                                                                  ===========     ===========
</TABLE>

Accumulated depreciation at June 30 of each year was as follows in thousands:

<TABLE>
<CAPTION>
                                                                                                    1998            1997
                                                                                                -------------   -------------

<S>                                                                                             <C>             <C>          
        Office buildings and improvements                                                       $         899   $         862
        Furniture, fixtures and equipment                                                                 819             765
                                                                                                  -----------     -----------

                                                                                                $       1,718   $       1,627
                                                                                                  ===========     ===========
</TABLE>

Depreciation  expense  for the years ended June 30,  1998,  1997 and 1996 was as
follows in thousands:

<TABLE>
<CAPTION>
                                                                                     1998           1997            1996
                                                                                 -------------  -------------   -------------

<S>                                                                              <C>            <C>             <C>          
         Office buildings and improvements                                       $          37  $          37   $          37
         Furniture, fixtures and equipment                                                  55             50              64
                                                                                   -----------    -----------     -----------

                                                                                 $          92  $          87   $         101
                                                                                   ===========    ===========     ===========
</TABLE>

                                       33
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 6 - Accrued interest receivable

Accrued interest receivable at June 30 of each year was as follows in thousands:

<TABLE>
<CAPTION>
                                                                                                    1998           1997
                                                                                                -------------   -------------

<S>                                                                                             <C>             <C>          
         Accrued interest on loans                                                              $         286   $         316
         Accrued interest on investments                                                                  279             121
                                                                                                  -----------     -----------

                                                                                                $         565   $         437
                                                                                                  ===========     ===========
</TABLE>


Note 7 - Deposits

Savings  deposits at June 30 of each year,  summarized by interest rate, were as
follows in thousands:

<TABLE>
<CAPTION>
                                                                                  1998                           1997
                                                                 -------------------------------------------------------------
                                                                      Amount       Percent          Amount        Percent
                                                                      ------       -------          ------        -------
<S>                                                              <C>                 <C>        <C>                <C>  
    Negotiable order of withdrawal deposits
       Non-interest bearing                                      $          953        1.40%    $         739         1.28%
       1.74%                                                              4,768        6.98             -             0.00
       2.15%                                                              -            0.00             4,118         7.11
       2.96%                                                              3,168        4.64             3,477         6.00
                                                                    -----------    --------       -----------     --------

                                                                          8,889       13.02             8,334        14.39
                                                                    -----------    --------       -----------     --------

    Passbooks and statement deposits, 3.00% for each year                 7,481       10.95             7,371        12.72
                                                                    -----------    --------       -----------     --------

    Certificates of deposit and other term deposits
       3.00% to 4.00%                                                       240         .35               109          .19
       4.01% to 5.00%                                                     3,082        4.51            14,116        24.37
       5.01% to 6.00%                                                    48,393       70.87            21,430        36.98
       6.01% to 7.00%                                                       200         .29             6,570        11.34
       7.01% to 8.00%                                                         3         .01                 3          .01
                                                                    -----------    --------       -----------     --------

              Total term deposits                                        51,918       76.03            42,228        72.89
                                                                    -----------    --------       -----------     --------

              Total deposits                                     $       68,288      100.00%    $      57,933       100.00%
                                                                    ===========    ==========     ===========     ==========
</TABLE>


The aggregate amounts of certificates of deposit with a denomination of $100,000
or more were $5,818,000,  $5,121,000,  and $3,970,000 at June 30, 1998, 1997 and
1996, respectively.

Certain deposit accounts were pledged as collateral for $207,000,  $171,000, and
$152,000 of consumer loans at June 30, 1998, 1997 and 1996, respectively.

                                       34
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 7 - Deposits (continued)

Maturities  of  certificates  of deposit  are  scheduled  for each  fiscal  year
indicated as follows in thousands:

<TABLE>
<CAPTION>
                                                     1999            2000           2001          After 2002      Total
                                                  -------------  --------------  -------------  -------------   -------------

        <S>                                       <C>            <C>             <C>            <C>             <C>          
        3.00% to 4.00%                            $         239  $            1  $       -      $       -       $         240
        4.01% to 5.00%                                    3,081               1          -              -               3,082
        5.01% to 6.00%                                   40,337           7,731            280             45          48,393
        6.01% to 7.00%                                    -                 200          -              -                 200
        7.01% to 8.00%                                        3           -              -              -                   3
                                                    -----------     -----------    -----------    -----------     -----------

                                                  $      43,660  $        7,933  $         280  $          45   $      51,918
                                                    ===========     ===========    ===========    ===========     ===========
</TABLE>

Interest expense on deposits for the years ended June 30, 1998, 1997 and 1996 is
summarized as follows in thousands:

<TABLE>
<CAPTION>
                                                                                    1998           1997            1996
                                                                                 -------------  -------------   -------------

       <S>                                                                      <C>            <C>             <C>          
        Money market                                                             $          93  $         110   $         111
        Passbook savings                                                                   224            219             213
        NOW                                                                                 92            102             110
        Club accounts                                                                        1              1               1
        Certificates of deposit                                                          2,558          2,099           2,135
                                                                                   -----------    -----------     -----------

                                                                                 $       2,968  $       2,531   $       2,570
                                                                                   ===========    ===========     ===========
</TABLE>


Note 8 - Borrowed funds

The following  table sets forth certain  information  regarding  advances at the
dates or for the periods indicated in thousands:

<TABLE>
<CAPTION>
                                                                                                   1998            1997
                                                                                                -------------   -------------
         FHLB-Atlanta advances
<S>                                                                                             <C>             <C>          
            Balance outstanding at end of year                                                  $       7,000   $       3,500
            Average balance outstanding                                                                 4,400           3,000
            Maximum amount outstanding at any month-end during the year                                 7,000           3,500

            Weighted-average interest rate during the year                                               5.87%           5.67%
            Weighted-average interest rate at end of year                                                5.63%           6.12%

</TABLE>


                                       35
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 8 - Borrowed funds (continued)

The following  table sets forth the repayment  schedule at June 30, 1998,  which
includes interest rates and amounts due by year, in thousands:

                Year Due             Interest Rate                 Amount

                  1998                    5.98%                $       1,000
                  2002                    5.68%                        2,000
                  2003                    5.52%                        2,000
                  2008                    5.51%                        2,000
                                                                 -----------

                                                               $       7,000
                                                               =============

Residential loans aggregating  $7,000,000 and $3,500,000 were pledged as of June
30,  1998  and  1997,   respectively,   as  collateral  for  the  advances  from
FHLB-Atlanta under a blanket floating lien agreement.


Note 9 - SAIF premium assessment

Pursuant to the Economic Growth and Paperwork  Reduction Act of 1996 (Act),  the
FDIC imposed a special  assessment on SAIF members to capitalize the SAIF at the
designated  reserve level of 1.25% of insured deposits as of September 30, 1996.
Based on the Company's deposits as of March 31, 1995, the date for measuring the
amount of the special assessment pursuant to the Act, the Company paid a special
assessment of $355,000 on November 27, 1996 to capitalize the SAIF. The FDIC has
lowered the premium for deposit  insurance to a level  necessary to maintain the
SAIF at its required reserve level. The Bank's premium for deposit insurance for
1998 is currently .0625% of assessable deposits and was .0657% in 1997.


Note 10 - Income taxes

The  Bank's  portion  of  the  consolidated   taxable  income  was  computed  by
application  of  Section  593(b)(2)  of the U.S.  Internal  Revenue  Code  which
provides a special deduction for bad debts. The bad debt deduction may be a "tax
preference item" to which a minimum tax may apply.

The 1996 federal tax legislation  repealed the benefits of Section  593(b)(2) of
the U.S.  Internal Revenue Code. For ensuing fiscal years, the Bank will compute
its tax bad debt deduction by use of the "experience method" which is based on a
moving  five-year  average  of actual  loss  experience.  The  legislation  also
provides that "applicable  excess reserves" must be recaptured as taxable income
over five years  beginning in fiscal 1997.  The amount to be  recaptured  is the
excess of the accumulated  reserves since 1987 over the amount allowed by use of
the experience method for those years.

                                       36
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 10 - Income taxes (continued)

The  consolidated  provision for income taxes for the years ended June 30, 1998,
1997 and 1996, consisted of the following elements in thousands:

<TABLE>
<CAPTION>
                                                                                    1998           1997           1996
                                                                                 -------------  -------------   -------------
<S>                                                                              <C>            <C>             <C>         
         Tax paid or payable currently
            Federal                                                              $        304   $        250    $        183
            State                                                                          33             41              14
         Income tax deferred, net                                                  (       19)   (        85)    (         6)
                                                                                   -----------    -----------     -----------

                   Total provision for income taxes                              $        318   $        206    $        191
                                                                                   ==========     ==========      ==========
</TABLE>

The  provision  for income taxes  differed  from that  computed at the statutory
corporate rate for the years ended June 30, 1998, 1997 and 1996 as follows:

<TABLE>
<CAPTION>
                                                                                         1998          1997         1996
                                                                                       -----------   -----------  -----------

<S>                                                                                          <C>           <C>          <C>  
        Tax at statutory rate                                                                34.0%         34.0%        34.0%
        Increases in taxes resulting from
           State income tax, net of federal tax benefit                                       2.8           2.0          1.9
           Other                                                                              1.5      (    4.2)         -
           Permanent non-deductible expenses                                                  2.5           2.2          2.6
                                                                                       ----------    ----------   ----------

                  Total provision for income taxes                                           40.8%         34.0%        38.5%
                                                                                       ==========    ==========   ==========
</TABLE>

The significant  components of the net deferred tax asset (liability) at June 30
of each year were as follows in thousands:

<TABLE>
<CAPTION>
                                                                                                       Liability Method
                                                                                                -----------------------------
                                                                                                   1998            1997
                                                                                                -------------   -------------
<S>                                                                                             <C>             <C>          
        Components of the deferred tax asset
           Loan fees                                                                            $           9   $          16
           Pension expense                                                                                 76              66
           Stock bonus plan                                                                                21              20
           Accelerated depreciation                                                                        12               4
                                                                                                  -----------     -----------

                                                                                                          118             106
        Valuation allowance                                                                             -               -
                                                                                                  -----------     -----------

                  Total deferred tax asset                                                                118             106
                                                                                                  -----------     -----------

        Components of the deferred tax liability
           Bad debts                                                                                        8              27
           Unrealized gains on securities, available for sale                                              35              15
                                                                                                  -----------     -----------

                  Total deferred tax liability                                                             43              42
                                                                                                  -----------     -----------

                  Net deferred tax asset                                                        $          75   $          64
                                                                                                  ===========     ===========
</TABLE>

                                       37
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 10 - Income taxes (continued)

The  Company's  consolidated  income  tax  returns  for years not  barred by the
statute of limitations are subject to review by tax authorities.


Note 11 - Retirement plans and employee benefit programs

The Company has a multi-employer defined benefit pension plan with The Financial
Institution's  Retirement  Fund.  Pension  expense is the amount of the required
contribution,  and a liability is recognized  for such  contributions  which are
unpaid at the end of the fiscal year.

Pension  expense  for the three  years  ended  June 30,  1998 was as  follows in
thousands:

                                   1998          1997            1996
                               -------------  -------------   -------------

        Pension expense        $       -      $          49   $          92
                                 ===========    ===========     ===========

The multi-employer  defined benefit plan covers  substantially all employees who
have reached age 21 and who have completed one year of service. The benefits are
based on length of service and high five-year average earnings.  However,  in no
event will the benefits be less than those vested  through June 30, 1992 under a
previous plan.

Supplemental executive retirement plan

The Company has deferred  compensation  agreements  with two principal  officers
which  provide for  retirement  benefits  supplementary  to those of the pension
plan.  As of June 30, 1998 and 1997,  cumulative  accruals  under the  contracts
totaled $201,000 and $175,000, respectively, and constituted general obligations
of the Company.

Employee stock ownership plan

At the time of the stock  conversion,  the Bank  established  an Employee  Stock
Ownership  Plan  covering all  full-time  employees  over the age of 21, with at
least 1,000 hours of service  within a plan year.  The ESOP borrowed  funds from
the Company to purchase a total of 45,647 shares of the Company's  common stock,
the loan being  collateralized  by the common stock.  Contributions by the Bank,
along with dividends received on unallocated  shares, are used to repay the loan
with shares being  released from the  Company's  lien  proportional  to the loan
repayments.  Annually  on June 30,  the  released  shares are  allocated  to the
participants  in the  same  proportion  that  their  wages  bear  to  the  total
compensation of all of the participants.  The Company has released 18,262 shares
of the common  stock as of June 30,  1998.  The Company  recognized  $12,000 and
$7,800 as accrued  compensation costs in 1998 and 1997,  respectively.  The fair
value of unearned ESOP shares totaled $558,000 and $511,000 at June 30, 1998 and
1997, respectively. There were no commitments to repurchase ESOP shares.

The Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly,  the shares  pledged as  collateral  are reported as a reduction of
stockholders' equity in the consolidated  statements of financial condition.  As
shares are released from collateral,  the Company reports  compensation  expense
equal  to the  current  market  price  of the  shares,  and  the  shares  become
outstanding  for earnings per share  computations.  Dividends on allocated  ESOP
shares  are  recorded  as  a  reduction  of  retained  earnings;   dividends  on
unallocated ESOP shares are recorded as a reduction of debt.

                                       38
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 11 - Retirement plans and employee benefit programs (continued)

Recognition and retention plan

The stockholders approved the establishment of a Management Stock Bonus Plan and
Trust  (MSBP) on October  25,  1995.  The plan  states  that the Trust shall not
purchase  more than 4% of the  aggregate  shares of common  stock  issued by the
Company in the  mutual-to-stock  conversion of the Bank (22,823 shares).  During
1996,  the Bank  purchased  22,812  shares of the  Company's  common stock at an
average  price of $17.02  per share to be  awarded to  directors,  officers  and
employees in  accordance  with the  provision of the  Recognition  and Retention
Plan.  The costs of the shares  awarded  under the plan are recorded as unearned
compensation,  a contra  equity  account,  and are  recognized  as an expense in
accordance  with the vesting  requirements  under the plan.  For the years ended
June 30,  1998 and 1997,  the  amounts  included in  compensation  expense  were
$63,000 and $54,000, respectively. The status of the shares in this plan at June
30, 1998 is shown as follows:

<TABLE>
                                                                                                   Unawarded       Awarded
                                                                                                   Shares          Shares
                                                                                                 -----------      ----------

<S>                                                                                               <C>            <C>   
        Balance at June 30, 1996                                                                       4,328          18,484
           Granted                                                                                     -               -
           Vested                                                                                      -          (    2,640)
           Forfeiture                                                                                  -               -
                                                                                                  ----------      ----------

        Balance at June 30, 1997                                                                       4,328          15,844
           Granted                                                                                      -              -
           Vested                                                                                       -         (    2,635)
           Forfeiture                                                                                   -              -
                                                                                                  -----------     ----------

        Balance at June 30, 1998                                                                       4,328          13,209
                                                                                                  ===========     ==========
</TABLE>

Stock option plans

The  stockholders  also  approved  the  establishment  of a stock option plan on
October 5, 1995 for directors,  officers and employees. The exercise price under
both plans is $17 per share, the fair market price on the date of the grant. One
is a non-incentive stock option plan, and the other is an incentive stock option
plan.  Rights  to  exercise  options  granted  vest at the rate of 20% per year,
beginning on the first anniversary of the grant. On March 18, 1998, the Board of
Directors  approved the establishment of a stock option plan for directors.  The
exercise  price is $21 per share,  the fair  market  price on the date of grant.
Rights to exercise options are 100% vested as of June 30, 1998.

                                       39
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 11 - Retirement plans and employee benefit programs (continued)

A summary of the stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                             Available         Options          Vested and
                                                                             for Grant         Outstanding      Exercisable
                                                                             ---------         -----------      -----------

<S>                                                                          <C>              <C>               <C>    
        Balance at June 30, 1996                                                   13,132           43,927              -
           Granted                                                                  -                -                  -
           Vested                                                                   -         (      8,785)             8,785
           Exercised                                                                -                -                  -
           Forfeiture                                                               -                -                  -
                                                                            -------------     ------------      -------------

        Balance at June 30, 1997                                                   13,132           35,142              8,785
           Granted                                                                   -              10,122             10,122
           Vested                                                                    -        (      8,777)             8,777
           Exercised                                                                 -               -                  -
           Forfeiture                                                                -               -                  -
                                                                            --------------    ------------      -------------

        Balance at June 30, 1998                                                    13,132          36,487             27,684
                                                                            ==============    ============      =============
</TABLE>

The Company  applies APB Opinion 25 in  accounting  for  employee  stock  option
plans. Accordingly, no compensation cost has been recognized in 1998 and 1997.

Pro forma information regarding net income and earnings per share is required by
SFAS 123,  and has been  determined  as if the  Company  had  accounted  for its
employee stock options under the fair value method of that  Statement.  The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:  risk-free
interest rate of 5.85%;  dividend yields of 1.76%;  volatility  factor of 27.5%;
and a weighted-average expected life of the option of 6.45 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  The  Company's  pro
forma information follows:

                                           1998          1997        1996
                                       -----------   -----------  ------------

        Pro forma net income           $       446   $       413  $       303
        Pro forma earnings per share
           Basic                       $       .93   $       .86  $       .59
           Diluted                     $       .88   $       .86  $       .59


                                       40
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 12 - Financial instruments with off-balance-sheet risk

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments consist primarily of commitments to extend credit.  These
instruments  involve,  to varying degrees,  elements of credit risk in excess of
the amount recognized in the statements of financial  position.  The contract or
notional  amounts of those  instruments  reflect the extent of  involvement  the
Company has in particular classes of financial instruments.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional  obligations
as it does for on-balance-sheet instruments.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of  collateral  deemed  necessary  by the Company  upon  extension of
credit  is  based  on  management's  credit  evaluation  of  the  counter-party.
Collateral normally consists of real property.

The Company's  commitments to finance real estate  acquisitions and construction
were $4,050,000 at June 30, 1998, $2,994,000 at June 30, 1997, and $3,929,000 at
June  30,  1996.  As of June  30,  1998,  the  Company  had  contracted  to sell
$2,371,000  of the loans to be  financed.  No loss is  anticipated.  At June 30,
1998,  outstanding  letters of credit  totaled  $391,000,  and unfunded lines of
credit  totaled  $1,155,000.  There were no loans sold with recourse in 1998 and
1997.


Note 13 - Restricted retained earnings

The Bank is  required  by federal  insurance  regulations  to  maintain  certain
reserves for the sole purpose of absorbing  losses. A federal  insurance reserve
was established for this purpose by an  appropriation of retained  earnings.  In
1980, the  requirement  for a separate  federal  insurance  reserve  account was
eliminated.  However,  amounts  previously  credited  to this  separate  reserve
account are designated "restricted retained earnings" and shall be used only for
absorption of losses.  The amount so designated totaled  $1,777,000,  $1,767,000
and $1,790,000 at June 30, 1998, 1997 and 1996, respectively.

                                       41
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 13 - Restricted retained earnings (continued)

In accordance  with the  regulations  concerning  conversion  from a mutual to a
stock  organization,  the Bank was required to establish a  liquidation  account
equal  to its net  worth  as of the  latest  statement  of  financial  condition
contained in the final prospectus.  Such liquidation account is to be maintained
as of the eligibility  record date (March 31, 1993) or supplemental  eligibility
record  date (June 30,  1994) for the  benefit of  depositors  who  continue  to
maintain  their  deposits  in the Bank  after the  conversion  in the event of a
complete  liquidation of the Bank. If, however, on any annual closing date (June
30) of the Bank,  the amount in any  deposit  account is less than the amount in
such deposit  account on March 30, 1993 or June 30,  1994,  then the interest in
the liquidation account relating to such deposit account would be reduced by the
amount of such reduction,  and such interest will cease to exist if such deposit
account is closed. The Bank may not declare or pay a cash dividend or repurchase
any of its capital stock if the effect  thereof would cause the net worth of the
Bank to be reduced below either the amount required for the liquidation  account
or  the  minimum  regulatory  capital  requirements.   At  June  30,  1998,  the
liquidation account,  unadjusted for customer  withdrawals,  totaled $4,166,000,
and minimum regulatory capital was $3,003,000.

See Note 16 for Bank regulatory capital requirements.


Note 14 - Earnings per share

The  following  table  sets  forth  the  reconciliation  of the  numerators  and
denominators of the basic and diluted earnings per share (EPS) computations:

<TABLE>
<CAPTION>
                                                                                           Year Ended June 30
                                                                          --------------------------------------------------
                                                                               1998             1997              1996
                                                                          ----------------  ---------------  ---------------
<S>                                                                       <C>               <C>              <C>            
           Numerator:
      (a)  Net income available to shareholders                           $           461   $          414   $           306
                                                                            =============     ============      ============


           Denominator:
           Weighted-average shares outstanding                                    509,008          522,884           550,826
           Less: ESOP weighted-average shares                               (      31,951)    (     36,518)     (     41,082)
                                                                            -------------     ------------      ------------

      (b)  Basic EPS weighted-average shares outstanding                          477,057          486,366           509,744

           Effect of dilutive securities:
           Incremental shares attributable to the Stock Option                      7,500            -                    93
              Plan and Management Stock Bonus Plan                                  2,255            -                 -
                                                                            -------------     ------------      --------

      (c)  Diluted EPS weighted-average shares outstanding                        486,812          486,366           509,837
                                                                            =============     ============      ============


           Basic earnings per share (a/b)                                 $           .97   $          .85   $           .60
                                                                            =============     ============      ============

           Diluted earnings per share (a/c)                               $           .95   $          .85   $           .60
                                                                            =============     ============      ============
</TABLE>

Earnings per share  amounts for 1997 and 1996 have been  restated to comply with
the provisions of SFAS 128.

                                       42
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 15 - Significant group concentrations of credit risk

The Company  grants  residential,  commercial,  and consumer  loans to customers
mainly in the  southwest  region of Virginia.  The Company has a loan  portfolio
consisting  principally of residential  mortgage loans and is not dependent upon
any  particular  economic  sector,  although  the  portfolio  as a whole  may be
affected by general economic factors of the southwest Virginia region.

At June 30, 1998, the Company had commercial bank deposits of $733,000 in excess
of the Federal Deposit Insurance Corporation insurance limit.


Note 16 - Bank regulatory matters

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

The  Office  of  Thrift   Supervision's   capital   regulations  require  thrift
institutions to maintain capital at least sufficient to meet three requirements:
tangible  capital,   core  capital,  and  risk-based  capital.   Management  has
determined  that  the  Bank's  capital  meets  and  exceeds  all  three  capital
requirements as follows as of June 30, 1998 and 1997, in thousands. Tangible and
core  capital  levels  are  shown as a  percentage  of  adjusted  total  assets.
Risk-based capital levels are shown as a percentage of risk-weighted assets:

<TABLE>
<CAPTION>
                                                                                        1998
                                                      -----------------------------------------------------------------------
                                                               Tangible                 Core                  Risk-based
                                                               Capital                  Capital                 Capital
                                                      ----------------------   ----------------------  ----------------------

<S>                                                   <C>               <C>    <C>               <C>   <C>              <C>  
        Regulatory capital computed                   $     7,683       9.1%   $     7,683       9.1%  $     7,890      20.8%
        Minimum capital requirement                         1,271       1.5          2,542       3.0         3,042       8.0
                                                         --------   -------      ---------    ------     ---------    ------

                  Regulatory capital excess           $     6,412       7.6%   $     5,141       6.1%  $     4,848      12.8%
                                                         ========   =======      =========  ========     =========  ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                        1997
                                                      ----------------------------------------------------------------------
                                                                Tangible                Core                  Risk-based
                                                                Capital               Capital                   Capital
                                                      ---------------------    ---------------------   ---------------------

<S>                                                   <C>              <C>     <C>              <C>    <C>              <C>  
        Regulatory capital computed                   $     7,905      11.1%   $     7,905      11.1%  $     8,123      21.6%
        Minimum capital requirement                         1,068       1.5          2,137       3.0         3,003       8.0
                                                         --------   -------      ---------  --------     ---------  --------

                  Regulatory capital excess           $     6,837       9.6%   $     5,768       8.1%  $     5,120      13.6%
                                                         ========   =======      =========  ========     =========  ========
</TABLE>

                                       43
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 17 - Related-party transactions

The  Company  has made  loans in the  ordinary  course of  business  to  various
officers  and  directors.  These  loans  are  generally  collateralized  by  the
individuals'  personal  residences  or by savings  accounts in the Company.  The
aggregate  balances of such loans which exceed $60,000 in aggregate  outstanding
amount to any officer or director  for the years ended June 30,  1998,  1997 and
1996 are summarized as follows in thousands:

<TABLE>
<CAPTION>
                                                                                    1998            1997           1996
                                                                                 -------------  -------------   --------------

<S>                                                                              <C>            <C>             <C>         
        Beginning balance                                                        $        286   $         49    $         56
        Additions                                                                       -                285           -
        Repayments                                                                (        89)    (       48)    (         7)
                                                                                   -----------    -----------     -----------

                  Ending balance                                                 $        197   $        286    $         49
                                                                                   ==========     ==========      ==========
</TABLE>

Fees for foreclosures, titles and deeds of trust, paid to a law firm, of which a
director is a principal,  aggregated  $2,575,  $6,625, and $18,000 for the years
ended June 30, 1998, 1997 and 1996, respectively. Insurance commissions received
by a director from business with or for the Company  aggregated  $4,000,  $3,000
and $3,000 for the years ended June 30, 1998, 1997 and 1996.


Note 18 - Commitments and contingencies

Rental expenses paid under operating leases for a loan office at June 30 of each
year was as follows:

<TABLE>
<CAPTION>
                                                                                    1998           1997            1996
                                                                                 -------------  -------------   -------------

<S>                                                                              <C>            <C>             <C>          
        Rental expense                                                           $      25,000  $      24,000   $      24,000
                                                                                   ===========    ===========     ===========
</TABLE>

The Company  entered into a three-year  lease  agreement for office  space.  The
lease terminates April 30, 2001.

The current minimum annual rental commitments under the noncancelable  operating
lease in effect at June 30, 1998 are as follows:

                Year Ending                                       Amount
                -----------                                   ---------------

                    1999                                      $        41,000
                    2000                                               42,000
                    2001                                               36,000
                                                                -------------

                                                              $       119,000
                                                              ===============

                                       44
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 19 - Disclosures about fair value of financial instruments

The estimated fair values of the Company's  financial  instruments as of June 30
of each year are as follows in thousands:

<TABLE>
<CAPTION>
                                                                             1998                           1997
                                                               -----------------------------    ------------------------------
                                                                 Carrying         Fair            Carrying         Fair
                                                                   Amount         Value             Amount         Value
                                                                   ------         -----             ------         -----
<S>                                                            <C>             <C>              <C>             <C>          
        Financial assets
           Cash and cash equivalents                           $       3,193   $       3,193    $       1,276   $       1,276
           Interest-bearing deposits                                   5,897           5,897            5,304           5,304
           Investment securities                                      11,641          11,709            6,711           6,712
           Mortgage-backed securities                                 11,151          11,186            3,318           3,371
           Loans receivable, net                                      48,211          59,620           50,982          54,579

        Financial liabilities
           Deposits                                                   68,288          68,391           57,933          57,929
           Advances from Federal Home Loan Bank                        7,000           6,913            3,500           3,500

        Unrecognized financial instruments
           Commitments to purchase securities                          -               -                -               -
           Standby letters of credit issued                              391             391              245             245

</TABLE>

Note 20 - Other noninterest expense

Other  noninterest  expense for the years ended June 30, 1998,  1997 and 1996 is
shown as follows in thousands:

<TABLE>
<CAPTION>
                                                                                     1998           1997           1996
                                                                                 -------------  -------------   -------------
<S>                                                                              <C>            <C>             <C>          
        Other noninterest expense
           Contributions                                                         $           7  $           5   $           5
           Dues and subscriptions                                                           14             12              14
           Insurance                                                                        31             32              38
           Office supplies, telephone and postage                                          113            101             101
           Other expenses                                                                   41             46              24
           Professional fees                                                               100             91             128
           Supervisory fees and assessments                                                 30             31              33
                                                                                   -----------    -----------     -----------

                                                                                 $         336  $         318   $         343
                                                                                   ===========    ===========     ===========
</TABLE>

                                       45
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 21 - Condensed parent company information

The following shows the Parent  Company's  condensed  financial  information (in
thousands) as of and for years of operation ended June 30, 1998 and 1997:


                                 Balance Sheets
<TABLE>
<CAPTION>
                                                                      1998           1997
                                                                 -------------   -------------
<S>                                                              <C>             <C>          
        Assets
           Cash and cash equivalents                             $         102   $          76
           Investment in Bank subsidiary                                 7,194           7,268
           Loan to Bank ESOP                                               274             319
           Loan to Bank subsidiary                                         575             850
           Other assets                                                    197              96
                                                                   -----------     -----------

                  Total assets                                   $       8,342   $       8,609
                                                                   ===========     ===========


        Liabilities and stockholders' equity
           Liabilities                                           $          15   $           7
           Stockholders' equity                                          8,327           8,602
                                                                   -----------     -----------

                  Total liabilities and stockholders' equity     $       8,342   $       8,609
                                                                   ===========     ===========
</TABLE>

                                       46
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 21 - Condensed parent company information (continued)


                            Statements of Operations
<TABLE>
<CAPTION>
                                                                                                    1998            1997
                                                                                                -------------   ------------
<S>                                                                                             <C>             <C>         
        Income
           Interest from
              Bank's ESOP loan                                                                  $         27    $         30
              Loan to Bank subsidiary                                                                     36              55
              Dividends from Bank subsidiary                                                             503           -
                                                                                                  ----------      ----------

                  Total income                                                                           566              85
                                                                                                  ----------      ----------

        Expense
           Directors' compensation                                                                        25              25
           Professional fees                                                                              84              49
           Stationery and supplies                                                                         1               3
           Other                                                                                          21              18
                                                                                                  ----------      ----------

                  Total expense                                                                          131              95
                                                                                                  ----------      ----------

                  Net income (loss) before income taxes and equity in
                     undistributed net income of Bank subsidiary                                         435      (       10)

        Income tax expense (credit)                                                               (       26)     (        5)
                                                                                                  -----------     ----------

                                                                                                         461      (        5)

        Equity in undistributed net income of Bank subsidiary                                          -                 419
                                                                                                  ----------      ----------

                  Net income                                                                    $        461    $        414
                                                                                                  ==========      ==========
</TABLE>

                                       47
<PAGE>

                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 21 - Condensed parent company information (continued)


                            Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                                    1998            1997
                                                                                                -------------   ------------
<S>                                                                                             <C>             <C>         
        Cash flows from operating activities
           Net income                                                                           $        461    $        414
           Adjustments
              Equity in undistributed net income of Bank subsidiary                               (      503)    (       419)
              (Increase) decrease in other assets                                                 (       56)              4
              Increase (decrease) in other liabilities                                                     8     (        24)
                                                                                                  ----------      -----------

                  Net cash used in operating activities                                           (       90)    (        25)
                                                                                                  -----------     -----------

        Cash flows from investing activities
           Dividends received from Bank subsidiary                                                       725           -
           Principal repayments from Bank subsidiary                                                   1,257             666
           Loans to Bank subsidiary                                                               (      950)          -
                                                                                                  ----------      ----------

                  Net cash provided by investing activities                                            1,032             666
                                                                                                  ----------      ----------

        Cash flows from financing activities
           Dividends paid                                                                         (      622)    (       146)
           Purchase of stock                                                                      (      294)    (       495)
                                                                                                  -----------     -----------

                   Net cash used in financing activities                                          (      916)    (       641)
                                                                                                  -----------     ----------

                  Increase in cash and cash equivalents                                                   26           -

        Cash and cash equivalents at beginning of year                                                    76              76
                                                                                                  ----------      ----------

        Cash and cash equivalents at end of year                                                $        102    $         76
                                                                                                  ==========      ==========

</TABLE>

                                       48
<PAGE>


                     SWVA BANCSHARES, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 1998, 1997 and 1996


Note 22 - Selected quarterly financial data (unaudited)

Condensed consolidated financial data for the years ended June 30, 1998 and 1997
is shown as follows in thousands, except per-share data:

<TABLE>
<CAPTION>

                                                                                                                  1998
                                                                    First          Second         Third           Fourth
                                                                    Quarter        Quarter        Quarter         Quarter
                                                                    -------        -------        -------         -------

<S>                                                              <C>             <C>            <C>             <C>         
Total interest income                                            $       1,393   $      1,424   $      1,520    $      1,471
Total interest expense                                                     718            789            850             869
                                                                    ----------     ----------     ----------      ----------

          Net interest income                                              675            635            670             602
Provision for credit losses                                                 24              3              3               3
                                                                    ----------     ----------     ----------      ----------

          Net interest income after provision for credit losses            651            632            667             599
Other noninterest income                                                    86             84            121             137
Noninterest expense                                                 (      550)    (      531)    (      547)     (      570)
                                                                    ----------     ----------     ----------      ----------

          Income before income tax expense                                 187            185            241             166
Income tax expense                                                          71             70             88              89
                                                                    ----------     ----------     ----------      ----------

           Net income                                            $         116   $        115   $        153    $         77
                                                                    ==========     ==========     ==========      ==========

Basic earnings per share                                         $         .24   $        .24   $        .32    $        .17
Diluted earnings per share                                                 .24            .24            .31             .16
Cash dividends per share                                                  1.15           -               .15            -

                                                                                                                  1997
                                                                    First          Second         Third           Fourth
                                                                    Quarter        Quarter        Quarter         Quarter

Total interest income                                            $       1,255   $      1,346   $      1,341    $      1,368
Total interest expense                                                     644            684            664             681
                                                                    ----------     ----------     ----------      ----------

          Net interest income                                              611            662            677             687
Provision for credit losses                                              -              -              -                  23
                                                                    ----------     ----------     ----------      ----------

          Net interest income after provision for credit losses            611            662            677             664
Other noninterest income                                                    87            130             76             105
Noninterest expense                                                 (      892)    (      538)    (      529)     (      433)
                                                                    ----------     ----------     ----------      ----------

          Income before income tax expense                          (      194)           254            224             336
Income tax expense                                                       -                 30             82              94
                                                                    ----------     ----------     ----------      ----------

           Net income                                            $  (      194)  $        224   $        142    $        242
                                                                    ==========     ==========     ==========      ==========

Basic earnings per share                                         $  (      .40)  $        .46   $        .29    $        .50
Diluted earnings per share                                          (      .40)           .46            .29             .50
Cash dividends per share                                                   .15           -               .15           -

</TABLE>

                                       49


<PAGE>



                                          OFFICE LOCATIONS
          
                                          Corporate Office
                  SWVA Bancshares, Inc. and Southwest Virginia Savings Bank, FSB
                                       302 Second Street, S.W.
                                       Roanoke, VA 24011-1597
                                           (540) 343-0135
          
                        Branch Offices - Southwest Virginia Savings Bank, FSB
          
               1006 Hardy Road                          1611 Hershberger Road
               Vinton, VA                               Roanoke, VA
      
               2133 Electric Road                       40 W. Main Street
               Roanoke, VA                              Salem, VA
      
                                       Loan Production Office
                                        Building D, Suite 101
                                       2847 Penn Forest Blvd.
                                             Roanoke, VA
          
                             ------------------------------------------
          
                             Board of Directors of SWVA Bancshares, Inc.
          
                                            John L. Hart
                                        Chairman of the Board
                                           Attorney-at-Law
<TABLE>
<CAPTION>
<S>                                <C>                                       <C>
F. Courtney Hoge                              James C. Brock                   Michael M. Kessler
Vice Chairman of the Board              President, Rusco Window Co.            President, Kessler Associates, LTD,
Insurance Sales Representative                                                 a photo processor
New York Life Insurance Co.

B.L. Rakes                                    Barbara C. Weddle                         Glen C. Combs
Executive Officer                             Executive Officer                         Vice President, Acosta Sales,
                                                                                        a food brokerage company


                                  Executive Officers of SWVA Bancshares, Inc.

B.L. Rakes                                  Barbara C. Weddle                           Mary G. Staples
President and Chief                         Senior Vice President                       Controller and Treasurer
Executive Officer                           and Secretary



Special Counsel:                                                       Independent Auditors:
Malizia, Spidi, Sloane & Fisch, P.C.                                   Cherry Bekaert & Holland
One Franklin Square                                                    1700 Central Fidelity Bank Building
1301 K Street, N.W., Suite 700 East                                    Lynchburg, VA  24505
Washington, D.C.  20005
</TABLE>

                          Transfer Agent and Registrar:
                          Registrar & Transfer Company
                                10 Commerce Drive
                               Cranford, NJ 07106
                                 (908) 272-8511

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

SWVA  Bancshares,  Inc.'s  Annual  Report for the year ended June 30, 1998 filed
with the Securities and Exchange  Commission on Form 10-KSB is available without
charge upon written request. For a copy of the Form 10-KSB or any other investor
information,  please write or call Barbara C. Weddle,  Senior Vice President and
Secretary at the Company's  Corporate  Office in Roanoke,  Virginia.  The Annual
Meeting of  Stockholders  will be held on October  14, 1998 at 10:30 a.m. at the
Holiday Inn-Tanglewood, 4468 Starkey Road, Roanoke, Virginia.

                                       50