EXHIBIT 13


              SPECIAL ANNUAL REPORT COVER TO BE PUBLISHED BY CLIENT







                      AF BANKSHARES, INC. AND SUBSIDIARIES

                          CONSOLIDATED FINANCIAL REPORT

                                  JUNE 30, 2000



<PAGE>

                                    CONTENTS


Selected Financial Data                                                    1 - 2


President's Message                                                            3


Operational Review                                                             5


Management's Discussion and Analysis of Financial Condition
   and Results of Operations                                              6 - 18


Independent Auditor's Report                                                  19


Financial Statements                                                     20 - 53


Corporate Information                                                    54 - 56

<PAGE>

                  SELECTED FINANCIAL AND OTHER DATA OF THE BANK

       The  following  tables  set  forth  certain  information  concerning  the
financial position and results of operations of the Company at the dates and for
the years  indicated.  The selected  financial  condition  data and the selected
operating data for the years then ended were derived from the audited  financial
statements of the Company.  The information  should be read in conjunction  with
the Financial Statements of the Bank presented elsewhere.



<TABLE>
<CAPTION>
                                                                                              AT JUNE 30,
                                                                 -------------------------------------------------------------------
                                                                   2000          1999            1998            1997         1996
                                                                 --------       -------       ---------        -------       -------
                                                                                            (IN THOUSANDS)
<S>                                                              <C>            <C>           <C>              <C>           <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets .............................................       $133,370       109,931       $ 100,074        $82,024       $72,318
Loans receivable, net (1) ................................        108,778        81,157          72,628         70,236        62,485
Investment securities (2) ................................          9,835        11,798           9,017          6,937         5,560
Cash and cash equivalents(3) .............................          7,423        12,395          14,789          2,533         1,830
Savings deposits .........................................        102,680        93,106          82,488         68,218        63,468
FHLB advances ............................................         15,513         2,564           4,116          1,654         1,250
Equity ...................................................         12,540        12,218          11,486         10,979         7,238
Book value per share .....................................          11.95         11.64           10.90          10.98           N/A
</TABLE>
<TABLE>
<CAPTION>
                                                                                     FOR THE YEAR ENDED JUNE 30,
                                                                 -------------------------------------------------------------------
                                                                   2000          1999           1998            1997           1996
                                                                 --------       -------       ---------        -------       -------
                                                                                           (IN THOUSANDS)
<S>                                                              <C>            <C>           <C>              <C>           <C>
SELECTED OPERATING DATA:
Interest  income and dividends ...........................       $  9,393         7,879       $   7,356        $ 6,213       $ 5,683
Interest expense .........................................          4,685         3,967           3,795          3,245         3,204
                                                                 --------       -------       ---------        -------       -------
       Net interest income ...............................          4,708         3,912           3,561          2,968         2,479
Provision for  loan losses ...............................             88            20             (25)            20            57
                                                                 --------       -------       ---------        -------       -------
       Net interest income after provision for
            loan losses ..................................          4,620         3,892           3,586          2,948         2,422
Non-interest income ......................................          1,821         1,206             991            169           142
Non-interest expense .....................................          5,660         4,348           3,448          2,556         1,809
                                                                 --------       -------       ---------        -------       -------
Income before income tax expense and cumulative
       effect of change in accounting principles .........            781           749           1,089            561           755
Income tax expense .......................................            328           235             381            218           301
                                                                 --------       -------       ---------        -------       -------
       Net income ........................................       $    453           514       $     708        $   343       $   454
                                                                 ========       =======       =========        =======       =======



Basic earnings per share (4) .............................       $   0.45          0.52       $    0.73        $  0.44       $   N/A
                                                                 ========       =======       =========        =======       =======
Diluted earnings per shares (4) ..........................       $   0.45          0.52       $    0.72        $  0.44       $   N/A
                                                                 ========       =======       =========        =======       =======
Dividends per share ......................................       $   0.20          0.20       $    0.20        $  0.10       $   N/A
                                                                 ========       =======       =========        =======       =======
</TABLE>

(1)      Loans  receivable,  net is comprised of total loans less  allowance for
         loan losses, undisbursed loan funds, and deferred loan fees.
(2)      Includes FHLB stock, certificates of deposit and investment securities.
(3)      Includes  interest-earning  deposit  balances  of  $2.6  million,  $4.2
         million,  $11.8 million,  $1.2 million, and $840,000, at June 30, 2000,
         1999, 1998, 1997 and 1996, respectively.
(4)      Earnings per share has been calculated in accordance with the Statement
         of Financial  Accounting  Standards No. 128, Earnings Per Share, and is
         based on net  income  for the year,  divided  by the  weighted  average
         number  of shares  outstanding  for the year.  In  accordance  with the
         AICPA's  SOP  93-6,   unallocated   ESOP  shares  were   deducted  from
         outstanding  shares  used in the  computation  of  earnings  per share.
         Diluted earnings per share includes the effect of dilutive common stock
         equivalents in the weighted average number of shares outstanding.


                                       1
<PAGE>


<TABLE>
<CAPTION>
                                                                                AT OR FOR THE YEAR ENDED JUNE 30,
                                                                    ----------------------------------------------------------
                                                                     2000        1999          1998        1997         1996
                                                                    ------      -------       ------      ------       ------
<S>                                                                 <C>         <C>           <C>         <C>          <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1)
PERFORMANCE RATIOS:
       Return on average assets (1) .............................     0.37%        0.49%        0.78%       0.44%        0.65%
       Return on average equity (1) .............................     3.99%        4.47%        6.31%       3.64%        6.50%
       Average equity to average assets .........................     9.21%       11.02%       12.21%      12.10%       10.05%
       Equity to total assets at end of period ..................     9.40%       11.11%       11.48%      13.39%       10.01%
       Interest rate spread (2) .................................     3.66%        3.64%        3.64%       3.34%        3.38%
       Average interest-earning assets to
            to average interest-bearing liabilities .............   108.18%      110.20%      111.95%     114.40%      107.79%
       Net interest margin (3) ..................................     4.18%        4.06%        4.17%       3.96%        3.76%
       Non-interest expense to average assets ...................     4.59%        4.17%        3.80%       3.28%        2.62%
       Efficiency ratio (4) .....................................    86.69%       84.96%       76.63%      81.48%       69.20%
       Dividend payout ratio (6) ................................    44.44%       38.46%       27.40%      22.73%         N/A

REGULATORY CAPITAL RATIOS (5):
       Tangible capital .........................................     8.89%       10.00%       10.90%      12.90%        9.80%
       Core capital .............................................     8.89%       10.00%       10.90%      12.90%        9.80%
       Total risk-based capital .................................    11.94%       17.40%       20.40%      26.30%       19.80%

ASSET QUALITY RATIOS AND OTHER DATA:
       Ratios:
            Nonperforming loans to total loans ..................     0.36%        0.07%        0.03%       0.18%        0.27%
            Nonperforming loans and real estate owned
               total assets .....................................     0.53%        0.11%        0.06%       0.16%        0.24%
            Allowance for loan losses to:
               Nonperforming loans ..............................   238.20%     1871.14%      851.10%     787.02%      629.89%
               Total loans ......................................     0.86%        1.28%        1.60%       1.42%        1.70%
       Number of full service branches ..........................        5            5            4           3            3
</TABLE>

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

(1)      With the  exception  of end of period  ratios,  all ratios are based on
         average monthly or quarterly balances during the indicated periods, and
         are annualized where  appropriate.  Asset Quality Ratios and Regulatory
         Capital Ratios are end of period ratios.
(2)      The  interest  rate  spread  represents  the  difference   between  the
         weighted-average  yield on  interest-bearing  assets and the  weighted-
         average cost of interest-bearing liabilities.
(3)      The net interest margin  represents net interest income as a percent of
         average interest-earning assets.
(4)      The efficiency ratio represents  noninterest expense as a percentage of
         the sum of net interest income and noninterest income.
(5)      For  definitions  and  further  information   relating  to  the  Bank's
         regulatory  capital  requirements,  see  "Regulation  -  Regulation  of
         Federal  Savings  Associations  - Capital  Requirements"  and Note 7 of
         Notes to the Consolidated Financial Statements.
(6)      The  dividend  payout  ratio  represents   dividends  per  share  as  a
         percentage of basic earnings per share.
         Earnings per share has been calculated in accordance with the Statement
         of Financial  Accounting  Standards No. 128, Earnings Per Share, and is
         based on net  income  for the year,  divided  by the  weighted  average
         number  of shares  outstanding  for the year.  In  accordance  with the
         AICPA's  SOP  93-6,   unallocated   ESOP  shares  were   deducted  from
         outstanding shares used in the computation of earnings per share.


                                       2
<PAGE>

PRESIDENT'S MESSAGE



Dear Shareholder,

Your  Company  closes  Fiscal Year 2000 and  officially  enters the 21st Century
prepared to offer our customers more financial solutions than ever before, along
with the broadest  array of financial  products in our 60+ year history.  During
the year, we continued our growth plan that will allow us to support the cost of
delivering the products expected by our Customers.

Preparations  for Y2K  dampened  our  earnings  but even so, we had a good year.
Detailed  financial  statements  are  contained  elsewhere  in this report but I
believe that one measure of our success is the 51% growth in non-interest income
during our 2000 year reflecting the growing  contributions  of our insurance and
brokerage  business.  Non-interest income totaled $1,821,239 in 2000 compared to
$1,205,759  during the 1999 fiscal year.  Asset growth continues during the past
year as well ending the year at just over $133 million,  a 21% increase over the
proceeding  year-end.  Most of this growth was driven by a 34% increase in loans
outstanding during the year.

We have  offered a growing menu of banking  products for the past 61 years.  The
2000  fiscal year marked the third year of our  offering  insurance  and annuity
products through AF Insurance  Services.  During the year, we added AF Insurance
Service  Center in Elkin and during July 2000 the  Company  executed a letter of
intent to acquire an agency in Boone.  Not only do these  acquisitions  complete
our  market  penetration,  we now  have  more  companies  with a wider  range of
products plus the volume to receive better rates from our insurance companies.

The  newest  segment  of  our  financial  solutions  is AF  Brokerage,  Inc.  AF
Brokerage, Inc. received final approval from NASD to operate as a fully licensed
broker/dealer during the 2000 year becoming the only locally owned broker/dealer
in our marketplace.  We no longer have to rely on a third party provider for our
non-insured, non-traditional banking investments allowing local people to assist
local people in building their future.

With the addition of AF Brokerage  and the  expansion of the  insurance  agency,
your Company has the products to be the premier  financial  services provider in
every market we serve. The difference is now performance. I lead every member of
the AF Team in  committing  that  performance  is the primary  objective  in the
coming year;  improving  upon our  non-interest  income and out  performing  our
competitors--both local, out of town and out of state.

Thank you for your continued  support and guidance.  As always,  your questions,
comments and suggestions are most welcome.



Sincerely,


James A. Todd
President & CEO


                                       3
<PAGE>












                      (This page intentionally left blank)














                                       4
<PAGE>

AF BANKSHARES 2000 OPERATIONAL REVIEW



During Fiscal Year 2000, the Company made significant  strides in expanding it's
traditional banking business and it's broader financial services capabilities.

Continuing  emphasis on checking  accounts and selected FDIC insured  investment
savings  vehicles  throughout  the year  resulted in a 10% increase in deposits,
from  $93,106,090 at June 30, 1999 to $102,679,834 at June 30, 2000. At the same
time, the aggressive  marketing of home equity lines and other loans in response
to borrowing  needs of  individuals,  families,  and businesses in the Company's
markets produced a 34% boost in total loans receivable.

Growth  of  the  Boone  bank,   Appalachian  First  Bank,   continued  with  the
introduction of a major  television,  newspaper,  and radio campaign  throughout
Watauga County. Of particular note is the significant growth in commercial loans
at Appalachian First.

On December 1, 1999, the Company  purchased an insurance agency in Elkin,  North
Carolina,  now known as AF Insurance Service Center. A longstanding  independent
agency in Elkin,  AF  Insurance  Service  Center  has  already  begun  producing
additional incremental business for the company. It is well worth noting that in
Fiscal Year 2000, the Company's  insurance  commissions from all agencies almost
doubled, from $499.9 million to $991.3 million.

On October 22, 1999, AF Brokerage,  Inc.  received approval of its membership in
the  National  Association  of  Securities  Dealers  (NASD).  Subsequently,   AF
Brokerage  began  operations in the fourth  quarter of 2000 as a fully  licensed
independent  broker/dealer -- the first broker/dealer  actually headquartered in
Ashe County.

Also,  plans were  finalized in Fiscal Year 2000 to improve the  Company's  data
processing and computer  systems by implementing a new operating system provided
by Fiserv,  Atlanta.  The new system will be fully operational by the end of the
first quarter Fiscal Year 2001; which should increase  customer  responsiveness,
while reducing  processing  times and aiding the customer  service effort by the
point of sale.

Other noteworthy events during Fiscal Year 2000 include:

         o        The  opening  of  the   Company's   new   administrative   and
                  headquarters building in downtown West Jefferson.

         o        The successful  preparations  for Y2K, which while the problem
                  turned out to be negligible,  helped  underscore the Company's
                  commitment to our customers.

         o        Continuing employee development and training programs designed
                  to make our  outstanding  customer  representatives  even more
                  successful.

All in all,  Fiscal Year 2000 was an excellent start for your Company in the new
millennium.



                                       5
<PAGE>

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

This  discussion  contains  certain  forward-looking  statements  consisting  of
estimates  with respect to the financial  condition,  results of operations  and
other  business of the Company that are subject to various  factors  which could
cause actual results to differ  materially from those  estimates.  Factors which
could  influence  the  estimates  include  changes in general  and local  market
conditions,  legislative and regulatory  conditions and an adverse interest rate
environment.  The  information  contained  in  this  section  should  be read in
conjunction with the Consolidated  Financial Statements,  the accompanying Notes
to the  Consolidated  Financial  Statements and the other sections  contained in
this document.

REORGANIZATION

AF  Bankshares,  Inc.  (the  "Company") is a federally  chartered  stock holding
company for AF Bank (the "Bank")  which  conducts  business from its main office
located in West Jefferson, North Carolina, branches in West Jefferson, Jefferson
and  Warrensville,  North Carolina  operating  under the trade name Ashe Federal
Bank; one branch in Alleghany County,  North Carolina  operating under the trade
name  Alleghany  First Bank;  and one branch in Watauga  County,  North Carolina
operating  under the trade name  Appalachian  First  Bank.  The  Company  has an
insurance  subsidiary  operating  under the trade names AF  Ashelande  Insurance
Service,  in West Jefferson;  AF Brown Insurance Agency in Wilkesboro;  AF Blair
Insurance  Agency in  Lenior;  AF  Insurance  Service  Center  in Elkin;  and AF
Insurance  Services,  Inc.  in  Sparta,  West  Jefferson  and  Jefferson,  North
Carolina.  The Company  has a  brokerage  service  subsidiary,  operating  as AF
Brokerage, Inc., which serves Ashe, Alleghany, Wilkes and Watauga Counties.

On April 15, 1996, the Board of Directors of Ashe Federal Bank adopted a Plan of
Reorganization  and the related  Stock  Issuance Plan pursuant to which the Bank
exchanged  its federal  mutual  savings bank charter for a federal stock savings
bank charter,  conducted a minority stock  offering,  and formed  AsheCo,  MHC a
mutual  holding  company which owned more than 50% of the common stock issued by
the Bank.  The Bank  conducted its minority stock offering in July and August of
1996 and the closing  occurred on October 4, 1996.  The Bank sold 461,779 shares
of common stock in the minority stock  offering,  which  includes  36,942 shares
sold to its Employee  Stock  Ownership  Plan (the  "ESOP"),  and issued  538,221
shares to the mutual holding company.

At the Bank's annual meeting held on December 8, 1997, the  shareholders of Ashe
Federal Bank  approved  the Ashe  Federal Bank 1997 Stock Option Plan;  the Ashe
Federal Bank 1997 Recognition and Retention Plan; a change in the Bank's federal
stock  charter,  changing the  corporate  name to AF Bank and approved a plan of
reorganization  providing for the  establishment  of AF  Bankshares,  Inc., as a
federally  chartered stock holding company parent of the Bank. On June 16, 1998,
the Bank completed its reorganization into a two-tier mutual holding company and
became a  wholly  owned  subsidiary  of the  Company  and the  Company  became a
majority owned subsidiary of AsheCo, MHC.

During the year ended June 30, 1999, the Company repurchased 6,300 shares of its
common stock for a total price of  $113,750,  and then  reissued  2,000 of these
shares.  Management  does not plan to acquire  additional  shares until it has a
specific purpose for additional stock purchases.

GENERAL

The Company had net income of approximately  $453,000 and $514,000 for the years
ended June 30, 2000 and 1999, respectively.  The Company's operating results are
primarily  dependent  upon net interest  income,  fees and charges and insurance
commissions.  Net interest income is the difference  between  interest earned on
loans, investments and interest-earning deposits at other financial institutions
and the cost of  interest-bearing  savings  deposits and other  borrowings.  The
primary  interest-earning  asset of the Company is its residential mortgage loan
portfolio  representing  60.0%  of  total  loans,  with  approximately  36.0% of
portfolio  mortgage  loans at fixed  rates at June 30,  2000.  The net  interest
income of the


                                       6
<PAGE>

Company is affected  by changes in economic  conditions  that  influence  market
interest  rates.  This exposure to changes in interest  rates  contributes  to a
moderate  degree of  interest  rate  risk,  because  of the  negative  impact of
increasing  rates to the  Bank's  earnings  and to the net  market  value of its
assets and liabilities.  Additionally, the Company receives fee income primarily
from loan origination fees, late loan payment fees, commissions from the sale of
credit life, accident and health insurance,  deposit transaction fees, insurance
commissions  generated from the insurance  agency  subsidiary,  income generated
from the  Company's  brokerage  subsidiary  and for  payment  of other  services
provided  to  customers  by the  Company.  The major  non-interest  costs to the
Company  include  compensation  and  benefits,  occupancy and equipment and data
processing  costs.  Other external factors that affect the operating  results of
the Company include changes in government and accounting  regulations,  costs of
implementing  information technology,  and changes in the competition's emphasis
within the Company's market area. For the year ended June 30, 2000, there was an
unusual nonrecurring  expenditure related to the Company's  preparations for the
anticipated  Y2K computer  problem;  this  expenditure  directly  and  adversely
affected net earnings for the period.

MANAGEMENT STRATEGY

On March 18, 1998 the Bank opened a new office, Alleghany First Bank, in Sparta,
North Carolina.  Additionally,  the Bank's  insurance agency  subsidiary  offers
property,  casualty,  health and life  insurance  products  within the Alleghany
facility. On March 1, 1999, the Bank opened a new branch office, in Boone, North
Carolina,  operating under the trade name  Appalachian  First Bank. Entry in the
Boone and Alleghany  markets  significantly  expands the Company's  potential to
market its banking,  insurance and non-insured  investment  products to a larger
and more diverse market.

On April 1, 1999 the Company  purchased  an  insurance  agency in Lenoir,  North
Carolina  that  operates  under the trade name, AF Blair  Insurance  Agency.  On
December 1, 1999 the  Company  purchased  an  insurance  agency in Elkin,  North
Carolina that operates  under the trade name, AF Insurance  Service  Center.  On
July 17, 2000 the Company signed a letter of intent to purchase the assets of an
insurance  agency in Boone,  North  Carolina.  If  consummated,  the purchase is
expected  to close in the second  quarter of the 2001  fiscal  year.  Management
believes that  penetration  into other  markets  increases  the  opportunity  to
deliver products from all of the Company's  subsidiaries to a broader market and
will make the insurance and brokerage  subsidiaries more profitable  investments
by  increasing  the  economies  of scale  and  adding to the  products  that are
available for delivery to the Company's customers. The Company continues to seek
opportunities to increase its market penetration for its services.

Management believes that the Company's  customers perceive "financial  services"
to include three  elements:  funds  transfer,  including  checking  accounts and
savings instruments,  insurance and securities  brokerage.  Further,  management
believes that the ability to offer insurance and brokerage services improves the
Company's  competitive  position;  enhances the Company's growth;  and increases
both the scope and scale of the Company's marketing efficiency.  During the year
ended June 30, 1999, the Company established a securities brokerage  subsidiary,
AF  Brokerage,  Inc.,  which  applied  to the NASD for  membership  in the third
quarter of 1998 and was granted  membership  on October 22, 1999.  AF Brokerage,
Inc.  commenced  operation  in the  fourth  quarter  of 2000  as an  independent
broker/dealer.  Management  continues to evaluate  acquisitions,  expansion  and
business  opportunities  that it believes  will provide  access to customers and
markets that  enhance the  Company's  value and  earnings  potential in the long
term.



                                       7
<PAGE>

During 1995,  management  introduced  fixed rate mortgage loans with  provisions
allowing the Bank to "call the loan due" after three or five year periods,  thus
reducing  the  period of time that the  Company  is  exposed  to a fixed rate of
interest in order to reduce  interest rate risk.  The call provision is now used
primarily  where  the  fixed  rate  mortgage  does not  qualify  for sale in the
secondary  market  and  where  the  borrower  has  no  desire  for  an  ARM.  At
approximately  the  same  time,  the  Company  began to  offer  consumer  loans,
including automobile and home improvement loans. In June 1998, the Company began
funding automobile loans originated by selected dealers in its market area where
the Company's loan officers have final  underwriting  authority to determine the
acceptability  of the  borrowers  to the Company.  At the end of June 2000,  the
Company had closed approximately $4.7 million of these loans. At the end of June
2000,  consumer loans  constituted  approximately  15.2% of portfolio  loans. In
1994, the Company began offering  commercial  loans to small  businesses in Ashe
County and has continued that business to include Alleghany County,  and Watauga
County.  Commercial  loans  generally  have  rates  based on the  prime  rate of
interest  that  more  closely  reflects  market  interest  rates.  Additionally,
consumer and  commercial  loans  generally  have shorter  terms and thus greater
interest rate sensitivity than mortgage loans.  Management has pursued the above
mortgage and  non-mortgage  loan strategies as primary  strategies to reduce the
level of interest rate risk  inherent in the Bank's loan  portfolio and maintain
acceptable  levels of credit risk.  Funding for the loan  originations  has been
provided  by  aggressively   marketing   savings  and  checking  accounts  while
maintaining  competitive  pricing on  certificates  of deposits and by borrowing
from the Federal Home Loan Bank of Atlanta  ("FHLB").  Deposits  increased  $9.6
million and FHLB advances increased $12.9 million during 2000.

In  addition  to  loans,   the  Bank  invests  in  federal  agency   securities,
certificates of deposit (generally with terms of five years or less),  overnight
deposits  with the FHLB,  equity  securities  in the Federal Home Loan  Mortgage
Corporation (FHLMC),  municipal bonds and mortgage-backed  securities secured by
adjustable  rate  mortgages  and  issued  by the  Government  National  Mortgage
Association (GNMA) and Fannie Mae. Management does not engage in the practice of
trading  securities,   rather,  the  Company's   investment  portfolio  consists
primarily of securities  designated as available for sale. Management intends to
maintain  investment  securities to meet liquidity  needs as a supplement to its
lending  activities and as a means to reduce  interest rate risk and credit risk
of its asset base in exchange for lower rates of return than would  typically be
available with other lending activities.

During the first quarter of the 2001 fiscal year,  the Company is switching data
processing service providers for the Company to Fiserv, Atlanta. Fiserv, Atlanta
offers a  system  that is more  versatile  then the  Company's  current  system.
Management  believes  this switch will enable the Company to provide an improved
level of customer service by improving the delivery capability of its system and
allowing the Company to provide  additional  products in order to met  customers
needs.  Management does not expect substantial  increases in its data processing
costs to result from this switch.

Management  believes it is important to view the annual financial results of the
Company within the larger context of the Company's  long-term strategic business
plan.  Doing so  helps  keep  short-term  results  in  better  perspective,  and
underscores  management's  commitment to the long-term profitability and success
of the Company.

It has long  been  management's  view  that the  Company's  success  in the 21st
Century  will  depend in large part upon its  ability to compete  far beyond the
narrow boundaries  imposed upon banking during the majority of the 20th Century.
In fact, the transition from "banking" to financial  services  provider impacted
every major competitor of the Company. The Financial Services  Modernization Act
is  an  excellent  example  of  regulatory  and  governmental  support  of  this
viewpoint.

Management believes that the Company's  customers perceive "financial  services"
to encompass five broad categories:  funds transfer including checking accounts;
insured savings instruments;  credit/lending services; insurance; and securities
brokerage. Preparing the Company to compete on a competitively superior basis in
all these categories has had a negative impact on short-term earnings.



                                       8
<PAGE>

Added to these planned  investments in the Company's future were several factors
outside the control of management:

         o        The costs of regulatory  compliance with, and preparations for
                  the possible Year 2000 computer problem (which in hard dollars
                  cost the Company more than $250,000);

         o        The recent  tightening  of  short-term  interest  rates by the
                  Federal Reserve in an effort to contain inflation; and

         o        The resulting  inverted yield curve between higher  short-term
                  interest rates and lower  long-term  rates that existed during
                  the majority of the 2000 fiscal year.

All these  factors  tended to exert  additional  downward  pressure  on earnings
during the most recent fiscal year ended June 30, 2000.

However,  it is  well  worth  noting  that  --  given  both  these  planned  and
uncontrollable dampening factors -- the Company's earnings for the most recently
completed year remain positive.

         o        An increase in net loans of $27.6 million or 34.0%;

         o        Asset growth of $23.4 million or 21.3%,  resulting in enhanced
                  leveraging the Company's capital;

         o        Continued  growth  in  non  interest  income,  reflecting  the
                  Company's  continuing  emphasis in the areas of insurance  and
                  securities services;

         o        Approval of the Company's broker/dealer license;

         o        The addition of the Company's  fourth  insurance agency to the
                  AF Insurance network;

         o        Adding  additional  insurance  markets with major  emphasis in
                  commercial  property and casualty business,  thereby providing
                  the  Company  with an even  better mix  between  personal  and
                  commercial coverages; and

         o        The  completion  of  the  Company's  new   administrative  and
                  corporate headquarters building.

Therefore,  management is optimistic  about the future of the Company.  Overall,
management  and the board of directors  are indeed  pleased  with the  continued
positive  short-term  earnings  of the  Company,  particularly  in  light of the
investments  required (i.e.,  slightly lower short-term  earnings) to accomplish
the goals of the long-term strategic plan.



                                       9
<PAGE>

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND 1999:

At June 30,  2000 and 1999 assets  totaled  $133.4  million and $109.9  million,
respectively.  Total assets  increased  by $23.4  million or 21.3% from June 30,
1999 to June 30, 2000,  primarily a result of an increase of $27.6  million,  or
34.0%,  in net loans  receivable  and an  increase  of $1.6  million or 64.4% in
office properties and equipment.  These increases are partially offset by a $5.0
million  decrease in cash and cash  equivalents.  Management  believes  that the
increase  in  net  loans   receivable   is   primarily  a  result  of  increased
concentration in the commercial  market,  which tends to yield larger loans. The
loan growth was  primarily  funded by increases in FHLB  advances and in savings
deposits.  The Company's level of advances from the FHLB increased $12.9 million
from $2.6  million  at June 30,  1999 to $15.5  million  at June 30,  2000.  The
Company's deposits increased by $9.6 million from $93.1 million at June 30, 1999
to $102.7  million at June 30, 2000.  Management  believes  that the increase in
deposits is attributable to its marketing  efforts directed  towards  increasing
balances in savings and transaction accounts.

The principal category of earning assets is loans and during the year ended June
30, 2000 loans receivable,  net,  increased by $27.6 million compared to an $8.5
million  increase  for the year ended June 30,  1999.  The increase in net loans
receivable is typical for the Company,  which  operates in lending  markets that
have had sustained loan demand over the past several years.

The Company's level of non-performing  assets, defined as loans past due 90 days
or more and repossessed  assets,  increased slightly from .14% of total loans at
June 30,  1999,  to .64% of  total  loans at June  30,  2000.  The low  level of
non-performing  assets is attributable  to  comprehensive  lending  policies and
exceptional  collection efforts. The Company's level of non-performing loans has
remained  consistently  low  in  relation  to  prior  periods  and  total  loans
outstanding.  The Company had net charge offs of $231,000 during year ended June
30,  2000  compared  to net charge  offs of $62,000  for the year ended June 30,
1999.  As a result  and based on  management's  analysis  of its  allowances,  a
provision for additional loan loss allowance of $88,000 was made during the year
ended June 30, 2000.

The Company's net investment in office  properties and equipment  increased $1.6
million to $4.2  million at June 30,  2000 from $2.5  million at June 30,  1999,
primarily a result of acquiring  and  renovating  a building  located at 21 East
Ashe Street in West  Jefferson,  purchase  of  equipment  for the new  insurance
agency and  equipment  for  additional  employees.  The building at 21 East Ashe
Street is used for the  Company's  corporate  offices as well as the  electronic
banking and loan  servicing  divisions.  The corporate  offices were  previously
located at 206 South  Jefferson  Avenue,  which is now occupied by the Company's
Insurance and Brokerage subsidiaries.

At June 30, 2000 retained earnings  increased  $358,000 or 4.5% to $8.3 million,
from $8.0  million at June 30,  1999,  as a result of earnings of  $453,000,  an
increase  for a fair  market  value  adjustment  for ESOP stock in the amount of
$74,000 and offset by dividends of $206,000.  Unrealized gain/loss on securities
available for sale decreased by $232,000 or 114.5% at June 30, 2000. At June 30,
2000 the Bank's  regulatory  capital amounted to $12.6 million compared to $12.0
million at June 30,  1999,  which as a  percentage  of total assets was 8.9% and
10.0% and was in excess of regulatory capital requirements at such dates.



                                       10
<PAGE>


         The following  table  analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning  assets and
interest-bearing  liabilities.  The  table  distinguishes  between  (i)  changes
attributable to volume (changes in volume multiplied by the prior period's rate)
(ii)  changes  attributable  to rate  (changes in rate  multiplied  by the prior
period's  volume)  and (iii) mixed  changes  (changes  in volume  multiplied  by
changes in rate). Rate/volume variances are allocated to the rate/volume column.


<TABLE>
<CAPTION>
                                                             YEAR ENDED                                  YEAR ENDED
                                                            JUNE 30, 1999                               JUNE 30, 1998
                                                             COMPARED TO                                 COMPARED TO
                                                             YEAR ENDED                                  YEAR ENDED
                                                            JUNE 30, 2000                               JUNE 30, 1999
                                                ----------------------------------------   --------------------------------------
                                                          INCREASE/(DECREASE)                         INCREASE/(DECREASE)
                                                                DUE TO                                     DUE TO
                                                ----------------------------------------   --------------------------------------
                                                                      RATE/                                       RATE/
                                                VOLUME      RATE      VOLUME      NET         VOLUME     RATE     VOLUME     NET
                                                -------     -----     ------    -------       ------     -----    ------    -----
                                                                                   (IN THOUSANDS)
<S>                                             <C>         <C>       <C>       <C>            <C>       <C>       <C>      <C>
ASSETS:
      Interest-earning assets:
          Interest-bearing deposits ........    $  (399)    $  56     $ (39)    $  (382)       $ 285     $   9     $ 10     $ 304
          Investment securities ............        (23)      133        (6)        104          171       (66)     (26)       79
          Loans receivable .................      2,103      (238)      (73)      1,792          277      (132)      (5)      140
                                                -------     -----     -----     -------        -----     -----     ----     -----
              Total ........................      1,681       (49)     (118)      1,514          733      (189)     (21)      523
                                                -------     -----     -----     -------        -----     -----     ----     -----
LIABILITIES:
      Interest-bearing liabilities:
          NOW and MMDA accounts ............         67       (12)       (3)         52           59       (95)     (16)      (52)
          Passbook savings .................        128         4         1         133          248       (61)     (27)      160
          Certificates of deposit ..........        152       (36)       (2)        114          234      (105)      (9)      120
          Borrowed funds ...................        495       (22)      (54)        419          (66)       13       (3)      (56)
                                                -------     -----     -----     -------        -----     -----     ----     -----
              Total ........................        842       (66)      (58)        718          475      (248)     (55)      172
                                                -------     -----     -----     -------        -----     -----     ----     -----
          Net interest income ..............    $   839     $  17     $ (60)    $   796        $ 258     $  59     $ 34     $ 351
                                                =======     =====     =====     =======        =====     =====     ====     =====
</TABLE>



                                       11
<PAGE>

     The following table provides information concerning the Company's yields on
interest-earning  assets and cost of funds on interest-bearing  liabilities over
the years ended June 30, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                                       FOR THE YEAR ENDED JUNE 30,
                                                      AT JUNE 30,      -----------------------------------------------------------
                                                         2000                     2000                            1999
                                                  -------------------  ----------------------------   ----------------------------
                                                             AVERAGE                        AVERAGE                        AVERAGE
                                                    ACTUAL    YIELD/    AVERAGE              YIELD/    AVERAGE              YIELD/
                                                   BALANCE     RATE     BALANCE    INTEREST   RATE     BALANCE   INTEREST    RATE
                                                  ---------   -----    --------   --------   -----    --------   --------    -----
                                                                             (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>     <C>        <C>         <C>     <C>        <C>          <C>
ASSETS:
   Interest-earning assets:
      Interest-bearing deposits ...............   $  2,599     5.63%   $  2,939   $    189    6.43%   $  9,741   $    571     5.86%
      Investment securities ...................      9,835     6.24%      9,523        605    6.35%      9,975        501     5.02%
      Loans receivable(1) .....................    108,778     8.63%    100,228      8,599    8.58%     76,597      6,807     8.89%
                                                  --------    -----    --------   --------            --------   --------

          Total interest-earning assets .......    121,212     8.37%    112,690      9,393    8.34%     96,313      7,879     8.18%
                                                                                  --------                       --------

      Non-interest-earning assets .............     12,158               10,645                          8,002
                                                  --------             --------                       --------

                           Total assets .......   $133,370             $123,335                       $104,315
                                                  ========             ========                       ========

LIABILITIES AND EQUITY:
   Interest-bearing liabilities:
      NOW and MMDA accounts ...................   $ 18,589     1.92%   $ 16,015        353    2.20%   $ 13,160        301     2.29%
      Savings .................................     23,032     3.83%     22,857        831    3.64%     19,257        698     3.62%
      Certificates of deposit .................     56,937     5.71%     54,800      2,885    5.26%     51,995      2,771     5.33%
      FHLB Advances and notes payable .........     16,443     5.65%     10,495        616    5.87%      2,988        197     6.59%
                                                  --------    -----    --------   --------            --------   --------

        Total interest-bearing liabilities.....    115,001     4.71%    104,167      4,685    4.50%     87,400      3,967     4.54%
                                                                                  --------                       --------

      Other non-interest-bearing liabilities...      5,829                7,811                          5,424

      Equity ..................................     12,540             $ 11,357                         11,491
                                                  --------             --------                       --------
           Total liabilities and equity .......   $133,370             $123,335                        104,315
                                                  ========             ========                       ========

Net interest income and
   interest rate spread(2) ....................                3.66%              $  4,708    3.84%              $  3,912     3.64%
                                                                                  ========                       ========
Net interest=earning assets and
   net interest margin (3) ....................   $  6,211             $  8,523               4.18%   $  8,913                4.06%
                                                  ========             ========                       ========
Ratio of interest-earning assets to
   interest-bearing liabilities ...............              105.40%                        108.18%                         110.20%
<FN>
-------------------------------
(1)      Balance is net of deferred loan fees and loans in process. Non-accrual loans are included in the balances.
(2)      Average interest rate spread represents the difference between the yield on average interest-earning assets and the cost of
         average interest-bearing liabilities.
(3)      Net interest margin represents net interest income divided by average total interest-earning  assets. With the exception of
         end of period ratios, all ratios are based on monthly balances during the indicated years. Management does not believe that
         the use of month end balances instead of daily balances has caused a material difference in the information presented.
</FN>
</TABLE>


                                       12
<PAGE>

COMPARISON  OF  OPERATING  RESULTS FOR THE FISCAL  YEARS ENDED JUNE 30, 2000 AND
1999:

GENERAL.  Net income for the years ended June 30, 2000 and 1999 was $453,000 and
$514,000,   respectively.  The  decrease  of  $61,000  or  11.8%  was  primarily
attributable to decreased  interest income on interest  bearing  deposits due to
the increased level of non-interest bearing deposits that the Bank maintained to
prepare for potential  customer  withdrawals  resulting from year 2000 concerns.
Changes were also attributable to costs associated with the Bank's branch office
in  Watagua  County,  Appalachian  First  Bank,  the costs  associated  with the
purchase  of AF  Insurance  Service  Center,  in Elkin  North  Carolina  and the
addition of  employees  in order to prepare  the  Company for future  expansion.
Management  believes that these initial costs of expansion will better  position
the  Company  for  the  future.  In  management's  opinion,  there  has  been an
improvement  in the level of  interest  rate risk from the end of the  Company's
most recent fiscal year.

NET INTEREST  INCOME.  Net interest  income  increased by $796,000 or 20.3% from
$3.9  million  for year ended June 30,  1999 to $4.7  million for the year ended
June 30,  2000.  The  increase  is  primarily  attributed  to the $27.6  million
increase in net loans  receivable  from $81.1 million at June 30, 1999 to $108.8
million at June 30,  2000,  resulting in an increase of $1.8 million in interest
income from loans. This increase was partially offset by an increase of $718,000
in interest expense.

INTEREST INCOME. Interest income increased by $1.5 million, or a 19.2% increase,
from $7.9 million during the year ended June 30, 1999 to $9.4 million during the
year end June 30, 2000. This increase was attributable to a change in the volume
and mix of the Company's loan portfolio.

INTEREST  EXPENSE.  Interest  expense for the year ended June 30, 2000 increased
$718,000  to $4.7  million.  The  increase  is the result of an  increase in the
average  outstanding  balance in the level of deposits and FHLB advances for the
year ended June 30, 2000 as compared to the similar period in 1999.

PROVISION FOR LOAN LOSSES.  Management made $88,000 of additional provisions for
loan losses  during the year ended June 30, 2000.  The Company  experienced  net
charge offs of  $231,000  during the year ended June 30,  2000.  During the year
ended June 30, 1999,  provision of $20,000 was made and the Company  experienced
net charge offs of $62,000.  Provisions,  which are  charged to  operations  and
resulting loan loss  allowances,  are amounts that  management  believes will be
adequate to absorb losses on existing loans that may become uncollectible. Loans
are  charged  off  against  the   allowance   when   management   believes  that
collectibility  is  unlikely.   The  evaluation  to  increase  or  decrease  the
provisions and resulting  allowances is based both on prior loan loss experience
and  other  factors,  such as  changes  in the  nature  and  volume  of the loan
portfolio,  overall  portfolio  quality and  current  economic  conditions.  The
Company's level of non-performing loans remained consistently low in relation to
prior periods and total loans  outstanding  during the year ended June 30, 2000.
At June 30, 2000, the Company's level of general  valuation  allowances for loan
losses amounted to $979,000 which management  believes is adequate to absorb any
losses that may exist in its loan portfolio.

NON-INTEREST  INCOME.  Non-interest income increased by $615,000 or 51.0% during
fiscal year 2000. The increase was primarily  attributed to increased  insurance
commissions  generated  by the  insurance  agency  and income  generated  by the
Company's brokerage  subsidiary.  Both these areas of growth and widening market
penetration  are  expected  to  continue to produce  increases  in  non-interest
income.


                                       13
<PAGE>

NON-INTEREST  EXPENSE.  Non-interest  expense increased by $1.3 million or 30.2%
from $4.3  million for the year ended June 30, 1999 to $5.7 million for the year
ended June 30, 2000.  Increases for non-interest expense for the year ended June
30, 2000 are primarily  attributable to compensation and employee benefit costs,
occupancy,  and data processing costs.  Compensation costs increased by $761,000
for the year ended June 30, 2000, primarily as the result of the addition of new
employees in the Company and insurance agency in order to service current growth
and to prepare the Company for future  expansion.  Occupancy  cost  increased by
$77,000 for the year ended June 30, 2000,  primarily  because of the addition of
the insurance  location in Elkin,  and, costs associated with renovations on the
new corporate and administrative building.

INCOME TAXES. Income taxes resulted from applying normal,  expected tax rates on
income earned  during the year ended June 30, 2000 and 1999.  Income tax expense
was  $328,000  and  $236,000,  for the  years  ended  June 30,  2000  and  1999,
respectively.  The  effective tax rate applied was higher than the statutory tax
rates  for 2000,  primarily  due to  permanent  differences  resulting  from the
decrease  in the  market  price of  shares  vesting  under the  recognition  and
retention plan in the current year.

IMPACT OF THE YEAR 2000.  The Company is pleased to report  that no  significant
difficulties were encountered.

COMPARISON  OF  OPERATING  RESULTS FOR THE FISCAL  YEARS ENDED JUNE 30, 1999 AND
1998:

GENERAL.  Net income for the years ended June 30, 1999 and 1998 was $514,000 and
$708,000,  respectively.  The  decrease  of  $195,000  or  27.5%  was  primarily
attributable to the cost  associated with  establishing a bank branch in Watauga
County,  costs  associated  with  obtaining a broker dealer license and costs to
acquire additional insurance agencies.  Management believes that these costs are
indicative of growth and  necessary in order to provide  access to customers and
markets that  enhance the  Company's  value and  earnings  potential in the long
term. In  management's  opinion,  there has been an  improvement in the level of
interest rate risk from the end of the Company's most recent fiscal year.

NET INTEREST INCOME. Net interest income increased by $351,000 or 9.8% from $3.6
million for year ended June 30, 1998 to $3.9 million for the year ended June 30,
1999.  The increase is a result of  increased  average  outstanding  balances in
interest-earning  assets,  partially  offset by the decline in the prime rate of
interest  during the year.  The decline in rates  between June 30, 1998 and 1999
reduced  interest  income by  approximately  $189,000.  Volume  accounted for an
annualized  increase  in interest  income of  approximately  $733,000.  Interest
expense on deposits  declined  approximately  $248,000  based on a reduction  in
rates while  interest  expense  increased  by  $475,000  based on an increase in
volume.

INTEREST INCOME.  Interest income increase by $523,000, or a 7.1% increase, from
$7.4 million during the year ended June 30, 1998 to $7.9 million during the year
end June 30, 1999. This increase was  attributable to a change in the volume and
mix of  the  Company's  loan  portfolio  and  an  increase  in  the  average  of
interest-bearing deposits.

INTEREST  EXPENSE.  Interest  expense for the year ended June 30, 1999 increased
$172,000  to $4.0  million.  The  increase  is the result of an  increase in the
average  outstanding  balances in the level of deposits  for the year ended June
30, 1999 as compared to the similar  period in 1998.  However,  the average rate
for deposits was lower at June 30, 1999 than for the comparable  period in 1998,
and was an offsetting factor to interest expense.


                                       14
<PAGE>

PROVISION FOR LOAN LOSSES. Management made additional provisions for loan losses
during the year ended June 30, 1999,  of $20,000.  The Company  experienced  net
charge  offs of $62,000  during the year  ended June 30,  1999.  During the year
ended June 30, 1998, no provisions were made;  however,  the Company experienced
net  recoveries  of  $158,000  that  served to  increase  the level of loan loss
reserves.  Provisions,  which are charged to operations  and resulting loan loss
allowances,  are amounts that the Company's management believes will be adequate
to absorb  potential  losses on  existing  loans that may become  uncollectible.
Loans are charged  off  against the  allowance  when  management  believes  that
collectibility  is  unlikely.   The  evaluation  to  increase  or  decrease  the
provisions and resulting  allowances is based both on prior loan loss experience
and  other  factors,  such as  changes  in the  nature  and  volume  of the loan
portfolio,  overall  portfolio  quality and  current  economic  conditions.  The
Company's level of non-performing loans remained consistently low in relation to
prior periods and total loans  outstanding  during the year ended June 30, 1999.
At June 30, 1999 the Company's  level of general  valuation  allowances for loan
losses amounted to $1.1 million which management  believes is adequate to absorb
any losses that may exist in its loan portfolio.

NON-INTEREST  INCOME.  Non-interest income increased by $214,000 or 21.6% during
the fiscal year 1999. The increase was primarily  attributable  to a gain on the
sale of FHLMC stock of $148,000,  insurance commissions of $500,000 generated by
the  insurance  agency,   and  income  generated  by  the  Company's   brokerage
subsidiary.

NON-INTEREST  EXPENSE.  Non-interest expense increased by $860,000 or 24.7% from
$3.5 million for the year ended June 30, 1998 to $4.3 million for the year ended
June 30, 1999. Increases for non-interest expense are primarily  attributable to
compensation  and employee benefit costs,  occupancy,  data processing costs and
legal expenses. Compensation costs increased by $460,000 for the year ended June
30, 1999,  primarily as the result of  additional  insurance  agency  employees'
salaries,  the addition of  Appalachian  First Bank employee  salaries,  and the
addition of salaries  paid to AF Brokerage,  Inc.  Occupancy  cost  increased by
$98,000 for the year ended June 30, 1999, due to increased  depreciation expense
resulting from the new branch location in Boone, computer equipment acquired for
the new insurance office in Lenior and for the brokerage subsidiary.  Additional
legal  costs  during  the  current  period  were the  result of  applying  for a
broker/dealer registration.

INCOME TAXES. Income taxes resulted from applying normal,  expected tax rates on
income earned  during the year ended June 30, 1999 and 1998.  Income tax expense
was  $236,000  and  $381,000,  for the years ended June 30,  1999 and 1998.  The
effective  tax rate applied was  slightly  lower than the  statutory  tax rates,
primarily due to qualifying  investment income that was exempt from state income
taxes.  Legislated  decreases are expected in the North  Carolina  corporate tax
rate in future periods, which would lower the overall effective tax rate.

CAPITAL RESOURCES AND LIQUIDITY

The term "liquidity"  generally refers to an organization's  ability to generate
adequate  amounts  of funds to meet its needs for cash.  More  specifically  for
financial  institutions,  liquidity ensures that adequate funds are available to
meet  deposit  withdrawals,  fund  loan  and  capital  expenditure  commitments,
maintain reserve  requirements,  pay operating  expenses,  and provide funds for
debt service,  dividends to stockholders,  and other institutional  commitments.
Funds  are  primarily  provided  through  financial   resources  from  operating
activities,  expansion  of the  deposit  base,  borrowings,  through the sale or
maturity of investments,  the ability to raise equity capital, or maintenance of
shorter-term  interest  earning  deposits.  At June  30,  2000,  cash  and  cash
equivalents, a significant source of liquidity, totaled $7.4 million.


                                       15
<PAGE>

As a federally  chartered  savings bank,  the Bank must maintain a daily average
balance of liquid assets equal to at least 4% of withdrawable deposits and short
term borrowings.  The Bank's liquidity ratio at June 30, 2000, as computed under
OTS  regulations,  was  considerably in excess of such  requirements.  Given its
excess liquidity and its ability to borrow from the FHLB, the Bank believes that
it will  have  sufficient  funds  available  to  meet  anticipated  future  loan
commitments, unexpected deposit withdrawals, and other cash requirements.

The Company's capital position is in excellent shape, by any objective benchmark
or comparison.

ASSET/LIABILITY MANAGEMENT

The Company's asset/liability  management is focused primarily on evaluating and
managing the Company's net interest income in relation to various risk criteria.
Factors beyond the Company's  control,  such as the effects of changes in market
interest  rates and  competition,  may also have an impact on the  management of
interest rate risk.

In the absence of other factors, the Company's overall yield on interest-earning
assets  will  increase  as  will  its  cost  of  funds  on its  interest-bearing
liabilities  when  market  rates  increase  over an  extended  period  of  time.
Inversely,  the  Company's  yields and cost of funds will  decrease  when market
rates decline.  The Company is able to manage these  fluctuations to some extent
by   attempting   to  control   the   maturity  or  rate   adjustments   of  its
interest-earning  assets and interest-bearing  liabilities over given periods of
time.  One  of  the  Company's  tools  to  monitor  interest  rate  risk  is the
measurement  of  sensitivity  of its net portfolio  value to changes in interest
rates.

In order to minimize the  potential  effects of adverse  material and  prolonged
increases in market interest rates on the Company's  operations,  management has
implemented  an  asset/liability  program  designed  to  improve  the  Company's
interest  rate risk  exposure.  The  program  emphasizes  that  originations  of
five-year fixed rate balloon mortgages,  adjustable rate mortgages, selling long
term  fixed  rate loans to the  secondary  market,  shorter  term  consumer  and
commercial  loans,  the investment of excess cash in short or intermediate  term
interest-earning  assets,  and the  solicitation of deposit accounts that can be
repriced rapidly.

Although the Company's  asset/liability  management program has generally helped
to decrease the exposure of its earnings to interest rate increases, the Company
continues to be susceptible to increased  levels of interest  rates,  which will
adversely affect earnings during prolonged  periods of rising interest rates and
positively affect earnings during prolonged periods of interest rate declines.

NET PORTFOLIO VALUE

All  federally  regulated  financial  institutions  are  required to measure the
exposure to changes in  interest  rates.  Institutions  with assets of less than
$500 million may rely on outside sources of measurement such as that provided by
the OTS and the FHLB.  The purpose is to determine how changes in interest rates
affect  the  estimated  value or Net  Portfolio  Value  ("NPV")  of the  insured
institution's  statement  of  financial  condition  under  several  immediate or
"shock" changes in market rates. Since the timing of repricing opportunities for
interest-earning  assets and  interest-bearing  liabilities  are different,  the
impact of shock changes will have a negative,  neutral or positive impact on the
NPV of the bank based on the  structure  of the bank's  assets and  liabilities.
Thus, NPV is the difference between incoming and outgoing  discounted cash flows
from assets,  liabilities and off-balance sheet contracts.  Generally, the level
of interest  rate risk is measured in a 200 basis point shock  environment  that
has the most negative impact on the Company's NPV.


                                       16
<PAGE>

The Company's  banking  subsidiary,  AF Bank, has  historically  been a mortgage
lender which means that it  generally  has longer  terms  before  repricing  its
assets  than  does  its  interest  bearing   liabilities  or  deposit  accounts;
therefore,  a rising rate  environment will have the most negative impact on the
NPV of the Company.  Management has implemented a strategy of limiting the terms
of mortgage  loans that it cannot sell in the secondary  market,  increasing the
level of loans  tied more  closely  to market  interest  rates such as the prime
rate,  and  generally  reducing  the terms of loans that the Company  offers for
portfolio.  The following  table presents the Company's NPV at June 30, 2000, as
calculated by the OTS, based on information provided to the OTS by the Company.

As a result  of  management's  actions,  at June 30,  2000,  the  estimated  NPV
declined by 7% in a 300 basis point rising interest rate shock scenario compared
to a loss in NPV of 4% in a falling rate scenario. This compares to a decline of
13%  under a  similar  rise  and a gain of 12% in a  similar  decline  one  year
earlier.  The improvement in interest rate risk is further measured by the basis
point  decline  in  the  ratio  of  NPV to  the  PV of  assets,  defined  as the
Sensitivity Measure by the OTS. At June 30, 2000, the decline of the sensitivity
measure  was 54 basis  points  with a 300 basis  point  shock  increase in rates
compared to a decline of 128 basis points at June 30, 1999.

<TABLE>
<CAPTION>
                                                                                        NPV as $ of PV (5)
                              Net Portfolio Value                                            of Assets
-------------------------------------------------------------------------------   ---------------------------------

   Changes in Rates             $ Amount     $ Change (1)          % of Change (2)           Ratio (3)   Change (4)
   ----------------             --------     ------------          ---------------           ---------   ----------
                            (Dollars in Thousands)
<S>                              <C>             <C>                      <C>                   <C>         <C>
       +300 bp                   13,945           (1118)                 (7.00)%                 10.68%       (54)
       +200 bp                   14,478            (585)                 (4.00)%                 10.98%       (24)
       +100 bp                   14,888            (176)                  1.00 %                 11.18%        (4)
         0 bp                    15,063              --                     --                   11.22%        --
       -100 bp                   14,842            (222)                 (1.00)%                 10.99%       (23)
       -200 bp                   14,312            (752)                 (5.00)%                 10.56%       (66)
       -300 bp                   14,426            (638)                 (4.00)%                 10.55%       (66)
<FN>
(1)      Represents the excess  (deficiency) of NPV assuming the indicated change in interest rates minus the estimated NPV assuming
         no change in interest rates.
(2)      Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates.
(3)      Calculated as the estimated NPV divided by average total assets.
(4)      Calculated as the excess  (deficiency) of the NPV ratio assuming the indicated  change in interest rates over the estimated
         NPV ratio assuming no change in interest rates.
(5)      PV means present value.
</FN>
</TABLE>

The  following  chart  provided  by the OTS  reflects  further  measures  of the
Company's interest rate risk.

   RISK MEASURES: 200BP RATE SHOCK:                 June 30, 2000  June 30, 1999
                                                    -------------  -------------
   Pre-Shock NPV Ratio: NPV as a % of PV of Assets      11.22%         12.40%
   Exposure Measure: Post Shock NPV Ratio               10.56%         11.72%
   Sensitivity Measure: Change in NPV                   -66 bp         -68 bp



                                       17
<PAGE>

Certain  shortcomings  are inherent in the methodology  used in the above table.
Modeling changes in NPV requires the making of certain assumptions that may tend
to  oversimplify  the manner in which actual yields and costs respond to changes
in market interest rates.  First,  the models assume that the composition of the
Bank's interest sensitive assets and liabilities  existing at the beginning of a
period  remains  constant  over the period being  measured.  Second,  the models
assume that a particular change in interest rates is reflected  uniformly across
the yield curve  regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements do provide an
indication of the Company's interest rate risk exposure at a particular point in
time, such  measurements  are not intended to provide a precise  forecast of the
effect of changes in market interest rates on the Company's net interest income.
Furthermore,  in times of  decreasing  interest  rates,  the value of fixed-rate
assets  could  increase  in value  and the lag in  repricing  of  interest  rate
sensitive assets could be expected to have a positive effect on the Company.

Management  believes that the NPV method of assessing the Company's  exposure to
interest rate risk and potential  reductions in net interest  income is a useful
tool for measuring  risk.  Management  also believes that the charts reflect the
positive  impact of  strategies to reduce  interest rate risk as evidenced  most
prominently  by the  relatively  low level of  interest  rate  sensitivity  that
reflected a decline of 66 basis  points and 68 basis  points for the years ended
June 30, 2000 and 1999, respectively. The strategies that have reduced the level
of interest  rate risk under an  increasing  rate  assumption  will  continue to
reduce the impact or rising rates as long term  mortgages  are sold and replaced
with shorter term mortgage and nonmortgage loans with rates that can be adjusted
to more closely  simulate market rates of interest.  Management  believes that a
strong equity capital  position and the existence of the corporate  authority to
raise  additional  capital as necessary act as valuable tools to absorb interest
rate risk.

FUTURE REPORTING REQUIREMENTS

The FASB has issued SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities,  which the Company has not been required to adopt as of June
30, 2000.  This  Statement,  which is effective for fiscal years beginning after
June 15, 2000,  establishes  accounting  and reporting  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized  firm  commitment,  an available  for sale  security,  or a foreign
currency denominated forecasted  transaction.  This Statement is not expected to
have a significant impact on the Company.

IMPACT OF INFLATION AND CHANGING PRICES

The  financial  statements  and  accompanying  footnotes  have been  prepared in
accordance with GAAP,  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 due to  inflation.
The assets and  liabilities  of the Bank are  primarily  monetary  in nature and
changes in the market  interest  rates  have a greater  impact on the  Company's
performance than do the effects of inflation.



                                       18
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
AF Bankshares, Inc. and Subsidiaries
West Jefferson, North Carolina

We have audited the accompanying  consolidated statements of financial condition
of AF Bankshares,  Inc. and  Subsidiaries  as of June 30, 2000 and 1999, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years then ended.  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 financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of AF  Bankshares,  Inc.  and
Subsidiaries  as of June 30, 2000 and 1999, and the results of their  operations
and their cash flows for the years then  ended,  in  conformity  with  generally
accepted accounting principles.




Charlotte, North Carolina
July 28, 2000



                                       19
<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
ASSETS                                                                               2000                1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>               <C>
Cash and cash equivalents:
   Interest-bearing deposits                                                      $  2,599,071      $  4,173,311
   Noninterest-bearing deposits                                                      4,823,781         8,221,749
Certificates of deposit, at cost                                                        99,000           198,000
Securities held to maturity (fair value $100,000 in 2000 and
   1999) (Note 2)                                                                      100,000           100,000
Securities available for sale (Note 2)                                               8,860,452        10,976,170
Federal Home Loan Bank stock (Notes 2 and 6)                                           775,700           523,600
Loans receivable, net (Notes 3 and 6)                                              108,778,257        81,156,766
Real estate owned                                                                      289,441            59,000
Office properties and equipment, net (Note 4)                                        4,183,610         2,544,777
Accrued interest receivable on loans                                                   605,749           398,918
Accrued interest receivable on investment securities                                    82,647            97,598
Prepaid expenses and other assets                                                      562,317           546,721
Deferred income taxes, net (Note 12)                                                   499,045           425,100
Intangible assets, net of accumulated amortization of
   $156,882 in 2000 and $76,284 in 1999                                              1,111,333           509,716
                                                                                  ------------------------------
             TOTAL ASSETS                                                         $133,370,403      $109,931,426
                                                                                  ==============================

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------
Liabilities:
   Savings deposits (Note 5)                                                      $102,679,834      $ 93,106,090
   Note payable (Note 6)                                                               700,000                --
   Note payable - ESOP (Note 9 and 17)                                                 229,878           255,420
   Advances from Federal Home Loan Bank (Note 6)                                    15,513,007         2,564,358
   Accounts payable and other liabilities (Note 10)                                  1,630,313         1,636,362
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares (Notes 9 and 17)                                             77,116           150,942
                                                                                  ------------------------------
            TOTAL LIABILITIES                                                      120,830,148        97,713,172
                                                                                  ------------------------------
Commitments and Contingencies (Notes 10 and 13)
Stockholders' equity (Note 17):
   Common stock, par value $.01 per share; authorized 5,000,000
      shares; 1,053,678 issued and 1,049,378 outstanding shares
      shares at 2000 and 1999 (Note 7)                                                  10,537            10,537
   Additional paid-in capital                                                        4,591,555         4,593,516
   Retained earnings, substantially restricted (Notes 7 and 12)                      8,331,965         7,974,373
   Recognition and retention plan (Note 11)                                           (281,344)         (479,960)
   Accumulated other comprehensive income (loss) (Note 2)                              (28,608)          203,638
                                                                                  ------------------------------
                                                                                    12,624,105        12,302,104
   Less cost of 4,300 shares of treasury stock                                         (83,850)          (83,850)
                                                                                  ------------------------------
            TOTAL STOCKHOLDERS' EQUITY                                              12,540,255        12,218,254
                                                                                  ------------------------------
            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $133,370,403      $109,931,426
                                                                                  ==============================

</TABLE>

See Notes to Consolidated Financial Statements.


                                       20

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                    2000                1999
--------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                     <C>
Interest income:
   Loans                                                                    $         8,598,994    $     6,806,902
   Investment securities                                                                605,189            501,410
   Interest-bearing deposits                                                            188,787            570,867
                                                                            -------------------    ---------------
                                                                                      9,392,970          7,879,179
                                                                            -------------------    ---------------

Interest expense:
   Deposits (Note 5)                                                                  4,069,009          3,769,899
   Federal Home Loan Bank advances (Note 6)                                             569,966            175,451
   Note payable                                                                          22,462                 --
   Note payable, ESOP                                                                    23,761             21,918
                                                                            -------------------    ---------------
                                                                                      4,685,198          3,967,268
                                                                             -------------------    --------------
           NET INTEREST INCOME                                                        4,707,772          3,911,911
Provision for loan losses (Note 3)                                                       88,000             20,000
                                                                             -------------------    --------------
           NET INTEREST INCOME AFTER PROVISION FOR
            LOAN LOSSES                                                               4,619,772          3,891,911
                                                                             -------------------    --------------
Noninterest income
   Insurance commissions                                                                 991,301           499,845
   Gain on sale on investments available for sale                                         94,603           165,505
   Other                                                                                 735,335           540,409
                                                                             -------------------    --------------
                                                                                       1,821,239         1,205,759
                                                                             -------------------    --------------
Noninterest expenses
   Compensation and employee benefits (Notes 8, 9, 10 and 11)                          3,022,254         2,261,079
   Occupancy and equipment                                                               502,700           426,161
   Deposit insurance premiums                                                             36,365            48,918
   Computer processing charges                                                           273,202           209,018
   Amortization                                                                           80,598            41,294
   Other                                                                               1,745,089         1,361,826
                                                                             -------------------    --------------
                                                                                       5,660,208         4,348,296
                                                                             -------------------    --------------
           INCOME BEFORE INCOME TAXES                                                    780,803           749,374
Income taxes (Note 12)                                                                   327,595           235,540
                                                                             -------------------    --------------
           NET INCOME                                                        $           453,208    $      513,834
                                                                             ===================    ==============
Basic earning per share (Note 14)                                            $              0.45    $         0.52
                                                                             ===================    ==============
Diluted earnings per share (Note 14)                                         $              0.45    $         0.52
                                                                             ===================    ==============
Cash dividends per share                                                     $              0.20    $         0.20
                                                                             ===================    ==============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       21

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                Common            Additional           Retained
                                                                 Stock         Paid-In Capital         Earnings
------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>                    <C>
Balance, June 30, 1998                                     $      10,537   $         4,580,151    $      7,279,694
   Vesting of recognition and retention plan                          --                    --                  --
   Transfer from redeemable common stock net of
      unearned ESOP shares                                            --                    --             357,127
   ESOP contribution                                                  --                13,365              33,723
   Cash dividend, $.20 per share                                      --                    --            (205,105)
   Purchase of common stock for treasury                              --                    --                  --
   Issuance of common stock from treasury                             --                    --              (4,900)
   Net income                                                         --                    --             513,834
   Other comprehensive income, net of tax:
      Unrealized holding losses arising during
        period, net of taxes $(82,485) (Note 2)                       --                    --                  --
      Less:  reclassification adjustment for
        gains included in net income,
        net of taxes of $51,969 (Note 2)                              --                    --                  --
      Other comprehensive loss                                        --                    --                  --
   Comprehensive income                                               --                    --                  --
                                                           -------------   -------------------    ----------------
Balance, June 30, 1999                                            10,537             4,593,516           7,974,373
   Vesting of recognition and retention plan                          --                    --                  --
   Transfer from redeemable common stock net of
      unearned ESOP shares                                            --                    --              73,826
   ESOP contribution                                                  --                (1,961)             37,000
   Cash dividend, $.20 per share                                      --                    --            (206,442)
   Net income                                                         --                    --             453,208
   Other comprehensive income, net of tax:
      Unrealized holding losses arising during
        period, net of taxes $(192,664) (Note 2)                      --                    --                  --
      Less:  reclassification adjustment for
        gains included in net income,
        net of taxes of $36,536 (Note 2)                              --                    --                  --
      Other comprehensive loss                                        --                    --                  --
   Comprehensive income                                               --                    --                  --
                                                           -------------   -------------------    ----------------
Balance, June 30, 2000                                     $      10,537   $         4,591,555    $      8,331,965
                                                           =============   ===================    ================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       22

<PAGE>

<TABLE>
<CAPTION>
                       Accumulated Other                                Total
  Recognition and        Comprehensive            Treasury          Stockholders'
   Retention Plan        Income (Loss)              Stock              Equity
----------------------------------------------------------------------------------
<S>                     <C>                    <C>                 <C>
  $     (678,576)       $       294,380        $          --       $    11,486,186
         198,616                     --                   --               198,616

              --                     --                   --               357,127
              --                     --                   --                47,088
              --                     --                   --              (205,105)
              --                     --             (113,750)             (113,750)
              --                     --               29,900                25,000
              --                     --                   --               513,834

              --               (204,278)                  --                    --

              --                113,536                   --                    --
                        ---------------
              --                (90,742)                  --               (90,742)
                                                                   ---------------
              --                     --                   --               423,092
  --------------        ---------------        -------------       ---------------
        (479,960)               203,638              (83,850)           12,218,254
         198,616                     --                   --               198,616

              --                     --                   --                73,826
              --                     --                   --                35,039
              --                     --                   --              (206,442)
              --                     --                   --               453,208

              --               (290,313)                  --                    --

              --                 58,067                   --                    --
                        ---------------
              --               (232,246)                  --              (232,246)
                                                                   ---------------
              --                     --                   --               220,962
   --------------        ---------------        -------------       ---------------
   $     (281,344)       $      (260,854)       $     (83,850)      $   12,540,255
   ==============        ===============        =============       ===============
</TABLE>


                                       23

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                     2000                1999
-----------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                 <C>
Cash Flows from Operating Activities
   Net income                                                                   $     453,208       $     513,834
   Adjustments to reconcile net income to net cash
      provided by operating activities:
        Provision for loan losses                                                      88,000              20,000
        Loss on disposal of office properties and equipment                                --                 607
        Loss on sale of other real estate owned                                        10,962                  --
        Gain on sale of investments available for sale                                (94,603)           (165,505)
        Provision for depreciation                                                    380,547             320,575
        Amortization of goodwill and noncompete covenants                              80,598              41,294
        Amortization of deferred loan fees                                           (175,794)           (156,603)
        Amortization of premium/discount on investments                                62,153              23,823
        Amortization of unearned ESOP shares                                           37,000              33,723
        ESOP fair value adjustment                                                     (1,961)             13,365
        Vesting of recognition and retention plan                                     198,616             198,616
        Stock compensation                                                                 --              25,000
        Proceeds from sale of loans held for sale                                   3,823,079          12,133,119
        Origination of loans held for sale                                         (3,831,520)        (12,120,263)
        (Gain) loss on sale of loans held for sale                                      8,441             (12,856)
        Deferred income taxes                                                          74,916             (59,165)
        Increase in operating assets:
           Accrued interest receivable                                               (191,880)            (86,957)
           Prepaid expenses and other assets                                          (15,596)           (107,058)
        Increase (decrease) in liabilities:
           Accounts payable and other liabilities                                      (6,049)            456,048
                                                                                -------------       -------------
             NET CASH PROVIDED BY OPERATING ACTIVITIES                                900,117           1,071,597
                                                                                -------------       -------------
Cash Flows from Investing Activities
   Purchases of securities available for sale                                      (1,500,000)         (9,501,897)
   (Increase) decrease in FHLB stock                                                 (252,100)            100,400
   Proceeds from calls of securities available for sale                             1,580,000           4,950,000
   Proceeds from sale of securities available for sale                                300,528             329,423
   Principal payments received on securities available for sale                     1,386,533           1,333,342
   Purchase of securities held to maturity                                           (100,000)                 --
   Proceeds from maturity of security held to maturity                                199,000                  --
   Net originations of loans receivable                                           (27,863,180)         (8,467,343)
   Purchase of office properties and equipment                                     (2,016,787)           (717,171)
   Proceeds from sale of properties and equipment                                      15,192              11,995
   Proceeds from sale of other real estate owned                                       88,080              54,165
   Purchase of goodwill and noncompete agreement                                           --            (266,000)
                                                                                -------------       -------------
             NET CASH USED IN INVESTING ACTIVITIES                                (28,162,734)        (12,173,086)
                                                                                -------------       -------------
</TABLE>
                                   (Continued)


                                       24

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                     2000                1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                  <C>
Cash Flows from Financing Activities
   Net increase in savings deposits                                              $     9,573,744      $    10,617,874
   Net borrowings (payments) on FHLB advances                                         12,948,649           (1,551,238)
   Purchase of common stock for treasury                                                      --             (113,750)
   Principal payments on borrowings                                                      (25,542)             (40,000)
   Cash dividends paid                                                                  (206,442)            (205,105)
                                                                                 ---------------      ---------------
          NET CASH PROVIDED BY FINANCING ACTIVITIES                                   22,290,409            8,707,781
                                                                                 ---------------      ---------------
          NET DECREASE IN CASH AND CASH EQUIVALENTS                                   (4,972,208)          (2,393,708)

Cash and cash equivalents:
   Beginning                                                                          12,395,060           14,788,768
                                                                                 ---------------      ---------------
   Ending                                                                        $     7,422,852      $    12,395,060
                                                                                 ===============      ===============

Supplemental Schedule of Cash and Cash Equivalents
   Interest-bearing deposits                                                     $     2,599,071      $     4,173,311
   Noninterest-bearing                                                                 4,823,781            8,221,749
                                                                                 ---------------      ---------------
                                                                                 $     7,422,852      $    12,395,060
                                                                                 ===============      ===============

Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest                                                                   $      4,585,898     $     3,996,665
      Income taxes                                                                        241,907             335,333

Supplemental Disclosure of Noncash Investing and Financing
   Activities
      Net change in unrealized gain (loss) on securities available
        for sale, net of tax                                                     $       (232,246)    $      (90,742)
      Transfer from loans receivable to real estate owned                                 329,483            104,563
      Originations of loans to facilitate sale of real estate owned                            --            (29,513)
      Fair value of ESOP shares in excess of unearned ESOP shares                          36,826            323,404
      Transfer to retained earnings to redeemable common stock                             73,826            357,127
      Note payable issued for purchase of insurance agency                                700,000                 --
      Fair value of office equipment received in purchase of
        insurance agency                                                                  (17,785)                --
      Intangible assets recorded on purchase of insurance agency                         (682,215)                --
</TABLE>

See Notes to Consolidated Financial Statements.


                                       25

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of  business:  AF  Bankshares,  Inc.  (the  "Company")  is a bank holding
company  which owns 100% of the common stock of AF Bank (the  "Bank"),  formerly
Ashe Federal Bank. The Company has no operations and conducts no business of its
own other than ownership of its  subsidiaries  and investing in securities.  The
Bank is a federally  chartered  stock savings bank which conducts  business from
its main office located in West  Jefferson,  North Carolina and four branches in
Sparta,  Jefferson,  Boone  and  Warrensville,  North  Carolina.  The  principal
activities  of the Bank consist of  obtaining  savings  deposits  and  providing
credit to customers  in its primary  market area,  Ashe,  Alleghany  and Watauga
Counties.  On April 15, 1996,  the Board of Directors of the Bank adopted a Plan
of  Reorganization  and a related Stock Issuance Plan pursuant to which the Bank
exchanged  its federal  mutual  savings bank charter for a federal stock savings
bank charter,  conducted a minority stock offering, and formed AsheCo, M.H.C., a
mutual holding company which owned 53.8% of the common stock issued by the Bank.
The Bank  conducted its minority  stock  offering in July and August of 1996 and
the closing  occurred on October 4, 1996. The Bank sold 461,779 shares of common
stock in the  minority  stock  offering,  including  36,942  shares  sold to its
Employee  Stock  Ownership  Plan (the "ESOP"),  and issued 538,221 shares to the
mutual holding company.  See Note 16 for additional  information  concerning the
minority stock offering and the reorganization.

On June 16, 1998,  the Board of Directors  approved the  formation of a mid-tier
holding company, AF Bankshares,  Inc. which became a 100% owner of the Bank in a
stock swap with AsheCo,  M.H.C., which was accounted for similar to a pooling of
interests. At June 30, 1998, AsheCo,  M.H.C.'s ownership of AF Bankshares,  Inc.
decreased to 51.10% due to the shares issued under the recognition and retention
plan discussed in Note 11. During the year ended June 30, 1999, AsheCo, M.H.C.'s
ownership  of AF  Bankshares,  Inc.  increased  to 51.29% due to the purchase of
shares held in treasury. No additional changes in AsheCo,  M.H.C.'s ownership of
AF Bankshares, Inc. occurred during the year ended June 30, 2000.

On July 1, 1997, the Bank purchased two insurance  agencies to form AF Insurance
Services,  Inc.,  which became a wholly owned  subsidiary of the Bank. A plan of
reorganization  was  completed  during  the  year  ended  June  30,  1999 and AF
Insurance Services, Inc. became a wholly owned subsidiary of AF Bankshares, Inc.
On April 1, 1999 and again on  December 1, 1999,  AF  Insurance  Services,  Inc.
purchased  additional insurance agencies.  AF Insurance Services,  Inc. operates
from its main office in West  Jefferson,  North  Carolina and branch  offices in
Lenoir,  North  Wilkesboro,  Jefferson,  Elkin and Sparta,  North Carolina.  The
transactions were recorded under the purchase method of accounting. Revenues are
not material to the financial information.

On August 5, 1998,  the Company  formed AF  Brokerage,  Inc.,  which is a wholly
owned  subsidiary of the Company.  Prior to receiving its approval from the NASD
to become a registered  broker/dealer,  AF Brokerage,  Inc. operated through the
use of a third party clearing broker.  AF Brokerage,  Inc. began operating as an
independent  broker/dealer  in  May,  2000.  Revenues  are not  material  to the
financial information.


                                       26

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
(CONTINUED)

The following is a description of the  significant  accounting  policies used in
the preparation of the accompanying financial statements.

Principles of consolidation:  The consolidated  financial statements include the
accounts of AF Bankshares,  Inc. and its wholly owned subsidiaries,  AF Bank, AF
Insurance  Services,  Inc. and AF Brokerage,  Inc. All significant  intercompany
transactions and balances have been eliminated in consolidation.

Basis of financial statement presentation: The accounting and reporting policies
of the Company conform to generally accepted  accounting  principles and general
practices  within the financial  services  industry.  In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported  amounts of assets and  liabilities  and  disclosure  of contingent
assets  and  liabilities  as of the  date of the  financial  statements  and the
reported revenues and expenses for the period.  Actual results could differ from
those estimates.

Cash and cash  equivalents:  For purposes of reporting  the  statements  of cash
flows,  the Company includes cash on hand and demand deposits at other financial
institutions  with  terms less than 90 days as cash and cash  equivalents.  Cash
flows from loans, loans held for sale and deposits are reported net. The Company
maintains  amounts due from banks which, at times, may exceed federally  insured
limits. The Company has not experienced any losses in such accounts.

Investment  securities:  The Company and the Bank have  investments  in debt and
equity securities.  Debt securities consist primarily of U.S.  Government agency
securities,  Federal Home Loan Bank bonds,  Fannie Mae and  Government  National
Mortgage Association  securities and certificates of deposit.  Equity securities
consist of  Federal  Home Loan  Mortgage  Corporation  (FHLMC)  stock and mutual
funds.

Management  classifies  all debt  securities  and certain  equity  securities as
trading,  available  for sale,  or held to  maturity  as  individual  investment
securities   are  acquired,   and  thereafter   the   appropriateness   of  such
classification  is reassessed  at each  statement of financial  condition  date.
Because  the Company  does not buy  investment  securities  in  anticipation  of
short-term  fluctuations in market prices, none of the investment securities are
classified as trading in accordance with Statement 115. All securities have been
classified as either available for sale or held to maturity.

Securities available for sale:  Securities  classified as available for sale are
those  securities that the Company  intends to hold for an indefinite  period of
time but, as in the case of debt  securities,  not necessarily to maturity.  Any
decision to sell a security  classified  as available for sale would be based on
various factors,  including  significant movements in interest rates, changes in
the maturity  mix of the  Company's  assets and  liabilities,  liquidity  needs,
regulatory  capital  considerations,   and  other  similar  factors.  Securities
available  for sale are  carried  at fair  value.  Premiums  and  discounts  are
amortized  using the interest  method over the  securities'  contractual  lives.
Unrealized gains or losses are reported as increases or decreases in equity, net
of the related deferred tax effect. Realized gains or losses,  determined on the
basis of the cost of specific securities sold, are included in income.


                                       27

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
(CONTINUED)

Declines  in the fair  value  of  individual  securities  classified  as  either
available  for sale or held to  maturity  below  their  amortized  cost that are
determined to be other than  temporary  result in  write-downs of the individual
securities  to their fair  value  with the  resulting  write-downs  included  in
current earnings as realized losses.

Securities held to maturity: Securities classified as held to maturity are those
securities  for which the  Company  has both the intent  and  ability to hold to
maturity regardless of changes in market conditions,  liquidity needs or changes
in general  economic  conditions.  These securities are carried at cost adjusted
for amortization of premium and accretion of discount,  computed by the interest
method over their contractual lives.  Based on the Company's  financial position
and  liquidity,  management  believes  the Company has the ability to hold these
securities to maturity.

Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
Home Loan Bank (FHLB)  system,  is required to maintain an investment in capital
stock of the FHLB in an amount  equal to the  greater  of 1% of its  outstanding
home loans or 5% of advances  from the FHLB. No ready market exists for the FHLB
stock, and it has no quoted market value.

Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses,  the undisbursed  portion of construction  loans,
and net  deferred  loan-origination  fees and costs.  The Bank's loan  portfolio
consists  principally of mortgage loans  collateralized  by first trust deeds on
single family residences,  other residential  property,  commercial property and
land.

Allowance for loan losses: The allowance for loan losses is increased by charges
to income and decreased by charge-offs  (net of recoveries)  based on the Bank's
evaluation of the  potential and inherent risk of losses in its loan  portfolio.
Management's  periodic  evaluation  of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse  situations  that may  affect  the  borrower's  ability  to  repay,  the
estimated value of any underlying  collateral,  and current economic conditions.
While management uses the best information available to make evaluations, future
adjustments may be necessary,  if economic or other conditions  differ or change
substantially from the assumptions used.

Impaired loans: SFAS No. 114,  Accounting by Creditors for Impairment of a Loan,
requires that the Bank  establish a specific loan  allowance on an impaired loan
if the  present  value of the  future  cash  flows  discounted  using the loan's
effective interest rate is less than the carrying value of the loan. An impaired
loan can also be valued  based upon its fair  value or the  market  value of the
underlying  collateral if the loan is primarily collateral  dependent.  The Bank
assesses for impairment all loans delinquent more than 90 days. See Note 3 for a
further information.


                                       28

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
(CONTINUED)

Interest  income:  SFAS No. 118,  Accounting  by Creditors  for  Impairment of a
Loan--Income  Recognition and  Disclosures,  which amended SFAS No. 114 requires
disclosure of the Bank's method of  accounting  for interest  income on impaired
loans. The Bank does not accrue interest on loans delinquent 90 days or more. In
addition,  interest accrued up to 90 days is reversed by the  establishment of a
reserve for uncollected interest, if in the opinion of management collectibility
is uncertain.  Such interest, if ultimately collected,  is credited to income in
the period  received.  The Bank anticipates that it will account for interest on
impaired  loans in a similar  fashion in the future if and when it has  impaired
loans.

Loan-origination  fees and  related  costs:  Loan fees and  certain  direct loan
origination  costs are  deferred,  and the net fee or cost is  recognized  as an
adjustment  to interest  income using the interest  method over the  contractual
life of the loans, adjusted for actual prepayments.

Loans held for sale: Loans held for sale are those loans the Bank has the intent
to sell in the  foreseeable  future.  They are carried at the lower of aggregate
cost or market  value.  Gains and  losses  on sales of loans are  recognized  at
settlement dates and are determined by the difference between the sales proceeds
and the carrying value of the loans.  All sales are made without  recourse.  The
Bank has no loans held for sale at June 30, 2000 or 1999.

Real estate owned: Real estate owned is initially recorded at the estimated fair
value at the date of foreclosure,  establishing a new cost basis.  Subsequent to
foreclosure, valuations of the property are periodically performed by management
and the  real  estate  is  carried  at the  lower  of cost or fair  value  minus
estimated  costs to sell.  Costs  relating to  improvement  of the  property are
capitalized,  while  holding costs of the property are charged to expense in the
period incurred.

Office  properties and equipment:  Office properties and equipment are stated at
cost less accumulated  depreciation  computed  principally by the  straight-line
method over estimated useful lives.

Intangible  assets:  Goodwill  is the  cost of the  investment  in AF  Insurance
Services, Inc. in excess of the fair value of net assets at the date of purchase
and is being  amortized  by the  straight  line  method over a period of fifteen
years.  Noncompete  agreements are stated at cost less accumulated  amortization
computed by the straight-line method over a period of seven years.

Pension plans: The Bank has a 401(k)  retirement plan available to substantially
all employees.  The Bank matches certain portions of voluntary  contributions by
participating employees.

The Bank has  deferred  compensation  and  retirement  plan  agreements  for the
benefit of the Board of Directors.  Both plans are unfunded and the  liabilities
are being accrued over the terms of active  service of the  directors.  The Bank
also has an ESOP which covers substantially all of it's employees. Contributions
to the plan are based on amounts necessary to fund the amortization requirements
of the ESOP's debt to an unrelated third party financial institution, subject to
compensation  limitations,  and are expensed  based on the AICPA's  Statement of
Position 93-6, Employers' Accounting for Employee Stock Ownership Plans.


                                       29

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
(CONTINUED)

Additionally,  the  Company  has  implemented  a  qualified  stock  option  plan
authorizing  the grant of up to 21,322  stock  options to certain  officers  and
directors,  either in the form of incentive stock options or non-incentive stock
options.  The Bank has also  implemented  a recognition  and  retention  plan by
reserving  53,678  shares of common stock for  issuance to certain  officers and
directors.

Advance  payments by borrowers for taxes and insurance:  Certain  borrowers make
monthly payments,  in addition to principal and interest, in order to accumulate
funds from which the Bank can pay the  borrowers'  property  taxes and insurance
premiums.

Income  taxes:  Deferred  taxes are  provided on an asset and  liability  method
whereby deferred tax assets are recognized for deductible temporary  differences
and operating loss and tax credit  carryforwards,  and deferred tax  liabilities
are recognized for taxable temporary differences.  Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation  allowance  when,  in the
opinion of  management,  it is more likely than not that some  portion or all of
the  deferred  tax  assets  will  not  be  realized.  Deferred  tax  assets  and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

Off-statement  of  financial  condition  risk:  The Bank is a party to financial
instruments with  off-statement of financial  condition risk such as commitments
to extend credit and home equity lines of credit.  Management  assesses the risk
related to these instruments for potential losses on an ongoing basis.

Earnings per share: SFAS No. 128, Earnings Per Share,  requires the presentation
of earnings per share by all entities that have common stock or potential common
stock,  such as options,  warrants and convertible  securities  outstanding that
trade in a public market. Those entities that have only common stock outstanding
are  required to present  basic  earnings  per-share  amounts.  Basic  per-share
amounts  are   computed  by  dividing   net  income  (the   numerator)   by  the
weighted-average  number of common shares  outstanding  (the  denominator).  All
other  entities are  required to present  basic and diluted  per-share  amounts.
Diluted  per-share  amounts assume the  conversion,  exercise or issuance of all
potential  common stock  instruments  unless the effect is to reduce the loss or
increase  the income  per common  share  from  continuing  operations.  For both
computations,  the number of shares of common stock  purchased by the  Company's
employee  stock  ownership  plan,  which have not been  allocated to participant
accounts, are not assumed to be outstanding.

Comprehensive income: SFAS No. 130, Reporting Comprehensive Income,  establishes
standards for reporting and display of  comprehensive  income and its components
(revenues,  expenses,  gains  and  losses)  in a  full  set  of  general-purpose
financial statements. This statement requires that all items that are recognized
under accounting  standards as components of comprehensive income be reported in
a  financial  statement  that is  displayed  with the same  prominence  as other
financial statements.


                                       30

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
(CONTINUED)

Fair value of financial  instruments:  The estimated fair values  required under
SFAS No. 107, Disclosures About Fair Value of Financial  Instruments,  have been
determined by the Company using  available  market  information  and appropriate
valuation methodologies.  However,  considerable judgment is required to develop
the estimates of fair value.  Accordingly,  the estimates presented for the fair
value of the Company's financial  instruments are not necessarily  indicative of
the amounts the Company could realize in a current market  exchange.  The use of
different  market  assumptions or estimation  methodologies  may have a material
effect on the estimated fair market value amounts.

The fair value estimates presented are based on pertinent  information available
to management as of June 30, 2000 and 1999.  Although management is not aware of
any factors that would  significantly  affect the  estimated  fair value amount,
such  amounts  have not been  comprehensively  revalued  for  purposes  of these
financial  statements since that date and therefore,  current  estimates of fair
value may differ significantly from the amounts presented herein.

NOTE 2. DEBT AND EQUITY SECURITIES

Debt and equity  securities  have been classified in the statements of financial
condition  according to management's  intent.  The carrying amount of securities
and approximate fair values at June 30 were as follows:

<TABLE>
<CAPTION>
                                                                                  2000
                                                -----------------------------------------------------------------
                                                                     Gross            Gross
                                                  Amortized        Unrealized       Unrealized          Fair
                                                    Cost              Gains            Losses           Value
                                                -----------------------------------------------------------------
<S>                                              <C>                <C>             <C>               <C>
Available for sale securities:
   Debt securities:
      U.S. Government agency securities          $ 4,415,595        $   1,348       $  (88,558)       $ 4,328,385
      Fannie Mae and Government
        National Mortgage Association              3,204,715            5,348          (54,836)         3,155,227
      Municipals                                     282,930               --          (11,559)           271,371
   Equity securities:
      Mutual Funds                                 1,000,000               --          (98,655)           901,345
      Federal Home Loan Mortgage
        Corporation Common Stock                       4,200          199,924               --            204,124
                                                 ----------------------------------------------------------------
                                                   8,907,440          206,620         (253,608)         8,860,452
Held to maturity securities:
   Debt securities:
      Federal Home Loan Bank                         100,000               --               --            100,000
Other investments:
   Federal Home Loan Bank stock                      775,700               --               --            775,700
                                                 ----------------------------------------------------------------
                                                 $ 9,783,140        $ 206,620       $ (253,608)       $ 9,736,152
                                                 ================================================================
</TABLE>


                                       31

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2. DEBT AND EQUITY SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                                           1999
                                               --------------------------------------------------------------
                                                                    Gross         Gross
                                                Amortized        Unrealized     Unrealized           Fair
                                                   Cost             Gains         Losses             Value
                                               --------------------------------------------------------------
<S>                                            <C>               <C>            <C>              <C>
Available for sale securities:
   Debt securities:
      U.S. Government agency securities        $  4,524,263      $   3,125      $  (39,229)      $  4,488,159
      Fannie Mae and Government
        National Mortgage Association             4,625,811         49,513          (3,080)         4,672,244
      Municipals                                    281,977                        (20,493)           261,484
   Equity securities:
      Mutual Funds                                1,205,216         61,939         (45,792)         1,221,363
      Federal Home Loan Mortgage
        Corporation Common Stock                      4,784        328,136              --            332,920
                                                -------------------------------------------------------------
                                                 10,642,051        442,713        (108,594)        10,976,170

Held to maturity securities:
   Debt securities:
      Federal Home Loan Bank                        100,000             --              --            100,000
Other investments:
   Federal Home Loan Bank stock                     523,600             --              --            523,600
                                               --------------------------------------------------------------
                                               $ 11,265,651      $ 442,713      $ (108,594)      $ 11,599,770
                                               ==============================================================
</TABLE>

The amortized cost and estimated fair value of debt securities at June 30, 2000,
by  contractual  maturity are shown below.  Fannie Mae and  Government  National
Mortgage  Association  securities  are not included in the  maturity  categories
because they do not have a single maturity date. Additionally, equity securities
and mutual funds are not included in the maturity categories because they do not
have contractual maturities.

                                       32

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2.     DEBT AND EQUITY SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                               Held to maturity securities:  Available for sale securities:
                                               ------------------------------------------------------------
                                                Amortized                      Amortized
                                                  Cost          Fair Value        Cost           Fair Value
                                               ------------------------------------------------------------
<S>                                            <C>             <C>             <C>              <C>
Due from one year to five years                $ 100,000        $ 100,000       $ 3,269,590     $ 3,219,813
Due from five years to ten years                      --               --           500,000         492,187
Due after ten years                                   --               --           928,935         887,756
Fannie Mae and Government
   National Mortgage Association
   debt securities                                    --               --         3,204,715       3,155,227
Mutual funds                                          --                          1,000,000         901,345
Equity securities                                     --               --             4,200         204,124
                                               ------------------------------------------------------------
                                               $ 100,000        $ 100,000       $ 8,907,440     $ 8,860,452
                                               ============================================================
</TABLE>

Sales of securities are summarized as follows for the years ended June 30:

<TABLE>
<CAPTION>

                                                                                2000            1999
                                                                            ----------------------------
<S>                                                                         <C>              <C>
Proceeds from calls of securities available for sale                        $ 1,580,000      $ 4,950,000
Proceeds from sale of securities available for sale                             300,528          329,423
                                                                            ----------------------------
                                                                              1,880,528        5,279,423
Realized gain on sale of securities available for sale                          (94,603)        (165,505)
                                                                            ----------------------------
Cost of securities sold                                                     $ 1,785,925      $ 5,113,918
                                                                            ============================

</TABLE>

The change in accumulated other comprehensive  income (loss),  which consists of
unrealized  gains (losses) on securities  available for sale for the years ended
June 30, are as follows:

<TABLE>
<CAPTION>
                                                                                2000            1999
                                                                            ----------------------------
<S>                                                                         <C>              <C>
Balance, beginning                                                          $   203,638      $   294,380
Change in net unrealized gains                                                 (381,107)        (149,383)
Change in deferred income taxes                                                 148,861           58,641
                                                                            ----------------------------
Balance, ending                                                             $   (28,608)     $   203,638
                                                                            ============================
</TABLE>


                                       33

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3. LOANS RECEIVABLE

Loans receivable at June 30, consist of the following:

<TABLE>
<CAPTION>
                                                                                2000            1999
                                                                            ----------------------------
<S>                                                                         <C>             <C>
   One to four-family                                                       $ 68,813,143    $ 48,432,985
   Multifamily                                                                 2,277,623         316,111
   Non residential                                                             8,577,554       2,068,070
   Land                                                                        2,439,602       1,258,481
   Construction loans                                                          4,058,901       5,081,781
   Commercial loans                                                           10,455,888      18,261,202
   Consumer loans                                                             17,375,621      12,143,508
                                                                            ----------------------------
                                                                             113,998,332      87,562,138

Less:
   Undisbursed loan funds                                                     (3,992,983)     (5,033,086)
   Deferred loan fees                                                           (247,824)       (249,605)
   Allowance for loan losses                                                    (979,268)     (1,122,681)
                                                                            ----------------------------
                                                                            $108,778,257    $ 81,156,766
                                                                            ============================
</TABLE>

The  following  is an  analysis of the  allowance  for loan losses for the years
ended June 30:

<TABLE>
<CAPTION>
                                                                                2000            1999
                                                                            ----------------------------
<S>                                                                         <C>             <C>

Balance, beginning                                                          $ 1,122,681      $ 1,164,263
   Provisions charged to operations                                              88,000           20,000
   Charge-offs                                                                 (327,835)         (74,034)
   Recoveries                                                                    96,422           12,452
                                                                            ----------------------------
Balance, ending                                                             $   979,268      $ 1,122,681
                                                                            ============================

</TABLE>

SFAS No. 114,  Accounting by Creditors  for  Impairment of a Loan, as amended by
SFAS No. 118 Accounting by Creditors for Impairment of a Loan-Income Recognition
and  Disclosure,  requires  that the Bank  establish  a  specific  allowance  on
impaired  loans and  disclosure of the Bank's method of accounting  for interest
income on impaired  loans.  The Bank assesses all loans  delinquent more than 90
days for  impairment  and such loans  amounted  to  approximately  $411,000  and
$60,000  at June 30,  2000 and 1999,  respectively.  These  loans are  primarily
collateral   dependent  and  management  has  determined   that  the  underlying
collateral value is in excess of the carrying amounts. As a result, the Bank has
determined  that specific  allowances on these loans are not required.  Interest
income foregone during 2000 and 1999 was $16,249 and $4,313,  respectively.  The
Bank established reserves for uncollectible interest totaling $10,911 and $4,313
at June 30, 2000 and 1999, respectively.


                                       34

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)

Loan  activity to officers and  directors of the Company  during the years ended
June 30, 2000 and 1999, is summarized as follows:

<TABLE>
<CAPTION>
                                       2000            1999
                                   ----------------------------
<S>                                <C>              <C>
Balance, beginning                 $ 1,035,605      $   943,194
Disbursements                          470,177          672,300
Payments received                     (180,609)         579,890
                                   ----------------------------
Balance, ending                    $ 1,325,173      $ 1,035,604
                                   ============================
</TABLE>

Mortgage loans serviced for others consist of FNMA loans and are not included in
the  accompanying  statements of financial  condition.  Mortgage loan portfolios
serviced for Fannie Mae were  approximately  $22,613,000 and $20,657,000 at June
30, 2000 and 1999, respectively.

There were no loans held for sale or outstanding commitments to sell loans as of
June 30, 2000 or 1999.

NOTE 4. OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment at June 30 consist of the following:

<TABLE>
<CAPTION>
                                       2000            1999
                                   ----------------------------
<S>                                <C>              <C>
Land and land improvements         $   308,329      $   308,329
Buildings                            2,968,811        1,421,055
Furniture and fixtures               1,919,117        1,434,791
Leasehold improvements                 252,120          252,120
Automobiles                             63,409           84,345
                                   ----------------------------
                                     5,511,786        3,500,640
Accumulated depreciation            (1,328,176)        (955,863)
                                   ----------------------------
                                   $ 4,183,610      $ 2,544,777
                                   ============================
</TABLE>


                                       35

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5. SAVINGS DEPOSITS

Savings deposits at June 30 consist of the following:

<TABLE>
<CAPTION>
                                                                                              2000                         1999
                                                                                         ------------------------------------------
<S>                                                                                      <C>                           <C>
Interest-bearing checking accounts at 1.91% (2.25% 1999)                                 $  17,194,967                 $ 13,831,977
Commercial and free checking (noninterest bearing)                                           3,960,144                    3,914,090
Passbook savings 3.83% (3.05% 1999)                                                         23,032,283                   21,840,801
Money market demand accounts 2.00% (2.50% 1999)                                              1,393,563                    1,593,041
                                                                                         ------------------------------------------
                                                                                            45,580,957                   41,179,909
                                                                                         ------------------------------------------
Certificates of Deposit:
   weighted average rate of 5.71% (4.94% 1999)
      4.00% to 5.99%                                                                        38,922,959                   49,488,579
      6.00% to 7.99%                                                                        18,014,374                    2,299,181
                                                                                         ------------------------------------------
                                                                                            56,937,333                   51,787,760
                                                                                         ------------------------------------------
Accrued interest payable                                                                       161,544                      138,421
                                                                                         ------------------------------------------
                                                                                         $ 102,679,834                 $ 93,106,090
                                                                                         ==========================================
Weighted average cost of savings deposits                                                         4.34%                        4.29%
                                                                                         ==========================================

</TABLE>

At June 30,  2000,  scheduled  maturities  of  certificates  of  deposit  are as
follows:

<TABLE>
<CAPTION>
                                2001              2002              2003              2004             After               Total
                            -------------------------------------------------------------------------------------------------------
<S>                         <C>               <C>               <C>                <C>             <C>                  <C>
4.00% to 5.99%              $33,438,122       $3,899,891        $ 1,022,495        $  338,907       $   223,544         $38,922,959
6.00% to 7.99%               14,523,035        1,681,664          1,612,238            50,000           147,437          18,014,374
                            -------------------------------------------------------------------------------------------------------
                            $47,961,157       $5,581,555        $ 2,634,733        $  388,907       $   370,981         $56,937,333
                            =======================================================================================================
</TABLE>

The  aggregate   amount  of  jumbo   certificates  of  deposit  with  a  minimum
denomination  of $100,000 was  $17,081,469  and $13,910,406 at June 30, 2000 and
1999, respectively. At June 30, 2000, scheduled maturities of jumbo certificates
of deposit are as follows:

<TABLE>
<CAPTION>
                                                                                                                         Weighted
                                                                                               Amount                  Average Rate
                                                                                            ---------------------------------------
<S>                                                                                         <C>                          <C>
Maturity period:
   Within three months                                                                      $ 5,568,024                   5.81%
   Three through six months                                                                   4,748,807                   5.99
   Six through twelve months                                                                  4,719,992                   6.08
   Over twelve months                                                                         2,044,646                   5.58
                                                                                            ---------------------------------------
                                                                                            $17,081,469                   5.89%
                                                                                            =======================================
</TABLE>

                                       36

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5. SAVINGS DEPOSITS (CONTINUED)

Eligible  savings  accounts  are insured to $100,000 by the Savings  Association
Insurance Fund (SAIF) which is  administered  by the Federal  Deposit  Insurance
Corporation (FDIC).

The Bank has pledged  securities  with a fair value of $100,000 at June 30, 2000
as collateral on treasury tax and loan account.

Interest  expense on savings  deposits  consists of the  following for the years
ended June 30:

<TABLE>
<CAPTION>
                                                                                     2000                1999
                                                                             --------------------=------------------
<S>                                                                          <C>                 <C>
Interest-bearing checking                                                    $        352,730    $     300,521
Passbook savings accounts                                                             831,664          698,461
Certificate accounts                                                                2,884,615        2,770,917
                                                                             ---------------------------------------
                                                                             $      4,069,009    $   3,769,899
                                                                             == ====================================
</TABLE>

NOTE 6. NOTES PAYABLE AND FEDERAL HOME LOAN BANK ADVANCES

Notes payable were entered into by AF Insurance  Services,  Inc. in  conjunction
with the  purchase  of an  insurance  agency in Elkin,  NC and  consists  of the
following at June 30:

<TABLE>
<CAPTION>
                                                                                     2000                 1999
                                                                             ---------------------------------------
<S>                                                                          <C>                 <C>
Notes payable, due in quarterly interest only installments at
   5.50% through December 1, 2004, at which time repayments
   of principal and interest will commence over a period of 60
   months with first payment due on January 1, 2005.                         $        700,000    $                --
                                                                             =======================================
</TABLE>

The Bank had advances outstanding of $15,513,007 and $2,564,358 at June 30, 2000
and 1999, respectively, from the FHLB. Interest is payable at rates ranging from
6.13% to 6.95%.  Pursuant to collateral  agreements with the FHLB,  advances are
collateralized by all the Bank's stock in the FHLB and qualifying first mortgage
loans.  $4,000,000  of the  advances  are due in June 2001,  $862,500  is due by
August 2002,  $150,507 is due January 2007,  $5,000,000 is due August 2009,  and
$3,000,000  is due  September  2009.  The  remaining  $2,500,000  is an  advance
borrowed  under the Daily Rate  Credit  Program at the FHLB and has no  maturity
date.  Interest  expense was  $569,966 and $175,451 for the years ended June 30,
2000 and 1999, respectively.


                                       37

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7. STOCKHOLDERS' EQUITY

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  regulatory  accounting  practices.
The Bank's capital amounts and  classifications  are also subject to qualitative
judgments  by the  regulators  about  components,  risk  weightings,  and  other
factors.

The Office of Thrift Supervision (OTS) regulations require  institutions to have
a minimum  regulatory  tangible capital equal to 1.5% of total assets, a minimum
ratio of 3% of total assets is required for the core capital ratio  provided the
institution  receives the highest  rating during the  examination  process.  For
institutions that receive less than the highest rating, the minimum core capital
ratio requirement is 4% of total assets. A minimum of 8% of risk-weighted assets
is required for the  risk-based  capital  ratio.  At June 30, 2000 and 1999, the
Bank exceeded all of the capital requirements.

The  following is a  reconciliation  of the Bank's  capital in  accordance  with
generally  accepted  accounting  principles  (GAAP) to the three  components  of
regulatory capital calculated under the requirements of the OTS at June 30, 2000
and 1999:

<TABLE>
<CAPTION>
                                                       June 30, 2000 Regulatory Capital
                          -------------------------------------------------------------------------------------------
                                              Percent                       Percent                        Percent
                                                 of                            of                            of
                                Tangible      Tangible          Core        Tangible       Risk-based    Risk-based
                                 Capital       Assets          Capital       Assets          Capital       Assets
                          -------------------------------------------------------------------------------------------
<S>                       <C>                   <C>        <C>               <C>       <C>                     <C>
GAAP capital              $      11,688,699                $  11,688,699               $     11,688,699
Unrealized loss on
   securities
   available for sale                28,608                       28,608                         28,608
Equity investment
   and other assets                      --                           --                        (118,575)
Qualifying general
   loan loss
   allowance                             --                           --                         979,268
                          -----------------                -------------               -----------------
Regulatory capital               11,717,307     8.9 %         11,717,307     8.9 %             12,578,000     11.9 %
Minimum capital
   requirement                    1,976,366     1.5            5,270,309     4.0                8,427,471       8.0
                          ------------------------------------------------------------------------------------------
Excess regulatory
   capital                $       9,740,941     7.4 %      $   6,446,998     4.9 %     $        4,150,529      3.9 %
                          ==========================================================================================
</TABLE>


                                       38

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7. STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                       June 30, 1999 Regulatory Capital
                          -------------------------------------------------------------------------------------------
                                              Percent                       Percent                        Percent
                                                 of                            of                            of
                                Tangible      Tangible          Core        Tangible       Risk-based    Risk-based
                                 Capital       Assets          Capital       Assets          Capital       Assets
                          -------------------------------------------------------------------------------------------
<S>                       <C>                  <C>      <C>                <C>         <C>                  <C>
GAAP capital              $    11,063,063               $    11,063,063                $    11,063,063
Unrealized gain on
   securities
   available for sale            (165,855)                     (165,855)                     (165,855)
Equity investment
   and other assets                    --                            --                       147,661
Qualifying general
   loan loss
   allowance                           --                            --                       856,113
                          ---------------               ---------------                --------------
Regulatory capital             10,897,208      10.0 %        10,897,208    10.0 %          11,900,982      17.4 %
Minimum capital
   requirement                  1,627,815       1.5           4,340,840     4.0             5,483,920       8.0
                          -------------------------------------------------------------------------------------------
Excess regulatory
   capital                $     9,269,393       8.5 %   $     6,556,368     6.0 %      $    6,417,062       9.4 %
                          ===========================================================================================
</TABLE>

As of June 30, 2000, the most recent  notification  from the OTS categorized the
Bank as well capitalized  under the regulatory  framework for prompt  corrective
action.  To be  categorized  as well  capitalized,  the Bank must maintain total
capital to risk weighted  assets of 10%, Tier I Capital to risk weighted  assets
of 6% and Tier I Capital to total assets of 5% or  $10,534,339,  $6,320,603  and
$6,587,888,   respectively.  There  are  no  conditions  or  events  since  that
notification that management believes have changed the Bank's category.

Under the conversion regulations the Bank may not declare or pay a cash dividend
on any of its stock if the effect  thereof  would cause the Bank's  equity to be
reduced below (1) the amount  required for the liquidation  account;  or (2) the
net worth requirements imposed by the OTS.

The Company paid cash  dividends  totaling $.20 per share during the each of the
years ended June 30, 2000 and 1999. On August 21, 2000,  the Company  declared a
$.05 per share cash dividend for  stockholders of record as of September 1, 2000
to be paid on September 18, 2000.


                                       39

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8. EMPLOYEE PENSION AND INCENTIVE PLANS

The  Company has a  profit-sharing  plan for the  benefit of  substantially  all
employees.  Contributions  are discretionary and totaled $57,608 and $41,281 for
the years ended June 30, 2000 and 1999, respectively.

The Company also has a discretionary  bonus plan under which bonuses are paid to
all employees if approved by the Board of Directors each year.  Expense  related
to these  incentives  was $113,220 and $36,544 for the years ended June 30, 2000
and 1999, respectively.

In addition,  the Company has a 401(k) retirement plan which contains provisions
for specified matching  contributions by the Bank. The Bank funds  contributions
as they accrue and 401(k) plan  expense  amounted to $92,302 and $70,367 for the
years ended June 30, 2000 and 1999, respectively.

NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN

As  part  of the  Reorganization,  the  Bank  established  an  ESOP  to  benefit
substantially  all employees.  The ESOP purchased  36,942 shares of common stock
with the proceeds from a loan from a third party financial institution. The note
requires annual principal  payments of 10% of the outstanding  principal balance
plus interest at the lending  institution's  prime rate (9.50% at June 30, 2000)
less .5% with a balloon  payment  due June,  2002.  The Bank is expected to make
quarterly  contributions to the ESOP in amounts  sufficient to allow the ESOP to
make its scheduled  principal and interest payments on the note. The ESOP shares
are  pledged  as  collateral  for the debt.  As the debt is  repaid,  shares are
released from collateral and allocated to active employees,  based on proportion
of debt  service  paid in the year.  The debt of the ESOP is recorded as debt in
the Company's accompanying statement of financial condition.

At June 30, 2000, future principal payments are due as follows:

<TABLE>
<CAPTION>
Year Ending June 30:                                                                                  Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>
2001                                                                                           $          22,988
2002                                                                                                     206,890
                                                                                               -----------------
                                                                                               $         229,878
                                                                                               =================
</TABLE>

Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Bank and are not reported as dividends in the financial statements. Dividends on
allocated or  committed  to be allocated  shares are credited to the accounts of
the participants and reported as dividends in the financial statements.


                                       40

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

Excluding  interest,  expense  of  $35,039  and  $47,088  during  2000 and 1999,
respectively,  has been  incurred  in  connection  with the  ESOP.  The  expense
includes,  in  addition  to the cash  contribution  necessary  to fund the ESOP,
$(1,961) in 2000 and $13,365 in 1999,  which  represents the difference  between
the fair  value of the  shares  which  have been  released  or  committed  to be
released to participants, and the cost of these shares to the ESOP. The Bank has
credited  (charged)  this  amount to  paid-in  capital  in  accordance  with the
provisions of AICPA Statement of Position 93-6.

At June 30, 2000 and 1999,  15,100 and 11,400  shares held by the ESOP have been
released or committed to be released to the plan's  participants for purposes of
computing  earnings per share. The fair value of the unallocated shares amounted
to approximately $175,000 and $281,000 at June 30, 2000 and 1999, respectively.

The Bank has also recorded a liability for a put back option,  which  represents
the excess of the fair market  value of the total number of ESOP shares over the
original cost of the unallocated ESOP shares.  The liability  recorded under the
put  back  option  was  $77,116  and   $150,942  at  June  30,  2000  and  1999,
respectively.

NOTE 10. DEFERRED COMPENSATION AND RETIREMENT PLAN AGREEMENTS

The Bank has an unfunded deferred  compensation  agreement providing retirement,
disability,  and  death  benefits  for  directors.  Vested  benefits  under  the
agreements are payable in monthly  installments  over a ten-year period upon the
director's  death,  disability or retirement.  The Bank has insured the lives of
the directors for amounts  sufficient  to discharge  its  obligations  under the
agreements.  The Bank also has a  retirement  plan for  members  of the Board of
Directors  which the Plan states that outside  directors with at least ten years
of service will  receive an amount equal to their annual  retainer for ten years
after their  retirement from the Board.  The liability for the benefits is being
accrued over the terms of active service of the directors. The amount charged to
expense  under these  plans  amounted to $55,536 and $54,361 for the years ended
June 30, 2000 and 1999, respectively.


                                       41

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11. RECOGNITION AND RETENTION PLAN AND STOCK OPTION PLAN

The Bank's stockholders  approved the Bank's Recognition and Retention Plan (the
"RRP") and the Bank's  stock  option plan on December 8, 1997.  The stock option
plan provides for the issuance of up to 21,322 stock options to certain officers
and  directors in the form of incentive  stock  options or  non-incentive  stock
options.  The exercise  price of the stock options may not be less than the fair
market value of the Company's common stock at the date of grant.  Under the Plan
21,322 of options,  which vest at the rate of 20% annually beginning at the date
of grant,  were all  granted on December 8, 1997 and expire on December 8, 2007.
As permitted under the generally accepted  accounting  principles,  grants under
the plan are accounted  for  following the  provisions of APB Opinion No. 25 and
its  related  interpretations.   Accordingly,  no  compensation  cost  has  been
recognized for grants made to date. Had compensation  cost been determined based
on the fair value method  prescribed  in FASB  Statement  No. 123, the pro forma
effect on reported net income for the year ended June 30, 2000 and 1999 would be
as follows:

<TABLE>
<CAPTION>
                                                                                   2000                 1999
                                                                           -------------------------------------
<S>                                                                        <C>                   <C>
   Net income
      As reported                                                          $           453,208   $       513,834
      Pro forma                                                                        424,553           485,179
   Earnings per share
      As reported
        Basic                                                              $              0.45   $          0.52
        Diluted                                                                           0.45              0.52
      Pro forma
        Basic                                                                             0.42              0.49
        Diluted                                                                           0.42              0.49
</TABLE>

In determining the fair value of the option grant as prescribed in Statement No.
123,  the  Black-Scholes  option  pricing  model  was used  with  the  following
assumptions:  a risk-free  interest rate of 5.61%,  expected  lives of 10 years,
expected volatility of 17.19% and expected dividends of $0.20 per year.

At June 30,  2000,  21,322  options  have been  granted at an exercise  price of
$18.50, of which 12,793 options are currently exercisable.  No options have been
exercised to date and all options granted are outstanding at June 30, 2000.

The RRP reserved for issuance 53,678 shares of common stock to certain  officers
and  directors.  The Bank issued shares to fund the RRP in December of 1997. The
restricted  common  stock  under  the RRP  vests  at the  rate  of 20%  annually
beginning  at the date of grant.  The expense  related to the vesting of the RRP
totaled $198,616 for each of the years ended June 30, 2000 and 1999.


                                       42

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12. INCOME TAX MATTERS

Under  the  Internal  Revenue  code,  the Bank is  allowed  a  special  bad debt
deduction  related to additions  to tax bad debt  reserves  established  for the
purpose of absorbing  losses.  The Bank is required to compute  such  deductions
using an experience  method.  The Bank's tax bad debt deduction was $231,413 and
$61,583 in 2000 and 1999, respectively.

The Bank will have to  recapture  its  excess tax bad debt  reserves  which have
accumulated  since 1988,  amounting  to  approximately  $92,000  over a six year
period.  The tax  associated  with  the  recaptured  reserves  is  approximately
$36,000. The recapture was scheduled to begin with the Bank's 1997 year, but was
delayed  two years  because  the Bank  originated  a required  minimum  level of
mortgage loans.  Deferred income taxes have been previously  established for the
taxes  associated with the recaptured  reserves and the ultimate  payment of the
related  taxes  will not result in a charge to  earnings.  The amount of reserve
recaptured   and  associated   tax  were   approximately   $15,000  and  $6,000,
respectively, for each of the years ended June 30, 2000 and 1999.

Deferred  taxes have been  provided for certain  increases in the Bank's tax bad
debt  reserves  subsequent  to 1987 which are in excess of additions to recorded
loan loss  allowances.  At June 30,  2000,  retained  earnings  contain  certain
historical   additions  to  bad  debt   reserves  for  income  tax  purposes  of
approximately  $870,000,  the  balance at June 30,  1987,  for which no deferred
taxes have been provided  because the Bank does not intend to use these reserves
for purposes other than to absorb losses. If amounts which qualified as bad debt
deductions  are used for  purposes  other  than to  absorb  bad debt  losses  or
adjustments arising from the carryback of net operating losses, income taxes may
be imposed at the then  existing  rates.  The  approximate  amount of unrecorded
deferred  tax  liability   associated   with  these   historical   additions  is
approximately  $340,000. In the future, if the Bank does not meet the income tax
requirements  necessary to permit the  deduction of an allowance  for bad debts,
the Bank's  effective  tax rate would  increase  to the  maximum  percent  under
existing law.


                                       43

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12. INCOME TAX MATTERS (CONTINUED)

The tax effects of temporary  differences that gave rise to significant portions
of the net deferred tax asset as of June 30 were:

<TABLE>
<CAPTION>
                                                                                    2000                1999
                                                                            ------------------------------------
<S>                                                                         <C>                   <C>
Deferred tax assets:
   Reserve for loan losses                                                  $         376,711     $     435,431
   Reserve for uncollected interest                                                     3,908             1,672
   Unrealized loss on securities available for sale                                    18,378                --
   Deferred compensation                                                              224,030           201,933
   Recognition and retention plan                                                      44,743            44,934
   Deferred loan fees                                                                   6,255                --
   State net economic loss carryforwards                                                8,717                --
                                                                            -----------------------------------
                                                                                      682,742           683,970
                                                                            -----------------------------------
Deferred tax liabilities:
   Reserve for loan losses                                                             17,738            23,752
   Unrealized gain on securities available for sale                                        --           130,483
   Depreciation                                                                       104,051            37,602
   FHLB stock dividends                                                                60,170            60,427
   Prepaid expenses                                                                     1,738                --
   Deferred loan fees                                                                      --             6,606
                                                                            -----------------------------------
                                                                                      183,697           258,870
                                                                            -----------------------------------
            NET DEFERRED TAX ASSET                                          $         499,045     $     425,100
                                                                            ===================================
</TABLE>

At June 30, 2000 and 1999,  no valuation  allowance was recorded on deferred tax
assets.

The provision  for income taxes  charged to operations  for the years ended June
30, 2000 and 1999 consists of the following:

<TABLE>
<CAPTION>
                                                                                    2000                1999
                                                                            ----------------------------------------
<S>                                                                         <C>                    <C>
Current                                                                     $          252,679     $     294,705
Deferred                                                                                74,916           (59,165)
                                                                            ----------------------------------------
                                                                            $          327,595     $     235,540
                                                                            ========================================
</TABLE>

A  reconciliation  of income taxes computed at the statutory  federal income tax
rate to the income tax provision follows:

<TABLE>
<CAPTION>
                                                       2000                                   1999
                                      ------------------------------------------------------------------------------
                                             Amount             Percent             Amount             Percent
                                      ------------------------------------------------------------------------------
<S>                                   <C>                        <C>             <C>                     <C>
Tax at statutory rate                 $          265,473         34.0%           $     254,787           34.0%
State tax, net of federal benefit                 32,928          4.2                   25,834            3.4
Municipal interest income                         (9,231)        (1.2)                 (27,296)          (3.6)
Permanent differences                             42,682         5.50                       --             --
Other                                             (4,257)        (0.5)                 (17,785)          (2.4)
                                      ------------------------------------------------------------------------------
Total                                 $          327,595        42.0%           $      235,540           31.4%
                                      ==============================================================================
</TABLE>


                                       44

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13. COMMITMENTS AND CONTINGENCIES

The Bank is a party to financial  instruments  with  off-statement  of financial
condition  risk in the normal course of business to meet the financing  needs of
its customers.  These financial instruments include commitments to extend credit
and equity  lines of credit.  Those  instruments  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the statement of financial condition.  The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.

A summary of the  contract  amount of the Bank's  exposure to  off-statement  of
financial condition risk, except for undisbursed  construction loan funds, is as
follows at June 30, 2000:

<TABLE>
<CAPTION>
                                                                                                     Notional
                                                                                                      Amount
                                                                                               --------------------
<S>                                                                                            <C>
Financial instruments whose contract amounts represent credit risk:
   Undisbursed home equity lines of credit                                                     $       8,453,000
   Undisbursed commercial letters of credit                                                               25,000
</TABLE>

The Bank evaluates each customer's  credit  worthiness on a case-by-case  basis.
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.  Home equity
lines of credit have  variable  rates based on the prime rate of interest.  Home
equity lines are reassessed  every five years.  Because many of the  commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily  represent future cash requirements.  The collateral obtained by
the Bank upon extension of credit is based on management's  credit evaluation of
the customer.  The collateral  held is the underlying  real estate.  Undisbursed
commercial lines of credit have variable rates of prime plus two percent and are
reassessed on an annual basis. Prime at June 30, 2000 was 9.50%.

The  Bank  has  entered  into  operating  leases  for the  branch  locations  in
Warrensville,  Sparta and Boone,  North  Carolina and the two insurance  company
branches  located in Wilkesboro and Lenoir,  North Carolina.  The minimum annual
lease payments are not significant to the Company's operations.


                                       45

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14. EARNINGS PER SHARE

Earnings per share has been calculated in accordance  with Financial  Accounting
Standards Board Statement No. 128, Earnings Per Share, and Statement of Position
93-6,  Employers' Accounting for Employee Stock Ownership Plans. For purposes of
this  computation,  the number of shares of common stock purchased by the Bank's
employee  stock  ownership  plan which have not been  allocated  to  participant
accounts are not assumed to be outstanding. The following are reconciliations of
the amounts used in the per share calculations:

<TABLE>
<CAPTION>
                                                                       For the Year Ended June 30, 2000
                                                           ---------------------------------------------------------
                                                                  Income            Shares            Per Share
                                                               (Numerator)       (Denominator)         Amount
                                                           ---------------------------------------------------------
<S>                                                        <C>                     <C>               <C>
BASIC AND DILUTED EPS                                      $       453,208         1,009,987         $      0.45
                                                           =========================================================

<CAPTION>
                                                                       For the Year Ended June 30, 1999
                                                           ---------------------------------------------------------
                                                                  Income            Shares            Per Share
                                                               (Numerator)       (Denominator)         Amount
                                                           ---------------------------------------------------------
<S>                                                        <C>                       <C>             <C>
BASIC AND DILUTED EPS                                      $       513,834           995,301         $      0.52
                                                           =========================================================
</TABLE>

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The  following  table  reflects a  comparison  of carrying  amounts and the fair
values of the financial instruments as of June 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                         2000                                   1999
                                       -------------------------------------------------------------------------------
                                            Carrying              Fair              Carrying              Fair
                                              Value               Value               Value               Value
                                       ------------------- -----------------------------------------------------------
<S>                                    <C>                  <C>                 <C>                 <C>
Financial assets:
   Cash
      Interest-bearing                 $        2,599,071   $   2,599,071       $  4,173,311        $   4,173,311
      Noninterest-bearing
        deposits                                4,823,781       4,823,781          8,221,749            8,221,749
   Certificates of deposit                         99,000          99,000            198,000              198,000
   Investments                                  8,960,452       8,960,452         11,076,170           11,076,170
   Loans receivable                           108,778,257     108,706,482         81,156,766           79,796,954
   Accrued interest receivable                    688,396         688,396            496,516              496,516
   FHLB stock                                     775,700         775,700            523,600              523,600

Financial liabilities:
   Deposits                                   102,679,834     102,513,268         93,106,090           92,924,645
   Advances from FHLB                          15,513,007      15,513,007          2,564,358            2,564,358
   Notes payable                                  700,000         700,000                 --                   --
   Note payable, ESOP                             229,878         229,878            255,420              255,420
</TABLE>


                                       46

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The fair  values  utilized  in the table  were  derived  using  the  information
described below for the group of instruments listed. It should be noted that the
fair values disclosed in this table do not represent market values of all assets
and liabilities of the Company and, thus, should not be interpreted to represent
the market or liquidation value of the Company.

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

Cash and certificates of deposits:  The carrying amounts for cash and short-term
instruments approximate their fair values.

Investment  securities:  Fair values for  securities  are based on quoted market
prices, where available. If quoted market prices are not available,  fair values
are based on quoted market prices of similar securities.

Loans receivable: The fair value of fixed rate loans is estimated by discounting
the future cash flows using the current  rates at which  similar  loans would be
made to  borrowers  with  similar  credit  ratings  and for the  same  remaining
maturities.  Certain  prepayment  assumptions have also been made depending upon
the original  contractual  lives of the loans.  The fair value of variable  rate
loans approximates their carrying value as these loans reprice frequently.

Accrued  interest  receivable and accrued  interest  payable:  The fair value of
accrued interest  receivable and payable is the amount  receivable or payable on
demand at the statement of financial condition date.

FHLB stock: The fair value of FHLB stock is the stated value by the FHLB.

Deposits: The fair value of demand deposits,  savings accounts and certain money
market  deposits is the amount  payable on demand at the  statement of financial
condition  date.  The fair value of fixed maturity  certificates  of deposit are
estimated based upon the discounted  value of contractual cash flows using rates
currently offered for deposits with similar remaining maturities.

Advances from FHLB, Notes payable and Note payable,  ESOP: The fair value of the
Advances  from  FHLB,  Notes  payable  and  Note  payable,  ESOP is equal to the
carrying value of the liability.

Off-statement of financial condition instruments:  Fair values for the Company's
off-statement of financial condition instruments (loan commitments) are based on
fees currently charged for similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standings. The fair value
for such commitments is nominal.


                                       47

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 16. REORGANIZATION AND MINORITY STOCK OFFERING

On October 4, 1996, the Bank  consummated  its  reorganization,  as explained in
Note 1, and issued 461,779 shares in a minority stock offering (including 36,942
shares  to the  ESOP)  which  resulted  in  gross  proceeds  of  $4,617,790,  or
$3,917,389,  net of conversion  costs of $700,401.  At closing,  such costs were
netted  against  the  stock  proceeds  received  and  shown  as a  reduction  of
stockholders' equity. As a part of the reorganization,  the Bank formed a mutual
holding company,  AsheCo,  M.H.C., which was issued 538,221 shares of the Bank's
common stock. Members of the mutual holding company consist of depositors of the
Bank,  who have the sole authority to elect the board of directors of the mutual
holding company for as long as it remains in mutual form. Initially,  the mutual
holding  company's  principal  assets were the shares of the Bank's common stock
received in the reorganization and on its initial  capitalization of $100,000 in
cash. The mutual holding company,  which by law must own in excess of 50% of the
stock of the  Bank,  was  issued  stock in the  reorganization  resulting  in an
ownership  interest  of 53.8% of the  Bank.  By  virtue  of its  ownership  of a
majority of the  outstanding  shares of the Bank, the mutual holding company can
generally  control the outcome of most matters  presented to the stockholders of
the Bank for  resolution  by vote  except for certain  matters  related to stock
compensation plans, a vote regarding conversion of the mutual holding company to
stock  form,  or  other  matters  which  require  a vote  only  by the  minority
stockholders.  The mutual  holding  company has registered as a savings and loan
holding  company and is subject to regulation,  examination,  and supervision by
the OTS.

The Bank also established an ESOP which was issued 36,942 shares of common stock
in the  reorganization.  The funds used by the ESOP to acquire these shares were
obtained from borrowings from an  unaffiliated  third party lender.  The loan is
reflected in the financial  statements of the Bank which makes  contributions to
the ESOP necessary to amortize the debt. Such  contributions  are expensed based
upon the fair value of the ESOP shares released or committed to be released from
restriction (or no longer debt  financed).  The total number of shares of common
stock issued as a result of the offering and reorganization  were 1,000,000.  On
June 16,  1998,  the Board of  Directors  approved  the  formation of a mid-tier
holding company, AF Bankshares,  Inc. which became a 100% owner of the Bank in a
stock swap with AsheCo,  M.H.C., which was accounted for similar to a pooling of
interests. At June 30, 1998, AsheCo,  M.H.C.'s ownership of AF Bankshares,  Inc.
decreased to 51.1% due to the shares issued under the  recognition and retention
plan discussed in Note 11. At June 30, 1999,  AsheCo,  M.H.C.'s  ownership of AF
Bankshares,  Inc.  increased  to 51.38% due to the  purchase  of shares  held in
treasury.

Concurrent  with the  reorganization,  the Bank has  established  a  liquidation
account in an amount equal to its net worth as reflected in its latest statement
of financial  condition used in its final  offering  circular.  The  liquidation
account will be maintained for the benefit of eligible  deposit  account holders
and supplemental eligible deposit account holders who continue to maintain their
deposit  accounts in the Bank after the  reorganization.  Only in the event of a
complete  liquidation  will eligible  deposit account  holders and  supplemental
eligible   deposit   account  holders  be  entitled  to  receive  a  liquidation
distribution  from the  liquidation  account in the  amount of the then  current
adjusted  sub  account  balance  for  deposit  accounts  then  held  before  any
liquidation  distribution  may be made with respect to common  stock.  Dividends
paid by the bank  subsequent  to the  reorganization  cannot  be paid  from this
liquidation account.

The Bank may not  declare  or pay a cash  dividend  on its  common  stock if its
stockholders'  equity would thereby be reduced below either the aggregate amount
then  required for the  liquidation  account or the minimum  regulatory  capital
requirements imposed by federal regulations.


                                       48

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA

The following are the condensed financial statements of AF Bankshares, as of and
for the years ended June 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                AF Bankshares, Inc.
                                             Condensed Balance Sheets
                                              June 30, 2000 and 1999
                                                                                    2000                1999
                                                                             ---------------------------------------
<S>                                                                            <C>                 <C>
Assets:
   Cash                                                                        $            116    $       232,410
   Securities available for sale                                                             --            267,155
   Investment in AF Bankshares                                                       11,688,699         11,063,063
   Investment in AF Insurance Services, Inc.                                            696,028            744,851
   Investment in AF Brokerage, Inc.                                                     241,252            236,758
   Other assets                                                                         259,060            111,930
                                                                             ---------------------------------------
                                                                               $     12,885,155    $    12,656,167
                                                                             =======================================
Liabilities and Equity:
   Liabilities:
      Accounts payable                                                         $         37,906    $        31,551
      Note payable - ESOP                                                               229,878            255,420
      Redeemable common stock held by the ESOP, net of
        unearned ESOP shares                                                             77,116            150,942
                                                                             ---------------------------------------
                                                                                        344,900            437,913
                                                                             ---------------------------------------

   Equity:
      Common stock                                                                       10,537             10,537
      Additional paid-in capital                                                     11,871,250         11,873,210
      Retained earnings                                                               1,052,270            694,679
      Recognition and retention plan                                                   (281,344)          (479,960)
      Accumulated other comprehensive income (loss)                                     (28,608)           203,638
                                                                             ---------------------------------------
                                                                                     12,624,105         12,302,104
      Less cost of 4,300 shares of treasury stock                                       (83,850)           (83,850)
                                                                             ---------------------------------------
                                                                                     12,540,255         12,218,254
                                                                             ---------------------------------------
                                                                             $       12,885,155    $    12,656,167
                                                                             =======================================
</TABLE>


                                       49

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)

<TABLE>
<CAPTION>
                                                AF Bankshares, Inc.
                                          Condensed Statements of Income
                                        Years Ended June 30, 2000 and 1999

                                                                                    2000                1999
                                                                             ---------------------------------------
<S>                                                                              <C>               <C>
Interest and investment income                                                   $     65,207      $     18,305
Equity in earnings subsidiaries                                                       577,154           645,031
Income tax credits                                                                     64,344            74,212
Other expense                                                                        (253,497)         (223,714)
                                                                             ----------------------------------------
        Net income                                                               $    453,208      $    513,834
                                                                             ========================================

<CAPTION>
                                                AF Bankshares, Inc.
                                        Condensed Statements of Cash Flows
                                        Years Ended June 30, 2000 and 1999

                                                                                    2000                1999
                                                                             -----------------------------------
<S>                                                                              <C>               <C>
Cash Flows from Operating Activities:
   Net income                                                                    $    453,208      $     513,834
   Change in assets and liabilities:
      Gain on sale of securities                                                      (63,994)           (17,400)
      Stock compensation                                                                   --             25,000
      Equity in earnings of subsidiaries                                             (577,154)          (645,031)
      Increase in accounts payable and other liabilities                               39,883                608
      Increase in other assets                                                       (147,130)          (111,930)
                                                                             -----------------------------------
        Net cash used in operating activities                                        (295,187)          (234,919)
                                                                             -----------------------------------
Cash Flows from Investing Activities:
   Purchase of securities available for sale                                               --           (367,001)
   Proceeds from sales of securities available for sale                               269,335            179,185
   Upstream dividends from AF Bank                                                         --          2,000,000
   Purchase of insurance agency                                                            --           (276,000)
   Capitalization of AF Brokerage, Inc.                                                    --           (250,000)
   Investment in AF Insurance Services, Inc.                                               --           (500,000)
                                                                             -----------------------------------
        Net cash provided by investing activities                                     269,335            786,184
                                                                             -----------------------------------
Cash Flows from Financing Activities:
   Cash dividends paid                                                               (206,442)          (205,105)
   Purchase of common stock for treasury                                                   --           (113,750)
                                                                             -----------------------------------
        Net cash used in financing activities                                        (206,442)          (318,855)
                                                                             -----------------------------------
Net increase (decrease) in cash                                                      (232,294)           232,410
   Cash - beginning                                                                   232,410                 --
                                                                             -----------------------------------
   Cash - ending                                                             $            116      $     232,410
                                                                             ===================================
</TABLE>


                                       50

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)

The  following  are the condensed  financial  statements  of the mutual  holding
company, AsheCo, M.H.C., as of and for the years ended June 30, 2000 and 1999:

<TABLE>
<CAPTION>
                                                  AsheCo, M.H.C.
                                             Condensed Balance Sheets
                                              June 30, 2000 and 1999

                                                                                    2000                1999
                                                                            ----------------------------------------
<S>                                                                             <C>                <C>
Assets:
   Cash                                                                         $      281,371     $     222,503
   Investment in AA&G, Inc. and Subsidiary                                              99,090            66,828
   Investment in AF Bankshares, Inc. and Subsidiaries                                6,431,897         6,277,739
   Other assets                                                                         48,588            26,086
                                                                            ----------------------------------------
                                                                                $     686,0946    $    6,593,156
                                                                            ========================================
Liabilities and Equity:
   Liabilities:
      Accrued expenses and other liabilities                                    $       1,000     $        1,000
                                                                            ----------------------------------------
   Equity:
      Additional paid-in-capital                                                    5,797,425          5,768,073
      Retained earnings                                                             1,062,521            824,083
                                                                            ----------------------------------------
                                                                                    6,859,946          6,592,156
                                                                            ----------------------------------------
                                                                                $   6,860,946     $    6,593,156
                                                                            ========================================

<CAPTION>
                                                  AsheCo, M.H.C.
                                          Condensed Statements of Income
                                        Years Ended June 30, 2000 and 1999

                                                                                    2000                1999
                                                                            ----------------------------------------
<S>                                                                              <C>              <C>
Interest income                                                                  $      7,367     $        6,242
Equity in earnings subsidiaries                                                       264,713            296,610
Income tax credits (expense)                                                           (9,661)            14,212
Other expense                                                                         (23,981)           (42,452)
                                                                            ----------------------------------------
        Net income                                                               $     238,438    $      274,612
                                                                            ========================================
</TABLE>


                                       51

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 17. MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)

<TABLE>
<CAPTION>
                                                  AsheCo, M.H.C.
                                         Condensed Statement of Cash Flows
                                        Years Ended June 30, 2000 and 1999

                                                                                    2000                1999
                                                                            ----------------------------------------
<S>                                                                         <C>                     <C>
Cash Flows from Operating Activities:
   Net income                                                               $          238,438      $      274,612
   Change in assets and liabilities:
      Equity in earnings of subsidiaries                                              (264,713)           (296,610)
      Decrease in accounts payable                                                          --             (11,000)
      Increase in other assets                                                         (22,502)             (6,677)
                                                                            ----------------------------------------
        Net cash used in operating activities                                          (48,777)            (39,675)
Cash Flows from Investing Activities:
   Dividends from AF Bankshares, Inc.                                                 (107,645)           (107,644)
                                                                            ----------------------------------------
Net increase in cash                                                                    58,868              67,969
   Cash - beginning                                                                    222,503             154,534
                                                                            ----------------------------------------
   Cash - ending                                                            $          281,371      $      222,503
                                                                            ========================================
</TABLE>

NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS

The FASB has issued SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities,  which the Company has not been required to adopt as of June
30, 2000.  This  Statement,  which is effective for fiscal years beginning after
June 15, 2000,  establishes  accounting  and reporting  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized  firm  commitment,  an available  for sale  security,  or a foreign
currency denominated forecasted  transaction.  This Statement is not expected to
have a significant impact on the Company.


                                       52

<PAGE>










                      (This page intentionally left blank)










                                       53

<PAGE>

AF BANKSHARES, INC.

CORPORATE INFORMATION

                                    OFFICERS

JAMES A. TODD                                        MELANIE PAISLEY MILLER
  President and Chief Executive Officer                Executive Vice President,
                                                        Secretary/Treasurer,
                                                        Chief Financial Officer

                                    DIRECTORS

JAN R. CADDELL, Chairman                        KENNETH R. GREENE, Vice Chairman

JAMES A. TODD                                   JOHN D. WEAVER

JERRY L. ROTEN                                  WAYNE R. BURGESS

W. O. ASHLEY, JR.                               FRANK E. ROLAND


                                       54

<PAGE>

CORPORATE INFORMATION (Continued)

                                     OFFICES

<TABLE>
<CAPTION>
<S>                                                             <C>
Corporate Offices                                               Insurance and Brokerage Offices
21 East Ashe Street                                             206 S. Jefferson Avenue
West Jefferson, North Carolina 28694                            West Jefferson, North Carolina 28694

West Jefferson Office                                           Jefferson Office
205 S. Jefferson Avenue                                         840 E. Main Street
West Jefferson, North Carolina 28694                            Jefferson, North Carolina 28640

Warrensville Office                                             Sparta Office - d/b/a Alleghany First Bank
4951 NC Hwy. 88 West                                            403 South Main Street
Warrensville, North Carolina 28693                              Sparta, NC 28675

Boone Office - d/b/a Appalachian First Bank                     North Wilkesboro Office - AF Brown Insurance
285 Highway 105                                                 315 Main Street
Boone, NC 28607                                                 North Wilkesboro, NC 28659

Lenoir Office - AF Blair Insurance                              AF Insurance Center of Elkin
324 Morganton Blvd, SW                                          227A West Main Street
Lenoir, NC 28645                                                Elkin, NC 28621

     STOCK TRANSFER AGENT                                                 LEGAL COUNSEL

ChaseMellon Shareholders Services, LLC                          Vannoy & Reeves
Overpeck Centre                                                 306 East Main Street
85 Challenger Road                                              West Jefferson, North Carolina 28694
Ridgefield Park, New Jersey 07660
www.chasemellon.com                                             Thacher Proffitt & Wood
                                                                1700 Pennsylvania Avenue
           AUDITORS                                             Washington, DC 20006
McGladrey & Pullen, LLP
One Morrocroft Centre                                                      FORM 10-KSB
6805 Morrison Boulevard, Suite 200
Charlotte, North Carolina 28211                                 A copy of Form 10-KSB as filed with the
                                                                Office of Thrift Supervision will be
        ANNUAL MEETING                                          furnished without charge to shareholders upon
                                                                written request to James A. Todd, President, AF
The 2000 annual meeting of stockholders of                      Bankshares, Inc., 21 East Ashe Street,
AF Bankshares, Inc. will be held on November 6,                 P.O. Box 26, West Jefferson, NC 28694.
2000 at 6:00 p.m. at the Corporate Office, 21 East
Ashe Street, West Jefferson, North Carolina.
</TABLE>


                                       55

<PAGE>

COMMON STOCK

The Company had 1,049,378 shares of common stock outstanding at August 31, 2000,
which are held by 429  shareholders  of record.  The majority of the outstanding
shares are held by the mutual holding company AsheCo, MHC. The remaining 515,457
shares are owned by minority  shareholders  including the Company's ESOP. Shares
are quoted on the OTC Electronic Bulletin Board under the symbol "ASFE."

MARKET FOR THE COMMON STOCK

There  is no  established  market  for the  Company's  common  stock,  excluding
occasional quotations,  although the Company's common stock is quoted on the OTC
Electronic  Bulletin  Board.  The table  below  reflects  the stock  trading and
dividend payment  frequency of the Company for the years ended June 30, 2000 and
1999.  For further  information  regarding  the  Company's  dividend  policy and
restrictions  on  dividends  paid,  please  refer to note 7 of the  notes to the
consolidated  financial  statements.  Stock  prices  reflect bid prices  between
broker/dealer,  prior to any markups,  markdowns or  commissions,  is based upon
information  provided to management of the Company by certain  securities  firms
effecting  transactions in the Company's stock on an ongoing basis,  and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                                              STOCK PRICE
2000:                                                                  DIVIDENDS          HIGH             LOW
--------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                <C>              <C>
First Quarter                                                       $           0.05   $       11.88    $   10.00
Second Quarter                                                                  0.05           12.00         8.13
Third Quarter                                                                   0.05            9.38         8.50
Fourth Quarter                                                                  0.05            8.00         6.13

<CAPTION>
                                                                                              STOCK PRICE
1999:                                                                  DIVIDENDS          HIGH             LOW
------------------------------------------------------------------- -------------------------------- ---------------
<S>                                                                 <C>                <C>              <C>
First Quarter                                                       $           0.05   $       22.00    $   14.00
Second Quarter                                                                  0.05           19.00        11.50
Third Quarter                                                                   0.05           17.25        12.00
Fourth Quarter                                                                  0.05           13.50         9.50
</TABLE>

DISCLAIMER:  This statement has not been reviewed,  or confirmed for accuracy or
relevance, by the Office of Thrift Supervision.


                                       56