<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                     For the fiscal year ended June 30, 2002

                          Commission File No.: 0-24479

                               AF BANKSHARES, INC.
        (Exact name of small business issuer as specified in its charter)

    Federally Chartered                                         56-2098545
  State of Incorporation                                   IRS Employer Number

                               21 East Ashe Street
                      West Jefferson, North Carolina 28694
                    (Address of Principal Executive Offices)

Issuer's telephone, including area code:  (336) 246-4344

Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                                 Title of Class

     Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

     Indicate by check mark there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B contained herein and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in part III of this Form
10-KSB, or any amendment to this Form 10-KSB. [X]

     The revenues for the issuer's fiscal year ended June 30, 2002 are
$14,430,793.

     The issuer had 1,049,378 shares of common stock outstanding as of August
31, 2002. The aggregate value of the voting stock held by non-affiliates of the
issuer, computed by reference to the price at which the common stock was sold on
August 31, 2002 was $5,739,394.

                      Documents Incorporated by Reference.

     Portions of the Annual Report to Stockholders for the year ended June 30,
2002 are incorporated by reference into Part I and II of this Form 10-KSB.

     Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-KSB.

     Transitional Small Business Disclosure Format.   Yes [_]    No [X]

<PAGE>

<TABLE>
                                TABLE OF CONTENTS
<S>                                                                              <C>
PART I .........................................................................  2
   Item 1.  Description of Business ............................................  2
   Item 2.  Properties ......................................................... 30
   Item 3.  Legal Proceedings .................................................. 32
   Item 4.  Submission of Matters to a Vote of Security Holders ................ 32

PART II ........................................................................ 32
   Item 5.  Market for Common Stock and Related Stockholder Matters ............ 32
   Item 6.  Management's Discussion and Analysis ............................... 32
   Item 7.  Financial Statements ............................................... 32
   Item 8.  Changes in and Disagreement with Accountants on Accounting and
   Financial Disclosure ........................................................ 33

PART III ....................................................................... 33
   Item 9.  Directors, Executive Officers, Promoters and Control Persons ....... 33
   Item 10. Executive Compensation ............................................. 33
   Item 11. Security Ownership of Certain Beneficial Owners and Management ..... 33
   Item 12. Certain Relationships and Related Transactions ..................... 33
   Item 13. Exhibits and Reports on Form 8-K ................................... 34

SIGNATURES ..................................................................... 35
</TABLE>

<PAGE>

                                     PART I

Item 1. Description of Business

General

         AF Bankshares, Inc. (the "Company") is a federally chartered stock
holding company which owns 100% of the common stock of AF Bank (the "Bank"), AF
Insurance Services, Inc. and AF Brokerage, Inc. The Company was formed in
connection with the Bank's reorganization into a two-tier mutual holding company
structure, which was completed on June 16, 1998. Under the reorganization, the
Bank became the wholly-owned subsidiary of the Company and holders of the Bank's
common stock became holders of the Company's common stock, on an equal share for
shares exchange. As part of the reorganization, AsheCo, M.H.C. (the "Mutual
Holding Company"), a federally chartered mutual holding company, which was
formed during fiscal year 1997 pursuant to the Bank's mutual to stock
conversion, purchased a majority of the common stock of the Company. At June 30,
2002, the mutual holding company owned 51.3% of the Company.

         The Company has no operations and conducts no business of its own other
than ownership of its subsidiaries and investing in securities. Founded in 1939,
the Bank is a federally chartered stock savings bank which conducts business
from its main office located in West Jefferson, North Carolina, with branches in
Boone, Jefferson, Sparta, Warrensville and West Jefferson, North Carolina. The
Bank was founded as a building and loan association, and later converted from a
North Carolina chartered building and loan to a federally chartered mutual
savings and loan association, and then to a federally chartered mutual savings
bank. During fiscal year 1997, the Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank and during
fiscal year 1998, the Bank completed its reorganization into a two-tier mutual
holding company and became a wholly owned subsidiary of the Company. The Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. At June 30, 2002, the Bank had total assets of $177.1 million,
total deposits of $136.8 million and equity of $12.8 million.

         The historical operations of the Bank have been that of a portfolio
mortgage lender, providing fixed rate loans for the residents of Ashe County,
North Carolina. Management has expanded the market area of the Company to
include Alleghany and Watauga counties and has diversified its product lines by
engaging in non-mortgage lending and offering non-traditional financial
services, such as insurance and brokerage products. More specifically, since
1996, the Bank has made a major commitment to small business commercial lending
and consumer lending as a means to increase the yield on its loan portfolio and
attract lower cost deposit accounts. As a result of this commitment, commercial
loans increased by 171.3% and consumer loans have increased by 63.2% since June
30, 1998. In addition, since July 1997, the Company has offered traditional
property and casualty, life and health insurance products through AF Insurance
Services, Inc., a wholly-owned subsidiary of the Company, headquartered in West
Jefferson, North Carolina and operating in Boone, Elkin, Jefferson, Lenoir,
Sparta, West Jefferson and Wilkesboro, North Carolina. The Company also has a
brokerage subsidiary, AF Brokerage, Inc., which serves Ashe, Alleghany, Wilkes
and Watauga counties. AF Brokerage offers various uninsured investment products,
including fixed-rate and variable annuities and mutual funds. The Company
believes that its strategy of expanding its market area and diversifying its
product lines will enhance its franchise value and strengthen earnings in the
future.

         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 interest paid
on savings deposits and borrowings of the Company. The primary interest-earning
asset of the Company is

                                        2

<PAGE>

its mortgage loan portfolio representing 84.0% of total loans, with
approximately 76.5% of portfolio mortgage loans at fixed rates at June 30, 2002.
The net interest income of the 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 changing 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,
insurance commissions generated from the insurance agency subsidiary and in
payment for 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.

         As of June 30, 2002, $120.6 million, or 84.0% of the Bank's total loan
portfolio consisted of real estate loans. Net loans at June 30, 2002 were $143.6
million of which $81.0 million or 56.4% were secured by one- to-four family
residences. Total mortgage loans, including construction loans, totaled $120.6
million as of June 30, 2002. Of that amount, approximately 23.5% was adjustable
rate loans, or had remaining terms of one year or less. The Bank's strategy is
to sell long term, fixed-rate mortgages while retaining the servicing. The
reduction in the level of fixed rate mortgages has served to reduce the
Company's exposure to interest rate risk.

         The Bank also invests in consumer loans and commercial loans. As of
June 30, 2002, the Bank's consumer loans and commercial loan portfolios were
$24.3 million, or 16.9% of total loans. Commercial loans totaled $10.8 million,
or 7.5% of the Bank's total loan portfolio. The Bank invests a portion of its
assets in debt and equity securities issued by the FHLB and the Federal Home
Loan Mortgage Corporation (the "FHLMC") and began investing in mortgage-backed
securities during fiscal 1996. Mortgage-backed securities totaled $1.9 million
or 1.1% of total assets at June 30, 2002, and FHLB FHLMC securities and other
debt and equity security investments totaled $8.4 million, or 4.8%, of total
assets at June 30, 2002.

Market Area and Competition

         Previously, the Bank's market area for deposit gathering and lending
has been concentrated in Ashe County, North Carolina. However, management
believes that the Company must expand its market base to build value for the
Company and its shareholders. In March 1998, the Bank opened a branch of AF Bank
in Alleghany County and operates the branch under the trade name Alleghany First
Bank. At the same time, an insurance agency branch of AF Insurance Services,
Inc., was opened in the same location. The staff of Alleghany First came from
the local banking community and is attuned to the needs and habits of Alleghany
citizens. The insurance agency personnel direct their attention to the special
needs of Alleghany County citizens as well. On March 1, 1999, the Bank also
opened a branch office in Boone, North Carolina operating under the trade name
Appalachian First Bank. In April 1999, the Company added an insurance agency in
Lenoir, North Carolina, in December 1999, the Company acquired an agency in
Elkin, North Carolina, in November 2000, the Company acquired an agency in
Boone, North Carolina and on October 1, 2001, the Company purchased the assets
of an insurance agency in Sparta, North Carolina. Entry into the Boone and
Alleghany markets significantly expands the Company's potential to market its
banking, insurance and noninsured investment products to a larger and more
diverse market. Management now believes that it is delivering the same
personalized customer service to the new markets that it has historically
delivered to Ashe County. 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

                                        3

<PAGE>

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 five broad categories: funds transfer including checking
accounts; insured savings instruments; credit/lending services; insurance; and
securities brokerage. Further, management believes that failure to offer
insurance and brokerage services in addition to traditional "banking only"
services would impair the Company's growth and make retention of existing
customers more difficult. During the three month period ending September 30,
1998, the Company established a securities brokerage subsidiary, AF Brokerage,
Inc., which currently conducts brokerage services in Ashe, Alleghany, Wilkes and
Watauga counties. AF Brokerage, Inc. was granted membership to the National
Association of Securities Dealers, Inc. ("NASD") on October 22, 1999, and
commenced operation in the fourth quarter of 2000 as an independent
broker/dealer. Management continues to evaluate acquisitions and business
opportunities that it believes will provide access to customers and markets
which would enhance the Company's long-term value and earnings potential.

         On November 1, 2000, the Company purchased the assets of an insurance
agency in Boone, North Carolina, adding insurance products to the banking
services offered by the Company in Watauga County. On October 1, 2001, the
Company purchased the assets of an insurance agency in Sparta, North Carolina.
Management believes that penetration into new (especially contiguous) markets
increases the opportunity to deliver products from all of the Company's
subsidiaries to a broader market base, thereby making the insurance and
brokerage subsidiaries more profitable investments by increasing the economies
of scale, as well as improving the economies of scope, and at the same time
adding to the products that are available for delivery to the Company's
customers. Of course, management is equally committed to protecting and
expanding the Company's market share in existing markets. As evidence of this
continuing commitment, on October 24, 2001 AF Bank opened the only financial
institution located inside the new Wal-Mart in West Jefferson, North Carolina.
Also, the Company opened a freestanding, financial center adjacent to Wal-Mart
offering full service banking, full line property and casualty, life and health
insurance as well as mutual funds and annuities. Thus, customers will enjoy the
convenience of banking where they shop as well as having access to a
comprehensive array of financial services at the free-standing branch office
(including ATM drive-through lanes, and a commercial depository). The Company
continues to seek opportunities to increase the market penetration of its
services.

         The Bank faces substantial competition for both the deposits it accepts
and the loans it makes. Management believes that the Bank has the second largest
deposit base in Ashe County, and the second largest deposit base in the part of
Ashe County which comprises its primary zip code, 28694. Located within Ashe
County are branches of seven other depository institutions, five of which are
commercial banks and two of which are credit unions. The Bank competes for
deposits by offering a variety of customer services and deposit accounts at
competitive interest rates. The Bank, like its competitors, is affected by
general economic conditions, particularly changes in market interest rates, real
estate market values, government policies and regulatory authorities' actions.
Changes in the ratio of the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions which may
have greater resources than the Bank, but which have not generally engaged in
lending activities in the Bank's market area in the past, and from credit unions
that can expand into the Bank's market area and compete for customers without
the level of taxation experienced by the Company. Competition may also increase
as a result of the lifting of restrictions on the interstate operations of
financial institutions. See "--Regulation."

Lending Activities

         Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of mortgage loans. The Bank also makes consumer and commercial loans.

                                        4

<PAGE>

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

         The following table sets forth the composition of the Bank's mortgage
and other loan portfolios in dollar amounts and percentages at the dates
indicated.

                                                     June 30,
                                 -----------------------------------------------
                                         2002                     2001
                                 ----------------------   ----------------------
                                  Amount   % of Total       Amount   % of Total
                                 --------- ------------   ---------- -----------
                                             (Dollars in thousands)

Mortgage loans:
  One-to four-family ..........  $ 80,952    56.39%       $ 73,821      59.21%
  Multi-family ................     6,142     4.28%          3,507       2.81%
  Non-residential .............    15,196    10.59%          8,525       6.84%
  Land ........................     8,008     5.58%          8,298       6.66%
  Construction ................    10,329     7.20%          5,344       4.29%
                                 --------  -------        --------   --------
    Total mortgage loans ......  $120,627    84.03%       $ 99,495      79.80%
                                 --------  -------        --------   --------

Other loans:
  Commercial ..................  $ 10,784     7.51%       $ 12,378       9.93%
  Consumer loans ..............    13,512     9.41%         14,051      11.27%
    Total other loans .........    24,296    16.92%         26,429      21.20%
                                 --------  -------        --------   --------
  Gross loans .................  $144,923   100.95%       $125,924     101.00%
                                 --------  -------        --------   --------

Less:
  Unearned discounts and net
    deferred loan fees ........  $    239     0.17%       $    227       0.18%
  Allowance for loan losses ...     1,131     0.79%          1,022       0.82%
                                 --------  -------        --------   --------
                                    1,370     0.95%          1,249       1.00%
                                 --------  -------        --------   --------
  Loans, net ..................  $143,553   100.00%       $124,675     100.00%
                                 ========  =======        ========   ========

  Loans serviced for others:
  One-to four-family and
    cooperative apartment .....  $ 33,168    97.07%       $ 24,196      96.03%
  Commercial ..................     1,000     2.93%          1,000       3.97%
    Total loans serviced
    for others ................  $ 34,168   100.00%       $ 25,196     100.00%
                                 ========  =======        ========   ========

                                        5

<PAGE>

         Loan Maturity. The following table shows the maturity or period to
repricing of the Bank's loan portfolio at June 30, 2002. Loans that have
adjustable rates are shown using scheduled principal amortization. The table
does not consider estimated prepayments of principal.

<TABLE>
<CAPTION>
                                           ----------------------------------------------------------------------------------------
                                                                                          At June 2002
                                           ----------------------------------------------------------------------------------------
                                                       Mortgage Loans
                                           ----------------------------------------
                                            Mortgage
                                            Loans
                                            One-to
                                             Four-   Multi-     Non-                              Commercial  Consumer
                                            Family   Family  Residential   Land    Construction      Loans      Loans   Total Loans
                                           --------- ------- -----------  ------- --------------- ----------- --------- -----------
                                                                                    (In thousands)
<S>                                        <C>       <C>      <C>         <C>      <C>              <C>       <C>      <C>
Amount due:
  One year or less ....................... $13,358   $1,891    $ 5,819    $3,344     $10,232        $ 6,815    $ 3,479  $  44,938
                                           -------   ------    -------    ------     -------        -------    -------  ---------

After one year:
  One to three years .....................  10,090        -      1,283       716          97          1,181      3,973     17,340
  More than three years to five years ....  17,663    1,324      5,779       992           -          1,319      4,293     31,370
  More than five years to fifteen years ..  32,163    2,927      2,298     2,956           -          1,469      1,691     43,504
  Over fifteen years .....................   7,678        -         17         -           -              -         76      7,771
                                           -------   ------    -------    ------     -------        -------    -------  ---------
Total due or repricing after one year ....  67,594    4,251      9,377     4,664          97          3,969     10,033     99,985
                                           -------   ------    -------    ------     -------        -------    -------  ---------
Total amounts due or repricing, gross .... $80,952   $6,142    $15,196    $8,008     $10,329        $10,784    $13,512  $ 144,923
                                           =======   ======    =======    ======     =======        =======    =======  =========
</TABLE>

         The following table sets forth the dollar amounts in each loan category
at June 30, 2002 that are due after June 30, 2003, and whether such loans have
fixed or adjustable interest rates.

                                            Due after June 30, 2003
                                   ---------------------------------------------
                                      Fixed           Adjustable       Total
                                   -----------   ---------------- --------------
                                                   (In thousands)
Mortgage loans:
   One- to four-family ......       $  65,883       $  1,711         $  67,594
   Multi-family .............           4,251              -             4,251
   Non-residential ..........           9,377              -             9,377
   Land .....................           4,628             36             4,664
   Construction .............              97              -                97
Commercial loans ............           3,899             70             3,969
Consumer loans ..............          10,034              -            10,033
                                    ---------      ---------         ---------
                                    $  98,169      $   1,817         $  99,985
                                    =========      =========         =========

         Origination, Purchase, Sale and Servicing of Loans. The Bank's lending
activities are conducted through its branches in Ashe, Alleghany and Watauga
counties, North Carolina. The Bank originates both adjustable-rate loans and
fixed-rate mortgage loans for portfolio and for sale in the secondary market.
Adjustable-rate mortgage loans carried in portfolio and fixed-rate mortgage
loans carry maximum maturities of 30 years and 15 years, respectively. Fixed
rate loans originated for sale in the secondary market have maximum maturities
of 30 years. Historically, the Bank held for its portfolio all loans it
originated. The Bank now sells all qualified fixed-rate loans to Fannie Mae, but
retains the servicing rights. The determination to sell loans is based upon
management's efforts to reduce interest rate risk. At June 30, 2002, the Bank
serviced approximately $33.2 million of loans for Fannie Mae.

         One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate
and adjustable-rate mortgage loans, with maturities up to 30 years, which are
secured by one- to four-family residences, which generally are owner-occupied.
Fixed-rate loans held in the Bank's portfolio have higher interest rates and
shorter terms than those loans sold to Fannie Mae. Most are secured by property
located in

                                        6

<PAGE>

Ashe, Alleghany and Watauga counties, North Carolina. Loan originations are
generally obtained from existing or past customers and members of the local
communities. See "--Origination, Purchase, Sale and Servicing of Loans."

         The Bank offers three to five year call loans, which are either called
or modified based on the Bank's interest rates currently in effect at the call
date. These loans are similar to adjustable rate loans in that the loans
generally amortize over terms of up to 30 years but are not indexed to any
widely recognized rate, such as the one year U.S. Treasury securities rate, and
do not have interest rate caps or floors. Instead, the majority of such loans
are modified at the call date and the rate is adjusted to the Bank's current
rate offered for similar loans being originated on such dates. For purposes of
the tabular presentations throughout this document, such loans are considered to
be adjustable.

         In view of its operating strategy, the Bank adheres to its Board
approved underwriting guidelines for loan originations, which, though prudent in
approach to credit risk and evaluation of collateral, allows management
flexibility with respect to documentation of certain matters and certain credit
requirements. As a result, such underwriting guidelines in certain lending
situations are less rigid than comparable Fannie Mae underwriting guidelines.
The Bank's loans are typically originated under terms, conditions and
documentation which permit them to be sold to U.S. government sponsored agencies
such as Fannie Mae. The Bank sells all qualifying fixed-rate loans to Fannie
Mae, while retaining servicing rights. The Bank's policy is to originate one- to
four-family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan. The Bank
offers products with a higher loan-to-value ratio in conjunction with private
mortgage insurance. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the rates on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.

         Construction Lending. The Bank originates construction loans primarily
to finance construction of one- to four-family homes to the individuals who will
be the owners and occupants upon completion of construction in the Bank's market
area. At June 30, 2002, that Bank's portfolio contained construction loans with
balances of approximately $10.3 million, or 7.2%, of net loans. The Bank's
policy is to disburse loan proceeds as construction progresses and as periodic
inspections warrant. These loans are made primarily to the individuals who will
ultimately occupy the home, and are structured to guarantee the permanent
financing to the Bank as well. Thus construction loans typically "roll" into
permanent financing. Construction loans are made for a maximum of 12 months, by
which time permanent financing must be obtained.

         Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost of construction. If the estimate of
construction cost proves to be inaccurate, the Bank may be compelled to advance
additional funds to complete construction.

         Non-Residential Mortgage Lending. The Bank originates commercial real
estate mortgage loans that are generally secured by properties used for business
purposes and retail facilities, such as small office buildings and church loans.
The Bank's underwriting procedures provide that non-residential mortgage loans
may be made, based on debt service coverage or in amounts up to the lesser of
(i) 80% of the lesser of the appraised value or purchase price of the property
or (ii) the Bank's current loans-to-one-borrower limit. These loans are
generally originated as three to five year call loans with amortization periods
of up to 15 years. The Bank considers factors such as the borrower's expertise,
credit history, profitability, cash flow, and the value of the collateral while
underwriting these loans. At June 30, 2002

                                        7

<PAGE>

the Bank's non-residential mortgage loan portfolio was $15.2 million, or 10.6%
of total loans outstanding. The largest non-residential mortgage loan in the
Bank's portfolio at June 30, 2002 was approximately $1.5 million and is secured
by a commercial property. As of the same date, the loan is performing in
accordance with the terms of its loans agreement.

         Mortgage loans secured by non-residential properties can be larger and
therefore may involve a greater degree of credit risk than one- to four-family
residential mortgage loans. This risk is attributable to the uncertain
realization of projected income-producing cash flows which are affected by
vacancy rates, the ability to maintain rent levels against competitively-priced
properties and the ability to collect rent from tenants on a timely basis.
Because payments on loans secured by non-residential properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's income and debt service ratio.

         Other Mortgage Lending. The Bank also offers loans secured by land and
multi-family residences. Land loans generally consist of residential building
lots for which the borrower intends to ultimately construct residential
properties, but may also include tracts purchased for agricultural use and a
minor amount for speculative purposes. Multi-family loans generally consist of
residential properties with more than four units, typically small apartment
complexes. At June 30, 2002, the Bank's total land loan portfolio was $8.0
million or 5.6% of total loans and its multi-family loan portfolio was $6.1
million or 4.3% of total loans.

         The Bank requires appraisals of all mortgage loans. Appraisals are
performed by independent appraisers designated by the Bank. The appraisals of
such properties are then reviewed by the Bank's management. The independent
appraisers used by the Bank are reviewed annually by management and the Board of
Directors.

         The Bank originates multi-family residential loans with both fixed and
adjustable interest rates which vary as to maturity. Such loans are typically
income-producing investment loans. Loan to value ratios on the Bank's
multi-family residential loans are generally limited to 80%. As part of the
criteria for underwriting these loans, the Bank's general policy is to require
principals of corporate borrowers to become co-borrowers or to obtain personal
guarantees from the principals of corporate borrowers.

         Multi-family residential lending generally entails significant
additional risks as compared with single-family residential property lending.
Such loans typically involve large loan balances to single borrowers or groups
of related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The success of
such projects is sensitive to changes in supply and demand, conditions in the
market for multi-family residential properties as well as to regional and
economic conditions, generally.

         Consumer Loans. Subject to the restrictions contained in federal laws
and regulations, the Bank also is authorized to make loans for a wide variety of
personal or consumer purposes. As of June 30, 2002, $13.5 million, or 9.4%, of
the Bank's total loan portfolio consisted of consumer loans. The primary
component of the Bank's consumer loan portfolio was $7.9 million of auto loans.
Consumer loans are available at fixed or variable interest rates.

         The Bank also offers loans secured by savings accounts at the Bank.
Interest rates charged on such loans are tied to the prime rate and are
available in amounts up to 90% of the value of the account. Savings account
loans are reviewed and approved in conformity with standards approved by the
Bank's Board of Directors. At June 30, 2002, the Bank's savings account loan
portfolio totaled $711,000 or 0.5% of the total loans outstanding.

                                        8

<PAGE>

         Consumer loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness, and
personal bankruptcy. In many cases, any repossessed collateral resulting from a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation and improper repair and
maintenance of the underlying security.

         As of June 30, 2002, the Bank had $155,000 in non-performing consumer
loans. Charge-offs for consumer loans totaled $282,000 and $126,000 for the
years ended June 30, 2002 and 2001, respectively.

         Commercial Business Loans. The Bank offers commercial business loans
that are generally provided to various types of closely held businesses located
in the Bank's primary market area. Commercial business loans generally have
terms of three years or less and interest rates which float in accordance with
the prime rate although the Bank occasionally originates commercial business
loans with fixed rates of interest. The Bank performs a cash flow analysis in
underwriting these loans. The Bank's commercial loans generally are secured by
equipment, machinery or other corporate assets including receivables. The Bank
requires principals of corporate borrowers to become co-borrowers or obtains
personal guarantees from the principals of the borrower with respect to all
commercial business loans.

         Commercial business lending generally entails significantly greater
credit risk than residential real estate lending. The repayment of commercial
business loans typically is dependent on the successful operations and income of
the borrower. Such risks can be significantly affected by economic conditions.
In addition, commercial business lending generally requires substantially
greater oversight efforts compared to residential real estate lending.

         As of June 30, 2002, the Bank had no non-performing commercial business
loans. Charge-offs for commercial business loans totaled $11,000 and $172,000
for the year ended June 30, 2002 and 2001, respectively.

         Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Bank. The Board of Directors has
established the following lending authority: the Bank's Chief Executive Officer
and lending officers may approve loans in amounts within assigned lending
limits, and the Loan Committee, comprised of the Executive Committee of the
Board of Directors may approve loans up to the Bank's loans-to-one-borrower
limit. In addition, the staff loan committee, comprised of the chief executive
officer, chief financial officer, chief lending officer, credit analyst and
collection officer meets weekly to review all loan applications that meet
lending policy criteria. The staff loan committee can approve lending
relationships up to $750,000. Larger amounts must be approved by the Executive
Committee of the Board of Directors. The foregoing lending limits are reviewed
annually and, as needed, revised by the Board of Directors. The Board generally
ratifies all loans on a monthly basis.

         For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information supporting the borrower's ability to repay is required. An
appraisal performed by a Bank approved independent appraiser is required for all
real property intended to secure the proposed loan. The Board annually approves
the independent appraisers used by the Bank and approves the Bank's appraisal
policy. It is the Bank's policy to obtain title insurance on all real estate
loans of $50,000 or more and hazard insurance on all improved real estate loans.
In connection with a borrower's request for a renewal of a mortgage loan, the
Bank evaluates both the borrower's ability to service the renewed loan applying
an interest rate that reflects prevailing market conditions and the customer's
payment history, as well as the value of the underlying collateral property.

                                        9

<PAGE>

Asset Quality

         Non-Performing Loans. Loans are considered non-performing if they are
in foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and period of delinquency. The Bank's policies generally provide that delinquent
mortgage loans be reviewed and that a written late charge notice be mailed no
later than the 17th day of delinquency. The Bank's policies provide that
telephone contact and further written notification will be attempted to
ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
attempts to obtain full payment or work out a repayment schedule with the
borrower to avoid foreclosure. It is the Bank's general policy to reserve all
accrued interest due on all loans that are 90 days or more past due.

         Real Estate Owned. Property acquired by the Bank as a result of
foreclosure on a mortgage loan is classified as real estate owned ("REO"). At
June 30, 2002, the Bank held $263,000 in REO, while non-performing loans,
defined as loans that are 90 days or more delinquent, totaled $460,000. The
Bank's REO is initially recorded at the fair value of the related assets at the
date of foreclosure. Thereafter, if there is a further deterioration in value,
the Bank provides an REO valuation allowance and charges operations for the
diminution in value less cost to sell. It is the policy of the Bank to obtain an
appraisal on all real estate acquired through foreclosure as soon as practicable
after it determines that foreclosure is imminent. The Bank generally reassesses
the value of REO at least annually thereafter. The policy for loans is to
establish loss reserves in accordance with the Bank's asset classification
process, based on Generally Accepted Accounting Principles ("GAAP").

                                       10

<PAGE>

       Non-performing Assets. The following table sets forth information
regarding the Bank's non-performing assets and troubled debt restructurings at
the dates indicated.

<TABLE>
<CAPTION>
                                                                                  At June 30,
                                                                    -----------------------------------
                                                                         2002                   2001
                                                                    ---------------        ------------
                                                                            (Dollars in thousands)
<S>                                                                 <C>                    <C>
Non-accrual mortgage loans:
     One-to four-family .........................................     $    305             $      -
     Multi-family ...............................................            -                    -
     Non-residential ............................................            -                    -
     Land .......................................................            -                    -
     Construction ...............................................            -                    -
                                                                      --------             --------
         Total mortgage loans ...................................          305                    -
                                                                      --------             --------
     Commercial .................................................            -                    -
     Consumer Loans .............................................          155                    -
                                                                      --------             --------
         Total non-accruing loans ...............................     $    460             $      -
                                                                      --------             --------

Loans delinquent 90 or more days for which
     interest is fully reserved and still accruing:
     One-to four-family .........................................     $      -             $    383
     Multi-family ...............................................            -                   28
     Non-residential ............................................            -                    -
     Land .......................................................            -                    -
     Construction ...............................................            -                    -
                                                                      --------             --------
         Total mortgage loans ...................................            -                  411
                                                                      --------             --------
     Commercial .................................................            -                    -
     Consumer Loans .............................................            -                   68
                                                                      --------             --------
Total loans delinquent 90 or more days for which
     interest has been fully reserved ...........................            -                    -
                                                                      --------             --------
Total non-performing loans ......................................     $    460             $    479
                                                                      --------             --------

Total real estate owned .........................................          263                  248
                                                                      --------             --------
     Total non-performing assets ................................     $    723             $    727
                                                                      --------             --------

Total non-performing loans to loans, gross ......................         0.32%                0.36%
Total non-performing assets to total assets .....................         0.41%                0.47%
</TABLE>

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

                                       11






<PAGE>

       The Bank's management reviews and classifies the Bank's assets monthly
and reports the results to the Bank's Board of Directors on a monthly basis. The
Bank classifies assets in accordance with the management guidelines described
above. At June 30, 2002, the Bank had $1.1 million of assets classified as
Substandard, $1.8 million of assets designated as Special Mention, no assets
classified as Loss and no assets classified as Doubtful.

       Allowance for Loan Losses. The Allowance for Loan Losses ("ALL") is
established through a provision for loan losses based on management's evaluation
of the risks inherent in the Bank's loan portfolio and the general economy. The
ALL is maintained at an amount management considers adequate to cover loan
losses which are deemed probable and estimable. The allowance is based upon a
number of factors, including asset classifications, economic trends, industry
experience and trends, industry and geographic concentrations, estimated
collateral values, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience, and the Bank's underwriting
policies. At June 30, 2002, the Bank's ALL was $1.1 million, or 0.8% of total
loans, as compared to $1.0 million or 0.8% of total loans at June 30, 2001. The
Bank had non-performing loans of $460,000 and $479,000 at June 30, 2002 and June
30, 2001, respectively. The Bank will continue to monitor and modify its ALL as
conditions dictate. While the Bank believes it has established its existing
allowances for loan losses in accordance with generally accepted accounting
principles, various regulatory agencies, as an integral part of their
examination processes, periodically review the Bank's ALL. These agencies may
require the Bank to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination, and
thereby negatively affect the Bank's financial condition and earnings. In
addition, there can be no assurance that increases in the Bank's allowance for
loan losses will occur in the future.

                                       12

<PAGE>

       The following table sets forth activity in the Bank's ALL at or for the
dates indicated.

<TABLE>
<CAPTION>
                                                                      At or for the Year Ended June 30,
                                                                    -------------------------------------
                                                                        2002                    2001
                                                                    ---------------        --------------
                                                                            (Dollars in thousands)
<S>                                                                 <C>                    <C>
Total loans outstanding at end of period ........................     $   144,923           $   125,924
Average total loans outstanding .................................         136,621               119,965

Balance at beginning of year ....................................           1,022                   979
                                                                      -----------          ------------
Provision for loan losses .......................................             420                   225
                                                                      -----------          ------------

Charge-offs:
     One- to four-family residential ............................            (123)                    -
     Multi-family residential ...................................               -                     -
     Non-residential and land ...................................             (11)                   (5)
     Construction ...............................................               -                     -
     Commercial .................................................             (11)                 (172)
     Consumer loans .............................................            (282)                 (126)
                                                                      -----------          ------------
         Total charge-offs ......................................            (427)                 (303)
                                                                      -----------          ------------

Recoveries ......................................................             116                   121
                                                                      -----------          ------------

Balance at end of year ..........................................     $     1,131           $     1,022
                                                                      ===========          ============

Allowance for loan losses to total loans
     at end of period ...........................................            0.78%                 0.81%
                                                                      ===========          ============

Allowance for loan losses to total non-performing
     assets at end of period ....................................          156.43%               140.58%
                                                                      ===========          ============

Allowance for loan losses to total non-performing
     loans at end of period .....................................          245.87%               213.36%
                                                                      ===========          ============

Ratio of net charge-offs during the period
     to average loans outstanding during period .................            0.23%                 0.15%
                                                                      ===========          ============
</TABLE>

                                       13

<PAGE>

       The following table sets forth the Bank's ALL allocated by loan category
and the percent of loans in each category to total loans at the dates indicated.

<TABLE>
<CAPTION>
                                                                              At June 30,
                                      --------------------------------------------------------------------------------------------
                                                       2002                                           2001
                                      ------------------------------------------    ----------------------------------------------
                                                                     Percent of                                       Percent of
                                                     Percent of       Loans in                     Percent of           Loans in
                                                    Allowance to        Each                      Allowance to            Each
                                       Allowance        Total       Category to      Allowance       Total            Category to
                                        Amount        Allowance     Total Loans       Amount       Allowance          Total Loans
                                      -----------  --------------  -------------    -----------  --------------      -------------
                                                                        (Dollars in thousands)
<S>                                   <C>          <C>             <C>              <C>          <C>                 <C>
Mortgage Loans:
   One-to four family ...............    $  606           53.58%         55.92%        $  572           55.96%            60.47%
   Multi-family .....................        20            1.77%          4.23%            15            1.47%             2.67%
   Non-residential and land .........        75            6.63%         16.03%            61            5.97%            12.68%
   Construction .....................        25            2.21%          7.11%            15            1.47%             4.07%
Other:
   Consumer .........................       310           27.41%          9.29%           284           27.79%            10.69%
   Commercial .......................        95            8.40%          7.42%            75            7.34%             9.42%
                                         ------         -------        -------         ------         -------           -------
   Total ............................    $1,131          100.00%        100.00%        $1,022          100.00%           100.00%
                                         ======         =======        =======         ======         =======           =======
</TABLE>



Investment Activities

       The Bank's investment policy permits it to invest in U.S. government
obligations, certain securities of various government-sponsored agencies and
municipal obligations, including mortgage-backed securities issued/guaranteed by
Fannie Mae, the FHLMC and the Government National Mortgage Association ("GNMA"),
certificates of deposit of insured banks, federal funds, mutual funds and
overnight deposits at the FHLB. At June 30, 2002, the Company held $11.4 million
in investment securities.

       The following table sets forth activity in the Company's investment
securities portfolio for the periods indicated:

<TABLE>
<CAPTION>
                                                             For the Year Ended June 30
                                                     -----------------------------------------
                                                            2002                    2001
                                                     --------------------  -------------------
                                                                   (In thousands)
<S>                                                  <C>                   <C>
Amortized cost at beginning of period ..............     $   7,680               $   9,882
Proceeds, net ......................................         4,624                  (1,132)
Principal payments from mortgage backed
  securities .......................................        (1,109)                 (1,184)
Gain on sales ......................................           131                     104
Premium and discount amortization, net .............            33                      10
                                                         ---------               ---------

Amortized cost at end of period ....................        11,359                   7,680
Net unrealized gain  (1) ...........................            62                     164
                                                         ---------               ---------
Total securities, net ..............................     $  11,421               $   7,844
                                                         =========               =========
</TABLE>

(1)    The net unrealized gain at June 30, 2002 and 2001 relates to available
       for sale securities in accordance with Statement of Financial Accounting
       Standards ("SFAS") No. 115. The net unrealized gain is presented in order
       to reconcile the "Amortized Cost" of the Company's securities portfolio
       in the "Carrying Cost," as reflected in the Statements of Financial
       Condition.

                                       14

<PAGE>

     The following table sets forth the amortized cost and fair value of the
Company's securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                        At June 30,
                                                ------------------------------------------------------------
                                                            2002                             2001
                                                ----------------------------    ----------------------------
                                                Amortized Cost    Fair Value    Amortized Cost    Fair Value
                                                --------------    ----------    --------------    ----------
                                                                      (In thousands)
<S>                                             <C>               <C>           <C>               <C>
Mortgage-backed securities:

   Fannie Mae and Government National
   Mortgage Association ......................      $  1,871       $   1,866        $  1,987       $   1,993
                                                    --------       ---------        --------       ---------
Other debt securities:
   U.S. Treasury and Agency ..................         6,641           6,688           3,259           3,267
   Other .....................................           797             809             382             385
                                                    --------       ---------        --------       ---------
Total debt securities ........................         7,438           7,497           3,641           3,652
                                                    --------       ---------        --------       ---------
Equity securities(1) .........................         1,001           1,009           1,003           1,150
Federal Home Bank Stock ......................         1,049           1,049           1,049           1,049
Net unrealized gain (2) ......................            62               -             164               -
                                                    --------       ---------        --------       ---------
Total securities, net ........................      $ 11,421       $  11,421        $  7,844       $   7,844
                                                    ========       =========        ========       =========
</TABLE>

____________________
(1) Equity securities consist of FHLMC common stock and mutual fund securities.
(2) The net unrealized gain at June 30, 2002 and 2001 relates to available for
    sale securities in accordance with SFAS No.115. The net unrealized gain is
    presented in order to reconcile the "Amortized Cost" of the Company's
    securities portfolio in the "Carrying Cost," as reflected in the Statements
    of Financial Condition.

     The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification and by type of security, at
the dates indicated.

<TABLE>
<CAPTION>
                                                                     At June 30,
                                       ----------------------------------------------------------------------------
                                                2002                      2001                        2000
                                       -----------------------   -----------------------    -----------------------
                                       Amortized                 Amortized                  Amortized
                                          Cost      Fair Value      Cost      Fair Value       Cost      Fair Value
                                       ---------    ----------   ---------    ----------    ---------    ----------
                                                                     (In thousands)
<S>                                    <C>          <C>          <C>          <C>           <C>          <C>
Held to Maturity
     Other debt securities ...........   $   100      $   100      $   100      $   100       $   100      $   100
                                         -------      -------      -------      -------       -------      -------
         Total held to maturity ......       100          100          100          100           100          100
                                         -------      -------      -------      -------       -------      -------

Available-for-Sale:
     Mortgage-backed securities ......     1,871        1,866        1,987        1,993         3,205        3,155
     Other debt securities ...........     7,338        7,397        3,442        3,453         4,698        4,599
     Equity securities: ..............     1,001        1,009        1,003        1,150         1,004        1,106
     Net unrealized gain (loss)(1) ...        62            -          164            -           (47)           -
                                         -------      -------      -------      -------       -------      -------
         Total available-for-sale ....    10,272       10,272        6,596        6,596         8,860        8,860
                                         -------      -------      -------      -------       -------      -------

Certificates of deposit ..............         -            -           99           99           198          198
                                         -------      -------      -------      -------       -------      -------
Federal Home Loan Bank Stock .........     1,049        1,049        1,049        1,049           776          776
                                         -------      -------      -------      -------       -------      -------

     Total securities, net ...........   $11,421      $11,421      $ 7,844      $ 7,844       $ 9,835      $ 9,835
                                         =======      =======      =======      =======       =======      =======
</TABLE>

____________________
(1) The net unrealized gains (loss) at June 30, 2002, 2001 and 2000 relate to
    available for sale securities in accordance with SFAS No. 115. The net
    unrealized gain (loss) is presented in order to reconcile the "Amortized
    Cost" of the Company's securities portfolio in the "Carrying Cost," as
    reflected in the Statements of Financial Condition.

                                       15

<PAGE>

     The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Company's investment
securities at June 30, 2002, by remaining period to contractual maturity. With
respect to mortgage-backed securities, the entire amount is reflected in the
maturity period that includes the final security payment date and, accordingly,
no effect has been given to periodic repayments or possible prepayments.

<TABLE>
<CAPTION>
                                                                          At June 30, 2002
                                               ---------------------------------------------------------------------------
                                                       Held-to-Maturity                       Available for Sale
                                               ---------------------------------      ------------------------------------
                                                                        Weighted                                  Weighted
                                               Amortized      Fair       Average      Amortized      Fair          Average
                                                  Cost        Value       Yield         Cost         Value          Yield
                                               ---------    ---------   --------      ---------    ---------      --------
                                                                         (Dollars in thousands)
<S>                                            <C>           <C>        <C>          <C>          <C>           <C>
Debt Securities
Mortgaged-backed securities:
   Due within 1 year ........................   $      -      $     -           -%     $      -     $      -            -%
   Due after 1 year but within 5 years ......          -            -           -             -            -            -
   Due after 5 years but within 10 years ....          -            -           -             -            -            -
   Due after 10 years .......................          -            -           -         1,871        1,866         6.31
                                                --------      -------                  --------     --------
           Total ............................          -            -           -         1,871        1,866         6.31
                                                --------      -------                  --------     --------

U.S. Treasury and Agency:
   Due within 1 year ........................          -            -           -           200          201         5.45
   Due after 1 year but within 5 years ......        100          100        6.01         4,404        4,464         5.04
   Due after 5 years but within 10 years ....          -            -           -         1,250        1,253         4.60
   Due after 10 years .......................          -            -           -           687          670         5.94
                                                --------      -------                  --------     --------
           Total ............................        100          100        6.01         6,541        6,588         5.06
                                                --------      -------                  --------     --------

Corporate & Other:
   Due within 1 year ........................          -            -           -             -            -            -
   Due after 1 year but within 5 years ......          -            -           -           512          509         7.20
   Due after 5 years but within 10 years ....          -            -           -             -            -            -
   Due after 10 years .......................          -            -           -           285          300         4.60
                                                --------      -------                  --------     --------
           Total ............................          -            -           -           797          809         4.60
                                                --------      -------                  --------     --------

Equity Securities: ..........................          -            -           -         1,001        1,009            -
                                                --------      -------                  --------     --------

Total:
   Due within 1 year ........................          -            -           -           200          201         5.45
   Due after 1 year but within 5 years ......        100          100        6.01         4,916        4,973         5.26
   Due after 5 years but within 10 years ....          -            -           -         1,250        1,253            -
   Due after 10 years .......................          -            -           -         2,843        2,836         6.05
   Equity Securities ........................          -            -           -         1,001        1,009            -
Federal Home Loan Bank Stock ................          -            -           -         1,049        1,049            -
                                                                                       --------     --------
   Total ....................................   $    100      $   100        6.01%     $ 11,259     $ 11,321         5.55%
                                                ========      =======                  ========     ========
</TABLE>

                                       16

<PAGE>

Sources of Funds

     General. Deposits, loans and security repayments and prepayments, proceeds
of refinanced loans sold to Fannie Mae and cash flows generated from operations
are the primary sources of the Bank's funds for use in lending and for other
general purposes.

     Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of regular (passbook)
savings accounts, checking accounts, money market deposit accounts, statement
savings accounts, IRAs and certificates of deposit. In recent years, the Bank
has offered certificates of deposit with maturities of up to 60 months. At June
30, 2002, the Bank's core deposits (which the Bank considers to consist of
checking accounts, regular savings accounts and statement savings accounts)
constituted 51.1% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Bank's deposits are obtained
predominantly from Ashe, Alleghany and Watauga counties. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect the Bank's
ability to attract and retain deposits.

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

                                                    For the Year Ended June 30,
                                                    ---------------------------
                                                      2002               2001
                                                    --------           --------
                                                          (In thousands)

Total deposits at beginning of period,
   including accrued interest ....................  $120,074           $102,680
Net increase before interest credited ............    12,472             12,164
Interest credited ................................     4,223              5,230
                                                    --------           --------
Total deposits at end of period ..................  $136,769           $120,074
                                                    ========           ========

     At June 30, 2002, the Bank had approximately $19.2 million in Jumbo
certificate of deposits (accounts in amounts over $100,000) maturing as follows:

                                                                      Weighted
                                                     Amount         Average Rate
                                                     ------         ------------
                                                          (In thousands)

   Maturity Period
     Within three months .........................  $  7,168              4.59%
     After three but within six months ...........     4,270              3.30%
     After six but within 12 months ..............     3,693              3.78%
     After 12 months .............................     4,691              5.08%
                                                    --------
              Total ..............................  $ 19,822              4.03%
                                                    ========
                                       17

<PAGE>

     The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates at the dates indicated.

<TABLE>
<CAPTION>
                                                                     At June 30,
                                ---------------------------------------------------------------------------------
                                                  2002                                      2001
                                --------------------------------------    ---------------------------------------
                                              Percent of      Weighted                   Percent        Weighted
                                                Total         Average                    of Total       Average
                                  Amount       Deposits         Rate        Amount       Deposits         Rate
                                ----------   -----------    ----------    ---------     ----------     ----------
                                                             (Dollars in thousands)
<S>                             <C>          <C>            <C>           <C>           <C>            <C>
Noninterest bearing
checking accounts ...........   $   12,382          9.05%         0.00%   $    8,502          7.08%          0.00%

Interest bearing
checking accounts ...........       22,768         16.65%         1.34%       19,195         15.99%          2.37%

Money Market accounts .......        1,467          1.07%         1.30%        1,402          1.17%          2.50%

Savings .....................       33,299         24.35%         2.40%       21,823         18.17%          3.63%

Certificates of deposit .....       66,667         48.74%         3.78%       68,909         57.39%          5.79%

Accrued interest ............          186          0.14%         0.00%          243          0.20%          0.00%
                                ----------   -----------    ----------    ----------    ----------     ----------

     Totals .................   $  136,769        100.00%         4.39%   $  120.074        100.00%          4.39%
                                ==========   ===========    ==========    ==========    ==========     ==========
</TABLE>

     The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at June 30, 2002 and the period to maturity.

<TABLE>
<CAPTION>
                                        Period to Maturity at June 30, 2002
                                ---------------------------------------------------
                                Less than      One to         Four to
     Interest Rate Range         One Year    Three years    Five Years      Total
     -------------------        ----------   -----------    ----------    ---------
                                               (Dollars in thousands)
<S>                             <C>          <C>            <C>           <C>
0.00% to 5.99% ..............   $   45,085   $    13,542    $       95    $  58,722
6.00% to 7.99% ..............        5,828         2,117             -        7,945
                                ----------   -----------    ----------    ---------
              Total .........   $   50,913   $    15,659    $       95    $  66,667
                                ==========   ===========    ==========    =========
</TABLE>

     Borrowings. The Bank may obtain advances from the FHLB as an alternative to
retail deposit funds and may do so in the future as part of its operating
strategy. These advances would be collateralized primarily by certain of the
Bank's mortgage loans and secondarily by the Bank's investment in capital stock
of the FHLB. See "Regulation--Regulation of Federal Savings Banks--Federal Home
Loan Bank System." Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. As of June 30, 2002, the maximum
amount of FHLB advances available to the Bank was $26.3 million. The Bank had
advances of $18.9 million at June 30, 2002 from the FHLB. Interest is payable at
rates ranging from 2.15% to 6.87%. Advances of $762,500 are due August 2002,
$147,424 are due January 2007, $5.0 million are due September 2010, $7.0 million
are due November 2010, $4.0 million are due January 2011 and $2.0 million that
mature daily.

Subsidiary Activities

     AF Insurance Services, Inc., a wholly owned subsidiary of the Company, was
formed in July 1997 upon the purchase of two independent insurance agencies for
the sole purpose of selling traditional

                                       18

<PAGE>

property and casualty, life and health insurance. Additional insurance agencies
were purchased in April of 1999, December 1999, November 2000 and October 2001.
AF Insurance Services, Inc. offers these services in a segregated location at
the Company's offices in, Boone, Sparta, Lenoir, Jefferson, Wilkesboro, West
Jefferson and Elkin, North Carolina.

AF Brokerage, Inc.

     AF Brokerage, Inc., a wholly owned subsidiary of the Company, was formed in
August 1998 for the purpose of selling non-insured investment products through a
third-party vendor. During the 2000 fiscal year, AF Brokerage, Inc.'s
application for registration was accepted by the NASD and the broker dealer
began selling non-insured investment products directly. AF Brokerage, Inc.
offers these services in a segregated location at the Company's offices and
branch locations.

Personnel

     As of June 30, 2002, the Company had 108 full-time employees. The employees
are not represented by a collective bargaining unit and the Company considers
its relationship with its employees to be good. See "Executive Compensation" for
a description of certain compensation and benefit programs offered to the Bank's
employees.

                                   REGULATION

General

     The Mutual Holding Company, the Company and the Bank are subject to
extensive regulation, examination and supervision by the OTS, as their
chartering agency. The Bank's deposit accounts are insured up to applicable
limits by the FDIC and it is a member of the FHLB of Atlanta. The Bank must file
reports with the OTS concerning its activities and financial condition and it
must obtain regulatory approvals prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions. The OTS
conducts periodic examinations to assess the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings institution can engage
and is intended primarily for the protection of the insurance fund and
depositors. The Company and the Mutual Holding Company, as savings and loan
holding companies, are required to file certain reports with, and otherwise
comply with, the rules and regulations of the OTS.

     The OTS has significant discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the
OTS or the Congress, could have a material adverse impact on the Company, the
Mutual Holding Company or the Bank.

     On November 12, 1999, President Clinton signed into law landmark financial
services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act
repeals depression-era laws restricting affiliations among banks, securities
firms, insurance companies and other financial services providers. Where
relevant, this regulation section discussed the impact of the GLB Act on the
Bank, the Company and the Mutual Holding Company.

     Any change in such laws and regulations, whether by the OTS, the FDIC or
through legislation, could have a material adverse impact on the Bank and the
Company and their operations and stockholders.

                                       19

<PAGE>

     The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings institutions and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.

Regulation of Federal Savings Banks

     Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act ("HOLA") and the regulations of the OTS
thereunder. Under these laws and regulations, the Bank may invest in mortgage
loans secured by residential and non-residential real estate, commercial and
consumer loans, certain types of debt securities and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(f) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.

     Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings institution may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not exceeding 10% of the association's unimpaired capital and surplus, if
such loans and extensions of credit are fully secured by readily-marketable
collateral. At June 30, 2002, the Bank's limit on loans to one borrower was
approximately $2.5 million. At June 30, 2002, the Bank's largest aggregate
amount of loans to one borrower was $2.0 million and is secured by a mix of one-
to four-family and multifamily real estate properties and commercial properties.
The second largest borrower had an aggregate balance of approximately $1.5
million, secured by commercial property. At June 30, 2002, all of the loans in
both of these lending relationships were performing in accordance with their
terms.

     QTL Test. Under federal law, the Bank must comply with the qualified thrift
lender or "QTL" test. The QTL test requires the Bank to maintain at least 65% of
its "portfolio assets" in certain "qualified thrift investments" in at least
nine months of the most recent 12-month period. "Portfolio assets" means, in
general, the Bank's total assets less the sum of:

     .    specified liquid assets up to 20% of total assets;

     .    goodwill and other intangible assets; and

     .    the value of property used to conduct the Bank's business.

     The QTL test is also satisfied if the Bank qualifies as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
The Bank met the QTL test at June 30, 2002, and in each of the prior 12 months,
and, therefore, qualifies as a thrift lender. If the Bank fails the QTL test it
must either operate under certain restrictions on its activities or convert to a
bank charter.

     Capital Requirements. OTS regulations require the Bank to meet three
minimum capital standards:

                                       20

<PAGE>

     .    a tangible capital ratio requirement of 1.5% of total assets, as
          adjusted under the OTS regulations;

     .    a leverage ratio requirement of 3% of core capital to such adjusted
          total assets, if a savings association has been assigned the highest
          composite rating of 1 under the Uniform Financial Institutions Ratings
          System; and

     .    a risk-based capital ratio requirement of 8% of core and supplementary
          capital to total risk-weighted assets.

     The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 is 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. In determining compliance with the risk based
capital requirement, the Bank must compute its risk-weighted assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks that the OTS believes
are inherent in each respective type of asset.

     OTS regulations define tangible capital, generally, as common stockholders'
equity (including retained earnings), certain non-cumulative perpetual preferred
stock and related earnings, nonwithdrawable accounts and pledged deposits that
qualify as core capital and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. The regulations define core
capital similarly to tangible capital, but core capital also includes certain
qualifying supervisory goodwill. Supplementary capital currently includes
cumulative and other perpetual preferred stock, mandatory convertible debt
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. In addition, supplementary capital includes up to 45%
of unrealized gains on available-for-sale equity securities with a readily
determinable fair value. The allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of supplementary capital that may be included as total capital
cannot exceed the amount of core capital.

     The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at June 30, 2002:

                                                       Capital          Excess
                                    Amount          Requirements       Capital
                                  ----------      ----------------   -----------
                                                   (In thousands)

Core Capital ...................    16,578             6,973            9,605

Risk-based capital .............    17,699            10,893            6,806

                                       21

<PAGE>

     A reconciliation between regulatory capital and GAAP capital at June 30,
2002 in the accompanying financial statements is presented below:

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

GAAP capital ........................................   $    16,618      $    16,618

Net unrealized loss on available for
   sale investment securities, net of tax ...........           (40)             (40)

Unrealized gains on available for
   sale equity securities ...........................             -               36

Allowance for loan losses included as
   supplementary capital ............................             -            1,131

Equity investment and other assets ..................             -              (46)
                                                        -----------      -----------

Regulatory capital ..................................   $    16,578      $    17,699
                                                        ===========      ===========
</TABLE>

     Limitation on Capital Distributions. The OTS imposes various restrictions
or requirements on the Bank's ability to make capital distributions, including
cash dividends. A savings institution that is the subsidiary of a savings and
loan holding company, such as the Bank, must file an application or a notice
with the OTS at least 30 days before making a capital distribution. The Bank
must file an application for prior approval if the total amount of its capital
distributions, including the proposed distribution, for the applicable calendar
year would exceed an amount equal to the Bank's net income for that year plus
the Bank's retained net income for the previous two years. However, a savings
association subsidiary of a savings and loan holding company, such as the Bank,
will continue to have to file a notice, unless the specific capital distribution
requires an application.

   The OTS may disapprove of a notice or application if:

   .  the Bank would be undercapitalized following the distribution;

   .  the proposed capital distribution raises safety and soundness concerns; or

   .  the capital distribution would violate a prohibition contained in any
      statute, regulation or agreement.

     Liquidity. A federal savings association, such as the Bank is required to
maintain a sufficient amount of liquid assets to ensure its safe and sound
operation

     Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended June 30, 2002 totaled $44,000.

     Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings institutions to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
institutions located in another state and (b) to an association that either
satisfies the "QTL" test for a qualified thrift

                                       22

<PAGE>

lender or qualifies as a "domestic building and loan association" under the
Internal Revenue Code of 1986 (the "Code"), which imposes qualification
requirements similar to those for a "qualified thrift lender" under HOLA. See
"--QTL Test." The authority for a federal savings institution to establish an
interstate branch network would facilitate a geographic diversification of the
association's activities. This authority under HOLA and the OTS regulations
preempts any state law purporting to regulate branching by federal savings
institutions.

     Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination on January 20, 1998.

     The CRA regulations establish an assessment system that bases an
association's rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b)
an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs, and
other offices.

     Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings institution (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.

     The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (a) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or

                                       23

<PAGE>

present other unfavorable features and (b) not exceed certain limitations on the
amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of the association's capital. In
addition, extensions of credit in excess of certain limits must be approved by
the association's board of directors.

     Enforcement. The OTS has primary enforcement responsibility over savings
associations, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, the OTS may
initiate these enforcement actions in response to violations of laws and
regulations and to unsafe or unsound practices.

     Standards for Safety and Soundness. Under federal law, the OTS adopted, a
set of guidelines prescribing safety and soundness standards. These guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings standards,
compensation, fees and benefits and excessive compensation or compensation
leading to material financial loss. In general, the guidelines require
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines.

     In addition, the OTS adopted regulations that authorize, but do not
require, the OTS to order an institution that has been given notice that it is
not satisfying these safety and soundness standards to submit a compliance plan.
If, after being notified, an institution fails to submit an acceptable plan or
fails in any material respect to implement an accepted plan, the OTS must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of federal law. If an
institution fails to comply with such an order, the OTS may seek to enforce the
order in judicial or administrative proceedings and to impose civil money
penalties.

     Prohibitions Against Tying Arrangements. 12 U.S.C. (S) 1972 prohibits
federal savings banks from engaging in certain tying arrangements. Under this
prohibition, as interpreted by the OTS, a depository institution may not,
subject to some exceptions, extend credit to or offer any other service, or fix
or vary the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or its affiliates or not obtain services of a competitor.

     Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings institution to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Banks are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value limitations so
long as such exceptions are reviewed and justified appropriately. The guidelines
also list a number of lending situations in which exceptions to the
loan-to-value standards are justified.

     Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings institutions. For
this purpose, a savings institution would be placed in one of five categories
based on the association's capital. Generally, a savings institution is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not

                                       24

<PAGE>

subject to any order or directive by the OTS to meet a specific capital level. A
savings institution will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the CAMEL financial institutions rating system). A savings institution
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings institution
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements." At
June 30, 2002, the Bank met the criteria for being considered
"well-capitalized."

     Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.

     Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund, and the Bank pays its deposit insurance assessments
to the SAIF. The FDIC also maintains another insurance fund, the Bank Insurance
Fund, which primarily insures the deposits of banks and state chartered savings
banks.

     Under federal law, the FDIC established a risk based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions whereby the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the quarter
ending three months before the beginning of the assessment period. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the regulations, the OTS applies
different assessment rates that correspond to nine assessment risk
classifications (i.e., combinations of capital groups and supervisory
subgroups). Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC may raise the assessment rates as necessary to
maintain the required reserve ratio of 1.25%.

     In addition, FDIC regulations require all insured institutions to pay
assessments to the FDIC at an annual rate of approximately .0184% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation,
an agency of the federal government established to recapitalize the predecessor
to the SAIF. These assessments will continue until the Financing Corporation
bonds mature in 2017.

     Federal Home Loan Bank System. The Bank is a member of the FHLB of Atlanta,
which is one of the regional FHLBs composing the FHLB System. Each FHLB provides
a central credit facility primarily for its member institutions. The Bank, as a
member of the FHLB of Atlanta, is required to acquire and hold shares of capital
stock in the FHLB of Atlanta in an amount equal to 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations, but not less than $500. The Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock at June 30, 2002,
of $1.0 million. Any advances from a FHLB must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance.

     FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirement could
reduce the amount the FHLBs can pay as

                                       25

<PAGE>

dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
be affected.

         Under the GLB Act, membership in the FHLB System is now voluntary for
all federally-chartered savings banks, such as the Bank. The GLB Act also
replaces the existing redeemable stock structure of the FHLB System with a
capital structure that requires each FHLB to meet a leverage limit and a
risk-based permanent capital requirement.

         Federal Reserve System. Under the Federal Reserve Board's regulations,
the Bank is required to maintain non-interest-earning reserves against its
transaction accounts. Federal Reserve Board regulations generally require that
(a) reserves of 3% must be maintained against aggregate transaction accounts of
$41.3 million or less, subject to adjustment by the Federal Reserve Board, and
(b) a reserve of $1.2 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) must be maintained against that portion of
total transaction accounts in excess of $41.3 million. The first $5.7 million of
otherwise reservable balances are exempted from the reserve requirements. The
Bank is in compliance with these reserve requirements. Because required reserves
must be maintained in the form of either vault cash, a noninterest bearing
account at a Federal Reserve Bank, or a passthrough account as defined by the
Federal Reserve Board, the effect of this reserve requirement is to reduce the
Bank's interest-earning assets to the extent that the requirement exceeds vault
cash.

Regulation of the Holding Company

         General. The Holding Company and the Company are holding companies
chartered pursuant to Section 10(o) of the HOLA. As such, the Holding Company
and the Company are registered with and subject to OTS examination and
supervision as well as certain reporting requirements. In addition, the OTS has
enforcement authority over the Company and the Holding Company and any of its
non-savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness, or stability of a subsidiary savings
institution. Unlike bank holding companies, federal mutual holding companies are
not subject to any regulatory capital requirements or to supervision by the
Federal Reserve System.

         Restrictions Applicable to Activities of Mutual Holding Companies.
Under federal law, a mutual holding company may engage only in the following
activities:

         .     investing in the stock of a savings institution;

         .     acquiring a mutual association through the merger of such
               association into a savings institution subsidiary of such holding
               company or an interim savings institution subsidiary of such
               holding company;

         .     merging with or acquiring another holding company, one of whose
               subsidiaries is a savings institution;

         .     investing in a corporation the capital stock of which is
               available for purchase by a savings institution under federal law
               or under the law of any state where the subsidiary savings
               institution or association is located; and

         .     the permissible activities described above for non-grandfathered
               savings and loan holding companies.

                                       26

<PAGE>

         If a mutual holding company acquires or merges with another holding
company, the holding company acquired or the holding company resulting from such
merger or acquisition may only invest in assets and engage in the foregoing
activities, and it has a period of two years to cease any non conforming
activities and divest any non-conforming investments.

         Restrictions Applicable to All Savings and Loan Holding Companies.
Federal law prohibits a savings and loan holding company, including the Company
and the Mutual Holding Company, directly or indirectly, from acquiring:

         .     control (as defined under HOLA) of another savings institution
               (or a holding company parent) without prior OTS approval;

         .     through merger, consolidation, or purchase of assets, another
               savings institution or a holding company thereof, or acquiring
               all or substantially all of the assets of such institution (or a
               holding company) without prior OTS approval; or

         .     control of any depository institution not insured by the FDIC
               (except through a merger with and into the holding company's
               savings institution subsidiary that is approved by the OTS).

         A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except:

         .     in the case of certain emergency acquisitions approved by the
               FDIC;

         .     if such holding company controls a savings institution subsidiary
               that operated a home or branch office in such additional state as
               of March 5, 1987; or

         .     if the laws of the state in which the savings institution to be
               acquired is located specifically authorize a savings institution
               chartered by that state to be acquired by a savings institution
               chartered by the state where the acquiring savings institution or
               savings and loan holding company is located or by a holding
               company that controls such a state chartered association.

         If the savings institution subsidiary of a federal mutual holding
company fails to meet the QTL test as set forth in Section 10(m) of the HOLA and
OTS regulations, the holding company must register with the FRB as a bank
holding company under the BHC Act within one year of the savings institution's
failure to so qualify.

Regulation of Insurance Activities

         The Company offers various insurance products through AF Insurance
Services, Inc., a wholly owned subsidiary of the Company. AF Insurance Services,
Inc. is licensed and regulated by the North Carolina Department of Insurance
(the "Department"). As such AF Insurance Services, Inc. is subject to the
supervision, examination and reporting requirements of the Department and its
activities are governed by the laws and regulations of the State of North
Carolina.

Regulation of Securities Brokerage Activities

         The Company offers non-insured investment products through AF
Brokerage, Inc., a wholly owned subsidiary of the Company. AF Brokerage, Inc. is
a North Carolina corporation which is

                                       27

<PAGE>

registered as a broker-dealer under Section 15 of the Securities Exchange Act of
1934, as amended, and is a member of the National Association of Securities
Dealers, Inc. (the "NASD"). As such, AF Brokerage, Inc. is subject to the
supervision, examination and reporting requirements of the SEC, the NASD and the
various states in which it conducts business.

Federal Securities Laws

         The Common Stock of the Company is registered with the SEC under the
Exchange Act. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.

The USA PATRIOT Act

         In response to the events of September 11/th/, President George W. Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.

         Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:

    .    Pursuant to Section 352, all financial institutions must establish
         anti-money laundering programs that include, at minimum: (i) internal
         policies, procedures, and controls, (ii) specific designation of an
         anti-money laundering compliance officer, (iii) ongoing employee
         training programs, and (iv) an independent audit function to test the
         anti-money laundering program.

    .    Section 326 of the Act authorizes the Secretary of the Department of
         Treasury, in conjunction with other bank regulators, to issue
         regulations by October 26, 2002 that provide for minimum standards with
         respect to customer identification at the time new accounts are opened.

    .    Section 312 of the Act requires financial institutions that establish,
         maintain, administer, or manage private banking accounts or
         correspondent accounts in the United States for non-United States
         persons or their representatives (including foreign individuals
         visiting the United States) to establish appropriate, specific, and,
         where necessary, enhanced due diligence policies, procedures, and
         controls designed to detect and report money laundering.

    .    Effective December 25, 2001, financial institutions are prohibited from
         establishing, maintaining, administering or managing correspondent
         accounts for foreign shell banks (foreign banks that do not have a
         physical presence in any country), and will be subject to certain
         recordkeeping obligations with respect to correspondent accounts of
         foreign banks.

    .    Bank regulators are directed to consider a holding company's
         effectiveness in combating money laundering when ruling on Federal
         Reserve Act and Bank Merger Act applications.

                                       28

<PAGE>

The Sarbanes-Oxley Act of 2002

         On July 31, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of
corporate governance and accounting measures for public companies designed to
promote honesty and transparency in corporate America and better protect
investors from the type of corporate wrongdoing that occurred in Enron, WorldCom
and similar companies. The Sarbanes-Oxley Act's principal legislation includes:

    .    the creation of an independent accounting oversight board;
    .    auditor independence provisions which restrict non-audit services that
         accountants may provide to their audit clients;
    .    additional corporate governance and responsibility measures, including
         the requirement that the chief executive officer and chief financial
         officer certify financial statements and the expansion of powers of
         audit committees;
    .    expanded disclosure requirements, including accelerated reporting of
         stock transactions by insiders;
    .    mandatory disclosure by analysts of potential conflicts of interest;
         and
    .    a range of enhanced penalties for fraud and other violations.

         We do not believe that the Sarbanes-Oxley Act will have a material
adverse affect upon our operations in the near term.

                           FEDERAL AND STATE TAXATION

Federal Taxation

         General. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank, Mutual Holding Company or the Company. The Bank has not been
audited by the Internal Revenue Service for the last eight years.

         For federal income tax purposes, the Bank reports its income on the
basis of a taxable year ending June 30, using the accrual method of accounting,
and is subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's tax reserve
for bad debts, discussed below. The Bank and the Company constitute an
affiliated group of corporations and, therefore, are eligible to report their
income on a consolidated basis. Because the Mutual Holding Company will own less
than 80% of the Common Stock, it will not be a member of such affiliated group
and will report its income on a separate return.

         Bad Debt Reserves. The Bank, as a "small bank" (one with assets having
an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general, are
loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing the Bank's taxable income. Pursuant to the Small
Business Job Protection Act of 1996, the Bank is now recapturing (taking into
income) over a multi-year period a portion of the balance of its bad debt
reserve as of June 30, 1996. Since the Bank has already provided a deferred tax
liability equal to the amount of such recapture, the recapture will not
adversely impact the Bank's financial condition or results of operations.

         Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the

                                       29

<PAGE>

amount distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute non-dividend distributions and,
therefore, will not be included in the Bank's income.

         The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate.

         Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired, under
current Administration proposals, such tax will be retroactively reinstated for
taxable years beginning after December 31, 1996 and before January 2008.

         Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. Because, following completion of the
Reorganization, the Mutual Holding Company will not be a member of such
affiliated group, it will not qualify for such 100% dividends exclusion, but
will be entitled to deduct 80% of the dividends it receives from the Company so
long as it owns more than 20% of the common stock.

State Taxation

         Under North Carolina law, the corporate income tax is 6.9% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of 0.0015
applied to the greatest of the institution's (i) capital stock, surplus and
undivided profits, (ii) investment in tangible property in North Carolina or
(iii) 55% of the appraised valuation of property in North Carolina.

Item 2.           Properties

         The Company conducts its business through its main office, located in
West Jefferson, North Carolina, and its branches located in Boone, Elkin,
Jefferson, Lenoir, Sparta, Warrensville, Wilkesboro and West Jefferson, North
Carolina. The Company owns the main office, corporate offices, the Mt. Jefferson
Financial Center Office, the Lenoir office and the Jefferson Branch.
Additionally, the Company holds an option to acquire land in Boone, North
Carolina to construct a Financial Service Center which is expected to be
completed during the 2004 fiscal year. Management believes that the Bank's
current and planned facilities are adequate to meet the present and immediately
foreseeable needs of the Bank and the Company.

                                       30

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                 Net Book
                                                                        Date Leased or         Lease             Value at
                                                    Leased or Owned        Acquired       Expiration Date     June 30, 2002
                                                    ---------------     --------------    ---------------     -------------
                                                                             (Dollars in thousands)
<S>                                                 <C>                 <C>               <C>                 <C>
Corporate Offices..............................           Owned           06/15/2000              --          $1,526,368
21 East Ashe Street
West Jefferson, NC 28694

Insurance and Brokerage Offices................           Owned            06/30/97               --          $  389,198
206 S. Jefferson Avenue
West Jefferson, NC 28694

AF Bank........................................           Owned            06/30/63               --          $  137,878
205 S. Jefferson Avenue
West Jefferson, NC 28694

AF Bank........................................           Owned            05/18/94               --          $  494,705
840 E. Main Street
Jefferson, NC 28640

AF Bank........................................          Leased            08/31/98       08/31/2003*                 --
4951 NC Hwy. 88 West
Warrensville, NC 28693

AF Bank........................................          Leased            01/09/98       12/31/2003*                 --
403 South Main Street
Sparta, NC 28675

AF Bank........................................          Leased            02/26/99       02/26/2003***               --
285 Hwy 105 Ext.
Boone, NC 28607

AF Insurance Services, Inc.....................          Leased            09/01/97       08/31/2002****              --
315 Main Street
North Wilkesboro, NC 28659

AF Insurance Services, Inc.....................           Owned           07/03/2000              --          $   94,067
324 Morganton Blvd., SW
Lenoir, NC 28645

AF Insurance Services, Inc.....................          Leased            12/01/99       11/30/2002**                --
277 A West Main Street
Elkin, NC 28621

AF Insurance Services, Inc.....................          Leased           01/01/2002      01/01/2005**                --
948 Johnson Ridge Road
Elkin, NC 28621

AF Insurance Services, Inc.....................          Leased            12/01/00       09/30/2007                  --
400 Shadowline Drive
Boone, NC 28607

AF Financial Center                                       Owned            04/10/01               --          $1,380,156
1441 Mt. Jefferson Road
West Jefferson, NC 28694

AF Bank                                                  Leased            01/08/01       01/08/11                    --
1489 Mt. Jefferson Road
West Jefferson, NC 28694
</TABLE>

________________________________

* Option to renew for two additional five-year periods.
** Option to renew for an additional three-year period.
*** Option to renew two additional one-year periods.
**** Option to renew for three additional one-year periods.

                                       31

<PAGE>

Item 3.   Legal Proceedings

     At June 30, 2002, there were no material legal proceedings to which the
Company or any of its subsidiaries was a party or to which any of its property
was subject.

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

     Not applicable.

                                     PART II

Item 5.   Market for Common Stock and Related Stockholder Matters

     Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Common Stock" and "Market for the
Common Stock" in the Registrant's 2002 Annual Report to Stockholders on page 52,
and is incorporated herein by reference.

     Information relating to the payment of dividends by the Registrant appears
under "Common Stock" and "Market for the Common Stock" in the Registrant's 2002
Annual Report to Stockholders on page 52, and is incorporated herein by
reference. A dividend declared by the Board of Directors of the Bank is
considered a capital distribution from the Bank to the stockholders, including
AsheCo, M.H.C., its mutual holding company. Under the requirements of the OTS,
there are certain restrictions on the ability of the Bank to pay a capital
distribution. See "Regulation -- Limitation on Capital Distributions."

     The Company paid cash dividends totaling $.20 per share during each of the
years ended June 30, 2002 and 2001.

Item 6.   Management's Discussion and Analysis

     Certain of the above-captioned information appears under "Selected
Financial and Other Data of the Company" "Management's Discussion and Analysis"
and in the Registrant's 2002 Annual Report to Stockholders on pages 2 through 3,
and 7 through 19 and is incorporated herein by reference.

Item 7.   Financial Statements

     The Financial Statements of AF Bankshares, Inc., together with the report
thereon by Larrowe & Company, PLC appears in the Registrant's 2002 Annual Report
to Stockholders on pages 20 through 49 and are incorporated herein by reference.

                                                                   Page(s) in
                                                                  Annual Report
                                                                 ---------------

..  Independent Auditor's Report ................................      49
..  Consolidated Statements of Financial Condition,
     June 30, 2002 and 2001 ....................................      20
..  Consolidated Statements of Income
     Years Ended June 30, 2002 and 2001 ........................      21
..  Consolidated Statements of Stockholders' Equity,
     Years Ended June 30, 2002 and 2001 ........................      22
..  Consolidated Statements of Cash Flows,
     Years Ended June 30, 2002 and 2001 ........................      23
..  Notes to Consolidated Financial Statements ..................      25

                                       32

<PAGE>

Item 8.   Changes in and Disagreement With Accountants On Accounting and
Financial Disclosure

     Not applicable.


                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons

     The information relating to Directors and Executive Officers of the Company
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on November 4, 2002.

Item 10.  Executive Compensation

     The information relating to executive compensation is incorporated herein
by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 4, 2002.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

     The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on November 4, 2002.

     The following table sets forth the aggregate information as of the
Company's equity compensation plans as in effect as of June 30, 2002.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                           Equity Compensation Plan Information

-----------------------------------------------------------------------------------------------------------------------
                                                                                              Number of securities
                                       Number of securities                                 remaining available for
                                           to be issued            Weighted-average       future issuance under equity
                                         upon exercise of          exercise price of           compensation plans
                                       outstanding options,       outstanding options,       (excluding securities
Plan category                          warrants and rights        warrants and rights       reflected in column (a))
-------------                          -------------------        -------------------       ------------------------
-----------------------------------------------------------------------------------------------------------------------
                                               (a)                        (b)                          (c)
-----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                         <C>                    <C>
Equity compensation plans
   approved by security
   holders .........................          21,707                $        18.50                        --
-----------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
   not approved by
   security holders ................              --                            --                        --
                                           ---------
-----------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------
     Total .........................          21,707                $        18.50                        --
                                           =========                                              ==========
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

Item 12.  Certain Relationships and Related Transactions

     The information relating to certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on November 4, 2002.

                                       33

<PAGE>

Item 13.  Exhibits and Reports On Form 8-K

     (a)  Exhibits

          2.1       Agreement and Plan of Reorganization dated September 15,
                    1997 by and among Ashe Federal Bank, AF Bankshares, Inc. and
                    Ashe Interim Savings Bank (incorporated by reference to the
                    Registration Statement on Form 8-A, as filed with the SEC on
                    June 16, 1998 (the "Form 8-A")).

          3.1       Federal Stock Charter of the Company (Incorporated by
                    reference to Exhibit 3.1 of the Form 8-A).

          3.2       Bylaws of the Company (Incorporated by reference to Exhibit
                    3.2 of the Form 8-A).

          4.1       Common Stock Certificate of the Company (Incorporated by
                    reference to Exhibit 4.3 of the Form 8-A).

          10.1      Employment Agreement with James A. Todd, President and Chief
                    Executive Officer (incorporated by reference to the 10-KSB
                    for the year ended June 30, 1998).*

          10.2      Employment Agreement with Melanie Paisley Miller, Executive
                    Vice President, Chief Financial Officer, Secretary and
                    Treasurer (incorporated by reference to the 10-KSB for the
                    year ended June 30, 1998).*

          10.3      Employment Agreement with Martin G. Little, Senior Vice
                    President and Chief Lending Officer (incorporated by
                    reference to the 10-KSB for the year ended June 30, 1998).*

          10.4      Employee Stock Ownership Plan of Ashe Federal Bank
                    (incorporated by reference to the Company's Annual Report on
                    Form 10-KSB for the year ended June 30, 1998).*

          13.1      2002 Annual Report to Stockholders, is filed herewith.

          21.1      Subsidiary Information is incorporated herein by reference
                    to "Part I - Subsidiary Activities."

          99.1      Section 906 of the Sarbanes-Oxley Act of 2002 CEO
                    Certification

          99.2      Section 906 of the Sarbanes-Oxley Act of 2002 CFO
                    Certification

          99.3      Proxy Statement for the 2002 Annual Meeting of Stockholders
                    for AF Bankshares, Inc. (previously filed with the
                    Securities and Exchange Commission on September 27, 2002).

          99.4      Indenture dated July 16, 2001 by and between AF Bankshares,
                    Inc. and The Bank of New York.

          99.5      Guarantee Agreement of AF Bankshares, Inc. dated July 16,
                    2001

     (b) Reports on Form 8-K

          No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended June 30, 2002.

*Incorporated by reference to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1998 as filed with the SEC on September 29, 1998.

                                       34

<PAGE>

                                   SIGNATURES

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

                                      AF Bankshares, Inc.
                                      (Registrant)


Date: September 30, 2002              By: /s/ James A. Todd
                                          --------------------------------------
                                          James A. Todd
                                          President and Chief Executive Officer

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
                                                                           Date
                                                                    ------------------
<S>                                                                 <C>
/s/ James A. Todd                                                   September 30, 2002
---------------------------------------------------
James A. Todd
President, Chief Executive Officer and Director
(Principal Executive Officer)


/s/ Melanie Paisley Miller                                          September 30, 2002
---------------------------------------------------
Melanie Paisley Miller
Executive Vice President, Secretary, Treasurer
  and Chief Financial Officer
(Principal Financial Officer)


/s/ Jan R. Caddell                                                  September 30, 2002
---------------------------------------------------
Jan R. Caddell - Director


/s/ Kenneth R. Greene                                               September 30, 2002
---------------------------------------------------
Kenneth R. Greene - Director


/s/ Donald R. Moore                                                 September 30, 2002
---------------------------------------------------
Donald R. Moore - Director


                                                                    September 30, 2002
---------------------------------------------------
Wayne R. Burgess - Director


/s/ Jimmy D. Reeves                                                 September 30, 2002
---------------------------------------------------
Jimmy D. Reeves - Director


                                                                    September 30, 2002
---------------------------------------------------
Michael M. Sherman - Director


                                                                    September 30, 2002
---------------------------------------------------
Jerry L. Roten - Director
</TABLE>

<PAGE>

<TABLE>
<S>                                                                    <C>
/s/ John D. Weaver                                                     September 30, 2002
-------------------------------------------
John D. Weaver - Director
</TABLE>

<PAGE>

                                 CERTIFICATIONS

       I, James A. Todd certify that:

1.     I have reviewed this annual report on Form 10-KSB of AF Bankshares, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
       statement of a material fact or omit to state a material fact necessary
       to make the statements made, in light of the circumstances under which
       such statements were made, not misleading with respect to the period
       covered by this annual report; and

3.     Based on my knowledge, the financial statements, and other financial
       information included in this annual report, fairly present in all
       material respects the financial condition, results of operations and cash
       flows of the registrant as of, and for, the periods presented in this
       annual report.

Date:  September 30, 2002                 /s/ James A. Todd
                                          --------------------------------------
                                          James A. Todd
                                          President and Chief Executive Officer


<PAGE>

       I, Melanie Paisley Miller, certify that:

1.     I have reviewed this annual report on Form 10-KSB of AF Bankshares, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
       statement of a material fact or omit to state a material fact necessary
       to make the statements made, in light of the circumstances under which
       such statements were made, not misleading with respect to the period
       covered by this annual report; and

3.     Based on my knowledge, the financial statements, and other financial
       information included in this annual report, fairly present in all
       material respects the financial condition, results of operations and cash
       flows of the registrant as of, and for, the periods presented in this
       annual report.

Date:  September 30, 2002                 /s/ Melanie Paisley Miller
                                          --------------------------------------
                                          Melanie Paisley Miller
                                          Executive Vice President, Secretary,
                                          Treasurer and Chief Financial Officer