EXHIBIT 13.1

                                    CONTENTS

<TABLE>
<S>                                                                                <C>
Selected Financial Data                                                                1 - 2

President's Message                                                                    3 - 4

Management's Discussion and Analysis of Financial Condition and

   Results of Operations                                                              5 - 18

Independent Auditor's Report                                                              19

Financial Statements                                                                 20 - 53

Corporate Information                                                                54 - 56
</TABLE>



<PAGE>

                SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY

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

<TABLE>
<CAPTION>
                                                                                     AT JUNE 30,
                                                  -----------------------------------------------------------------------------
                                                      1999             1998           1997             1996            1995
                                                  ------------    -------------  -------------    -------------   -------------
                                                                   (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                                              <C>              <C>            <C>              <C>             <C>
SELECTED FINANCIAL CONDITION DATA:

Total assets                                     $     109,931    $     100,074  $      82,024    $      72,318   $      65,440
Loans receivable, net (1)                               81,157           72,628         70,236           62,485          58,294
Investment securities (2)                               11,798            9,017          6,937            5,560           2,754
Cash and cash equivalents (3)                           12,395           14,789          2,533            1,830           2,469
Savings deposits                                        93,106           82,488         68,218           63,468          58,496
FHLB advances                                            2,564            4,116          1,654            1,250              --
Equity                                                  12,218           11,486         10,979            7,238           6,768
Book value per share                                     11.64            10.90          10.98              N/A             N/A
</TABLE>

<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED JUNE 30,

                                                    -----------------------------------------------------------------------------
                                                       1999              1998            1997            1996            1995
                                                    -----------      -------------   -------------   -------------   ------------
                                                                     (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                                                 <C>              <C>             <C>             <C>             <C>
SELECTED OPERATING DATA:

Interest  income and dividends                      $     7,879      $       7,356   $       6,213   $       5,683   $      5,108
Interest expense                                          3,967              3,795           3,245           3,204          2,630
                                                    -----------      -------------   -------------   -------------   ------------
       Net interest income                                3,912              3,561           2,968           2,479          2,478
Provision for (recovery of) loan losses                      20                (25)             20              57            204
                                                    -----------      -------------   -------------   -------------   ------------
       Net interest income after provision for
            (recovery of) loan losses                     3,892              3,586           2,948           2,422          2,274
Noninterest income                                        1,206                991             169             142            126
Noninterest expense                                       4,349              3,488           2,556           1,809          1,507
                                                    -----------      -------------   -------------   -------------   ------------
Income before income taxes                                  749              1,089             561             755            893
Income tax expense                                          235                381             218             301            347
                                                    -----------      -------------   -------------   -------------   ------------
       Net income                                           514                708             343             454            546
Other comprehensive income (loss), net of tax               (91)               (56)            175              16             30
                                                    -----------      -------------   -------------   -------------   ------------
       Comprehensive income                         $       423      $         652   $         518   $         470   $        576
                                                    ===========      =============   =============   =============   ============
Basic earnings per share (4)                        $      0.52      $        0.73   $        0.44   $         N/A   $        N/A
                                                    ===========      =============   =============   =============   ============
Diluted earnings per shares (4)                     $      0.52      $        0.72   $        0.44   $         N/A   $        N/A
                                                    ===========      =============   =============   =============   ============
Dividends per share                                 $      0.20      $        0.20   $        0.10   $         N/A   $        N/A
                                                    ===========      =============   =============   =============   ============
</TABLE>

 (1)   Loans receivable, net is comprised of total loans less allowance for loan
       losses, undisbursed loan funds, and deferred loan fees.
 (2)   Includes FHLB stock, certificates of deposit and investment securities.
 (3)   Includes   interest-earning  deposit  balances  of  $4.2  million,  $11.8
       million, $1.2 million, $840,000, and $1.5 million at June 30, 1999, 1998,
       1997, 1996 and 1995 respectively.
 (4)   Earnings per share has been  calculated in accordance  with the Statement
       of Financial  Accounting  Standards No. 128,  Earnings Per Share,  and is
       based on net income for the year,  divided by the weighted average number
       of shares  outstanding  for the year. In accordance  with the AICPA's SOP
       93-6,  unallocated ESOP shares were deducted from outstanding shares used
       in the  computation  of earnings  per share.  Diluted  earnings per share
       includes the effect of dilutive common stock  equivalents in the weighted
       average number of shares outstanding.

                                       1
<PAGE>
<TABLE>
<CAPTION>
                                                                                       AT OR FOR THE YEAR ENDED JUNE 30,

                                                                     ---------------------------------------------------------------
                                                                        1999          1998          1997        1996          1995
                                                                     ---------     ---------     ----------  ----------    ---------
<S>                                                                 <C>           <C>          <C>          <C>          <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1)
PERFORMANCE RATIOS:

       Return on average assets                                         0.49%         0.77%        0.44%        0.65%        0.86%
       Return on average equity                                         4.47%         6.31%        3.64%        6.50%        8.66%
       Average equity to average assets                                11.02%        12.21%       12.10%       10.05%        9.91%
       Equity to total assets at end of period                         11.11%        11.48%       13.39%       10.01%       10.34%
       Interest rate spread (2)                                         3.64%         3.64%        3.34%        3.38%        3.68%
       Average interest-earning assets to
            to average interest-bearing liabilities                   110.20%       111.95%      114.40%      107.79%      108.94%
       Net interest margin (3)                                          4.06%         4.17%        3.96%        3.76%        4.06%
       Noninterest expense to average assets                            4.17%         3.80%        3.28%        2.62%        2.37%
       Efficiency ratio (4)                                            84.97%        76.63%       81.48%       69.20%       57.87%
       Dividend payout ratio (6)                                       38.46%        27.40%       22.73%         N/A          N/A

REGULATORY CAPITAL RATIOS (5):

       Tangible capital                                                10.00%        10.90%       12.90%        9.80%       10.10%
       Core capital                                                    10.00%        10.90%       12.90%        9.80%       10.10%
       Total risk-based capital                                        17.40%        20.40%       26.30%       19.80%       21.60%

ASSET QUALITY RATIOS AND OTHER DATA:
       Ratios:

            Nonperforming loans to total loans                          0.07%         0.03%        0.18%        0.27%        1.12%
            Nonperforming loans and real estate owned
               to total assets                                          0.11%         0.06%        0.16%        0.24%        1.08%
            Allowance for loan losses to:
               Nonperforming loans                                   1871.14%       851.10%      787.02%      629.89%      179.38%
               Total loans                                              1.28%         1.54%        1.42%        1.70%        2.00%
       Number of full service branches                                     5             4            3            3            2
</TABLE>



 (1)   With the  exception  of end of period  ratios,  all  ratios  are based on
       average monthly or quarterly balances during the indicated  periods,  and
       are  annualized  where  appropriate.  Asset Quality Ratios and Regulatory
       Capital Ratios are end of period ratios.

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

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

 (4)   The efficiency  ratio represents  noninterest  expense as a percentage of
       the sum of net interest income and noninterest income.


 (5)   For definitions and further information relating to the Bank's regulatory
       capital requirements, see "Note 7 of the Notes to Consolidated  Financial
       Statements.

 (6)   The dividend payout ratio represents  dividends per share as a percentage
       of basic  earnings per share.  Earnings per share has been  calculated in
       accordance with the Statement of Financial  Accounting Standards No. 128,
       Earnings Per Share,  and is based on net income for the year,  divided by
       the  weighted  average  number of  shares  outstanding  for the year.  In
       accordance  with the  AICPA's  SOP 93-6,  unallocated  ESOP  shares  were
       deducted from outstanding  shares used in the computation of earnings per
       share.

                                       2

<PAGE>


PRESIDENT'S MESSAGE

Dear Shareholder,

As the cover of this report indicates, your Company celebrated its 60th birthday
this  year.  And it is my  pleasure  to  report to you that we begin our next 60
years doing business on the same basis our founders had in mind more than half a
century ago -- "Neighbors Helping Neighbors."

These are exciting times in the financial services industry,  and this past year
was especially exciting for your company.

Total assets as of June 30, 1999 stood at $110 million,  a 10% increase over the
$100 million level reported at June 30, 1998. Stockholders' equity grew $700,000
to $12.2  million on June 30, 1999,  compared to $11.5 million on June 30, 1998.
Net  income for the year ended  June 30,  1999 was  $514,000  or $.52 per share,
versus $708,000 for the prior year ended June 30, 1998.

The slight  decline in net income  reflects a strong  belief on the part of your
board of  directors  and  management  that  now is the time to make  significant
investments  in  the  long-term  growth  and  success  of  the  Company.   These
investments are expensive in the short-term;  however, they significantly expand
our future earnings capacity and viability in the long run.

During the year, your Company established a securities brokerage subsidiary,  AF
Brokerage,  Inc.,  which  has  applied  to  become  a  member  of  the  National
Association of Securities Dealers, Inc. The Company currently conducts brokerage
services as a branch of a third  party  broker/dealer.  Once all its  regulatory
applications are accepted, AF Brokerage will operate independently.

Your Company also added an insurance agency in Lenior, North Carolina, operating
under the name AF Blair  Insurance  Agency;  and a bank  office in Boone,  North
Carolina, operating under the name Appalachian First.

We  entered  Alleghany  and  Watauga  Counties  because  we were able to attract
experienced  people  who were  attuned  to the needs of those  markets  and knew
potential customers there for our services.  Their knowledge and commitment have
enabled the Company to expand its banking,  insurance and  brokerage  businesses
into new areas offering us added prospects for growth,  while better  leveraging
our equity.  Your  management  and board  remain  committed  to  pursuing  sound
business  opportunities  that will lead to  increases  in both  shareholder  and
customer value.

The complete array of financial  services and products we offer are all designed
to meet,  and surpass the specific  needs and wants of our  customers.  As those
needs and wants  change,  we endeavor to develop new services to better meet our
customers  changing  demands.  For  example,  in the year just ended we've added
24-hour telephone access to account information for our banking customers. Plus,
we are well on the way to introducing full-service on-line banking.

Our  delivery  system is centered on  employees  who provide a level of customer
service that exceeds our customers' expectations. To enhance the overall quality
of our customer service,  we implemented a customer support training system that
included:   building  product  knowledge  for  employees  awareness  of  Company
products;  learning  how to listen to  customers  to  determine  the  customers'
desires;  and  developing a level of confidence in the products that  encourages
all  employees  to refer  customers  to areas in the  Company  that  address all
customers' needs and desires.

                                       3

<PAGE>


Customer  concerns about the changing of the  millennium  ("Y2K") and the rather
overblown coverage by the news media have consumed considerable resources during
the past year.  We have upgraded and tested all our equipment to ensure that our
systems  will work on January 1, 2000 -- and beyond.  I am pleased to be able to
frankly  tell you,  "We are ready." Our offices will open as normal for business
on Monday, January 3, 2000.

All told,  indeed it was an exciting year. As a result,  your Company is solidly
positioned to take advantage of future opportunities, increase our market share,
and  successfully  meet the  challenges of competing in the  financial  services
industry in the 21st Century.

On behalf of the board of  directors,  management,  and staff of AF  Bankshares,
Inc., thank you for your business,  your support, and your confidence throughout
the year.  Please know that  everyone here is dedicated to serving the financial
needs of our communities in an exceptionally  personalized manner,  perhaps best
described as "Neighbors Helping Neighbors."

Sincerely,

James A. Todd
President & CEO

P.S.  Contrary to popular opinion, it feels great to be sixty!

                                       4

<PAGE>


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

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

REORGANIZATION

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

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

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


GENERAL

The Company had net income of $514,000 and $708,000 for the years ended June 30,
1999 and 1998,  respectively.  The  Company's  operating  results are  primarily
dependent  upon  net  interest  income,  fees  and  charges,  gain  on  sale  of
investments  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-bearing  savings deposits and with
other  borrowings.  The  primary  interest-earning  asset of the  Company is its
mortgage  loan  portfolio  representing  64% of net  loans,  with  approximately
one-half of portfolio  mortgage  loans at fixed rates at June 30, 1999.  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 increasing rates to the Bank's earnings and to the net market value of
its  assets and  liabilities.

                                       5

<PAGE>

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,  income  generated from the Company's  brokerage  subsidiary and for
payment of other  services  provided to the customer by the  Company.  The major
noninterest  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.

MANAGEMENT STRATEGY

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

On April 1, 1999 the Company  purchased  an  insurance  agency in Lenior,  North
Carolina  to be  operated  under  the trade  name,  AF Blair  Insurance  Agency.
Management   believes  that  penetration   into  other  markets   increases  the
opportunity  to deliver  products  from all of the Company's  subsidiaries  to a
broader  market and will make the  insurance  and  brokerage  subsidiaries  more
profitable  investments  by increasing  the economies of scale and adding to the
products that are available for delivery to the Company's customers. The Company
continues  to seek  opportunities  to increase  its market  penetration  for its
services.

Management believes that the Company's  customers perceive "financial  services"
to include three  elements:  funds  transfer,  including  checking  accounts and
savings instruments,  insurance and securities  brokerage.  Further,  management
believes that failure to offer insurance and brokerage  services will impair the
Company's growth and make retention of existing customers more difficult. During
the year ended June 30, 1999,  the Company  established  a securities  brokerage
subsidiary,  AF  Brokerage,  Inc.,  which has  applied to become a member of the
National Association of Securities Dealers, Inc. ("NASD"). The Company currently
conducts brokerage services as a branch of a third party  broker/dealer but will
operate independently once its regulatory applications are accepted. The Company
expects to be accepted  into  membership in the NASD within the first quarter of
the  fiscal  year  ending  June  30,  2000.  Management  continues  to  evaluate
acquisitions and business  opportunities that it believes will provide access to
customers and markets that enhance the Company's value and earnings potential in
the long term.

The historical  operations of the Company has been that of a portfolio  mortgage
lender,  providing  fixed rate loans for the  residents  of Ashe  County,  North
Carolina.  In the late 1980's adjustable rate mortgages (ARMs) were offered, and
at June 30, 1999, ARMs represented  approximately one-half of portfolio mortgage
loans outstanding. This change in the composition of the mortgage loan portfolio
results from the Company's strategy of selling 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.

During 1995,  management  introduced  fixed rate mortgage loans with  provisions
allowing  the Company to "call the loan due" after  three or five year  periods,
thus  reducing the period of time that the Company is exposed to a fixed rate of
interest in order to reduce  interest rate risk.  The call provision is now used
primarily  where  the  fixed  rate  mortgage  does not  qualify  for sale in the
secondary  market  and  where  the  borrower  has  no  desire  for  an  ARM.  At
approximately  the  same  time,  the  Company  began to  offer  consumer  loans,
including  automobile and home  improvement  loans. In June of 1998, the Company
began

                                       6

<PAGE>

funding automobile loans originated by selected dealers in its market area where
the Company's loan officers have final  underwriting  authority to determine the
acceptability  of the  borrowers  to the Company.  At the end of June 1999,  the
Company had closed  approximately $3.9 million of these loans. At June 30, 1999,
consumer loans  constituted  approximately  13.9% of gross  portfolio  loans. In
1994, the Company began offering  commercial  loans to small  businesses in Ashe
County and has expanded that business to include Alleghany  County,  and Watauga
County.  At June 30, 1999 commercial loans  constituted  approximately  20.9% of
gross portfolio loans.  Commercial loans generally have rates based on the prime
rate of interest that more closely reflects market interest rates. Additionally,
consumer and  commercial  loans  generally  have shorter  terms and thus greater
interest rate sensitivity than mortgage loans.  Management has pursued the above
mortgage and  nonmortgage  loan  strategies as primary  strategies to reduce the
level of  interest  rate risk  inherent  in the  Company's  loan  portfolio  and
maintain acceptable levels of credit risk. Funding for the loan originations has
been provided by  aggressively  marketing  savings and checking  accounts  while
maintaining competitive pricing on certificates of deposits.  Deposits increased
$10.6 million during the year ended June 30, 1999. Additionally, the Company was
able to lower the amount  that was  outstanding  on the  Federal  Home Loan Bank
("FHLB") advances. At June 30, 1999 the Company had borrowed money totaling $2.6
million compared to $4.1 million at June 30, 1998.

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

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND 1998:

At June 30, 1999 and 1998,  assets totaled  $109.9  million and $100.1  million,
respectively.  Total assets increased by $9.9 million or 9.8% from June 30, 1998
to June 30,  1999,  primarily  as a result of an  increase of $8.5  million,  or
11.7%,  in net loans  receivable  and an  increase  of $2.9  million or 35.6% in
securities  available  for sale.  Management  believes  that the increase in net
loans  receivable  is  primarily  a result  of  increased  concentration  in the
commercial  market,  which tends to yield larger loans,  further enhanced by the
addition of the branch in Watauga County, a larger commercial  market.  The loan
growth was primarily funded by the increase in savings  deposits.  The Company's
deposits increased by $10.6 million from $82.5 million at June 30, 1998 to $93.1
million at June 30, 1999.  Management  believes that the increase in deposits is
attributable to its marketing  efforts directed towards  increasing  balances in
savings and transaction accounts.  The Company's level of advances from the FHLB
decreased  $1.6  million  from $4.1  million at June 30, 1998 to $2.6 million at
June  30,  1999.  The  Company's  level of loans  sold to the  secondary  market
increased  significantly during the period ended June 30, 1999 to $20.7 million,
primarily due to lower interest rates on fixed rate originations.

The principal category of earning assets is loans and during the year ended June
30, 1999 loans  receivable,  net,  increased by $8.5 million  compared to a $2.4
million  increase  for the year ended June 30,  1998.  The increase in net loans
receivable is typical for the Company,  which  operates in lending  markets that
have had  sustained  loan demand over the past several  years.  Beginning in the
fiscal year ended June 30, 1997, the Company began actively  soliciting  banking
relationships  with  local  commercial  customers.  As a result  of this  focus,
commercial  loans  receivable  increased  from $4.2  million at June 30, 1997 to
$18.3 million at June 30, 1999,  an increase of $14.1  million or 336.7%.  These
loans  are  a  combination  of  real

                                       7

<PAGE>

estate, secured, personal property and unsecured, and generally have prime based
pricing and have terms of three years or less.  During  1997,  1998 and 1999 the
Company  also  emphasized  home equity line of credit  loans.  Home equity loans
increased  from $4.1  million at June 30, 1998 to $4.8 million at June 30, 1999,
an increase of $700,000.

The Company's level of non-performing  assets, defined as loans past due 90 days
or more and repossessed assets,  increased slightly from .06% of total assets at
June 30,  1998,  to .11% of total  assets  at June 30,  1999.  The low  level of
non-performing  assets is attributable  to  comprehensive  lending  policies and
exceptional  collection efforts. The Company's level of non-performing loans has
remained  consistently  low  in  relation  to  prior  periods  and  total  loans
outstanding.  The Company  had net of charge  off, of $62,000  during year ended
June 30, 1999 compared to net recoveries of $158,000 for the year ended June 30,
1998.  As a result  and based on  management's  analysis  of its  allowances,  a
provision for additional loan loss allowance of $20,000 was made during the year
ended June 30, 1999.

The Company's net investment in office  properties and equipment  increased $1.2
million to $2.5 million at June 30, 1999 from $1.4 million at June 30, 1997,  as
a result of acquiring and renovating a building  located at 206 South  Jefferson
Avenue in West Jefferson,  acquiring  equipment for the Alleghany First Bank and
Appalachian  First Bank,  leasehold  improvements  in the  Alleghany and Watauga
facilities,  equipment for AF Blair Insurance  Agency and updating the Company's
data  processing  equipment.  The  building  at 206  South  Jefferson  Avenue is
occupied by the Company's insurance agency subsidiary, a board meeting room that
also  serves as a  community  meeting  room and the  corporate  offices  for the
Company. The Alleghany facility is occupied by the banking offices as well as an
insurance  agency  subsidiary  office and a  brokerage  subsidiary  office.  The
Appalachian  facility  is  occupied  by the  banking  offices  with  room for an
insurance  agency  subsidiary  office and a brokerage  subsidiary  office in the
future. The Company completed replacing all of its computer equipment during the
period with equipment that is compatible with the year 2000 environment.

At June 30, 1999 retained earnings  increased  $695,000 or 9.5% to $8.0 million,
from $7.3  million at June 30,  1998,  as a result of earnings of  $514,000,  an
increase  for a fair  market  value  adjustment  for ESOP stock in the amount of
$357,000  and  offset by  dividends  of  $205,000.  Additional  paid in  capital
increased by $13,000 to $4.6 million at June 30, 1999 as a result of  additional
shares issued under the ESOP.  The unrealized  gain on securities  available for
sale decreased by $91,000 or 30.8% at June 30, 1999 primarily as a result of the
sale of 2,560  shares  of  stock  in the  FHLMC.  At June  30,  1999 the  Bank's
regulatory  capital  amounted to $10.9 million compared to $10.9 million at June
30, 1998,  which as a percentage of total assets was 10.0% and was  considerably
in excess of regulatory capital requirements at such date.

                                       8

<PAGE>

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

<TABLE>

<CAPTION>
                                                       YEAR ENDED                                    YEAR ENDED
                                                      JUNE 30, 1999                                 JUNE 30, 1998
                                                       COMPARED TO                                   COMPARED TO
                                                       YEAR ENDED                                     YEAR ENDED
                                                      JUNE 30, 1998                                 JUNE 30, 1997
                                              ----------------------------------            ------------------------------
                                                    INCREASE/(DECREASE)                            INCREASE/(DECREASE)
                                                          DUE TO                                        DUE TO
                                              ----------------------------------            ------------------------------
                                                               RATE/                                        RATE/
                                              VOLUME   RATE    VOLUME   NET                 VOLUME  RATE   VOLUME    NET
                                              ------------------------------                ------------------------------
                                                      (IN THOUSANDS)                               (IN THOUSANDS)
<S>                                          <C>     <C>      <C>     <C>                  <C>    <C>     <C>     <C>
ASSETS:
      Interest-earning assets:
           Interest-bearing deposits          $ 285   $   9    $ 10    $304                 $232   $(15)   $(40)   $  177
           Investment securities                171     (66)    (26)     79                   86    (33)     (8)       45
           Loans receivable                     277    (132)     (5)    140                  488    400      33       921
                                              ------------------------------                ------------------------------
               Total                            733    (189)    (21)    523                  806    352     (15)    1,143
                                              ------------------------------                ------------------------------
LIABILITIES:
      Interest-bearing liabilities:
           Interest-bearing checking accounts    59     (95)    (16)    (52)                  42    (29)     (3)       10
           Passbook savings                     248     (61)    (27)    160                  117      3       2       122
           Certificates of deposit              234    (105)     (9)    120                  190     22       3       215
           Borrowed funds                       (66)     13      (3)    (56)                 196      1       6       203

                                              ------------------------------                ------------------------------
               Total                            475    (248)    (55)    172                  545     (3)      8       550
                                              ------------------------------                ------------------------------
           Net interest income                $ 258   $  59    $ 34    $351                 $261   $355    $(23)   $  593
                                              ==============================                ==============================
</TABLE>
<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                          JUNE 30, 1997
                                                           COMPARED TO
                                                            YEAR ENDED
                                                          JUNE 30, 1996
                                                --------------------------------
                                                       INCREASE/(DECREASE)
                                                             DUE TO
                                                --------------------------------
                                                                   RATE/
                                                VOLUME    RATE    VOLUME    NET
                                                --------------------------------
                                                          (IN THOUSANDS)
<S>                                              <C>    <C>      <C>     <C>
ASSETS:
      Interest-earning assets:
           Interest-bearing deposits              $(48)  $  18    $ (7)   $ (37)
           Investment securities                   112      23      10      145
           Loans receivable                        691    (234)    (35)     422
                                                --------------------------------
               Total                               755    (193)    (32)     530
                                                --------------------------------
LIABILITIES:
      Interest-bearing liabilities:
           Interest-bearing checking accounts       64      (1)     (1)      62
           Passbook savings                         75      (1)      0       74
           Certificates of deposit                 (18)   (125)     (1)    (144)
           Borrowed funds                           42       2       5       49
                                                --------------------------------
               Total                               163    (125)      3       41
                                                --------------------------------
           Net interest income                    $592   $ (68)   $(35)   $ 489
                                                ================================
</TABLE>

                                        9

<PAGE>
The following  table provides  information  concerning  the Company's  yields on
interest-earning  assets and cost of funds on interest-bearing  liabilities over
the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
                                                                            FOR THE YEAR ENDED JUNE 30,
                                                ------------------------------------------------------------------------------------
                                  AT JUNE 30,
                                    1999                     1999                    1998                          1997
                             ----------------- --------------------------- ---------------------------  ----------------------------
                                      AVERAGE                     AVERAGE                      AVERAGE                       AVERAGE
                             ACTUAL    YIELD/   AVERAGE            YIELD/   AVERAGE             YIELD/   AVERAGE              YIELD/
                             BALANCE    RATE    BALANCE  INTEREST   RATE    BALANCE   INTEREST   RATE    BALANCE  INTEREST     RATE
                             -------   -------  -------  -------- -------  --------   --------  -------  -------  --------  --------
                                                                        (DOLLARS IN THOUSANDS)
<S>                          <C>        <C>    <C>       <C>       <C>     <C>        <C>       <C>     <C>       <C>        <C>
ASSETS:
  Interest-earning
   assets:
   Interest-bearing
    deposits............     $  4,173   5.32%  $  9,471  $  571    5.86%   $ 4,714    $  267    5.66%   $ 1,319   $   90     6.82%
   Investment
    securities..........       11,798   5.00%     9,975     501    5.02%     7,095       422    5.95%     5,774      377     6.53%
   Loans receivable(1)..       81,157   8.39%    76,597   6,807    8.89%    73,544     6,667    9.07%    67,785    5,746     8.48%
                             --------          --------  ------            -------    ------            -------   ------
    Total
     interest-earning
     assets.............       97,128   7.85%    96,313  $7,879    8.18%    85,353    $7,356    8.62%    74,878   $6,213     8.30%
                                                         ------                       ------                      ------
   Non-interest-earning
    assets..............       12,803             8,002                      6,447                        3,037
                             --------          --------                    -------                      -------
   Total assets.........     $109,931          $104,315                    $91,800                      $77,915
                             ========          ========                    =======                      =======
LIABILITIES AND EQUITY:
  Interest-bearing
   liabilities:
   Interest-bearing
    checking accounts...     $ 15,425   2.28%  $ 13,160     301    2.29%   $11,265       353    3.13%   $10,040      343     3.42%
   Passbook savings.....       21,841   3.05%    19,257     698    3.62%    13,172       538    4.08%    10,279      416     4.05%
   Certificates of
    deposit.............       51,788   4.94%    51,995   2,771    5.33%    47,770     2,651    5.55%    44,313    2,436     5.50%
   FHLB Advances and
    notes payable.......        2,820   6.47%     2,988     197    6.59%     4,038       253    6.27%       818       50     6.11%
                             --------          --------  ------            -------    ------            -------   ------
    Total
     interest-bearing
     liabilities........       91,874   4.09%    87,400   3,967    4.54%    76,245     3,795    4.98%    65,450    3,245     4.96%
                                                         ------                       ------                      ------
   Other
    non-interest-bearing
    liabilities.........        5,839            5,424                       4,343                        3,038
   Equity...............       12,218           11,491                      11,212                        9,427
                             --------          --------                    -------                      -------
   Total liabilities
    and equity .........     $109,931          $104,315                    $91,800                      $77,915
                             ========          ========                    =======                      =======
Net interest
 income and
 interest rate
 spread(2)..............                3.76%            $3,912    3.64%              $3,561    3.64%             $2,968     3.34%
                                                         ======                       ======                      ======
Net
 interest-earning
 assets and net
 interest margin (3)....     $  5,254          $  8,913            4.06%   $ 9,108              4.17%   $ 9,428              3.96%
                             ========          ========                    =======                      =======
Ratio of interest-earning
 assets to
 interest-bearing
 liabilities............              105.72%                    110.20%                      111.95%                      114.40%
</TABLE>
-------------------------------
(1)  Balance  is net of  deferred  loan fees and loans in  process.  Non-accrual
     loans are included in the balances.
(2)  Average interest rate spread represents the difference between the yield on
     average  interest-earning  assets and the cost of average  interest-bearing
     liabilities.
(3)  Net interest margin represents net interest income divided by average total
     interest-earning  assets.  With the exception of end of period ratios,  all
     ratios are based on monthly balances during the indicated years. Management
     does not  believe  that  the use of month  end  balances  instead  of daily
     balances has caused a material difference in the information presented.

                                       10
<PAGE>

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

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

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

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

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

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

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

NONINTEREST  EXPENSE.  Noninterest  expense  increased by $860,000 or 24.7% from
$3.5 million for the year ended June 30, 1998 to $4.3 million for the year ended
June 30, 1999.  Increases for noninterest ex-

                                       11

<PAGE>

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

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

IMPACT OF THE YEAR 2000.  A lot of  attention  has been given to the impact that
the  year  2000  date  change  will  have on  businesses,  utilities  and  other
organizations  that rely on computerized  systems to help run their  operations.
The year 2000 date change can affect any system that uses  computer  software or
computer chips including  automated equipment and machinery.  For example,  many
computer programs and computer chips store the calendar year portion of the date
as two digits rather than four digits.  These software programs and chips record
the year 1999 as "99". This approach works until the year 2000 when the "00" may
be  interpreted  as the year 1900  instead of the year 2000.  Banks use computer
systems to perform financial  calculations,  transfer funds, record deposits and
loan payments,  run security systems and vaults and a myriad of other functions.
Because  banks rely heavily on their  computer  systems,  the Federal  Financial
Institutions  Examination  Council ("FFIEC") has placed significant  emphasis on
the  problems  surrounding  the year  2000  issues  and has  required  financial
institutions to document the assessment,  testing and corrections  made to ready
their computer systems and programs for the year 2000 date change. The FFIEC and
OTS have strict regulations,  guidelines, and milestones in place that each FDIC
insured financial  institution must follow in order to remain  operational.  The
Company's board of directors has remained informed of the Company's position and
progress in its year 2000 project.

The  Company's  year 2000 project and  contingency  planning  remain on schedule
according to the guidelines set forth by the FFIEC.  The Company replaced all of
its computer systems in the fall of 1998 with year 2000 compliant  systems.  The
Company's internal software  remediation,  replacement,  and testing efforts are
substantially  complete.  The Company's most critical  external exposure to year
2000 lies with its data processing  provider,  Fiserv Orlando.  Fiserv renovated
its systems in June 1998 and tested its remediation efforts in October 1998. The
test results  revealed that there were two minor  problems which have since been
corrected.  The first  problem  occurred  in the General  Ledger  portion of the
program,  and the second problem  occurred  primarily due to the method of aging
the test loan accounts. The General Ledger corrections,  which have already been
applied,  were re-tested in February 1999, and no problems were found.  The loan
test conditions are being modified and will be re-tested in October 1999. Fiserv
estimates that it has completed with it's remediation and testing efforts of the
Company's mission critical systems. In addition,  the Company tested its systems
on-line  with  Fiserv's  system in  November  1998.  One purpose was to test all
transactions  using test data created in a test institution to validate Fiserv's
remediation  efforts to date. The second  purpose was to test the  communication
hardware  under  the  direct  control  of the  testing  parties.  The  test  was
successful  and correctly  validated the testing  objectives.  In addition,  the
Company has  contacted  its major  customers  and vendors to inquire about their
progress in  addressing  the year 2000  problem  and does not  believe  that the
problems of such  customers and vendors will have a material  adverse  effect on
the Company or its operations. The Company will continue to monitor the progress
of these  parties in  addressing  the year 2000  problem  as the new  millennium
approaches.

                                       12

<PAGE>

As noted,  the Company has replaced all of its  computers and printers at a cost
of $244,000.  Software costs amounted to $101,000 and include internal  software

for accounts  payable,  fixed assets,  payroll and insurance agency  management.
Management  believes  that all material  costs to prepare for the year 2000 that
are under the direct  control of the Company have been  incurred.  The remaining
costs are expected to amount to less than $5,000.

The year 2000  problems can affect the  Company's  operation in a number of ways
but the mission  critical issue is maintaining  customers'  account  information
including tracking deposits, interest accruals and loan payments. The Company is
dependent  upon  electricity,  telephone  lines,  computer  hardware  and Fiserv
Orlando's data processing capacity.

The Company is in contact  with its  electric  utility and the  utility's  staff
regularly  updates the Company as to its  progress.  Assurances  have been given
that no major  problems  exist and that the electric  company will have all year
2000 problems  addressed  before June 30, 1999. The utility  company has further
assured  the  Company  that  contingency  plans are in place for any  unforeseen
problems  that may exist.  The Company  has  installed  a fixed  generator  with
sufficient  capacity  to run the system  servers  and  workstations  at the West
Jefferson branch office in case that the Company experiences power outages.  The
generator was tested and performed as expected.

The  Company  uses  two  telephone   utilities:   Skyline  Telephone  Membership
Corporation and Sprint. Skyline Telephone has tested its system with the Company
and had no date related problems. Service between Fiserv Orlando and the Company
is the contractual responsibility of Fiserv Orlando.

To prevent  difficulties  in the event there is an  unforeseen  interruption  in
either telephone or electrical  service when the year changes,  the Company will
print hard copies of all account  information.  In  addition,  the Company  will
download all account  information  into programs on the Company's  hardware that
will allow bank  personnel to extract  customer  information  without  regard to
outside  sources.  Additionally,  the Company  stores  customer  information  on
retrievable  media in  house.  The  insurance  agency's  computer  hardware  and
software has been tested, validated, and found to be year 2000 compliant.

Fiserv  Orlando has  responded to the Company that  renovation of its program is
complete.  In the event that Fiserv Orlando experiences some unforeseen problems
relating to the year 2000, the Company will convert its data to one of the other
Fiserv programs that is able to operate in the 2000 environment.  The Company is
planning  to attend a customer  meeting in October of 1999 to review and comment
on Fiserv's Business Resumption Contingency Plan.

The Company is continuously evaluating its liquidity needs for the year 2000 and
believes that its plan  provides for the  sufficient  funding to meet  customers
demands.  If  additional  funding needs become  necessary  due to  unanticipated
customer cash demands,  the Company has in place a borrowing  agreement with the
FHLB and with the Federal  Reserve Bank of Richmond,  that  management  believes
will exceed any customer demands for cash.

                                       13

<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
1997:

GENERAL.  Net income for the years ended June 30, 1998 and 1997 was $708,000 and
$343,000, respectively. The increase of $365,000 or 106.3% during the year ended
June 30, 1998 were primarily  attributable lower FDIC premiums,  and the absence
of the one time  assessment  from SAIF  during the year ended June 30,  1997 and
from an increase in net interest income. In management's opinion, there has been
an improvement in the level of interest rate risk during 1998.

NET INTEREST  INCOME.  Net interest  income  increased by $594,000 or 20.0% from
$3.0  million  for year ended June 30,  1997 to $3.6  million for the year ended
June 30,  1998.  The  increase  is a result  of  increased  average  outstanding
balances in interest  earning  assets and an  improved  interest  rate spread in
effect during the year. The Company's  interest rate spread increased  primarily
because  the  average  yield on loans was higher  during the year ended June 30,
1998 as compared to the year ended in 1997.

INTEREST  INCOME.  Interest  income  increase  from $6.2 million to $7.4 million
during the year end June 30,  1998,  or an 18.4%  increase.  This  increase  was
attributable  to both an overall  increase in the weighted  average yield of the
Company's   loan   portfolio   and  by  a  change  in  the  volume  and  mix  of
interest-earning assets outstanding.

INTEREST  EXPENSE.  Interest  expense for the year ended June 30, 1998 increased
$549,000  to $3.8  million.  The  increase  is the result of an  increase in the
average  outstanding  balances in the level of deposits and  borrowings  for the
year ended June 30, 1998 as compared to the similar period in 1997. However, the
increase  was  partially  offset by a slightly  lower  average rate for deposits
during the year ended June 30, 1998 than for the comparable year ended 1997, and
was an offsetting factor to interest expense.

PROVISION FOR LOAN LOSSES.  Management  did not make  additional  provisions for
loan  losses  during  the  year  ended  June  30,  1998;  however,  the  Company
experienced net recoveries of $158,000 that served to increase the level of loan
loss  reserves.  During  the year  ended  June 30,  1997,  provisions  were made
totaling $20,000. Provisions, which are charged to operations and resulting loan
loss  allowances,  are amounts that the  Company's  management  believes will be
adequate  to  absorb   potential  losses  on  existing  loans  that  may  become
uncollectible.  Loans are  charged off against  the  allowance  when  management
believes that collection is unlikely. The evaluation to increase or decrease the
provisions and resulting  allowances is based both on prior loan loss experience
and  other  factors,  such as  changes  in the  nature  and  volume  of the loan
portfolio,  overall  portfolio  quality and  current  economic  conditions.  The
Company's level of non-performing loans remained consistently low in relation to
prior periods and total loans  outstanding  during the year ended June 30, 1998.
At June 30, 1998, the Company's level of general  valuation  allowances for loan
losses amounted to $1.2 million which management  believes is adequate to absorb
any losses that may exist in its loan portfolio.

NONINTEREST INCOME.  Noninterest income increased by $822,000 to $991,000 during
the fiscal year 1998. The increase was primarily  attributable  to a gain on the
sale of FHLMC stock of $306,000 and insurance  commissions of $404,000 generated
by the insurance agency during the year ended June 30, 1998.

                                       14

<PAGE>
NONINTEREST  EXPENSE.  Noninterest  expense  increased by $932,000 or 36.5% from
$2.6 million for the year ended June 30, 1997 to $3.5 million for the year ended
June 30, 1998.  Increases  for  noninterest  expense for the year ended June 30,
1998  are  primarily  attributable  to  compensation  costs,   occupancy,   data
processing  costs and legal expenses.  Compensation  costs increased by $866,000
for the year ended  June 30,  1998,  primarily  as the result of the cost of the
Bank's Recognition and Retention Plan, insurance agency employees' salaries, and
Alleghany First  employees'  salaries.  Occupancy cost increased by $110,000 for
the year ended June 30, 1998 because of increased depreciation expense resulting
from the addition of the new office facility at 206 South Jefferson Avenue,  the
new branch location in Sparta,  computer  equipment acquired to address the year
2000 problem and one-time  charges  associated  with  changing  data  processing
providers  from NCR to Fiserv  Orlando in October 1997.  Additional  legal costs
during  the  current  period  were  the  result  of  obtaining  shareholder  and
regulatory  approvals for a recognition and retention plan, a stock option plan,
and establishing a mid-tier holding company.

INCOME TAXES. Income taxes resulted from applying normal,  expected tax rates on
income earned  during the year ended June 30, 1998 and 1997.  Income tax expense
was  $381,000  and  $218,000,  for the years ended June 30,  1998 and 1997.  The
effective  tax rate applied was  slightly  lower than the  statutory  tax rates,
primarily due to qualifying  investment income that was exempt from state income
taxes.  Legislated  decreases are expected in the North  Carolina  corporate tax
rate in future periods, which would lower the overall effective tax rate.

CAPITAL RESOURCES AND LIQUIDITY

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

At June 30, 1999, cash and cash equivalents,  a significant source of liquidity,
totaled $12.4 million.  A significant  portion of this is a direct result of the
Bank selling  loans in the  secondary  market and  retaining the proceeds in the
Bank's FHLB account.

As a federally  chartered  savings bank,  the Bank must maintain a daily average
balance  of liquid  assets  equal to at least 4% of  withdrawable  deposits  and
short-term  borrowings.  During the year ended June 30, 1998 the OTS reduced the
required  level of liquidity to 4% from 5%,  eliminated the short term liquidity
requirement and imposed a new requirement  that savings  associations  generally
maintain  sufficient  liquidity to ensure safe and sound operations.  The Bank's
liquidity  ratio at June 30,  1999,  as  computed  under  OTS  regulations,  was
considerably in excess of such requirements.  Given its excess liquidity and its
ability to borrow from the FHLB, the Bank believes that it will have  sufficient
funds available to meet anticipated future loan commitments,  unexpected deposit
withdrawals, and other cash requirements.

                                       15

<PAGE>
ASSET/LIABILITY MANAGEMENT

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

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

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

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

NET PORTFOLIO VALUE

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

The Company's  banking  subsidiary,  AF Bank, has  historically  been a mortgage
lender which means that it  generally  has longer  terms  before  repricing  its
assets  than  does  its  interest  bearing   liabilities  or  deposit  accounts;
therefore,  a rising rate  environment will have the most negative impact on the
NPV of the Company.  Management has implemented a strategy of limiting the terms
of mortgage  loans that it cannot sell in the secondary  market,  increasing the
level of loans  tied more  closely  to market  interest  rates such as the prime
rate,  and  generally  reducing  the terms of loans that the Company  offers for
portfolio.  The following  table presents the Company's NPV at June 30, 1999, as
calculated by the OTS, based on information provided to the OTS by the Company.

                                       16

<PAGE>
As a result  of  management's  actions,  at June 30,  1999,  the  estimated  NPV
declined  by 13% in a 300  basis  point  rising  interest  rate  shock  scenario
compared to a gain in NPV of 12% in a falling rate scenario.  This compares to a
decline of 13% under a similar  rise and a gain of 10% in a similar  decline one
year earlier.  The improvement in interest rate risk is further  measured by the
basis  point  decline  in the ratio of NPV to the PV of  assets,  defined as the
Sensitivity Measure by the OTS. At June 30, 1999, the decline of the sensitivity
measure was 128 basis  points  with a 300 basis  point  shock  increase in rates
compared to a decline of 133 basis points at June 30, 1998.
<TABLE>
<CAPTION>
                                                            NPV as $ of PV (5)
                    Net Portfolio Value                         of Assets
---------------------------------------------------------- ---------------------
Changes in Rates  $ Amount  $ Change (1)  % of Change (2)  Ratio (3)  Change (4)
----------------  --------  ------------  ---------------  ---------  ----------
                           (Dollars in Thousands)
<S> <C>            <C>          <C>              <C>            <C>     <C>
   +300 bp         12,018       (1,757)          (13.00)%       11.13%  (128)
   +200 bp         12,804         (971)           (7.00)%       11.72%   (68)
   +100 bp         13,436         (339)           (2.00)%       12.18%   (22)
     0 bp          13,775                                       12.40%
   -100 bp         13,925          150              1.00%       12.47%     7
   -200 bp         14,572          797              6.00%       12.92%    52
   -300 bp         15,446        1,671             12.00%       13.54%   113
</TABLE>

(1)  Represents the excess  (deficiency) of NPV assuming the indicated change in
     interest  rates  minus the  estimated  NPV  assuming  no change in interest
     rates.
(2)  Calculated  as the  amount of change in the  estimated  NPV  divided by the
     estimated NPV assuming no change in interest rates.
(3)  Calculated as the estimated NPV divided by average total assets.
(4)  Calculated  as the  excess  (deficiency)  of the  NPV  ratio  assuming  the
     indicated change in interest rates over the estimated NPV ratio assuming no
     change in interest rates.
(5)  PV means present value.

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

  RISK MEASURES: 200BP RATE SHOCK:                  June 30, 1999  June 30, 1998
                                                    ----------------------------
  Pre-Shock NPV Ratio: NPV as a % of PV of Assets       12.40%        13.10%
  Exposure Measure: Post Shock NPV Ratio                11.72%        12.44%
  Sensitivity Measure: Change in NPV                    -68 bp        -67 bp

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

                                       17

<PAGE>
Management  believes that the NPV method of assessing the Company's  exposure to
interest rate risk and potential  reductions in net interest  income is a useful
tool for measuring  risk.  Management  also believes that the charts reflect the
positive  impact of  strategies to reduce  interest rate risk as evidenced  most
prominently  by the  relatively  low level of  interest  rate  sensitivity  that
reflected a decline of 68 basis  points and 67 basis  points for the years ended
June 30, 1999 and 1998, respectively. The strategies that have reduced the level
of interest  rate risk under an  increasing  rate  assumption  will  continue to
reduce the impact or rising rates as long term  mortgages  are sold and replaced
with shorter term mortgage and nonmortgage loans with rates that can be adjusted
to more closely  simulate market rates of interest.  Management  believes that a
strong equity capital  position and the existence of the corporate  authority to
raise  additional  capital as necessary act as valuable tools to absorb interest
rate risk.

FUTURE REPORTING REQUIREMENTS

The FASB has issued SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities,  which the Company has not been required to adopt as of June
30, 1999.  This  Statement,  which is effective for fiscal years beginning after
June 15, 2000,  establishes  accounting  and reporting  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized  firm  commitment,  an available  for sale  security,  or a foreign
currency denominated forecasted  transaction.  This Statement is not expected to
have a significant impact on the Company.

The FASB has issued  SFAS No. 134,  Accounting  for  Mortgage-Backed  Securities
Retained after the  Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, an amendment of FASB Statement No. 65, which the Company has
not been required to adopt as of June 30, 1999.  Statement No. 65, as amended by
FASB Statements No. 115,  Accounting for Certain  Investments in Debt and Equity
Securities,  and No. 125,  Accounting  for  Transfers and Servicing of Financial
Assets   and   Extinguishments   of   Liabilities,   requires   that  after  the
securitization  of a mortgage loan held for sale, an entity  engaged in mortgage
banking activities classify the resulting  mortgage-backed security as a trading
security.  This Statement  further amends Statement No. 65 to require that after
the  securitization  of  mortgage  loans  held for sale,  an entity  engaged  in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained  interests  based on its ability and intent to sell or hold those
investments.  This Statement  conforms the subsequent  accounting for securities
retained  after the  securitization  of  mortgage  loans by a  mortgage  banking
enterprise  with the subsequent  accounting  for  securities  retained after the
securitization  of other types of assets by a  nonmortgage  banking  enterprise.
This Statement is effective for fiscal years  beginning after December 15, 1998,
and is not expected to have a significant impact on the Company.

IMPACT OF INFLATION AND CHANGING PRICES

The  financial  statements  and  accompanying  footnotes  have been  prepared in
accordance with GAAP,  which require the  measurement of financial  position and
operating  results in terms of  historical  dollars  without  consideration  for
changes  in the  relative  purchasing  power  of  money  over  the  time  due to
inflation.  The assets and  liabilities  of the Bank are  primarily  monetary in
nature and  changes in the market  interest  rates have a greater  impact on the
Company's performance than do the effects of inflation.

                                       18

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



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


We have audited the accompanying  consolidated statements of financial condition
of AF Bankshares,  Inc. and  Subsidiaries  as of June 30, 1999 and 1998, and the
related   consolidated   statements   of  income   and   comprehensive   income,
stockholders'  equity,  and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of AF  Bankshares,  Inc.  and
Subsidiaries  as of June 30, 1999 and 1998, and the results of their  operations
and their cash flows for the years then  ended,  in  conformity  with  generally
accepted accounting principles.

Charlotte, North Carolina
July 30, 1999

                                       19

<PAGE>

<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998

ASSETS                                                                               1999              1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                <C>
Cash and cash equivalents:
   Interest-bearing deposits                                                  $  4,173,311       $ 11,838,926
   Noninterest-bearing deposits                                                  8,221,749          2,949,842
Certificates of deposit, at cost                                                   198,000            198,000
Securities held to maturity (fair value $100,000 in 1999 and
   1998) (Note 2)                                                                  100,000            100,000
Securities available for sale (Note 2)                                          10,976,170          8,094,739
Federal Home Loan Bank stock (Notes 2 and 6)                                       523,600            624,000
Loans receivable, net (Notes 3 and 6)                                           81,156,766         72,627,870
Real estate owned                                                                   59,000             38,115
Office properties and equipment, net (Note 4)                                    2,544,777          2,160,783
Accrued interest receivable on loans                                               398,918            321,679
Accrued interest receivable on investment securities                                97,598             87,880
Prepaid expenses and other assets                                                  546,721            439,663
Deferred income taxes, net (Note 12)                                               425,100            307,294
Intangible assets, net of accumulated amortization of
   $76,284 in 1999 and $34,990 in 1998                                             509,716            285,010
                                                                              --------------------------------
              TOTAL ASSETS                                                    $109,931,426       $100,073,801
                                                                              ================================

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------
Liabilities:
   Savings deposits (Note 5)                                                  $ 93,106,090       $ 82,488,216
   Note payable - ESOP (Note 9 and 17)                                             255,420            295,420
   Advances from Federal Home Loan Bank (Note 6)                                 2,564,358          4,115,596
   Accounts payable and other liabilities (Note 10)                              1,636,362          1,180,314
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares (Notes 9 and 17)                                        150,942            508,069
                                                                              --------------------------------
              TOTAL LIABILITIES                                                 97,713,172         88,587,615
                                                                              --------------------------------
Commitments and Contingencies (Notes 10 and 13)
Stockholders' equity:  (Note 17)
   Common stock, par value $.01 per share; authorized 5,000,000 shares;
      1,053,678 issued and 1,049,378 outstanding shares
      at 1999 and 1,053,678 issued and outstanding at 1998 (Note 7)                 10,537             10,537
   Additional paid-in capital                                                    4,593,516          4,580,151
   Retained earnings, substantially restricted (Notes 7 and 12)                  7,974,373          7,279,694
   Deferred recognition and retention plan (Note 11)                              (479,960)          (678,576)
   Accumulated other comprehensive income, unrealized gain
      on securities available for sale (Note 2)                                    203,638            294,380
                                                                              --------------------------------
                                                                                12,302,104         11,486,186

   Less cost of 4,300 shares of treasury stock                                     (83,850)
                                                                              --------------------------------
              TOTAL STOCKHOLDERS' EQUITY                                        12,218,254         11,486,186
                                                                              --------------------------------
              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $109,931,426       $100,073,801
                                                                              ================================
</TABLE>
See Notes to Consolidated Financial Statements.

                                       20

<PAGE>
<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 1999 AND 1998
                                                                                 1999               1998
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
Interest income:
   Loans                                                                     $6,806,902         $6,667,587
   Investment securities                                                        501,410            421,609
   Interest-bearing deposits                                                    570,867            267,162
                                                                             ------------------------------
                                                                              7,879,179          7,356,358
                                                                             ------------------------------
Interest expense:
   Deposits (Note 5)                                                          3,769,899          3,541,900
   Federal Home Loan Bank advances (Note 6)                                     175,451            226,392
   Note payable, ESOP                                                            21,918             26,512
                                                                             ------------------------------
                                                                              3,967,268          3,794,804
                                                                             ------------------------------
              NET INTEREST INCOME                                             3,911,911          3,561,554
Provision for (recovery of) loan losses (Note 3)                                 20,000            (25,000)
                                                                             ------------------------------
              NET INTEREST INCOME AFTER PROVISION FOR
                 (RECOVERY OF) LOAN LOSSES                                    3,891,911          3,586,554
                                                                             ------------------------------
Noninterest income
   Insurance commissions                                                        499,845            403,900
   Gain on sale on investments available for sale                               165,505            305,550
   Other                                                                        540,409            281,846
                                                                             ------------------------------
                                                                              1,205,759            991,296
                                                                             ------------------------------
Noninterest expenses
   Compensation and employee benefits (Notes 8, 9, 10 and 11)                 2,261,079          1,801,254
   Occupancy and equipment                                                      426,161            327,944
   Deposit insurance premiums                                                    48,918             43,696
   Computer processing charges                                                  209,018            138,511
   Amortization                                                                  41,294             34,990
   Other                                                                      1,361,826          1,141,797
                                                                             ------------------------------
                                                                              4,348,296          3,488,192
                                                                             ------------------------------
              INCOME BEFORE INCOME TAXES                                        749,374          1,089,658
Income taxes (Note 12)                                                          235,540            381,255
                                                                             ------------------------------
              NET INCOME                                                        513,834            708,403
                                                                             ------------------------------
Other comprehensive loss, net of tax:

   Unrealized loss on securities, net of tax 1999 ($82,485);
      1998 ($101,568)                                                          (204,278)          (254,370)
   Less: reclassification adjustment for gains included in net income,
      net of tax 1999 ($51,969); 1998 ($106,943)                                113,536            198,607
                                                                             ------------------------------
   Other comprehensive loss                                                     (90,742)           (55,763)
                                                                             ------------------------------
              COMPREHENSIVE INCOME                                           $  423,092         $  652,640
                                                                             ==============================

Basic earning per share (Note 14)                                            $     0.52         $     0.73
                                                                             ==============================
Diluted earnings per share (Note 14)                                         $     0.52         $     0.72
                                                                             ==============================
Cash dividends per share                                                     $     0.20         $     0.20
                                                                             ==============================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       21

<PAGE>
<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998

                                                           Common           Additional          Retained
                                                           Stock         Paid-In Capital        Earnings
-------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>             <C>                <C>
Balance, June 30, 1997                                    $10,000         $3,552,726         $7,065,824
   Adoption of recognition and retention plan                 537            992,506
   Vesting of recognition and retention plan
   Transfer to redeemable common stock
      net of unearned ESOP shares                                                              (332,536)
   ESOP contribution                                                          34,919             37,000
   Cash dividend, $.20 per share                                                               (198,997)
   Net change in unrealized gain on securities
      available for sale, net (Note 2)
   Net income                                                                                   708,403

                                                          ----------------------------------------------
Balance, June 30, 1998                                     10,537          4,580,151          7,279,694
   Vesting of recognition and retention plan
   Transfer from redeemable common stock net of
      unearned ESOP shares                                                                      357,127
   ESOP contribution                                                          13,365             33,723
   Cash dividend, $.20 per share                                                               (205,105)
   Purchase of common stock for treasury
   Issuance of common stock from treasury                                                        (4,900)
   Net change in unrealized gain on securities
      available for sale, net (Note 2)
   Net income                                                                                   513,834
                                                          ----------------------------------------------
Balance, June 30, 1999                                    $10,537         $4,593,516         $7,974,373
                                                          ==============================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       22

<PAGE>
<TABLE>
<CAPTION>
                       Accumulated Other
                         Comprehensive
                      Income, Unrealized
     Deferred           Gain (Loss) on                               Total
  Recognition and         Securities             Treasury        Stockholders'
  Retention Plan      Available for Sale          Stock              Equity

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

<S>                      v <C>             <C>                 <C>
  $                          $350,143       $                   $10,978,693
   (993,043)
    314,467                                                         314,467

                                                                   (332,536)
                                                                     71,919

                                                                   (198,997)

                              (55,763)                              (55,763)
                                                                    708,403
--------------------------------------------------------------------------
   (678,576)                  294,380                            11,486,186
    198,616                                                         198,616

                                                                    357,127
                                                                     47,088

                                                                   (205,105)
                                             (113,750)             (113,750)
                                               29,900                25,000

                              (90,742)                              (90,742)
                                                                    513,834
--------------------------------------------------------------------------
$ (479,960)                  $203,638       $ (83,850)          $12,218,254
==========================================================================
</TABLE>

                                       23

<PAGE>
<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998

                                                                                        1999              1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                 <C>
Cash Flows from Operating Activities
   Net income                                                                     $     513,834       $    708,403
   Adjustments to reconcile net income to net cash
      provided by operating activities:
        Provision for (recovery of) loan losses                                          20,000           (25,000)
        Loss on disposal of office properties and equipment                                 607              9,146
        Gain on sale of investments available for sale                                 (165,505)          (305,550)
        Provision for depreciation                                                      320,575            238,568
        Amortization of goodwill and noncompete covenant                                 41,294             34,990
        Amortization of deferred loan fees                                             (156,603)          (222,904)
        Amortization of premium/discount on investments                                  23,823             12,687
        Amortization of unearned ESOP shares                                             33,723             37,000
        ESOP fair value adjustment                                                       13,365             34,919
        Vesting of recognition and retention plan                                       198,616            314,467
        Stock compensation                                                               25,000
        Proceeds from sale of loans held for sale                                    12,133,119          8,091,901
        Origination of loans held for sale                                          (12,120,263)        (8,084,101)
        Gain on sale of loans held for sale                                             (12,856)            (7,800)
        Deferred income taxes                                                           (59,165)            (1,026)
        Increase in operating assets:
           Accrued interest receivable                                                  (86,957)           (16,948)
           Prepaid expenses and other assets                                           (107,058)          (159,378)
        Increase (decrease) in liabilities:
           Accrued interest payable                                                     (29,397)              2,630
           Accounts payable and other liabilities                                       456,048            515,378
                                                                              -------------------------------------
              NET CASH PROVIDED BY OPERATING ACTIVITIES                               1,042,200          1,177,382
                                                                              -------------------------------------
Cash Flows from Investing Activities
   Purchases of securities available for sale                                        (9,501,897)        (5,922,587)
   (Increase) decrease in FHLB stock                                                    100,400           (48,300)
   Proceeds from calls of securities available for sale                               4,950,000          3,050,000
   Proceeds from sale of securities available for sale                                  329,423            311,633
   Principal payments received on securities available for sale                       1,333,342            730,812
   Net originations of loans receivable                                              (8,467,343)        (2,195,238)
   Purchase of office properties and equipment                                         (717,171)        (1,036,924)
   Proceeds from sale of properties and equipment                                        11,995              4,200
   Proceeds from sale of real estate owned                                               54,165             12,827
   Purchase of goodwill and noncompete agreement                                       (266,000)          (320,000)
                                                                              -------------------------------------
              NET CASH USED IN INVESTING ACTIVITIES                                 (12,173,086)        (5,413,577)
                                                                              -------------------------------------
</TABLE>

                                       24

<PAGE>
<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998

                                                                                         1999               1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                 <C>
Cash Flows from Financing Activities
   Net increase in savings deposits                                               $  10,647,271       $ 14,267,090
   Net borrowings (payments) on FHLB advances                                        (1,551,238)          2,461,365
   Purchase of common stock for treasury                                               (113,750)
   Principal payments on borrowings                                                     (40,000)           (37,000)
   Cash dividends paid                                                                 (205,105)          (198,997)
                                                                              -------------------------------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES                               8,737,178         16,492,458
                                                                              -------------------------------------
              NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   (2,393,708)         12,256,263
Cash and cash equivalents:
   Beginning                                                                         14,788,768          2,532,505
                                                                              -------------------------------------
   Ending                                                                         $  12,395,060       $ 14,788,768
                                                                              =====================================

Supplemental Schedule of Cash and Cash Equivalents
   Interest-bearing deposits                                                      $   4,173,311       $ 11,838,926
   Noninterest-bearing                                                                8,221,749          2,949,842
                                                                              -------------------------------------
                                                                                  $  12,395,060       $ 14,788,768
                                                                              =====================================

Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest                                                                    $   3,996,665       $  3,792,174
      Income taxes                                                                      335,333            485,178

Supplemental Disclosure of Noncash Investing and Financing
   Activities
      Net change in unrealized gain on securities available for sale,
         net of tax                                                               $     (90,742)      $    (55,763)
      Transfer from loans receivable to real estate owned                               104,563             50,942
      Originations of loans to facilitate sale of real estate owned                     (29,513)
      Fair value of ESOP shares in excess of unearned ESOP shares                       323,404            295,536
      Transfer (from) to retained earnings to redeemable
        common stock                                                                    357,127           (332,536)

See Notes to Consolidated Financial Statements.
</TABLE>

                                       25

<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of  business:  AF  Bankshares,  Inc.  (the  "Company")  is a bank holding
company  which owns 100% of the common stock of AF Bank (the  "Bank"),  formerly
Ashe Federal Bank. The Company has no operations and conducts no business of its
own other than ownership of its  subsidiaries  and investing in securities.  The
Bank is a federally  chartered  stock savings bank which conducts  business from
its main office located in West  Jefferson,  North Carolina and four branches in
Sparta,  Jefferson,  Boone  and  Warrensville,  North  Carolina.  The  principal
activities  of the Bank consist of  obtaining  savings  deposits  and  providing
credit to customers  in its primary  market area,  Ashe,  Alleghany  and Watauga
Counties.  On April 15, 1996,  the Board of Directors of the Bank adopted a Plan
of  Reorganization  and a related Stock Issuance Plan pursuant to which the Bank
exchanged  its federal  mutual  savings bank charter for a federal stock savings
bank charter,  conducted a minority stock offering, and formed AsheCo, M.H.C., a
mutual holding company which owned 53.8% of the common stock issued by the Bank.
The Bank  conducted its minority  stock  offering in July and August of 1996 and
the closing  occurred on October 4, 1996. The Bank sold 461,779 shares of common
stock in the  minority  stock  offering,  including  36,942  shares  sold to its
Employee  Stock  Ownership  Plan (the "ESOP"),  and issued 538,221 shares to the
mutual holding company.  See Note 17 for additional  information  concerning the
minority stock offering and the reorganization.

On June 16, 1998,  the Board of Directors  approved the  formation of a mid-tier
holding company, AF Bankshares,  Inc. which became a 100% owner of the Bank in a
stock swap with AsheCo,  M.H.C., which was accounted for similar to a pooling of
interests. At June 30, 1998, AsheCo,  M.H.C.'s ownership of AF Bankshares,  Inc.
decreased to 51.10% due to the shares issued under the recognition and retention
plan discussed in Note 11. During the year ended June 30, 1999, AsheCo, M.H.C.'s
ownership  of AF  Bankshares,  Inc.  increased  to 51.38% due to the purchase of
shares held in treasury.

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

On August 5, 1998,  the Company  formed AF  Brokerage,  Inc.,  which is a wholly
owned  subsidiary  of the  Company.  AF  Brokerage,  Inc.  is in the  process of
applying  for a license  to become a  registered  broker/dealer.  Currently,  AF
Brokerage,  Inc.  operates  through  the use of a third  party  clearing  broker
pending approval of the application with NASD.

                                       26

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

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

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

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

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

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

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

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

                                       27

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

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

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

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

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

Impaired loans: SFAS No. 114,  Accounting by Creditors for Impairment of a Loan,
requires that the Bank  establish a specific loan  allowance on an impaired loan
if the  present  value of the  future  cash  flows  discounted  using the loan's
effective interest rate is less than the carrying value of the loan. An impaired
loan can also be valued  based upon its fair  value or the  market  value of the
underlying  collateral if the loan is primarily collateral  dependent.  The Bank
assesses for impairment all loans delinquent more than 90 days. See Note 3 for a
further  explanation of the  Statement.  No loans were impaired at June 30, 1999
and 1998,  and there is no specific SFAS No. 114 allowance  associated  with the
portfolio.

Interest  income:  SFAS No. 118,  Accounting  by Creditors  for  Impairment of a
Loan--Income  Recognition and  Disclosures,  which amended SFAS No. 114 requires
disclosure of the Bank's method of  accounting  for interest  income on impaired
loans.  The Bank generally  continues to accrue interest on loans  delinquent 90
days  or  more.   However,   all  such  accrued  interest  is  reversed  by  the
establishment  of a reserve  for  uncollected  interest,  if in the  opinion  of
management  collectibility is uncertain. Such interest, if ultimately collected,
is credited to income in the period received.  The Bank anticipates that it will
account for interest on impaired loans in a similar fashion in the future if and
when it has impaired loans.

                                       28

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

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

Loans held for sale: Loans held for sale are those loans the Bank has the intent
to sell in the  foreseeable  future.  They are carried at the lower of aggregate
cost or market  value.  Gains and  losses  on sales of loans are  recognized  at
settlement dates and are determined by the difference between the sales proceeds
and the carrying value of the loans.  All sales are made without  recourse.  The
Bank has no loans held for sale at June 30, 1999 or 1998.

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

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

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

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

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

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

                                       29

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

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

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

The fair value estimates presented are based on pertinent  information available
to management as of June 30, 1999 and 1998.  Although management is not aware of
any factors that would  significantly  affect the  estimated  fair value amount,
such  amounts  have not been  comprehensively  revalued  for  purposes  of these
financial  statements since that date and therefore,  current  estimates of fair
value may differ significantly from the amounts presented herein.

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

Earnings per share: SFAS No. 128, Earnings Per Share,  requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options,  warrants and convertible  securities,  outstanding that
trade in a public market. Those entities that have only common stock outstanding
are  required to present  basic  earnings  per-share  amounts.  Basic  per-share
amounts  are   computed  by  dividing   net  income  (the   numerator)   by  the
weighted-average  number of common shares  outstanding  (the  denominator).  All
other  entities are  required to present  basic and diluted  per-share  amounts.
Diluted  per-share  amounts assume the  conversion,  exercise or issuance of all
potential  common stock  instruments  unless the effect is to reduce the loss or
increase the income per common share from continuing operations.

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

                                       30

<PAGE>
NOTE 1.  DEBT AND EQUITY SECURITIES

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

<TABLE>
<CAPTION>
                                                                              1999
                                               --------------------------------------------------------------
                                                                      Gross            Gross
                                                  Amortized         Unrealized      Unrealized          Fair
                                                     Cost             Gains           Losses           Value
                                               --------------------------------------------------------------
<S>                                            <C>                 <C>           <C>             <C>
Available for sale securities:
   Debt securities:
      U.S. Government agency securities        $ 4,224,263         $  3,125      $ (36,791)      $ 4,190,597
      Federal Farm Credit Notes                    300,000                          (2,438)          297,562
      Fannie Mae and Government
        National Mortgage Association            4,625,811           49,513         (3,080)        4,672,244
      Municipals                                   281,977                         (20,493)          261,484
   Equity securities:
      Mutual Funds                               1,205,216           61,939        (45,792)        1,221,363
      Federal Home Loan Mortgage
        Corporation Common Stock                     4,784          328,136                          332,920
                                               --------------------------------------------------------------
                                                10,642,051          442,713       (108,594)       10,976,170
Held to maturity securities:
   Debt securities:
      Federal Home Loan Bank                       100,000                                           100,000
Other securities:
   Federal Home Loan Bank stock                    523,600                                           523,600
                                               --------------------------------------------------------------
                                               $11,265,651         $442,713      $(108,594)      $11,599,770
                                               ==============================================================
</TABLE>

                                       31

<PAGE>
NOTE 2.     DEBT AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>

                                                                               1998
                                                --------------------------------------------------------------
                                                                      Gross            Gross
                                                  Amortized         Unrealized      Unrealized          Fair
                                                      Cost            Gains           Losses           Value
                                                --------------------------------------------------------------
<S>                                             <C>                <C>              <C>             <C>
Available for sale securities:
   Debt securities:
      U.S. Government agency securities         $5,029,967         $  4,453         $(11,156)       $5,023,264
      Federal Farm Credit Notes                    400,000                            (1,062)          398,938
      Fannie Mae and Government
        National Mortgage Association            2,174,353           60,503                          2,234,856
   Equity securities:
      Federal Home Loan Mortgage
        Corporation Common Stock                     6,917          430,764                            437,681
                                                --------------------------------------------------------------
                                                 7,611,237          495,720          (12,218)        8,094,739
Held to maturity securities:
   Debt securities:
      Student Loan Marketing
        Association                                100,000                                             100,000
Other securities:
   Federal Home Loan Bank stock                    624,000                                             624,000
                                                --------------------------------------------------------------
                                                $8,335,237         $495,720         $(12,218)       $8,818,739
                                                =============================================================-
</TABLE>

The amortized cost and estimated fair value of debt securities at June 30, 1999,
by  contractual  maturity are shown below.  Fannie Mae and  Government  National
Mortgage  Association  securities  are not included in the  maturity  categories
because they do not have a single maturity date. Additionally, equity securities
and mutual funds are not included in the maturity categories because they do not
have contractual maturities.
<TABLE>
<CAPTION>

                                                 Held to maturity securities:     Available for sale securities:
                                               --------------------------------------------------------------------
                                                   Amortized                        Amortized
                                                     Cost          Fair Value          Cost          Fair Value
                                               --------------------------------------------------------------------
<S>                                               <C>               <C>            <C>              <C>
Due from one year to five years                   $100,000          $100,000       $2,880,000       $2,849,257
Due from five years to ten years                                                    1,017,323        1,017,792
Due after ten years                                                                   908,917          882,594
Fannie Mae and Government
   National Mortgage Association

   debt securities                                                                  4,625,811        4,672,244
Mutual funds                                                                        1,205,216        1,221,363
Equity securities                                                                       4,784          332,920
                                               -------------------------------------------------------------------
                                                  $100,000         $100,000       $10,642,051      $10,976,170
                                               ===================================================================
</TABLE>

                                       32

<PAGE>
NOTE 2.     DEBT AND EQUITY SECURITIES (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                                    1999               1998
                                                                             --------------------------------------
<S>                                                                             <C>                <C>
Proceeds from calls of securities available for sale                            $4,950,000         $3,050,000
Proceeds from sale of securities available for sale                                329,423            311,633
                                                                             --------------------------------------
                                                                                 5,279,423          3,361,633
Realized gain on sale of securities available for sale                            (165,505)          (305,550)
                                                                             --------------------------------------
Cost of securities sold                                                         $5,113,918         $3,056,083
                                                                             ======================================
</TABLE>

The  change  in  accumulated  other  comprehensive  income,  which  consists  of
unrealized  gains on securities  available for sale for the years ended June 30,
are as follows:
<TABLE>
<CAPTION>

                                                                                      1999               1998
                                                                             --------------------------------------
<S>                                                                             <C>                  <C>
Balance, beginning                                                              $  294,380           $350,143
Change in net unrealized gains                                                    (149,383)           (91,589)
Change in deferred income taxes                                                     58,641             35,826
                                                                             --------------------------------------
Balance, ending                                                                  $ 203,638           $294,380
                                                                             ======================================
</TABLE>

The Bank, as a member of the FHLB system,  is required to maintain an investment
in  capital  stock of the FHLB in an amount  equal to the  greater  of 1% of its
outstanding  home loans or 5% of advances  from the FHLB. No ready market exists
for  the  FHLB  stock,  and it has no  quoted  market  value.  For  presentation
purposes, such stock is assumed to have a market value which is equal to cost.

NOTE 1.  LOANS RECEIVABLE

Loans receivable at June 30, consist of the following:
<TABLE>
<CAPTION>

                                                                                      1999               1998
                                                                             --------------------------------------
<S>                                                                               <C>                <C>
   One to four-family                                                             $48,432,985        $55,462,490
   Multifamily                                                                        316,111            668,146
   Non residential                                                                  2,068,070          1,417,513
   Land                                                                             1,258,481          2,423,690
   Construction loans                                                               5,081,781          3,477,239
   Commercial loans                                                                18,261,202          3,974,669
   Consumer loans                                                                  12,143,508          8,281,791
                                                                             ------------------------------------
                                                                                   87,562,138         75,705,538

Less:

   Undisbursed loan funds                                                          (5,033,086)        (1,597,657)
   Deferred loan fees                                                                (249,605)          (315,748)
   Allowance for loan losses                                                       (1,122,681)        (1,164,263)
                                                                             ------------------------------------
                                                                                  $81,156,766        $72,627,870
                                                                             ====================================
</TABLE>

                                       33

<PAGE>
NOTE 3.    LOANS RECEIVABLE (CONTINUED)

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

                                                                                    1999               1998
                                                                             --------------------------------------
<S>                                                                              <C>                <C>
Balance, beginning                                                               $1,164,263         $1,031,182
   Provisions (recoveries) charged to operations                                     20,000           (25,000)
   Charge-offs                                                                      (74,034)           (12,936)
   Recoveries                                                                        12,452            171,017
                                                                             --------------------------------------
Balance, ending                                                                  $1,122,681         $1,164,263
                                                                             ======================================
</TABLE>
SFAS No. 114,  Accounting by Creditors  for  Impairment of a Loan, as amended by
SFAS No. 118 Accounting by Creditors for Impairment of a Loan-Income Recognition
and  Disclosure,  requires  that the Bank  establish  a  specific  allowance  on
impaired  loans and  disclosure of the Bank's method of accounting  for interest
income on impaired  loans.  The Bank assesses all loans  delinquent more than 90
days for impairment and such loans amounted to approximately $60,000 and $24,000
at June 30, 1999 and 1998,  respectively.  Average balances for loans delinquent
more than 90 days  totaled  approximately  $120,000  and  $111,000 for the years
ended June 30, 1999 and 1998, respectively. These loans are primarily collateral
dependent and management has determined that the underlying  collateral value is
in excess of the carrying  amounts.  As a result,  the Bank has determined  that
specific  allowances on these loans are not required.  Interest  income foregone
during  1999 and 1998 was $4,313 and $509,  respectively.  The Bank  established
reserves for  uncollectible  interest on mortgage and  consumer  loans  totaling
$4,313 and $5,485 at June 30, 1999 and 1998, respectively.

Loan  activity to officers and  directors of the Company  during the years ended
June 30, 1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>

                                                                                    1999               1998
                                                                             --------------------------------------
<S>                                                                              <C>                 <C>
Balance, beginning                                                               $  943,194          $ 855,339
Disbursements                                                                       672,300            327,935
Payments received                                                                   (79,890)          (240,080)
                                                                             --------------------------------------
Balance, ending                                                                  $1,535,604          $ 943,194
                                                                             ======================================
</TABLE>

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
statements of financial condition.  Mortgage loan portfolios serviced for Fannie
Mae were  approximately  $20,657,000  and  $8,511,000 at June 30, 1999 and 1998,
respectively.

There were no loans held for sale or outstanding commitments to sell loans as of
June 30, 1999 or 1998.

                                       34

<PAGE>
NOTE 1.  OFFICE PROPERTIES AND EQUIPMENT

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

<TABLE>
<CAPTION>

                                                                                   1999               1998
                                                                            --------------------------------------
<S>                                                                           <C>                 <C>
Land and land improvements                                                    $   308,329         $  260,399
Buildings                                                                       1,421,055          1,239,304
Furniture and fixtures                                                          1,434,791          1,065,993
Leasehold improvements                                                            252,120            197,540
Automobiles                                                                        84,345             84,345
                                                                            --------------------------------------
                                                                                3,500,640          2,847,581
Accumulated depreciation                                                        (955,863)          (686,798)
                                                                            --------------------------------------
                                                                               $2,544,777         $2,160,783
                                                                            ======================================
</TABLE>

NOTE 1.  SAVINGS DEPOSITS

Savings deposits at June 30 consist of the following:
<TABLE>
<CAPTION>

                                                                                   1999               1998
                                                                            --------------------------------------
<S>                                   <C>   <C>    <C>                         <C>                <C>
Interest-bearing checking accounts at 2.25% (3.00% 1998)                       $13,831,977        $ 8,465,225
Commercial and free checking (noninterest bearing)                               3,914,090          3,469,656
Passbook savings 3.05% (4.25% 1998)                                             21,840,801         16,729,421
Money market demand accounts 2.50% (3.75% 1998)                                  1,593,041          1,855,571
                                                                            --------------------------------------
                                                                                41,179,909         30,519,873
                                                                            --------------------------------------
Certificates of Deposit:
   weighted average rate of 4.94% (5.52% 1998)
      4.00% to 5.99%                                                            49,488,579         45,411,880
      6.00% to 7.99%                                                             2,299,181          6,388,645
                                                                            --------------------------------------
                                                                                51,787,760         51,800,525
                                                                            --------------------------------------

Accrued interest payable                                                           138,421            167,818
                                                                            --------------------------------------
                                                                               $93,106,090        $82,488,216
                                                                            ======================================
Weighted average cost of savings deposits                                            4.29%              4.94%
                                                                            ======================================
</TABLE>

At June 30,  1999,  scheduled  maturities  of  certificates  of  deposit  are as
follows:
<TABLE>
<CAPTION>

                           2000           2001            2002            2003           After          Total
                      ------------------------------------------------------------------------------------------
<S>                   <C>             <C>             <C>             <C>               <C>         <C>
4.00% to 5.99%        $42,693,272     $3,619,452      $1,957,795      $1,202,194        $15,866     $49,488,579
6.00% to 7.99%          1,963,692        128,170         143,456          63,863                      2,299,181
                     -------------------------------------------------------------------------------------------
                      $44,656,964     $3,747,622      $2,101,251      $1,266,057        $15,866     $51,787,760
                     ===========================================================================================
</TABLE>

                                       35

<PAGE>
NOTE 5.    SAVINGS DEPOSITS (CONTINUED)

The  aggregate   amount  of  jumbo   certificates  of  deposit  with  a  minimum
denomination  of $100,000 was  $13,910,406  and $13,894,135 at June 30, 1999 and
1998, respectively. At June 30, 1999, scheduled maturities of jumbo certificates
of deposit are as follows:
<TABLE>
<CAPTION>

                                                                                                     Weighted
                                                                                  Amount           Average Rate
                                                                            --------------------------------------
<S>                                                                           <C>                      <C>
Maturity period:
   Within three months                                                        $ 4,975,364              5.25%
   Three through six months                                                     3,392,960               4.76
   Six through twelve months                                                    4,231,745               4.97
   Over twelve months                                                           1,310,337               4.92
                                                                            --------------------------------------
                                                                              $13,910,406              5.01%
                                                                            ======================================
</TABLE>

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

The Bank has pledged  securities  with a fair value of $100,000 at June 30, 1999
as collateral on treasury tax and loan account.

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


<TABLE>
<CAPTION>
                                         1999               1998
                                  --------------------------------------
<S>                                  <C>                <C>
Interest-bearing checking            $  300,521         $  353,185
Passbook savings accounts               698,461            538,205
Certificate accounts                  2,770,917          2,650,510
                                  --------------------------------------
                                     $3,769,899         $3,541,900
                                  ======================================
</TABLE>

NOTE 6.  FEDERAL HOME LOAN BANK ADVANCES

The Bank had advances  outstanding of $2,564,358 and $4,115,596 at June 30, 1999
and 1998, respectively, from the FHLB. Interest is payable at rates ranging from
5.68% to 6.87%.  Pursuant to collateral  agreements with the FHLB,  advances are
collateralized by all the Bank's stock in the FHLB and qualifying first mortgage
loans. $912,500 of the advances are due by August of 2002, $1,500,000 are due by
September  of 2002 and the  remaining  $151,858  is due January  2007.  Interest
expense was  $175,451  and  $226,392 for the years ended June 30, 1999 and 1998,
respectively.

                                       36

<PAGE>
NOTE 7.  STOCKHOLDERS' EQUITY

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

The Office of Thrift Supervision (OTS) regulations require  institutions to have
a minimum  regulatory  tangible capital equal to 1.5% of total assets, a minimum
3% of total assets for the core capital ratio and 8% of risk-weighted assets for
the risk-based  capital ratio.  At June 30, 1999 and 1998, the Bank exceeded all
of the capital requirements.

The  following is a  reconciliation  of the Bank's  capital in  accordance  with
generally  accepted  accounting  principles  (GAAP) to the three  components  of
regulatory capital calculated under the requirements of the OTS at June 30, 1999
and 1998:

<TABLE>
<CAPTION>
                                                           June 30, 1999 Regulatory Capital
                           ----------------------------------------------------------------------------------------
                                              Percent                     Percent                       Percent
                                                of                           of                           of
                                Tangible     Tangible          Core       Tangible      Risk-based    Risk-based
                                 Capital      Assets         Capital       Assets         Capital       Assets
                           ----------------------------------------------------------------------------------------
<S>                           <C>            <C>           <C>           <C>           <C>             <C>
GAAP capital                 $11,063,063                  $11,063,063                 $11,063,063
Unrealized gain on
   securities
   available for sale          (165,855)                    (165,855)                   (165,855)
Equity investment
   and other assets                                                                       147,661
Qualifying general
   loan loss
   allowance                                                                              856,113
                           --------------            -----------------           -----------------
Regulatory capital            10,897,208     10.0 %        10,897,208    10.0 %        11,900,982      17.4 %
Minimum capital
   requirement                 1,627,815      1.5           3,255,630     3.0           5,483,920       8.0
                           ----------------------------------------------------------------------------------------
Excess regulatory
   capital                    $9,269,393      8.5 %       $ 7,641,578     7.0 %       $ 6,417,062       9.4 %
                           ========================================================================================
</TABLE>

                                       37

<PAGE>
NOTE 7.    STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>

                                                     June 30, 1998 Regulatory Capital
                           ----------------------------------------------------------------------------------------
                                              Percent                     Percent                       Percent
                                                 of                          of                            of
                                 Tangible     Tangible         Core       Tangible       Risk-based    Risk-based
                                 Capital       Assets        Capital       Assets         Capital        Assets
                           ----------------------------------------------------------------------------------------
<S>                            <C>           <C>           <C>           <C>            <C>            <C>
GAAP capital                  $11,486,186                 $11,486,186                  $11,486,186
Goodwill and
   other nonincludable
   assets                       (285,010)                   (285,010)                    (300,010)
Unrealized gain on
   securities
   available for sale           (294,380)                   (294,380)                    (294,380)
Qualifying general
   loan loss
   allowance                                                                               715,254
                           ---------------           -----------------           ------------------
Regulatory capital             10,906,796    10.9 %        10,906,796    10.9 %         11,607,050     20.4 %
Minimum capital
   requirement                  1,494,270     1.5           2,988,540     3.0            4,543,304      8.0
                           ----------------------------------------------------------------------------------------
Excess regulatory
   capital                    $ 9,412,526     9.4 %       $ 7,918,256     7.9 %        $ 7,063,746     12.4 %
                           ========================================================================================
</TABLE>

As of June 30, 1999, the most recent  notification  from the OTS categorized the
Bank as well capitalized  under the regulatory  framework for prompt  corrective
action.  To be  categorized  as well  capitalized,  the Bank must maintain total
capital to risk weighted  assets of 10%, Tier I Capital to risk weighted  assets
of 6% and Tier I Capital to total  assets of 5% or  $6,855,000,  $4,113,000  and
$5,426,000,   respectively.  There  are  no  conditions  or  events  since  that
notification that management believes have changed the Bank's category.

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

The Company paid cash  dividends  totaling $.20 per share during the years ended
June 30, 1999 and 1998. On July 19, 1999, the Company  declared a $.05 per share
cash  dividend  for  stockholders  of record  as of July 30,  1999 to be paid on
August 13, 1999.  This dividend will be funded by an upstream  dividend from the
Bank to the Company.

                                       38

<PAGE>
NOTE 8.  EMPLOYEE PENSION AND INCENTIVE PLANS

The  Bank  has a  profit-sharing  plan  for the  benefit  of  substantially  all
employees.  Contributions  are discretionary and totaled $41,281 and $52,300 for
the years ended June 30, 1999 and 1998, respectively.

The Bank also has a discretionary bonus plan under which bonuses are paid to all
employees if approved by the Board of Directors  each year.  Expense  related to
these  incentives  was $36,544 and $54,289 for the years ended June 30, 1999 and
1998, respectively.

In addition, the Bank implemented a 401(k) retirement plan during the year ended
June 30, 1998 which contains provisions for specified matching  contributions by
the Bank.  The Bank funds  contributions  as they accrue and 401(k) plan expense
amounted  to $70,367  and  $74,239  for the years  ended June 30, 1999 and 1998,
respectively.

NOTE 9.  EMPLOYEE STOCK OWNERSHIP PLAN

As  part  of the  Reorganization,  the  Bank  established  an  ESOP  to  benefit
substantially  all employees.  The ESOP purchased  36,942 shares of common stock
with the proceeds from a loan from a third party financial institution. The note
requires annual principal  payments of 10% of the outstanding  principal balance
plus interest at the lending  institution's  prime rate (7.75% at June 30, 1999)
less .5% with a balloon  payment  due June,  2002.  The Bank is expected to make
quarterly  contributions to the ESOP in amounts  sufficient to allow the ESOP to
make its scheduled  principal and interest payments on the note. The ESOP shares
are  pledged  as  collateral  for the debt.  As the debt is  repaid,  shares are
released from collateral and allocated to active employees,  based on proportion
of debt  service  paid in the year.  The debt of the ESOP is recorded as debt in
the Company's accompanying statement of financial condition.

At June 30, 1999, future principal payments are due as follows:

Year Ending June 30:                                                 Amount
-----------------------------------------------------------------------------
2000                                                                $ 25,542
2001                                                                  22,988
2002                                                                 206,890
                                                                   ----------
                                                                    $255,420
                                                                   ==========

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

                                       39

<PAGE>

NOTE 9.    EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

Excluding  interest,  expense  of  $47,088  and  $71,919  during  1999 and 1998,
respectively,  has been  incurred  in  connection  with the  ESOP.  The  expense
includes,  in  addition  to the cash  contribution  necessary  to fund the ESOP,
$13,365 in 1999 and $34,919 in 1998, which represents the difference between the
fair value of the shares which have been released or committed to be released to
participants,  and the cost of these  shares to the ESOP.  The Bank has credited
this  amount to  paid-in  capital in  accordance  with the  provisions  of AICPA
Statement of Position 93-6.

At June 30,  1999 and 1998,  11,400 and 7,400  shares held by the ESOP have been
released or committed to be released to the plan's  participants for purposes of
computing  earnings per share. The fair value of the unallocated shares amounted
to approximately $281,000 and $643,000 at June 30, 1999 and 1998, respectively.

The Bank has also recorded a liability for a put back option,  which  represents
the excess of the fair market  value of the total number of ESOP shares over the
original cost of the unallocated ESOP shares.  The liability  recorded under the
put  back  option  was  $150,942  and  $508,069  at  June  30,  1999  and  1998,
respectively.

NOTE 10.  DEFERRED COMPENSATION AND RETIREMENT PLAN AGREEMENTS

The Bank has an unfunded deferred  compensation  agreement providing retirement,
disability,  and  death  benefits  for  directors.  Vested  benefits  under  the
agreements are payable in monthly  installments  over a ten-year period upon the
director's  death,  disability or retirement.  The Bank has insured the lives of
the directors for amounts  sufficient  to discharge  its  obligations  under the
agreements.  The Bank also has a  retirement  plan for  members  of the Board of
Directors  which the Plan states that outside  directors with at least ten years
of service will  receive an amount equal to their annual  retainer for ten years
after their  retirement from the Board.  The liability for the benefits is being
accrued over the terms of active service of the directors. The amount charged to
expense  under these  plans  amounted to $54,361 and $78,812 for the years ended
June 30, 1999 and 1998, respectively.

                                       40

<PAGE>

NOTE 11.  RECOGNITION AND RETENTION PLAN AND STOCK OPTION PLAN

The Bank's stockholders  approved the Bank's Recognition and Retention Plan (the
"RRP") and the Bank's  stock  option plan on December 8, 1997.  The stock option
plan provides for the issuance of up to 21,322 stock options to certain officers
and  directors in the form of incentive  stock  options or  non-incentive  stock
options.  The exercise  price of the stock options may not be less than the fair
market value of the Company's common stock at the date of grant.  Under the Plan
21,322 of options,  which vest at the rate of 20% annually beginning at the date
of grant,  were all  granted on December 8, 1997 and expire on December 8, 2007.
As permitted under the generally accepted  accounting  principles,  grants under
the plan are accounted  for  following the  provisions of APB Opinion No. 25 and
its  related  interpretations.   Accordingly,  no  compensation  cost  has  been
recognized for grants made to date. Had compensation  cost been determined based
on the fair value method  prescribed  in FASB  Statement  No. 123, the pro forma
effect on reported net income for the year ended June 30, 1999 and 1998 would be
as follows:

                                              1999                1998
                                            ---------------------------
   Net income
      As reported                           $513,834           $708,403
      Pro forma                              485,179            679,748
   Earnings per share
      As reported
        Basic                               $   0.52           $   0.73
        Diluted                                 0.52               0.72
      Pro forma
        Basic                                   0.49               0.70
        Diluted                                 0.49               0.69

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

At June 30,  1999,  21,322  options  have been  granted at an exercise  price of
$18.50, of which 8,528 options are currently  exercisable.  No options have been
exercised to date and all options granted are outstanding at June 30, 1999.

The RRP reserved for issuance 53,678 shares of common stock to certain  officers
and  directors at the time of the  adoption.  The Bank issued shares to fund the
RRP in December of 1997. The restricted  common stock under the RRP vests at the
rate of 20% annually  beginning at the date of grant. The expense related to the
vesting of the RRP totaled  $198,616  and  $314,467  for the year ended June 30,
1999 and 1998, respectively.

                                       41

<PAGE>
NOTE 12.  INCOME TAX MATTERS

Under  the  Internal  Revenue  code,  the Bank is  allowed  a  special  bad debt
deduction  related to additions  to tax bad debt  reserves  established  for the
purpose of absorbing losses.  Through 1996, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience.  Tax legislation
passed in 1996  eliminated  the percentage of taxable income method as an option
for  computing  bad  debt  deductions  in all  future  years.  The Bank is still
permitted  to take  deductions  for bad debts,  but is required to compute  such
deductions using an experience method.

In conjunction with the change in computing the tax bad debt deduction, the Bank
will  also  have to  recapture  its  excess  tax bad debt  reserves  which  have
accumulated  since 1988,  amounting  to  approximately  $92,000  over a six year
period.  The tax  associated  with  the  recaptured  reserves  is  approximately
$36,000. The recapture was scheduled to begin with the Bank's 1997 year, but was
delayed  two years  because  the Bank  originated  a required  minimum  level of
mortgage loans.  Deferred income taxes have been previously  established for the
taxes  associated with the recaptured  reserves and the ultimate  payment of the
related  taxes  will not result in a charge to  earnings.  The amount of reserve
recaptured   and  associated   tax  were   approximately   $15,000  and  $6,000,
respectively, for each of the years ended June 30, 1999 and 1998.

Deferred  taxes have been  provided for certain  increases in the Bank's tax bad
debt  reserves  subsequent  to 1987 which are in excess of additions to recorded
loan loss  allowances.  At June 30,  1999,  retained  earnings  contain  certain
historical   additions  to  bad  debt   reserves  for  income  tax  purposes  of
approximately  $870,000,  the  balance at June 30,  1987,  for which no deferred
taxes have been provided  because the Bank does not intend to use these reserves
for purposes other than to absorb losses. If amounts which qualified as bad debt
deductions  are used for  purposes  other  than to  absorb  bad debt  losses  or
adjustments arising from the carryback of net operating losses, income taxes may
be imposed at the then  existing  rates.  The  approximate  amount of unrecorded
deferred  tax  liability   associated   with  these   historical   additions  is
approximately $340,000.

                                       42

<PAGE>
NOTE 12.    INCOME TAX MATTERS (CONTINUED)

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


                                                             1999         1998
                                                          ----------------------
Deferred tax assets:
   Reserve for loan losses                                $435,431      $453,480
   Reserve for uncollected interest                          1,672         2,137
   Deferred compensation                                   201,933       176,954
   Recognition and retention plan                           44,934        44,793
                                                          ----------------------
                                                           683,970       677,364
                                                          ----------------------
Deferred tax liabilities:
   Reserve for loan losses                                  23,752        53,563
   Unrealized gain on securities available for sale        130,483       189,124
   Depreciation                                             37,602        44,319
   FHLB stock dividends                                     60,427        60,949
   Deferred loan fees                                        6,606        22,115
                                                          ----------------------
                                                           258,870       370,070
                                                          ----------------------
              NET DEFERRED TAX ASSET                      $425,100      $307,294
                                                          ======================

At June 30, 1999 and 1998,  no valuation  allowance was recorded on deferred tax
assets.

The provision  for income taxes  charged to operations  for the years ended June
30, 1999 and 1998 consists of the following:

                                                     1999               1998
                                           -------------------------------------
Current                                            $294,705           $382,281
Deferred                                            (59,165)            (1,026)
                                          --------------------------------------
                                                   $235,540           $381,255
                                          ======================================

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

<TABLE>
<CAPTION>
                                                       1999                                  1998
                                       ---------------------------------------------------------------------------
                                             Amount            Percent             Amount            Percent
                                       ---------------------------------------------------------------------------
<S>                                       <C>                    <C>            <C>                   <C>
Tax at statutory rate                     $ 254,787              34.0%          $ 370,484             34.0%
State tax, net of federal benefit            25,834               3.4             37,892               3.5
Municipal interest income                   (27,296)             (3.6)           (19,813)             (1.8)
Other                                       (17,785)             (2.4)            (7,308)             (0.7)
                                       ---------------------------------------------------------------------------
Total                                       235,540              31.4%          $ 381,255             35.0%
                                       ===========================================================================
</TABLE>

                                       43

<PAGE>
NOTE 13.  COMMITMENTS AND CONTINGENCIES

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

A summary of the  contract  amount of the Bank's  exposure to  off-statement  of
financial condition risk, except for undisbursed  construction loan funds, is as
follows at June 30, 1999:

                                                                       Notional
                                                                        Amount

                                                                     -----------
Financial instruments whose contract amounts represent credit risk:

   Undisbursed home equity lines of credit                           $5,981,090
   Undisbursed commercial lines of credit                             1,341,045

The Bank evaluates each customer's  credit  worthiness on a case-by-case  basis.
Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Home equity
lines of credit have  variable  rates based on the prime rate of interest.  Home
equity lines are reassessed  every five years.  Because many of the  commitments
are expected to expire without being drawn upon, the total commitment amounts do
not necessarily  represent future cash requirements.  The collateral obtained by
the Bank upon extension of credit is based on management's  credit evaluation of
the customer.  The collateral  held is the underlying  real estate.  Undisbursed
commercial lines of credit have variable rates of prime plus two percent and are
reassessed on an annual basis. Prime at June 30, 1999 was 7.75%.

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

                                       44

<PAGE>
NOTE 14.  EARNINGS PER SHARE

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

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


                                                    For the Year Ended June 30, 1998
                                         -------------------------------------------------------
                                               Income            Shares          Per Share
                                            (Numerator)      (Denominator)         Amount
                                         -------------------------------------------------------
BASIC EPS
Income available to stockholders              $708,403          975,717              $0.73
                                                                             ===================

EFFECT OF DILUTIVE SECURITIES
RRP restricted stock awards                   @                   3,189
Stock options                                                     1,854
                                         ------------------------------------

DILUTED EPS
Income available to stockholders              $708,403          980,760              $0.72
                                         =======================================================
</TABLE>

                                       45

<PAGE>

NOTE 15.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The  following  table  reflects a  comparison  of carrying  amounts and the fair
values of the financial instruments as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>

                                                        1999                                  1998
                                       ----------------------------------------------------------------------------
                                            Carrying             Fair             Carrying             Fair
                                              Value              Value              Value              Value
                                       ----------------------------------------------------------------------------
<S>                                        <C>                <C>                <C>                <C>
Financial assets:
   Cash
      Interest-bearing                     $ 4,173,311        $ 4,173,311        $11,838,926        $11,838,926
      Noninterest-bearing
        deposits                             8,221,749          8,221,749          2,949,842          2,949,842
   Certificates of deposit                     198,000            198,000            198,000            198,000
   Investments                              11,076,170         11,076,170          8,194,739          8,194,739
   Loans receivable                         81,156,766         79,796,954         72,627,870         72,297,027
   Accrued interest receivable                 496,516            496,516            409,559            409,559
   FHLB stock                                  523,600            523,600            624,000            624,000

Financial liabilities:
   Deposits                                 93,106,090         92,924,645         82,488,216         82,589,250
   Advances from FHLB                        2,564,358          2,564,358          4,115,596          4,115,596
   Note payable, ESOP                          255,420            255,420            295,420            295,420
</TABLE>

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

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

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

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

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

                                       46

<PAGE>
NOTE 15.    FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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

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

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

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

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

NOTE 16.  RECLASSIFICATION OF FINANCIAL STATEMENTS

Certain  amounts in the  financial  statements  for the year ended June 30, 1998
have been reclassified to conform with classifications adopted in the year ended
June  30,  1999.  These  reclassifications  had  no  effect  on  net  income  or
stockholders' equity.

                                       47

<PAGE>
NOTE 17.  REORGANIZATION AND MINORITY STOCK OFFERING

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

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

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

                                       48

<PAGE>
NOTE 17.  REORGANIZATION AND MINORITY STOCK OFFERING (CONTINUED)

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

NOTE 18.  MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA

The mid-tier holding company, AF Bankshares,  Inc., was formed on June 16, 1998.
At June 30, 1998,  the  Company's  only asset was the  investment in AF Bank and
Subsidiaries of $11,486,186.  There were no significant operations from the date
of  inception  to June 30,  1998.  The  following  are the  condensed  financial
statements of AF Bankshares, as of and for the year ended June 30, 1999:

                               AF Bankshares, Inc.
                             Condensed Balance Sheet
                                  June 30, 1999

Assets:
   Cash                                                           $   232,410
   Securities available for sale                                      267,155
   Investment in AF Bankshares                                     11,063,063
   Investment in AF Insurance Services, Inc.                          744,851
   Investment in AF Brokerage, Inc.                                   236,758
   Other assets                                                       111,930
                                                                  ------------
                                                                  $12,656,167
                                                                  ============
Liabilities and Equity:
   Liabilities:
      Accounts payable                                            $    31,551
      Note payable - ESOP                                             255,420
      Redeemable common stock held by the ESOP, net of
        unearned ESOP shares                                          150,942
                                                                  ------------
                                                                      437,913
                                                                  ------------
   Equity:
      Common stock                                                     10,537
      Additional paid in capital                                   11,873,210
      Retained earnings                                               694,679
      Deferred recognition and retention plan                       (479,960)
                                                                  ------------
      Accumulated other comprehensive income, unrealized
        gain on securities available for sale, net                    203,638
                                                                  ------------
                                                                   12,302,104

      Less cost of 4,300 shares of treasury stock                    (83,850)
                                                                   -----------
                                                                   12,218,254
                                                                  ------------
                                                                  $12,656,167
                                                                  ============

                                       49

<PAGE>
NOTE 18.    MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)

                               AF Bankshares, Inc.
                          Condensed Statement of Income
                            Year Ended June 30, 1999

Interest and investment income                                        $   18,305
Equity in earnings subsidiaries                                          645,031
Income tax credits                                                        74,212
Other expense                                                          (223,714)
                                                              ------------------
        Net income                                                    $  513,834
                                                              ==================


                               AF Bankshares, Inc.
                        Condensed Statement of Cash Flows
                            Year Ended June 30, 1999

Cash Flows from Operating Activities:
   Net income                                                         $  513,834
   Change in assets and liabilities:
      Gain on sale of securities                                        (17,400)
      Stock compensation                                                  25,000
      Equity in earnings of subsidiaries                               (645,031)
      Increase in accounts payable and other liabilities                     608
      Increase in other assets                                         (111,930)
                                                              ------------------
        Net cash used in operating activities                          (234,919)
                                                              ------------------
Cash Flows from Investing Activities:
   Purchase of securities available for sale                           (367,001)
   Proceeds from sales of securities available for sale                  179,185
   Upstream dividends from AF Bank                                     2,000,000
   Purchase of insurance agency                                        (276,000)
   Capitalization of AF Brokerage, Inc.                                (250,000)
   Investment in AF Insurance Services, Inc.                           (500,000)
                                                              ------------------
        Net cash provided by investing activities                        786,184
                                                              ------------------
Cash Flows from Financing Activities:
   Cash dividends paid                                                 (205,105)
   Purchase of common stock for treasury                               (113,750)
                                                              ------------------
        Net cash used in financing activities                          (318,855)
                                                              ------------------

Net increase in cash                                                     232,410
   Cash - beginning
                                                              ------------------
   Cash - ending                                                      $  232,410
                                                              ==================

                                       50

<PAGE>
NOTE 18.    MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)

The  following  are the condensed  financial  statements  of the mutual  holding
company, AsheCo, M.H.C., as of and for the years ended June 30, 1999 and 1998:

                                 AsheCo, M.H.C.
                            Condensed Balance Sheets
                             June 30, 1999 and 1998

                                                            1999          1998
                                                       -------------------------
Assets:
   Cash                                                $  222,503     $  154,534
   Investment in AA&G, Inc. and Subsidiary                 66,828         38,004
   Investment in AF Bankshares, Inc. and Subsidiaries   6,277,739      5,867,144
   Other assets                                            26,086         19,409
                                                       -------------------------
                                                       $6,593,156     $6,079,091
                                                       =========================
Liabilities and Equity:
   Liabilities:
      Accrued expenses and other liabilities           $    1,000     $   12,000
                                                       -------------------------
   Equity:
      Additional paid-in-capital                        5,768,073      5,517,620
      Retained earnings                                   824,083        549,471
                                                       -------------------------
                                                        6,592,156      6,067,091
                                                       -------------------------
                                                       $6,593,156     $6,079,091
                                                       =========================


                                 AsheCo, M.H.C.
                         Condensed Statements of Income
                       Years Ended June 30, 1999 and 1998

                                                            1999         1998
                                                       -------------------------
Interest income                                        $   6,242          4,770
Equity in earnings subsidiaries                          296,610        401,110
Income tax credits                                        14,212         12,048
Other expense                                            (42,452)       (71,055)
                                                       -------------------------
        Net income                                     $ 274,612        346,873
                                                       =========================


                                       51
<PAGE>


NOTE 18.    MID-TIER HOLDING COMPANY AND MUTUAL HOLDING COMPANY DATA (CONTINUED)

                                 AsheCo, M.H.C.
                        Condensed Statement of Cash Flows
                       Years Ended June 30, 1999 and 1998

                                                          1999         1998
                                                          ----------------------
Cash Flows from Operating Activities:

   Net income                                           $  274,612     $346,873
   Change in assets and liabilities:
      Equity in earnings of subsidiaries                 (296,610)     (401,110)
      Decrease in accounts payable                        (11,000)       (2,838)
      Increase in other assets                             (6,677)      (19,409)
                                                        ------------------------
        Net cash used in operating activities             (39,675)      (76,484)
Cash Flows from Investing Activities:
   Dividends from AF Bankshares, Inc.                      107,644      107,644
                                                        ------------------------
Net increase in cash                                        67,969       31,160
   Cash - beginning                                        154,534      123,374
                                                        ------------------------
   Cash - ending                                        $  222,503     $154,534
                                                        ========================

NOTE 19.  RECENT ACCOUNTING PRONOUNCEMENTS

The FASB has issued SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities,  which the Company has not been required to adopt as of June
30, 1999.  This  Statement,  which is effective for fiscal years beginning after
June 15, 2000,  establishes  accounting  and reporting  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized  firm  commitment,  an available  for sale  security,  or a foreign
currency denominated forecasted  transaction.  This Statement is not expected to
have a significant impact on the Company.

                                       52

<PAGE>
NOTE 19.    FUTURE REPORTING REQUIREMENTS (CONTINUED)

The FASB has issued  SFAS No. 134,  Accounting  for  Mortgage-Backed  Securities
Retained after the  Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, an amendment of FASB Statement No. 65, which the Company has
not been required to adopt as of June 30, 1999.  Statement No. 65, as amended by
FASB Statements No. 115,  Accounting for Certain  Investments in Debt and Equity
Securities,  and No. 125,  Accounting  for  Transfers and Servicing of Financial
Assets   and   Extinguishments   of   Liabilities,   requires   that  after  the
securitization  of a mortgage loan held for sale, an entity  engaged in mortgage
banking activities classify the resulting  mortgage-backed security as a trading
security.  This Statement  further amends Statement No. 65 to require that after
the  securitization  of  mortgage  loans  held for sale,  an entity  engaged  in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained  interests  based on its ability and intent to sell or hold those
investments.  This Statement  conforms the subsequent  accounting for securities
retained  after the  securitization  of  mortgage  loans by a  mortgage  banking
enterprise  with the subsequent  accounting  for  securities  retained after the
securitization  of other types of assets by a  nonmortgage  banking  enterprise.
This Statement is effective for fiscal years  beginning after December 15, 1998,
and is not expected to have a significant impact on the Company.

                                       53

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AF BANKSHARES, INC.
CORPORATE INFORMATION
<S>                                             <C>       <C>
OFFICERS

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

STEPHEN R. HOOKS                                          JAMES R. WALKER
   Executive Vice President                                  Senior Vice President and Chief Information
                                                                Officer

LINDA D. MATEJ
   Assistant Secretary

DIRECTORS

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

JAMES A. TODD                                             JOHN D. WEAVER

JERRY L. ROTEN                                            WAYNE R. BURGESS

W. O. ASHLEY, JR.                                         FRANK E. ROLAND
</TABLE>

                                       54

<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION (CONTINUED)

                                                     OFFICES
<S>                                                      <C>
Corporate Offices                                         West Jefferson Office
206 S. Jefferson Avenue                                   205 S. Jefferson Avenue
West Jefferson, North Carolina 28694                      West Jefferson, North Carolina 28694

Jefferson Office                                          Warrensville Office
840 E. Main Street                                        4951 NC Hwy. 88 West
Jefferson, North Carolina 28640                           Warrensville, North Carolina 28693

Sparta Office - d/b/a Alleghany First Bank                North Wilkesboro Office - AF Brown Insurance
403 South Main Street                                     1347 West D Street
Sparta, NC 28675                                          North Wilkesboro, NC 28659

Boone Office - d/b/a Appalachian First Bank               Lenoir Office - AF Blair Insurance
285 Highway 105                                           324 Morganton Blvd, SW
Boone, NC 28607                                           Lenoir, NC 28645

       STOCK TRANSFER AGENT                                         LEGAL COUNSEL
ChaseMellon Shareholders Services, LLC                    Vannoy & Reeves
Overpeck Centre                                           306 East Main Street
85 Challenger Road                                        West Jefferson, North Carolina 28694
Ridgefield Park, New Jersey 07660

                                                          Thacher Proffitt & Wood
               AUDITORS                                   1700 Pennsylvania Avenue
McGladrey & Pullen, LLP                                   Washington, DC 20006
One Morrocroft Centre
6805 Morrison Boulevard, Suite 200                          FORM 10-KSB
Charlotte, North Carolina 28211                           A copy of Form 10-KSB as filed with the
                                                          Office of Thrift Supervision will be
                     ANNUAL MEETING                       furnished without charge to shareholders upon
The 1999 annual meeting of stockholders of                written request to James A. Todd, President, AF
AF Bankshares, Inc. will be held on November 1,           Bankshares, Inc., 206 S. Jefferson Avenue,
1999 at 6:00 p.m. at the Corporate Office,                P. O. Box 26, West Jefferson, NC 28694.
206 S. Jefferson Avenue, West Jefferson,
North Carolina.
</TABLE>

                                       55

<PAGE>
COMMON STOCK

The Company had 1,049,378 shares of common stock outstanding at August 31, 1999,
which are held by 439  shareholders  of record.  The majority of the outstanding
shares are held by the mutual holding company AsheCo, MHC. The remaining 515,457
shares are owned by minority  shareholders  including the Company's ESOP. Shares
are quoted on the OTC Electronic Bulletin Board under the symbol "ASFE."

MARKET FOR THE COMMON STOCK

There  is no  established  market  for the  Company's  common  stock,  excluding
occasional quotations,  although the Company's common stock is quoted on the OTC
Electronic  Bulletin  Board.  The table  below  reflects  the stock  trading and
dividend payment  frequency of the Company for the years ended June 30, 1999 and
1998.  For further  information  regarding  the  Company's  dividend  policy and
restrictions  on  dividends  paid,  please  refer to note 7 of the  notes to the
consolidated  financial  statements.  Stock  prices  reflect bid prices  between
broker/dealer,  prior to any markups,  markdowns or  commissions,  is based upon
information  provided to management of the Company by certain  securities  firms
effecting  transactions in the Company's stock on an ongoing basis,  and may not
necessarily represent actual transactions.

                                                        STOCK PRICE
1999:                              DIVIDENDS        HIGH            LOW
-------------------------------------------------------------------------
First Quarter                       $0.05         $22.00          $14.00
Second Quarter                       0.05          19.00           11.50
Third Quarter                        0.05          17.25           12.00
Fourth Quarter                       0.05          13.50            9.50


                                                        STOCK PRICE
1998:                              DIVIDENDS        HIGH            LOW
-------------------------------------------------------------------------
First Quarter                       $0.05         $17.00          $10.50
Second Quarter                       0.05          19.00           16.50
Third Quarter                        0.05          21.00           19.25
Fourth Quarter                       0.05          22.00           20.00


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

                                       56