2001 Annual Report

                                       of

                              BancAffiliated, Inc.


                                       A-1

<PAGE>



                                Table of Contents
                                -----------------


Selected Financial Data..................................................  A-3
Management's Discussion And Analysis of
  Financial Condition And Results of Operations..........................  A-5
Independent Auditor's Report.............................................  A-17
Consolidated Financial Statements........................................  A-18
Notes to Consolidated Financial Statements...............................  A-22
Stockholder Information..................................................  A-42
Corporate Information....................................................  A-43





                                       A-2

<PAGE>



                             SELECTED FINANCIAL DATA




                                                              At June 30,
                                                     --------------------------

                                                          2001           2000
                                                     --------------------------
                                                            (In Thousands)
Selected Financial Condition Data:
   Total assets.....................................     $35,527        $28,031
   Loans receivable, net............................      22,738         16,189
   Federal funds sold...............................         980          1,510
   Interest-bearing deposits in other
      financial institutions........................         387            144
   Securities available for sale, at fair value:
      Federal Home Loan Bank stock..................         719            483
   Securities to be held to maturity, at cost:
      Mortgage-backed securities....................       6,036          4,779
      Collateralized mortgage obligations...........       3,537          3,842
   Deposits.........................................      16,531         16,632
   Federal Home Loan Bank borrowings................      14,239          8,977
   Total equity.....................................       4,603          2,211



                                                           Years Ended June 30,
                                                     --------------------------
                                                            2001           2000
                                                     --------------------------

Selected Operations Data:
   Interest and dividend income.....................    $ 2,734         $ 1,858
   Interest expense.................................     (1,486)           (931)
                                                                        -------
      Net interest income...........................      1,248             927
   Provision for loan losses........................       (298)            (55)
                                                        -------         -------
      Net interest income after loan losses.........        950             872
                                                        -------         -------

   Other operating income:
      Service charges and fees......................         48              36
      Gain on sale of other real estate owned.......        ---             ---
      Other.........................................        ---               4
                                                        -------         -------
        Total other operating income................         48              40
                                                        -------         -------

   Other operating expenses:
      Compensation and benefits.....................        451             390
      Occupancy and equipment expense...............        218             197
      Other operating expenses......................        194             194
                                                        -------         -------
         Total other operating expenses.............        863             781
                                                        -------         -------

         Income before income taxes.................        135             131

   Income tax expense...............................         17               6
                                                        -------         -------
   Income before effect of accounting change                118             125
   Cumulative effect of accounting change...........        ---             (30)
      Net income....................................    $   118         $    95
                                                        =======         =======




                                       A-3

<PAGE>






                                                          Years Ended June 30,
                                                          --------------------

                                                           2001         2000
                                                          ------       ------
Key Operating Ratios and Other Data:
-----------------------------------
Performance ratios:
   Return on assets (1)(5).........................        0.39%        0.47%
   Return on equity (2)(5).........................        4.67%        4.45%
   Net interest margin (3)(5)......................        4.32%        4.74%
   Interest rate spread (4)(5).....................        3.74%        4.06%
   Operating expense divided by average assets(5)..        2.88%        3.86%

   Average interest-earning assets divided by
     average interest-bearing liabilities(5).......         111%         114%

Quality ratios:
   Non-performing assets divided by total assets...        0.04%        0.12%
   Allowance for loan losses to
     non-performing loans..........................       1,213%         437%
   Allowance for loan losses to gross loans........        0.79%        0.94%

Capital ratios:
   Equity to total assets at end of period.........       12.96%        7.89%
   Average equity to average assets................        8.44%       10.55%
   Tier 1 risk-based capital ratio.................       12.96%       13.16%
   Total risk-based capital ratio..................       13.47%       14.07%

Other data:
   Number of full service offices..................           1            1

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

(1)  Ratio of net income to average total assets
(2)  Ratio of net income to average equity
(3)  Net interest income divided by average earning assets.
(4)  Difference   between   average   rate  on   interest-earning   assets   and
     interest-bearing liabilities.
(5)  Consolidated at fiscal June 30, 2001and bank only June 30, 2000




                                       A-4

<PAGE>



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

"Safe Harbor"  Statement under the Private  Securities  Litigation Reform Act of
1995.

     A number of the matters and subject  areas  discussed in this annual report
that are  historical or current facts deal with potential  future  circumstances
and developments. The discussion of these matters and subject areas is qualified
by  the  inherent  risks  and  uncertainties   surrounding  future  expectations
generally,  and also may materially  differ from the actual future experience of
BancAffiliated,  Inc.  involving  any one or more of such  matters  and  subject
areas.  BancAffiliated,  Inc. has attempted to identify, in context,  certain of
the factors that it currently  believes may cause actual future  experience  and
results to differ from BancAffiliated, Inc.'s current expectations regarding the
relevant matter or subject area. These risks and uncertainties  include, but are
not limited to, changes in economic conditions in BancAffiliated,  Inc.'s market
area, changes in policies by regulator agencies, fluctuations in interest rates,
and demand for loans in BancAffiliated,  Inc.'s market area and competition, all
or some of which could cause actual results to differ materially from historical
earnings and those presently anticipated or projected, or described from time to
time in  BancAffiliated,  Inc.'s  reports  filed  with the U.S.  Securities  and
Exchange  Commission ("SEC") and disseminated by  BancAffiliated,  Inc. in press
releases.  This annual  report speaks only as of its date,  and  BancAffiliated,
Inc. disclaims any duty to update the information herein.

General

     The  following  discussion  is  intended  to  assist in  understanding  the
financial  condition and results of operations of  BancAffiliated,  Inc. and its
subsidiary   Affiliated  Bank.  The  following  discussion  should  be  read  in
conjunction  with the financial  statements  and the  accompanying  notes to the
financial statements.

     BancAffiliated,  Inc. and Affiliated  Bank's  results of operations  depend
primarily on its net interest income,  which is the difference  between interest
income  on  interest-earning  assets,  which  principally  consist  of loans and
investment  securities,  and interest expense on  interest-bearing  liabilities,
which principally consist of deposits and borrowings.  BancAffiliated,  Inc. and
Affiliated  Bank's  results of  operation  also are affected by the level of its
noninterest income and expenses and income tax expense.

Asset and Liability Management and Market Risk

     Our Risk when  Interest  Rates  Change.  The rates of  interest  we earn on
assets and pay on  liabilities  generally are  established  contractually  for a
period of time. Market interest rates change over time. Our loans generally have
longer  maturities  than our deposits.  Accordingly,  our results of operations,
like those of other financial institutions,  are impacted by changes in interest
rates and the interest rate sensitivity of our assets and liabilities.  The risk
associated  with  changes in  interest  rates and our  ability to adapt to these
changes is known as interest rate risk and is our most significant  market risk.
As of June 30, 2001, our one-year  cumulative interest rate sensitivity gap as a
percentage  of total  assets  was a  positive  9.2%,  which  generally  means if
interest  rates  decrease,  our net  interest  income  could be reduced  because
interest earned on assets


                                       A-5

<PAGE>



could decrease more quickly than interest paid on interest-bearing  liabilities,
including deposits and borrowings.

     How We Measure Our Risk of Interest Rate Changes. As part of our attempt to
manage our  exposure  to changes in interest  rates and comply  with  applicable
regulations, we monitor our interest rate risk. In monitoring interest rate risk
we continually  analyze and manage assets and liabilities based on their payment
streams  and  interest  rates,  the  timing  of  their  maturities,   and  their
sensitivity to actual or potential changes in market interest rates.

     In order to minimize  the  potential  for adverse  effects of material  and
prolonged  increases  in interest  rates on our results of  operations,  we have
adopted  investment/asset  and liability management policies to better match the
maturities   and   repricing   terms   of  our   interest-earning   assets   and
interest-bearing  liabilities.  The board of directors  sets and  recommends the
asset and liability  policies of Affiliated  Bank,  which are implemented by the
asset/liability  management committee. The asset/liability  management committee
is  chaired by  President  Graham  and is  comprised  of members of our board of
directors.

     The purpose of the asset/liability  management committee is to communicate,
coordinate and control  asset/liability  management consistent with our business
plan and board approved  policies.  The committee  establishes  and monitors the
volume and mix of assets and funding sources taking into account  relative costs
and spreads,  interest rate  sensitivity and liquidity needs. The objectives are
to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk, and profitability goals.

     The  asset/liability  management  committee  generally meets on a quarterly
basis to review,  among other  things,  economic  conditions  and interest  rate
outlook, current and projected liquidity needs and capital position, anticipated
changes in the volume and mix of assets and  liabilities  and interest rate risk
exposure  limits  versus  current  projections  pursuant to net present value of
portfolio equity analysis and income simulations. The asset/liability management
committee  recommends  appropriate  strategy  changes based on this review.  The
President or his designee is  responsible  for  reviewing  and  reporting on the
effects of the policy  implementations  and strategies to the board of directors
at least quarterly.

     In order to manage our assets  and  liabilities  and  achieve  the  desired
liquidity,  credit  quality,  interest  rate  risk,  profitability  and  capital
targets, we have focused our strategies on:

     o    Originating adjustable rate loans,
     o    Originating a reasonable volume of short-and  intermediate-term  fixed
          rate loans,
     o    Managing our deposits to establish stable deposit relationships.

     At  times,   depending  on  the  level  of  general   interest  rates,  the
relationship  between long- and short-term interest rates, market conditions and
competitive factors,  the asset/liability  management committee may determine to
increase our interest rate risk  position  somewhat in order to maintain our net
interest margin.  In the future,  we intend to continue our existing strategy of
originating relatively short-term and/or adjustable rate loans.



                                       A-6

<PAGE>



     The  asset/liability  management  committee regularly reviews interest rate
risk by forecasting the impact of alternative  interest rate environments on net
interest  income and market value of portfolio  equity,  which is defined as the
net present  value of an  institution's  existing  assets and  liabilities,  and
evaluating  such impacts against the maximum  potential  changes in net interest
income and market value of portfolio  equity that are authorized by the board of
directors of Affiliated Bank.

     The  Office  of  Thrift  Supervision  provides  Affiliated  Bank  with  the
information  presented in the  following  table,  which is based on  information
provided to the Office of Thrift Supervision by Affiliated Bank. It presents the
change in  Affiliated  Bank's net  portfolio  value at June 30, 2001 (the latest
data  available),  that would occur upon an immediate  change in interest  rates
based on Office of Thrift  Supervision  assumptions,  but without  effect to any
steps that management might take to counteract that change.

<TABLE>
<CAPTION>

         Change in                               Net Portfolio Value
      Interest Rates in                          ------------------                        Net Portfolio Value
     Basis Points ("bp")                       (Dollars in Thousands)                      as % of PV of Assets
        (Rate Shock                                                                        --------------------
        in Rates) (1)                $ Amount         $ Change         % Change            NPV Ratio     Change
       --------------                --------         --------         --------            ---------     ------
<S>      <C>                          <C>               <C>               <C>                <C>         <C>
         +300 bp                      3,673             -371              -9%                10.43%      -82 bp
         +200 bp                      3,862             -182              -5%                10.87%      -38 bp
         +100 bp                      3,983              -61              -2%                11.13%      -11 bp
            0 bp                      4,044              ---              ---                11.25%         ---
         -100 bp                      3,966              -79              -2%                11.01%      -23 bp
         -200 bp                      3,911             -133              -3%                10.84%      -41 bp
         -300 bp                      3,873             -171              -4%                10.71%      -54 bp

<FN>
-----------
(1)  Assumes  an   instantaneous   uniform  change  in  interest  rates  at  all
     maturities.

</FN>
</TABLE>

     The Office of Thrift Supervision uses certain  assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates,  loan  prepayment  rates,  deposit decay rates,  and the market values of
certain assets under differing interest rate scenarios, among others.

     As with any method of measuring  interest rate risk,  certain  shortcomings
are inherent in the method of analysis  presented in the  foregoing  table.  For
example,  although certain assets and liabilities may have similar maturities or
periods to repricing,  they may react in different  degrees to changes in market
interest  rates.  Also,  the  interest  rates on  certain  types of  assets  and
liabilities may fluctuate in advance of changes in market interest rates,  while
interest  rates  on  other  types  may  lag  behind  changes  in  market  rates.
Additionally,  certain  assets,  such as adjustable  rate mortgage  loans,  have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset.  Further,  if interest  rates change,  expected  rates of
prepayments  on loans and early  withdrawals  from  certificates  could  deviate
significantly from those assumed in calculating the table.



                                       A-7

<PAGE>



     The following table presents the contractual  maturities and repricing data
of  BancAffiliated,  Inc.'s and Affiliated  Bank's  interest-earning  assets and
interest-bearing  liabilities,  commonly  called a "gap" report,  as of June 30,
2001. It gives an indication of our interest rate sensitivity position; however,
it is used by management in  conjunction  with other reports to determine  plans
and  strategies  for  managing  our  interest  rate  risk.  The gap  report  has
limitations;  for example, no prepayment  assumptions have been made with regard
to interest-earning assets.


<TABLE>
<CAPTION>

                                                                                                 Not Rate
                                                                      Rate Sensitive            Sensitive
                                                                      --------------                or
                                                           Within       90 days     1 to 3         Over
                                                           90 days     to 1 Year     Years       3 Years      Total
                                                           -------     ---------    ------      ---------     -----
                                                                          (Dollars in Thousands)
<S>                                                       <C>           <C>         <C>          <C>        <C>
Interest-Earning Assets:
   Deposits in banks..................................    $  1,367      $   ---     $   ---      $   ---    $  1,367
   Mortgage-backed and related securities.............       4,697        4,876         ---          ---       9,573
   Federal Home Loan Bank stock......................          719          ---         ---          ---         719
   Loans..............................................      14,774        1,418       3,807        2,739      22,738
                                                          --------      -------     -------      -------    --------
     Total interest-earning assets....................    $ 21,557      $ 6,294     $ 3,807      $ 2,739    $ 34,397
                                                          ========      =======     =======      =======    ========

Interest-Bearing Liabilities:
   Savings accounts...................................    $    199      $   288     $   968      $   474    $  1,929
   NOW, money market accounts ........................         240          360         626          ---       1,226

   Time deposit accounts..............................       3,343        7,799         519          ---      11,661
   Federal Home Loan Bank advances....................      13,548           27         478          186      14,239
                                                          --------      -------     -------      -------    --------
     Total interest-bearing liabilities...............    $ 17,330      $ 8,474     $ 2,591      $   660    $ 29,055
                                                          ========      =======     =======      =======    ========

Interest sensitivity gap..............................    $  4,227      $(2,180)    $ 1,216
                                                          ========      =======     =======

Cumulative gap........................................    $  4,227      $ 2,047     $ 3,263
                                                          ========      =======     =======

Ratio of interest-earning assets to interest-bearing
   liabilities........................................       124.4%        74.3%      146.9%
                                                             =====        =====       =====

Cumulative gap as a percentage of total assets........        11.9%         5.8%        9.2%
                                                             =====        =====       =====

</TABLE>


     As with any  method of  measuring  interest  rate  risk,  shortcomings  are
inherent  in the method of  analysis  presented  in the  foregoing  tables.  For
example,  although assets and liabilities may have similar maturities or periods
to  repricing,  they may react in  different  degrees  to  changes in the market
interest  rates.  Also,  the  interest  rates on  certain  types of  assets  and
liabilities may fluctuate in advance of changes in market interest rates,  while
interest   rates  on  other  types  may  lag  behind  changes  in  market  rate.
Additionally,  certain  assets,  such as adjustable  rate mortgage  loans,  have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset.  Further,  if interest  rates change,  expected  rates of
prepayments  on loans and early  withdrawals  from  certificates  could  deviate
significantly from those assumed in calculating the table.



                                       A-8

<PAGE>



Changes in Financial Condition from June 30, 2001 to June 30, 2000.

     General.  At June 30, 2001,  our total assets  increased by $7.5 million or
26.8% to $35.5  million  from $28.0  million at June 30,  2000.  The increase in
assets was  primarily  due to a $1.0  million  increase in  mortgage-backed  and
related securities and loan growth of $6.5 million. Funding increased assets was
an increase in Federal Home Loan Bank  advances of $5.3  million,  proceeds from
the  initial  public  offering  of $2.3  million,  and net  income of  $118,000.
Deposits decreased by $101,000 during the same period.

     Loans.  At June 30, 2001, our net loan portfolio  increased $6.5 million or
40.1% to $22.7 million from $16.2 million at June 30, 2000.  The increase in the
loan  portfolio over this time period was due to increased loan demand caused by
our efforts to expand  Affiliated  Bank's real  estate and  commercial  business
lending  activities.  The loan  portfolio  increased in all  categories,  except
consumer  loans,  with the  largest  increases  in our  real  estate  loans  and
commercial  business loans. Total real estate loans increased by $4.8 million to
$15.3 million at June 30, 2001 from $10.5  million at June 30, 2000.  Commercial
business  loans  increased by $2.1 million to $5.4 million at June 30, 2001 from
$3.3 million at June 30, 2000.

     Securities.  Mortgage-backed  and related  securities held to maturity were
$9.6  million at June 30, 2001,  compared to $8.6 million at June 30, 2000.  The
increase of $1.0 million was  primarily  due to the purchase of  mortgage-backed
and related securities to increase income.

     Liabilities. Our total liabilities increased $5.1 million or 19.8% to $30.9
million  at June 30,  2001  compared  to $25.8  million at June 30,  2000.  This
increase was due  primarily  to Federal Home Loan Bank  advances of $5.2 million
which was offset by a $101,000  decrease  in  deposits.  Federal  Home Loan Bank
advances grew from $9.0 to $14.2 million at June 30, 2001 and deposits decreased
from $16.6 million to $16.5 million at June 30, 2001.

     Equity. Total equity increased by $2.4 to $4.6 million at June 30, 2001, as
a result of the $2.3  million in net proceeds  derived  from the initial  public
offering and $118,000 in earnings retention.





                                       A-9

<PAGE>



Average Balances, Net Interest Income, Yields Earned and Rates Paid

     The  following  table  presents for the periods  indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.  No tax equivalent  adjustments  were made.
All average balances are monthly average balances. Non- accruing loans have been
included in the table as loans carrying a zero yield.

<TABLE>
<CAPTION>

                                                                      Years Ended June 30,
                                            ----------------------------------------------------------------------
                                                             2001                               2000
                                            ----------------------------------------------------------------------
                                                        Interest                  Interest
                                             Average     Earned/        Yield/    Average    Earned/      Yield/
                                             Balance      Paid           Rate     Balance     Paid         Rate
                                             -------    --------        ------   --------    -------      ------
                                                                       (Dollars in Thousands)
<S>                                          <C>        <C>            <C>       <C>        <C>            <C>
Interest-Earning Assets:
   Deposits in banks......................   $    562   $    34        6.06%     $    762   $    43         5.64%
   Securities (1).........................      8,770       611        6.96         5,031       346         6.88
   Loans..................................     19,573     2,089        6.70        13,780     1,469        10.66
                                             --------   -------                  --------   -------

   Total interest-earning assets..........     28,905     2,734        9.46%       19,573     1,858         9.49%
                                                        -------                             -------

Noninterest-earning assets................      1,019                                 656
                                             --------                            --------

   Total assets...........................   $ 29,924                            $ 20,229
                                             ========                            ========

Interest-Bearing Liabilities:
   Savings accounts.......................   $  2,415   $    80        3.31      $  3,054   $   120         3.93
   NOW and money market accounts..........      2,130        91        4.26           432        19         4.40
   Time deposit accounts..................     11,714       761        6.50         8,498       484         5.70
   Federal Home Loan Bank advances
     and Federal Funds purchased..........      9,720       554        5.70         5,158       308         5.97
                                             --------   -------                  --------   -------

   Total interest-bearing liabilities.....     25,979     1,486        5.72%       17,142       931         5.43%
                                             --------   -------                  --------   -------

Noninterest-bearing liabilities and equity
 ..........................................      3,945                               3,087
                                             --------                            --------

   Total liabilities and equity...........   $ 29,924                            $ 20,229
                                             ========                            ========

Net interest income.......................              $ 1,248                             $   927
                                                        =======                             =======

Net interest spread(2)....................                             3.74%                                4.06%
                                                                       ====                                =====

Net interest margin(3)....................                             4.32%                                4.74%
                                                                       ====                                =====

<FN>

(1)  Includes  mortgage-backed and related securities and Federal Home Loan Bank
     stock.
(2)  The net  interest  spread is the  difference  between the  average  rate on
     interest-earning assets and interest-bearing liabilities.
(3)  The  net  interest  margin  is  net  interest  income  divided  by  average
     interest-earning assets.

</FN>
</TABLE>



                                      A-10

<PAGE>



Rate/Volume Analysis

     The  following  table  presents  the dollar  amount of changes in  interest
income and interest expense for major components of interest-earning  assets and
interest-bearing  liabilities.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume,  which are changes in volume  multiplied by the old rate,
and (2) changes in rate, which are changes in rate multiplied by the old volume.
Changes  attributable  to both rate and volume which cannot be  segregated  have
been allocated proportionately to the change due to volume and the change due to
rate.

<TABLE>
<CAPTION>


                                                                                        Years Ended
                                                                                            June
                                                                                       2001 vs. 2000
                                                                        -------------------------------------------
                                                                        Increase (decrease)
                                                                                due to
                                                                      --------------------------                Total
                                                                                                              Increase
                                                                       Volume               Rate             (Decrease)
                                                                       ------               ----             ----------
<S>                                                                    <C>                 <C>                 <C>
Interest income:
Deposits in banks........................................              $ (12)              $   3               $  (9)
Investment securities....................................                261                   4                 265
Loans....................................................                619                   1                 620
                                                                       -----               -----               -----

     Total interest income...............................                868                   8                 876
                                                                       -----               -----               -----

Interest expense:
Savings accounts.........................................                (23)                (17)                (40)
NOW and money market accounts............................                 73                  (1)                 72
Time deposit accounts....................................                202                  75                 277
Federal Home Loan Bank advances..........................                259                 (13)                246
                                                                       -----               -----               -----

     Total interest expense..............................                511                  44                 555
                                                                       -----               -----               -----

Net interest income......................................              $ 357               $ (36)              $ 321
                                                                       =====               ======              =====

</TABLE>


                                                       A-11

<PAGE>



     The following  table presents the weighted  average yields earned on loans,
investments and other  interest-earning  assets,  and the weighted average rates
paid on savings and borrowings  and the resultant  interest rate spreads at June
30, 2001.


                                                                   At
                                                                June 30,
                                                                  2001
                                                                --------

Weighted average yield on:
   Deposits in banks...................................           6.06%
   Mortgage-backed and related securities..............           6.97%
   Loans...............................................          10.67%
   Federal Home Loan Bank stock........................           6.94%

   Combined weighted average yield on
     interest-earning assets...........................           9.46%

Weighted average rate paid on:
   Savings accounts....................................           3.31%
   NOW and money market accounts.......................           4.26%
   Time deposit accounts...............................           6.50%
   Federal Home Loan Bank advances.....................           5.70%

   Combined weighted average rate paid on
     interest-bearing liabilities......................           5.72%

Spread.................................................           3.74%

Comparison of Results of Operations for the Years Ended June 30, 2001 and 2000.

     General.  We reported  net income of  $118,000  for the year ended June 30,
2001 and $95,000 for the year ended June 30, 2000.  This  increase in income was
due  primarily  to an increase in net interest  income of $321,000  offset by an
increase  in  non-interest  expense of $82,000  and an increase in the loan loss
provision of $243,000.

     Net Interest  Income.  Net interest income  increased  $321,000 or 34.6% to
$1,248,000  for fiscal 2001  compared to fiscal  2000,  reflecting a $876,000 or
47.2%  increase  in  interest  income,  partially  offset by a $555,000 or 59.6%
increase in interest  expense.  Our interest rate spread  decreased to 3.74% for
fiscal 2001 compared to 4.06% for fiscal 2000. In addition, the ratio of average
interest-earning  assets to average  interest-bearing  liabilities  decreased to
111% for year ended June 30, 2001 compared to 114% for year ended June 30, 2000.

     Interest  Income.  The increase in interest income of $876,000 for the year
ended June 30, 2001 was primarily  due to an increase in the average  balance of
interest-earning  assets.  The  average  balance  of  the  securities  portfolio
increased to $8.8 million for the year ended June 30, 2001 from $5.0 million for
the year ended June 30,  2000,  due  primarily  to the  purchase  of  securities
partially  match-funded by Federal Home Loan Bank advances.  This resulted in an
increase in income on securities of $265,000.  In addition,  the average balance
of our total loan  portfolio  grew by $5.8 million to $19.6 million for the year
ended  June 30,  2001  from  $13.8  million  for the year  ended  June 30,  2000
enhancing loan interest by $620,000. In the aggregate,


                                      A-12

<PAGE>



interest-earning  assets  increased  $9.3 million to $28.9  million for the year
ended June 30,  2001 from $19.6  million for the year ended June 30,  2000.  The
average yield on  interest-earning  assets decreased to 9.46% for the year ended
June 30, 2001 from 9.49% for the year ended June 30,  2000,  primarily  due to a
general increase in market rates of interest.

     Interest Expense. The increase in interest expense of $555,000 for the year
ended June 30, 2001 was  primarily due to the increase in Federal Home Loan Bank
advances and the increase in time deposit  accounts.  Average  Federal Home Loan
Bank advances  increased by $4.5 million to $9.7 million for the year ended June
30, 2001 from $5.2  million for the year ended June 30,  2000.  This  created an
increase in Federal  Home Loan Bank  interest  costs of  $246,000.  Average time
deposits  increased by $3.2 million to $11.7 million for the year ended June 30,
2001 from $8.5 million for the year ended June 30, 2000. This contributed to the
$309,000  increase  in deposit  interest  costs.  The  average  rate on interest
bearing  liabilities  increased from 5.43% at June 30, 2000 to 5.72% at June 30,
2001, due primarily to the liability mix changing with generally higher interest
rates on the new funding.

     Provision for Loan Losses. We charge provisions for loan losses to earnings
to maintain  the total  allowance  for loan  losses.  Our  determination  of the
allowance is based on an  evaluation  of the  portfolio,  past loss  experience,
current economic  conditions,  volume,  growth and composition of the portfolio,
and other  relevant  factors.  The allowance is increased by provisions for loan
losses which are charged  against  income.  Our  policies  require the review of
assets on a regular basis, and we appropriately  classify loans as well as other
assets if warranted.  We believe we use the best information available to make a
determination  with respect to the allowance for loan losses,  recognizing  that
adjustments may be necessary depending upon a change in economic conditions.

     The  provision  for loan  losses  made  during the year ended June 30, 2001
totaled  $298,000  compared with a provision made during the year ended June 30,
2000 that totaled $55,000. This increase was due primarily to the write-off of a
loan of a large commercial borrower of Affiliated Bank that declared bankruptcy.
After tax, this charge-off action had approximately a $155,000 adverse impact on
Affiliated  Bank's  earnings for the fiscal year ended June 30,  2001.  With the
write-off  of this large  loan,  Affiliated  Bank's  nonperforming  assets  were
reduced to 0.04% of total assets at June 30, 2001.

     While management uses the best information  available to make  evaluations,
adjustments  to the allowance may be necessary  based on changes in economic and
other conditions. We anticipate that our allowance for loan losses will increase
as we continue to implement Affiliated Bank's strategy of originating  primarily
construction  and  commercial   loans.   Additionally,   the  Office  of  Thrift
Supervision, as an integral part of its examination process, periodically review
Affiliated  Bank's allowance for loan losses.  The Office of Thrift  Supervision
may require the  recognition  of  adjustments  to the  allowance for loan losses
based  on  its  judgment  of  information  available  to it at the  time  of its
examination.

     Other  Operating  Income.  Other  operating  income amounted to $48,000 and
$40,000 for the years ended June 30, 2001 and 2000,  respectively.  The increase
is  primarily   attributed   to  the  growth  in  the  number  of  deposits  and
corresponding service charges on these accounts.


                                      A-13

<PAGE>



     Other Operating  Expenses.  Other operating  expenses  increased $82,000 or
10.5% to $863,000 for the year ended June 30, 2001  compared to $781,000 for the
year ended June 30,  2000.  This  increase  was  primarily  due to  increases in
compensation and benefits arising from increased  staffing and Affiliated Bank's
growth.

     Cumulative  Effect of  Accounting  Change.  Included  in the June 30,  2000
financial statements, as restated, are the effects of adopting the provisions of
Statement of Position  98-5,  "Reporting  on the Costs of Start-Up  Activities."
Affiliated Bank expensed $30,000 net of income tax of $15,000.

Liquidity and Commitments

     Affiliated Bank's  liquidity,  represented by cash and cash equivalents and
mortgage-backed and related securities, is a product of its operating, investing
and  financing   activities.   Our  primary   sources  of  funds  are  deposits,
amortization,    prepayments   and   maturities   of   outstanding   loans   and
mortgage-backed  and related  securities,  and other short-term  investments and
funds provided from operations.  While scheduled  payments from the amortization
of  loans  and  mortgage-backed   related  securities  and  maturing  investment
securities and short-term  investments  are  relatively  predictable  sources of
funds,  deposit  flows and loan  prepayments  are greatly  influenced by general
interest rates,  economic  conditions and  competition.  In addition,  we invest
excess funds in short- term interest-earning  assets, which provide liquidity to
meet lending requirements.  We also generate cash through borrowings. We utilize
Federal Home Loan Bank  advances to leverage our capital base and provide  funds
for our lending and  investment  activities,  and enhance our interest rate risk
management.

     Liquidity  management  is both a daily and  long-term  function of business
management.  Excess  liquidity is generally  invested in short-term  investments
such as  overnight  deposits.  We use our  sources  of funds  primarily  to meet
ongoing commitments,  to pay maturing time deposits and savings withdrawals,  to
fund loan  commitments  and to maintain our  portfolio  of mortgage-  backed and
related  securities.  At June 30,  2001,  the total  approved  loan  commitments
unfunded  amounted to $8.5 million,  which  includes the  unadvanced  portion of
construction loans of $6.8 million. There was one letter of credit in the amount
of $72,000 at June 30, 2001.  Time  deposits and advances  from the Federal Home
Loan Bank  scheduled  to mature  in one year or less at June 30,  2001,  totaled
$10.7 million and $13.6 million,  respectively.  Based on historical experience,
management  believes that a significant portion of maturing deposits will remain
with Affiliated Bank.  Affiliated Bank anticipates that we will continue to have
sufficient  funds,  through  deposits  and  borrowings,   to  meet  our  current
commitments.

     At June 30, 2001,  Affiliated Bank had available to it additional  advances
from the Federal Home Loan Bank of  approximately  $386,000 and a federal  funds
line of credit of $2.0 million.

Impact of Inflation

     The consolidated  financial  statements presented herein have been prepared
in accordance with generally accepted  accounting  principles.  These principles
require the measurement of


                                      A-14

<PAGE>



financial position and operating results in terms of historical dollars, without
considering  changes in the relative  purchasing power of money over time due to
inflation.

     Our primary  assets and  liabilities  are monetary in nature.  As a result,
interest  rates  have a more  significant  impact  on our  performance  than the
effects  of  general  levels  of  inflation.  Interest  rates,  however,  do not
necessarily  move in the same  direction or with the same magnitude as the price
of goods and services,  since such prices are affected by inflation. In a period
of rapidly rising  interest rates,  the liquidity and maturity  structure of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.

     The  principal  effect of  inflation,  as distinct  from levels of interest
rates, on earnings is in the area of noninterest expense.  Such expense items as
employee  compensation,  employee benefits and occupancy and equipment costs may
be  subject to  increases  as a result of  inflation.  An  additional  effect of
inflation  is the  possible  increase  in the  dollar  value  of the  collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which  properties  securing our loans have appreciated in dollar value due to
inflation.

Recent Accounting Pronouncements

     In June 1998,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement No. 133 (FAS 133),  Accounting for Derivative  Instruments and Hedging
Activities.  In July 1999,  the FASB issued  Statement No. 137,  Deferral of the
Effective  Date of FASB  Statement No. 133, which deferred the effective date of
FAS 133 to no later  than  January  1,  2001  for  Affiliated  Bank's  financial
statements.  FAS 133  requires  companies to record  derivatives  on the balance
sheet at fair value.  Changes in the fair values of these  derivatives  would be
reported in earnings or other  comprehensive  income depending on the use of the
derivative and whether it qualifies for hedge accounting.  The key criterion for
hedge  accounting is that the hedging  relationship  must be highly effective in
achieving  offsetting  changes  in fair value of assets or  liabilities  or cash
flows from forecasted transactions.  In June 2000, the FASB issued Statement No.
138,   Accounting  for  Certain  Derivative   Instruments  and  Certain  Hedging
Activities, and amendment of FASB Statement No. 133.

     In September 2000, the FASB issued Statement No. 140 (FAS 140),  Accounting
for the  Transfers  and  Servicing of Financial  Assets and  Extinguishments  of
Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain
standards in the accounting for securitization  transactions and collateral, but
it carries over most of FAS 125's  provisions.  The  collateral  and  disclosure
provisions of FAS 140 are effective for year-end 2000 financial statements.  The
other  provisions of this Statement are effective for transfers and servicing of
financial  assets and  extinguishment  of liabilities  occurring after March 31,
2001 and  Affiliated  Bank has not yet  completed  the analysis to determine the
impact of the revised provisions on the financial  statement that will be issued
after March 31, 2001.

     In June  2001,  the FASB  issued  statement  No.  141 (FAS  141),  Business
Combinations.  FAS 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations,  and FASB
Statement  No. 38,  Accounting  for  Preacquisition  Contingencies  of Purchased
Enterprises.  All business combinations in the scope of this Statement are


                                      A-15


<PAGE>

to be accounted for using one method,  the purchase  method.  FAS 141 applies to
all business combinations initiated after June 30, 2001. FAS 141 also applies to
all business combinations  accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later.

     In June 2001,  the FASB issued  statement  No. 142 (FAS 142),  Goodwill and
Other Intangible  Assets. FAS 142 addresses  financial  accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17,  Intangible  Assets.  It addresses how  intangible  assets that are acquired
individually  or with a group  of other  assets  (but not  those  acquired  in a
business combination) should be accounted for in financial statements upon their
acquisition.  This Statement  also  addresses how goodwill and other  intangible
assets should be accounted for after they have been initially  recognized in the
financial  statements.  The  provisions  of FAS 142 are  required  to be applied
starting with fiscal years beginning after December 15, 2001.

     Management  does not believe these  pronouncements  will have a significant
effect on its operations.

     During 1998,  Statement of Position (SOP) 98-5,  "Reporting on the Costs of
Start-Up  Activities," was issued.  This SOP provides  guidance on the financial
reporting  of  start-up  costs and  organization  costs.  It  requires  costs of
start-up activities and organization costs to be expensed as incurred.  This SOP
is effective for financial  statements for fiscal years beginning after December
15, 1998.  Affiliated  Bank adopted the  provisions  of this SOP in its restated
June 30,  2000  financial  statements,  which  resulted in a charge to income of
$30,000 net of income tax of $15,000.


                                      A-16

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY








                          Independent Auditors' Report
                          ----------------------------


The Board of Directors
BancAffiliated, Inc.

We have audited the accompanying  consolidated  balance sheet of BancAffiliated,
Inc.  and  Subsidiary  (Company)  as of June 30,  2001 and 2000 and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for the years then ended. These consolidated  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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of BancAffiliated, Inc.
and  Subsidiary as of June 30, 2001 and 2000,  the results of its operations and
its cash flows for the years then ended in conformity  with  generally  accepted
accounting principles.

As described in Note 20 to the consolidated  financial  statements,  the Company
has restated its June 30, 2000  financial  statements  to include the effects of
adopting Statement of Position 98-5.

                                         /s/ Payne, Falkner, Smith & Jones, P.C.
                                         ---------------------------------------
                                         Payne, Falkner, Smith & Jones, P.C.

Dallas, Texas
July 31, 2001


                                      A-17
<PAGE>

<TABLE>
<CAPTION>

                       BANCAFFILIATED, INC. AND SUBSIDIARY

                           Consolidated Balance Sheet

                        June 30, 2001 and 2000 (Restated)

               (In Thousands of Dollars, except per share amounts)

                                                                                                 2001              2000
                                                                                              ----------        ----------
<S>      <C>                                                                                    <C>              <C>
         ASSETS
         ------
         Cash and due from banks                                                                $    479         $    421
         Federal funds sold                                                                          980            1,510
         Interest bearing deposits in other banks                                                    387              144
                                                                                                --------         --------

                   Total cash and cash equivalents                                                 1,846            2,075
         Federal Home Loan Bank stock, at cost                                                       719              483
         Securities held to maturity (fair value of $9,677
              and $8,602 at June of 2001 and June of 2000)                                         9,573            8,621
         Loans, net                                                                               22,738           16,189
         Bank premises and equipment, net                                                            435              465
         Accrued interest receivable                                                                 166              148
         Other assets                                                                                 50               50
                                                                                                --------         --------

                   Total assets                                                                 $ 35,527         $ 28,031
                                                                                                ========         ========

         LIABILITIES AND  STOCKHOLDERS' EQUITY

         Deposits                                                                               $ 16,531         $ 16,632
         Advances from Federal Home Loan Bank                                                     14,239            8,977
         Other liabilities                                                                           154              211
                                                                                                --------         --------

                   Total liabilities                                                              30,924           25,820
         Commitments and contingencies                                                                 -                -

         Stockholders' Equity:
             Preferred stock, $.01 par value, 1,000,000 shares
                   Authorized, issued and outstanding
                 Authorized, -0- issued and outstanding                                                -                -
             Common stock, $.01 par value, 4,000,000 shares
                  Authorized, 264,500 issued and outstanding                                           3                -
             Additional paid-in capital                                                            2,271                -
             Retained earnings                                                                     2,329            2,211
                                                                                                --------         --------

                   Total stockholders' equity                                                      4,603            2,211
                                                                                                --------         --------
                   Total liabilities and stockholders' equity                                   $ 35,527         $ 28,031
                                                                                                ========         ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      A-18
<PAGE>


<TABLE>
<CAPTION>

                       BANCAFFILIATED, INC. AND SUBSIDIARY

                        Consolidated Statement of Income

              For the Years Ended June 30, 2001 and 2000 (Restated)

                            (In Thousands of Dollars)
                                                                                                   2001                 2000
                                                                                                ----------           ----------
<S>        <C>                                                                                    <C>                  <C>
           Interest and dividend income:
                Loans                                                                             $ 2,089              $ 1,469
                Investment securities                                                                 645                  346
                Other                                                                                   -                   43
                                                                                                  -------              -------

                     Total interest income                                                          2,734                1,858
                                                                                                  -------              -------
           Interest expense:
                Deposits                                                                              932                  623
                Advances from Federal Home Loan Bank                                                  554                  308
                                                                                                  -------              -------

                     Total interest expense                                                         1,486                  931
                                                                                                  -------              -------

           Net interest income                                                                      1,248                  927
           Provision for loan losses                                                                  298                   55
                                                                                                  -------              -------

           Net interest income after provision for loan losses                                        950                  872
                                                                                                  -------              -------
           Noninterest income:
                Fee income on services charges                                                         48                   36
                Other                                                                                   -                    4
                                                                                                  -------              -------

                     Total noninterest income                                                          48                   40
                                                                                                  -------              -------
           Noninterest expense:
                Compensation and benefits                                                             451                  390
                Occupancy                                                                             218                  197
                Data processing                                                                        75                   70
                Other                                                                                 119                  124
                                                                                                  -------              -------

                     Total noninterest expense                                                        863                  781
                                                                                                  -------              -------
           Income before income tax expense                                                           135                  131
           Income tax expense                                                                          17                    6
                                                                                                  -------              -------
           Income before cumulative effect of accounting
                change                                                                                118                  125
                                                                                                  -------              -------
           Cumulative effect of accounting change
                (net of income tax of $15)                                                              -                  (30)
                                                                                                  -------              -------

           Net income                                                                             $   118              $    95
                                                                                                  -------              -------

           Earnings per share - Basic and Diluted                                                 $  (.20)                 N/A
                                                                                                  =======              =======

</TABLE>

                                      A-19
<PAGE>

<TABLE>
<CAPTION>

                       BANCAFFILIATED, INC. AND SUBSIDIARY

            Consolidated Statement of Changes in Stockholders' Equity

              For the Years Ended June 30, 2001 and 2000 (Restated)

                            (In Thousands of Dollars)

                                                                                                      Additional
                                               Comprehensive       Preferred           Common           Paid-in          Retained
                                                   Income            Stock             Stock            Capital          Earnings
                                            ----------------- ---------------   ---------------  ----------------  ---------------
<S>                                               <C>                 <C>              <C>               <C>             <C>
      Balances June 30, 1999                      $     -             $    -           $    -            $     -         $  2,116

      Net income for the year ended
        June 30, 2000 as restated                      95                  -                -                  -               95
                                                  -------             ------           ------            -------         --------
      Balances June 30, 2000 as restated          $    95                  -                -                  -            2,211
                                                  =======
      Net income for the year ended
        June 30, 2001                                 118                  -                -                  -              118

      Proceeds from issuance of
        common stock                                    -                  -                3              2,271                -
                                                  -------             ------           ------            -------         --------

      Balances June 30, 2001                      $   118             $    -           $    3            $ 2,271         $  2,329
                                                  =======             ======           ======            =======         ========

</TABLE>


                                      A-20





<PAGE>

<TABLE>
<CAPTION>


                       BANCAFFILIATED, INC. AND SUBSIDIARY

                      Consolidated Statement of Cash Flows

              For the Years Ended June 30, 2001 and 2000 (Restated)

                            (In Thousands of Dollars)


                                                                                     2001                   2000
                                                                                  ----------             ----------
<S>                                                                               <C>                    <C>
Cash flows from operating activities:
     Net income                                                                   $      118             $       95
       Adjustments to reconcile net income to net
         cash provided by operating activities:
          Cumulative effect of accounting change                                           -                     30
          Depreciation and amortization                                                   55                     55
          Provision for loan losses                                                      298                     55
          Increase in accrued interest and other assets                                  (19)                  (110)
        (Decrease) increase in accrued interest and other liabilities                    (57)                    88
                                                                                  ----------             ----------

                 Net cash provided by operating activities                               395                    213
                                                                                  ----------             ----------
Cash flows from investing activities:
     Purchase of securities held to maturity                                          (2,571)                (8,980)
     Purchase of Federal Home Loan Bank stock                                           (236)                  (445)
     Paydowns of securities held to maturity                                           1,611                    357
     Net loans originated                                                             (6,847)                (5,670)
     Net purchases of property and equipment                                             (16)                  (426)
                                                                                  ----------             ----------

                 Net cash used by investing activities                                (8,059)               (15,164)
                                                                                  ----------             ----------
Cash flows from financing activities:
     Net (decrease) increase  in deposits                                               (101)                 7,113
     Proceeds from advances received from
     Federal Home Loan Bank                                                            5,262                  8,223
     Proceeds from issuance of common stock                                            2,274                      -
                                                                                  ----------             ----------

                 Net cash provided by financing activities                             7,435                 15,336
                                                                                  ----------             ----------

Net (decrease) increase in cash and cash equivalents                                    (229)                   385

Cash and cash equivalents at beginning of period                                       2,075                  1,690
                                                                                  ----------             ----------

Cash and cash equivalents at end of period                                        $    1,846             $    2,075
                                                                                  ==========             ==========

</TABLE>

                                      A-21
<PAGE>


                       BANCAFFILIATED, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                        June 30, 2001 and 2000 (Restated)


1.   Summary of Significant Accounting Policies
     ------------------------------------------

The accounting  and reporting  policies of  BancAffiliated,  Inc. and Subsidiary
(together referred to as the Company) conform to generally  accepted  accounting
principles and to practices generally followed within the Banking industry.  The
following is a description of the more significant of these policies.

Basis of Presentation
---------------------

The  accompanying  consolidated  financial  statements  include the  accounts of
BancAffiliated,  Inc.  (BI) and its  wholly-owned  subsidiary,  Affiliated  Bank
(Bank).

BI was  incorporated in January of 2001 to facilitate the conversion of the Bank
from  mutual  to  stock  form  (the  Conversion).  On  May  25,  2001  with  the
consummation of the  Conversion,  BI became the holding company of the Bank (see
Note 2). BI had no results of operations prior to January 2001.

The Bank was established in 1959 as Affiliated Federal Credit Union. Deposit and
loan  growth  were  severely  restricted  due to the  fact  the  credit  union's
membership sponsor ceased  operations.  In June 1998, the credit union converted
from a federally  chartered credit union to a federally chartered mutual savings
bank.   The  Bank's   primary  source  of  revenue  is  interest  on  loans  and
mortgage-backed and related securities.  The Bank is subject to competition from
other  financial  institutions.  The Bank is also subject to the  regulations of
certain federal agencies and undergoes periodic examinations by those regulatory
authorities.

Use of Estimates
----------------

The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity  with  generally  accepted  accounting  principles.  In preparing the
financial  statements,  management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance  sheet  and  revenues  for  the  period.  Actual  results  could  differ
significantly from those estimates.

Cash and Cash Equivalents
-------------------------

Cash and cash equivalents consist of cash on hand,  certificates of deposit with
original  maturities  of three  months or less,  and funds due from  banks.  For
purposes of the statement of cash flows, the Company considers all highly liquid
debt  instruments  with  original  maturities of three months or less to be cash
equivalents.


                                      A-22

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


Investment Securities
---------------------

Trading Securities

Securities that are held for short-term resale are classified as trading account
securities and recorded at their fair values.  Realized and unrealized gains and
losses on trading account securities are included in other income.

Securities Held-to Maturity

Government,  Federal  agency,  and corporate debt securities that management has
the  positive  intent and  ability to hold to  maturity  are  reported  at cost,
adjusted  for  amortization  of premiums and  accretion  of  discounts  that are
recognized  in  interest  income  using the  interest  method over the period to
maturity.  Mortgage-backed securities represent participating interests in pools
of long-term  first  mortgage  loans  originated  and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.

Securities Available for Sale

Available for sale securities consist of investment securities not classified as
trading securities nor as held to maturity securities.  Unrealized holding gains
and losses,  net of tax, on available for sale  securities are included in other
comprehensive income.  Realized gains (losses) on available-for-sale  securities
are included in other income (expense) and, when  applicable,  are reported as a
reclassification  adjustment,  net of tax, in other comprehensive  income. Gains
and losses on the sale of available-for-sale securities are determined using the
specific-identification  method.  The amortization of premiums and the accretion
of discounts are  recognized in interest  income using the interest  method over
the period of maturity.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities  below their cost that are other than temporary result in write-downs
of the individual  securities to their fair value.  The related  write-downs are
included in earnings as realized losses.

Loans and Allowance for Loan Loss
---------------------------------

Loans  receivable  that  management  has the intent and  ability to hold for the
foreseeable   future  or  until  maturity  or  pay-off  are  reported  at  their
outstanding  principal  balance adjusted for any charge-offs,  the allowance for
loan losses,  and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.

Impaired  loans are accounted  for at the net present  value of expected  future
cash flows,  discounted at the loan's  effective  interest  rate, the observable
market price of the loan or at the fair value of the  collateral  if the loan is
collateral dependent.


                                      A-23

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


The accrual of interest on impaired loans is discontinued  when, in management's
opinion,  the borrower may be unable to meet  payments as they become due.  When
interest  accrual is  discontinued,  all unpaid  accrued  interest is  reversed.
Interest income is subsequently  recognized only to the extent cash payments are
received.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs  (net  of  recoveries).  Management's  periodic  evaluation  of  the
adequacy of the allowance is based on the Company'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.

Fees and Costs Associated with Originating Loans
------------------------------------------------

Loan origination fees, net of certain direct  origination  costs, are recognized
as an adjustment of the related loan yield using the interest method.

Bank Premises and Equipment
---------------------------

Company premises,  equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization using the straight-line method.

                  Building                                    30 years
                  Furniture, fixtures and equipment           3-10 years
                  Leasehold improvements                      Term of the lease

Other Real Estate Owned
-----------------------

Real  estate  properties  acquired  through or in lieu of loan  foreclosure  are
initially  recorded at the lower of the  Company's  cost of  acquisition  or the
asset's fair market value which becomes the property's new basis. Costs relating
to  development  and  improvement  of property are  capitalized,  whereas  costs
relating  to holding  property  are  expensed.  The  portion of  interest  costs
relating to development of real estate is  capitalized  subject to  management's
evaluation of its recoverability.

Valuations are periodically performed by management, and an allowance for losses
is established, if necessary, by means of a charge to operations if the carrying
value of the property  exceeds the lower of its fair value less estimated  costs
to sell or cost.

Income Taxes
------------

Deferred tax assets and  liabilities  are reflected at currently  enacted income
tax rates  applicable  to the  period  in which  the  deferred  tax  assets  and
liabilities  are  expected to be realized or settled.  As changes in tax laws or
rates are enacted,  deferred tax assets and liabilities are adjusted through the
provision for income taxes.  Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.


                                      A-24

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY



Financial Instruments
---------------------

The Company has not acquired or issued any derivative financial instruments.

In the  ordinary  course of business  the Company has entered  into  certain off
balance sheet financial  instruments  consisting of commitments to extend credit
and credit card  commitments.  Such  financial  instruments  are recorded in the
financial  statements  when they are  funded or  related  fees are  incurred  or
received.

Fair Values of Financial Instruments
------------------------------------

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

Cash and short term instruments

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

Available for sale and held to maturity securities

Fair values for securities excluding restricted equity securities,  are based on
quoted  market  prices.  The carrying  values of  restricted  equity  securities
approximate their fair value.

Loans

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

Deposits

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



                                      A-25

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


Advances from Federal Home Loan Bank

The carrying amount of the advances from Federal Home Loan Bank approximates its
fair value.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

Off balance sheet instruments

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

Recent Accounting Pronouncements
--------------------------------

In June 1998, the Financial  Accounting  Standards Board (FASB) issued Statement
No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities.
In July 1999, the FASB issued Statement No. 137,  Deferral of the Effective Date
of FASB  Statement No. 133,  which  deferred the effective date of FAS 133 to no
later  than  January 1, 2001 for the  Company's  financial  statements.  FAS 133
requires  companies to record  derivatives  on the balance  sheet at fair value.
Changes in the fair values of those derivatives would be reported in earnings or
other comprehensive income depending on the use of the derivative and whether it
qualifies for hedge  accounting.  The key criterion for hedge accounting is that
the  hedging  relationship  must be highly  effective  in  achieving  offsetting
changes in fair  value of assets or  liabilities  or cash flows from  forecasted
transactions.  In June 2000, the FASB issued  Statement No. 138,  Accounting for
Certain Derivative  Instruments and Certain Hedging Activities,  an amendment of
FASB Statement No. 133. The statement is effective for the Company's fiscal year
ending June 30, 2001.  Because the Company  generally  does not hold  derivative
instruments,  the adoption of this  statement did not have a material  impact on
the financial statements.

In September 2000, the FASB issued  Statement No. 140 (FAS 140),  Accounting for
the  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain
standards in the accounting for securitizations and other transfers of financial
assets and collateral,  and requires some disclosures relating to securitization
transactions and collateral,  but it carries over most of FAS 125's  provisions.
The collateral  and disclosure  provisions of FAS 140 are effective for year-end
2000 financial statements.  The other provisions of this Statement are effective
for  transfers  and  servicing  of  financial  assets  and   extinguishments  of
liabilities  occurring after March 31, 2001.  Because the Company generally does
not have  transactions  that  involve the  transfer  and  servicing of financial
assets and  extinguishments  of liabilities,  the adoption of this statement did
not have a material impact on the financial statements.

In  June  2001,  the  FASB  issued   statement  No.  141  (FAS  141),   Business
Combinations.  FAS 141 addresses financial accounting and reporting for business
combinations and supersedes APB


                                      A-26

<PAGE>


                       BANCAFFILIATED, INC. AND SUBSIDIARY


Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. All business combinations
in the scope of this  Statement  are to be accounted  for using one method,  the
purchase method.  FAS 141 applies to all business  combinations  initiated after
June 30, 2001. FAS 141 also applies to all business  combinations  accounted for
using the purchase  method for which the date of acquisition is July 1, 2001, or
later.

In June 2001,  the FASB issued  statement No. 142 (FAS 142),  Goodwill and Other
Intangible  Assets.  FAS 142 addresses  financial  accounting  and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible  Assets.  It  addresses  how  intangible  assets  that  are  acquired
individually  or with a group  of other  assets  (but not  those  acquired  in a
business combination) should be accounted for in financial statements upon their
acquisition.  This Statement  also  addresses how goodwill and other  intangible
assets should be accounted for after they have been initially  recognized in the
financial  statements.  The  provisions  of FAS 142 are  required  to be applied
starting with fiscal years beginning after December 15, 2001.

Management does not believe these  pronouncements will have a significant effect
on its operations.

Reclassification
----------------

Certain  amounts  previously  reported have been  reclassified to conform to the
current format.


2.   Formation of Holding Company and Conversion to Stock Form
     ---------------------------------------------------------

On May 25,  2001,  BI became the holding  company for  Affiliated  Bank upon the
Bank's conversion from a federally  chartered mutual savings bank to a federally
chartered  capital stock savings bank. The conversion was  accomplished  through
amendment of the Bank's federal  charter and the sale and issuance by BI of 264,
500  shares of common  stock at $10 per share  (par  value of $0.01 per  share).
Proceeds  from  the  sale  of  common  stock,   net  of  expenses   incurred  of
approximately $371,000, were approximately $2,274,000.

3.   Statement of Cash Flows
     -----------------------

The  Company  has  chosen to report  on a net basis its cash  receipts  and cash
payments for  customers'  account  accepted and  repayments of those  customers'
deposits  account,  loans made to customers and principal  collections  on those
loans and interest bearing deposits in other financial institutions.

The Company uses the indirect method to present cash flows from operating
activities. Supplemental cash flow information is presented as follows (in
thousands):

                                      A-27
<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


                                            2001              2000
                                       -------------     -------------

      Cash transactions:
        Interest expense paid          $   1,488            $   930
                                       =========            =======

        Income taxes paid              $      16            $     -
                                       =========            =======

4.   Debt and Equity Securities
     --------------------------

Debt and equity  securities  have been classified in the balance sheet according
to management's  intent. The carrying amount of securities and their approximate
fair values are as follows (in thousands):

<TABLE>
<CAPTION>


                                                                     Gross               Gross
                                               Amortized          Unrealized          Unrealized          Fair
                                                 Costs               Gains              Losses           Value
                                             --------------      --------------      --------------  ---------------
<S>                                          <C>                 <C>                 <C>             <C>
Securities Held to Maturity
June 30, 2001:

   Mortgage backed securities                $       6,036       $          62       $           -   $        6,098
   Collateralized mortgage obligations               3,537                  42                   -            3,579
                                             --------------      --------------      --------------  ---------------

                                             $       9,573       $         104       $           -   $        9,677
                                             ==============      ==============      ==============  ===============
June 30, 2000:

   Mortgage backed securities                $       4,779       $           2       $          33   $        4,748
   Collateralized mortgage obligations               3,842                  33                  21            3,854
                                             --------------      --------------      --------------  ---------------

                                             $       8,621       $          35       $          54   $        8,602
                                             ==============      ==============      ==============  ===============

</TABLE>



The securities held to maturity are backed by GNMA, FNMA or FHLMC.

There were no sales of investment securities during 2001 or 2000.

Investment  securities  with an amortized cost of  approximately  $9,573,000 and
$8,621,000  were pledged to secure  borrowings  at June 30,  2001,  and June 30,
2000, respectively.

                                      A-28

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


The amortized cost and estimated market value of debt and equity  securities are
shown below (in thousands).  Expected  maturities  will differ from  contractual
maturities  because  borrowers  may have the right to call or repay  obligations
with or without prepayment penalties.

                                                 Amortized             Fair
                                                    Cost               Value
                                             ----------------   ----------------

Due in one year or less                      $            50    $            50
Due from one year to five years                            -                  -
Due from five to ten years                                 -                  -
Due after ten years                                    5,986              6,048
                                             ---------------    ---------------
                                                       6,036              6,098

Collateralized mortgage obligations                    3,537              3,579
                                             ---------------    ---------------

                                             $         9,573    $         9,677
                                             ===============    ===============

5.   Loans and Allowance for Loan Losses
     -----------------------------------

The  composition  of loans at June 30, 2001 and 2000  consisted of the following
(in thousands):

                                                   2001                2000
                                             ---------------     ---------------
Real estate:

     Residential 1-4 family                  $        2,249      $        2,073
     Multi-family                                       620                 628
     Commercial                                       1,805               2,901
     Construction and development                    17,462               8,910
                                             --------------      --------------

                                                     22,136              14,512
Commercial                                            5,409               3,338
Consumer:
     Automobile                                       1,302               1,589
     Loans secured by deposits                          285                 406
     Credit cards                                       388                 415
     Other                                              179                  90
                                             --------------     ---------------

                                                      2,154               2,500
                                             --------------     ---------------

                                                     29,699              20,350
Allowance for loan losses                              (182)               (153)
Loans in process                                     (6,779)             (4,008)
                                             --------------     ---------------

                                             $       22,738     $        16,189
                                             ==============     ===============

                                      A-29

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


A summary of the  activity in the  allowance  for loan losses was as follows (in
thousands):

                                             2001             2000
                                           --------          -------
       Balance at beginning of period      $    153          $   102
       Provision charged to operations          298               55
         Loans charged-off                     (272)             (12)
       Recoveries                                 3                8
                                           --------          -------
        Balance at end of period           $    182          $   153
                                           ========          =======


The Company extends  commercial and consumer credit loans primarily to borrowers
in the state of Texas.  At June 30,  2001,  substantially  all of the  Company's
loans were collateralized  with real estate,  automobiles,  deposits,  and other
assets.  Although the Company has a  diversified  loan  portfolio,  its debtors'
ability to honor their  contracts is  substantially  dependent  upon the general
economic conditions.

Impairment of loans having  recorded  investments of  approximately  $12,000 and
$19,000 at June 30, 2001 and June 30, 2000 have been  recognized  in  conformity
with FASB  Statement  No. 114 as amended by FASB  Statement No. 118. The average
recorded investment in impaired loans during 2001 was approximately $10,000. The
total allowance for loan losses related to these loans was approximately  $3,000
and $8,000 at June 30, 2001, and June 30, 2000,  respectively.  Interest  income
recognized  on impaired  loans for such  payments  received in 2001 and 2000 was
insignificant.

6.   Accrued Interest Receivable
     ---------------------------

Accrued interest receivable at June 30, 2001 and 2000 consisted of the following
(in thousands):

                                                   2001        2000
                                                --------     --------

     Loans receivable                           $    118     $    104
     Mortgage-backed and related securities           48           44
                                                --------     --------
                                                $    166     $    148
                                                ========     ========

                                      A-30

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


7.   Bank Premises and Equipment
     ---------------------------

Property and  equipment at June 30, 2001 and 2000 is  summarized  as follows (in
thousands):

                                                  2001                    2000
                                                -------                 -------

     Land                                       $   100                 $   100
     Building                                       285                     285
     Furniture fixtures and equipment               184                      95
     Leasehold improvements                           -                      76
                                                -------                 -------
                                                    569                     556

     Less accumulated depreciation
      and amortization                              134                      91

                                                $   435                 $   465
                                                =======                 =======

8.   Advances From Federal Home Loan Bank
     ------------------------------------

Advances from the Federal Home Loan Bank amounted to approximately  $14,239,000,
and $8,977,000 at June 30, 2001, and June 30, 2000, respectively. The borrowings
are  collateralized  by a  security  agreement  which  requires  the  Company to
maintain a certain level of qualified  first mortgage  collateral in relation to
the amount of outstanding  debt. The borrowings bear interest rates ranging from
3.83% to 5.87%.

The scheduled repayments of principal due on outstanding advances are as follows
(in thousands):

                           Year Ending June 30,

                                   2002                           $      13,570
                                   2003                                      32
                                   2004                                     439
                                   2005                                      35
                                   2006                                      36
                                Thereafter                                  127
                                                                  -------------

                                                                  $      14,239
                                                                  =============



                                      A-31

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY



9.   Deposits
     --------

Deposits at June 30, 2001 and 2000 are summarized as follows (in thousands):

                                            2001                       2000
                                       -------------              -------------

    Demand accounts                    $      1,745               $      1,766
    Money market                              1,196                        853
    Savings                                   1,929                      2,882
                                       -------------              -------------
                                              4,870                      5,501
    Certificates of deposit:
         0.0% to 4.99%                        2,269                        400
         5.0% to 5.99%                        2,304                      2,608
         6.0% to 6.99%                        3,693                      5,182
          7.0% to 7.99%                       3,395                      2,941
                                       -------------              -------------
                                             11,661                     11,131
                                       -------------              -------------
                                       $     16,531               $     16,632
                                       =============              ============

Scheduled maturities of certificates of deposit are as follows:

                          Year Ending June 30,
                          --------------------
                                  2002                             $    11,123
                                  2003                                     538
                                                                  -------------
                                                                   $     11,661
                                                                  =============


Interest  expense on  deposits  for the years  ended  June 30,  2001 and 2000 is
summarized as follows (in thousands):


                                                 2001                  2000
                                          ----------------      ----------------

           Demand deposits                 $            11       $            19
           Money market                                 80                     -
           Savings                                      80                   120
           Certificate of deposit                      761                   484
                                          ----------------      ----------------
                                           $           932       $           623
                                          ================      ================

The weighted  average rates on  certificates  of deposits are 6.10% and 6.34% at
June 30, 2001 and 2000, respectively.

Deposits in excess of $100,000 are not federally insured.


                                      A-32

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


10.  Income Taxes
     ------------

<TABLE>
<CAPTION>

The  provision  for  income  taxes for the years  ended  June 30,  2001 and 2000
consisted of the following (in thousands):

                                                                                      2001             2000
                                                                                  -------------     ------------
<S>    <C>                                                                        <C>               <C>
       Income tax expense (benefit):
            Current                                                               $         14      $         16
            Deferred                                                                         3               (25)
                                                                                  -------------     ------------

            Total tax consequences                                                          17                (9)
            Less: tax effects of change in accounting principle                              -               (15)
                                                                                  -------------     ------------

                 Income tax expense                                               $         17      $          6
                                                                                  =============     ============
</TABLE>



<TABLE>
<CAPTION>

The  provision  for federal  income taxes is less than that computed by applying
the federal  statutory  rate of 34% as indicated in the  following  analysis (in
thousands):

                                                      2001             %               2000             %
                                                 ---------------  ------------    ---------------  -------------
<S>    <C>                                       <C>                     <C>      <C>                     <C>
       Taxes based on statutory rate             $           46           34%     $          30            34%
       Surtax exemption                                    (10)            7%               (12)          (14%)

       Reduction in the valuation
            allowance for the net
            deferred tax asset                               -             0%               (48)          (54%)

       Other                                               (19)          (14%)               21            24%
                                                 ---------------  ------------    ---------------  -------------

                                                 $          17            13%     $          (9)          (10%)
                                                 ===============  ============    ===============  =============
</TABLE>


                                      A-33


<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


<TABLE>
<CAPTION>

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the recorded  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):

                                                                                          2001           2000
                                                                                     -------------  -------------
<S>   <C>                                                                            <C>            <C>
      Deferred tax assets:
           Allowance for possible loan losses                                        $         22   $         13
           Tax basis of conversion costs in excess of book                                     18             14
                                                                                     -------------  -------------

                Total deferred tax assets                                                      40             27
                                                                                     -------------  -------------
      Deferred tax liabilities:
           Bank premises and equipment                                                          -              2
           Stock dividend                                                                      18              -
                                                                                     -------------  -------------

                Total deferred tax liabilities                                                 18              2
                                                                                     -------------  -------------

                Net deferred tax asset                                               $         22   $         25
                                                                                     =============  =============
</TABLE>


Included in other  assets at June 30, 2001 and 2000 are net  deferred tax assets
of approximately $22,000 and $25,000, respectively.  Included in other assets at
June 30, 2001 are federal  income taxes  receivably  of  approximately  $25,000.
Included in other  liabilities at June 30, 2000 are federal income taxes payable
of approximately $15,000.

11.  Related Party Transactions
     --------------------------

In the ordinary  course of business,  the Company has and expects to continue to
have transactions including borrowings, with its employees,  officers, directors
and their affiliates. In the opinion of management, such transactions are on the
same terms,  including  interest  rates and  collateral  requirements,  as those
prevailing at the time for comparable  transactions with  unaffiliated  persons.
The aggregate  amount of such loans was  approximately  $381,000 and $814,000 at
June  30,  2001  and  2000,   respectively.   During  2001  new  loans   totaled
approximately $48,000 and principal payments totaled approximately $481,000.

12.  Financial Instruments
     ---------------------

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal course of business to meet the financing needs of its members.  These
financial  instruments include  commitments to extend 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  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented by the contractual amount of these instruments. The Company uses the
same credit policies in making  commitments  and  conditional  obligations as it
does  for  on-balance-sheet   instruments.  The  approximate  amounts  of  these
financial instruments at June 30, 2001 and 2000 were as follows (in thousands):


                                      A-34


<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>



                                                                                        2001                  2000
                                                                                ------------------    -----------------
<S>                                                                              <C>                          <C>
Financial instruments whose contract
     Amounts represent credit risk:
        Commitments to extend variable rate credit                               $            790             $   1,029
        Commitments to extend fixed rate credit                                               150                   250
         Letters of credit                                                                     89                    72
                                                                                 ------------------    -----------------
                                                                                 $          1,029             $   1,351
                                                                                 ==================    =================


Commitments  to extend fixed rate credit and the related  interest  rates are as
follows (in thousands):

                         Rate                                                           2001                  2000
                                                                                 ------------------    -----------------

                         8.30%                                                   $            150      $              -
                         7.20%                                                                  -                   250
                                                                                 ------------------    -----------------

                                                                                 $            150      $            250
                                                                                 ==================    =================

</TABLE>


Commitments  to extend  variable  rate credit are at rates ranging from 6.75% to
11.5% as of June 30, 2001.

Commitments to extend credit are agreements to lend to a member as long as there
is no  violation  of any  condition  established  in the  contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without being fully drawn upon, the total commitment  amounts do not necessarily
represent  future  cash  requirements.   The  Company  evaluates  each  member's
creditworthiness  on a  case-by-case  basis.  The amount and type of  collateral
obtained,  if deemed  necessary by the Company upon extension of credit,  varies
and is based on management's credit evaluation of the borrower.

Standby letters of credit are conditional  commitments  issued by the Company to
guarantee the  performance  of a customer to a third party.  Standby  letters of
credit generally have fixed expiration  dates or other  termination  clauses and
may require  payment of a fee.  The credit risk  involved in issuing  letters of
credit is essentially  the same as that involved in extending loan facilities to
customers.  The Company's policy for obtaining collateral and the nature of such
collateral is  essentially  the same as that involved in making  commitments  to
extend credit.

Although  the  maximum  exposure  to loss  is the  amount  of such  commitments,
management currently anticipates no material losses from such activities.

                                      A-35

<PAGE>


                       BANCAFFILIATED, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>

The estimated fair values of the Company's financial instruments at June 30,
2001, and June 30, 2000 were as follows (in thousands):



                                                                 2001                              2000
                                                                 ----                              ----
                                                   ---------------------------------- --------------------------------
                                                      Carrying            Fair           Carrying          Fair
                                                       Amount            Value            Amount           Value
                                                   ---------------- ----------------- --------------- ----------------
<S>                                                <C>              <C>               <C>             <C>
Financial assets:
     Cash and due from banks,
          and federal funds sold                   $         1,459  $          1,459  $        1,931  $         1,931
     Interest bearing deposits                                 387               387             144              144
     Federal Home Loan Bank stock                              719               719             483              483
     Securities held to maturity                             9,573             9,677           8,621            8,602
     Loans                                                  22,738            22,854          16,189           16,125
     Accrued interest receivable                               166               166             148              148
Financial liabilities:
     Deposit liabilities                                    16,531            16,650          16,632           16,651
     Accrued interest payable                                   98                98             156              156
     Other borrowings                                       14,239            14,239           8,977            8,977
Off balance sheet assets:
     Commitments to extend credit                                -                 -               -                -
     Standby letters of credit                                   -                 -               -                -

</TABLE>


13.  Earnings Per Share
     ------------------

For  2001,  earnings  per  share  is  based  upon the  weighted  average  shares
outstanding and results of operations after the conversion  described in Note 2.
The  computation  of per share loss is as follows  (in  thousands  except  share
amounts):

          Net Loss                                                 $         52
          Average common shares outstanding                             264,500
                                                                   -------------

          Basic and diluted earnings per share                     $       (.20)
                                                                   =============

The  computation of earnings per share,  excluding any investment  income on the
net  proceeds,  if the shares  had been  outstanding  for the entire  year is as
follows (in thousands, except share amounts):

          Net Income                                               $         118
          Average common shares outstanding                              264,500
                                                                   -------------

          Basic and diluted earnings per share                     $        0.45
                                                                   =============

At June  30,  2000 the Bank was a mutual  savings  institution  and,  thus,  net
earnings  per share is not  reported on the results of  operations  for the year
then ended.

14.  Employee Benefits
     -----------------

The Bank  maintains a qualified,  tax-exempt  savings plan known as a Simple IRA
(the "Plan") with a cash or deferred feature  qualifying under Section 408(p) of
the Internal  Revenue  Code.  Employees of  Affiliated  Bank who earned at least
$5,000 in the preceding calendar year may participate in this Plan.

                                      A-36

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


Participants are permitted to make salary reduction contributions to the Plan of
up to $6,000 of the participant's annual salary. In addition, the Bank may match
the  participant's  contribution  on a dollar for dollar basis up to 100% of the
participant's  before-tax  contribution up to a maximum contribution by the Bank
of 3% of the participant's  annual salary for the year. All contributions by the
Bank and the  participants,  as well as  earnings,  are  fully  and  immediately
vested.

Participants may invest amounts  contributed to their IRA accounts in any number
of investment  options  available under the Plan. Each  participant  receives an
annual statement,  which provides information regarding, among other things, the
market  value  of his  investments  and  contributions  made to the  Plan on the
participant's  behalf.  For both of the years ended June 30, 2001 and 2000,  the
Company's contributions to the Plan were approximately $11,000.

15.  Noninterest Expense
     -------------------

Other noninterest expense amounts for the years ended June 30, 2001 and 2000 are
summarized as follows (in thousands):
                                                 2001                 2000
                                            --------------       -------------

         Services charges and fees           $          11        $         16
         Loan expense                                    5                   4
         Exam and audit expense                         17                  12
         Regulatory assessments                         12                   8
         Outsource expense                              21                  18
         Franchise tax expense                           6                  11
         Auto allowance                                  6                   6
         Travel                                         18                  12
         Meals and entertainment                         8                  12
         Miscellaneous expense                          15                  25
                                            --------------       -------------

                                            $         119        $        124
                                            =============        =============

16.  Commitments and Contingencies
     -----------------------------

The Company is involved in certain  legal actions  arising from normal  business
activities.  Management  believes that the outcome of such  proceedings will not
materially  affect  the  financial  position  or results  of  operations  of the
Company.

Net rent expense under operating  leases,  included in occupancy  expenses,  was
approximately  $16,000  and  $27,000 for the years ended June 30, 2001 and 2000,
respectively.

17.  Significant Group Concentrations of Credit Risk
     -----------------------------------------------

Most of the Company's  business activity is with customers located within Texas.
Such customers are normally also customers of the Company.

                                      A-37

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


The  distribution of commitments to extend credit  approximates the distribution
of loans  outstanding.  Commercial  and standby  letters of credit were  granted
primarily to commercial borrowers.

The  contractual  amounts  of  credit  related  financial  instruments  such  as
commitments to extend credit,  credit card  arrangements,  and letters of credit
represent the amounts of potential  accounting loss should the contract be fully
drawn upon,  the  customer  default,  and the value of any  existing  collateral
become worthless.

18.  Condensed Financial Information of BancAffiliated
     -------------------------------------------------

The condensed  financial  information of BI as of June 30, 2001 is summarized as
follows (in thousands):

                Assets
                     Cash and due from banks                      $         882
                     Investment in Affiliated Bank                        3,618
                     Other                                                  123
                                                                 --------------

                          Total Assets                            $       4,623
                                                                 ==============

                Liabilities and Stockholders' Equity
                     Accrued liabilities                          $          20
                     Stockholders' equity                                 4,603
                                                                 --------------

                                                                  $       4,623
                                                                 ==============

As more fully  described in Note 2 BI became the holding  company for Affiliated
Bank on May 25, 2001 and did not incur any  significant  income or expense  from
May 25, 2001 through June 30, 2001.

19.  Regulatory Matters
     ------------------

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


                                      A-38

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY


Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum  amounts and ratios of:  total  risk-based
capital  and  Tier  I  capital  to  risk-weighted  assets  (as  defined  in  the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined).  Management believes,  as of June
30,  2001,  and  June  30,  2000,  that  the Bank  meets  all  capital  adequacy
requirements to which it is subject.

As of June 30, 2001,  and June 30, 2000,  the Bank's capital ratios exceed those
levels  necessary to be categorized as "well  capitalized"  under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized,"
the Bank must maintain minimum total risk-based,  Tier I risk-based,  and Tier I
leverage  ratios as  disclosed in the table below.  There are no  conditions  or
events  since June 30, 2001,  and June 30, 2000 that  management  believes  have
changed the Bank's category.

                                      A-39

<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>

A comparison of the Bank's actual capital amounts and ratios to required capital
amounts and ratios is presented in the following table (in thousands):


                                                                                               To Be Well
                                                                                           Capitalized Under
                                                                For Capital                Prompt Corrective
                                        Actual                 Adequacy Purposes             Action Provisions
                                   Amount     Ratio           Amount       Ratio          Amount          Ratio
                                (dollars in thousands)     (dollars in thousands)        (dollars in thousands)
                                    thousands)
<S>                            <C>            <C>         <C>                 <C>      <C>                  <C>
     As of June 30, 2001
        Total Risk-Based
          Capital (to Risk-
          Weighted assets)     $     3,801    16.60%      $     1,832         8.0%     $     2,290          10.0%
        Tier I capital (to
          Risk-Weighted
          assets)              $     3,619    15.80%      $       916         4.0%     $     1,374           6.0%
        Tier I capital (to
          Adjusted Total
          Assets)              $     3,619    10.22%      $     1,416         4.0%     $     1,770           5.0%
        Tangible Capital
          (to Adjusted
          Total Assets)        $     3,619    10.22%      $       531         1.5%     $       885           2.5%

     As of June 30, 2000
        Total Risk-Based
          Capital (to Risk-
          Weighted assets)     $     2,364    14.07%      $     1,344         8.0%     $     1,681          10.0%
        Tier I capital (to
          Risk-Weighted
          assets)              $     2,211    13.16%      $       672         4.0%     $     1,008           6.0%
        Tier I capital (to
          Adjusted Total
          Assets)              $     2,211     7.89%      $     1,121         4.0%     $     1,401           5.0%
        Tangible Capital
          (to Adjusted
          Total Assets)        $     2,211     7.89%      $       420         1.5%     $       701           2.5%


</TABLE>


The following is a reconciliation of equity capital in accordance with Generally
Accepted  Accounting  Principles  (GAAP)  with  total  risk  based  capital  (in
thousands):

                                                     2001              2000
                                               -------------     --------------

GAAP equity capital                             $      3,619      $       2,211

Allowance for loan losses                                182                153
                                                ------------      -------------

Total risk-based capital                        $      3,801      $       2,364
                                                ============      =============

                                      A-40
<PAGE>

                       BANCAFFILIATED, INC. AND SUBSIDIARY



20.  Adoption  of  Statement  of  Position  98-5 and  Restatement  of  Financial
     Statements
     ---------------------------------------------------------------------------

In the years prior to June 30, 2000 the Bank  capitalized  certain costs related
to  converting  from a federal  credit union to a federal  mutual  savings bank.
During the year ended June 30, 2000,  the Bank changed its method of  accounting
for the  costs  of  start-up  activities  to  comply  with the  requirements  of
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities."

The  accompanying  financial  statements  for the year ending June 30, 2000 have
been restated to expense the  unamortized  conversion  costs.  The effect of the
restatement is as follows (in thousands):



                                                                  Increase
                                                                 (Decrease)
                  Other assets                                $            (27)
                                                              =================

                  Retained Earnings                           $            (27)
                                                              =================

                  Other Expense                               $             (5)
                                                              =================

                  Tax expense                                 $              2
                                                              =================

                  Cumulative effect of accounting change
                  (net of tax)                                $            (30)
                                                              =================

                  Net income                                  $            (27)
                                                              =================

                                      A-41

<PAGE>


                      BANCAFFILIATED, INC. AND SUBSIDIARIES
                             STOCKHOLDER INFORMATION

ANNUAL MEETING

The annual meeting of stockholders  will be at 2:00 p.m.,  Bedford,  Texas time,
October 29,  2001,  at the main office  located at 500  Harwood  Road,  Bedford,
Texas.

STOCK LISTING

The Company's  stock is traded on the OTC  Electronic  Bulletin  Board under the
symbol "BAFI."

PRICE RANGE OF COMMON STOCK

The  following  table sets  forth the high and low bid  prices of the  Company's
common  stock  since it began  trading  on May 25,  2001.  These  prices  do not
represent actual transactions and do not include retail mark-ups, mark- downs or
commissions.


                                          High          Low          Dividends
                                        ----------------------------------------
June 30, 2001................            $11.00        $9.50           N/A

The Company has not declared any dividends during fiscal 2001.  Dividend payment
decisions  are  made  with  consideration  of a  variety  of  factors  including
earnings,    financial   condition,   market   considerations   and   regulatory
restrictions.

As of June 30, 2001, the Company had approximately 88 stockholders of record and
264,500 outstanding shares of common stock.

SHAREHOLDERS AND GENERAL INQUIRIES                TRANSFER AGENT

Garry J. Graham                                   Registrar and Transfer Company
BancAffiliated,                                   10 Commerce Drive
500 Harwood Road                                  Cranford, New Jersey 07016
Bedford, Texas 76021                              (908) 272-8511
(817) 285-6195

ANNUAL AND OTHER REPORTS

The Company is  required to file an annual  report on Form 10-KSB for its fiscal
year ended June 30, 2001, with the Securities and Exchange Commission. Copies of
the Form  10-KSB  annual  report  and the  Company's  quarterly  reports  may be
obtained without charge by contacting:

Garry J. Graham
BancAffiliated, Inc.
500 Harwood Road
Bedford, Texas 76021
(817) 285-6195



                                      A-42

<PAGE>


                      BANCAFFILIATED, INC. AND SUBSIDIARIES
                              CORPORATE INFORMATION


COMPANY AND BANK ADDRESS

500 Harwood Road                        Telephone:  (817) 285-6195
Bedford, Texas 76021                    Fax:  (817) 285-6420

DIRECTORS OF THE BOARD

Kenneth L. Lee                          Garry J. Graham
President                               President and Chief Executive Officer
K. Lee Enterprises, Inc.                BancAffiliated, Inc. and Affiliated Bank
Mansfield, Texas                        Bedford, Texas

Donna M. Rosiere                        William J. Wethington
Owner and Operator                      Retired real estate investor
Two Bit DFW, Inc                        Bedford, Texas
Forth Worth, Texas

Harry M. Goddard                        Kenneth L. Schilling
Texas Regional Manager                  Owner
JEH/Eagle Supply                        Schilling Business and Tax Service
Mansfield, Texas                        Watauga, Texas

Donald H. Stone                         James E. Jennings
President and Chief Executive Officer   Retired Executive
ProCuts, Inc.                           Affiliated Foods, Inc.
Hurst, Texas                            Bedford, Texas



                   BANCAFFILIATED INC. AND SUBSIDIARY OFFICERS

Garry J. Graham
President and Chief Executive Officer

INDEPENDENT AUDITORS                   SPECIAL COUNSEL

Payne, Falkner, Smith & Jones, P.C.    Jenkens & Gilchrist, P.C.
Suite 1111                             1919 Pennsylvania Avenue, N.W., Suite 600
14001 Dallas Expressway                Washington, DC 20006-3404
Dallas, Texas 75240



                                      A-43