SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]       ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
          EXCHANGE ACT OF 1934
          For the Fiscal Year Ended June 30, 2002
                                                        OR
[ ]       TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
          EXCHANGE ACT OF 1934


          For the transition period from ________________ to ________________

                         Commission File Number 1-16433

                              BANCAFFILIATED, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

         Maryland                                              75-2926393
--------------------------------------------------------------------------------
(State or Other Jurisdiction of                            (I.R.S. Employer
 Incorporation or Organization)                          Identification Number)

500 Harwood Road, Bedford, Texas                                    76021
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                           Zip Code

       Registrant's telephone number, including area code: (817) 285-6195

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

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

         Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X   NO    .
                                      ----   ----

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]

         As of September 17, 2002, the Registrant had 264,500 shares of Common
Stock issued and outstanding.

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the bid and asked
price of such stock as of September 17, 2002 was $3.0 million. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)

                       DOCUMENTS INCORPORATED BY REFERENCE
   PART II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
        ended June 30, 2002, which is attached as Appendix A to the Proxy
       Statement for the Annual Meeting of Stockholders to be held in 2002
            PART III of Form 10-KSB - Proxy Statement for 2002 Annual
                            Meeting of Stockholders.

<PAGE>



                                     PART I



Item 1.   Description of Business

                                    BUSINESS

General.

         "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 these 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.

         The following discussion is intended to assist in understanding the
financial condition and results of operations of BancAffiliated, Inc. and
Affiliated Bank. The discussion and analysis does not include any comments
relating to BancAffiliated, Inc., since BancAffiliated, Inc. has no significant
operations.

         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. Affiliated Bank's results of
operation also are affected by the level of its non-interest income and expenses
and income tax expense.

         BancAffiliated, Inc. BancAffiliated, Inc. was formed in March, 2001 by
Affiliated Bank. The acquisition of Affiliated Bank by BancAffiliated, Inc. was
consummated on May 25, 2001, in connection with Affiliated Bank's conversion
from the mutual to stock form. All references to


                                        2

<PAGE>



BancAffiliated, Inc. prior to May 25, 2001, except where otherwise indicated,
are to Affiliated Bank.

         At June 30, 2002, BancAffiliated, Inc. had $56.3 million of assets and
stockholders equity of $5.0 million.

         The executive offices of BancAffiliated, Inc. are located at 500
Harwood Road, Bedford, Texas 76021, and its telephone number at that address is
(817) 285-6195.

         The activities of BancAffiliated, Inc. itself have been limited to
investment in the stock of Affiliated Bank and deposits at Affiliated Bank and
the purchase of loan participations from Affiliated Bank. Unless otherwise
indicated, all activities discussed below are of Affiliated Bank.

         Affiliated Bank. Affiliated Bank was established in 1959 as Affiliated
Federal Credit Union. The credit union initially served the employees of
Affiliated Food Stores. Over time, Affiliated Federal Credit Union's membership
grew to include the employees of other small businesses in the Dallas-Fort Worth
metropolitan area. However, as a credit union, Affiliated Federal Credit Union
was legally restricted to serve only customers who shared a "common bond" such
as a common employer.

         As a credit union, Affiliated Bank did not experience membership growth
in recent years due to a reduction in the number of employees of Affiliated Food
Stores. In addition, Affiliated Food Stores ceased operations in 1993, thereby
eliminating the largest source of new customers for Affiliated Federal Credit
Union. After reviewing its strategic options, the board of directors determined
that converting to a federal mutual savings bank would address the problem of a
declining customer base by providing access to all members of the general
public. Therefore, after receiving the necessary regulatory approvals, on June
1, 1998, Affiliated Federal Credit Union converted to a federal mutual savings
bank known as Affiliated Bank, F.S.B. Affiliated Bank now serves the general
public rather than being limited to serving only distinct employee groups.

         Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in construction and
development loans, commercial business loans, commercial real estate loans, and
permanent loans secured by first mortgages on owner- occupied, one- to
four-family residences. We also originate automobile loans and, to a lesser
extent, a variety of other consumer loans and multi-family residential loans.

         Our revenues are derived principally from interest on loans and
mortgage-backed and related securities. We also generate revenue from service
charges and other income.

         We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, NOW and non-interest

                                        3

<PAGE>



bearing demand deposit accounts and time deposit accounts with varied terms
ranging from 30 days to 24 months. We solicit deposits in our primary market
area of Tarrant County and we accept brokered deposits. We also rely on
borrowings from the Federal Home Loan Bank as a source of funds.

Lending Activities

         Market Area. Affiliated Bank is a community-oriented financial
institution offering a variety of financial services to meet the needs of the
communities it serves. We are headquartered at 500 Harwood Road, Bedford, Texas,
and have one full service banking office primarily serving Tarrant County,
Texas.

         General. Our loans carry either a fixed or an adjustable rate of
interest. Construction and commercial loans are generally shorter-term loans.
Construction loans generally pay interest monthly with principal due at
maturity. Commercial loans are generally short term and amortize monthly or have
interest payable monthly or quarterly, and principal due at maturity. Mortgage
loans generally have a longer term amortization, with shorter-term maturities,
and principal and interest due each month. At June 30, 2002, our net loan
portfolio totaled $26.6 million, which constituted 47.8% of our total assets.

         At June 30, 2002, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was $652,000. At June 30, 2002,
we had no loans or group of loans to related borrowers with outstanding balances
in excess of this amount. Our five largest lending relationships at June 30,
2002 were as follows: (1) a $1.3 million interim construction relationship
consisting of 15 residential construction loans totaling $1.0 million and loans
for residential lots that total $274,000, $685,000 of which has been sold to
other banks as participations; (2) a $528,000 interim construction loan for a
personal residence; (3) an $802,000 loan on 38 residential lots of which
$275,000 was participated to another lender; (4) a $500,000 loan relationship
consisting of a line of credit for commercial business purposes and (5) a
$423,000 loan to refinance an office warehouse.



                                        4

<PAGE>



         The following table presents information concerning the composition of
BancAffiliated, Inc. and subsidiary loan portfolio in dollar amounts and in
percentages as of the dates indicated.
<TABLE>
<CAPTION>


                                                                     June 30,
                                              ------------------------------------------------------
                                                       2002                          2001
                                              ------------------------------------------------------
                                                Amount          Percent       Amount      Percent
                                                           (Dollars in Thousands)
<S>                                               <C>             <C>      <C>                <C>

Real Estate Loans:
   One- to four-family residential                $ 4,214          13.5%   $  2,249            7.2%
   Multi-family residential..................         121           0.4         620            1.9
                                                 --------         -----    --------           ----

     Total residential loans.................       4,335          13.9       2,869            9.1
   Commercial real estate....................       2,051           6.5       1,804            5.8
   Construction and development loans........      13,133          42.0      17,441           55.6
                                                   ------          ----      ------           ----

     Total real estate loans.................      19,519          62.4      22,114           70.5
                                                                   ----                       ----

   Commercial business loans.................       6,518          20.8       6,318           20.1

Consumer Loans:
   Automobile loans..........................       3,704          11.8       1,302            4.1
   Credit cards..............................       1,126           3.6       1,195            3.8
   Loans secured by deposits.................         269           0.9         285            0.9
   Other personal and installment loans......          167          0.5         179            0.6
                                                   -------        -----    --------          -----

     Total consumer loans....................       5,266          16.8       2,961            9.4
                                                   ------          ----     -------          -----

     Gross loans.............................      31,303         100.00%    31,393          100.00%
                                                                  ======                     ======

     Loans in process........................       3,809                     8,473
                                                   ------                   -------
     Total loans............................       27,494                    22,920

Allowance for loan losses....................         315                       182
                                                  -------                  --------

     Net loans receivable....................     $27,179                   $22,738
                                                  =======                   =======

</TABLE>


                                        5

<PAGE>




         The following schedule illustrates the contractual maturity of
Affiliated Bank's loan portfolio at June 30, 2002. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>


                                                                   Over One
                                                 One Year           Year to        Over Five
                                                  or Less         Five Years         Years       Total
                                                  -------         ----------         -----       -----
                                                            (Dollars in Thousands)
<S>                                               <C>                <C>           <C>        <C>


One- to four-family residential loans...           $2,460            $   722       $1,032     $  4,214
Multi-family............................              ---                121                       121
Commercial real estate..................              924              1,127                     2,051
Construction............................            9,029              1,006                    10,035
Commercial business.....................            4,244              1,784                     6,028
All other loans.........................              755              3,608           92        4,455
                                                   ------              -----     --------      -------
Total loans (net of LIP)................          $17,412             $8,368       $1,124      $26,904
                                                  =======             ======       ======      =======

Allowance for loan losses...............                                                           315
                                                                                              --------
     Net loans..........................                                                       $26,589
                                                                                               =======
</TABLE>


         Of our outstanding total loans of $26.6 million at June 30, 2002,
approximately $13.8 million have fixed rates of interest and approximately $12.8
million have adjustable rates of interest.

         Construction and Development Lending. We originate construction loans
to builders and to individuals for the construction of their primary residences.
Substantially all of these loans are secured by property located within our
market area. Loans to individuals for the construction of their residences
typically run for up to 12 months. The borrower pays interest only during the
construction period. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans. At June 30, 2002, we had $13.1 million or 41.9% of our gross loan
portfolio in construction and development loans, of which $2.5 million was not
disbursed. Of this amount, approximately $8.7 million or 66.5% were fixed rate
loans and approximately $4.3 million or 33.5% were adjustable rate loans. Our
largest construction loan relationship at June 30, 2002, was a $1.3 million
relationship consisting of 15 residential construction loans totaling $1.0
million and loans for residential lots that total $274,000, $685,000 of which
has been sold to other banks as participations. At June 30, 2002, this borrower
had $1.2 million outstanding to us, $638,000 of which was participated to other
banks.

         Construction loans generally have adjustable interest rates based upon
the highest prime rate of interest published in the Wall Street Journal with
terms of 12 months. The proceeds of the loan are advanced during construction
based upon the percentage of completion as determined by an inspection of the
project. The loan amount normally does not exceed 80% of the projected


                                        6

<PAGE>



completed value. Whether we are willing to provide permanent financing to the
purchaser of the home is determined independently of the construction loan by
separate underwriting. In the event that upon completion the house is not sold,
we generally will renew the loan for up to 6 months. However, following that
renewal, if the house is still not sold, the builder is required to make
principal and interest payments until the house is sold.

         Construction and development loans are obtained through continued
business with builders who have previously borrowed from us, from walk-in
customers and through referrals from existing customers and realtors. The
application process includes submission of accurate plans, specifications and
costs of the project to be constructed. These items are used as a basis to
determine the appraised value of the subject property. Loans are based on the
lesser of current appraised value or the cost of construction, including the
land and the building. We generally conduct regular inspections of the
construction project being financed.

         Because of the uncertainties inherent in estimating construction and
development costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks
discussed below regarding commercial real estate loans and tend to be more
sensitive to general economic conditions than many other types of loans. In
addition, payment of interest from loan proceeds can make it difficult to
monitor the progress of a project.

         Commercial Business Lending. We also originate commercial business
loans. At June 30, 2002, approximately $6.0 million or 21.9% of our total loan
portfolio was comprised of commercial business loans. Of this amount,
approximately $4.3 million or 71.5% were fixed rate loans and approximately $1.7
million or 28.5% were adjustable rate loans. Our largest commercial business
loan at June 30, 2002, was a $500,000 loan to a business borrower secured by
marketable securities. At June 30, 2002, this borrower had $498,000 outstanding
to us.

         Unlike residential mortgage loans, which are generally made on the
basis of the borrower's ability to make repayments from his or her employment
and other income and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). These loans consist primarily of working capital,
equipment and lines of credit for business to support their operations. Our
commercial business loans are usually, but not always, secured by business
assets and generally by personal assets or guarantees as well. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. A
small portion of our commercial business loans are unsecured.



                                        7

<PAGE>



         Commercial Real Estate Lending. Affiliated Bank offers commercial real
estate loans. These loans are secured primarily by small retail establishments,
rental properties and small office buildings located in our primary market area.
At June 30, 2002, commercial real estate loans totaled $2.1 million or 7.5% of
our total loan portfolio. Of this amount, approximately $1.1 million or 54.9%
were fixed rate loans and approximately $900,000 or 45.1% were adjustable rate
loans. Our largest commercial real estate loan at June 30, 2002, was a $423,000
loan to a real estate investor secured by the real estate. At June 30, 2002,
this borrower had $423,000 outstanding to us.

         We originate both fixed-rate and adjustable-rate commercial real estate
loans. The interest rate on these loans is generally tied to the highest prime
rate of interest published in the Wall Street Journal. Loan-to-value ratios on
our commercial real estate loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments, amortize over 15 to 25 years, and have maturities of 3 to 5 years.

         Loans secured by commercial real estate are underwritten based on the
income producing potential of the property, the financial strength of the
borrower and any guarantors. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
commercial real estate loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "-- Loan Originations,
Purchases, Sales and Repayments."

         Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality -- Non-Performing Loans."

         Consumer and Automobile Lending. Consumer loans generally have shorter
terms to maturity, which reduces our exposure to changes in interest rates, and
carry higher rates of interest than do one- to four-family residential mortgage
loans. In addition, management believes that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by
increasing the number of customer relationships and providing cross- marketing
opportunities. At June 30, 2002, our consumer loan portfolio totaled $4.5
million or 16.2% of our total loan portfolio. We offer a variety of secured
consumer loans, including automobile loans and loans secured by savings
deposits. We also offer a limited amount of unsecured loans.



                                        8

<PAGE>



         The most significant component of our consumer lending is automobile
loans. We originate automobile loans on a direct basis and purchase loans as
well. These loans totaled $3.7 million at June 30, 2002 or 13.5% of our total
loan portfolio. Automobile loans may be written for up to five years and usually
have fixed rates of interest. Loan to value ratios for automobile loans are up
to 100% of the sales price for new automobiles and up to 100% of value on used
cars, based on valuation from official used car guides.

         Affiliated Bank also originates credit card loans, loans secured by
deposit accounts and other consumer loans. At June 30, 2002, we had $269,000 or
1.0% of our total loan portfolio in loans secured by deposits. At June 30, 2002,
we also had $315,000 in adjustable-rate credit card loans or 1.15% of our total
loan portfolio. Management is contemplating the discontinuance of its credit
card lending. However, at this time Affiliated Bank continues to offer the
credit cards.

         Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles. In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance. As a result, consumer loan
collections are dependent on the borrower's continuing financial stability and,
thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy.

         One- to Four-Family Residential Lending. At June 30, 2002, one- to
four-family residential mortgage loans totaled $4.2 million or 15.3% of our
total loan portfolio. We generally underwrite our one- to four-family loans
based on the applicant's employment and credit history and the appraised value
of the subject property. Presently, we lend up to 80% of the lesser of the
appraised value or purchase price for one- to four-family residential loans.
Should we grant a loan with a loan-to-value ratio in excess of 80%, we may
require private mortgage insurance in order to reduce our exposure below 80%.
Properties securing our one- to four-family loans are generally appraised by
independent fee appraisers approved by the board of directors. We require our
borrowers to obtain title and hazard insurance, and flood insurance, if
necessary, in an amount not less than the value of the property improvements.

         We currently originate one- to four-family mortgage loans on a fixed-
rate basis. Our pricing strategy for mortgage loans includes setting interest
rates that are competitive with other local financial institutions and
consistent with our internal needs. Generally, our home mortgages are structured
with a 15 to 30 year amortization and with a 3 to 5 year maturity. While not
mandatory, these loans will generally be renewed after repricing to the current
market rate.

         Our real estate loans generally contain a "due on sale" clause allowing
us to declare the unpaid principal balance due and payable upon the sale of the
security property. The loans currently originated by us are not typically
underwritten and documented pursuant to Freddie Mac guidelines. Under current
policy, we originate these loans for portfolio. See "- Originations, Purchases,
Sales and Repayments." We have not experienced difficulty with the


                                        9

<PAGE>



payment history for these loans. See "- Asset Quality -- Non-Performing Assets"
and "-- Classified Assets."

         Multi-Family Residential Lending. We offer multi-family residential
loans. These loans are secured primarily by real estate located in our primary
market area. At June 30, 2002, multi-family residential loans totaled $121,000
or 0.4% of our gross loan portfolio.

         Our multi-family residential loans are originated with both fixed and
adjustable interest rates. The interest rate on these loans is generally tied to
the prime rate of interest published in the Wall Street Journal. Loan-to-value
ratios on our multi-family residential loans typically do not exceed 80% of the
appraised value of the property securing the loan. These loans typically require
monthly payments, are fully amortizing and have maximum maturities of 25 years.

         Loans secured by multi-family residential real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family residential loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "-- Loan Originations,
Purchases, Sales and Repayments."

         Loans secured by multi-family residential properties are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
residential properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired. See "- Asset Quality --
Non-Performing Assets."

Loan Originations, Purchases, Sales and Repayments

         We originate loans through employees located at our office. Walk-in
customers and referrals from our current customer base, advertisements, real
estate brokers, mortgage loan brokers, and builders are also important sources
of loan originations. While we originate both adjustable-rate and fixed-rate
loans, our ability to originate loans is dependent upon customer demand for
loans in our market area. Demand is affected by local competition and the
interest rate environment. We also purchase and sell participation interests in
loans as well as purchase loans originated by others.




                                       10

<PAGE>



         The following table shows the loan origination, purchase, sale and
repayment activities of Affiliated Bank for the periods indicated, and includes
loans originated for both our own portfolio and for sale of participating
interests.



                                                  Years Ended
                                                    June 30,
                                       ------------------------------
                                              2002          2001
                                       ------------------------------
                                           (Dollars in Thousands)

Total loans, beginning of year.........       $22,920        $16,342

Loan originations and purchases:
   Real estate mortgage loans..........        24,742         17,016
   Consumer loans......................         3,785            823
   Other loans.........................         4,508          6,490
                                              -------        -------

     Total loan originations...........        33,035         24,329
                                              -------        -------

Loan repayments........................        25,959         16,867
Loan participations sold...............         3,091            884
                                              -------        -------

    Total repayments and sales.........        29,050         17,751
                                              -------        -------

Total loans, end of period.............       $26,905        $22,920
                                              =======        =======

Asset Quality

         When a borrower fails to make a payment on a mortgage loan on or before
the default date, we mail a delinquency notice to the borrower when the loan is
10 days past due. When the loan is 20 days past due, we mail a subsequent
delinquent notice to the borrower. All delinquent accounts are reviewed by loan
personnel, who attempt to cure the delinquency by contacting the borrower once
the loan is 20 days past due. If the loan becomes 30 days delinquent, the
collector will generally contact by phone or send a personal letter to the
borrower in order to identify the reason for the delinquency. Once the loan
becomes 90 days delinquent, contact with the borrower is made typically
requesting payment of the delinquent amount in full, or the establishment of an
acceptable repayment plan to bring the loan current. If an acceptable repayment
plan has not been agreed upon, loan personnel will generally refer the account
to legal counsel, with instructions to prepare a notice of intent to foreclose.
The notice of intent to foreclose allows the borrower up to 30 days to bring the
account current. Once the loan becomes 120 days delinquent, and an acceptable
repayment plan has not been agreed upon, the collection officer will turn over
the account to our legal counsel with instructions to initiate foreclosure.

         For consumer loans a similar process is followed, with the initial
written contact being made once the loan is 10 days past due. Follow-up contacts
are generally made on an accelerated basis compared to the mortgage loan
procedure.

                                       11

<PAGE>




         Delinquent Loans. The following table sets forth our loans delinquent
60 - 90 days and over past due by type, number, amount and percentage of type at
June 30, 2002.


<TABLE>
<CAPTION>



                              60 to 89 days past due            90 days and over past due               Total Delinquent Loans
                        ------------------------------------------------------------------------------------------------------------
                                                 Percent                              Percent                            Percent
                                                 of Loan                              of Loan                            of Loan
                        Number      Amount       Category     Number     Amount       Category    Number      Amount     Category
                        ------      -------      ---------   --------    ------       --------    ------      ------     --------
                                                                   (Dollars in Thousands)
<S>                        <C>         <C>         <C>          <C>        <C>          <C>        <C>       <C>             <C>

Real estate:
  Residential...........   ---         ---         ---          1          161          3.7%       1         161             3.7%
  Commercial............   ---         ---         ---
  Construction..........    3          354         3.3%         1          284          2.7%       4         638             6.0%

Other:
  Consumer..............   ---         ---         ---%         1            2          0.04%      1           2             0.04%
  Commercial............   ---         ---         ---

Total...................    3          354         1.3%         3          447          1.6%       6         801             2.9%


</TABLE>



                                       12

<PAGE>



         Non-Performing Assets. The table below sets forth the amounts and
categories of non- performing assets in our loan portfolio. Non-performing
assets consist of non-accrual loans, accruing loans past due 90 days and more,
and foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. Generally, all loans past due 90 days and over are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.

         Foreclosed assets consist of real estate and other assets which have
been acquired through foreclosure on loans. At the time of foreclosure, assets
are recorded at the lower of their estimated fair value less selling costs or
the loan balance, with any write-down charged against the allowance for loan
losses. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates.


<TABLE>
<CAPTION>

                                                                                               At June 30,
                                                                               --------------------------------------
                                                                                          2002              2001
                                                                               --------------------------------------
<S>                                                                                         <C>            <C>

Non-accruing loans:
   Consumer...................................................................              $  16               $12
   Construction...............................................................                284               ---
   Residential................................................................                161               ---
     Total....................................................................                461                12
                                                                                              ---              ----

Accruing loans past due 90 days and over:
   Consumer...................................................................                  2                 3

     Total....................................................................                  2                 3
                                                                                              ---              ----

Total non-performing loans....................................................                463                15

Foreclosed assets.............................................................                ---               ---
                                                                                              ---              ----

Total non-performing assets...................................................               $463               $15

Allowance for loan losses.....................................................                315               182

Coverage of non-performing loans..............................................              68.0%          1,213.3%

Non-performing assets as a percentage of total assets.........................              0.82%             0.04%

</TABLE>

         Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 2002, there was also an aggregate of
$837,000 primarily in residential construction loans with respect to which known
information about the possible credit problems


                                       13

<PAGE>



of the borrowers have caused management to have doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories. These
loans and the non-performing loans have been considered in management's
determination of the adequacy of our allowance for loan losses and carry special
allocations of $49,000.

         Classified Assets. Regulations provide for the classification of loans
and other assets, such as debt and equity securities considered by regulators to
be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.

         When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision, which may order the establishment of additional general or specific
loss allowances.

         In connection with the filing of our periodic reports with the Office
of Thrift Supervision and in accordance with our classification of assets
policy, we regularly review the problem assets in our portfolio to determine
whether any assets require classification in accordance with applicable
regulations. On the basis of management's review of our assets, at June 30,
2002, we had classified $823,000 of our assets as substandard, none as doubtful
and none as loss. The total amount of classified assets represented 20.4% of
Affiliated Bank's equity capital and 1.5% of our total assets at June 30, 2002.

         Allowance for Loan Losses. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the ratio analysis and specific allowances
for identified problem loans. In addition, the allowance incorporates the
results of measuring impaired loans as provided in SAS No. 114, "Accounting


                                       14

<PAGE>



by Creditors for Impairment of a Loan" and SAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods, income recognition and disclosures
related to impaired loans.

         The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loans or pools of
loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.

         The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting our key lending areas and other conditions, such as credit
quality trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss
experience in particular segments of the portfolio that existed as of the
balance sheet date and the impact that such conditions were believed to have had
on the collectibility of the loan. Senior management reviews these conditions
quarterly in discussions with our senior credit officers. To the extent that any
of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management's estimate of the
effect of such condition may be reflected as a specific allowance applicable to
such credit or portfolio segment. Where any of these conditions is not evidenced
by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the loss related to this condition
is reflected in the unallocated allowance. The evaluation of the inherent loss
with respect to these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments.

         Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions in Affiliated Bank's
market area. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. For
all specifically reviewed loans for which it is probable that Affiliated Bank
will be unable to collect all amounts due according to the terms of the loan
agreement, Affiliated Bank determines impairment by computing a fair value
either based on discounted cash flows using the loan's initial interest rate or
the fair value of the collateral if the loan is collateral dependent. Large
groups of smaller balance homogenous loans that are collectively evaluated for
impairment and are excluded from specific impairment evaluation, and their
allowance for loan losses is calculated in accordance with the allowance for
loan losses policy described above.

         Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Our methodology as


                                       15

<PAGE>



described permits adjustments to any loss factor used in the computation of the
formula allowance in the event that, in management's judgment, significant
factors which affect the collectibility of the portfolio as of the evaluation
date are not reflected in the loss factors. By assessing the estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon any more recent information that
has become available. In addition, management's determination as to the amount
of our allowance for loan losses is subject to review by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation, which may require the
establishment of additional general or specific allowances based upon their
judgement of the information available to them at the time of their examination
of Affiliated Bank.

         At June 30, 2002, our allowance for loan losses was $315,000 or 1.15%
of the total loan portfolio and approximately 68.0% of total non-performing
loans. Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in our loan portfolios.




                                       16

<PAGE>



         The following table sets forth an analysis of our allowance for loan
losses.

<TABLE>
<CAPTION>




                                                                                            Years Ended June 30
                                                                                 --------------------------------------
                                                                                          2002               2001
                                                                                 --------------------------------------
<S>                                                                                      <C>                <C>


Total loans outstanding (at end of period)..................................             $26,905            $22,920
                                                                                         -------            -------

Average loans outstanding (period to date)..................................             $24,742            $19,573
                                                                                         -------            -------

Allowance for loan losses, beginning of period..............................             $   182            $   153

Loan charge-offs:
     Consumer loans.........................................................                  29                 20
     Commercial loans.......................................................                 ---                252
     Residential construction...............................................                  25                ---
        Total loan charge-offs..............................................                  54                272
                                                                                         -------            -------

Loan recoveries:
     Consumer loans.........................................................                   2                  3
                                                                                         -------            -------
        Total loan recoveries...............................................                   2                  3
                                                                                         -------            -------

Net loan charge-offs........................................................                  52                269
Provision charged to operations.............................................                 185                298
                                                                                         -------            -------

Allowance for loan losses, end of period....................................             $   315            $   182
                                                                                         =======            =======

Ratio of net loan charge-offs during the period
   to average loans outstanding.............................................               0.21%              1.37%
                                                                                         =======            =======

Provision as a percentage of average loans..................................               0.75%              1.52%
                                                                                         =======            =======

Allowance as a percentage of total loans....................................               1.17%              0.79%
                                                                                         =======            =======

</TABLE>



                                       17

<PAGE>



         The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.

<TABLE>
<CAPTION>


                                                            At June 30,
                                   ----------------------------------------------------------------
                                                2002                           2001
                                   ----------------------------------------------------------------
                                                     Percent of                     Percent of
                                                      Loans in                       Loans in
                                                        Each                           Each
                                                      Category                       Category
                                                      to Total                       to Total
                                       Amount          Loans          Amount          Loans
                                   ----------------------------------------------------------------
<S>                                        <C>          <C>           <C>              <C>


One- to four-family residential..          $    2         15.3%       $    5            10%
Multi-family residential.........               1          0.04            2              3
Commercial real estate...........               4          7.5             9              8
Construction and
  development loans..............              57         38.6            88             46
Commercial business loans........             181         21.9            55             23
Automobile loans.................              48         13.5            13              6
Other personal and investment
   loans.........................              22         3.16            10              4
                                            -----      --------         ----           ----
                                           $  315       100.00%       $  182           100%
                                            =====      ========         ====           ====
</TABLE>


Investment Activities

         Affiliated Bank is required by federal regulations to maintain an
amount of liquid assets necessary to ensure it safe and sound operation.
Affiliated Bank may invest in certain securities as part of this requirement.
Cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided.

         Affiliated Bank is authorized to invest in various types of liquid
assets, including United States Treasury obligations, securities of various
federal agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, federal savings banks may also invest
their assets in investment grade commercial paper and corporate debt securities
and mutual funds whose assets conform to the investments that a federally
chartered savings bank is otherwise authorized to make directly. See "How We Are
Regulated - Affiliated Bank" for a discussion of additional restrictions on our
investment activities.

         The president has the basic responsibility for the management of our
investment portfolio, subject to the direction and guidance of the
Investment/Asset and Liability Management Committee. The president considers
various factors when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The


                                       18

<PAGE>



maturity structure of investments will be affected by various market conditions,
including the current and anticipated slope of the yield curve, the level of
interest rates, the trend of new deposit inflows, and the anticipated demand for
funds via deposit withdrawals and loan originations and purchases.

         The current objectives of our investment portfolio are to provide
liquidity when loan demand is high, to assist in maintaining earnings when loan
demand is low and to maximize earnings while satisfactorily managing risk,
including credit risk, reinvestment risk, liquidity risk and interest rate risk.

         Our investment securities currently consist of collateralized mortgage
obligations and securities issued under government-sponsored agency programs.
While these investment securities carry a reduced credit risk as compared to
whole loans, they remain subject to the risk that a fluctuating interest rate
environment, along with other factors like the geographic distribution of the
underlying mortgage loans, may alter the prepayment rate of the mortgage loans
and so affect both the prepayment speed, and value, of the investment
securities.

         Collateralized mortgage obligations are securities derived by
reallocating the cash flows from mortgage-backed securities or pools of mortgage
loans in order to create multiple classes, or tranches, of securities with
coupon rates and average lives that differ from the underlying collateral as a
whole. The term to maturity of any particular tranche is dependent upon the
prepayment speed of the underlying collateral as well as the structure of the
particular collateralized mortgage obligation. As a result of these factors, the
estimated average lives of the collateralized mortgage obligations will be
shorter than the contractual maturities as shown on the following table.
Although a significant proportion of Affiliated Bank's collateralized mortgage
obligations are interests in tranches which have been structured (through the
use of cash flow priority and "support" tranches) to give somewhat predictable
cash flows, the cash flow and hence the value of the collateralized mortgage
obligations are subject to change.

         Affiliated Bank invests in collateralized mortgage obligations as an
alternative to mortgage loans and conventional mortgage-backed securities as
part of its asset/liability management strategy. Management believes that
collateralized mortgage obligations represent attractive investment alternatives
relative to other investments due to the wide variety of maturity and repayment
options available through such investments. In particular, Affiliated Bank has
from time to time concluded that intermediate and long duration collateralized
mortgage obligations (with an expected average life of 20-years or less)
represent a better combination of rate and duration than adjustable rate
mortgage-backed securities. Because Affiliated Bank's collateralized mortgage
obligations are purchased as an alternative to mortgage loans and because
Affiliated Bank has the ability and intent to hold such securities to maturity,
all such securities are classified as held-to-maturity. At June 30, 2002,
Affiliated Bank held $1.9 million of collateralized mortgage obligations. All of
Affiliated Bank's collateralized mortgage obligations are guaranteed by either
Fannie Mae or Freddie Mac.



                                       19

<PAGE>



         To assess price volatility, the Federal Financial Institutions
Examination Council adopted a policy which requires an annual "stress" test of
mortgage derivative securities. This policy, which has been adopted by the
Office of Thrift Supervision, requires Affiliated Bank to annually test its
collateralized mortgage obligations and other mortgage-related securities to
determine whether they are high-risk or non high-risk securities. Mortgage
derivative products with an average life or price volatility in excess of a
benchmark 30-year mortgage-backed pass-through security are considered high-risk
mortgage securities. Under the policy, savings institutions, such as Affiliated
Bank, may generally only invest in high-risk mortgage securities in order to
reduce interest rate risk. As of June 30, 2002, Affiliated Bank had no high risk
securities.

         In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying collateralized mortgage obligations are segmented and paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche of a
collateralized mortgage obligations may therefore carry prepayment risk that
differs from that of both the underlying collateral and other tranches. It is
Affiliated Bank's strategy to purchase tranches of collateralized mortgage
obligations that are categorized as "planned amortization classes," "targeted
amortization classes" or "very accurately defined maturities" and are intended
to produce stable cash flows in different interest rate environments.

         Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Affiliated Bank does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.




                                       20

<PAGE>



         The following table sets forth the composition of our collateralized
mortgage obligation and investments portfolio at the dates indicated.

<TABLE>
<CAPTION>


                                                                                               June 30,
                                                                --------------------------------------------------------------------
                                                                               2002                               2001
                                                                --------------------------------------------------------------------
                                                                        Carrying            % of           Carrying          % of
                                                                          Value            Total             Value          Total
                                                                --------------------------------------------------------------------
                                                                                        (Dollars in Thousands)
<S>                                                                       <C>                  <C>            <C>            <C>

Securities available for sale, at fair value:
  Federal Home Loan Bank stock..................................          $ 1,464                9%           $  719         100%
  Securities available for sale at fair value...................           14,704               91%              ---         ---
                                                                           ------              ---             -----         ---
  Total.........................................................           16,168              100%              719         100
                                                                           ======              ===               ===         ===
Securities to be held to maturity, at amortized cost:
   Mortgage-backed securities...................................            7,864               81%            6,036          63
   Collateralized mortgage obligations..........................            1,868               19%            3,537          37
                                                                            -----              ---             -----         ---

     Total......................................................            9,732              100%            9,573         100%
                                                                            =====              ===             =====         ====

Securities to be held to maturity, at fair value................            9,797                              9,677
                                                                            =====                              =====

</TABLE>


         The composition and maturities of the investment securities portfolio,
excluding Federal Home Loan Bank stock, as of June 30, 2002, are indicated in
the following table.
<TABLE>
<CAPTION>



                                      Less than 1 Year         1 to 5 Years          Over 10 Years         Total Securities
                                      ----------------         ------------          -------------         ----------------
                                               Weighted               Weighted               Weighted               Weighted
                                                Average                Average                Average                Average
                                     Amount      Yield      Amount      Yield     Amount       Yield      Amount      Yield
                                     ------      -----      ------      -----     ------       -----      ------      -----
                                                                     (Dollars in Thousands)
<S>                                    <C>        <C>        <C>           <C>      <C>            <C>     <C>            <C>

Securities available for sale:
  Mortgage-backed securities......     $  ---         %      $   ---       --- %    $14,704        4.5%    $14,704        4.5%
     Collateralized mortgage
       obligations................        ---       ---          ---       ---          ---         ---        ---         ---
                                       ------                 ------              ---------              ---------
     Sub-Total....................        ---                    ---                 14,704                 14,704
                                       ------                 ------                 ------                 ------
Securities to be held to maturity:
     Mortgage-backed securities...        ---       ---          ---       ---        7,864        4.5%      7,864        4.5%
     Collateralized mortgage
       obligations................        ---       ---          ---       ---        1,868        2.8%      1,868        2.8%
                                       ------                -------                  -----                 ------
     Sub-Total....................     $  ---                 $  ---                $ 9,732        4.2%    $ 9,732        4.2%
                                       ------                 ------                -------               --------
     Total........................     $  ---                 $  ---                $24,346        4.4%    $24,346        4.4%
                                       ======                 ======                =======                =======

</TABLE>



                                       21

<PAGE>



Sources of Funds

         General. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.

         Deposits. We offer a variety of deposit accounts to both consumers and
businesses having a wide range of interest rates and terms. Our deposits consist
of NOW accounts, time deposit accounts, savings, money market and demand deposit
accounts. We primarily rely on competitive pricing policies, marketing and
customer service to attract and retain these deposits. We solicit deposits in
our market area and rely on wholesale deposits obtained through our
telemarketing efforts and deposit brokers. At June 30, 2002, we had $3.9 million
in brokered deposits, all of which mature in one to 12 months. Management
believes that the use of brokered deposits is a cost effective and stable method
to manage the Bank's funding sources.

         The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We try to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives, subject to competitive
factors. Based on our experience, we believe that our deposits are relatively
stable sources of funds. Despite this stability, our ability to attract and
maintain these deposits and the rates paid on them has been and will continue to
be significantly affected by market conditions.

         The following table sets forth our deposit flows during the periods
indicated.

<TABLE>
<CAPTION>


                                                                                           Years Ended June 30,
                                                                             ---------------------------------------------
                                                                                        2002                2001
                                                                             ---------------------------------------------
<S>                                                                                      <C>               <C>


Net deposits (withdrawals) to non-brokered accounts..........................             $6,293           $ (1,836)
Net deposits (withdrawals) to brokered accounts..............................             (1,562)               819
Interest credited to deposit accounts........................................                734                916
                                                                                          ------           --------

   Net increase (decrease)...................................................              5,465               (101)

Opening balance of deposit accounts..........................................             16,531             16,632
                                                                                          ------           --------

Ending balance of deposit accounts...........................................            $21,996            $16,531
                                                                                         =======            =======

Percent increase (decrease)..................................................              33.1%             (0.6)%
                                                                                           ====              =====

</TABLE>


                                       22

<PAGE>



         The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered at the dates indicated.
<TABLE>
<CAPTION>


                                                                                   June 30,
                                                      -----------------------------------------------------------------------------
                                                                         2002                             2001
                                                      -----------------------------------------------------------------------------

                                                                Amount             Percent        Amount           Percent
                                                                ------             -------        ------           -------
<S>                                                            <C>                    <C>          <C>               <C>

Noninterest-bearing accounts.........................          $ 1,993                 9.1%        $1,458              8.8%
Savings accounts.....................................            1,754                 8.0          1,929             11.7
NOW and money market accounts........................            1,111                 5.1          1,483              9.0
                                                                ------                ----          -----          -------
    Total non-certificates...........................            4,858                22.2          4,870             29.5
                                                                ------                ----          -----           ------
Certificates of deposit:
    0.00% to 2.99%...................................            5,580                25.4            ---            ---
    3.00% to 3.99%...................................            6,525                29.7             56               .3
    4.00% to 4.99%...................................            4,691                21.3          2,213             13.4
                                                                                      ----
    5.00% to 5.99%...................................              342                 1.6          2,304             13.9
    6.00% to 6.99%...................................              ---                 ---          3,693             22.3
    7.00% to 7.99%...................................              ---                 ---          3,395             20.6
                                                             ---------                              -----           ------
    Total certificates...............................           17,138                78.0         11,661             70.5
                                                                ------                             ------           ------
           Total deposits............................          $21,996               100.00%      $16,531            100.00%
                                                               =======               ======       =======            ======
</TABLE>

         The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 2002.

<TABLE>
<CAPTION>

                                                                                             Weighted
                                                                                              Average
                                                                    Amount                     Rate
                                                               -------------------------------------------
                                                                            (Dollars in Thousands)
<S>                                                                     <C>                     <C>

Certificate accounts maturing within:
One month.....................................................          $  2,413                3.50%
One to three months...........................................             6,166                4.20
Three to six months...........................................             4,126                2.87
Six to nine months............................................             2,527                3.03
Nine to twelve months.........................................             1,768                3.03
Twelve to eighteen months.....................................                79                2.77
Eighteen months to two years..................................                59                3.00
Over two years................................................               ---                 ---
                                                                        --------                ----
     Total....................................................           $17,138                3.47%
                                                                         =======                ====


</TABLE>


                                       23

<PAGE>



         The following table indicates the amount of Affiliated Bank's
certificates of deposit and other deposits by time remaining until maturity as
of June 30, 2002.
<TABLE>
<CAPTION>


                                                                          Maturity
                                                       --------------------------------------------------------
                                                                      Over       Over
                                                        3 Months     3 to 6     6 to 12      Over
                                                         or Less     Months     Months     12 months   Total
                                                       --------------------------------------------------------
                                                                           (In Thousands)
<S>                                                         <C>         <C>        <C>           <C>   <C>

Certificates of deposit less than $100,000............      $4,126      $1,918     $2,290        $116    8,450

Brokered certificates of deposits less than $100,000..         774         294        589          22    1,679

Certificates of deposit of $100,000 or more...........       2,689       1,415        707         ---    4,811

Brokered certificates of deposit of $100,000
 or more..............................................         990         499        709         ---    2,198
                                                            ------      ------     ------      ------  -------

Total certificates of deposit.........................      $8,579      $4,126     $4,295        $138  $17,138
                                                            ======      ======     ======              =======

</TABLE>

         Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to fund loan demand or when they meet our asset/liability management goals. Our
borrowings historically have consisted of advances from the Federal Home Loan
Bank of Dallas. See Note 7 of the Notes to Financial Statements.

         We may obtain advances from the Federal Home Loan Bank of Dallas upon
the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At June
30, 2002, we had $29.0 million in Federal Home Loan Bank advances outstanding.




                                       24

<PAGE>



         The following table sets forth information as to our Federal Home Loan
Bank advances for the periods indicated.


                                                       Years Ended June 30,
                                                --------------------------------
                                                      2002              2001
                                                --------------------------------
                                                      (Dollars in Thousands)

Federal Home Loan Bank advances:
   Maximum balance..............................      $28,325           $9,657
                                                      =======           ======

   Average monthly balance......................      $21,038            5,086
                                                      =======            =====

   Amount outstanding at end of period..........      $28,994            8,977
                                                      =======            =====

   Weighted average interest rate of advances at
     end of period..............................        1.95%            6.45%
                                                        ====             ====

   Weighted average interest rate on average
      amounts outstanding during the period.....        2.71%            5.96%
                                                        ====             ====


Subsidiary and Other Activities

         At June 30, 2002, BancAffiliated had a single subsidiary, Affiliated
Bank.

Competition

         We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.

         We attract all of our deposits through our single location. Competition
for those deposits is principally from other savings institutions, commercial
banks and credit unions located in the same community, as well as mutual funds
and other alternative investments. We compete for these deposits by offering
superior service and a variety of deposit accounts at competitive rates. As of
June 30, 2002, we believe that we hold less than 1% of the deposits in our
primary market area.

Employees

         At June 30, 2002, we had a total of nine employees, including one
part-time employee. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.


                                       25

<PAGE>



                                   REGULATION

General

         Affiliated Bank, as a federally chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Affiliated Bank also is subject to
regulation and examination by the FDIC, which insures the deposits of Affiliated
Bank to the maximum extent permitted by law, and requirements established by the
Federal Reserve Board. Federally chartered savings institutions are required to
file periodic reports with the Office of Thrift Supervision and are subject to
periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting shareholders. This regulatory oversight will
continue to apply to Affiliated Bank following the reorganization.

         The Office of Thrift Supervision regularly examines Affiliated Bank and
prepares reports for the consideration of Affiliated Bank's board of directors
on any deficiencies that it may find in Affiliated Bank's operations. The FDIC
also has the authority to examine Affiliated Bank in its role as the
administrator of the Savings Association Insurance Fund. Affiliated Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both Federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of Affiliated Bank's
mortgage requirements. Any change in such regulations, whether by the FDIC, the
Office of Thrift Supervision or Congress, could have a material adverse impact
on BancAffiliated, Inc. and Affiliated Bank and their operations.

BancAffiliated, Inc.

         Pursuant to regulations of the Office of Thrift Supervision and the
terms of BancAffiliated, Inc.'s Maryland articles of incorporation, the purpose
and powers of BancAffiliated, Inc. are to pursue any or all of the lawful
objectives of a thrift holding company and to exercise any of the powers
accorded to a thrift holding company.

         If Affiliated Bank fails the qualified thrift lender test,
BancAffiliated, Inc. must obtain the approval of the Office of Thrift
Supervision prior to continuing after such failure, directly or through other
subsidiaries, any business activity other than those approved for multiple
thrift companies or their subsidiaries. In addition, within one year of such
failure BancAffiliated, Inc. must register as, and will become subject to, the
restrictions applicable to bank holding companies. See "- Qualified Thrift
Lender Test."




                                       26

<PAGE>



Affiliated Bank

         The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Affiliated Bank
is required to file periodic reports with the Office of Thrift Supervision and
is subject to periodic examinations by the Office of Thrift Supervision and the
FDIC. When these examinations are conducted by the Office of Thrift Supervision
and the FDIC, the examiners may require Affiliated Bank to provide for higher
general or specific loan loss reserves. All savings institutions are subject to
a semi-annual assessment, based upon the savings institution's total assets, to
fund the operations of the Office of Thrift Supervision.

         The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Affiliated Bank and BancAffiliated, Inc. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the Office of Thrift Supervision. Except under certain
circumstances, public disclosure of final enforcement actions by the Office of
Thrift Supervision is required.

         In addition, the investment, lending and branching authority of
Affiliated Bank is prescribed by federal laws and it is prohibited from engaging
in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Affiliated Bank
is in compliance with the noted restrictions.

         Affiliated Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 2002, Affiliated Bank's lending
limit under this restriction was $652,000. Affiliated Bank is in compliance with
the loans-to-one-borrower limitation.

         The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.




                                       27

<PAGE>



Insurance of Accounts and Regulation by the FDIC

         Affiliated Bank is a member of the Savings Association Insurance Fund,
which is administered by the FDIC. Deposits are insured up to the applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Savings Association Insurance Fund or the Bank Insurance
Fund. The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.

         The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.

         Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to approximately 2.00 basis points for each $100 in
domestic deposits. The Savings Association Insurance Fund assessment prior to
2000 was about 6 basis points since Bank Insurance Fund insured institutions did
not fully participate in the assessment at that time. These assessments, which
may be revised based upon the level of Bank


                                       28

<PAGE>



Insurance Fund and Savings Association Insurance Fund deposits, will continue
until the bonds mature in the year 2017.

Regulatory Capital Requirements

         Federally insured savings institutions, such as Affiliated Bank, are
required to maintain a minimum level of regulatory capital. The Office of Thrift
Supervision has established capital standards, including a tangible capital
requirement, a leverage ratio or core capital requirement and a risk-based
capital requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.

         The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 2002, Affiliated Bank had no intangible assets.

         At June 30, 2002, Affiliated Bank had tangible capital of $4.0 million,
or 7.23% of adjusted total assets, which is approximately $3.2 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

         The capital standards also require core capital equal to at least 4.0%
of adjusted total assets unless its supervisory condition is such to allow it to
maintain a 3.0% ratio. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At June 30, 2002, Affiliated Bank had no intangibles which were
subject to these tests.

         At June 30, 2002, Affiliated Bank had core capital equal to $4.03
million, or 7.23% of adjusted total assets, which is $1.80 million above the
minimum requirement of 4.0% in effect on that date.

         The Office of Thrift Supervision also requests savings institutions to
maintain a Tier 1 risk-based capital ratio. At June 30, 2002, Affiliated Bank
has a Tier 1 risk-based capital ratio of 14.0%, which was $2.8 million above the
4% requirement on that date.

         The Office of Thrift Supervision also requires savings institutions to
have total capital of at least 8.0% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be


                                       29

<PAGE>



used to satisfy the risk-based requirement only to the extent of core capital.
The Office of Thrift Supervision is also authorized to require a savings
institution to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities.

         In determining the amount of risk-weighted assets, all assets,
including certain off- balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the Office of Thrift Supervision has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
Fannie Mae or Freddie Mac.

         On June 30, 2002, Affiliated Bank had total risk-based capital of $4.3
million and risk- weighted assets of $28.7 million; or total capital of 15.1% of
risk-weighted assets. This amount was approximately $2.0 million above the 8.0%
requirement in effect on that date.

         The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until such plan is approved by the Office of Thrift Supervision may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
Office of Thrift Supervision is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.

         As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.

         Any savings institution that fails to comply with its capital plan or
has Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" must be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.



                                       30

<PAGE>



         The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.

         The imposition by the Office of Thrift Supervision or the FDIC of any
of these measures on Affiliated Bank may have a substantial adverse effect on
its operations and profitability.

Limitations on Dividends and Other Capital Distributions

         Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.

         Generally, savings institutions, such as Affiliated Bank, that before
and after the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding years
that is still available for dividend. However, an institution deemed to be in
need of more than normal supervision by the Office of Thrift Supervision may
have its dividend authority restricted by the Office of Thrift Supervision.
Affiliated Bank may pay dividends to BancAffiliated, Inc. in accordance with
this general authority.

         Savings institutions proposing to make any capital distribution need
not submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings institutions that do
not, or would not meet their current minimum capital requirements following a
proposed capital distribution or propose to exceed these net income limitations,
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."

Qualified Thrift Lender Test

         All savings institutions, including Affiliated Bank, are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At June 30, 2002, Affiliated Bank met the test with a 99.2%
ratio and has always met the test since its effectiveness.



                                       31

<PAGE>



         Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender within one year of failure and thereafter remains a
qualified thrift lender. If such an institution has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
such an institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any institution that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.

Community Reinvestment Act

         Under the Community Reinvestment Act, every FDIC-insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the Community Reinvestment Act. The Community
Reinvestment Act requires the Office of Thrift Supervision, in connection with
the examination of Affiliated Bank, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by Affiliated Bank. An unsatisfactory rating may be used as the
basis for the denial of an application by the Office of Thrift Supervision. Due
to the heightened attention being given to the Community Reinvestment Act in the
past few years, Affiliated Bank may be required to devote additional funds for
investment and lending in its local community. In August 1999, Affiliated Bank
was examined for Community Reinvestment Act compliance and received a rating of
satisfactory in its examination.

Transactions with Affiliates

         Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of Affiliated Bank include BancAffiliated,
Inc. and any company which is under common control with Affiliated Bank. In
addition, a savings institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Office of Thrift Supervision has the discretion to treat
subsidiaries of savings institutions as affiliates on a case by case basis.



                                       32

<PAGE>



         Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.

Federal Securities Law

         The stock of BancAffiliated, Inc. is registered with the SEC under the
Securities Exchange Act of 1934, as amended. BancAffiliated, Inc. will be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Securities Exchange Act of 1934.

         BancAffiliated, Inc. stock held by persons who are affiliates of
BancAffiliated, Inc. may not be resold without registration unless sold in
accordance with certain resale restrictions. Affiliates are generally considered
to be officers, directors and principal stockholders. If BancAffiliated, Inc.
meets specified current public information requirements, each affiliate of
BancAffiliated, Inc. will be able to sell in the public market, without
registration, a limited number of shares in any three-month period.

Federal Reserve System

         The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts, primarily checking, NOW and Super NOW checking accounts.
At June 30, 2002, Affiliated Bank was in compliance with these reserve
requirements. Savings institutions are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve
Bank.

Federal Home Loan Bank System

         Affiliated Bank is a member of the Federal Home Loan Bank of Dallas,
which is one of 12 regional Federal Home Loan Banks, that administers the home
financing credit function of savings institutions. Each Federal Home Loan Bank
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans or advances to
members in accordance with policies and procedures, established by the board of
directors of the Federal Home Loan Bank, which are subject to the oversight of
the Federal Housing Finance Board. All advances from the Federal Home Loan Bank
are required to be fully secured by sufficient collateral as determined by the
Federal Home Loan Bank. In addition, all long-term advances are required to
provide funds for residential home financing.



                                       33

<PAGE>



         As a member, Affiliated Bank is required to purchase and maintain stock
in the Federal Home Loan Bank of Dallas. At June 30, 2002, Affiliated Bank had
$1.5 million in Federal Home Loan Bank stock, which was in compliance with this
requirement. In past years, Affiliated Bank has received substantial dividends
on its Federal Home Loan Bank stock. Over the past two fiscal years such
dividends have averaged 4.1% and were 3.0% for the fiscal year ended June 30,
2002.

         Under federal law the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Affiliated Bank's Federal Home Loan Bank stock may result in a corresponding
reduction in Affiliated Bank's capital.

         For the year ended June 30, 2002, Affiliated Bank recorded $33,731 in
dividends paid by the Federal Home Loan Bank of Dallas as compared to $37,020
for the fiscal year ended June 30, 2002.

Federal Taxation

         General. BancAffiliated, Inc. and Affiliated Bank are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to BancAffiliated, Inc. or
Affiliated Bank. Affiliated Bank's federal income tax returns have never been
audited by the IRS.

         BancAffiliated, Inc. files a consolidated federal income tax return
with Affiliated Bank. Accordingly, it is anticipated that any cash distributions
made by BancAffiliated, Inc. to its stockholders would be considered to be
taxable dividends and not as a non-taxable return of capital to stockholders for
federal and state tax purposes.

         Method of Accounting. For federal income tax purposes, Affiliated Bank
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending on June 30, for filing its federal income tax
return.

         Bad Debt Reserves. As a result of the Small Business Job Protection
Act, savings associations of Affiliated Bank's size may now use the experience
method in computing bad debt deductions.



                                       34

<PAGE>



         Minimum Tax. The Internal Revenue Code imposes an alternative minimum
tax at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Affiliated Bank has not been subject to the alternative minimum tax, nor do we
have any such amounts available as credits for carryover.

         Net Operating Loss Carryovers. A financial institution may carryback
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years prior to August 6, 1997, the carryback period was three years and the
carryforward period was 15 years. At June 30, 2000, BancAffiliated, Inc. had no
net operating loss carryforwards for federal income tax purposes.

         Corporate Dividends-Received Deduction. BancAffiliated, Inc. may
eliminate from its income dividends received from Affiliated Bank as a wholly
owned subsidiary of BancAffiliated, Inc. if it elects to file a consolidated
return with Affiliated Bank. The corporate dividends-received deduction is 100%
or 80%, in the case of dividends received from corporations with which a
corporate recipient does not file a consolidated tax return, depending on the
level of stock ownership of the payor of the dividend. Corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
70% of dividends received or accrued on their behalf.

State Taxation

         The State of Texas does not have a corporate income tax, but it does
have a corporate franchise tax. Prior to January 1, 1992, savings banks had been
exempt from the corporate franchise tax. The tax for the year 2000 is the higher
of 0.25% of taxable capital, usually the amount of paid in capital plus retained
earnings, or 4.5% of "net taxable earned surplus." "Net taxable earned surplus"
is net income for federal income tax purposes increased by the compensation of
directors and executive officers and decreased by interest on obligations
guaranteed by the U.S. government. Net income cannot be reduced by net operating
loss carryforwards from years prior to 1991, and operating loss carryovers are
limited to five years.


Item 2.           Description of Properties

         At June 30, 2002, we had one full service office. We own the office
building in which our home office and executive offices are located, which was
purchased in 1999. The net book value of our investment in premises, equipment
and fixtures, excluding computer equipment, was approximately $416,000 at June
30, 2002.


                                       35

<PAGE>



         We believe that our current facilities are adequate to meet our
immediate needs; however, planning is in process for an additional location to
promote and support additional growth.

         We utilize a third party service provider to maintain our data base of
depositor and borrower customer information. The net book value of the data
processing and computer equipment utilized by us at June 30, 2002 was
approximately $0.

Item 3.           Legal Proceedings

         From time to time we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of such litigation.

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

         No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2002.

                                     PART II

Item 5.           Market for Registrant's Common Equity and
                  Related Stockholder Matters

         Page A-39 of the Annual Report to Stockholders, which is attached as
Appendix A to the Proxy Statement for the Annual Meeting of Stockholders to be
held in 2002, is herein incorporated by reference.

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

         Pages A-3 through A-14 of the Annual Report to Stockholders, which is
attached as Appendix A to the Proxy Statement for the Annual Meeting of
Stockholders to be held in 2002, are herein incorporated by reference.

Item 7.           Financial Statements

         The following information appearing in BancAffiliated, Inc.'s Annual
Report to Stockholders, which is attached as Appendix A to the Proxy Statement
for the Annual Meeting of Stockholders to be held in 2002, is incorporated by
reference.


                                       36

<PAGE>



<TABLE>
<CAPTION>

                                                                                                           Pages in
                                                                                                            Annual
Annual Report Section                                                                                       Report
---------------------                                                                                      -------
<S>                                                                                                          <C>

Independent Auditors' Report...........................................................................      A-15
Consolidated Balance Sheet as of June 30, 2002 and 2001................................................      A-16
Consolidated Statements of Income for the Years Ended June 30, 2002 and 2001...........................      A-17
Consolidated Statements of Changes in Stockholders' Equity for
   Years Ended June 30, 2002 and 2001..................................................................      A-18
Consolidated Statements of Cash Flows for Years Ended June 30, 2002
   and 2001............................................................................................      A-19
Notes to Consolidated Financial Statements.............................................................      A-20
</TABLE>

         With the exception of the aforementioned information, BancAffiliated,
Inc.'s Annual Report to Stockholders for the year ended June 30, 2002, is not
deemed filed as part of this Annual Report on Form 10-KSB.

Item 8.           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure

         There have been no changes in or disagreements with BancAffiliated,
Inc.'s accountants on accounting or financial disclosure matters.

                                    PART III

Item 9.           Directors, Executive Officers, Promoters and
                  Control Persons; Compliance with Section 16(a)
                  of the Exchange Act

Directors

         Information concerning Directors of BancAffiliated, Inc. is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held in 2002, a copy of which will be filed not later than
120 days after the close of the fiscal year.

Executive Officers

         Information concerning Executive Officers of BancAffiliated, Inc. is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held on October 30, 2002, a copy of which will be filed
not later than 120 days after the close of the fiscal year.




                                       37

<PAGE>



Compliance with Section 16(a)

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 2002, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.

Item 10.          Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference from the Proxy Statement for the Annual Meeting of Stockholders to be
held in 2002, a copy of which will be filed not later than 120 days after the
close of the fiscal year.

Item 11.          Security Ownership of Certain Beneficial
                  Owners and Management

         Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Proxy Statement for
the Annual Meeting of Stockholders to be held in 2002, a copy of which will be
filed not later than 120 days after the close of the fiscal year.

         During the fiscal year ended June 30, 2002, the Company did not have
any compensation plans or individual compensation arrangements under which
equity securities of the Company were authorized for issuance to employees or
non-employees.

Item 12.          Certain Relationships and Related Transactions

         Information concerning certain relationships and related transactions
is incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Stockholders to be held in 2002, a copy of which will be filed not
later than 120 days after the close of the fiscal year.




                                       38

<PAGE>



Item 13.          Exhibits and Reports on Form 8-K

                  (a) Exhibits
<TABLE>
<CAPTION>

        Regulation                                                                                    Reference to
            S-B                                                                                     Prior Filing or
          Exhibit                                                                                    Exhibit Number
          Number                                        Document                                    Attached Hereto
         --------                                      ----------                                  ----------------
           <S>              <C>                                                                            <C>

           3(i)             Articles of Incorporation                                                      *
           3(ii)            Bylaws                                                                         *
             4              Instruments defining the rights of security holders,                           *
                            including debentures
            10              Material Contracts                                                             *
                            (a)  Employment Contract between
                                  Garry J. Graham and the Affiliated Bank
            13              Annual Report to Stockholders                                                  **
            21              Subsidiaries of Registrant                                                     21
            99              Section 906 Certification Under the Sarbanes-                                  99
                            Oxley Act of 2002

---------------
<FN>
*Filed as exhibits to the Company's Form SB-2 registration statement filed on
February 1, 2001 (File No. 333-54814) of the Securities Act of 1933. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-B.
**The 2002 Annual Report to  Stockholders is attached as Appendix A to the Proxy
Statement for the Annual Meeting of Stockholders to be held in 2002.
</FN>
</TABLE>

         (b) Reports on Form 8-K

         BancAffiliated, Inc. filed no reports on Form 8-K during the last
quarter of the period covered by this Form 10-KSB.

Item 14.          Controls and Procedures

         Page A-14 of the Annual Report to Stockholders, which is attached as
Appendix A to the Proxy Statement for the Annual Meeting of Stockholders to be
held in 2002, is herein incorporated by reference.

                                       39

<PAGE>



                                   SIGNATURES

         In accordance with Section 13 of 15(d) of the Exchange Act, the Issuer
caused this report to be singed on its behalf by the undersigned, thereunto duly
authorized.


Date:     September 27, 2002                  BANCAFFILIATED, INC.
         --------------------------
                                              By:  /s/ Garry J. Graham
                                                 -------------------------------
                                                 Garry J. Graham
                                                 (Duly Authorized
                                                 Representative)



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


By: /s/ Garry J. Graham                      By:  /s/ Garry J. Graham
   -------------------------------------        --------------------------------
    Garry J. Graham, Director, President         Garry J. Graham
    and Chief Executive Officer                  Chief Financial Officer
    (Principal Executive and Operating           (Chief Financial and Accounting
    Officer)                                     Officer)

Date: September 27, 2002                     Date:   September 27, 2002
     -----------------------------------          ------------------------------

By: /s/ Kenneth L. Lee                       By: /s/ Donna M. Rosiere
   -------------------------------------        --------------------------------
   Kenneth L. Lee, Chairman of the Board        Donna M. Rosiere, Director


Date: September 27, 2002                     Date:  September 27, 2002
     -----------------------------------          ------------------------------

By: /s/ William J. Wethington                By: /s/ Kenneth L. Schilling
   -------------------------------------        --------------------------------
   William J. Wethington, Director              Kenneth L. Schilling, Director


Date: September 27, 2002                     Date: September 27, 2002
     -----------------------------------          ------------------------------

By:  /s/ Donald H. Stone                     By: /s/ James E. Jennings
   -------------------------------------        --------------------------------
   Donald H. Stone, Director                    James E. Jennings, Director

Date: September 27, 2002                     Date:  September 27, 2002
     -----------------------------------          ------------------------------






                                       40

<PAGE>



                              BANCAFFILIATED, INC.
               CHIEF EXECUTIVE AND FINANCIAL OFFICER CERTIFICATION

I, Garry J. Graham, certify that:

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

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

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

4.       The registrant's other certifying officers and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b)       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing dat of this annual report (the "Evaluation Date");
                  and

         c)       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of registrant's board of directors (or persons
         performing the equivalent function):

         a)       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and
         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.

Date: September 27, 2002                         /s/ Garry J. Graham
     -------------------------                  --------------------------------
                                                Garry J. Graham


                                       41