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, 2001
                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(d) OF THE  SECURITIES
     EXCHAN 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 21, 2001, 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 21, 2001 was $2.1  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, 2001, which is attached as Appendix A to the Proxy
       Statement for the Annual Meeting of Stockholders to be held in 2001
         PART III of Form 10-K - Proxy Statement for 2001 Annual Meeting
                                of Stockholders.

                                        1

<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 BancAffilliated, 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 noninterest  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,  2001,  BancAffiliated,  Inc.  had $35.5  million of assets and
stockholders equity of $4.6 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 can now serve 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 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


                                        3

<PAGE>



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, 2001, our net loan portfolio  totaled $22.7
million, which constituted 63.9% of our total assets.

     At June 30, 2001,  the maximum amount which we could have loaned to any one
borrower and the borrower's related entities was $570,000.  At June 30, 2001, 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, 2001
were as  follows:  (1) a  $600,000  interim  construction  loan  for a  personal
residence,  of which $100,000 was participated to another lender, (2) a $750,000
development  loan  for  over 88  single  family  lots,  of  which  $500,000  was
participated to another lender,  (3) a $484,000  multi-family loan secured by 22
condominiums,  (4) a $437,000 loan to refinance an office  warehouse,  and (5) a
$500,000  loan  relationship  consisting  of a line  of  credit  for  commercial
business purposes. At June 30, 2001, all of these loans totaling $2.8 million in
the aggregate were performing in accordance with their terms.




                                        4

<PAGE>

<TABLE>
<CAPTION>


     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.


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

                                                            2001                                2000
                                              ----------------------------------------------------------------
                                                   Amount         Percent             Amount           Percent
                                                   ------         -------             ------           -------
                                                                 (Dollars          in Thousands)
<S>                                              <C>              <C>                <C>               <C>
Real Estate Loans:
   One- to four-family residential...........    $  2,249           7.6 %            $  2,073           10.2 %
   Multi-family residential..................         620           2.1                   628            3.1
                                                 --------         ------             --------          ------

     Total residential loans.................       2,869           9.7                 2,701           13.3
   Commercial real estate....................       1,804           6.1                 2,901           14.2
   Construction and development loans........      17,462          58.7                 8,910           43.8
                                                 --------         ------             --------          ------

     Total real estate loans.................      22,135          74.5                14,512           71.3
                                                                                                       ------

   Commercial business loans.................       5,409          18.2                 3,338           16.4

Consumer Loans:
   Automobile loans..........................       1,302           4.4                 1,589            7.8
   Credit cards..............................         388           1.3                   415            2.0
   Loans secured by deposits.................         285           1.0                   406            2.0
   Other personal and installment loans......         179           0.6                    90             .5
                                                 --------         ------             --------          ------

     Total consumer loans....................       2,154           7.3                 2,500           12.3
                                                 --------         ------             --------          ------

     Gross loans.............................      29,698         100.00%              20,350          100.00%
                                                                  ======                               ======

     Loans in process........................       6,778                               4,008
                                                 --------                            --------
     Total loans............................       22,920                              16,342

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

     Net loans receivable....................    $ 22,738                            $ 16,189
                                                 ========                            ========


</TABLE>

                                        5

<PAGE>


<TABLE>
<CAPTION>


     The following schedule  illustrates the contractual  maturity of Affiliated
Bank's loan  portfolio  at June 30, 2001.  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.


                                                                   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...          $   207             $  887       $1,155      $ 2,249
Multi-family............................              ---                620          ---          620
Commercial real estate..................              591                958          255        1,804
Construction............................            9,532              1,152          ---       10,684
Commercial business.....................            2,814              2,119          476        5,409
All other loans.........................              665              1,379          110        2,154
                                                  -------             ------       ------      -------
Total loans (net of LIP)................          $13,809             $7,115       $1,996      $22,920
                                                  =======             ======       ======      =======

Allowance for loan losses...............                                                           182
                                                                                               -------
     Net loans..........................                                                       $22,738
                                                                                               =======
</TABLE>


     Of our  outstandaing  total  loans  of  $22.9  million  at June  30,  2001,
approximately $9.1 million have fixed rates of interest and approximately  $13.8
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,  2001,  we had  $17.5  million  or 58.9% of our  gross  loan
portfolio in construction  and development  loans, of which $6.8 million was not
disbursed.  Of this amount,  approximately  $0.6 million or 3.4% were fixed rate
loans and  approximately  $16.9 million or 96.6% were adjustable rate loans. Our
largest  construction loan at June 30, 2001, was a $750,000 development loan for
over 88 single family lots, of which $500,000 was participated to other lenders.
At June 30, 2001, this borrower had $110,000 outstanding to us.

     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  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.


                                        6

<PAGE>



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,  2001,  approximately  $5.4  million  or 23.6%  of our  total  loan
portfolio  was  comprised  of  commercial   business   loans.  Of  this  amount,
approximately $3.1 million or 57.4% were fixed rate loans and approximately $2.3
million or 42.6% were adjustable  rate loans.  Our largest  commercial  business
loan at June 30, 2001,  was a $500,000  loan to a business  borrower  secured by
marketable securities.  At June 30, 2001, this borrower had $450,000 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.

     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, 2001,  commercial  real estate loans totaled $1.8 million or 7.9% of
our total loan portfolio. Of this amount, approximately $0.8


                                        7

<PAGE>



million or 44.4% were  fixed  rate  loans and  approximately  $1.0 or 55.6% were
adjustable rate loans. Our largest commercial real estate loan at June 30, 2001,
was a $437,000  loan to a real estate  investor  secured by the real estate.  At
June 30, 2001, this borrower had $437,000 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,  2001,  our  consumer  loan  portfolio  totaled $2.2
million  or 9.6% 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.

     The most significant component of our consumer lending is automobile loans.
We  originate  automobile  loans on a direct  basis.  These loans  totaled  $1.3
million at June 30, 2001 or 5.7% 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.


                                        8

<PAGE>



     Affiliated Bank also originates credit card loans, loans secured by deposit
accounts and other consumer  loans. At June 30, 2001, we had $285,000 or 1.2% of
our gross loan portfolio in loans secured by deposits. At June 30, 2001, we also
had  $388,000  in  adjustable-rate  credit  card loans or 1.7% 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,  2001,  one- to
four-family residential mortgage loans totaled $2.2 million or 9.6% 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  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, 2001, multi- family residential loans totaled $620,000 or 2.1%
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


                                        9

<PAGE>



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.

     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.


                                       10

<PAGE>


                                                     Years Ended
                                                      June 30,
                                       -----------------------------------------
                                                2001          2000
                                       -----------------------------------------
                                              (Dollars in Thousands)

Total loans, beginning of year.........       $16,342        $10,676

Loan originations:
   Real estate mortgage loans..........        17,016         12,302
   Consumer loans......................           823          1,386
   Other loans.........................         6,490          3,979
                                              -------        -------

     Total loan originations...........        24,329         17,667
                                              -------        -------

Loan repayments........................        16,867         11,190
Loan participations sold...............           884            811
                                              -------        -------

    Total repayments and sales.........        17,751         12,001
                                              -------        -------

Total loans, end of period.............       $22,920        $16,342
                                              =======        =======

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>


<TABLE>
<CAPTION>


     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, 2001.




                          60 to 89 days past due            90 days and over past due            Total Delinquent Loans
                      ------------------------------     -------------------------------     ------------------------------
                                                                    Percent                                        Percent
                                                                    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......    ---        ---         ---         ---        ---           ---        ---        ---          ---
  Commercial.......    ---        ---         ---         ---        ---           ---        ---        ---          ---
  Construction.....    ---        ---         ---         ---        ---           ---        ---        ---          ---

Other:
  Consumer.........      3         14        0.65%          2          3          0.14%         5        $17         0.79%
  Commercial.......    ---        ---        ----         ---        ---          ----        ---        ---         ----

Total...............     3         14        0.06%          2          3          0.1%          5        $17         0.07%

</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.



                                                             At June 30,
                                                        ---------------------
                                                          2001         2000
                                                        ---------------------

Non-accruing loans:
   Consumer.............................................$   12        $ 20
                                                        ------        -------

     Total..............................................    12          20
                                                        ------        -------

Accruing loans past due 90 days and over:
   Consumer.............................................     3          15
                                                                      -------

     Total..............................................     3          15
                                                        ------        -------

Total non-performing loans..............................    15          35

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

Total non-performing assets.............................$   15        $ 35
                                                                      =======

Allowance for loan losses...............................   182        $153
                                                                      =======

Coverage of non-performing loans........................ 1,213.3%      437.0 %
                                                                      =======

Non-performing assets as a percentage of total assets...    0.04%        0.12%
                                                                      =======


     Other Loans of Concern. In addition to the non-performing  assets set forth
in the table above, as of June 30, 2001,  there was also an aggregate of $18,000
primarily  in  small  balance   consumer  loans  with  respect  to  which  known
information  about the possible  credit  problems of the  borrowers  have caused
management to have doubts as to the ability of the borrowers to


                                       13

<PAGE>



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 have
been considered in management's  determination  of the adequacy of our allowance
for loan losses and carry special allocations of $4,000.

     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, 2001, we had classified
$27,000 of our assets as  substandard,  $3,000 as doubtful and none as loss. The
total amount of classified assets represented 0.83% of  AffiliatedBank's  equity
capital and 0.08% of our total assets at June 30, 2001.

     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 SFAS No. 114,  "Accounting by
Creditors for  Impairment of a Loan" and SFAS No. 118,  "Accounting by Creditors
for Impairment of a Loan -


                                       14

<PAGE>



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 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


                                       15

<PAGE>



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 the end of the fourth  quarter of the fiscal  year ended June 30,  2001,
Affiliated Bank recognized a loss on a large  commercial  borrower.  The subject
borrower  had filed  bankruptcy  and  Affiliated  Bank was notified on April 11,
2001.  While  Affiliated  Bank  continues  to pursue  collection,  it elected to
recognize the loss on the loan at the end of the fourth quarter.

     At June 30, 2001,  our  allowance  for loan losses was $182,000 or 0.79% of
the total loan  portfolio  and  approximately  1,213.3% 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>

<TABLE>
<CAPTION>


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




                                                                                         Years Ended June 30, 2000
                                                                                         --------------------------
                                                                                           2001              2000
                                                                                         --------------------------
<S>                                                                                      <C>                <C>
Total loans outstanding (at end of period)..................................             $22,920            $16,189
                                                                                         -------            =======

Average loans outstanding (period to date)..................................             $19,573            $13,780
                                                                                         -------            =======

Allowance for loan losses, beginning of period..............................             $   153            $   102

Loan charge-offs:
     Consumer loans.........................................................                  20                 11
     Commercial loans.......................................................                 252                ---
                                                                                         -------            -------
        Total loan charge-offs..............................................                 272                 11
                                                                                         -------            -------

Loan recoveries:
     Consumer loans.........................................................                   3                  7
                                                                                         -------            -------
        Total loan recoveries...............................................                   3                  7
                                                                                         -------            -------

Net loan charge-offs........................................................                 269                  4
Provision charged to operations.............................................                 298                 55
                                                                                         -------            -------

Allowance for loan losses, end of period....................................             $   182            $   153
                                                                                         =======            =======

Ratio of net loan charge-offs during the period
   to average loans outstanding.............................................                1.37%              0.03%
                                                                                            ====               ====

Provision as a percentage of average loans..................................                1.52%              0.40%
                                                                                            ====               ====

Allowance as a percentage of total loans....................................                0.79%              0.95%
                                                                                            ====               ====

</TABLE>


                                       17

<PAGE>

<TABLE>
<CAPTION>


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



                                                                 At June 30,
                                           ----------------------------------------------------
                                                     2001                       2000
                                           -------------------------      ---------------------
                                                          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..          $    5              10%         $    7       13%
Multi-family residential.........               2               3              10        4
Commercial real estate...........               9               8              21       18
Construction and
  development loans..............              88              46              37       30
Commercial business loans........              55              23              44       20
Automobile loans.................              13               6              21       10
Other personal and investment
   loans.........................              10               4              13        5
                                           ------             ---          ------      ---
                                           $  182             100%         $  153      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  maturity  structure  of
investments will be affected by various market conditions, including the current
and anticipated


                                       18

<PAGE>



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,  2001,
Affiliated Bank held $3.5 million of collateralized mortgage obligations. All of
Affiliated Bank's  collateralized  mortgage obligations are guaranteed by either
Fannie Mae or Freddie Mac.

     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


                                       19

<PAGE>



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, 2001,
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>

<TABLE>
<CAPTION>


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


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

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

                                                                          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..................................              719               100%          $  483            100%
                                                                                                              ======            ===

Securities to be held to maturity, at amortized cost:
   Mortgage-backed securities...................................            6,036                63           $4,779             55%
   Collateralized mortgage obligations..........................            3,537                37            3,842             45
                                                                            -----               ---           ------            ---

     Total......................................................            9,573              100%           $8,621            100%
                                                                            =====              ===            ======            ===

Securities to be held to maturity, at fair value................            9,677                             $8,602
                                                                            =====                             ======
</TABLE>


<TABLE>
<CAPTION>


     The  composition  and  maturities of the investment  securities  portfolio,
excluding  Federal Home Loan Bank stock,  as of June 30, 2001,  are indicated in
the following table.


                                         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 to be held to maturity:
     Mortgage-backed securities..        $50        3.73%     $ ---         ---%    $5,986       6.43%     $6,036       6.41%
     Collateralized mortgage
       obligations...............        ---         ---        ---         ---      3,537       4.90%      3,537       4.90%
                                                                                    ------                 ------
           Total.................        $50        3.73%     $ ---         ---%    $9,523       5.81%     $9,573       5.81%
                                         ===                  =====                 ======                 ======
</TABLE>


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


                                       21

<PAGE>



efforts and deposit  brokers.  At June 30, 2001, we had $5.4 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,
                                                                                       -----------------------------

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


<S>                                                                                     <C>                 <C>
Net deposits (withdrawals) to non-brokered accounts..........................           $ (1,836)           $  3,875
Net deposits (withdrawals) to brokered accounts..............................                819               2,625
Interest credited to deposit accounts........................................                916                 613
                                                                                        --------            --------

   Net increase (decrease)...................................................               (101)              7,113

Opening balance of deposit accounts..........................................             16,632               9,519
                                                                                        --------            --------

Ending balance of deposit accounts...........................................           $ 16,531            $ 16,632
                                                                                        ========            ========

Percent increase (decrease)..................................................               (0.6)%              74.7%
                                                                                            =====               ====
</TABLE>




                                       22

<PAGE>

<TABLE>
<CAPTION>


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


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

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

                                                                Amount              Percent       Amount             Percent
                                                                ------              -------       ------             -------

<S>                                                            <C>                   <C>          <C>                <C>
Noninterest-bearing accounts.........................          $ 1,458                 8.8%       $ 1,766             10.6%
Savings accounts.....................................            1,929                11.7          2,882             17.4
NOW and money market accounts........................            1,483                 9.0            853              5.1
                                                               -------               -----        -------            -----
    Total non-certificates...........................            4,870                29.5          5,501             33.1
                                                               -------               -----        -------            -----
Certificates of deposit:
    0.00% to 4.99%...................................            2,269                13.7            400              2.4
    5.00% to 5.99%...................................            2,304                13.9          2,608             15.7
    6.00% to 6.99%...................................            3,693                22.3          5,181             31.1
    7.00% to 7.99%...................................            3,395                20.6          2,942             17.7
                                                               -------               -----        -------            -----
    Total certificates...............................           11,661                70.5         11,131             66.9
                                                               -------               -----        -------            -----
           Total deposits............................          $16,531               100.00%      $16,632            100.0%
                                                               =======               ======       =======            =====
</TABLE>


         The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 2001.


                                                                      Weighted
                                                                       Average
                                                     Amount             Rate
                                                     -------------------------
                                                       (Dollars in Thousands)
Certificate accounts maturing within:
One month..........................................  $   780            6.49%
One to three months................................    2,565            6.98
Three to six months................................    3,542            6.23
Six to nine months.................................    2,618            5.83
Nine to twelve months..............................    1,637            4.84
Twelve to eighteen months..........................      519            5.44
Eighteen months to two years.......................      ---             ---
Over two years.....................................      ---             ---
                                                     -------
     Total.........................................  $11,661            6.09%
                                                     =======





                                       23

<PAGE>

<TABLE>
<CAPTION>


     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,
2001.


                                                                                    Maturity
                                                           ---------------------------------------------------

                                                                          Over     Over          Over
                                                           3 Months      3 to 6   6 to 12         12
                                                           or Less       Months    Months       Months   Total
                                                           ---------------------------------------------------
                                                                                (In Thousands)
<S>                                                         <C>         <C>        <C>           <C>   <C>
Certificates of deposit less than $100,000............      $1,011        $974     $1,947        $ 27    3,959

Brokered certificates of deposits less than $100,000           ---         234        470         187      891

Certificates of deposit of $100,000 or more...........         728         401      1,004         130    2,263

Brokered certificates of deposit of $100,000
 or more..............................................       1,604         923      1,846         175    4,548
                                                            ------      ------     ------        ----  -------

Total certificates of deposit.........................      $3,343      $2,532     $5,267        $519  $11,661
                                                            ======      ======     ======        ====  =======

</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, 2001, we
had $14.2 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,
                                                      -------------------------
                                                        2001             2000
                                                      -------------------------
                                                      (Dollars in Thousands)
Federal Home Loan Bank advances:
   Maximum balance...........................          $14,239           $9,657
                                                       =======           ======

   Average monthly balance...................          $ 9,518           $5,086
                                                       =======           ======

   Amount outstanding at end of period.......          $14,239           $8,977
                                                       =======           ======

   Weighted average interest rate of advances at
     end of period...........................             3.89%            6.45%
                                                          ====             ====

   Weighted average interest rate on average
      amounts outstanding during the period..             5.82%            5.96%
                                                          ====             ====

Subsidiary and Other Activities

     At June 30, 2001, 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,  2001,  we  believe  that we hold less than 1% of the  deposits  in our
primary market area.

Employees

     At June 30, 2001,  we had a total of 9 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 $570,000 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, 2001,  Affiliated  Bank's lending
limit under this restriction was $570,000. 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 basis points for each $100 in
domestic deposits.  The Savings  Association  Insurance Fund assessment prior to
2000 was about 6 basis 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 Insurance Fund and


                                       28

<PAGE>



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, 2001, Affiliated Bank had no intangible assets.

     At June 30, 2001,  Affiliated Bank had tangible capital of $3.6 million, or
10.2% of adjusted total assets,  which is  approximately  $3.1 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, 2001,  Affiliated Bank had no intangibles which were
subject to these tests.

     At June 30, 2001,  Affiliated  Bank had core capital equal to $3.6 million,
or 10.2% of  adjusted  total  assets,  which is $2.2  million  above the minimum
requirement of 4.0% in effect 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
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.



                                       29

<PAGE>



     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,  2001,  Affiliated  Bank had total  risk-based  capital of $3.8
million and risk- weighted assets  of $23 million;  or total capital of 16.5% of
risk-weighted  assets.  This amount was  approximately $2 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.

     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.



                                       30

<PAGE>



     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.  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, 2001,  Affiliated  Bank met the test with a 98% ratio and has always
met the test since its effectiveness.

     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


                                       31

<PAGE>



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.  Affiliated Bank was examined for
Community  Reinvestment  Act compliance and received a rating of satisfactory in
its latest 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.

     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.


                                       32

<PAGE>




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,
2001, 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.

     As a member,  Affiliated Bank is required to purchase and maintain stock in
the Federal  Home Loan Bank of Dallas.  At June 30,  2001,  Affiliated  Bank had
$718,700 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  6.4% and were 6.9% for the fiscal year ended June 30,
2001.


                                       33

<PAGE>



     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,  2001,  Affiliated  Bank  recorded  $37,020 in
dividends  paid by the  Federal  Home Loan Bank of Dallas as compared to $15,812
for the fiscal year ended June 30, 2001.

Federal Taxation

     General.  BancAffiliated,  Inc.  and  Affiliated  Bank will be  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.

     Following the conversion,  BancAffiliated,  Inc.  anticipates  that it will
file a consolidated  federal income tax return with  Affiliated  Bank commencing
with the first taxable year after completion of the conversion.  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.

     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


                                       34

<PAGE>



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 November 30, 2000,  Affiliated Bank 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,  2001,  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 $431,000 at June
30, 2001.

     We believe that our current facilities are adequate to meet the present and
immediately foreseeable needs of Affiliated Bank and BancAffiliated, Inc.



                                       35

<PAGE>



     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,  2001  was
approximately $4,000.

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
solicitaion of proxies or otherwise, during the quarter ended June 30, 2001.

                                     PART II

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

     Page  A-42 of the  Annual  Report to  Stockholders,  which is  attached  as
Appendix  A to  the  definitive  Proxy  Statement  for  the  Annual  Meeting  of
Stockholders to be held in 2001, is herein incorporated by reference.

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

     Pages A-5  through  A-16 of the  Annual  Report to  Stockholders,  which is
attached as Appendix A to the definitive  Proxy Statement for the Annual Meeting
of Stockholders to be held in 2001, are herein incorporated by reference.

Item 7.           Financial Statements
                  --------------------

     The following information appearing in BancAffiliated,  Inc.'s Annual Repot
to  Stockholders,  which is  attached  as  Appendix  A to the  definitive  Proxy
Statement  for the  Annual  Meeting  of  Stockholders  to be held  in  2001,  is
incorporated by reference.


                                       36

<PAGE>

<TABLE>
<CAPTION>



                                                                                                                 Pages in
                                                                                                                  Annual
Annual Report Section                                                                                             Report
---------------------                                                                                            --------
<S>                                                                                                               <C>
Independent Auditors' Report...........................................................................           A-17
Consolidated Balance Sheet as of June 30, 2001 and 2000................................................           A-18
Consolidated Statements of Income for the Years Ended June 30, 2001
and 2000...............................................................................................           A-19
Consolidated Statements of Changes in Stockholder's Equity for
   Years Ended June 30, 2001 and 2000..................................................................           A-20
Consolidated Statements of Cash Flows for Years Ended June 30, 2001
   and 2000............................................................................................           A-21
Notes to Consolidated Financial Statements.............................................................           A-22

</TABLE>


     With  the  exception  of the  aforementioned  information,  BancAffiliated,
Inc.'s  Annual Report to  Stockholders  for the year ended June 30, 2001, 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 definitive  Proxy  Statement for the Annual Meeting
of Stockholders to be held in 2001, 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 definitive  Proxy  Statement for the
Annual Meeting of  stockholders to be held in October 2001, 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, 2001, 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  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held in 2001,  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  definitive  Proxy
Statement for the Annual Meeting of  Stockholders  to be held in 2001, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

Item 12.          Certain Relationships and Related Transactions
                  ----------------------------------------------

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of Stockholders to be held in 2001, 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
                  --------------------------------
<TABLE>
<CAPTION>

                  (a) Exhibits

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

<S>       <C>               <C>                                                                           <C>

           3(i)             Certificate 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

          23                Consents of Experts and Counsel                                               23
<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 2001  Annual  Report to  Stockholders  is attached as Appendix A to the
     definitive  Proxy  Statement for the Annual Meeting of  Stockholders  to be
     held in 2001.

</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.


                                       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 28, 2001                          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
       Officer)                                        Accounting Officer)

Date: September 28, 2001                          Date: September 28, 2001
      -------------------------                       --------------------------



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

Date: September 28, 2001                          Date: September 28, 2001
      -------------------------                       --------------------------



By:   /s/ William J. Wethington                   By:  /s/ Harry M. Goddard
      -------------------------                       --------------------------
      William J. Wethington, Director                 Harry M. Goddard, Director

Date: September 28, 2001                          Date: September 28, 2001
      -------------------------                       --------------------------



By:   /s/ Kenneth L. Schilling                    By:  /s/ Donald H. Stone
      -------------------------                       --------------------------
      Kenneth L. Schilling, Director                  Donald H. Stone, Director

Date: September 28, 2001                          Date: September 28, 2001
      -------------------------                       --------------------------



By:   /s/ James E. Jennings
      -------------------------
      James E. Jennings, Director

Date: September 28, 2001
      -------------------------

                                       40