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, 2003
                                       OR
[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ________________ to ________________

                         Commission File Number 1-16433

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

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

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

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

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

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

                                      None
                                      ----

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

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

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

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

         As of September 10, 2003,  the  Registrant had 278,500 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  10, 2003 was $5.2 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, 2003,  which is attached as Appendix A to the Proxy  Statement  for the
Annual  Meeting of  Stockholders  to be held in 2003.
PART  III  of  Form  10-KSB  -  Proxy  Statement  for  2003  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 BancAffiliated,  Inc., since BancAffiliated, Inc. has no significant
operations.

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

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




                                       2
<PAGE>

         At June 30, 2003, BancAffiliated,  Inc. had $73.8 million of assets and
stockholders equity of $5.6 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,
deposits at other banks 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
during  the early  1990's  due to a  reduction  in the  number of  employees  of
Affiliated Food Stores. In addition, Affiliated Food Stores ceased operations in
1993,  thereby  eliminating  the largest  source of new customers for Affiliated
Federal  Credit  Union.  After  reviewing its  strategic  options,  the board of
directors  determined  that  converting to a federal  mutual  savings bank would
address the  problem of a declining  customer  base by  providing  access to all
members  of  the  general  public.  Therefore,  after  receiving  the  necessary
regulatory approvals, on June 1, 1998, Affiliated Federal Credit Union converted
to a federal mutual  savings bank known as Affiliated  Bank,  F.S.B.  Affiliated
Bank now serves the general  public  rather than being  limited to serving  only
distinct employee groups.

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

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

         We offer a variety of deposit  accounts having a wide range of interest
rates  and  terms,  which  generally  include  savings  accounts,  money  market
accounts,  NOW and non-interest bearing demand deposit accounts and time deposit
accounts  with  varied  terms  ranging  from 30 days to 24  months.  We  solicit
deposits in our primary  market  area of Tarrant  County and we accept  brokered
deposits. We also rely on borrowings from the Federal Home Loan Bank as a source
of funds.

                                       3
<PAGE>

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.  At June 30,  2003,  the  maximum  amount  which we could have
loaned to any one borrower and  borrower's  related  entities was $1.1  million.
However,  the Office of Thrift  Supervision allows federal savings banks to loan
more than that amount to certain  borrowers under certain  programs.  Affiliated
Bank has qualified for and  participates  in both of the loan program that allow
the bank to exceed the standard loan to one borrower limits. One of the programs
allows the bank to loan up to twice its normal  loan to one  borrower  limit for
the production of residential  housing  within  certain  limitations.  The other
program is an expanded  program  referred to as the "Pilot Program" which allows
thrifts to grant loans  under the same  lending  limit rules as state  chartered
institutions,  again within certain  limitations.  Affiliated Bank complied with
the loan to one borrow  limitations  as well as the  parameters  of the expanded
loan authority programs.

         Affiliated Bank's five largest loan relationships at June 30, 2003 were
as follows: (1) a $2 million interim construction  relationship consisting of 18
residential construction loans of which $825,000 has been sold to other banks as
participations;  (2) a $1.5 million interim construction relationship consisting
of nine residential  construction loans: (3) a $1.5 million interim construction
relationship  consisting  of 15  residential  construction  loans  totaling $1.1
million and loans for residential  lots that total  $448,000,  $236,000 of which
has  been  sold  as  participations;  (4) a $1.2  million  interim  construction
relationship  consisting  of nine  residential  construction  loans  that  total
$981,000 and a lot  development  loan of  $157,000;  and (5) a $1.0 million loan
relationship consisting of a line of credit for commercial business purposes.



                                       4
<PAGE>



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

<TABLE>
<CAPTION>


                                                                  June 30,
                                                  ------------------------------------------
                                                         2003                   2002
                                                  ------------------     -------------------
                                                  Amount     Percent     Amount      Percent
                                                  ------     -------     ------      -------
                                                            (Dollars in Thousands)
<C>                                               <C>          <C>       <C>           <C>


Real Estate Loans:
   One- to four-family residential                $ 4,670       9.2%     $ 4,214       13.5%
   Multi-family residential..................         103       0.2          121         0.4
                                                  -------    -------     -------     -------
     Total residential loans.................       4,773        9.4       4,335        13.9
   Commercial real estate....................       2,311        4.5       2,051         6.5
   Construction and development loans........      28,755       56.4      13,133        42.0
     Total real estate loans.................      35,839       70.3      19,519        62.4
                                                             -------                 -------


   Commercial business loans.................      10,434       20.5       6,518        20.8

Consumer Loans:
   Automobile loans..........................       2,543        5.0       3,704        11.8
   Credit cards..............................       1,014        2.0       1,126         3.6
   Loans secured by deposits.................         318        0.6         269         0.9
   Other personal and installment loans......         803        1.6         167         0.5
                                                  -------    -------     -------     -------
     Total consumer loans....................      4,678         9.2       5,266        16.8
                                                  -------    -------     -------     -------

     Gross loans.............................      50,951    100.00%      31,303     100.00%
                                                             =======                 =======

     Loans in process........................      12,068                  3,809
                                                  -------                -------

     Total loans............................       38,883                 27,494


Allowance for loan losses....................         407                    315
                                                  -------                -------


     Net loans receivable....................     $38,476                $27,179
                                                  =======                =======
</TABLE>


                                       5
<PAGE>



         The  following  schedule   illustrates  the  contractual   maturity  of
Affiliated  Bank's  loan  portfolio  at June  30,  2003.  Mortgages  which  have
adjustable or  renegotiable  interest  rates are shown as maturing in the period
during which the  contract is due. The schedule  does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>


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


         One- to four-family residential loans..           $1,575             $1,696       $1,399      $4,670
         Multi-family...........................              ---                103          ---         103
         Commercial real estate.................            1,038                999          274       2,311
         Construction...........................           15,489              2,230           66      17,785
         Commercial business....................            4,723              4,891          ---       9,614
         All other loans........................              817              3,087           31       3,935
                                                          -------            -------       ------     -------
         Total loans (net of LIP)...............          $23,642            $13,006       $1,770     $38,418
                                                          =======            =======       ======     =======
         Allowance for loan losses..............                                                          407
                                                                                                      -------
              Net loans.........................                                                      $38,011
                                                                                                      =======

</TABLE>

         Of our  outstanding  total  loans of $38.8  million  at June 30,  2003,
approximately $24.1 million have fixed rates of interest and approximately $14.8
million have adjustable rates of interest.

         Construction and Development  Lending. We originate one- to four-family
residential   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, 2003, we had $28.8 million
or 56.4% of our gross loan portfolio in construction  and development  loans, of
which $10.5  million  was not  disbursed.  Of this  amount,  approximately  $0.7
million or 6.7% were fixed rate loans and  approximately  $9.8  million or 93.3%
were adjustable rate loans. Our largest  construction  loan relationship at June
30,  2003,  was  a  $2.0  million  relationship  consisting  of  18  residential
construction   loans  of  which  $825,000  has  been  sold  to  other  banks  as
participations.  At June 30, 2003, this borrower had $1.2 million outstanding to
us, $378,000 of which was participated to other banks.

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


                                       6
<PAGE>

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

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

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

         Commercial  Business  Lending.  We also originate  commercial  business
loans. At June 30, 2003,  approximately  $9.6 million or 24.7% of our total loan
portfolio  was  comprised  of  commercial   business   loans.  Of  this  amount,
approximately $6.1 million or 63.5% were fixed rate loans and approximately $3.5
million or 36.5% were adjustable  rate loans.  Our largest  commercial  business
loan at June  30,  2003,  was a $1.0  million  loan to a  business  relationship
secured by marketable  securities.  At June 30, 2003, this borrower had $979,600
outstanding to us.

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


                                       7
<PAGE>

         Commercial Real Estate Lending.  Affiliated Bank offers commercial real
estate loans. These loans are secured primarily by small retail  establishments,
rental properties and small office buildings located in our primary market area.
At June 30, 2003,  commercial  real estate loans totaled $2.3 million or 5.9% of
our total loan portfolio.  Of this amount,  approximately  $1.5 million or 65.2%
were fixed rate loans and  approximately  $800,000 or 34.8% were adjustable rate
loans. Our largest  commercial real estate loan at June 30, 2003, was a $390,000
loan to a real estate investor secured by the real estate.

         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,  2003,  our  consumer  loan  portfolio  totaled $3.9
million  or 10.1% of our total  loan  portfolio.  We offer a variety  of secured
consumer  loans,  including  automobile  loans  and  loans  secured  by  savings
deposits. We also offer a limited amount of unsecured loans.

                                       8
<PAGE>

         The most  significant  component of our consumer  lending is automobile
loans.  We originate  automobile  loans on a direct basis and purchase  loans as
well.  These loans  totaled  $2.5  million at June 30, 2003 or 6.5% of our total
loan portfolio. Automobile loans may be written for up to five years and usually
have fixed rates of interest.  Loan to value ratios for automobile  loans are up
to 100% of the sales price for new  automobiles  and up to 100% of value on used
cars, based on valuation from official used car guides.

         Affiliated  Bank also  originates  credit card loans,  loans secured by
deposit  accounts and other consumer loans. At June 30, 2003, we had $318,000 or
0.8% of our total loan portfolio in loans secured by deposits. At June 30, 2003,
we also had $271,000 in  adjustable-rate  credit card loans or 0.7% of our total
loan portfolio.  Management is contemplating  the  discontinuance  of its credit
card lending.  However,  at this time  Affiliated Bank continues to offer 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, 2003,  one- to
four-family  residential  mortgage  loans  totaled  $4.7 million or 12.0% 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,


                                       9
<PAGE>

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, 2003,  multi-family  residential loans totaled $103,000
or 0.3% of our gross loan portfolio.

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

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

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

Loan Originations, Purchases, Sales and Repayments

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


                                       10
<PAGE>

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

                                                Years Ended
                                                  June 30,
                                          -------------------------
                                            2003          2002

                                          -----------   -----------
                                           (Dollars in Thousands)


Total loans, beginning of year........        $27,494       $22,920
Loan originations and purchases:
   Real estate mortgage loans.........         34,696        24,742
   Consumer loans.....................          1,573         3,785
   Other loans........................         11,425         4,508
                                          -----------   -----------
     Total loan originations..........         47,694        33,035
                                          -----------   -----------
Loan repayments.......................         34,969        25,370
Loan participations sold..............          1,336         3,091
                                          -----------   -----------
    Total repayments and sales........         36,305        28,461
                                          -----------   -----------
Total loans, end of period............        $38,883       $27,494
                                          ===========   ===========


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.


                                       11
<PAGE>

         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.

         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, 2003.
<TABLE>
<CAPTION>



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

<C>                        <C>        <C>      <C>         <C>             <C>           <C>        <C>       <C>            <C>

Real estate:
  Residential..........    ---        $---     ---%        ---             $---          ---%       ---       $---           ---%
  Commercial...........    ---         ---     ---%        ---              ---          ---%       ---        ---           ---%
  Construction.........    ---         ---     ---%        ---              ---          ---%       ---        ---           ---%

Other:
  Consumer.............     4           10    0.21%          2                5         0.11%         6         15          0.32%
  Commercial...........    ---         ---      ---        ---              ---                     ---        ---

Total..................     4          $10    0.03%          2             $  5         0.00%         6        $15          0.03%
                                       ===                                 ====                                ===


</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,
                                                          ------------------
                                                           2003        2002
                                                          ------      ------
                             (Dollars in Thousands)

Non-accruing loans:
   Consumer............................................     $ 4        $16
   Construction........................................     ---        284
   Residential.........................................     ---        161
                                                            ---        ---
     Total.............................................       4        461
                                                          ------      ------

Accruing loans past due 90 days and over:
   Consumer............................................       5          2

     Total.............................................       5          2
                                                          ------      ------

Total non-performing loans.............................       9        463

Foreclosed assets......................................     442        ---
                                                          ------      ------

Total non-performing assets............................    $451       $463

Allowance for loan losses..............................     407        315

Coverage of non-performing loans.......................   90.2%      68.0%

Non-performing assets as a percentage of total assets..   0.63%      0.82%



         Other Loans of Concern.  In addition to the  non-performing  assets set
forth in the table above,  as of June 30,  2003,  there was also an aggregate of
$20,000  primarily  in consumer  loans with  respect to which known  information
about the possible  credit  problems of the borrowers have caused  management to

                                       13
<PAGE>

have  doubts as to the ability of the  borrowers  to comply  with  present  loan
repayment  terms and which may result in the future  inclusion  of such items in
the non-performing  asset categories.  These loans and the non-performing  loans
have been  considered  in  management's  determination  of the  adequacy  of our
allowance for loan losses and carry special allocations of $6,000.

         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,
2003, we had classified $442,000 of our assets as substandard,  none as doubtful
and none as loss.  The total amount of classified  assets  represented  6.61% of
Affiliated Bank's equity capital and 0.60% of our total assets at June 30, 2003.

         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

                                       14
<PAGE>

results of measuring  impaired loans as provided in SAS No. 114,  "Accounting by
Creditors for  Impairment of a Loan" and SAS No. 118,  "Accounting  by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods,  income recognition and disclosures
related to impaired loans.

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

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

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

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

                                       15
<PAGE>

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

         At June 30, 2003,  our  allowance for loan losses was $407,000 or 1.06%
of the total loan  portfolio and  approximately  4,522% of total  non-performing
loans.  Assessing  the adequacy of the  allowance  for loan losses is inherently
subjective as it requires  making material  estimates,  including the amount and
timing of future cash flows expected to be received on impaired loans,  that may
be  susceptible  to  significant  change.  In the  opinion  of  management,  the
allowance,  when taken as a whole,  is adequate to absorb  reasonable  estimated
loan losses inherent in our loan portfolios.














                                       16
<PAGE>


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




                                                         Years Ended June 30
                                                      -------------------------
                                                        2003             2002
                                                      --------         --------
                                                         (Dollars in Thousands)

Total loans outstanding (at end of period)...........  $38,883          $27,494
                                                      --------         --------

Average loans outstanding (period to date)...........  $30,535          $24,742
                                                      --------         --------

Allowance for loan losses, beginning of period.......    $ 315            $ 182

Loan charge-offs:
     Consumer loans..................................       34               29
     Commercial loans................................      ---              ---
     Residential construction........................        5               25
                                                      --------         --------
        Total loan charge-offs.......................       39               54
                                                      --------         --------

Loan recoveries:

     Consumer loans..................................       11                2
                                                            --                -
        Total loan recoveries........................       11                2
                                                      --------         --------

Net loan charge-offs.................................       28               52
Provision charged to operations......................      120              185
                                                      --------         --------

Allowance for loan losses, end of period.............    $ 407            $ 315
                                                      ========         ========

Ratio of net loan charge-offs during the period
   to average loans outstanding......................    0.09%            0.21%
                                                      ========         ========

Provision as a percentage of average loans...........    0.39%            0.75%
                                                      ========         ========

Allowance as a percentage of total loans.............    1.05%            1.15%
                                                      ========         ========



                                       17
<PAGE>


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

<TABLE>
<CAPTION>

                                                        At June 30,
                                      ------------------------------------------------------
                                              2003                       2002
                                      ------------------------------------------------------
                                                   Percent of                  Percent of
                                                  Loans in Each              Loans in Each
                                                   Category                     Category
                                                   to Total                     to Total
                                        Amount       Loans         Amount          Loans
                                      ----------- ------------- ------------- --------------
                                                 (Dollars in Thousands)
<C>                                         <C>         <C>             <C>         <C>


One- to four-family residential             $  2         12.16%          $ 2          15.3%
Multi-family residential......               ---          0.27             1           0.04
Commercial real estate........                 5          6.02             4            7.5
Construction and
  development loans...........                54         34.36            57           38.6
Commercial business loans.....               297         25.69           181           21.9
Automobile loans..............                21          7.35            48           13.5
Other personal and investment
   loans......................                28         14.15            22           3.16
                                            ----        ------          -----       -------
                                            $407        100.00%         $315        100.00%
                                            ====        ======          =====       =======
</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

                                       18
<PAGE>

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 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,  2003,
Affiliated Bank held $2.6 million of collateralized mortgage obligations. All of
Affiliated Bank's  collateralized  mortgage obligations are guaranteed by either
Fannie Mae or Freddie Mac.

                                       19
<PAGE>

         To  assess  price  volatility,   the  Federal  Financial   Institutions
Examination  Council  adopted a policy which requires an annual "stress" test of
mortgage  derivative  securities.  This  policy,  which has been  adopted by the
Office of Thrift  Supervision,  requires  Affiliated  Bank to annually  test its
collateralized  mortgage  obligations and other  mortgage-related  securities to
determine  whether they are  high-risk  or non  high-risk  securities.  Mortgage
derivative  products  with an average  life or price  volatility  in excess of a
benchmark 30-year mortgage-backed pass-through security are considered high-risk
mortgage securities. Under the policy, savings institutions,  such as Affiliated
Bank,  may generally  only invest in high-risk  mortgage  securities in order to
reduce interest rate risk. As of June 30, 2003, Affiliated Bank had no high risk
securities.

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

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



                                       20
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                    June 30,
                                                               ----------------------------------------------------------
                                                                         2003                            2002
                                                               --------------------------    ----------------------------
                                                               Carrying           % of         Carrying           % of
                                                                Value            Total          Value              Total
                                                               --------          -----         --------           -------
                                                                                 (Dollars in Thousands)
<C>                                                            <C>                <C>           <C>                 <C>

Securities available for sale, at fair value:
  Federal Home Loan Bank stock..............................   $1,569               7%          $ 1,464               9%
  Mortgage-backed Securities................................   17,826              81%           14,704              91%
  Collateralized-mortgage obligations.......................    2,590              12%              ---             ---%
                                                               --------          -----         --------           -------
  Total.....................................................   21,985             100%           16,168             100%
                                                               ========          =====         ========           =======
Securities to be held to maturity, at amortized cost:
   Mortgage-backed securities...............................    5,583              99%            7,864              81%
   Collateralized mortgage obligations......................       59               1%            1,868              19%
                                                               --------          -----         --------           -------

     Total..................................................    5,642             100%            9,732             100%
                                                               ========          =====         ========           =======

Securities to be held to maturity, at fair value............   $5,685                           $ 9,797
                                                               ========                        ========

</TABLE>



         The composition and maturities of the investment  securities portfolio,
excluding  Federal Home Loan Bank stock,  as of June 30, 2003,  are indicated in
the following table.
<TABLE>
<CAPTION>



                                                Less than 1 Year         1 to 5 Years      Over 10 Years        Total Securities
                                                ----------------         ------------      -------------        ----------------

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

          Securities available for sale:
            Mortgage-backed securities.....       $---        ---%      $---       ---%   $17,826        4.2%   $17,826       4.2%
               Collateralized mortgage
                 obligations...............        ---        ---        ---       ---      2,590        3.7%     2,590       3.7%
                                                ------      --------    ------  ---------  ------   --------    -------    --------

               Sub-Total...................        ---        ---        ---       ---     20,416        4.1%    20,416       4.1%
                                                ------      --------    ------  ---------  ------   --------    -------    --------
          Securities to be held to maturity:
               Mortgage-backed securities..        ---        ---        ---       ---      5,583        3.5%     5,583       3.5%
               Collateralized mortgage
                 obligations...............        ---        ---        ---       ---         59        2.5%        59       2.5%
                                                ------      --------    ------  ---------  ------   --------    -------    --------
               Sub-Total...................       $---        ---       $---       ---    $ 5,642        3.5%    $5,642       3.5%
                                                ------      --------    ------  ---------  ------   --------    -------    --------

               Total.......................       $---        ---       $---       ---    $26,058        4.0%   $26,058       4.0%
                                                ======      ========    ======  =========  ======   ========    =======    ========

</TABLE>



                                       21
<PAGE>



Sources of Funds

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

         Deposits.  We offer a variety of deposit accounts to both consumers and
businesses having a wide range of interest rates and terms. Our deposits consist
of NOW accounts, time deposit accounts, savings, money market and demand deposit
accounts.  We primarily  rely on  competitive  pricing  policies,  marketing and
customer  service to attract and retain these deposits.  We solicit  deposits in
our  market  area  and  rely  on  wholesale   deposits   obtained   through  our
telemarketing  efforts  and  deposit  brokers.  At June 30,  2003,  we had $13.2
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,
                                                       ----------------------------------
                                                           2003                  2002
                                                       ---------------    ---------------
                                                              (Dollars in Thousands)
<C>                                                           <C>                <C>


Net deposits (withdrawals) to non-brokered accounts...         $3,476             $6,293
Net deposits (withdrawals) to brokered accounts.......          9,310            (1,562)
Interest credited to deposit accounts.................            598                734
                                                           -----------         ----------

   Net increase (decrease)............................         13,384              5,465


Opening balance of deposit accounts...................         21,996             16,531
                                                           -----------         ----------

Ending balance of deposit accounts....................        $35,380            $21,996
                                                           ===========         ==========

Percent increase (decrease)...........................          60.8%              33.1%
                                                                ====               ====

</TABLE>


                                       22
<PAGE>


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

                                                                                   June 30,
                                                                    2003                          2002
                                                       -------------------------------------------------------------
                                                              Amount          Percent      Amount           Percent
                                                       -------------- ---------------- -------------- --------------
<C>                                                          <C>               <C>           <C>            <C>

Noninterest-bearing accounts......................            $6,243            17.6%        $ 1,993           9.1%
Savings accounts..................................             2,059              4.9          1,754            8.0
NOW and money market accounts.....................             1,737              5.8          1,111            5.1
                                                       -------------- ---------------- -------------- --------------
    Total non-certificates........................            10,039             28.4          4,858           22.2
                                                       -------------- ---------------- -------------- --------------

Certificates of deposit:
    0.00% to 1.99%................................             6,837             19.3            ---            ---
    2.00% to 2.99%................................            13,481             38.1          5,580           25.4
    3.00% to 3.99%................................             4,926             13.9          6,525           29.7
    4.00% to 4.99%................................                97              0.3          4,691           21.3
                                                                                                               ----
    5.00% to 5.99%................................               ---              ---            342            1.6
                                                       -------------- ---------------- -------------- --------------

    Total certificates............................            25,341             71.6         17,138           78.0
                                                       -------------- ---------------- -------------- --------------

           Total deposits.........................           $35,380          100.00%        $21,996        100.00%
                                                       ============== ================ ============== ==============

</TABLE>

         The following table shows rate and maturity  information for Affiliated
Bank's certificates of deposit as of June 30, 2003.

                                                                   Weighted
                                                                   Average
                                                    Amount           Rate

                                                --------------- ---------------
                                                     (Dollars in Thousands)

Certificate accounts maturing within:

One month.......................................        $2,598           2.52%
One to three months.............................         3,330            2.17
Three to six months.............................         6,179            2.45
Six to nine months..............................         5,974            2.28
Nine to twelve months...........................         6,386            2.43
Twelve to eighteen months.......................           739            3.28
Eighteen months to two years....................           135            1.81
Over two years..................................           ---             ---
                                                --------------- ---------------
     Total......................................       $25,341           2.28%
                                                =============== ===============






                                       23
<PAGE>


         The  following  table   indicates  the  amount  of  Affiliated   Bank's
certificates  of deposit and other deposits by time remaining  until maturity as
of June 30, 2003.
<TABLE>
<CAPTION>

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


Certificates of deposit less than $100,000............     $2,788      $1,931     $3,864       $ 69    $8,652

Brokered certificates of deposits less than $100,000..         39       1,534      3,070        204     4,847

Certificates of deposit of $100,000 or more...........        917         803      1,604        177     3,501

Brokered certificates of deposit of $100,000
 or more..............................................      2,184       1,911      3,822        424     8,341
                                                          --------     ------     ------       ----   -------

Total certificates of deposit.........................     $5,928      $6,179    $12,360       $874   $25,341
                                                           ======      ======    =======       ====   =======

</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, 2003, we had $30.7  million in Federal Home Loan Bank advances  outstanding.
In  addition,  BancAffiliated,  Inc.  borrowed  $2.0  million for the purpose of
infusing capital into Affiliated Bank to support future growth.






                                       24
<PAGE>



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

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

      Federal Home Loan Bank advances:
         Maximum balance.............................          $31,190         $28,325
                                                               =======         =======

         Average monthly balance.....................          $27,550         $21,038
                                                               =======         =======

         Amount outstanding at end of period.........          $30,687         $28,994
                                                               =======         =======

         Weighted  average  interest rate of advances
           at end of period                                      1.14%           1.95%
                                                                 ====            ====

         Weighted average interest rate on average
            amounts outstanding during the period....            1.65%           2.71%
                                                                 ====            ====
</TABLE>


Subsidiary and Other Activities

         At  June  30,  2003,  BancAffiliated,  Inc.  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,  2003,  we  believe  that we hold less than 1% of the  deposits  in our
primary market area.

Employees

         At June 30, 2003, we had a total of fourteen  employees,  including two
part-time  employees.  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 as a result of Federal legislation, could have a
material  adverse impact on  BancAffiliated,  Inc. and Affiliated Bank and their
operations.

BancAffiliated, Inc.

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

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



                                       26
<PAGE>


Affiliated Bank

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

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

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

         Affiliated    Bank's    general    permissible    lending   limit   for
loans-to-one-borrower  is equal to the greater of $500,000 or 15% of  unimpaired
capital  and  surplus  (except  for  loans  fully  secured  by  certain  readily
marketable  collateral,  in  which  case  this  limit  is  increased  to  25% of
unimpaired  capital and surplus).  At June 30, 2003,  Affiliated  Bank's lending
limit under this restriction was $1.1 million.  Affiliated Bank is in compliance
with    the    loans-to-one-borrower    limitation.    See    "Business--Lending
Activities-General."

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



                                       27
<PAGE>


Insurance of Accounts and Regulation by the FDIC

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

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

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

         Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association  Insurance Fund insured institutions has ranged from 0 to 27
basis points.  However,  Savings  Association  Insurance Fund and Bank Insurance
Fund  insured   institutions  are  required  to  pay  a  Financing   Corporation
assessment,  in order to fund the  interest  on bonds  issued to resolve  thrift
failures in the 1980s, equal to approximately 2.00 basis points for each $100 in
domestic deposits. These assessments,  which may be revised based upon the level
of Bank Insurance  Fund and Savings  Association  Insurance Fund deposits,  will
continue until the bonds mature in the year 2017.


                                       28
<PAGE>

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, 2003, Affiliated Bank had no intangible assets.

         At June 30, 2003, Affiliated Bank had tangible capital of $6.7 million,
or 9.11% of adjusted total assets, which is approximately $5.6 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, 2003,  Affiliated Bank had no intangibles which were
subject to these tests.

         At June  30,  2003,  Affiliated  Bank had  core  capital  equal to $6.7
million,  or 9.11% of adjusted  total  assets,  which is $3.8 million  above the
minimum requirement of 4.0% in effect on that date.

         The Office of Thrift Supervision also requires savings  institutions to
maintain a Tier 1 risk-based  capital ratio.  At June 30, 2003,  Affiliated Bank
has a Tier 1 risk-based  capital  ratio of 15.63%,  which was $5.0 million above
the 4% requirement on that date.

         The Office of Thrift Supervision also requires savings  institutions to
have total  capital  of at least 8.0% of  risk-weighted  assets.  Total  capital
consists  of  core  capital,  as  defined  above,  and  supplementary   capital.
Supplementary  capital  consists  of  certain  permanent  and  maturing  capital
instruments  that do not qualify as core capital and general  valuation loan and
lease  loss  allowances  up to a  maximum  of  1.25%  of  risk-weighted  assets.
Supplementary capital may be 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, 2003,  Affiliated Bank had total risk-based capital of $7.1
million and risk-weighted  assets of $42.7 million; or total capital of 16.6% of
risk-weighted  assets. This amount was approximately $3.7 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
that is still available for dividend.  However,  an institution  deemed to be in
need of more than normal  supervision  by the Office of Thrift  Supervision  may
have its  dividend  authority  restricted  by the Office of Thrift  Supervision.
Affiliated  Bank may pay dividends to  BancAffiliated,  Inc. in accordance  with
this general authority.

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

Qualified Thrift Lender Test

         All savings  institutions,  including  Affiliated Bank, are required to
meet a qualified  thrift  lender  test to avoid  certain  restrictions  on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the savings  institution  may  maintain 60% of its assets in those
assets  specified in Section  7701(a)(19)  of the Internal  Revenue Code.  Under
either test, such assets primarily consist of residential  housing related loans
and  investments.  At June 30, 2003,  Affiliated Bank met the test with a 99.39%
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 its home state.  In addition,  the
institution is immediately  ineligible to receive any new Federal Home Loan Bank

                                       31
<PAGE>

borrowings  and is subject to national bank limits for payment of dividends.  If
such an institution  has not  requalified or converted to a national bank within
three years after the failure,  it must divest of all  investments and cease all
activities not permissible  for a national bank. If any  institution  that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure,  the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.

Community Reinvestment Act

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

Transactions with Affiliates

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

         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.

                                       32
<PAGE>

Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.

Federal Securities Law

         The stock of BancAffiliated,  Inc. is registered with the SEC under the
Securities Exchange Act of 1934, as amended. BancAffiliated,  Inc. is 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,  2003,  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, 2003,  Affiliated Bank had
$1.6 million in Federal Home Loan Bank stock,  which was in compliance with this
requirement.  Over the past two fiscal years such  dividends  have averaged 2.8%
and were 2.7% for the fiscal year ended June 30, 2003.



                                       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, 2003,  Affiliated Bank recorded  $40,000 in
dividends  paid by the  Federal  Home Loan Bank of Dallas as compared to $34,000
for the fiscal year ended June 30, 2002.

Federal Taxation

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

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

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

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

         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

                                       34
<PAGE>

tax may be used as credits  against  regular tax  liabilities  in future  years.
Affiliated Bank has not been subject to the  alternative  minimum tax, nor do we
have any such amounts available as credits for carryover.

         Net Operating Loss  Carryovers.  A financial  institution may carryback
net  operating  losses to the  preceding  two  taxable  years and forward to the
succeeding  20 taxable  years.  This  provision  applies to losses  incurred  in
taxable years beginning after August 6, 1997. For losses incurred in the taxable
years  prior to August 6, 1997,  the  carryback  period was three  years and the
carryforward period was 15 years. At June 30, 2003, BancAffiliated,  Inc. had no
net operating loss carryforwards for federal income tax purposes.

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

State Taxation

         The State of Texas does not have a corporate  income  tax,  but it does
have a corporate franchise tax. Prior to January 1, 1992, savings banks had been
exempt from the corporate franchise tax. The tax for the year 2003 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,  2003,  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 $387,000 at June
30, 2003.

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

                                       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,  2003  was
approximately $43,000.

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
solicitation of proxies or otherwise, during the quarter ended June 30, 2003.

                                     PART II

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

         Page A-43 of the Annual  Report to  Stockholders,  which is attached as
Appendix A to the Proxy  Statement for the Annual Meeting of  Stockholders to be
held in 2003, is herein incorporated by reference.

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

         Pages A-3 through A-14 of the Annual Report to  Stockholders,  which is
attached  as  Appendix  A to the  Proxy  Statement  for the  Annual  Meeting  of
Stockholders to be held in 2003, are herein incorporated by reference.

Item 7.           Financial Statements

         The following  information  appearing in BancAffiliated,  Inc.'s Annual
Report to  Stockholders,  which is attached as Appendix A to the Proxy Statement
for the Annual Meeting of  Stockholders  to be held in 2003, is  incorporated by
reference.


                                       36
<PAGE>


<TABLE>
<CAPTION>


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

Independent Auditors' Report...................................................         A-15
Consolidated Balance Sheet as of June 30, 2003 and 2002........................         A-16
Consolidated Statements of Income for the Years Ended June 30, 2003 and
   2002........................................................................         A-17
Consolidated Statements of Changes in Stockholders' Equity for
   Years Ended June 30, 2003 and 2002..........................................         A-18
Consolidated Statements of Cash Flows for Years Ended June 30, 2003,
   2002 and 2001...............................................................         A-19
Notes to Consolidated Financial Statements.....................................         A-20

</TABLE>

         With the exception of the aforementioned  information,  BancAffiliated,
Inc.'s  Annual Report to  Stockholders  for the year ended June 30, 2003, 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.

Item 8A.          Controls and Procedures

         Page A-14 of the Annual  Report to  Stockholders,  which is attached as
Appendix A to the Proxy  Statement for the Annual Meeting of  Stockholders to be
held in 2003, is herein incorporated by reference.

                                    PART III

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

Directors

         Information   concerning   Directors   of   BancAffiliated,   Inc.   is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held in 2003, a copy of which will be filed not later than
120 days after the close of the fiscal year.


                                       37
<PAGE>

Executive Officers

         Information  concerning  Executive Officers of BancAffiliated,  Inc. is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held in 2003, a copy of which will be filed not later than
120 days after the close of the fiscal year.

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, 2003, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.

Item 10. Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference from the Proxy  Statement for the Annual Meeting of Stockholders to be
held in 2003,  a copy of which  will be filed not later  than 120 days after the
close of the fiscal year.



                                       38
<PAGE>



Item 11. Security Ownership of Certain Beneficial
                  Owners and Management

         Information  concerning security ownership of certain beneficial owners
and management is incorporated  herein by reference from the Proxy Statement for
the Annual Meeting of  Stockholders  to be held in 2003, a copy of which will be
filed not later than 120 days after the close of the fiscal year.

         The following table sets forth  information  with respect to securities
to be issued under  BancAffiliated,  Inc.'s equity compensation plans as of June
30, 2003.
<TABLE>
<CAPTION>

                                        Equity Compensation Plan Information

=========================================== ==================================== =========================== =======================
                                            (a)                                  (b)                         (c)
=========================================== ==================================== =========================== =======================
<C>                                         <C>                                  <C>                         <C>

Plan Category                               Number of securities to be issued    Weighted-average exercise   Number of securities
                                            upon exercise of outstanding         price of outstanding        remaining available
                                            options, warrants and rights         options, warrants and       for future issuance
                                                                                 rights                      under equity
                                                                                                             compensation plans
                                                                                                             (excluding securities
                                                                                                             reflected in column
                                                                                                             (a))
=========================================== ==================================== =========================== =======================
Equity compensation plans approved by
security holders:

1.  Recognition and Retention Plan          1.   6,953(1)                        1.  N/A                     1.    7,000
2.  2002 Stock Option and Incentive Plan    2.  12,873(2)                        2.  $11.53                  2.   26,000

=========================================== ==================================== =========================== =======================
Equity compensation plans not approved by
security holders                                    N/A                                N/A                          N/A
=========================================== ==================================== =========================== =======================
Total                                            19,826                               N/A                         33,000
=========================================== ==================================== =========================== =======================
<FN>

(1) Includes issued but unvested shares
(2) Includes issued but unvested options
</FN>
</TABLE>


Item 12.          Certain Relationships and Related Transactions

         Information  concerning certain  relationships and related transactions
is  incorporated  herein by reference  from the Proxy  Statement  for the Annual
Meeting of  Stockholders  to be held in 2003,  a copy of which will be filed not
later than 120 days after the close of the fiscal year.



                                       39
<PAGE>



Item 13.          Exhibits and Reports on Form 8-K

                  (a) Exhibits

<TABLE>
<CAPTION>

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

           3(i)              Articles of Incorporation                                                  *

           3(ii)             Bylaws                                                                     *

             4               Instruments defining the rights of security holders,                       *
                             including debentures

            10               Material Contracts                                                         *
                             (a) Employment Contract between
                              Garry J. Graham and the Affiliated Bank
                             (b) Revision and Addendum to Employment                                   10(a)
                             Contract between Garry J. Graham and the
                             Affiliated Bank

            13               Annual Report to Stockholders                                              *

            21               Subsidiaries of Registrant                                                21

           31.1              Certification of Garry J. Graham pursuant to Rule 13a-14                  31.1
                             under the Securities Exchange Act of 1934

           32.1              Certification of Garry J. Graham pursuant to 18 U.S.C. 1350,              32.1
                             as dopted pursuant to Section 906 of the Sarbanes-Oxley Act
                             of 2002

<FN>
---------------
*Filed as exhibits to the Company's Form SB-2  registration  statement  filed on
February 1, 2001 (File No. 333-54814) of the Securities Act of 1933. All of such
previously  filed  documents  are hereby  incorporated  herein by  reference  in
accordance with Item 601 of Regulation S-B.
**The 2003 Annual Report to  Stockholders is attached as Appendix A to the Proxy
Statement for the Annual Meeting of Stockholders to be held in 2003.
</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.


                                       40
<PAGE>

Item 14. Principal Accountant Fees and Services

         The  information  required  as to this item is  incorporated  herein by
reference from the Proxy  Statement for the Annual Meeting of Stockholders to be
held in 2003,  a copy of which  will be filed not later  than 120 days after the
close of the fiscal year.














                                       41
<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 26, 2003                  BANCAFFILIATED, INC.
     --------------------------

                                          By:  /s/ Garry J. Graham
                                             ---------------------------------
                                             Garry J. Graham
                                             (Duly Authorized Representative)



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

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

Date: September 26, 2003                   Date: September 26, 2003
     ---------------------------                -------------------------------


By: /s/ Kenneth L. Lee
   -----------------------------
   Kenneth L. Lee, Chairman of the Board


Date: September 26, 2003
      --------------------------


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

Date: September 26, 2003                   Date: September 26, 2003
     --------------------------                 -------------------------------

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

Date: September 26, 2003                   Date: September 26, 2003
     --------------------------                 -------------------------------



                                       42