Form 10-QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

Commission File No: 0-24479

AF Financial Group

(Exact name of small business issuer as specified in its charter)

Federally Chartered

56-2098545

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

21 East Ashe Street

West Jefferson, North Carolina 28694

(Address of principal executive offices)

(336) 246-4344

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 30, 2006 there were 1,050,804 shares of the registrant’s common stock outstanding, $.01 par value.

Transitional Small Business Disclosure Format: Yes ¨ No x

AF FINANCIAL GROUP

CONTENTS


		Pages
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Financial Condition as of March 31, 2006 (unaudited) and June 30, 2005		1

Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) for the Three and Nine Months ended March 31, 2006 and 2005		2

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended March 31, 2006 and 2005		3

Notes to Condensed Consolidated Financial Statements		4 – 8

Item 2. Management’s Discussion and Analysis		9 –18
Item 3. Controls and Procedures		19

PART II – OTHER INFORMATION

Item 6. Exhibits		20-21
Signatures		22

AF FINANCIAL GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

As of March 31, 2006 and June 30, 2005


ASSETS	March 31, 2006			June 30, 2005
	(Unaudited)			*()**
Cash and cash equivalents:
Interest-bearing deposits	$	1,442,441		$	2,657,931
Noninterest-bearing deposits		9,624,415			6,150,597
Securities held to maturity		—			153,787
Securities available for sale		4,136,050			3,891,711
Federal Home Loan Bank stock		1,701,700			1,704,800

Loans		190,394,687			182,627,642
Less allowance for loan losses		(1,528,706	)		(1,385,412	)

Loans receivable, net		188,865,981			181,242,230
Loans held for sale		364,600			1,226,750
Office properties and equipment, net		12,962,703			12,756,375
Accrued interest receivable on loans		999,996			886,813
Accrued interest receivable on investment securities		49,496			62,373
Prepaid expenses and other assets		1,468,524			1,719,280
Goodwill		1,648,468			1,648,468

Total assets	$	223,264,374		$	214,101,115

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Savings deposits	$	174,073,020		$	163,976,928
Short-term borrowings		300,000			2,570,544
Long-term borrowings		32,083,763			31,968,407
Accounts payable and other liabilities		2,407,420			1,853,628
Deferred income taxes, net		52,461			76,373
Redeemable common stock held by the ESOP, net of unearned ESOP shares		686,340			616,266

Total liabilities		209,603,004			201,062,146

Commitments and Contingencies

Stockholders’ Equity:
Common stock, par value $.01 per share; authorized 5,000,000 shares; 1,054,644 issued and 1,050,804 outstanding shares at March 31, 2006 and 1,053,675 issued and 1,049,835 outstanding shares at June 30, 2005		10,546			10,537
Additional paid-in capital		4,738,072			4,687,955
Retained earnings, substantially restricted		8,994,371			8,375,186
Accumulated other comprehensive income (loss)		(6,739	)		40,171

		13,736,250			13,113,849
Less the cost of 3,840 shares of treasury stock		(74,880	)		(74,880	)

Total stockholders’ equity		13,661,370			13,038,969

Total liabilities and stockholders’ equity	$	223,264,374		$	214,101,115

See Notes to Condensed Consolidated Financial Statements.

*	The Condensed Consolidated Statement of Financial Condition as of June 30, 2005 has been derived from audited consolidated financial statements.

AF FINANCIAL GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

For the Three and Nine Months Ended March 31, 2006 and 2005


	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
Interest and dividend income:
Loans	$	3,319,031		$	2,889,065		$	9,658,166		$	8,640,503
Investment securities		63,239			66,707			171,837			171,747
Interest-bearing deposits		59,028			18,908			138,987			41,612

Total interest income		3,441,298			2,974,680			9,968,990			8,853,862

Interest expense:
Savings deposits		1,046,576			703,815			2,824,503			2,022,293
Short-term borrowings		3,784			43,158			18,334			127,038
Long-term borrowings		428,593			458,542			1,327,059			1,340,549

Total interest expense		1,478,953			1,205,515			4,169,896			3,489,880

Net interest income		1,962,345			1,769,165			5,799,094			5,363,982
Provision for loan losses		111,000			85,000			180,000			(128,922	)

Net interest income after provision for loan losses		1,851,345			1,684,165			5,619,094			5,492,904

Noninterest income:
Insurance commissions		876,930			679,017			2,158,952			1,927,571
Other		395,739			364,581			1,212,867			1,088,258

		1,272,669			1,043,598			3,371,819			3,015,829

Noninterest expense:
Compensation and employee benefits		1,491,375			1,397,873			4,415,950			4,247,510
Occupancy and equipment		333,173			337,878			1,014,074			1,008,486
Computer processing charges		219,264			167,710			643,469			503,931
Other		618,566			593,418			1,634,659			1,900,809

		2,662,378			2,496,879			7,708,152			7,660,736

Income before income taxes		461,636			230,884			1,282,761			847,997
Income taxes		196,992			98,578			543,817			374,480

Net income		264,644			132,306			738,944			473,517

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities, net of tax		(17,915	)		(29,814	)		(46,910	)		3,867

Comprehensive income	$	246,729		$	102,492		$	692,034		$	477,384

Basic earnings per share of common stock	$	0.25		$	0.13		$	0.70		$	0.45

Diluted earnings per share of common stock	$	0.25		$	0.13		$	0.70		$	0.45

Basic weighted average shares outstanding		1,049,929			1,045,260			1,048,672			1,044,328

Diluted weighted average shares outstanding		1,051,695			1,046,858			1,050,112			1,045,214

Cash dividends declared per share	$	0.05		$	0.05		$	0.15		$	0.15

See Notes to Condensed Consolidated Financial Statements

AF FINANCIAL GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Nine Months Ended March 31, 2006 and 2005


	Nine Months Ended March 31,
	2006			2005
Cash Flows from Operating Activities
Net income	$	738,944		$	473,517
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		180,000			(128,922	)
Depreciation		696,597			691,785
Gain on loans held for sale		(26,735	)		(67,668	)
Proceeds from loans held for sale		13,245,205			11,941,718
Orgination of loans held for sale		(12,356,320	)		(11,142,450	)
ESOP expense		58,950			53,475
Change in operating assets and liabilities:
Accrued interest receivable		(100,306	)		12,326
Accrued interest payable		(111,747	)		(204,326	)
Prepaid expense and other assets		441,109			316,025
Accounts payable and other liabilities		686,195			212,984

Net cash provided by operating activities		3,451,892			2,158,464

Cash Flows from Investing Activities
Increase in Federal Home Loan Bank stock		3,100			(227,600	)
Purchases of investments held to maturity		—			(438,787	)
Proceeds from maturities of investments held to maturity		153,787			575,000
Purchases of securities available for sale		(1,000,000	)		(1,900,000	)
Proceeds from principal repayment and maturities of securities available for sale		278,915			2,146,908
Proceeds from sale of investments available for sale		400,000			—
Net originations of loans receivable		(7,803,751	)		(5,164,331	)
Recovery in insurance agency assets		—			27,978
Purchases of office properties and equipment		(932,354	)		(2,215,058	)
Proceed from sale of real estate owned		—			80,000

Net cash used in investing activities		(8,900,303	)		(7,115,890	)

Cash Flows from Financing Activities
Net increase in savings deposits		10,075,436			6,836,039
Short-term borrowings (repayments), net		(2,270,544	)		(3,560,503	)
Long-term borrowings (repayments), net		(39,644	)		2,620,017
Net proceeds from common stock issued		17,927			—
Tax benefit from exercise of stock options		1,027			—
Dividends paid		(77,463	)		(77,319	)

Net cash provided by financing activities		7,706,739			5,818,234

Net increase in cash and cash equivalents		2,258,328			860,808
Cash and cash equivalents:
Beginning		8,808,528			7,674,052

Ending	$	11,066,856		$	8,534,860

See Notes to Condensed Consolidated Financial Statements.

AF FINANCIAL GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business

AF Financial Group (the “Company”) is a federally chartered thrift holding company which owns 100% of the common stock of AF Bank (the “Bank”), AF Insurance Services, Inc. (an independent insurance agency) and AF Capital Trust I (a Delaware business trust). AF Bank conducts business from its main office located in West Jefferson, North Carolina, with branches in Boone, Jefferson, Sparta, Warrensville, and West Jefferson, North Carolina. Headquartered in West Jefferson, North Carolina, AF Insurance Services, Inc., has branches in Boone, Elkin, Jefferson, Lenoir, Sparta, West Jefferson, and North Wilkesboro, North Carolina.

Note 2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (except for the condensed consolidated statement of financial condition at June 30, 2005, which is derived from audited consolidated financial statements) have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The results of operations for the three and nine month periods ended March 31, 2006 are not necessarily indicative of the results of operations that may be expected for the Company’s fiscal year ending June 30, 2006.

The Company’s accounting policies are set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2005 audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2005. This quarterly report should be read in conjunction with such annual report.

Note 3. Earnings Per Share

Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assumes the exercise or issuance of all potential common stock instruments such as options, unless the effect is antidilutive (to reduce a loss or increase earnings per share). Shares owned by the Company’s ESOP that have not been committed to be released are not considered to be outstanding for the purposes of computing earnings per share. Earnings per share have been calculated in accordance with Statement of Position 93-6 “Employers’ Accounting for Employee Stock Ownership Plans” and Statement of Financial Accounting Standards No. 128: Earnings Per Share.

Earnings per share have been computed using the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding as follows:


	Three Months Ended March 31,		Nine Months Ended March 31,
	2006	2005	2006	2005
Weighted average shares outstanding	1,049,929	1,045,260	1,048,672	1,044,328
Potentially dilutive effect of stock options	1,766	1,598	1,440	886

Weighted average shares outstanding, including potentially dilutive effect of stock options	1,051,695	1,046,858	1,050,112	1,045,214

Note 4. Dividends Declared

On March 24, 2006, the Board of Directors of the Company declared a dividend of $0.05 a share for stockholders of record as of April 7, 2006 and payable on April 21, 2006. The dividends declared were accrued and reported in accounts payable and other liabilities in the March 31, 2006 Consolidated Statement of Financial Condition. AsheCo, MHC, the mutual holding company, waived the receipt of dividends declared by the Company.

Note 5. Stockholders’ Equity


	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total Stockholders’ Equity
*Balance, June 30, 2005*	$	10,537	$	4,687,955	$	8,375,186		$	40,171		$	(74,880	)	$	13,038,969

Transfer to redeemable common stock net of unearned ESOP shares		—		—		(70,074	)		—			—			(70,074	)
ESOP contribution		—		31,172		27,778			—			—			58,950
Cash dividend, $.15 per share		—		—		(77,463	)		—			—			(77,463	)
Net income		—		—		738,944			—			—			738,944
Common stock issued in connection with stock option exercise		9		18,945		—			—			—			18,954
Other comprehensive loss, net of tax:
Unrealized holding loss arising during period, net of tax benefit of $23,912		—		—		—			(46,910	)		—			(46,910	)

Comprehensive income															692,034

*Balance, March 31, 2006*	$	10,546	$	4,738,072	$	8,994,371		$	(6,739	)	$	(74,880	)	$	13,661,370

Note 6. Stock Options

The Company’s stockholders approved the Bank’s Stock Option Plan on December 8, 1997. The stock option plan provides for the issuance of up to 21,707 stock options to certain officers and directors in the form of incentive stock options or non-incentive stock options. No options have been granted since December 8, 1997.

At March 31, 2006, 13,604 options have been granted at an exercise price of $18.50, of which 13,604 options are fully vested and therefore currently exercisable. A summary of the changes in the Company’s options during the nine months ended March 31, 2006 and 2005 is presented below:


	2006		2005
Stock options outstanding at beginning of the year	14,573		21,707
Granted	—		—
Exercised	(969	)	—
Terminated	—		(7,134	)

Stock options outstanding at the end of the quarter	13,604		14,573

Stock options exercisable at the end of the quarter	13,604		14,573

Note 7. Segment Reporting

The Company had additional reportable segments: AF Bank, AF Brokerage, Inc. and AF Insurance Services, Inc. During the year ended June 30, 2005, AF Brokerage, Inc. was dissolved as a separate entity and as of June 30, 2005, operated as AF Investments, a subsidiary of AF Bank. The information below includes the operating results of AF Brokerage, Inc. during the 2005 fiscal year prior to the dissolution. AF Bank is a federally chartered stock savings bank. The principal activities of the Bank consist of obtaining savings deposits and providing credit to customers in its primary market area. AF Insurance Services, Inc. provides insurance services. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and nine months ended March 31, 2006 and March 31, 2005 is as follows (dollars in thousands):


	AF Financial Group			AF Bank		AF Insurance Services, Inc.			Inter- segment Elimination			Consolidated Totals
Three Months Ended March 31, 2006

Interest income	$	—		$	3,443	$	—		$	(2	)	$	3,441

Interest expense		127			1,341		13			(2	)		1,479

Net interest income		(127	)		2,102		(13	)		—			1,962
Provision for loan losses		—			111		—			—			111

Net interest income after provision		(127	)		1,991		(13	)		—			1,851
Non-interest income		—			416		891			(34	)		1,273
Non-interest expense		102			2,003		591			(34	)		2,662

Income (loss) before income taxes		(229	)		404		287			—			462
Income taxes		(73	)		158		112			—			197

Net income (loss)	$	(156	)	$	246	$	175		$	—		$	265

Assets	$	310		$	221,080	$	2,477		$	(603	)	$	223,264


	AF Financial Group			AF Bank		AF Insurance Services, Inc.			AF Brokerage Inc.			Inter- segment Elimination			Consolidated Totals
Three Months Ended March 31, 2005

Interest income	$	—		$	2,976	$	—		$	—		$	(1	)	$	2,975

Interest expense		125			1,070		11			—			(1	)		1,205

Net interest income		(125	)		1,906		(11	)		—			—			1,770
Provision for loan losses		—			85		—			—			—			85

Net interest income after provision		(125	)		1,821		(11	)		—			—			1,685
Non-interest income		—			353		685			90			(85	)		1,043
Non-interest expense		74			1,772		642			94			(85	)		2,497

Income (loss) before income taxes		(199	)		402		32			(4	)		—			231
Income taxes		(69	)		156		13			(1	)		—			99

Net income (loss)	$	(130	)	$	246	$	19		$	(3	)	$	—		$	132

Assets	$	360		$	215,731	$	2,228		$	197		$	(384	)	$	218,132


	AF Financial Group			AF Bank		AF Insurance Services, Inc.			Inter- segment Elimination			Consolidated Totals
Nine Months Ended March 31, 2006

Interest income	$	—		$	9,974	$	—		$	(5	)	$	9,969

Interest expense		393			3,740		42			(5	)		4,170

Net interest income		(393	)		6,234		(42	)		—			5,799
Provision for loan losses		—			180		—			—			180

Net interest income after provision		(393	)		6,054		(42	)		—			5,619
Non-interest income		—			1,299		2,206			(133	)		3,372
Non-interest expense		186			5,899		1,756			(133	)		7,708

Income (loss) before income taxes		(579	)		1,454		408			—			1,283
Income taxes		(185	)		569		160			—			544

Net income (loss)	$	(394	)	$	885	$	248		$	—		$	739

Assets	$	310		$	221,080	$	2,477		$	(603	)	$	223,264


	AF Financial Group			AF Bank			AF Insurance Services, Inc.			AF Brokerage Inc.			Inter- segment Elimination			Consolidated Totals
Nine Months Ended March 31, 2005

Interest income	$	—		$	8,858		$	—		$	1		$	(5	)	$	8,854

Interest expense		388			3,065			42			—			(5	)		3,490

Net interest income		(388	)		5,793			(42	)		1			—			5,364
Provision for loan losses		—			(129	)		—			—			—			(129	)

Net interest income after provision		(388	)		5,922			(42	)		1			—			5,493
Non-interest income		—			1,066			1,971			238			(259	)		3,016
Non-interest expense		243			5,563			1,819			295			(259	)		7,661

Income (loss) before income taxes		(631	)		1,425			110			(56	)		—			848
Income taxes		(207	)		555			42			(16	)		—			374

Net income (loss)	$	(424	)	$	870		$	68		$	(40	)	$	—		$	474

Assets	$	360		$	215,731		$	2,228		$	197		$	(384	)	$	218,132

Item 2. Management’s Discussion and Analysis

This Form 10-QSB contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and other business of the Company, that are subject to various factors which could cause actual results to differ materially from the estimates. These factors include: changes in general, economic and market conditions; the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company’s operations and investments; our ability to offer new products and increase lower cost core deposits; and depositor and borrower preferences. The Company disclaims any obligation to publicly announce future events or developments that may affect the forward-looking statements contained herein.

Overview

AF Financial Group (the “Company”) is a federally chartered thrift holding company that owns 100% of the common stock of AF Bank (the “Bank”), AF Insurance Services, Inc. (an independent insurance agency) and AF Capital Trust I (a Delaware business trust). The Company has no operations and conducts no business of its own other than ownership of its subsidiaries. The Bank is a federally chartered stock savings bank which was chartered in 1939 and the historical operations of AF Bank have been to provide fixed rate loans for the residents of Ashe County, North Carolina. Over the past several years, we have expanded our market area to include Alleghany, Caldwell, Surry, Watauga and Wilkes counties and have diversified our product lines by engaging in non-residential mortgage and non-mortgage lending and offering insurance and uninsured investment products. In July 1997, we started offering traditional property and casualty, life and health insurance products through AF Insurance Services, Inc., headquartered in West Jefferson, North Carolina and operating in Boone, Elkin, Jefferson, Lenoir, Sparta, West Jefferson and Wilkesboro, North Carolina.

During the fourth quarter of the 2005 fiscal year, AF Financial Group dissolved the broker/dealer subsidiary, AF Brokerage, Inc. We continue to offer the same level of service through a third party relationship that AF Bank has entered into with LaSalle Street Securities. This new structure allows us to offer a full array of investment products, including fixed-rate and variable annuities and mutual funds while reducing expenses associated with maintaining an independent broker/dealer registration. This new third party relationship operates as a division of AF Bank under the name AF Investments.

We are committed to the long-term profitability and success of AF Financial Group. There are a number of positive factors and recent events, which reflect our progress toward our long-term goals during the nine months ended March 31, 2006:

•

An increase in net loans of $7.6 million or 4.2%;

•

An increase in savings deposits of $10.1 million or 6.2%;

•

Asset growth of $9.2 million or 4.3%;

•

An increase in stockholders’ equity of $622,401 or 4.8%;

•

An increase in net income of $265,427, or 56.1%, during the nine months ended March 31, 2006 as compared to the nine months ended March 31, 2005;

•

An increase in noninterest income of $355,990 or 11.8% during the nine months ended March 31, 2006 as compared to the nine months ended March 31, 2005;

•

The completion of a core data processing system conversion for AF Bank that will provide cost savings in future quarters and provide a system that will allow our products and services to be more convenient for our customers.

Our operating results are primarily dependent upon net interest income, fees and charges and insurance commissions. Net interest income is the difference between interest earned on loans and investments and the interest paid on savings deposits and our borrowings. Our primary interest-earning asset is our loan portfolio representing 85.4% of total assets. Our net interest income is affected by changes in economic conditions that influence market interest rates and to a large extent by the monetary actions by the Federal Reserve. We have reduced the exposure to rising rates by limiting the term or the time to reprice the loans that we retain in our portfolio.

Net income increased $132,338 to $264,644 for the three months ended March 31, 2006 from $132,306 for the three month period ended March 31, 2005. Net income increased $265,427, or 56.1%, to $738,944 for the nine month period ended March 31, 2006 from $473,517 for the nine month period ended March 31, 2005. This change is primarily due to an increase in interest income due to the 200 basis point interest rate hike by the Federal Reserve during the twelve months ended March 31, 2006 and an increase in insurance commissions. At March 31, 2006 we had approximately $66.4 million in loans priced at prime or a margin thereto which provides for adjusting rates immediately when market rates change. In the rising rate environment that existed during the nine months ended March 31, 2006, our ability to make immediate rate adjustments on our loans priced at prime and our ability to move our deposit mix to less interest rate sensitive products has allowed us to increase our net interest margin. We believe that the stabilization of interest rates by the Federal Reserve will have a more positive impact on our net income than continued rate hike adjustments.

Critical Accounting Policies and Estimates

The notes to our audited consolidated financial statements for the year ended June 30, 2005 included in the AF Financial Group 2005 Annual Report on Form 10-KSB contain a summary of our significant accounting policies. We believe that our policies with respect to the methodology for our determination of the allowance for loan losses, the fair value of mortgage servicing assets and asset impairment judgments, including the recoverability of goodwill, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors. We consider the following accounting policies to be most critical in their potential effect on our financial position or results of operations:

Allowance for Loan Losses

The Allowance for Loan Losses (“ALL”) is established through a provision for loan losses based on our evaluation of the risks inherent in AF Bank’s loan portfolio, prior loss history and the general economy. The ALL is maintained at an amount we consider adequate to cover loan losses which are deemed probable and estimable. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, our assessment of the credit risk inherent in the portfolio, historical loan loss experience, and AF Bank’s underwriting policies.

All loans in the portfolio are assigned an allowance percentage requirement based on the type of underlying collateral and payment terms. Furthermore, loans are evaluated individually and are assigned a credit grade using such factors as the borrower’s cash flow, the value of the collateral and the strength of any guarantee. Loans identified as having weaknesses, or adverse credit grades, are assigned a higher allowance percentage requirement than loans where no weaknesses are identified. We routinely monitor our loan portfolio to determine if a loan is deteriorating, therefore requiring a higher allowance requirement. Factors we consider are payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

The allowance percentage requirement changes from period to period as a result of a number of factors, including: changes in the mix of types of loans; changes in credit grades within the portfolio, which arise from a deterioration or an improvement in the performance of the borrower; changes in the historical loss percentages and delinquency trends; current charge offs and recoveries; and changes in the amounts of loans outstanding.

Although we believe that we have established and maintained the ALL at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. We will continue to monitor and modify our ALL as conditions dictate.

Mortgage Servicing Assets

Mortgage servicing assets represent the present value of the future net servicing fees from servicing mortgage loans sold to the secondary market. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of mortgage servicing assets, which requires the development of a number of assumptions, including anticipated loan principal amortization and prepayments of principal. The value of mortgage servicing rights is significantly affected by mortgage interest rates available in the marketplace that influence the speed of mortgage loan prepayments. During periods of declining interest rates, the value of mortgage servicing assets generally declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing assets generally increases due to reduced refinance activity. We amortize mortgage servicing assets over the estimated period that servicing income is expected to be received based on estimates of the amount and timing of future cash flows. The amount and timing of servicing asset amortization is adjusted quarterly based on actual results and updated projections.

Goodwill

We evaluate the carrying value of goodwill annually by comparing the market value of each reporting segment to the respective total equity at that level. Impairment would then be determined if the equity exceeds the fair value of the reporting unit. This evaluation is subjective as it requires material estimates that may be susceptible to significant change. Goodwill is recorded in our reportable segment, AF Insurance Services, Inc.

Comparison of Financial Condition at March 31, 2006 and June 30, 2005:

Total assets increased by $9.2 million, or 4.3%, to $223.3 million at March 31, 2006 from $214.1 million at June 30, 2005. The increase in assets was primarily the result of an increase of $2.3 million, or 25.6%, in cash and cash equivalents and an increase of $7.6 million, or 4.2%, in net loans receivable, partially offset by a decrease of $862,150 in loans held for sale from June 30, 2005 to March 31, 2006. The increase in cash and cash equivalents is the result of the $10.1 million increase in savings deposits. The increase in net loans receivable is primarily due to the increases in one-to four family and non-residential loans during the nine months ended March 31, 2006. AF Bank operates in lending markets that have had sustained loan demand for mortgage loans over the last several years. One-to-four family mortgage loans increased $3.5 million from $96.4 million at June 30, 2005 to $99.9 million at March 31, 2006. Non-residential loans increased $3.1 million from $27.1 million at June 30, 2005 to $30.2 million at March 31, 2006.

Securities available for sale increased $244,339, or 6.3%, to $4.1 million at March 31, 2006 from $3.9 million at June 30, 2005. This increase was due to the purchase of investments totaling $1.0 million partially offset by the sell of two investments totaling $400,000 and the $278,915 proceeds received from principal payments on mortgage backed securities. At March 31, 2006, our investment portfolio had $4,844 in net unrealized losses as compared to net unrealized gains of $65,978 at June 30, 2005.

As mentioned above, net loans increased $7.6 million, or 4.2%, to $188.9 million at March 31, 2006 from $181.2 million at June 30, 2005. The following table sets forth the composition of our mortgage and other loan portfolios in dollar amounts and percentages at the dates indicated.


	At March 31, 2006				At June 30, 2005
	Amount		% of Total		Amount		% of Total
	(Dollars in thousands)
Mortgage loans:
One-to four-family	$	99,903	52.90	%	$	96,368	53.17	%
Multi-family		4,246	2.25	%		4,171	2.30	%
Non-residential		30,246	16.01	%		27,154	14.98	%
Land		17,894	9.47	%		17,155	9.47	%
Construction		11,716	6.20	%		11,416	6.30	%

Total mortgage loans	$	164,005	86.83	%	$	156,264	86.22	%

Other loans:
Commercial	$	16,783	8.89	%	$	15,972	8.82	%
Consumer loans		9,839	5.21	%		10,611	5.85	%

Total other loans	$	26,622	14.10	%	$	26,583	14.67	%

Gross loans	$	190,627	100.93	%	$	182,847	100.89	%

Less:
Unearned discounts and net deferred loan fees	$	232	0.12	%	$	220	0.13	%
Allowance for loan losses		1,529	0.81	%		1,385	0.76	%

		1,761	0.93	%		1,605	0.89	%

Loans, net	$	188,866	100.00	%	$	181,242	100.00	%

Savings deposits increased by $10.1 million, or 6.2%, from $164.0 million at June 30, 2005 to $174.1 million at March 31, 2006. We believe that the increase in deposits is attributable to our continuing effort to increase balances in savings and transaction accounts and in smaller, stable certificates of deposits. We intend to further focus our marketing efforts in this area and to offer new products to increase lower cost core deposits.

Short-term borrowings decreased $2.3 million, or 88.3%, to $300,000 at March 31, 2006 from $2.6 million at June 30, 2005. Long-term borrowings increased $115,356, or 0.4%, to $32.1 million at March 31, 2006 from $32.0 million at June 30, 2005. The decrease in short-term borrowings was funded by the $10.1 million increase in savings deposits discussed above. Management decided to pay off some borrowings with the increase in savings deposits because interest rates on new deposits were lower than rates on the borrowings that were repaid.

The Bank’s level of non-performing loans, defined as loans past due 90 days or more, increased to $1,215,837, or 0.54% of total assets, at March 31, 2006 compared to $366,930, or 0.17% of total assets, at March 31, 2005. The increase in the level of non-performing loans is primarily due to one nonresidential mortgage loan that was over 90 days delinquent as of March 31, 2006. Management believes that the Bank has sufficient collateral and does not anticipate a loss on this loan. The Bank recognized total charge-offs of $64,305 during the nine months ended March 31, 2006 compared to total charge-offs of $126,452 during the nine months ended March 31, 2005. Total recoveries during the nine months ended March 31, 2006 decreased to $27,600 for the nine months ended March 31, 2006 from $425,292 for the nine months ended March 31, 2005. The Bank recognized net charge-offs of approximately $36,705 during the nine months ended March 31, 2006 compared to a net recovery of $298,840 for the nine months ended March 31, 2005. The net recovery during the nine months ended March 31, 2005 is primarily due to a recovery on one commercial loan that was charged off in a prior year.

The ALL to total non-performing assets and to total non performing loans totaled 125.73% at March 31, 2006 compared to 748.87% at June 30, 2005. This decrease was primarily attributable to an increase in the level of non-performing loans during the nine months ended March 31, 2006. Non-performing loans totaled $185,000 at June 30, 2005 compared to $1,215,837 at March 31, 2006. The increase in non-performing loans is primarily due to one nonresidential commercial loan that was over 90 days delinquent at March 31, 2006. Due to this increase in non-performing loans and based upon a detailed analysis of the overall quality of our loan portfolio, we made a $180,000 provision to the ALL during the nine month period ended March 31, 2006. This additional provision increased the level of the ALL by $143,294 during the nine months ended March 31, 2006. The ALL to total loans totaled 0.80% at March 31, 2006 compared to 0.76% at June 30, 2005.

The following table sets forth activity in the Bank’s ALL at or for the dates indicated.


	For the Nine Months Ended March 31, 2006			For the Nine Months Ended March 31, 2005
	(Dollars in thousands)
Balance at beginning of year	$	1,385		$	1,245
Provision for loan losses		180			(129	)

Charge-offs:
One- to four-family residential		(28	)		(16	)
Multi-family residential		—			—
Non-residential and land		—			—
Construction		—			—
Commercial		—			—
Consumer loans		(36	)		(110	)

Total charge-offs		(64	)		(126	)

Recoveries:
One- to four-family residential		2			13
Multi-family residential		—			—
Non-residential and land		—			—
Construction		—			—
Commercial		—			342
Consumer loans		26			70

Total recoveries		28			425

Balance at end of period	$	1,529		$	1,415


	At March 31, 2006			At June 30, 2005
Total loans outstanding	$	190,627		$	182,847

Allowance for loan losses	$	1,529		$	1,385

Allowance for loan losses to total loans at end of period		0.80	%		0.76	%

Allowance for loan losses to total non-performing assets at end of period		125.73	%		748.87	%

Allowance for loan losses to total non-performing loans at end of period		125.73	%		748.87	%

Comparison of Operating Results for the Three and Nine Months Ended March 31, 2006 and 2005:

Net income for the three-month period ended March 31, 2006 increased $132,338 to $264,644 compared to net income of $132,306 during the same period in 2005. Net income for the nine-month period increased $265,427 to $738,944 compared to $473,517 during the nine-month period ended March 31, 2005. The increase in net income during the three-and nine-month periods was attributable to an increase in interest income and noninterest income partially offset by an increase in interest expense.

Interest Income. Interest income increased by $466,618, or 15.7%, from $2,974,680 for the three-month period ended March 31, 2005 to $3,441,298 for the three-month period ended March 31, 2006. Interest income increased by $1,115,128, or 12.6%, from $8,853,862 for the nine-month period ended March 31, 2005 to $9,968,990 for the nine-month period ended March 31, 2006. Interest income from loans increased $429,966, or 14.9%, from $2,889,065 for the three-month period ended March 31, 2005 to $3,319,031 for the three-month period ended March 31, 2006. Interest income from loans increased $1,017,663, or 11.8%, from $8,640,503 for the nine-month period ended March 31, 2005 to $9,658,166 for the nine-month period ended March 31, 2006. The increase in interest income from loans for the three-and nine-month periods was attributable to an increase in the weighted average rate on portfolio loans and an increase in the outstanding loan balances. The weighted average rate on portfolio loans increased ..78% from 6.27% at March 31, 2005 to 7.05% at March 31, 2006, primarily due to the 200 basis point interest rate hike by the Federal Reserve during the twelve months ended March 31, 2006. Total loans increased $3.4 million from $187.2 million at March 31, 2005 to $190.6 million at March 31, 2006.

Interest Expense. Interest expense increased by $273,438, or 22.7%, to $1,478,953 for the three-month period ended March 31, 2006 from $1,205,515 for the three-months ended March 31, 2005. Interest expense increased by $680,016, or 19.5%, to $4,169,896 for the nine-month period ended March 31, 2006 from $3,489,880 for the nine months ended March 31, 2005. Interest expense on savings deposits increased $342,761 from $703,815 for the three months ended March 31, 2005 to $1,046,576 for the three months ended March 31, 2006. Interest expense on savings deposits increased $802,210 from $2,022,293 for the nine months ended March 31, 2005 to $2,824,503 for the nine months ended March 31, 2006. These increases were primarily attributable to the increase in savings deposits and to an increase of the weighted average rate paid on deposits. Savings deposits increased $9.9 million from $164.2 million at March 31, 2005 to $174.1 million at March 31, 2006. The weighted average rate paid on savings deposits increased .75% from 1.80% at March 31, 2005 to 2.55% at March 31, 2006.

Net Interest Income. Net interest income increased by $193,180, or 10.9%, from $1,769,165 for the three- month period ended March 31, 2005 to $1,962,345 for the three-month period ended March 31, 2006. Net interest income increased by $435,112, or 8.1%, from $5,363,982 for the nine-month period ended March 31, 2005 to $5,799,094 for the nine-month period ended March 31, 2006. The increases in net interest income during the three-and nine-month periods ended March 31, 2006 is the result of the increase in the weighted average interest rate earned on the loan portfolio, partially offset by the increase in interest expense, as discussed above. We do not believe that there has been a material change in interest rate risk from the end of our most recent fiscal year.

Provision for Loan Losses. The provision for loan losses charged to earnings is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb probable losses on existing loans that may become uncollectible. Loans are charged off against the allowance when we believe collection is unlikely. The allowance for loan losses changes from period to period as a result of a number of factors, including: changes in the mix of types of loans; changes in credit grades within the portfolio, which arise from a deterioration or an improvement in the performance of the borrower; changes in the historical loss percentages and delinquency trends; current charge offs and recoveries; and changes in the amounts of loans outstanding. The net change in all of the components results in the provision for loan losses. We had no significant changes in any of the factors mentioned above during the three-and nine-months ended March 31, 2006.

We made a $111,000 provision to the allowance for loan losses during the three-month period ended March 31, 2006, compared to a provision for loan losses of $85,000 made during the three-month period ended March 31, 2005. We made a $180,000 provision to the ALL during the nine-month period ended March 31, 2006, compared to a net reversal of provision for loan losses of $128,922 made during the nine-month period ended March 31, 2005. The increases in the amount of the provision expense during the nine-month period ended March 31, 2006 is primarily due to a $309,080 recovery from a commercial loan that was previously charged off during the nine-months ended March 31, 2005 resulting in net recoveries for the period of $298,840. Conversely, we had net charge-offs of $36,705 during the nine months ended March 31, 2006.

As mentioned above, during the nine-month period ended March 31, 2006 we had net charge-offs of $36,705. We made a $180,000 provision to the ALL during the nine-month period ended March 31, 2006 based upon an analysis of the quality of our loan portfolio. Future loan loss provision requirements are uncertain. At March 31, 2006, our level of ALL amounted to $1,528,706, or 0.80% of total loans, as compared to $1,385,412 of ALL, or 0.76% of total loans at June 30, 2005, which we believe is adequate to absorb any probable losses inherent in our loan portfolio.

Noninterest Income. Noninterest income increased by $229,071, or 22.0%, from $1,043,598 for the three- month period ended March 31, 2005 to $1,272,669 for the three months ended March 31, 2006. Noninterest income increased by $355,990, or 11.8%, from $3,015,829 for the nine-month period ended March 31, 2005 to $3,371,819 for the nine months ended March 31, 2006. The increase in noninterest income during the three-and nine-month periods ended March 31, 2006 was primarily attributable to increases in transaction fees on deposit accounts and an increase in insurance commissions. The increase in transaction fees on deposit accounts is primarily attributable to an increase in the number of transaction accounts and an increase in the amount of transaction fees charged for services on deposit accounts. These trends are expected to continue to produce growth in non-interest income. The increase in insurance commissions is primarily due to an increase in contingency income received from the insurance companies we represent as compared to the same time period in 2005. The increase in contingency income is due to an improved claims ratio and the increased volume of business we place with the carriers we represent.

Non-Interest Expense. Non-interest expense increased by $165,499, or 6.6%, from $2,496,879 for the three months ended March 31, 2005 to $2,662,378 for the three months ended March 31, 2006. Non-interest expense increased by $47,416, or 0.6%, from $7,660,736 for the nine months ended March 31, 2005 to $7,708,152 for the nine months ended March 31, 2006. The increase in non-interest expense for the three-and nine-month periods ended March 31, 2006 is primarily attributable to an increase in compensation and employee benefit expense and an increase in computer processing charges partially offset by a decrease in expenses on real estate owned. Compensation and employee benefit increased during the three and nine months ended March 31, 2006 due to an increase in salaries and an increase in overtime expenses paid. Increased overtime expenses are due to the Bank’s core data processing conversion that occurred during the third quarter of the current fiscal year.

Computer processing charges increased $51,554 from $167,710 for the three months ended March 31, 2005 to $219,264 for the three months ended March 31, 2006. Computer processing charges increased $139,538 from $503,931 for the nine months ended March 31, 2005 to $643,469 for the nine months ended March 31, 2006. These increases are due to expenses associated with the Bank’s core data processing conversion. Expenses on real estate owned decreased $164,235 during the nine-month period ended March 31, 2006 compared to the nine-month period ended March 31, 2005. No REO was held by the Company at March 31, 2006 as compared to REO of $240,000 at March 31, 2005.

Income Taxes. Income taxes resulted from applying normal, expected tax rates on income earned during the three and nine months ended March 31, 2006 and 2005. The income tax expense was $196,992 for the three months ended March 31, 2006 compared to the income tax expense of $98,578 for the three months ended March 31, 2005. The income tax expense was $543,817 for the nine months ended March 31, 2006 compared to the income tax expense of $374,480 for the nine months ended March 31, 2005. The effective tax rate was higher than statutory tax rates, resulting primarily from the fact that North Carolina corporations may not file consolidated income tax returns. This has the effect of taxing all income in a particular member of a consolidated group without permitting an offsetting benefit for losses incurred in another member of the same group, creating a higher than expected “overall” state income tax expense.

Capital Resources and Liquidity:

The term “liquidity” generally refers to an organization’s ability to generate adequate amounts of funds to meet its needs for cash. More specifically, for financial institutions, liquidity ensures that adequate funds are available to meet deposit withdrawals, fund loan demand and capital expenditure commitments, maintain reserve requirements, pay operating expenses, and provide funds for debt service, dividends to stockholders, and other institutional commitments. The Company’s primary sources of funds consist of deposits, borrowings, repayment and prepayment of loans, sales and participations of loans, maturities of securities and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and maturities of securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions, and competition. The Company uses its liquid resources primarily to fund existing and future loan commitments, to fund net deposit outflows, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses. For additional information about cash flows from the Company’s operating, financing and investing activities, see “Condensed Consolidated Statements of Cash Flow.”

Liquidity management is both a daily and long-term function of management. If we require funds beyond our ability to generate them internally, we believe we could borrow additional funds from the FHLB and use the wholesale deposit markets. At March 31, 2006, we had borrowings of $26.1 million from the FHLB. The Bank also maintains borrowing agreements with the FRB of Richmond, Virginia.

The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit scheduled to mature in less than one year totaled $67.5 million at March 31, 2006. Based upon historical experience, we believe that a significant portion of such deposits will remain with the Bank.

As of March 31, 2006, cash and cash equivalents, a significant source of liquidity, totaled $11.1 million. The OTS regulations require the Company to maintain sufficient liquidity to ensure its safe and sound operation. Given our level of liquidity and our ability to borrow from the FHLB, we believe that we will have sufficient funds available to meet anticipated future loan commitments, unexpected deposit withdrawals, and other cash requirements. We do not anticipate any financial or insurance acquisitions at this time.

Capital management is another important daily and long-term function of management. While we currently meet all regulatory capital levels, we monitor this level on an ongoing basis. Our principal goals related to capital management are to provide an adequate return to shareholders while retaining a sufficient foundation from which to support future growth and to comply with all regulatory guidelines.

Off Balance-Sheet Arrangements:

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital resources or expenditures that are material to investors. The Company has executed a letter of intent to participate in a $5.0 million trust preferred issuance during the first quarter of the 2007 fiscal year. At approximately the same time this new issuance settles, the Company intends to pay off the existing $5.0 million trust preferred issuance. The Company will have to pay an early redemption cost of approximately $384,375. This amount is expected to be expensed during the first quarter of the 2007 fiscal year. The Company expects that the new issuance will be priced at a floating rate of LIBOR plus 150 basis points compared to the current issuance which is at a fixed rate of 10.25%.

New Accounting Pronouncements:

In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first interim reporting period of the first fiscal year that begins on or after December 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2006. Since all options granted were fully vested on December 8, 2001 there would be no cost of employee stock option compensation in our consolidated financial statements for the three and nine months ended March 31, 2006 and 2005. Accordingly, the adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.

Item 3. Controls and Procedures

The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. The Company’s Board of Directors, operating through its Audit Committee, which is composed entirely of independent outside directors, provides oversight of the Company’s financial reporting process.

Management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that the controls and procedures ensure that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 6. Exhibits


2.1		Agreement and Plan of Reorganization dated September 15, 1997 by and among Ashe Federal Bank, AF Bankshares, Inc. and Ashe Interim Savings Bank (Incorporated by reference to Exhibit 2.1 of the Registration Statement on Form 8-A, as filed with the SEC on June 16, 1998 (the “Form 8-A”)).

3.1		Federal Stock Charter of the Company (Incorporated by reference to Exhibit 3.1 of the Form 8-A).

3.2		Bylaws of the Company (Incorporated by reference to Exhibit 3.2 of the Form 8-A).

4.1		Common Stock Certificate of the Company (Incorporated by reference to Exhibit 4.3 of the Form 8-A).

4.2		Indenture dated July 16, 2001 by and between AF Bankshares, Inc. and The Bank of New York (Incorporated by reference to Exhibit 4.2 of the Annual Report on Form 10-KSB, as filed with the SEC on September 29, 2003 (the “2003 Form 10-KSB”)).

4.3		Guarantee Agreement of AF Bankshares, Inc. dated July 16, 2001 (Incorporated by reference to Exhibit 4.3 of the 2003 Form 10-KSB).

10.1		Employment Agreement between AF Bank and Melanie Paisley Miller dated November 18, 2002 (Incorporated by reference to Exhibit 10.2 of the 2003 Form 10-KSB).

10.2		Employment Agreement with Martin G. Little, Senior Vice President and Chief Lending Officer (Incorporated by reference to Exhibit 10.3 of the Annual Report on Form 10-KSB, as filed with the SEC on September 29, 1998 (the “1998 Form 10-KSB”).

10.3		Employee Stock Ownership Plan of Ashe Federal Bank (Incorporated by reference to Exhibit 10.4 of the 1998 Form 10-KSB).

10.4		Amendment No. 1 to the Employee Stock Ownership Plan of AF Bank (Incorporated by reference to Exhibit 10.5 of the 2003 Form 10-KSB).

10.5		Amendment No. 2 to the Employee Stock Ownership Plan of AF Bank (Incorporated by reference to Exhibit 10.6 of the 2003 Form 10-KSB).

10.6		Amendment No. 3 to the Employee Stock Ownership Plan of AF Bank (Incorporated by reference to Exhibit 10.7 of the 2003 Form 10-KSB).

10.7		Amendment No. 4 to the Employee Stock Ownership Plan of AF Bank (Incorporated by reference to Exhibit 10.7 of the 2003 Form 10-KSB).

10.8		Salary Continuation Agreement between AF Bankshares, Inc. and Melanie Paisley Miller dated April 15, 2002 (Incorporated by reference to Exhibit 10.10 of the 2003 Form 10-KSB).


10.9		Employment Agreement between AF Financial Group and Melanie Paisley Miller dated November 18, 2002 (Incorporated by reference to Exhibit 10.13 of the 2003 Form 10-KSB).

10.10		Amended and Restated Retirement Plan for Board Members of AF Bank (Incorporated by reference to Exhibit 10 of the Form 8-K filed with the SEC on October 26, 2005).

31.1		Rule 13a-14(a)/15d-14(a) Certifications

31.2		Rule 13a-14(a)/15d-14(a) Certifications

32.1		Section 1350 Certifications

32.2		Section 1350 Certifications

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	AF Financial Group

Dated May 12, 2006	By:	/s/ Melanie Paisley Miller
		Melanie Paisley Miller
		Chief Financial Officer, Executive Vice President, Secretary, Treasurer

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