ASHE FEDERAL BANK

                      AGREEMENT AND PLAN OF REORGANIZATION

         THIS AGREEMENT AND PLAN OF REORGANIZATION, dated September 15, 1997, is
by and among ASHE FEDERAL BANK, a federal  stock  savings bank (the "Bank");  AF
BANKSHARES,   INC.,  a  federally-chartered   corporation  (the  "Stock  Holding
Company"),  and ASHE INTERIM SAVINGS BANK, a to-be-formed  interim federal stock
savings bank ("Interim").

         The  parties  hereto  desire  to enter  into an  Agreement  and Plan of
Reorganization  whereby the corporate  structure of the Bank will be reorganized
into  the  stock  holding  company  form  of  ownership.   The  result  of  such
reorganization  will be that immediately after the Effective Date (as defined in
Article V below),  all of the issued and outstanding shares of common stock, par
value $0.01 per share,  of the Bank will be held by the Stock  Holding  Company,
and the holders of the issued and outstanding shares of common stock of the Bank
will become the holders of the issued and outstanding  shares of common stock of
the Stock Holding Company.

         The  reorganization  of the Bank will be  accomplished by the following
steps:  (1) the formation by the Bank of the Stock  Holding  Company as a wholly
owned subsidiary; (2) the formation of Ashe Interim Savings Bank ("Interim"), an
interim  federal  stock  savings  bank which  will be wholly  owned by the Stock
Holding  Company;  and (3) the merger of Interim into the Bank, with the Bank as
the surviving  corporation.  Pursuant to such merger: (i) each of the issued and
outstanding shares of common stock of the Bank will be converted by operation of
law into an equal number of issued and outstanding shares of common stock of the
Stock Holding  Company;  and (ii) each of the issued and  outstanding  shares of
common stock of Interim will automatically be converted by operation of law into
an equal  number of issued and  outstanding  shares of common stock of the Bank.
Notwithstanding  any other provision  herein, at any time prior to the Effective
Date,  the Bank shall be entitled to revise the structure of the merger or other
transactions  contemplated  hereby or the manner of effecting such transactions;
provided,  that each of the  transactions  comprising such revised  structure or
manner shall not, as a result of such revision,  subject any of the stockholders
of the  Bank to  adverse  tax  consequences.  This  agreement  and  any  related
documents  shall be  appropriately  amended in order to reflect any such revised
structure.

         NOW,  THEREFORE,  in order to  consummate  this  Agreement  and Plan of
Reorganization,  and in  consideration of the mutual covenants herein set forth.
the parties agree as follows:

                                    ARTICLE I

                             MERGER OF INTERIM INTO
                          THE BANK AND RELATED MATTERS

         1.1 On the  Effective  Date,  Interim  will be merged with and into the
Bank (the "Merger") and the separate  existence of Interim shall cease,  and all
assets and property (real, personal and mixed,  tangible and intangible,  choses
in action,  rights and credits)  then owned by Interim,  or which would inure to
it, shall  immediately  and  automatically,  by operation of law and without any
conveyance, transfer, or further action,

                                        1

become the property of the Bank.  The Bank shall be deemed to be a  continuation
of Interim, and the Bank shall succeed to the rights and obligations of Interim.

         1.2  Following  the Merger,  the  existence of the Bank shall  continue
unaffected  and  unimpaired  by the  Merger,  with all the  rights,  privileges,
immunities  and  powers,  and  subject to all the duties and  liabilities,  of a
corporation  organized under federal law. The Charter and Bylaws of the Bank, as
presently  in effect,  shall  continue in full force and effect and shall not be
changed in any manner whatsoever by the Merger.

         1.3 From and after the  Effective  Date,  and subject to the actions of
the Board of Directors of the Bank, the business presently conducted by the Bank
(whether directly or through its subsidiaries)  will continue to be conducted by
it, as a wholly  owned  subsidiary  of Stock  Holding  Company,  and the present
directors and officers of the Bank will continue in their present positions. The
home office and branch offices of the Bank in existence immediately prior to the
Effective  Date  shall  continue  to be the  home  office  and  branch  offices,
respectively, of the Bank from and after the Effective Date.

                                   ARTICLE II

                               CONVERSION OF STOCK

         2.1 The terms and  conditions  of the Merger,  the mode of carrying the
same into effect, and the manner and basis of converting the common stock of the
Bank into common stock of the Stock Holding  Company  pursuant to this Agreement
shall be as follows:

                  A. On the  Effective  Date,  each share of common  stock,  par
value $0.01 per share, of the Bank issued and outstanding  immediately  prior to
the Effective Date shall automatically by operation of law be converted into and
shall become one share of common stock,  par value $0.01 per share, of the Stock
Holding Company (the "Stock Holding Company Common Stock"). Each share of common
stock of Interim issued and outstanding  immediately prior to the Effective Date
shall,  on the Effective  Date,  automatically  by operation of law be converted
into and become  one share of common  stock,  $0.01 par value per share,  of the
Bank and shall  not be  further  converted  into  shares  of the  Stock  Holding
Company,  so that from and after  the  Effective  Date,  all of the  issued  and
outstanding  shares  of  common  stock  of the Bank  shall be held by the  Stock
Holding Company.

                  B. On the Effective  Date,  the current stock option plans and
recognition  plans  of  the  Bank  (collectively,  the  "Benefit  Plans")  shall
automatically,  by operation  of law, be continued as Benefit  Plans of the Bank
and/or the Stock  Holding  Company.  Each option to purchase  shares of the Bank
common stock under the Bank's stock option plan outstanding at that time will be
automatically  converted into an identical option,  with identical price,  terms
and  conditions,  to purchase  an  identical  number of shares of Stock  Holding
Company  Common  Stock in lieu of shares  of the Bank  common  stock.  The Stock
Holding  Company  and the Bank may make  appropriate  amendments  to the Benefit
Plans to reflect the  adoption  of the  Benefit  Plans as the plans of the Stock
Holding  Company,  without  adverse  effect  on  the  Benefit  Plans  and  their
participants.

                  C.  From and  after  the  Effective  Date,  each  holder of an
outstanding certificate or certificates that, prior thereto,  represented shares
of the Bank common stock,  shall,  upon  surrender of the same to the designated
agent of the Bank, be entitled to receive in exchange therefor a certificate or

                                        2

certificates  representing  the number of whole shares of Stock Holding  Company
Common Stock into which the shares theretofore represented by the certificate or
certificates  so  surrendered  shall have been  converted,  as  provided  in the
foregoing  provisions  of this  Section  2.1.  Until so  surrendered,  each such
outstanding  certificate which, prior to the Effective Date,  represented shares
of Bank common stock shall be automatically  deemed for all purposes to evidence
the  ownership  of the equal  number of whole  shares of Stock  Holding  Company
Common Stock. Former holders of shares of Bank common stock will not be required
to exchange their Bank common stock certificates for new certificates evidencing
the same  number of shares of Stock  Holding  Company  Common  Stock.  If in the
future the Stock  Holding  Company  determines  to effect an  exchange  of stock
certificates,  instructions  will be sent to all  holders  of  record  of  Stock
Holding Company Common Stock.

                  D. All shares of Stock Holding Company Common Stock into which
shares of the Bank  common  stock  shall have been  converted  pursuant  to this
Article  II shall be  deemed to have been  issued  in full  satisfaction  of all
rights pertaining to such converted shares.

                  E. On the Effective Date, the holders of certificates formerly
representing the Bank common stock outstanding on the Effective Date shall cease
to have any rights with respect to the stock of the Bank common stock, and their
sole rights shall be with  respect to the Stock,  Holding  Company  Common Stock
into which their  shares of the Bank common  stock shall have been  converted by
the Merger.

                                   ARTICLE III

                                   CONDITIONS

         3.1 The  obligations of the Bank,  Stock Holding Company and Interim to
effect  the Merger  and  otherwise  consummate  the  transactions  which are the
subject  matter  hereof  shall  be  subject  to  satisfaction  of the  following
conditions:

                  A.  To the  extent  required  by  applicable  law,  rules  and
regulations,  the holders of the  outstanding  shares of the Bank  common  stock
shall, at a meeting of the  stockholders of the Bank duly called,  have approved
this Agreement by the  affirmative  vote of a majority of the shares of the Bank
common stock.

                  B. Any and all  approvals  from the OTS,  the  Securities  and
Exchange   Commission   and  any  other  federal   governmental   agency  having
jurisdiction  necessary  for  the  lawful  consummation  of the  Merger  and the
issuance and delivery of Stock Holding  Company Common Stock as  contemplated by
this Agreement shall have been obtained.

                  C. The Bank shall have  received  either (i) a ruling from the
Internal  Revenue  Service or (ii) an  opinion  from its legal  counsel,  to the
effect  that the  Merger  will be  treated as a  non-taxable  transaction  under
applicable provisions of the Internal Revenue Code of 1986, as amended, and that
no gain or loss  will be  recognized  by the  stockholders  of the Bank upon the
exchange of the Bank common stock held by them solely for Stock Holding  Company
Common Stock.

                                        3



                                   ARTICLE IV

                                   TERMINATION

         4.1 This  Agreement  may be  terminated  at the  election of any of the
parties hereto if any one or more of the conditions to the obligations of any of
them hereunder shall not have been satisfied and shall have become  incapable of
fulfillment  and shall not be waived.  This  Agreement may also be terminated at
any time prior to the  Effective  Date by the mutual  consent of the  respective
Boards of Directors of the parties.

         4.2 In the event of the  termination of this Agreement  pursuant to any
of the  foregoing  provisions,  no party  shall have any  further  liability  or
obligation of any nature to any other party under this Agreement.

                                    ARTICLE V

                            EFFECTIVE DATE OF MERGER

         5.1 Upon  satisfaction  or waiver (in accordance with the provisions of
this  Agreement) of each of the conditions set forth in Article III, the parties
hereto  shall cause to be filed with the OTS  Articles of  Combination  and such
certificates or further documents as shall be required by the OTS, and with such
other federal regulatory  agencies as may be required.  Upon approval by the OTS
and endorsement of such Articles of Combination by the OTS, the Merger and other
transactions   contemplated  by  this  Agreement  shall  become  effective.  The
Effective Date for all purposes  hereunder shall be the date of such endorsement
by the OTS.

                                   ARTICLE VI

                                  MISCELLANEOUS

         6.1 Any of the terms or conditions of this Agreement, which may legally
be waived, may be waived at any time by any party hereto that is entitled to the
benefit  thereof,  or any of such terms or conditions may be amended or modified
in whole or in part at any time, to the extent  authorized by applicable law, by
an agreement in writing, executed in the same manner as this Agreement.

         6.2 Any of the terms or conditions of this  Agreement may be amended or
modified in whole or in part at any time, to the extent  permitted by applicable
law, rules, and regulations,  by an amendment in writing, provided that any such
amendment  or  modification  is not  materially  adverse to the Bank,  the Stock
Holding Company or their stockholders. In the event that any governmental agency
requests or requires that the  transactions  contemplated  herein be modified in
any respect as a condition  of  providing  a  necessary  regulatory  approval or
favorable  ruling,  or that in the  opinion  of  counsel  such  modification  is
necessary to obtain such approval or ruling, this Agreement may be modified,  at
any time before or after adoption thereof by the stockholders of the Bank, by an
instrument in writing,  provided that the effect of such amendment  would not be
materially adverse to the Bank, Stock Holding Company or their stockholders.

         6.3 This Agreement shall be governed by and construed under the laws of
the United States.

                                        4


         IN  WITNESS  WHEREOF,  the  parties  hereto  have  duly  executed  this
Agreement and Plan of Reorganization as of the date first above written.

                                      ASHE FEDERAL BANK

                                      By:  /s/ James A. Todd
                                           -------------------------------------
                                           James A. Todd
                                           President and Chief Executive Officer


                                      AF BANKSHARES, INC.
                                      (IN FORMATION)

                                      By:  /s/ James A. Todd
                                           -------------------------------------
                                           James A. Todd
                                           President and Chief Executive Officer


                                      ASHE INTERIM SAVINGS BANK
                                      (IN FORMATION)

                                      By:  /s/ James A. Todd
                                           -------------------------------------
                                           James A. Todd
                                           President and Chief Executive Officer

                                        5