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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


                                  FORM 10-KSB

[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT
      OF 1934

            For the fiscal year ended September 30, 1999

                                      OR

[  ]  TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934

       For the transition  period  from                 to
                                        ---------------     ----------------
       Commission File Number 0-23323

                      THE BRYAN-COLLEGE STATION FINANCIAL
                                HOLDING COMPANY
                (Name of Small Business Issuer in its Charter)

         Delaware                                             36-4153491
(State or Other Jurisdiction of                            (I.R.S. Employer
  Incorporation or Organization)                            Identification
                                                            Number)


   2900 Texas Avenue
      Bryan, Texas                                              77802
(Address of Principal Executive Offices)                      (Zip Code)

       Issuer's telephone number, including area code: (409) 779-2900

        Securities Registered Under Section 12(b) of the Exchange Act:

                                     None

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

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

     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 twelve  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

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of Issuer'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.

      The Issuer had $245,000 in net income for the fiscal year ended  September
30, 1999.

      As of December 28, 1999, there were issued and outstanding  428,409 shares
of the Issuer's  Common  Stock.  The Issuer's  voting stock is not regularly and
actively traded,  and there are no regularly quoted bid and asked prices for the
Issuer's  voting  stock.  Accordingly,  the  Issuer is unable to  determine  the
aggregate market value of the voting stock held by non-affiliates.

                      DOCUMENTS INCORPORATED BY REFERENCE

     PARTS II and IV of Form  10-KSB - Annual  Report  to  Stockholders  for the
Fiscal Year Ended  September 30, 1999.  Transitional  Small Business  Disclosure
Format: YES NO X

      PART III of Form  10-KSB  - Proxy  Statement  for the  Annual  Meeting  of
Stockholders for the fiscal year ended September 30, 1999.

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<PAGE>
                                    PART I

Item 1.  Description of Business

General

      The Bryan-College Station Financial Holding Company (the "Holding Company"
and, when referred to with First Federal Savings Bank, the "Combined  Company"),
a  Delaware  corporation,  was  formed  as of April 1,  1998 to act as a unitary
thrift  holding  company for First Federal  Savings Bank,  Bryan,  Texas ("First
Federal" or the "Bank") by acquiring 100% of the stock of First Federal  through
the  exchange of  approximately  32% of First  Federal  common stock for Holding
Company  common stock and the  purchase of  approximately  68% of First  Federal
common stock for cash (the "Acquisition"). The Holding Company received approval
from the Office of Thrift  Supervision  (the "OTS") to acquire all of the common
stock  of  the  Bank  outstanding  upon  completion  of  the  Acquisition.   The
Acquisition  was  completed  on April 1, 1998.  All  references  to the Combined
Company,  unless  otherwise  indicated,  at or before April 1, 1998 refer to the
Bank.

     First Federal is a federally  chartered,  independent  thrift  institution,
headquartered in Bryan-College  Station,  Texas, which began operations in 1965.
First Federal is  predominantly a residential  mortgage and consumer  automobile
lender, originating loans primarily in Bryan-College Station and the surrounding
immediate  trade area, and now expanding into the general trade area bordered by
the   growing   "Texas   Triangle"   of   Houston,   Austin-San   Antonio,   and
Dallas-Ft.Worth. First Federal originates a significant amount of consumer loans
primarily  secured by automobiles  through selected  automobile  dealers.  These
loans  are  partially  insured  against  loss by  credit-default  insurance.  In
addition, to a lesser extent, First Federal originates residential  construction
loans  in its  immediate  trade  area,  Small  Business  Administration  ("SBA")
partially guaranteed loans throughout the "Texas Triangle", and small commercial
real  estate  and small to  medium  commercial  business  loans.  First  Federal
converted from the mutual to stock form of  organization  and  recapitalized  in
1993. As a result of First Federal's  transition to full-service banking in 1994
and 1995, and the incurring of the expenses  associated  therewith  (such as new
data processing,  tellers and drive-in  facilities),  net income was $193,000 in
1994 and  $211,000  in 1995.  In 1996,  net  income  rose to  $454,000  before a
one-time charge of $220,000 to recapitalize  the Savings  Association  Insurance
Fund.  In 1997,  net income  rose to $605,000  and to $628,000 in 1998.  In this
fiscal year, net income increased 30% to $815,000.

     Implementing  new strategy,  in 1994 and 1995,  senior  management of First
Federal began expanding its core  residential  mortgage lending and by investing
in innovative, niche business with higher risk-adjusted returns than residential
loans such as its Second  Chance  Auto Loan  Program,  in order to compete  more
effectively in its "niche" market,  increase the overall  profitability of First
Federal  and enhance  stockholder  value.  In  addition to its core  residential
mortgage and Second  Chance  consumer auto lending  business,  since fiscal 1994
First Federal has increased its focus on the following products:

         0        SBA loans  (partially  government  guaranteed)  throughout the
                  "Texas  Triangle" by utilizing First Federal's new designation
                  as a certified  SBA lender,  and managed by an  experienced  &
                  seasoned SBA loan originator hired in
                  1999.
         0        Direct consumer lending.

                                      2

<PAGE>



         0        Commercial  lending  to  small  and  medium-sized  businesses,
                  secured  by  "hard   collateral"   such  as  real  estate  and
                  automobiles.
         0        Commercial  real  estate  lending,  primarily  to small  and
                  medium-sized businesses
         0        Home improvement loans.

      First  Federal funds these lending  products  using a retail  deposit base
gathered  in  its  home  market  of  Bryan-College  Station  as  well  as in the
surrounding  counties  of  Burleson,   Grimes,  Leon,  Madison,   Robertson  and
Washington,  which  comprise  its  immediate  trade area.  Because of the unique
charter  granted to the Holding  Company which permits it to enter into any type
of lawful business (subject to regulatory oversight),  whether or not related to
banking (as long as such business is safe and  profitable),  its strategic  plan
over the next three years is to safely and  profitably  diversify into different
types of  businesses,  products and services and carefully  expand  further into
this "Texas Triangle", including expanding the business of its primary operating
subsidiary,  First  Federal (as its capital will permit)  through  strategically
located,   low-cost  and  profitable  loan   production   offices  and  low-cost
full-service  mini-branches -- in order to enhance  stockholder value now and in
the future.  First Federal currently operates three  full-service  offices and a
mortgage  lending  office,  two of which are  located  in Bryan  (including  its
principal   executive   offices   which  are  situated  in  the  middle  of  the
Bryan-College  Station  community),  a new  facility  located  at a key  highway
intersection in North Bryan,  and one  full-service  branch in adjacent  College
Station,  which is the home of the third largest university in the nation, Texas
A&M  University,  and the new George Bush  Presidential  Library,  and centrally
located mortgage lending offices in College Station.

      First  Federal  has  concentrated  on  the  middle-class  and  blue-collar
population as its targeted  market in providing  banking  products and services,
which had  successfully led to its  loan-to-deposit  ratio of 97.9% at September
30, 1999 consisting  primarily of performing  short-term  balloon and adjustable
rate residential  mortgage loans and consumer loans which are secured  primarily
by  automobiles.  Although its favorable loan demand enables the Bank to utilize
all of its deposits to fund loan products,  First Federal  maintains  additional
liquidity  through  $28.5 million  borrowing  authority at the Federal Home Loan
Bank of  Dallas  ("FHLB of  Dallas").  At  September  30,  1999 and 1998,  First
Federal's  loan to  deposit  ratio  was 97.9% and  110.9%,  respectively.  First
Federal has a positive spread between the interest it earns on its loans and the
interest  it pays for  deposits  of 5.94% at  September  30, 1999 as compared to
5.10% and 4.56% at September 30, 1998 and 1997, respectively.  In addition, over
the past five fiscal  years,  First Federal has  experienced  an average of only
$34,000,  or .058% of the average total loan portfolio in actual annual net loan
charge-offs,  resulting  from an average total loan  portfolio of $58.5 million,
and an average of only $43,000 in actual  annual net loan  charge-offs  over the
past three years from an average total loan portfolio of $65.7 million, or .065%
in actual annual net loan charge-offs.

      In  addition,  this  type of loan  portfolio  enabled  the Bank to have an
interest rate risk  scenario at September  30, 1999,  so that if interest  rates
were to rise 200 basis points (2%) the Bank would not have any change in its net
portfolio  value -- and if  interest  rates were to rise 300 basis  points  (3%)
First Federal would have only a 2% change in its net portfolio  value. See "Loan
Delinquencies; Nonperforming Assets and Classified Assets."

                                      3

<PAGE>

Forward-Looking Statements

      When used in this Annual Report on Form ("Form  10-KSB") or future filings
by the  Holding  Company,  the  Combined  Company,  or First  Federal,  with the
Securities  and  Exchange  Commission,  in the Holding  Company's,  the Combined
Company's  or First  Federal's  press  releases or other  public or  shareholder
communication,  or in oral  statements  made with the approval of an  authorized
executive  officer the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated,"  "hope," "estimate,"  "project," "believe" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Holding
Company, the Combined Company, or First Federal wishes to caution readers not to
place undue reliance of any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national  economic  conditions,  changes in levels of market interest rates,
credit risks of lending  activities,  and  competitive  and regulatory  factors,
could affect the financial performance of any or all of these entities and could
cause any or all of these actual  entities  results for future periods to differ
materially from those anticipated or projected.

      The Holding  Company,  the  Combined  Company,  or First  Federal does not
undertake,  and specially  disclaims any  obligations,  to publicly  release the
result of any revisions which may be made to any  forward-looking  statements in
order to reflect  the  occurrence  of  anticipated  or  unanticipated  events or
circumstances after the date of such statements.

Market Area

      Bryan-College  Station  is in Brazos  County,  Texas and is located in the
center of the growing "Texas Triangle", bordered by Houston, Austin-San Antonio,
and  Dallas-Ft.  Worth.  It is the home of Texas  A&M  University,  which has an
enrollment of over 43,000  students and is the third  largest  university in the
nation -- and is also the home of the new George Bush Presidential  Library.  It
also is home to Blinn  College's  new campus,  with its growing  student body of
10,000 students.  Management  considers the Bryan-College  Station area, and the
surrounding  Texas  counties  of  Brazos,   Burleson,   Grimes,  Leon,  Madison,
Robertson,  and Washington to be its primary-market and trade areas for deposits
and lending  activities;  however,  it has recently begun increasing its lending
into the triangle bordered by Houston,  Austin-San Antonio, and Dallas-Ft. Worth
-- into which it plans to carefully expand over the next three years.

     Although higher education plays a large role in the  Bryan-College  Station
economy  and  assists  the  community  in  consistently   achieving  the  lowest
unemployment rate in the State of Texas, recent  diversification of the economy,
includes a new  computer  manufacturing  plant which was  completed  in 1999,  a
large,  new  regional   computer   services  center  which  recently   completed
construction,  an expanding  regional office for a national telephone company, a
large new regional  poultry  processing  plant, a new juvenile  detention center
which is the largest in the State of Texas, several specialty chemical plants, a
relatively new Compaq  Computer  Research  Center,  one of the largest  aluminum
window and door manufacturing  plants in the nation, and other  computer-related
and high-tech industries.  In addition,  Bryan-College is home to a fast-growing
regional  medical  complex  consisting  of four major,  expanding  hospitals and
related  facilities  (including  a new  physicians-owned  hospital  now  nearing
completion)  which serves all of the area between Houston,  Austin-San  Antonio,
and  Dallas-Ft.  Worth.  It also  will be home to two  very  recently  announced
multi-million dollar championship golf courses, hotels and conference centers.

                                      4

<PAGE>

      Population  growth  trends within First  Federal's  market area have shown
increases at rates exceeding those of the State. According to a 1996 Wall Street
Journal article, Brazos County (home of Bryan-College Station) was listed as one
of the top  metropolitan  areas which is expected to have the fastest  household
growth  in the U.S.  over the next 20 years.  Brazos  County  was  ranked by the
American  Demographics  as third  among "The 10 Hottest  Counties,"  in terms of
"market  potential."  In  addition,  the  1997-98  American  Almanac of Jobs and
Salaries  named  Bryan-College   Station  as  the  third  fastest  growing  U.S.
metropolitan area in terms of job growth for the years 1995-2025.  Data from the
U.S. Census estimates that the Bryan-College metropolitan area should have a 20%
growth rate from 1990 to the year 2000.  The 1998  American  Chamber of Commerce
Researchers  Association  Cost of Living Index indicated that the  Bryan-College
Station area is one of the least expensive  places to live in the United States.
The city ranks as the  second  least  expensive  city out of 29  surveyed  Texas
cities and fifth least expensive city out of 329 surveyed cities in the nation.

      Since 1990, numerous independent financial institutions have been acquired
in the  Bryan-College  Station area,  some by  out-of-state  multi-bank  holding
companies.  Currently,  there is only one other thrift institution  operating in
the area,  which is a branch  owned by an  organization  out of  Brazos  County.
Consequently,  management  believes  the  opportunity  exists for the  continued
careful expansion of First Federal's  lending and deposit gathering  activities,
as one of the few remaining independent,  publicly-traded financial institutions
in its primary trade-area and the general trade area into which it has now begun
some expansion,  the "Texas Triangle" -- by offering full-service and innovative
banking to its  targeted  "niche",  the  growing  middle  class and  blue-collar
segment of the population.

      The principal  executive  offices of the Holding Company and First Federal
are located at 2900 Texas Avenue,  Bryan, Texas 77802 and their telephone number
at that address is (409) 779-2900.

Lending Activities

      General. The principal lending activities of First Federal are originating
first mortgage  residential  real estate loans secured by owner occupied one- to
four-family  residential  property,  and originating  and purchasing  automobile
loans from  automobile  dealers  selected by First  Federal  which are partially
insured against credit default.

      While a substantial portion of the loans originated for portfolio by First
Federal are  conventional  residential  mortgage loans (i.e.,  not guaranteed or
insured by agencies of the federal government), which are secured by residential
properties, most may not conform with all of the requirements for sale to Fannie
Mae  ("FNMA") or the Federal Home Loan  Mortgage  Corporation  ("FHLMC").  These
loans may not conform for several  reasons.  Some loans may have some relatively
small credit  deficiencies  (which in certain  cases may result in First Federal
securing the loan by additional collateral and /or requiring a guarantor for the
loan). In addition,  the borrower may, among other things,  have an insufficient
length of employment history or insufficient length of residence history for the
loan to qualify  for sale to FNMA or FHLMC,  or the  residence  may not  qualify
because of its rural  location,  or there exists  insufficient,  recent sales of
comparable  properties for appraisal  purposes.  As a result,  the loan may pose
some higher risk than secondary market conventional mortgage loans. However, all
long-term,  fixed rate  conventional  mortgage loans are sold immediately to the
secondary market and are not held in First Federal's loan portfolio. Loans which
do not comply  with FNMA or FHLMC  underwriting  requirements  are held in First
Federal's

                                      5

<PAGE>

loan  portfolio  only  if  they  meet  First   Federal's   credit   underwriting
requirements  and are  short-term  balloon loans or loans which have  adjustable
interest rates.

      In recent years,  First Federal has  significantly  increased its consumer
lending  area in order  to  increase  its  risk-adjusted  yield on these  loans,
consisting  of  consumer  loans  primarily  secured by vehicles  and  originated
through  indirect  lending from automobile  dealers under its Second Chance Auto
Lending Program, which has as additional protection  credit-default insurance of
up to  $6,000  per loan  loss in the event  the  borrower  fails to make  timely
payments  and the vehicle is  repossessed.  At September  30, 1999,  the average
gross yield on $13.2  million  unpaid  principal  balance of Second  Chance Auto
loans was 19.36%.  This Second Chance Auto Lending  Program has  gradually  been
expanded to select auto dealers  (primarily  franchised new car dealers) located
throughout  First Federal's  immediate trade area in surrounding  counties,  and
more recently  throughout the triangle  between Houston,  Austin and Dallas.  In
order to expand its Second  Chance Auto Loan  Program,  First  Federal  recently
hired the President of another  automobile  finance  company to manage this loan
program,  and is adding  additional  loan officers,  loan  assistants,  new loan
funding   software,   additional  loan  collectors   expanding  its  offices  to
accommodate  growth in this loan program.  While this level of personnel creates
additional  expense,  nevertheless,  First Federal believes this type of lending
requires additional  personnel and facilities,  which will necessarily  increase
operating  expenses -- so long as this type of lending is carefully  managed and
increases  the  overall  profitability  of First  Federal.  First  Federal  also
originates  residential  construction  loans,  small  commercial real estate and
small to medium commercial business loans. In addition,  First Federal has begun
originating  SBA  business  loans on a more  active  basis and in 1999  hired an
experienced  and  seasoned  SBA loan  originator  to expand its SBA loan program
throughout the Texas Triangle with its newly-acquired designation as a Certified
SBA  lender.  Generally,  First  Federal  sells for a profit the SBA  guaranteed
portion of SBA loans and retains servicing for the entire loan.

      First  Federal's  policy is not to invest its loan portfolio in long-term,
fixed rate mortgage-backed  securities or retain long-term, fixed rate loans. In
order to reduce  First  Federal's  vulnerability  to changes in interest  rates,
First Federal generally originates  short-term three-year balloon and adjustable
rate, one- to four-family residential mortgage loans, consumer loans (especially
automobile  loans) and  short-term  construction  loans.  At September 30, 1999,
First Federal had $22.8 million of balloon  residential  mortgage  loans,  $15.2
million  of  adjustable  rate  residential  mortgage  and other  loans and $25.0
million of consumer loans  (predominately  automobile loans with an average life
of 30-34 months) out of a total of $72.1 million in gross loans.

      Loan originations come primarily from advertising, walk-in customers, real
estate brokers, homebuilders, referrals from existing customers, and a number of
automobile dealers throughout the state of Texas. Non-residential loans in which
the aggregate lending  relationship to one borrower does not exceed $100,000 are
approved  by  First  Federal's   President/Chief   Executive  Officer,  and  all
non-residential  loan  applications  for over $100,000 in aggregate  debt to one
borrower are approved by the Board of  Directors'  Loan  Committee.  Residential
loans  which  do not  exceed  $200,000,  are  approved  by  the  President/Chief
Executive  Officer,  with loans of this type over $200,000 approved by the Board
of Directors' Loan Committee.

     First  Federal's  total loan  portfolio  increased $5.1 million from fiscal
years 1997 to 1998;  however,  in order to  gradually  increase  its  regulatory
capital  ratios  (which are in excess of the minimum  regulatory  requirements),
First Federal  intentionally  reduced its loan portfolio $1.7 million during the
fiscal year from 1998 to 1999  through  profitable  sales of $5.6 million in 90%
loan  participations in its Second Chance Auto Loan Program (with no recourse to
First  Federal  except for fraud or willful  misconduct),  and also  reduced its
emphasis on direct consumer loans.

                                      6

<PAGE>

      Loan Portfolio  Composition.  The following  table sets forth  information
concerning the  composition of First  Federal's loan portfolio in dollar amounts
and in percentages  (before  deductions for loans in process,  deferred fees and
discounts and allowances for losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                  September 30,
                               ---------------------------------------------------
                                    1999              1998              1997
                               ---------------------------------------------------
                               Amount  Percent   Amount  Percent   Amount  Percent
                               ---------------------------------------------------
<S>                             <C>    <C>        <C>    <C>       <C>    <C>
                                              (Dollars in Thousands)
Real Estate Loans
  Residential.................. $33,436   46.35% $32,846   44.50%  $35,541   51.72%
  Residential held-for-sale....      62     .09      328     .44       204     .30
  Commercial...................   5,865    8.13    4,616    6.26     4,166    6.06
  Construction.................   4,800    6.65    6,166    8.36    10,305   15.00
                                -------   -----  -------   -----   -------   -----
     Total real estate loans...  44,163   61.22   43,956   59.56    50,216   73.08

Other Loans:
  Consumer loans:
    Secured by automobile......  18,529   25.69   24,636   33.38    15,082   21.95
    Secured by deposit
     accounts(1)...............   1,080    1.50      951    1.29       925    1.34
    Held for sale..............   2,402    3.33      ---     ---       ---     ---
    Other......................   2,973    4.12    1,236    1.67       726    1.06
                                -------   -----  -------   -----   -------   -----
     Total consumer loans......  24,984   34.64   26,823   36.34    16,733   24.35
  Commercial business loans....   2,988    4.14    3,024    4.10     1,766    2.57
                                -------   -----  -------   -----   -------   -----
     Total other loans.........  27,972   38.78   29,847   40.44    18,499   26.92
                                -------   -----  -------   -----   -------   -----
     Total loans ..............  72,135  100.00   73,803  100.00    68,715  100.00
Less:
  Undisbursed portion of
   construction loans..........   1,669    2.32    2,089    2.83     3,452    5.02
  Net deferred fees and
   discounts...................      82     .11       30     .04       131     .19
  Deferred income..............       3     ---        3     ---         3     ---
  Allowance for losses on
   loans.......................     326     .45      307     .42       273     .40
  Premiums, net of discounts...    (383)   (.53)    (620)   (.84)     (381)   (.55)
                                -------   -----  -------   -----   -------   -----
     Net loans ................ $70,438   97.65% $71,994   97.55%  $65,237   94.94%
                                =======   =====  =======   =====   =======   =====
</TABLE>
---------------

(1)  Not included in the regulatory  definition of 35% maximum of consumer loans
     to total assets.





                                         7

<PAGE>

     The following  table shows the fixed- and  adjustable-rate  composition  of
First Federal's loan portfolio at the dates indicated.


<TABLE>
<CAPTION>
                                                  September 30,
                               -----------------------------------------------------------
                                       1999                 1998              1997
                               -----------------------------------------------------------
                               Amount       Percent    Amount  Percent   Amount  Percent
                               -----------------------------------------------------------
<S>                             <C>    <C>        <C>    <C>       <C>    <C>     <C>
                                              (Dollars in Thousands)
Real estate:
  Residential....................  $22,808    31.62    $18,370    24.89%  $21,486    31.27%
  Residential held-for-sale......       62      .09        328      .44       204      .30
  Commercial.....................    3,677     5.10      2,321     3.16     2,470     3.59
  Construction...................    4,800     6.65      5,924     8.02    10,305    15.00
                                  --------   ------    -------   ------   -------  -------
    Total real estate loans......   31,347    43.46     26,943    36.51    34,465    50.16
  Consumer loans.................   22,582    31.31     26,823    36.34    16,733    24.35
  Consumer held for sale.........    2,402     3.33        ---      ---       ---      ---
  Commercial business loans......      578      .80        642      .87     1,271     1.85
                                  --------   ------    -------   ------   -------  -------
    Total fixed-rate loans.......   56,909    78.90     54,408    73.72    52,469    76.36

Adjustable-Rate Loans:
  Real estate:
  Residential....................   10,628    14.73     14,476    19.61    14,055    20.45
  Commercial.....................    2,188     3.03      2,295     3.10     1,696     2.47
  Construction...................      ---      ---        242      .34       ---      ---

  Commercial business loans......    2,410     3.34      2,382     3.23       495      .72
                                  --------   ------    -------   ------   -------  -------

    Total adjustable rate loans..   15,226    21.10     19,395    26.28    16,246    23.64
                                   -------   ------    -------   ------   -------  -------
    Total loans..................   72,135   100.00     73,803   100.00    68,715   100.00

Less:
  Undisbursed portion of
   construction loans............    1,669     2.32      2,089     2.83     3,452     5.02
  Deferred fees and discounts....       82      .11         30      .04       131      .19
  Deferred income................        3      ---          3      ---         3      ---
  Allowance for losses on loans..      326      .45        307      .42       273      .40
  Premiums, net of discounts.....     (383)    (.53)      (620)    (.84)     (381)    (.55)
                                   -------   ------    -------   ------   -------  -------
    Net loans ...................  $70,438    97.65%   $71,994    97.55%  $65,237    94.94%
                                   =======   ======    =======   ======   =======  =======
</TABLE>




                                         8

<PAGE>

      The  following  table  shows  the  origination,   purchase  and  repayment
activities for loans of First Federal for the periods indicated.



                                         Year Ended September  30,
                                        ----------------------------
                                         1999       1998      1997
                                        ----------------------------
                                              (In Thousands)
Loans Funded:
   Real estate - residential........    $19,541   $14,966    $18,468
      - commercial..................      1,940     2,269      1,485
      - construction or development.     10,623    10,880     12,142
   Non-real estate - consumer.......     15,088    20,384     13,052
      - commercial business.........     12,975     7,615      2,446
                                      ---------  --------    -------
      Total loans originated........     60,167    56,114     47,593

Loans Sold:
   Loans sold.......................     15,852     8,571      7,243
   Principal repayments and
    refinancings....................     45,983    42,455     23,558
                                      ---------   -------    -------
   Total reductions.................     61,835    51,026     30,801
   Change in other items, net.......        112     1,669     (1,134)
                                      ---------   -------    -------
   Net increase (decrease)..........   $ (1,556)  $ 6,757    $15,658
                                       ========   =======    =======


      At September 30, 1999,  First  Federal  serviced $6.8 million in loans for
others.

                                      9

<PAGE>

      The following schedule  illustrates the maturities of First Federal's loan
portfolio, excluding loans held-for-sale at September 30, 1999. Loans which have
adjustable or  renegotiable  interest  rates and  amortizing  loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does  not  reflect  the  effects  of  possible  prepayments  or  enforcement  of
due-on-sale clauses.


<TABLE>
<CAPTION>

                                    Real Estate
                   ------------------------------------------------
                     Residential      Commercial      Construction        Consumer         Business        Total
                   --------------   --------------   --------------   --------------   ---------------  ---------------

                           Weighted         Weighted         Weighted         Weighted         Weighted       Weighted
                           Average           Average         Average          Average          Average        Average
                    Amount  Rate    Amount   Rate    Amount   Rate     Amount   Rate    Amount  Rate    Amount  Rate
                   ---------------- --------------- ----------------- ---------------- ---------------- ---------------
<S>                    <C>    <C>    <C>    <C>        <C>    <C>       <C>     <C>      <C>      <C>     <C>     <C>
                                                    (Dollars in Thousands)
Due During
Years Ended
September 30,

2000(1)............ $ 5,148  9.08%  $  794   8.87%   $4,770    8.44% $ 1,848   10.07%  $1,270  9.22%   $13,830      8.99%
2001 and 2002......  14,922  8.78    1,044   8.81       ---     ---    8,585   15.24      264  9.22      4,815     11.02
2003 and 2004......   2,370  8.53    1,069   9.43        30    9.75   14,306   14.49      389  9.45     18,164     13.30
2005 to 2009.......   1,096  8.28      685   8.86       ---     ---      227    8.99      375  9.53      2,383      8.71
2010 to 2019.......   1,705  8.47    1,423   9.33       ---     ---       18    8.00      690  9.88      3,836      9.03
2020 and following.   8,257  8.47      850   8.33       ---     ---      ---     ---      ---   ---      9,107      8.46
                    -------         ------           ------          -------           ------          -------
                    $33,498         $5,865           $4,800          $24,984           $2,988          $72,135
                    =======         ======           ======          =======           ======          =======
</TABLE>

-------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.



                                      10

<PAGE>



The total amount of loans due after September 30, 2000, that have fixed rates of
interest (including  three-year balloon home loans and other types of loans with
balloon  maturities)  is $45.2 million while the total amount of loans due after
such date which have floating or adjustable rates of interest is $13.1 million.

     One- to Four-Family Residential Real Estate Lending. One of First Federal's
primary  lending  programs is the  origination  of loans secured by mortgages on
owner-occupied  one-  to  four-family  residences,  and to a  lesser  degree  on
non-owner  occupied  one- to  four-family  residences.  In order to increase the
interest rate sensitivity of its residential  loan portfolio,  First Federal has
emphasized   since  1979  the  origination  of  non-FNMA  and  FHLMC  conforming
three-year  balloon loans (generally with 30 year  amortization  schedules).  At
September  30,  1999,  $21.2  million or 29.4%,  of First  Federal's  gross loan
portfolio   consisted  of  fixed-rate  balloon  loans  on  one-  to  four-family
residences.  On the same  date,  First  Federal  had  $1.6 of  other  fixed-rate
residential  loans or 2.2% of the gross loan portfolio.  All of these loans were
secured by residential properties located in the State of Texas, with a majority
of the properties  located in First Federal's  primary market area. On September
30, 1999, only 2.5% of all portfolio residential loans were 90 days or more past
due --all of which were secured by first liens on  residential  properties  with
appraised values in excess of the unpaid balances of those loans.

      First  Federal's   residential   loans  are  generally   underwritten  and
documented  to permit their sale in the secondary  market.  In the event they do
not conform to FNMA and FHLMC  secondary  market  standards,  First Federal will
determine whether or not such loans meet its  credit-underwriting  guidelines to
be  considered  for approval for funding into First  Federal's  loan  portfolio.
First  Federal  evaluates  both the  borrower's  ability to make  principal  and
interest  payments and the value of the property (and any other collateral) that
will secure the loan. One- to four-family  loan  originations are generally made
in amounts up to 90% of the cost or appraised  value of the  security  property,
whichever  is  lower.  The  determination  as to  lend in  excess  of 80% of the
appraised  value is made on a  case-by-case  basis and is based on a variety  of
factors,  including  the  borrower's  credit  and  payment  history,  length  of
employment,  length of residence  and other factors  relating to the  borrower's
stability, debt-to-income ratio, as well as the quality of the property securing
the loan. First Federal may require private mortgage  insurance on certain loans
that it retains in its portfolio. As a result, in most instances, concerning its
loans with  loan-to-value  ratios over 80% (but not  exceeding  the 90% maximum)
which may have no private  mortgage  insurance,  in the event of a  foreclosure,
First  Federal can be subject to a greater risk of loss on the  foreclosure  and
disposition  of such  property  in the event of a  decrease  in the value of the
property. First Federal has, however, had a very limited loss experience on such
loans. See "--Loan  Delinquencies;  Nonperforming Assets and Classified Assets."
Over the past three fiscal years,  First Federal has  experienced  an average of
only $43,000 in actual  annual  total net loan  charge-offs,  resulting  from an
average  total loan  portfolio of $65.7  million,  or .058% in actual annual net
loan charge-offs.

      First   Federal's   residential   mortgage   loans   customarily   include
"due-on-sale"  clauses,  which are provisions  giving First Federal the right to
declare a loan  immediately  due and payable in the event the borrower  sells or
otherwise  disposes of the real property subject to the mortgage,  when the loan
is not  repaid in full.  First  Federal  generally  enforces  these  due-on-sale
clauses.   First  Federal  requires,  in  connection  with  the  origination  of
residential real estate loans,  title insurance and fire and casualty  insurance
coverage  as well as  flood  insurance,  where  appropriate,  to  protect  First
Federal's interest. The cost of this insurance coverage is paid by the borrower.

                                      11

<PAGE>

      Mortgage-Backed  Securities.  Because of its very  favorable  loan demand,
First  Federal has a limited  portfolio of  mortgage-backed  securities,  all of
which  are  held-to-maturity.  Such  mortgage-backed  securities  can  serve  as
collateral for borrowings and through repayments,  as a source of liquidity. For
information  regarding  the  carrying  and  market  values  of  First  Federal's
mortgage-backed  securities  portfolio,  see Note 2 of the  Notes  to  Financial
Statements.

      Consistent  with  First  Federal's   asset/liability  policy  to  minimize
interest  rate  risk,  approximately  91%  of  First  Federal's  mortgage-backed
securities carry adjustable interest rates.

      The   following   table   sets   forth  the  book   value  of  the  Bank's
mortgage-backed securities at the dates indicated.



                                             September 30,
                                      ------------------------

                                         1999    1998   1997
                                      ------------------------
Issuers:

Federal Home Loan Mortgage
Corporation..........................    $447    $655 $  774
Federal National Mortgage Association     245     299    376
                                         ----    ---- ------
    Total............................    $692    $954 $1,150
                                         ====    ==== ======






                                      12

<PAGE>

      The following  table sets forth the  contractual  maturities of the Bank's
mortgage-backed  securities  at  September  30,  1999.  Not  considered  in  the
preparation of the table below is the effect of prepayments,  periodic principal
repayments and the adjustable rate nature of these instruments.

<TABLE>
<CAPTION>

                                                                           Due in
                                       ----------------------------------------------------------------

                                        6 Months  6 Months   1 to   3 to 5  5 to 10  10 to 20  Over 20   Balance
                                         or Less  to 1 Year 3 Years  Years   Years    Years     Years  Outstanding
                                       ---------------------------------------------------------------------------
<S>                                          <C>    <C>        <C>    <C>    <C>       <C>      <C>       <C>
                                                                       (Dollars in Thousands)
Federal Home Loan Mortgage Corporation   $ ---     $ ---     $ ---   $ ---     $ 8   $ 65       $ 374     $ 447

Federal National Mortgage Association.     ---       ---       ---     ---     ---    104         141       245
                                         -----     -----     -----   -----     ---   ----       -----     -----
     Total............................   $ ---     $ ---     $ ---   $ ---     $ 8   $169       $ 515     $ 692
                                         =====     =====     =====   =====     ===   ====       =====     =====
</TABLE>





                                      13

<PAGE>



      First  Federal's  mortgage-backed  and  other  securities  portfolios  are
managed in accordance with a written  investment  policy adopted by the Board of
Directors. Investments may be made in accordance with the policy and approval by
its Investment Committee.

      Consumer Lending.  Federal laws and regulations permit federally chartered
thrift  institutions to make secured and unsecured consumer loans (First Federal
generally discourages  unsecured lending) up to a regulatory-defined  maximum of
35% of their total assets less  permissible  investments in commercial paper and
corporate  debt. At September 30, 1999, such  regulatory-defined  consumer loans
represented 29.2% of First Federal's total assets.  In addition,  federal thrift
institutions  have lending  authority  above the 35% limit for certain  consumer
loans such as home improvement loans,  mobile home loans,  credit card loans and
educational loans. First Federal generally discourages unsecured loans, or loans
secured  by  "soft  collateral"  such  as  inventory,  accounts  receivable  and
special-purpose  equipment  except where the borrower is  credit-worthy  and the
loan is partially guaranteed by the SBA.

      As part of management's strategy to shorten the average effective maturity
of its loans and thereby  minimize its interest rate risk,  and also to increase
the average yield of its loan portfolio,  First Federal offers various  consumer
loans, including but not limited to automobile and home improvement loans. First
Federal also offers  loans to its  depositors  on the security of their  deposit
accounts.

      First Federal currently originates substantially all of its consumer loans
in its primary market area,  except for loans originated  pursuant to its Second
Chance Auto Lending  Program  which are  selectively  purchased  generally  from
automobile  dealers selected by First Federal and located in the State of Texas.
Direct consumer loans are made when First Federal extends credit directly to the
borrower as compared to indirect loans made through  automobile dealers selected
by First Federal.  First Federal will be increasing the  origination of indirect
automobile  loans through its Second  Chance Auto Lending  Program and has added
additional  loan staff and  software and loan  collection  staff to augment this
popular loan program.

      In  September  1991,  upon the  initiative  of present  management,  First
Federal began purchasing motor vehicle  installment sales contracts on a regular
indirect  basis  from  selected  automobile  dealers  pursuant  to an  agreement
established  between  the  dealer and First  Federal  ("Dealer  Agreement").  In
December  1995,  First  Federal  expanded  this type of lending by  initiating a
credit-default   insured  indirect   automobile  loan  origination  program  for
borrowers with less than prime credit, and involving automobile dealers selected
by First Federal and now located  primarily in the "Texas Triangle"  bordered by
Houston,  Austin,  San Antonio and Dallas ("Second  Chance Auto Loans").  Second
Chance  Auto Loans are  currently  insured by The Royal & Sun  Alliance  Company
(which carries a rating of A-1 "Superior" by A.M.  Best's,  an insurance  rating
company) for  credit-default  by the borrower up to $6,000 per loan in the event
there is a  deficiency  between  the  unpaid  balance of the loan and the resale
price of the repossessed  vehicle.  At September 30, 1999, $3.0 million of First
Federal's  Second  Chance  Auto Loans was insured by other  insurers  subject to
their limitations,  if any. On that date, Second Chance Auto Loans averaged,  at
the time of origination,  $12,500 per loan. At September 30, 1999, Second Chance
Auto Loans  totaled $13.2  million  while total  automobile  loans totaled $18.5
million or 28% of First Federal's gross loan portfolio.

      In the  future,  First  Federal  may  elect  to make  some  credit-default
automobile   loans  to  borrowers  with  less  than  prime  credit  and  without
credit-default insurance, but with additional

                                      14

<PAGE>



special  loan loss  reserves  at a level which First  Federal  believes  will be
adequate  to absorb any future  loan  losses.  First  Federal  may also elect to
insure its Second Chance Auto Loans  against  credit-default  through  different
insurance companies which may result in different levels of insured coverage.

      Second   Chance   Auto   Loans   are   underwritten   according   to   the
credit-underwriting guidelines developed by First Federal and agreed to by First
Federal's  credit-default  insurer,  while other non-insured  retail installment
automobile sales contracts purchased from auto dealers are underwritten pursuant
to First Federal's own credit  underwriting  guidelines.  Each sales contract is
fully  amortized and provides for level  payments over the term of the contract.
The contracts are non-recourse to the originating  automobile dealer (except for
fraud) and are purchased,  in First Federal's sole discretion,  from the dealers
on  a   case-by-case   basis,   after  the  Bank's  review  of  the   borrower's
credit-worthiness  and ability to pay the loan.  First  Federal  also  generally
conducts a personal interview with the borrower prior to approving the loan.

      Second  Chance Auto Loan's  retail  installment  automobile  contracts are
reviewed by First  Federal's  internal  automobile  loan review  personnel,  and
monthly random sample reviews are conducted by an independent outside audit firm
specializing  in these  types of loans  in order to  determine  compliance  with
approved credit-underwriting  guidelines. In addition, this same firm conducts a
random  sample audit each month to determine  First  Federal's  compliance  with
previously approved loan collection and servicing guidelines. All monthly audits
to date have reflected  First Federal's  substantial  compliance with the credit
underwriting  and loan collection and servicing  guidelines of First Federal and
the credit-default insurance company. Among other things, the Bank considers the
market  value,  durability  and useful  life of the  vehicle  being  financed in
conjunction   with  the  term  of  the  loan,   along  with  the  stability  and
creditworthiness  of the buyer.  Used vehicles are generally not financed longer
than 60 months  and only then when the  vehicle  is not older than two years and
has no more than 30,000 miles of usage.

      Under the approved  credit  underwriting  guidelines,  the maximum  amount
financed may not exceed 125% of the  manufacturer's  suggested  retail price for
new vehicles or retail value for used vehicles as provided in the "NADA Official
Used Car Guide,"  which may include the cost of service and  warranty  contracts
and premiums for,  credit life and disability  insurance  obtained in connection
with the vehicle  (such  amounts in addition  to the sales  price,  collectively
referred to as "Additional Vehicle Costs"). First Federal will generally use the
Southwest  edition of the "NADA  Official Used Car Guide" to assign a value to a
used vehicle for underwriting  purposes.  The primary focus,  however, is on the
ability and  willingness of the borrower to repay the loan rather than the value
of the underlying  collateral.  The amount  financed by First Federal  generally
includes these Additional Vehicle Costs, which are refunded pro rata as a credit
to the loan in the event the borrower prepays the loan or the borrower  defaults
in payment of the loan and the vehicle is  repossessed.  First Federal  requires
comprehensive  insurance  coverage on vehicles securing consumer loans, paid for
by the  borrower.  However,  First  Federal  pays  for  borrower  credit-default
insurance on its Second Chance Auto Loan Program.

      All automobile  dealers enter into a Dealer  Agreement with First Federal.
First  Federal  has two  kinds of  Dealer  Agreements  which  are  substantially
similar.  Automobile  dealers  selling loans  pursuant to the Second Chance Auto
Lending Program are not required to establish dealer reserves; however, the loan
amount of the automobile sales contract is generally discounted from the dealer

                                      15

<PAGE>



by First Federal prior to purchase. For non-Second Chance Auto Loans, the Dealer
Agreement provides for a reserve account to be established,  requiring a minimum
balance to be maintained at First Federal.  The reserve account is used by First
Federal to protect against excess interest payments to the automobile dealer due
to loan  prepayments,  payoffs,  or for  repossession  expenses plus any related
losses.  Minimum reserve balances and the method of disbursement are outlined in
each  Dealer  Agreement.  If the  reserve  account  falls  below the agreed upon
levels,  the  automobile  dealer is required  to increase  the balance up to the
agreed upon  minimum  amount.  Automobile  dealers are also  required to make an
immediate  deposit to cover any shortages under this type of a Dealer Agreement.
At  September  30, 1999,  First  Federal had $1.7  million of  automobile  loans
requiring automobile dealer reserves.

      Consumer loans may entail greater risk than do residential mortgage loans,
particularly  consumer loans that are secured by rapidly depreciable assets such
as  automobiles.  First Federal makes a very limited amount of unsecured  loans,
which entail an even greater risk.  Any  repossessed  collateral for a defaulted
consumer  loan may not always  provide an adequate  source of  repayment  of the
outstanding loan balance as a result of the greater  likelihood of damage,  loss
or depreciation of the vehicle or other  collateral.  In certain  circumstances,
such as the borrower  filing  Chapter 7 bankruptcy or First Federal being unable
to locate  the  borrower,  the  remaining  deficiency  may not  warrant  further
substantial collection efforts against the borrower. In addition,  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.  Furthermore,  the application of various federal and state
laws,  including federal and state bankruptcy and insolvency laws, may limit the
amount which can be  recovered  on such loans.  Such loans may also give rise to
claims and defenses by a borrower  against an assignee of the loan, who may then
be able to assert  against the assignee,  the claims and defenses that he or she
has against the seller of the underlying collateral. Consumer loan delinquencies
may increase over time as the loans age. Lastly,  there can be no assurance that
First Federal can collect any amount due under the applicable  insurance policy.
However, since First Federal's Second Chance Auto Loan Program began in December
1995, no claim timely filed for reimbursement for  credit-default  insurance has
been denied by the credit-default insurance company.

      At  September  30,  1999,  1.22% of First  Federal's  consumer  loans were
past-due over 90 days (nonperforming assets). However, there can be no assurance
that First Federal's  consumer loan  delinquencies  and  repossessions  will not
increase in the future.

      Construction Lending.  First Federal generally makes construction loans to
individuals  for  the   construction  of  their   residences  and  generally  to
experienced  homebuilders  primarily  for  the  construction  of  contracted-for
(custom)  residences,  and  also to a lesser  degree  primarily  to  experienced
homebuilders  for  residences  that have not been  pre-sold  when First  Federal
believes  that the  residence is priced and located so that it should be sold in
the relatively short term.

      Construction  loans to  individuals  for their  residences  generally have
terms of nine months and are usually made on a  non-amortizing  (interest  only,
payable monthly),  balloon basis, to be repaid from the permanent  mortgage loan
when the  construction  is completed.  First  Federal's  construction  loans are
generally made either as the initial stage of a combination  loan (i.e.,  with a
commitment from First Federal to provide permanent  financing upon completion of
the  project)  or with a takeout  obligation  (commitment  to provide  permanent
financing by a third party lender).

                                      16

<PAGE>



Residential  construction loans are generally  underwritten pursuant to the same
guidelines used for originating  permanent  residential  loans. At September 30,
1999, First Federal had $4.8 million in residential construction loans, of which
$3.9 million are to  borrowers  who have  indicated  to First  Federal that they
intend to live in the properties upon completion of construction.

      Residential  construction  loans  are  generally  made  up  to  a  maximum
loan-to-value  ratio of 80% based on an  independent  appraisal  and estimate of
costs.  Residential  construction  loans involve additional risk attributable to
the fact that loan funds are  advanced  upon the  security of the project  under
construction,  which is more  difficult  to value  prior  to the  completion  of
construction.  Because of some uncertainties inherent in estimating construction
costs and the market for the home upon completion, it is relatively difficult to
evaluate  the total loan funds  required  to  complete  a project,  the  related
loan-to-value  ratios, and the likelihood of ultimate success of the project. In
evaluating a construction  loan, First Federal  considers the credit  worthiness
and  reputation  of the  borrower  and  the  experience  and  reputation  of the
contractor,  the amount of the borrower's  equity (down payment) in the project,
independent  appraisal  valuations  and  review  of  cost  estimates,   and,  if
applicable,  pre-construction  sale and market  information.  Progress  payments
during  construction  of homes are  generally  made only after  inspection by an
independent,  licensed real estate inspector.  Residential construction loans to
borrowers  other than  owner  occupants  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.

     Commercial  Real  Estate  Lending.  In order to  enhance  the  yield of its
assets,  First Federal originates a limited amount of construction and permanent
loans secured by commercial real estate.  First Federal's  permanent  commercial
real estate loan  portfolio  includes  loans  secured by churches,  small office
buildings,  and other small business  properties.  First Federal generally makes
only  commercial  real estate loans secured by income  producing  property,  and
discourages  large  commercial real estate loans.  At September 30, 1999,  First
Federal had two  commercial  real estate  loans in excess of $500,000  that were
secured by  income-producing  properties.  These loans originated in July, 1998,
and February,  1999, and had a balances of $511,000 and $737,000,  respectively,
at September 30, 1999 and are performing in accordance with their loan repayment
terms.

      The following table presents  information as to the locations and types of
properties  securing First  Federal's  commercial real estate loans at September
30, 1999.


                                    Number
                                      of      Principal
                                    Loans      Balance
                                ------------------------
                                  (Dollars in Thousands)
Bryan-College Station area:
  Churches...................           10       1,174
  Land.......................           27         794
  Multi-family residential...            3         437
  Retail.....................           16       2,244
  Office.....................            6         741
  Other......................            6         475
                                      ----      ------
  Total......................           68       5,865


                                      17

<PAGE>



      Commercial  real estate loans included in First  Federal's  portfolio have
terms generally  ranging from 3 to 5 years with a balloon payment and 20-25 year
amortization schedules.

      First Federal  generally will not originate or purchase a commercial  real
estate  loan with a balance of greater  than 80% of the  appraised  value of the
underlying  collateral,  subject  to a  lesser  loan to  value  ratio  as may be
required by regulations.  Land and developed building lot loans are individually
negotiated and are secured by properties  located in First  Federal's  principal
market area where First  Federal  personnel  are familiar  with  current  market
values and  marketability.  First Federal  requires  that any such  appraisal be
performed by independent,  professionally  designated and qualified  appraisers.
Senior  management of First Federal reviews all independent  appraisals prior to
funding any loan. In originating or purchasing any loan, First Federal considers
the creditworthiness of the borrower, the value of the underlying collateral and
the level of experience and  reputation of the  contractor.  In determining  the
borrower's  creditworthiness,  the Bank  considers  the  character,  experience,
management ability and financial strength of the borrower as well as the ability
of the  property  securing  the loan to  generate  adequate  funds to cover both
operating expenses and debt service.

      Commercial  real  estate  lending   generally  affords  First  Federal  an
opportunity to receive  interest at rates generally higher than those obtainable
from residential  lending.  Commercial real estate lending,  however,  entails a
higher level of risk than loans secured by one- to four-family residences.  This
risk is primarily attributed to several factors,  including the concentration of
principal  in a limited  number of loans and  borrowers,  the effects of general
economic conditions on income producing  properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans  secured  by  commercial  real  estate  is  typically  dependent  upon the
successful operation of the related real estate project and thus, may be subject
to a greater  extent to  adverse  conditions  in the real  estate  market or the
economy generally. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed),  the  borrower's  ability to repay the loan
may be  impaired.  For  these  reasons,  First  Federal  limits  the  amount  of
commercial  real  estate  loans held in its loan  portfolio.  In order to manage
interest rate risk,  the  maturities  of these loans are generally  short or the
interest rates therein are adjustable.

      Commercial  Business and SBA Lending.  First Federal  engages in a limited
amount of commercial  business  lending,  primarily to small  businesses.  These
loans are  generally  made with  adjustable  interest  rates,  in order to limit
interest  rate risk.  Many of these  loans are SBA  guaranteed;  however,  First
Federal  generally sells the guaranteed  portion of the loan. The SBA guarantees
up to 90% of the loan  amount,  which is backed by the full  faith and credit of
the U.S. Government.  This guaranty generally ranges from 75% to 90% of the loan
amount up to a maximum  guaranteed  loan amount of $750,000  subject to the type
and term of the loan. The term of these SBA loans  generally  range from five to
seven years for working  capital  loans and up to 25 years for loans  secured by
income-producing  real estates.  Interest rates for loans with  maturities  less
than seven years cannot  exceed  2.25% over WSJ Prime,  and for those over seven
years,  2.75% of WSJ Prime.  These loans are attractive to borrowers  because of
the extended loan  maturities and to the Bank, as lender,  as the interest rates
adjust  and  because  the  guaranteed  portion  of the  loan  can be sold in the
secondary market. At September 30, 1999, First Federal had $3.0 million or 4.14%
of First Federal's gross loan portfolio in commercial business loans outstanding
of which $1.0 million  represents the  unguaranteed  portion of SBA loans. As of
the same date, First Federal's largest  commercial  business loan was a $508,000
floor plan line of credit to an automobile dealer, secured

                                      18

<PAGE>



by vehicles. The next largest commercial business loan was a $170,000 floor plan
line of credit to an  automobile  dealer and secured by vehicles.  Each of these
loans are performing in accordance with their  respective loan repayment  terms.
First Federal  discourages  large  commercial  business  lending  because of the
larger risk exposure to the Bank's capital if such loans do not perform.

      First Federal  discourages  unsecured  loans.  It also  discourages  loans
secured by "soft  collateral" such as inventory or accounts  receivable,  except
where the  borrower  has a good  credit  history,  debt-to-income  ratio and the
majority of the loan is  guaranteed  by the SBA.  First  Federal's  policy is to
generally make loans secured by "hard collateral," such as vehicles and improved
real estate (primarily homes).  Loans are generally made using "soft collateral"
(such as  inventory,  accounts  receivable,  etc.) only when the majority of the
loan  is  guaranteed  by the  SBA.  Unlike  residential  mortgage  loans,  which
generally  are  made on the  basis  of the  borrower's  ability  to  repay  from
employment and other income and are secured by improved real property,  business
loans pose a higher risk and typically  are made on the basis of the  borrower's
ability to make  repayment  from the cash flow of the  business  and to a lesser
extent, the borrower's net worth and liquid assets.  First Federal's  commercial
business  loans are  generally  secured  by  business  assets  such as  accounts
receivable,  inventory  and  equipment  and an SBA  guaranty.  As a result,  the
availability  of funds for the repayment of business loans may be  substantially
dependent  on the  success  of the  business  itself.  Further,  the  collateral
securing the loan may depreciate over time, may be difficult to appraise and may
fluctuate  in value  based  generally  on the  success of the  business  and the
economy.  Partial guarantees (75% or more) by the SBA are generally required for
commercial business loans primarily secured by accounts  receivable,  inventory,
equipment and other "soft collateral."

Loan Delinquencies; Nonperforming Assets and Classified Assets

      When a borrower fails to make a required  payment on a loan, First Federal
attempts to cause the  deficiency to be cured by contacting the borrower as soon
as possible. In most cases, deficien cies are cured promptly. After a payment is
three days past due, First  Federal's  collections  department  will contact the
borrower by telephone and letter and continue  that contact on a regular  basis.
Between  30-45 days past due,  First Federal may also send the borrower a demand
letter.  When deemed appropriate by senior management,  First Federal institutes
action to foreclose on or  repossess  the  collateral.  If  foreclosed  on, real
property  is sold at a public sale and may be  purchased  by a third party or by
First  Federal.  Repossessed  vehicles are generally  analyzed by an independent
automobile specialist,  repaired and renovated accordingly by First Federal, and
resold without  warranty  through First  Federal's  personnel and through select
auto dealers and other independent parties. A decision as to whether and when to
initiate foreclosure or repossession proceedings is based on such factors as the
amount of the  outstanding  loan in relation to the original  indebtedness,  the
extent of delinquency and the borrower's ability and willingness to cooperate in
curing delinquencies. First Federal aggressively pursues delinquent loans and as
a result has  experienced  minimum  foreclosure and losses thereon over the past
three years.



                                      19

<PAGE>



      The following table sets forth information  concerning delinquent mortgage
and other loans at September  30, 1999 in dollar  amounts and as a percentage of
First Federal's total loan portfolio.  The amounts presented represent the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.


<TABLE>
<CAPTION>
                                     Loans Delinquent at September 30, 1999
                              ----------------------------------------------------
                                                                       Total
                                                         90 Days    Delinquent
                                30-59 Days  60-89 Days   and Over     Loans
                             ----------------------------------------------------
<S>                                <C>          <C>       <C>             <C>
                                             (Dollars in Thousands)
Residential Real Estate:
  Number of loans.........          ---          12           8          20
  Amount..................         $---        $480        $851      $1,331
  Percent of total loans..          ---        1.43%       2.54%       3.97%

Commercial Real Estate:
  Number of loans.........          ---         ---         ---         ---
  Amount..................          ---         ---         ---         ---
  Percent of total loans..          ---         ---         ---         ---

Consumer:
  Number of loans.........          105          16          23         144
  Amount..................        1,013         162         295       1,470
  Percent of total loans..         4.05         .65        1.18        5.88


Total:
  Number of loans.........          105          28          31         164
  Amount..................       $1,013        $642      $1,146      $2,801
  Percent of total loans..         1.40         .89        1.59        3.88


</TABLE>


                                      20

<PAGE>



      The table below sets forth the amounts and  categories  of  non-performing
assets in First Federal's loan portfolio. Loans are placed on non-accrual status
when the collection of principal  and/or interest  becomes  doubtful or there is
insufficient  collateral  to  prevent  a loss.  For all years  presented,  First
Federal has had no  troubled  debt  restructurings,  which  involve  forgiving a
portion of interest or  principal  on any loans.  Foreclosed  assets may include
assets acquired in settlement of loans.


                                         September 30,
                              --------------------------------
                                   1999      1998      1997
                              --------------------------------
                                  (Dollars in Thousands)
Non-accruing loans:
  Residential.................   $    21   $   ---   $   ---
  Consumer....................        11       ---         8
                                 -------   -------   -------
    Total.....................        32       ---         8
                                 -------   -------   -------

Accruing loans delinquent
 more than 90 days:
  Residential.................       851       446       370
  Commercial Real Estate......       ---       ---       ---
  Consumer....................       295       135       126
                                  ------   -------   -------
    Total.....................     1,146       581       496
                                  ------   -------   -------

Foreclosed assets:
  Residential.................       298       282       520
  Commercial real estate......       275       ---       ---
  Other Repossessed Assets
   (Vehicles)(1)..............       958       479       258
                                  ------   -------   -------
    Total.....................     1,531       761       778
                                  ------   -------   -------

Total non-performing assets...    $2,709   $ 1,342   $ 1,282
                                  ======   =======   =======
Total as a percentage of
 total assets at end of period      3.31%     1.62%     1.71%
                                  ======   =======   =======

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

     (1)  Reserves  established  and  relating to  individual  vehicles  are not
reflected herein.

      For the most part,  nonperforming  assets at September 30, 1999, consisted
of  repossessed  vehicles  through the Second Chance Auto Loan Program  totaling
$958,000  which were awaiting  sale,  reimbursement  by insurance  companies for
damage claims and  reimbursement for  credit-default  insurance claims which had
been timely filed, two residential homes and an office  building/warehouse.  The
Combined  Company  generally  expects  the  volume of  repossessed  vehicles  to
continue  at the same  rate (7% to 10%) as it has  since  the  beginning  of the
Second  Chance  Auto Loan  Program  in  December,  1995,  and for the  volume of
repossessed vehicles to gradually increase at the same rate as this loan program
expands.

      As of September  30, 1999,  there were no  concentrations  of loans in any
types of industry which exceeded 10% of First  Federal's  total loans,  that are
not included as a loan category in the table above.

      At September 30, 1999,  nonaccrual loans totaled $32,000.  Interest income
recognized relative to non-performing  loans during the year ended September 30,
1999 was not material.

                                      21

<PAGE>

     Other Loans of Concern. As of September 30, 1999, there was an aggregate of
$1.5 million of loans which known information about the possible credit problems
of the  borrowers  or the cash  flows of the  security  properties  have  caused
management  to have  some  questions  and/or  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 nonperforming assets categories.  None
of these loans, however, were considered to be a "loss" at September 30, 1999.

      Classified  Assets.   Federal   regulations   require  that  each  insured
institution classify its own assets on a regular basis. First Federal classifies
its assets no less than quarterly.  In addition, in connection with examinations
of insured  institutions,  the OTS has authority to identify problem assets and,
if appropriate,  require them to be classified.  There are three classifications
for problem assets:  substandard,  doubtful and loss.  "Substandard" assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured  institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the weaknesses of substandard assets, with the
additional characteristics that the weaknesses make collection or liquidation in
full  on  the  basis  of  currently   existing  facts,   conditions  and  values
questionable,  and  there is a high  possibility  of loss.  An asset  classified
"Loss" is considered  uncollectible and of such little value that continuance as
an asset of the institution is not warranted.  Assets  classified as substandard
or doubtful require the institution to establish general  allowances  (reserves)
for possible  loan losses.  If an asset or portion  thereof is  classified  as a
"Loss," the institution must either establish specific allowances (reserves) for
loan losses in the amount of 100% of the portion of the asset  classified  loss,
or charge-off such amount. General loss allowances established to cover possible
losses related to assets classified  "Substandard" or "Doubtful" may be included
in determining the institution's regulatory capital under the risk-based capital
standard,  while specific loss allowances do not qualify as regulatory  capital.
If an institution does not agree with an examiner's  classification of an asset,
it may appeal this  determination to the OTS District Director.  Generally,  all
assets  of  First  Federal  which  have  been  classified  are  included  in the
discussion above of other loans of concern and assets for which repayment by the
borrower may be in doubt.

      In connection with the filing of its periodic  reports with the OTS and in
accordance with its  classification  of assets policy,  First Federal's Board of
Directors has established an Asset Review Committee, which regularly reviews all
loans of any concern  with senior  management  and  applicable  loan  collection
personnel,  to  determine  which loans  should be  classified  under  applicable
regulations.  Classified  assets loans, as described  above, of First Federal at
September 30, 1999 were as follows:


                               (In Thousands)

Substandard(1)............        2,607
Doubtful..................          ---
Loss......................          ---


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

(1)   Includes  $1.5 million of "other  loans of concern"  and also  repossessed
      real estate (two single family  residences  and an  office/warehouse)  and
      repossessed  vehicles awaiting sale,  reimbursement by insurance companies
      for  damage  claims  or   reimbursements   for  claims   submitted   under
      credit-default   insurance,   which   loans   are   also   classified   as
      "non-performing assets."

                                      22

<PAGE>



Allowance for Losses on Loans

      First Federal's policy is to establish allowances for loan losses based on
historical  data,  economic  trends  and  projections,   an  assessment  of  the
borrower's  overall  financial  condition,  the type and value of any collateral
securing  such loans and other  relevant  factors.  While the  Combined  Company
believes   that  it  uses  the  best   information   available   to  make   such
determinations,  future  adjustments  could be necessary and net income could be
affected if  circumstances  substantially  differ from the  assumptions  used in
making the initial determination.

      The following  table sets forth an analysis of First  Federal's  allowance
for loan losses.


                                           Year Ended September 30,
                                     ------------------------------------
                                         1999        1998        1997
                                     ------------------------------------
                                           (Dollars in Thousands)

Balance at beginning of period....        $307        $273        $247
Charge-offs......................          (92)        (75)         (5)
Recoveries........................           7          30           6

Provisions for losses on loans....         104          79          25
                                          ----        ----        ----
Balance at end of period..........        $326        $307        $273
                                          ====        ====        ====

Ratio of net charge-offs during
the period to average loans
outstanding during the period.....         .12%        .06%        .01%


      The allocation of the allowance for losses on loans at the dates indicated
is summarized as follows:

<TABLE>
<CAPTION>

                                          September 30,
                 -------------------------------------------------------------------------
                               1999                 1998                   1997
                 -------------------------------------------------------------------------
                              Percent of              Percent of               Percent of
                                Loan in                Loan in                  Loan in
                                 Each                    Each                    Each
                               Category                Category                 Category
                  Amount to   Total Loans  Amount to  Total Loans   Amount to  Total Loans
                 -------------------------------------------------------------------------
<S>                     <C>    <C>              <C>    <C>               <C>    <C>
Real Estate......   $103         61.22%      $183       59.56%        $200        73.08%
Other............    223         38.78        124       40.44           73        26.92
                    ----        ------       ----      ------         ----       ------
   Total.........   $326        100.00%      $307      100.00%        $273       100.00%
                    ====        ======       ====      ======         ====       ======
</TABLE>


      For information on First Federal's allowance for losses on foreclosed real
estate, see Note 1 of the Notes to Financial  Statements in the Annual Report to
Stockholders filed as Exhibit 13 to this Form 10-KSB.


                                      23

<PAGE>



Investment Activities

      The Combined  Company's  liquid assets (other than loans,  mortgage-backed
securities  receivable,  and  non-interest  bearing  deposits  with the  Federal
Reserve Bank of Dallas),  are invested  primarily in  interest-bearing  deposits
with the FHLB of Dallas,  and FHLB stock.  First  Federal is required by federal
regulations  to maintain a minimum  amount of liquid assets that may be invested
in specified  securities  and is also  permitted to make certain other  security
investments.   First  Federal  maintains   liquidity  in  excess  of  regulatory
requirements. In addition, in order to ensure additional liquidity to meet large
unanticipated  needs for cash, First Federal maintains a $28.5 million borrowing
authority at the FHLB of Dallas.  Cash flow  projections are regularly  reviewed
and updated to assure that adequate  liquidity is provided.  As of September 30,
1999,  First  Federal's  liquidity  ratio (liquid  assets as a percentage of net
withdrawable  savings  and  current  borrowings)  was 6.18% as  compared  to the
regulatory  requirement  of 4%. At  September  30,  1999,  First  Federal had no
borrowings from the FHLB; however,  First Federal had the ability, if needed, to
borrow up to $28.5  million  from the FHLB of Dallas  for  additional  liquidity
purposes.

      The following table sets forth the  composition of the Combined  Company's
liquid assets at the dates indicated.


                                              At September 30,
                               ----------------------------------------------

                                      1999          1998           1997
                               ----------------------------------------------

                                  Book   Fair   Book    Fair   Book   Fair
                                 Value  Value  Value   Value   Value  Value
                               ----------------------------------------------
                                          (Dollars in Thousands)

Interest-bearing deposits...... $1,619 $1,619 $3,892  $3,892 $3,675 $3,675

FHLB stock.....................    404    404    382     382    896    896
                                ------ ------ ------  ------ ------ ------
     Total liquid assets and
      FHLB stock............... $2,023 $2,023 $4,274  $4,274 $4,571 $4,571
                                ====== ====== ======  ====== ====== ======



Sources of Funds

     General.  Deposit accounts have  traditionally been the principal source of
First  Federal's  funds  for use in  lending  and  for  other  general  business
purposes.  In  addition  to  deposits,  First  Federal  derives  funds from loan
repayments and cash flows generated from its overall operations.  Scheduled loan
payments are a relatively  stable  source of funds,  while  deposit  inflows and
outflows  and the related cost of such funds vary.  Borrowings  from the FHLB of
Dallas may be used on a short-term  basis to compensate for seasonal  reductions
in deposits or deposit inflows at less than projected  levels and may be used on
a longer term basis to support expanded lending  activities in order to minimize
excess cash on hand over and above liquidity requirements.

      Deposits.  First Federal  attracts both short-term and long-term  deposits
from its primary  market area and has not actively  sought  deposits  outside of
this  area.  However,  its  strategic  plan is to expand  its  deposit-gathering
activities  over the  next  three  years to the  "Texas  Triangle"  referred  to
previously herein. First Federal offers regular passbook accounts, NOW accounts,
commercial  and  personal  checking  accounts   (including  its  "Golden  Eagle"
checking, designed for persons of age

                                      24

<PAGE>



50 or more, its "30 Something"  checking account designed for persons between 30
and 49 years of age, and its "Working People's" checking account),  money market
deposit  accounts,  fixed  interest rate  certificates  of deposits with varying
maturities,  and negotiated rate $95,000 or above jumbo  certificates of deposit
("Jumbo CDS"). At September 30, 1999,  First Federal had $7.2 million in "Golden
Eagle" accounts, $1.5 million in its "30 Something" accounts and $0.3 million in
"Working People" accounts.

      Deposit account terms vary according to the minimum balance required,  the
time period the funds must remain on deposit and the interest rate,  among other
factors.  First Federal regularly evaluates the internal cost of funds,  surveys
rates and types of accounts offered by competing institutions,  reviews its cash
flow  requirements  for lending and liquidity and makes rate changes when deemed
appropriate.  In order to decrease the volatility of its deposits, First Federal
imposes  penalties  of up to 30 days of interest for  certificates  maturing one
year or less and 90 days for certificates  over one year, on early withdrawal on
its certificates of deposit. As are other financial institutions,  First Federal
has become more  susceptible to short-term  fluctuations  in deposit  flows,  as
customers have become more interest rate conscious.  In addition,  First Federal
has not been  willing to pay  higher  rates to retain  deposits  that may not be
profitably  deployed.  First Federal does not have any brokered deposits and has
no present intention to accept or solicit such deposits.

     In 1994,  First Federal  initiated  its efforts to increase its  depository
accounts through a marketing campaign  emphasizing the community  involvement of
First  Federal  with all  segments  of the  population  in its trade  area.  The
measures  undertaken in connection with this marketing campaign include meetings
with many of the area's black church ministers and key  representatives of their
congregations in order to solicit their banking business and make loans to their
churches  for  expansion  and  renovation  and  to  individual  church  members,
increasing  the  proportion of First  Federal's  employees  that speak  Spanish,
advertising in Spanish language  publications,  making direct contact with local
Hispanic community organizations and the planning of the opening of a new office
at a later date in the north Bryan area with a significant  Hispanic  influence.
The new  building  for the north Bryan  facility is planned  for  occupancy  and
availability  to customers on or before  December 31, 1999.  First  Federal also
increased its checking or transaction  accounts through an aggressive  marketing
campaign aimed at, among others, local college students and faculty, and added a
full-service branch in College Station, Texas, (immediately south of Bryan) that
opened in the first  half of 1994 and its new north  Bryan  full-service  branch
that opened in temporary  quarters in June,  1998,  at a key  intersection  of a
principal  north-south  highway and a principal  east-way highway through Bryan.
This  immediate  area in north Bryan  presently  has no other  banking  facility
nearby to service its financial needs.



                                      25

<PAGE>

      The following  table sets forth the deposit flows at First Federal  during
the periods indicated.  Net increase (decrease) refers to the amount of deposits
during a period less the amount of withdrawals during the period.



                                   Year Ended September 30,
                            -----------------------------------

                                 1999        1998        1997
                            -----------------------------------
                                   (Dollars in Thousands)

Opening balance..........      $73,554     $58,808     $51,677
Net deposits
(withdrawals)............       (2,624)     12,557       5,308
Interest credited........        2,310       2,189       1,823
                               -------     -------     -------

Ending balance...........      $73,240     $73,554     $58,808
                               =======     =======     =======

Net increase (decrease)..      $  (314)    $14,746     $ 7,131
                               =======     =======     =======

Percent increase
 (decrease)(1)...........         (.43)%     25.07%      13.80%
                               =======     =======     =======
-------------------
(1)   After two years of fast  growth  (averaging  20% a year in 1997 and 1998),
      management planned a "no -growth" strategy for deposits in the fiscal year
      ending  September  30,  1999,  in order to  gradually  increase  ratios of
      capital to total assets and increase  emphasis on  profitability  of First
      Federal, both goals were accomplished by First Federal.



                                      26

<PAGE>



      The following table sets forth the dollar amount of savings  deposits,  by
interest rate range, in the various types of deposit  programs  offered by First
Federal at the dates indicated.

<TABLE>
<CAPTION>

                                                     At September 30,
                           --------------------------------------------------------------

                                     1999                 1998                 1997
                           --------------------------------------------------------------

                                        Percent              Percent             Percent
                           Amount      of Total   Amount    of Total   Amount   of Total
                           --------------------------------------------------------------
<S>                           <C>           <C>    <C>         <C>     <C>           <C>
                                                 (Dollars in Thousands)
Certificate Accounts:

 0.00- 2.99%...............$     56      0.1%    $    45       0.1%    $    88      .2%
 3.00- 4.99%...............  26,281     35.8       5,509       7.5       4,250     7.2
 5.00- 6.99%...............  19,765     27.0      43,093      58.6      34,489    58.6
 7.00- 8.99%...............     930      1.3         911       1.2         978     1.7
                           --------    -----     -------     -----     -------   -----
Total Certificate Accounts.  47,032     64.2      49,558      67.4      39,805    67.7

Other Accounts:

Passbook Accounts..........   5,130      7.0       5,199       7.1       4,393     7.5
NOW Accounts..............   11,327     15.5       9,735      13.2       6,970    11.8
Money Market Accounts......   4,465      6.1       4,595       6.2       4,229     7.2
Commercial Checking
 Accounts..................   2,253      3.1       2,178       3.0       1,232     2.1
Other non-interest bearing
 accounts..................   3,033      4.1       2,289       3.1       2,179     3.7
Total Other Accounts.......  26,208     35.8      23,996      32.6      19,003    32.3
                           --------    -----     -------     -----     -------   -----
Total Deposits(1).......... $73,240    100.0%    $73,554     100.0%    $58,808   100.0%
                           ========    =====     =======     =====     =======   =====
</TABLE>


            At  September  30, 1999  scheduled  maturities  of  certificates  of
deposit are as follows.


                                  At September 30,
                    -------------------------------------------
                                           2002 and
                       2000       2001    thereafter    Total
                    -------------------------------------------
0.00- 2.99%.........    $    56  $  ---   $    ---    $     56
3.00- 4.99%.........     23,212   2,516        553      26,281
5.00- 6.99%.........     15,328   3,268      1,169      19,765
7.00- 8.99%.........        930     ---        ---         930
                        -------  ------   --------    --------
     Total..........    $39,526  $5,784   $  1,722    $ 47,032
                        =======  ======   ========    ========

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

(1)   After two years of fast  growth  (averaging  20% a year in 1997 and 1998),
      management planned a "no -growth" strategy for deposits in the fiscal year
      ending  September  30,  1999,  in order to  gradually  increase  ratios of
      capital to total assets and increase  emphasis on  profitability  of First
      Federal, both goals were accomplished by First Federal.



                                      27

<PAGE>



      The following table  indicates the amount of First Federal's  certificates
of deposit by time remaining until maturity as of September 30, 1999.

<TABLE>
<CAPTION>

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

Certificates of deposit less than
 $100,000...........................  $ 8,996  $ 9,128   $13,568   $ 7,104  $38,796
Certificates of deposit of
 $100,000 or more...................    2,141    2,451     3,242       402    8,236
                                      -------  -------   -------   -------  -------
Total...............................  $11,137  $11,579   $16,810   $ 7,506  $47,032
                                      =======  =======   =======   =======  =======
</TABLE>


      Borrowings.  First Federal's  borrowings primarily have been advances from
the FHLB of Dallas. As a member of the FHLB of Dallas, First Federal is required
to own  capital  stock in the FHLB of  Dallas  and is  authorized  to apply  for
advances from the FHLB of Dallas.  Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities.

      On April  1,  1998,  the  Holding  Company  issued  $3,629,000  of 11 1/2%
subordinated  debentures due on March 31, 2003 (the "Debentures").  The proceeds
from the issuance of the Debentures  were used to partially fund the acquisition
of First Federal  stock by the Holding  Company.  Interest on the  Debentures is
payable  quarterly on the fifteenth day of January,  April,  July and October of
each year. See Note 13 to the Notes to Consolidated  Financial Statements of the
Combined Company.

     For additional information relating to borrowings,  see Note 7 to the Notes
to Consolidated Financial Statements of the Combined Company.

      The following table sets forth the maximum  month-end  balance and average
balance of FHLB advances and other borrowings during the periods indicated.


                                              Year Ended September 30,
                                        --------------------------------------
                                            1999        1998         1997
                                        --------------------------------------
                                                    (In Thousands)
Maximum Balance:
FHLB advances..........................      $   800     $10,000      $10,000
Debentures.............................        3,629       3,629          ---

Average Balance:
FHLB advances..........................      $   176     $ 3,984      $ 3,067
Debentures.............................        3,629       1,815          ---



                                      28

<PAGE>



      The following  table sets forth certain  information as to First Federal's
FHLB advances and other borrowings at the dates indicated.


                                                  September 30,
                                        ------------------------------
                                           1999      1998      1997
                                        ------------------------------
                                               (In Thousands)

FHLB advances..........................    $  ---    $  800   $10,000
Debentures.............................     3,629     3,629       ---
                                           ------    ------   -------
Total borrowings.......................    $3,629    $4,429   $10,000
                                           ======    ======   =======

Weighted average interest rate of FHLB
advances...............................       ---%     5.43%     5.55%
Weighted average interest rate on
Debentures.............................     11.50%    11.50%      ---%


Service Corporation

      Federally  chartered  institutions  are permitted to invest in the capital
stock,  obligations,  or other  specified  types of securities  of  subsidiaries
(referred to as "service  corporations") and to make loans to such subsidiaries,
and joint ventures in which such subsidiaries are participants,  in an aggregate
amount not  exceeding 2% of an  institution's  assets,  plus an additional 1% of
assets if the  amount  over 2% is used for  specified  community  or inner  city
development  purposes.  Federal  regulations  also permit  institutions  to make
specified loans to such  subsidiaries  under its general lending  authority.  In
addition,  such  institutions  are  authorized  to invest  unlimited  amounts in
subsidiaries  that  are  engaged  solely  in  activities  in  which  the  parent
institution may engage.

     First Federal's service corporation, First Service Corporation of Bryan, is
currently inactive.  At September 30, 1999, First Federal had a total investment
of $13,000 in its service  corporation.  In 1999, the Holding Company  organized
Best of Texas, Inc., a proposed used car dealership organized for the purpose of
selling used cars, including First Federal's  repossessed vehicles. At September
30,  1999,  the  Holding  Company  had a  total  investment  of  $1,000  in this
corporation.  As of the same date,  this  corporation  was  inactive  and in the
process of making  application for a dealership license with the State of Texas.
See "Regulation - Federal Regulation of Thrift Institutions."


                                  REGULATION
General

      First Federal is a federally chartered thrift institution, the deposits of
which are federally  insured and backed by the full faith and credit of the U.S.
government.  Accordingly,  First Federal is subject to broad federal  regulation
and oversight extending to all its operations.  First Federal is a member of the
FHLB of Dallas  and is subject to  certain  limited  regulation  by the Board of
Governors  of  the  Federal  Reserve  System  ("Federal  Reserve  Board").  As a
financial institution holding company of First Federal, the Holding Company also
is subject to federal regulation oversight. The purpose of the regulation of the
Holding  Company and other  holding  companies is to protect  subsidiary  thrift
institution.  First  Federal  is a member  Savings  Association  Insurance  Fund
("SAIF") and the deposits of First Federal are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over First Federal.


                                      29

<PAGE>



      Certain of these  regulatory  requirements  and restrictions are discussed
below or elsewhere in this document.


Federal Regulation of Thrift Institutions

      The  OTS  has   extensive   authority   over  the   operations  of  thrift
institutions.  As part of this  authority,  First  Federal is  required  to file
periodic reports with the OTS and is subject to periodic  examination by the OTS
and the FDIC. The last regular OTS  examination of First Federal began March 15,
1999,  for books and records as of December  31, 1998.  Under agency  scheduling
guidelines,  it is likely that another  examination  will be initiated within 12
months of the last exam.  When these  examinations  are conducted by the OTS and
the FDIC,  the examiners may require First Federal to provide for higher general
or  specific  loan loss  reserves.  All  thrift  institutions  are  subject to a
semi-annual  assessment,  based upon the thrift  institution's  total assets, to
fund the operations of the OTS.  First  Federal's OTS assessment for the expense
of examinations for the fiscal year ended September 30, 1999, was $26,000.

      The  OTS  also  has  extensive   enforcement  authority  over  all  thrift
institutions  and their  holding  companies,  including  First  Federal  and the
Holding Company.  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 OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.

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

      First    Federal'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 September 30, 1999,  First Federal's legal
lending  limit  under  this  restriction  was  $874,000.  First  Federal  is  in
compliance with the loans-to-one-borrower limitation.

      The OTS,  as well as the  other  federal  banking  agencies,  has  adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  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.  A
failure to submit a plan or to comply  with an  approved  plan will  subject the
institution to further enforcement  action.  First Federal has adopted these OTS
guidelines.


                                      30

<PAGE>



Insurance of Accounts and Regulation by the FDIC

      First Federal is a member of the SAIF,  which is administered by the FDIC.
Deposits are insured up to applicable  limits by the FDIC and such  insurance is
backed by the full faith and credit of the U.S. 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 SAIF or the BIF. The FDIC also
has the authority to initiate  enforcement actions against thrift  institutions,
after giving the OTS 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 will be 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 SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF 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 SAIF  members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC.

      Effective  January 1, 1997, the premium  schedule for BIF and SAIF insured
institutions   ranged  from  0  to  27  basis  points.   However,   SAIF-insured
institutions are required to pay a Financing  Corporation (FICO) assessment,  in
order to fund the interest on bonds  issued to resolve bank and thrift  failures
in the 1980s, equal to approximately 6.00 basis points for each $100 in domestic
deposits,   while   BIF-insured   institutions   pay  an  assessment   equal  to
approximately  1.00  basis  points  for  each  $100 in  domestic  deposits.  The
assessment  is expected  to be reduced to about 2.00 basis  points no later than
January  1,  2000,  when  BIF  insured  institutions  fully  participate  in the
assessment. These assessments,  which may be revised based upon the level of BIF
and SAIF deposits will continue until the bonds mature in the year 2015.

Regulatory Capital Requirements

      Federally insured thrift institutions, such as First Federal, are required
to  maintain a minimum  level of  regulatory  capital.  The OTS 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 thrift  institutions.  These  capital  requirements  must be  generally  as
stringent as the comparable capital  requirements for national banks. The OTS is
also authorized to

                                      31

<PAGE>



impose  capital   requirements  in  excess  of  these  standards  on  individual
associations 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 September 30, 1999,  the Bank did not have any  intangible
assets.

      The OTS regulations  establish  special  capitalization  requirements  for
thrift  institutions that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.  First Federal was not subject to any such deduction at
September 30, 1999.

      At September 30, 1999, First Federal had tangible capital of $5.8 million,
or 7.2% of adjusted total assets,  which is approximately $2.6 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 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however,  a thrift  institution must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition  is such to allow it to maintain a 3% ratio.  At  September  30, 1999,
First Federal had no intangibles which were subject to these tests.

      At  September  30,  1999,  First  Federal had core  capital  equal to $5.8
million,  or 7.2% of adjusted  total  assets,  which is $2.6  million  above the
minimum leverage ratio requirement of 4% as in effect on that date.

       The OTS risk-based requirement requires thrift institutions to have total
capital of at least 8% 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
OTS is also authorized to require a thrift institution to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of  non-traditional  activities.  At September  30, 1999,  First  Federal had no
capital  instruments  that  qualify as  supplementary  capital  and  $326,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.

      Certain exclusions from capital and assets are required to be made for the
purpose  of  calculating  total  capital.  Such  exclusions  consist  of  equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential construction loans in excess of an 80%

                                      32

<PAGE>



loan-to-value ratio and reciprocal  holdings of qualifying capital  instruments.
First  Federal had no such  exclusions  from capital and assets at September 30,
1999.

      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 OTS 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 the FNMA or FHLMC.

     OTS regulations  also require that every thrift  institution with more than
normal  interest  rate risk  exposure  to deduct  from its  total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest-rate  risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a  thrift  institution,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule will not become effective until the OTS
evaluates the process by which thrift  institutions  may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed.  Any thrift  institution  with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement  unless the
OTS determines otherwise.

     On September 30, 1999,  First Federal had total capital of $6.2 million and
risk-weighted assets of $67.7 million, or total capital of 9.1% of risk-weighted
assets.  This amount was  $734,000  above the 8%  requirement  in effect on that
date.  First Federal has very recently  initiated a strategy to profitably  sell
some of its  100%  risk-weighted  loans in order to  continue  to  increase  its
risk-weight  capital ratio.  This strategy was implemented in fiscal year ending
September 30, 1999,  resulting in profitable sales of 90% loan participations of
Second Chance Auto Loans, which assisted in increasing  risk-weight capital from
8.52% at September 30, 1998 to 9.08% at September 30, 1999.

      The OTS and the FDIC  are  authorized  and,  under  certain  circumstances
required,  to take certain actions against thrift institutions that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS 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  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

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

      Any thrift  institution  that fails to comply with its capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital

                                      33

<PAGE>



ratio  of  less  than  6%)  must be made  subject  to one or more of  additional
specified actions and operating  restrictions which may cover all aspects of its
operations  and include a forced merger or acquisition  of the  association.  An
association that becomes "critically undercapitalized" (i.e., a tangible capital
ratio  of 2% or  less) is  subject  to  further  mandatory  restrictions  on its
activities  in addition to those  applicable to  significantly  undercapitalized
associations.  In addition, the OTS must appoint a receiver (or conservator with
the  concurrence  of the FDIC) for a thrift  institution,  with certain  limited
exceptions, within 90 days after it becomes critically undercapitalized.

      At September 30, 1999, First Federal fell within the regulatory definition
of "adequately capitalized".

Regulatory Guidance on Subprime Lending

      In March 1999, the federal banking agencies issued an interagency guidance
on subprime  lending,  which is defined in the guidance as  extending  credit to
borrowers who have a significantly  higher risk of default than traditional bank
lending  customers.  The guidance  applies to direct  extensions of credit;  the
purchase of subprime  loans from other lenders,  including  delinquent or credit
impaired loans purchased at a discount;  the purchase of subprime  automobile or
other  financing  paper  from  lenders  or  dealers;  and the  purchase  of loan
companies that originate subprime loans. The guidance provides that institutions
should recognize the additional risks inherent in subprime lending and determine
if these risks are acceptable and controllable  given the  institution's  staff,
financial condition, size and level of capital support. Institutions that engage
in subprime lending in any significant way should have  board-approved  policies
and procedures, as well as internal controls that identify, measure, monitor and
control these  additional  risks.  The agencies believe that the following items
are  essential  components  of a  well-structured  risk  management  program for
subprime lenders:

            o      adequate planning and strategy;
            o      sufficient staff expertise;
            o      appropriate lending policy;
            o      thorough purchase evaluation;
            o      strong loan administration procedures;
            o      ongoing loan review and monitoring;
            o      special  care to comply with  consumer  protection  laws and
                   regulations;
            o      adequate  planning with respect to  securitization  and sale
                   of subprime loans; and
            o      periodic  evaluation of the  institution's  subprime lending
                   program.

      If the risks  associated  with this activity are not properly  controlled,
the banking  agencies  consider  subprime  lending a high-risk  activity that is
unsafe and unsound.  In light of the higher risks  associated  with this type of
lending,  the  agencies  may  impose  higher  minimum  capital  requirements  on
institutions  engaging  in  subprime  lending.  Due to the  high-risk  nature of
subprime lending, banking examiners will carefully evaluate this activity during
regular and special  examinations.  We believe that the Bank is  conducting  its
subprime  lending  operations  in  accordance  with  the  guidance  and that the
guidance will have no material effect on the Bank's operations.


                                      34

<PAGE>



      Any   undercapitalized   association   is  also  subject  to  the  general
enforcement  authority of the OTS and the FDIC,  including the  appointment of a
conservator or a receiver.

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

      The  imposition  by the OTS or the  FDIC of any of these  measures  on the
Holding  Company or First Federal may have a substantial  adverse  effect on the
Combined Company's operations and
profitability.

Limitations on Dividends and Other Capital Distributions

      The OTS imposes 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.  The OTS also  prohibits a savings  institution
from declaring or paying any dividends or from repurchasing any of its stock if,
as a result of such action,  the regulatory  capital of the institution would be
reduced below the amount required to be maintained for the  liquidation  account
established in connection with the institution's mutual to stock conversion.

      First Federal may make a capital  distribution without the approval of the
OTS  provided  it  notifies  the OTS,  30 days  before it  declares  the capital
distribution and meets the following  requirements:  (i) has a regulatory rating
in one  of the  two  top  examination  categories,  (ii)  is not of  supervisory
concern, and will remain adequately- or well-capitalized,  as defined in the OTS
prompt corrective action regulations,  following the proposed distribution,  and
(iii) the  distribution  does not  exceed the  institution's  net income for the
calendar  year-to-date  plus  retained  net income for the previous two calendar
years (less any  dividends  previously  paid).  If First Federal do not meet the
above stated  requirements,  it must obtain the prior approval of the OTS before
declaring any proposed distributions.

Liquidity

      All thrift institutions, including First Federal, are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings  payable in one year or less.  For a discussion of what First Federal
includes  in  liquid  assets,  see  "Management's  Discussion  and  Analysis  of
Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources."  This  liquid  asset  ratio  requirement  may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
thrift  institutions.  At the present time, the minimum  regulatory liquid asset
ratio is 4%.

      In addition,  short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term U.S Treasury  obligations)  currently
must  constitute at least 1% of the  association's  average daily balance of net
withdrawable  deposit accounts and current borrowings.  Penalties may be imposed
upon associations for violations of either liquid asset ratio requirement.

                                      35

<PAGE>



At September 30, 1999,  First Federal was in compliance with both  requirements,
with an overall liquid asset ratio of 6.18% and a short-term liquid assets ratio
of 6.18%.

Accounting

      An OTS policy statement  applicable to all thrift  institutions  clarifies
and re-emphasizes that the investment activities of a thrift institution must be
in compliance with approved and documented  investment  policies and strategies,
and must be accounted for in accordance with GAAP.  Under the policy  statement,
management  must support its  classification  of and accounting for loans (i.e.,
whether held for investment,  sale or trading) and securities  (held-to-maturity
available-for-sale or trading) with appropriate documentation.  First Federal is
in compliance with these amended rules.

      The OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must  incorporate any other accounting  regulations or orders  prescribed by the
OTS.

Qualified Thrift Lender Test

      All thrift  institutions,  including  First Federal are required to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations.  This test requires a thrift 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 thrift  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 September  30, 1999,  First Federal met the test at 72.06%
QTL, and has always met the test since its effectiveness.

      Any thrift  institution  that fails to meet the QTL test must convert to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible for both a thrift institution and a national bank, and it is limited
to  national  bank  branching  rights  in  its  home  state.  In  addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
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.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL 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. See "-- Holding Company Regulation."

Community Reinvestment Act

      Under  the  Community   Reinvestment  Act  ("CRA"),   every   FDIC-insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet

                                      36

<PAGE>



the credit needs of its entire  community,  including  low and  moderate  income
neighborhoods.  The CRA 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 CRA.  The CRA
requires the OTS, in connection with the examination of First Federal, 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 First Federal.  An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS. Due
to the heightened  attention being given to the CRA in the past few years, First
Federal may be required to devote additional funds for investment and lending in
its local community.

      First  Federal was  examined  for CRA  compliance  in 1998 and  received a
rating of satisfactory.

Transactions with Affiliates

      Generally,  transactions  between a thrift institution or its subsidiaries
and its affiliates  are required to be on terms as favorable to the  association
as transactions with non-affiliates. In addition, certain of these transactions,
such  as  loans  to  an  affiliate,  are  restricted  to  a  percentage  of  the
association's  capital.  Affiliates of First Federal include the Holding Company
and any company which is under common control with First Federal. In addition, a
thrift  institution  may not lend to any  affiliate  engaged in  activities  not
permissible  for a bank  holding  company  or  acquire  the  securities  of most
affiliates. First Federal's subsidiaries are not deemed affiliates; however, the
OTS  has  the  discretion  to  treat  subsidiaries  of  thrift  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 OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

Holding Company Regulation

      The Holding  Company is a unitary savings and loan holding company and can
engage in any safe and sound  business  that is lawful to  conduct,  subject  to
regulatory  oversight  by the OTS. As such,  the Holding  Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Holding Company and its non-thrift  institution  subsidiaries which also permits
the OTS to restrict or prohibit  activities  that are determined to be a serious
risk to the subsidiary thrift  institution.  Otherwise,  the Holding Company can
engage in any safe and sound  business,  which is lawful to conduct for any type
of  business.  The  Holding  Company is  exploring  offering a related  business
through another subsidiary of the Holding Company.

      As a  unitary  savings  and loan  holding  company,  the  Holding  Company
generally  is not  subject to  activity  restrictions.  If the  Holding  Company
acquires  control of another  thrift  institution as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the Holding Company and any of its subsidiaries (other than First Federal or any
other

                                      37

<PAGE>



SAIF-insured  thrift  institution)  would  become  subject to such  restrictions
unless  such other  institutions  each  qualify as a QTL and were  acquired in a
supervisory acquisition.

      If First Federal fails the QTL test,  the Holding  Company must obtain the
approval of the OTS prior to continuing after such failure,  directly or through
its other  subsidiaries,  any business  activity  other than those  approved for
multiple savings and loan holding companies or their subsidiaries.  In addition,
within one year of such failure the Holding  Company must  register as, and will
become subject to, the restrictions  applicable to bank holding  companies.  The
activities  authorized for a bank holding company are much more limited than are
the  activities  authorized  for a unitary or multiple  savings and loan holding
company. See "--Qualified Thrift Lender Test."

      The Holding  Company must obtain  approval  from the OTS before  acquiring
control of any other SAIF-insured  institution.  Such acquisitions are generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling thrift institutions in more than one state. However, such interstate
acquisitions  are  permitted  based  on  specific  state  authorization  or in a
supervisory acquisition of a failing thrift institution.

Federal Securities Law

      The stock of the  Holding  Company  is  registered  with the SEC under the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act").  The Holding
Company is subject  to the  information,  proxy  solicitation,  insider  trading
restrictions and other requirements of the SEC under the Exchange Act.

      The Holding  Company stock held by persons who are  affiliates  (generally
officers,  directors and principal  stockholders) of the Holding Company may not
be resold without  registration or unless sold in accordance with certain resale
restrictions.  If the Holding Company meets specified current public information
requirements,  each  affiliate  of the  Holding  Company  is 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
noninterest  bearing  reserves at specified  levels  against  their  transaction
accounts (primarily checking and NOW checking accounts).  At September 30, 1999,
First Federal was in compliance  with these reserve  requirements.  The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy  liquidity  requirements  that may be imposed by the OTS.
See "-- Liquidity."

      Thrift institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust  other  reasonable   alternative   sources  of  funds,   including  FHLB
borrowings, before borrowing from the Federal Reserve Bank.


                                      38

<PAGE>



Federal Home Loan Bank System

      First  Federal  is a  member  of the  FHLB of  Dallas,  which is one of 12
regional FHLBs,  that  administers the home financing  credit function of thrift
institutions.  Each FHLB  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 FHLB  System.  It makes  loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the  oversight of the
Federal  Housing  Finance  Board.  All advances from the FHLB are required to be
fully secured by  sufficient  collateral as determined by the FHLB. In addition,
all  long-term  advances  are  required to provide  funds for  residential  home
financing.

      As a member,  First Federal is required to purchase and maintain  stock in
the FHLB of Dallas.  At September  30, 1999,  First Federal had $404,000 in FHLB
stock,  which was in  compliance  with this  requirement.  In past years,  First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such  dividends  have  averaged  6.0% and were 5.5% for fiscal year
1999.

      Under  federal  law the  FHLBs  are  required  to  provide  funds  for the
resolution  of  troubled  thrift  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  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction in value of First  Federal's FHLB stock may result in a  corresponding
reduction in First Federal's capital.

      For the year  ended  September  30,  1999,  dividends  paid by the FHLB of
Dallas to First Federal totaled  $21,000,  which  constitute a $17,000  decrease
from the amount of dividends  received in fiscal year 1998. The $21,000 dividend
received for the year ended  September 30, 1999  reflects an annualized  rate of
5.5%, or .48% below the rate for fiscal 1998.

Federal and State Taxation

      Thrift  institutions such as First Federal that meet certain  definitional
tests relating to the composition of assets and other  conditions  prescribed by
the Internal  Revenue Code of 1986,  as amended (the  "Code"),  are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified  formula limits,  be taken as a deduction in computing  taxable
income for  federal  income  tax  purposes.  The amount of the bad debt  reserve
deduction is computed under the experience method.

      Under the experience  method,  the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the thrift institution over a period of years.

      In August 1996,  legislation  was enacted that repealed the  percentage of
taxable  income  method  used by  many  thrifts,  including  First  Federal,  to
calculate  their bad debt reserve for federal income tax purposes.  As a result,
small thrifts such as First Federal must  recapture  that portion of the reserve
that exceeds the amount that could have been taken under the  experience  method
for tax

                                      39

<PAGE>



years  beginning  after  December  31,  1987.  The  recapture  will occur over a
six-year  period,  the  commencement  of which will be  delayed  until the first
taxable year beginning after December 31, 1997,  provided the institution  meets
certain residential lending requirements. The management of the Combined Company
does not  believe  that the  legislation  will  have a  material  impact  on the
Combined  Company.  At  September  30,  1999,  First  Federal had  approximately
$257,000  in bad debt  reserves  subject to  recapture  for  federal  income tax
purposes.  The  deferred  tax  liability  related  to  the  recapture  has  been
previously established so there will be no effect on future net income.

      In addition to the regular  income  tax,  corporations,  including  thrift
institutions  such as First Federal,  generally are subject to a minimum tax. An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative minimum taxable income.

      A portion of First Federal's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of September  30,  1999,  the portion of First  Federal's  reserves
subject to this treatment for tax purposes totaled approximately $643,000.

      The Combined  Company files a consolidated  federal income tax return with
First Federal on a fiscal year basis using the accrual method of accounting.

      Management is not aware of any examination of issues related to still open
federal income tax returns  (including  returns of subsidiaries and predecessors
of, or entities  merged into,  First Federal) which would result in a deficiency
that could have a material  adverse  effect on the  financial  condition  of the
Combined Company.

      Texas Taxation.  The State of Texas does not have a corporate  income tax,
but it does have a corporate franchise tax to which First Federal is subject.

      The tax 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.

      Delaware Taxation.  As a Delaware holding company,  the Holding Company is
exempted  from Delaware  corporate  income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware.  The Holding Company
is also subject to an annual franchise tax imposed by the state of Delaware.

Competition

      After  two years of growth  averaging  20% a year in 1997 and 1998,  First
Federal planned a "no-growth" or slight reduction in deposits during fiscal year
ending September 30, 1999, in order

                                      40

<PAGE>



to gradually increase its regulatory capital ratios and increase  profitability.
This plan was  successful by increasing net profits from $628,000 in fiscal year
ending September 30, 1998, to $814,000 in fiscal year ending September 30, 1999,
with capital  ratios  increasing  during this same period of time.  As a result,
First Federal's  deposits decreased .43% in the fiscal year ending September 30,
1999,  and its  loan-to-deposit  ratio was  97.9%,  as of  September  30,  1999;
however, First Federal faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks and mortgage companies who also make loans
located in First Federal's primary market area. First Federal competes for loans
principally  on the basis of the  interest  rates and loan fees it charges,  the
types  of loans  it  originates  and the  quality  of  service  it  provides  to
borrowers.

      First Federal faces  substantial  competition in attracting  deposits from
other thrift  institutions,  commercial  banks,  money market and mutual  funds,
credit  unions and other  investment  vehicles.  The ability of First Federal to
attract  and retain  deposits  depends on its  ability to provide an  investment
opportunity  that satisfies the  requirements of investors as to rate of return,
liquidity,  risk and other factors. First Federal competes for these deposits by
offering a variety of  deposit  accounts  at  competitive  rates and  convenient
business hours.

      Checking accounts introduced by First Federal include accounts targeted to
those  individuals age 50 or over ("Golden Eagle Account") and age 30 to 49 ("30
Something  Account"),  both of which include special benefits and planned trips,
along with its special  "Working  People's"  checking  account  designed for the
working people of the Brazos Valley.

     At  September  30,  1999  there  was  one  local,   community-owned  thrift
institution  (First Federal),  one state savings bank and seven commercial banks
with retail  offices in  Bryan-College  Station,  Texas,  where First  Federal's
principal offices and full-service branches are located.

Employees

      At September  30, 1999,  the Combined  Company had a total of 63 full-time
and 19  part-time  employees.  None  of the  Combined  Company's  employees  are
represented by any collective  bargaining  agreement.  Management  considers its
employee  relations  to be  good,  with a staff  committed  to the  goals of the
Combined Company.

Executive Officers Who are Not Directors

      The following  information as to the business  experience  during the past
five years is supplied with respect to each executive officer of the Bank. There
are no  arrangements or  understandings  between the persons named and any other
person pursuant to which such officers were selected.

     William  Wantuck.  Mr.  Wantuck  joined  First  Federal in January  1999 as
Executive Vice President and Chief Financial Officer. Mr. Wantuck supervises the
accounting,   regulatory   reporting,   loan   administration,   branch  banking
operations, management information systems and secondary mortgage loan marketing
functions.   Mr.  Wantuck  has  been  in  banking  since  1976,  primarily  with
independent  financial  institutions,  and  has  extensive  experience  in  most
operational areas of banking.  Mr. Wantuck is a certified public  accountant,  a
certified  internal  auditor and a certified  financial  services  auditor.  Mr.
Wantuck is a member of the Audit Committee, the Asset Review Committee, the

                                      41

<PAGE>



Regulatory Compliance Committee,  the Investment/Insurance and Finance Committee
and is Chairperson of the Asset/Liability Committee.

     Mary L. Hegar.  Ms. Hegar joined First Federal in 1977 and became Assistant
Secretary/Treasurer in 1987 and was promoted to Senior Vice  President/Financial
and Regulatory.  Ms. Hegar primarily coordinates the accounting functions of the
Bank,  monitors First  Federal's  investments  and is responsible for regulatory
reporting. Ms. Hegar is a member of the Asset/Liability Committee.

Item 2.  Description of Property

Offices

      First Federal owns the building and land for the Holding Company's and its
executive office at 2900 Texas Avenue, Bryan, Texas, which was built in 1956 and
acquired  by First  Federal in 1978.  This  office now has  approximately  8,700
square  feet and is  situated  on  almost  an acre of land with over 200 feet of
frontage situated on the principal  thoroughfare in Bryan-College  Station.  The
depreciated  net book value of this office and land (with  recent  improvements)
was $732,000 at September 30, 1999. An expansion of 800 square feet was added in
1995, and additional drive-in facilities were added in 1994 and 1997. Additional
land was  acquired  in fiscal  1998,  located  near  First  Federal's  principal
offices,  to construct a new, larger  drive-in  facility when the need arises in
the future. An additional expansion of approximately 1,000 square feet was added
in fiscal 1999 to institute safe deposit  service with over 700 new safe deposit
boxes and increased  spaces for its growing Note  Department  and for additional
customer service.

      First  Federal  also opened and owns a branch  office at 2202  Longmire in
College  Station in March of 1994,  located  adjacent  to one of the key highway
intersections in College  Station.  This office was renovated and expanded after
its  acquisition  by First Federal from the FDIC.  The office has  approximately
2320  square feet and is  situated  on almost two acres of land,  with  adequate
expansion  space for the growth of the branch and the offices of First Federal's
expanding  Second  Chance Auto Loan  Program.  The book value of this office and
land was $301,000 at September 30, 1999.

      First Federal also acquired in fiscal 1998  approximately one acre of land
at a key  intersection of two major highways in north Bryan, as the site for its
north Bryan  full-service  branch.  It opened in June 1998,  with a special bank
modular  facility  pending  construction  of the  permanent  facility,  which is
tentatively schedule to commence before December 31, 1999. First Federal is very
pleased to date with the acceptance by the community of this new facility.  This
branch is intended to better serve the Hispanic and minority community,  working
class population and other residents in this part of the community not presently
served by a nearby  banking  facility.  Management  believes  its current  check
clearing  capability can service these  additional  accounts.  The book value of
this office and land was $302,000 at September 30, 1999.

     The  Bank   maintains  a  database  of  depositor  and  borrower   customer
information.  The net book value of the data  processing and computer  equipment
and software utilized by the Bank at September 30, 1999 was $164,000.


                                      42

<PAGE>



Item 3.  Legal Proceedings

      The Combined  Company is, from time to time,  a party to certain  lawsuits
arising in the ordinary course of its business.  The Combined  Company  believes
that none of these  lawsuits  would,  if adversely  determined,  have a material
adverse effect on its financial condition.

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 three months ended  September
30, 1999.

                                   PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

      Pages  56  and  57  of  the  Combined  Company's  1999  Annual  Report  to
      Stockholders is incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation

      Pages 6   through  24 of the  Combined  Company's  1999  Annual  Report to
      Stockholders is incorporated herein by reference.

Item 7.  Financial Statements

      Pages 26  through  55 of the  Combined  Company's  1999  Annual  Report to
      Stockholders are incorporated herein by reference.

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

      There has been no current  report on Form 8-K filed within 24 months prior
to the  date of the most  recent  financial  statements  reporting  a change  of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                   PART III

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

      Information  concerning  Directors of the Combined Company is incorporated
herein by reference from the definitive  proxy  statement for the annual meeting
of  stockholders  to be held on February 24, 2000, a copy of which will be filed
not later than 120 days after the close of the fiscal year.


                                      43

<PAGE>



      To the  Combined  Company's  knowledge,  based  solely  on a review of the
copies  of  such  reports   furnished  to  the  Combined   Company  and  written
representations that no other reports are required, during the fiscal year ended
September  30, 1999,  all Section  16(a) filing  requirements  applicable to its
officers,  directors and greater than 10 percent beneficial owners were complied
with.

Item 10.  Executive Compensation

      Information  concerning  executive  compensation is incorporated herein by
reference  from  the  definitive  proxy  statement  for the  annual  meeting  of
stockholders  to be held on February 24, 2000, a copy of which will be filed not
later than 120 days after the close of the fiscal year.

Item 11.  Security Ownership of Certain Beneficial Owners and
          Management

      Information concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  proxy
statement  for the annual  meeting of  stockholders  to be held on February  24,
2000,  a copy of which  will be filed not later than 120 days after the close of
the fiscal year.

Item 12.  Certain Relationships and Related Transactions

      Information  concerning certain  relationships and related transactions is
incorporated  herein by reference  from the definitive  proxy  statement for the
annual meeting of  stockholders to be held on February 24, 2000, a copy of which
will be filed not later than 120 days after the close of the fiscal year.



                                      44

<PAGE>



Item 13.  Exhibits and Reports on Form 8-K

(a)   Exhibits
                                                       Reference to
                                                       Prior Filing
                                                        or Exhibit
  Regulation                                              Number
 S-B Exhibit                                             Attached
    Number                   Document                     Hereto
 ---------- -----------------------------------------  ------------
      2     Plan of acquisition, reorganization,           None
            arrangement, liquidation or succession

      3(a)  Certificate of Incorporation                     *

      3(b)  By-Laws                                          *

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

      9     Voting Trust Agreement                         None

     10     Material contracts                               *

     11     Statement re: computation of per share       Not required

     12     Statement re:  computation of ratios         Not required

     13     Annual Report to Security Holders                13

     16     Letter re:  change in certifying                None
            accountants

     18     Letter re:  change in accounting principles     None

     21     Subsidiaries of Registrant                        21

     22     Published report regarding matters submitted     None
            to vote of security holders

     23     Consents of Experts and Counsel              Not required

     24     Power of Attorney                            Not required

     27     Financial Data Schedule                           27

     99     Additional Exhibits                              None

---------------------
*     Filed  as  exhibits  to  the  Combined  Company's  Form  S-1  registration
      statement (File No. 333-28179) filed on May 30, 1997 pursuant to Section 5
      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.


(b)   Reports on Form 8-K


      There were no reports on Form 8-K filed for the  quarter  ended  September
30, 1999.



                                      45

<PAGE>



                                  SIGNATURES

      Pursuant to the  requirements of section 15(d) of the Securities  Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly
authorized.

                                    THE BRYAN-COLLEGE STATION
                                    FINANCIAL HOLDING COMPANY


Date:  January 7, 2000              By:/s/ J. Stanley Stephen
       ---------------                 -----------------------------------
                                       J. Stanley  Stephen,  President  and
                                        Chief Executive Officer
                                        (Duly Authorized Representative)

          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
this report has been signed below by the following  person in the capacities and
on the dates indicated.



By:/s/ Richard L. Peacock            By:/s/ J. Stanley Stephen
   ------------------------------       ------------------------------
   Richard L. Peacock                   J. Stanley Stephen, President
    Chairman of the Board                and  Chief  Executive Officer
                                         (Principal Executive Officer)

Date:  January 7, 2000               Date:  January 7, 2000
      ---------------------------          ---------------------------


By:/s/ Ken L. Hayes                  By:/s/ Ernest A. Wentrek
   ------------------------------       ------------------------------
   Ken L. Hayes, Director               Ernest A. Wentrek, Director
                                         and Vice Chairman of the Board


Date:  January 7, 2000               Date:  January 7, 2000
      ---------------------------          ---------------------------


By:/s/ Charles Neelley                By:/s/ George Koenig
   -------------------------------       ------------------------------
   Charles Neelley                       George Koenig, Director
    Director, Secretary and Treasurer     and Executive Vice President
    of the Board of Directors


Date:  January 7, 2000                Date:  January 7, 2000
      ---------------------------           ---------------------------






<PAGE>



By:/s/ Roland Ruffino                  By:/s/ Robert H. Conaway
   ---------------------------------      ------------------------------
   Roland Ruffino                         Robert H. Conaway
   Director                               Director


Date:  January 7, 2000                Date:  January 7, 2000
      ---------------------------           ---------------------------




By:/s/ Joseph W. Krolczyk                By:/s/ Gary A. Snoe
   ----------------------------------       -----------------------------
   Joseph W. Krolczyk                       Gary A. Snoe
   Director                                 Director


Date:  January 7, 2000                Date:  January 7, 2000
      ---------------------------           ---------------------------




By:/s/ William Wantuck                      By:/s/ Helen Chavarria
   ------------------------------------        -----------------------------
   William Wantuck                             Helen Chavarria
   Chief Financial Officer                     Director
    (Principal Financial and Accounting
     Officer)


Date:  January 7, 2000                 Date:  January 7, 2000
      ---------------------------            ---------------------------