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

                                   FORM 10-KSB

[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 [FEE REQUIRED]

                  For the fiscal year ended December 31, 1998

                                       OR

[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

         For the transition period from                       to

                         Commission File Number 0-21165

                        FIRST ALLEN PARISH BANCORP, INC.
                 (Name of small business issuer in its charter)

        Delaware                                             72-1331593
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)

     222 South 10th Street, Oakdale, Louisiana                 71463
    (Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code:        (318) 335-2031
                                                           -------------- 

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of class)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. YES [ X ]   NO    [   ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item  405 of  Regulation  S-B  contained  herein,  and  no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

         The  Registrant's  revenues for the fiscal year ended December 31, 1998
were $2,411,105.

         As of March 30, 1999, there were issued and outstanding  266,622 shares
of the Registrant's Common Stock. The Registrant's voting stock is not regularly
and actively traded,  and there are no regularly quoted bid and asked prices for
the  Registrant's  voting  stock.  Accordingly,  the  Registrant  is  unable  to
determine the aggregate market value of the voting stock held by non-affiliates.
<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE

         Parts  II and III of  Form  10-KSB  -  Portions  of  Annual  Report  to
Stockholders for the fiscal year ended December 31, 1998.

         Part III of Form 10-KSB - Portions of Proxy  Statement  for 1999 Annual
Meeting of Stockholders.



                                        2

<PAGE>
                                     PART I

Item 1.  Description of Business

General

         First Allen Parish  Bancorp,  Inc.  ("First Allen Parish  Bancorp" and,
with its  subsidiaries,  the "Company") was formed in June 1996 at the direction
of First Federal Savings and Loan  Association of Allen Parish ("First  Federal"
or the  "Association") for the purpose of owning all of the outstanding stock of
the Association issued upon the conversion of the Association from the mutual to
stock form (the "Conversion"). On September 27, 1996, First Allen Parish Bancorp
acquired all of the shares of the  Association in connection with the completion
of the Conversion. All references to the Company, unless otherwise indicated, at
or before  September 27, 1996 refer to the  Association.  The  Company's  common
stock is quoted on the National  Security  Quotation  System "Pink Sheets" under
the symbol "FALN".

         First  Federal  is  a   federally-chartered   stock  savings  and  loan
association  headquartered in Oakdale,  Louisiana.  First Federal was originally
chartered in 1962. Its deposits are insured up to the maximum  allowable  amount
by the Savings  Association  Insurance  Fund  ("SAIF")  of the  Federal  Deposit
Insurance Corporation (the "FDIC"). Through its office in Oakdale, First Federal
serves  communities  located in Allen Parish and in the surrounding  parishes in
the State of  Louisiana.  At December 31, 1998,  the Company had total assets of
$38.7  million,  deposits  of $33.6  million  and  stockholders'  equity of $4.8
million.

         The   Association   has  been,   and  intends  to  continue  to  be,  a
community-oriented financial institution offering selected financial services to
meet the needs of the communities it serves.  The Association  attracts deposits
from the general public and historically  has used such deposits,  together with
other  funds,  to originate  loans  secured by real  estate,  including  one- to
four-family  residential  mortgage  loans,  commercial  real estate loans,  land
loans, construction loans and loans secured by other properties. At December 31,
1998, 81.2% of the Association's gross loan portfolio consisted of loans secured
by real  estate.  The  Association  also  originates  consumer  and other  loans
consisting primarily of loans secured by automobiles,  manufactured homes, loans
secured by deposits  ("share loans") and lines of credit.  At December 31, 1998,
consumer  and other  loans  constituted  31.5% of the  Association's  gross loan
portfolio.  In order to supplement its loan  originations,  the  Association has
invested a  significant  portion of its  assets in  mortgage-backed  securities,
which  are  insured  or  guaranteed  by  federal  agencies,  as  well  as  other
investments. At December 31, 1998, the Association's  mortgage-backed securities
portfolio  totaled $16.2  million,  or 41.9% of total assets.  See "- Investment
Activities."

         The executive  office of the Company and the  Association is located at
222 South 10th Street,  Oakdale,  Louisiana  71463 and its  telephone  number is
(318) 335-2031.  A newly  constructed  full service branch completed in November
1998 is  located  at 110  North  Fifth  Street,  Oberlin,  Louisiana  and a loan
production office was opened in 1998 located at 531 North Ninth Street,  Kinder,
Louisiana.
<PAGE>
Market Area and Competition
---------------------------

         First  Federal  serves  Allen  Parish,  Louisiana  and the  surrounding
parishes,  from its offices in Oakdale,  Oberlin  and Kinder,  Louisiana.  Allen
Parish consists of small farms and residential communities of predominantly one-
to four-family residences. The Association's market for deposits is concentrated
in Allen Parish. The Association is the only independent  financial  institution
headquartered in Allen Parish.

         The economy of the  Association's  market area  consists  primarily  of
small  farming  communities,  the timber and wood  industry  and state and local
government.  The  largest  employers  in the  Association's  market area are the
Federal Bureau of Prisons, which operates a corrections facility,  Boise Cascade
Corporation, a wood manufacturer,  Arizona Chemical, a division of International
Paper Co.,  Grand  Casino,  which is operated by the  Coushatta  Indians and the
Allen Parish School Board. In recent years the oil and gas industry has become a
growing segment of the Association's economy.


                                        3
<PAGE>
         The  Association's  business and  operating  results are  significantly
affected by the general economic  conditions in the  Association's  market area.
Management  believes that the population in the  Association's  market area will
remain stable in the foreseeable future.

         The Association  faces significant  competition in attracting  deposits
from  commercial  banks,  other  savings  institutions  and credit  unions.  The
Association  faces  additional  competition for deposits from  short-term  money
market funds,  from other  corporate and  government  securities  funds and from
brokerage funds and insurance companies.  The Association also faces significant
competition  in the  origination  of loans from savings  institutions,  mortgage
banking companies, credit unions and commercial banks.

Lending Activities
------------------

         General.  The Association's  loan portfolio consists primarily of loans
secured by real  estate  which  consist  primarily  of loans  secured by one- to
four-family  residences,  commercial real estate loans,  construction  loans and
loans secured by other properties.  The Association also originates consumer and
other loans consisting  primarily of loans secured by automobiles,  manufactured
homes,  share loans,  lines of credit and other consumer  loans. At December 31,
1998, the Association's gross loans totaled $16.8 million, of which $8.8 million
or 52.8% were one-to  four-family  residential  mortgage  loans.  Of the one- to
four-family  mortgage  loans  outstanding  at that date,  32.7% were  fixed-rate
loans, and 67.3% were adjustable-rate  loans. At December 31, 1998, $2.1 million
or 12.4% of gross  loans  were  secured by  commercial  real  estate  properties
consisting of retail shops and churches,  $394,000, or 2.3%, of gross loans were
construction  loans for the construction of owner-occupied  homes, and $483,000,
or 2.9% of gross loans consisted of land loans. At that date, consumer and other
loans totaled $4.7 million or 27.8% of the  Association's  gross loan portfolio,
of  which  $774,000,  or 4.6%,  consisted  of share  loans,  $702,000,  or 4.2%,
consisted of automobile  loans,  $2.2 million,  or 13.3%,  consisted of lines of
credit to small  farms and  businesses,  $40,000 or 0.2%  consisted  of loans on
manufactured  homes and $935,000 or 5.5% consisted of other loans (consisting of
personal loans,  disaster relief loans,  and loans to governmental  entities and
non-profit organizations).

         The Association also invests in mortgage-backed securities. At December
31, 1998,  mortgage-backed and related securities totaled $16.2 million.  See "-
Investment Activities."

         The Association's  loans-to-one borrower limit is generally the greater
of 15% of unimpaired capital and surplus or $500,000.  At December 31, 1998, the
maximum amount which the Association could have lent under this limit to any one
borrower and the borrower's  related  entities was  approximately  $585,000.  At
December 31, 1998, the  Association  had one borrower that exceeded this maximum
limit; however the Association is currently working with this borrower to reduce
its  loan  below  the  required  limit.   The   Association's   largest  lending
relationship  at December 31, 1998 was  $824,000 in loans to one borrower  which
was comprised of six loans, three of which were secured by real estate and three
of which were  unsecured  commercial  loans.  The  Association's  second largest
lending  relationship at December 31, 1998 was $533,000 in loans to one borrower
which was  comprised  of ten loans,  seven of which were secured by real estate,
one of which was  secured  by a  certificate  of  deposit  and two of which were
unsecured commercial loans. The Association's third largest lending relationship
totaled  $326,000,  which consisted of four loans,  two of which were secured by
real estate, one of which was secured by an automobile,  and one of which was an
unsecured  commercial  loan.  At  December  31,  1998,  all of these  loans were
performing in accordance with their terms.

                                        4
<PAGE>
         Loan  Portfolio  Composition.  Set forth below is data  relating to the
composition of the Association's  loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
                                                           At December 31,
                                    -----------------------------------------------------------
                                          1998                  1997                1996
                                    ------------------   ------------------   -----------------   
                                    Amount    Percent    Amount     Percent    Amount    Percent
                                                      (Dollars in Thousands)
<S>                                 <C>        <C>       <C>        <C>       <C>        <C>   
Real estate loans:
  One- to four-family residential   $8,884     59.64%    $ 8,376    61.38%    $7,279     60.97%
  Commercial real estate loans..     2,084     13.99       1,467    10.75      1,519     12.73
  Construction..................       394      2.65         353     2.59        487      4.08
  Land loans....................       483      3.24         612     4.49        451      3.78
  Other real estate loans.......       256      1.72         280     2.05        237      1.99
                                    ------    ------     -------   ------     ------    ------
 Total first mortgage loans.....    12,101     81.24      11,088    81.25      9,973     83.55
                                    ------    ------     -------   ------     ------    ------

Consumer and other loans:
  Automobile....................       702      4.71         526     3.85        475      3.97
  Manufactured homes............        40      0.27          24     0.18         22      0.19
  Share loans...................       774      5.19         735     5.39        795      6.66
  Lines of credit...............     2,248     15.10       1,321     9.68      1,003      8.41
  Other loans...................       935      6.27         970     7.11        721      6.04
                                    ------    ------     -------   ------     ------    ------
     Total consumer and other loans  4,699     31.54       3,576    26.21      3,016     25.27
                                    ------    ------     -------   ------     ------    ------

     Total loans receivable.....    16,800    112.78      14,664   107.46     12,989    108.82

Less:
  Undisbursed loan proceeds.....    (1,579)   (10.60)       (710)   (5.20)      (755)    (6.34)
  Unearned discounts............       (21)    (0.14)         (8)   (0.06)        --        --
  Allowance for loan losses.....      (304)    (2.04)       (300)   (2.20)      (296)    (2.48)
                                    -------   -------    --------  -------    -------   -------
    Total loans receivable,
      net  .....................    $14,896   100.00%    $13,646   100.00%    $11,938   100.00%
                                    =======   ======     =======   ======     =======   ======
</TABLE>

         One- to Four-Family  Mortgage Loans. The Association's  primary lending
activity is the origination of one-to four-family,  owner-occupied,  residential
mortgage  loans secured by property  located in the  Association's  market area.
Loans are generated through the Association's  marketing  efforts,  its existing
customers and referrals, real estate brokers, builders and local businesses. The
Association  generally  has limited its real  estate  loan  originations  to the
financing of properties  located within its market area and will not make out of
state loans. At December 31, 1998, the Association had $8.8 million, or 52.8% of
its  gross  loan  portfolio,  invested  in  mortgage  loans  secured  by one- to
four-family residences.
<PAGE>
         The  Association  originates for retention in its portfolio  fixed-rate
residential  one-  to  four-family  loans  with  terms  of up to 15  years.  The
Association's  fixed-rate  mortgage  loans  amortize  monthly with principal and
interest due each month.  Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option.

         The Association  currently offers ARM loans with  amortization  periods
ranging up to 30 years.  The Association  generally offers ARM loans that either
adjust  every  year or every  three  years  from the date of  origination,  with
interest rate adjustment  limitations up to two percentage points per adjustment
and with a cap of up to six  percentage  points on total interest rate increases
over the life of the loan.  Currently,  ARM loans are originated  with a minimum
interest  rate of five  percent  and a  maximum  rate of 15%  regardless  of the
initial rate. In a rising interest rate  environment,  such rate limitations may
prevent ARM loans from repricing to market interest  rates,  which would have an
adverse  effect on net  interest  income.  The  Association  has used  different
interest  indices for ARM loans in the past,  and  currently  uses the  National
Average  Contract  Interest Rate for Major Lenders on the Purchase of Previously
Occupied  Loans  as  its  index.  ARM  loans  secured  by  residential  one-  to
four-family  real estate  totaled $6.0  million,  or 67.3% of the  Association's
total one- to four-family  residential  real estate loans receivable at December
31, 1998.  The  origination  of  fixed-rate  mortgage  loans versus ARM loans is
monitored  on an ongoing  basis and is  affected  significantly  by the level of
market interest rates, customer preference,  the Association's interest rate gap
position  and  loan   products   offered  by  the   Association's   competitors.
Particularly in a relatively low interest rate

                                        5
<PAGE>
environment, borrowers may prefer fixed-rate loans to ARM loans. During the year
ended  December 31, 1998,  the  Association  originated  $804,000 in  fixed-rate
residential mortgage loans and $1.0 million of ARM loans.

         The primary purpose of offering ARM loans is to make the  Association's
loan portfolio more interest rate  sensitive.  However,  as the interest  income
earned on ARM loans varies with  prevailing  interest  rates,  such loans do not
offer the  Association  predictable  cash flows as would  long-term,  fixed-rate
loans. ARM loans carry increased credit risk associated with potentially  higher
monthly  payments by borrowers as general market interest rates increase.  It is
possible,  therefore,  during periods of rising interest rates, that the risk of
delinquencies  and  defaults  on ARM  loans  may  increase  due  to  the  upward
adjustment  of interest  costs to the  borrower,  resulting  in  increased  loan
losses.

         The Association's  residential first mortgage loans customarily include
due-on-sale  clauses,  which are provisions  giving the Association the right to
declare a loan  immediately  due and payable in the event,  among other  things,
that the borrower sells or otherwise  disposes of the  underlying  real property
serving as security  for the loan.  Due-on-sale  clauses are a means of imposing
assumption fees and increasing the interest rate on the  Association's  mortgage
portfolio during periods of rising interest rates.

         Pursuant  to  federal  regulations,   all  financial  institutions  are
required  to adopt  and  maintain  comprehensive  written  real  estate  lending
policies  that are  consistent  with safe and  sound  banking  practices.  These
lending policies must reflect  consideration  of the Interagency  Guidelines for
Real Estate Lending Policies adopted by the Federal banking agencies,  including
the OTS, in December 1992 ("Guidelines").  The Guidelines set forth, pursuant to
the mandates of the FDICIA,  uniform regulations  prescribing standards for real
estate lending. Real estate lending is defined as extension of credit secured by
liens on  interests  in real  estate or made for the  purpose of  financing  the
construction of a building or other  improvements to real estate,  regardless of
whether a lien has been taken on the property.

         The policies must address certain lending  considerations  set forth in
the Guidelines,  including  loan-to-value  ("LTV") limits,  loan  administration
procedures,  underwriting standards,  portfolio  diversification  standards, and
documentation,  approval and reporting requirements. These policies must also be
appropriate  based upon the size of the  institution and the nature and scope of
its operations,  and must be reviewed and approved by the institution's board of
directors at least annually.  The LTV ratio  framework,  with an LTV ratio being
the total amount of credit to be extended  divided by the appraised value of the
property  at the time the credit is  originated,  must be  established  for each
category of real estate loans.  If not a first lien, the lender must combine all
senior liens when calculating  this ratio.  The Guidelines,  among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%);  construction   (commercial,   multi-family  and  nonresidential)  (80%);
improved property (85%); and owner occupied one- to four-family  residential (no
maximum  ratio,  however,  any LTV ratio in excess of 90%  requires  appropriate
insurance or readily marketable collateral).
<PAGE>
         Certain  institutions  are  permitted to make real estate loans that do
not  conform  with  the   established  LTV  ratio  limits  up  to  100%  of  the
institution's  total capital.  Within this aggregate limit,  total loans for all
commercial,  agricultural,   multi-family  and  other  non-one-  to  four-family
residential  properties  should not exceed 30% of total capital.  An institution
will come  under  increased  supervisory  scrutiny  as the  total of such  loans
approaches  these  levels.  Certain  loans are exempt from the LTV ratios (e.g.,
those  guaranteed by a government  agency,  loans to facilitate the sale of real
estate  owned,  loans  renewed,  refinanced  or  restructured  by  the  original
lender(s) to the same  borrower(s)  where there is no  advancement of new funds,
etc.).

                                        6
<PAGE>
         Regulations  limit  the  amount  that a  savings  association  may lend
relative  to the  appraised  value of the real  estate  securing  the  loan,  as
determined  by an appraisal at the time of loan  origination.  Such  regulations
permit a maximum LTV ratio of 95% for  residential  property (and 100% for loans
guaranteed  by the  Veterans  Administration)  and 90% for all other real estate
loans. The Association's lending policies,  however, generally limit the maximum
LTV  ratio on  fixed-rate  and ARM loans to 95% of the  lesser of the  appraised
value or the  purchase  price of the  property  securing the loan in the case of
loans secured by one- to four-family  owner-occupied properties. The maximum LTV
ratio on other types of real estate loans is generally  the lesser of 80% of the
appraisal value or the purchase price of the property.

         When  underwriting  residential  real  estate  loans,  the  Association
reviews  and  verifies  each loan  applicant's  employment,  income  and  credit
history.  Management  believes that  stability of income and past credit history
are integral parts in the underwriting process. Generally, the applicant's total
monthly mortgage payment, including all escrow amounts, is limited to 28% of the
applicant's total monthly income. In addition,  total monthly obligations of the
applicant, including mortgage payments, should not generally exceed 42% of total
monthly  income.  Written  appraisals  are  generally  required  on real  estate
property  offered to secure an applicant's  loan. For real estate loans with LTV
ratios  of  between  80% and 95%,  the  Association  requires  private  mortgage
insurance.  The  Association  requires fire,  casualty and where necessary flood
insurance on all properties securing real estate loans. The Association requires
title insurance, and an attorney's title opinion.

         Commercial  Real Estate Loans.  The Association  originates  commercial
real estate loans typically  secured by retail  facilities,  churches and office
buildings.  At December 31, 1998,  $2.1 million,  or 12.4% of the  Association's
gross loan portfolio  consisted of commercial real estate loans. At December 31,
1998,  all of the  Association's  commercial  real estate  loans were secured by
properties  within the State of  Louisiana.  The maximum loan to value ratio for
commercial  real estate loans  originated by the Association is 80%. At December
31, 1998,  the largest  commercial  real estate loan had a principal  balance of
$334,000,  and was secured by commercial real estate. The loan was performing in
accordance with its terms at December 31, 1998.

         The underwriting  standards  employed by the Association for commercial
real estate loans include a determination of the applicant's  credit history and
an  assessment  of the  applicant's  ability to meet  existing  obligations  and
payments on the proposed loan. Written appraisals are obtained on all commercial
real  estate  loans.  The  Association  assesses  the  creditworthiness  of  the
applicant by reviewing a credit report,  financial statements and tax returns on
the applicant.

         Loans secured by  commercial  real estate  generally  involve a greater
degree of credit risk than one- to  four-family  mortgage  loans.  The increased
risk is the result of several factors, including the effects of general economic
conditions  in income  producing  properties  and the  successful  operation  or
management of the properties securing the loans.  Furthermore,  the repayment of
loans  secured  by  commercial  real  estate  is  typically  dependent  upon the
successful  operation of the related business and real estate  property.  If the
cash flow from the project is reduced,  the borrower's ability to repay the loan
may be impaired.
<PAGE>
         Land Loans.  The  Association  offers land  loans,  primarily  loans to
purchase and develop  single family  homesites,  which may consist of individual
lots or large acreage  tracts.  At December 31, 1998,  $483,000,  or 2.9% of the
Association's  gross loan  portfolio  consisted of land loans.  The maximum loan
amount generally does not exceed 75% of the appraised value of the property. The
terms of land loans are negotiated on a case by case basis; however,  fixed rate
loans are typically  originated  for terms of 5 years or less;  adjustable  rate
land loans are  originated  for terms up to 15 years and will either adjust at a
premium over the prime rate or will be based upon the National  Average Contract
Interest Rate for Major Lenders on the Purchase of  Previously  Occupied  Loans.
The  Association  will make a  limited  number  of land  loans  for  speculation
purposes.  Land loans are typically made to companies or  individuals  with whom
the Association has had a prior business relationship.

                                        7
<PAGE>
         Construction  Lending.  At  December  31,  1998,  the  Association  had
$394,000 or 2.3% of its gross loan portfolio,  invested in  construction  loans.
First Federal offers loans to both builders and individuals for the construction
of one- to four-family residences. Currently, such loans are offered with fixed-
or  adjustable-rates  of interest,  with loan terms of six months.  The interest
rates of construction loans are typically at a margin over the prime rate or the
National  Average  Contract  Interest  Rate for Major Lenders on the Purchase of
Previously  Owned  Homes.  The  maximum  loan  amount will not exceed 80% of the
appraised value of the project.  The Association  requires the builder to submit
plans, specifications and cost projections. In addition, the Association reviews
the borrower's existing financial  condition,  including total outstanding debt.
Funds are  dispersed  as the  construction  project  progresses.  Following  the
construction period, these loans may convert to permanent loans,  generally with
terms for up to 15 years if the interest rate is fixed and up to 30 years if the
interest rate is  adjustable.  At December 31, 1998,  none of the  Association's
construction loans were non-performing.

         Construction lending and land loans are generally considered to involve
a higher level of credit risk than one-to four-family  residential lending since
the risk of loss on construction loans is dependent largely upon the accuracy of
the initial  estimate of the individual  property's value upon completion of the
project and the estimated cost (including  interest) of the project. If the cost
estimate  proves to be inaccurate,  the  Association  may be required to advance
funds  beyond  the  amount  originally  committed  to permit  completion  of the
project.

         Consumer and Other Lending.  First Federal offers a variety of consumer
loans, including loans secured by deposits, lines of credit, automobile and home
improvement loans. The Association currently originates substantially all of its
consumer loans in its primary  market area generally to its existing  customers.
At December  31,  1998,  the  Association's  consumer  and other loan  portfolio
totaled $4.7 million, or 27.8% of its gross loan portfolio.

         The Association offers loans secured by the borrower's savings deposits
("share loans"). At December 31, 1998, share loans totaled $774,000,  or 4.6% of
the Association's gross loan portfolio.

         First Federal  originates home improvement  loans. Home equity and home
improvement  loans secured by second  mortgages,  together with loans secured by
all prior liens, are generally  limited to 80% or less of the appraised value of
the home.  Generally,  such loans have a maximum  term of up to 15 years.  As of
December 31, 1998, home improvement loans amounted to $46,000, which represented
0.28% of the Association's gross loan portfolio.

         The Association also originates  lines of credit for businesses.  These
loans are made on both a secured  and  unsecured  basis.  Lines of credit may be
secured by real estate,  equipment and inventory.  They are generally originated
with interest  rates that adjust at a premium above the prime rate. All lines of
credit are reviewed annually by the Association.  Lines of credit loans amounted
to approximately  $2.2 million at December 31, 1998, which  represented 13.3% of
the Association's gross loan portfolio.

         Another component of the Association's consumer loan portfolio consists
of automobile  loans.  The Association  originates  automobile loans on a direct
basis,  where the  Association  extends credit  directly to the borrower.  These
loans  generally have terms that do not exceed five years and carry a fixed-rate
of interest.  Generally,  loans on new vehicles are made in amounts up to 80% of
dealer  cost and loans on used  vehicles  are made in  amounts  up to 80% of the
vehicle's  published  NADA  value.  At  December  31,  1998,  the  Association's
automobile  loans  totaled  $702,000  or 4.2% of the  Association's  gross  loan
portfolio.
<PAGE>
         Consumer loan terms vary according to the type and value of collateral,
length of  contract  and  creditworthiness  of the  borrower.  The  underwriting
standards employed by the Association for consumer loans include an application,
a  determination  of the  applicant's  payment  history  on other  debts  and an
assessment of ability to meet existing  obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.

         Consumer loans entail greater credit risk than do residential  mortgage
loans,  particularly  in the case of consumer  loans which are  unsecured or are
secured  by  rapidly  depreciable  assets,  such as  automobiles.  Further,  any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the

                                        8
<PAGE>
outstanding loan balance as a result of the greater  likelihood of damage,  loss
or  depreciation.  In addition,  consumer loan  collections are dependent on the
borrower's  continuing  financial  stability,  and thus are  more  likely  to be
affected by adverse  personal  circumstances.  Furthermore,  the  application of
various federal and state laws,  including  bankruptcy and insolvency  laws, may
limit the amount which can be recovered on such loans.  Management believes that
its level of  delinquencies is relatively low in comparison with other financial
institutions,  and  that  its  low  level  of  consumer  loan  delinquencies  is
attributable to the Association's  policy of aggressively  contacting  borrowers
who become  delinquent in repaying their loans. At December 31, 1998,  $9,685 in
consumer loans were non-performing. See "- Delinquencies and Classified Assets."
There can be no assurances, however, that delinquencies will not increase in the
future.

Loan Maturity Schedule
----------------------

         The  following  table sets forth  certain  information  at December 31,
1998,  regarding  the  dollar  amount  of loans  maturing  in the  Association's
portfolio  based on their  contractual  terms to maturity.  Demand loans,  loans
having no stated schedule of repayments and no stated  maturity,  and overdrafts
are reported as due in one year or less.
<TABLE>
<CAPTION>
                                                          One          Three       Five        Ten         Twenty
                                          Within       Through        Through     Through     Through       Years
                                         One Year    Three Years    Five Years   Ten Years  Twenty Years   Or More      Total
                                       ----------     ----------     ---------  ----------   ----------  ----------  ----------   
<S>                                    <C>           <C>            <C>         <C>          <C>         <C>         <C>       
First mortgage loans:
  One- to four-family residential      $  799,182     $  185,617     $ 357,912  $2,579,434   $3,887,744  $1,074,489  $8,884,378   
  Other properties.............           318,130         95,641       256,664     967,211    1,143,434      41,788   2,822,868   
  Construction.................           287,298        106,703            --          --           --          --     394,001   
Consumer and other loans.......         3,239,557        647,343       567,960     149,210       94,598          --   4,698,668   
                                       ----------     ----------     ---------  ----------   ----------  ----------  ----------   
     Total.....................        $4,644,167     $1,035,304     $1,182,536 $3,695,855   $5,125,776  $1,116,277  $16,799,915  
                                       ==========     ==========     ========== ==========   ==========  ==========  ===========  
</TABLE>                                              


         The  following  table  sets  forth  the  dollar  amount of all loans at
December 31, 1998 that have  predetermined  interest  rates and have floating or
adjustable interest rates and which are due after December 31, 1999.
<TABLE>
<CAPTION>

                                                                                   Floating or
                                                               Fixed-Rates      Adjustable Rates        Total
<S>                                                            <C>                 <C>               <C>       
First mortgage loans:
  One- to four-family residential...........................   $2,371,341          $5,713,855        $8,085,196
  Other properties..........................................    1,879,079             625,659         2,504,738
  Construction..............................................      106,703                  --           106,703
Consumer and other loans....................................    1,459,111                  --         1,459,111
                                                               ----------          ----------        ----------
     Total..................................................   $5,816,234          $6,339,514        $12,155,748
                                                               ==========          ==========        ===========
</TABLE>
                                        9
<PAGE>
Origination of Loans
--------------------

         Loan   originations   are  developed  from  continuing   business  with
depositors and borrowers,  soliciting realtors,  builders, walk-in customers and
third-party sources. All real estate loans must be approved by the Association's
board of  directors.  Consumer  and other loans up to $15,000 may be approved by
the Association's President. All other consumer and other loans must be approved
by the Board of Directors.

         While the Association  originates both  adjustable-rate  and fixed-rate
loans,  its ability to originate loans to a certain extent is dependent upon the
relative  customer  demand for loans in its  market,  which is  affected  by the
interest rate environment,  among other factors. For the year ended December 31,
1998,  the  Association  originated  $5.5 million in  fixed-rate  loans and $3.0
million in adjustable rate loans.

         In recent years the Association has neither purchased,  nor sold loans.
All loans  originated  by the  Association  are  retained  in the  Association's
portfolio.

         Set forth below is a table showing the Association's  loan originations
and repayments for the periods indicated.
<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                  ---------------------------------------------------
                                                    1998                 1997                 1996
                                                  --------             -------               --------
                                                                    (In Thousands)
<S>                                               <C>                  <C>                   <C>     
Total loans receivable at beginning of period     $ 14,664             $12,989               $ 11,883
                                                  --------             -------               --------
Originations:
 First mortgage loans -
  One- to four-family residential...........         1,803               2,199                    590
  Construction..............................         1,104                 306                    664
  Other properties..........................           500                 618                  1,025
 Consumer and other loans:
  Automobile................................           632                 389                    308
  Manufactured home.........................            24                   6                      5
  Other.....................................         2,778               2,200                  2,564
 Refinancing................................         1,682               1,388                    755
                                                  --------             -------               --------
    Total originations......................         8,523               7,106                  5,911
  Transfer of mortgage loans
    to foreclosed real estate...............            --                 (28)                   (74)
  Repayments................................        (6,387)             (5,403)                (4,731)
                                                  ---------            --------              ---------
Net loan activity...........................         2,136               1,675                  1,106
                                                  --------             -------               --------
     Total loans receivable
        at end of period....................      $ 16,800             $14,664               $ 12,989
                                                  ========             =======               ========
</TABLE>
<PAGE>
Delinquencies and Classified Assets
-----------------------------------

         The Association's  collection procedures provide that when a loan is 15
days past due, a  computer-generated  late charge notice is sent to the borrower
requesting  payment  plus a  late  charge.  If the  loan  remains  delinquent  a
telephone  call is made or a  letter  is  sent  to the  borrower  stressing  the
importance of  reinstating  the loan and obtaining  reasons for the  delinquency
before  the loan  becomes  delinquent  after 30  days.  After 45 days a  written
commitment  to bring the loan  current is required.  When a loan  continues in a
delinquent  status for 90 days or more,  and a repayment  schedule  has not been
made or adhered to by the  borrower,  a notice of intent to  foreclose  upon the
underlying  property  is sent to the  borrower  by the  Association's  attorney,
giving the borrower 10 days to cure the delinquency.  If not cured,  foreclosure
proceedings are initiated.

         In recent years the Association has increased its collection efforts by
more closely  monitoring  delinquent  loans and  employing  diligent  collection
efforts.  Management  believes that these efforts have  contributed  to the loan
portfolio's  low  delinquency  levels.  At December 31, 1998,  1997 and 1996 the
percentage  of total loans  delinquent  90 days or more to net loans  receivable
were 0%, 0%, and 0%, respectively.

         Delinquent  Loans  and  Nonperforming  Assets.  Generally,  when a loan
becomes more than 90 days  delinquent,  the  Association  will place the loan on
non-accrual status and previously accrued interest income on the loan

                                       10
<PAGE>
is charged against current income.  The loan will remain on a non-accrual status
as long as the loan is more than 90 days delinquent.

         Real  estate  acquired  through   foreclosure  or  by  deed-in-lieu  of
foreclosure  is  classified  as real estate owned until such time as it is sold.
When real estate  owned is  acquired,  it is recorded at the lower of the unpaid
principal  balance of the related loan, or its fair market value, less estimated
selling expenses. Any further write-down of real estate owned is charged against
earnings.  At December 31,  1998,  the  Association  owned  approximately  $0 of
property classified as real estate owned.

         Delinquent  consumer  loans are handled in a similar manner as to those
described  above;  however,  shorter  time frames for each step apply due to the
type  of  collateral   generally  associated  with  such  types  of  loans.  The
Association's  procedures for repossession  and sale of consumer  collateral are
subject to various  requirements under Louisiana and federal consumer protection
laws.

         The  following  table  sets  forth  information  with  respect  to  the
Association's delinquent loans and other problem assets at December 31, 1998.
<TABLE>
<CAPTION>

                                                                    At December 31, 1998
                                                                ----------------------------
                                                                Balance               Number
                                                                -------               ------
                                                                          (In Thousands)
<S>                                                             <C>                     <C>                        
One- to four-family residential real estate:
    Loans 60 to 89 days delinquent............................  $    --                  --
    Loans 90 days or more delinquent..........................       --                  --
Other properties:
    Loans 60 to 89 days delinquent............................       31                   1
    Loans 90 days or more delinquent..........................       --                  --
Construction:
    Loans 60 to 89 days delinquent............................       50                   2
    Loans 90 days or more delinquent..........................       --                  --
Consumer and other loans:
    Loans 60 to 89 days delinquent............................       43                   4
    Loans 90 days or more delinquent..........................       --                  --
Foreclosed real estate and repossessions......................       --                  --
Other nonperforming assets....................................       --                  --
Restructured loans within the meaning of Statement of
    Financial Accounting Standards No. 15 (not included
    in other nonperforming categories above)..................      107                   5
Loans to facilitate sale of real estate owned.................      393                  16

</TABLE>
                                       11

<PAGE>
         The following table sets forth information  regarding  delinquent loans
and real estate owned by the Association at the dates indicated. At December 31,
1998, the Association  had $107,000 in restructured  loans within the meaning of
SFAS 15.
<TABLE>
<CAPTION>
                                                                         At December 31,
                                                          ------------------------------------------
                                                             1998             1997             1996
                                                          --------           -------       ---------
                                                                     (Dollars In Thousands)
<S>                                                       <C>                <C>           <C>      
Non-accruing loans:
  First mortgage loans:
    One- to four-family residential..................     $     66           $    76       $      44
    Other properties.................................           --                --              --
    Commercial.......................................           42                49              --
    Construction.....................................           --                --              --
  Consumer and other loans...........................            9                 1              --
                                                          --------           -------       ---------
    Total non-accruing loans.........................          117               126              44
                                                          --------           -------       ---------
Accruing loans past due 90 days or more: 
  First mortgage loans:
    One- to four-family residential..................           --                --       $      --
    Other properties.................................           --                --              --
    Construction.....................................           --                --              --
  Consumer and other loans...........................           --                --              --
                                                          --------           -------       ---------
     Total accruing loans delinquent
        90 days or more..............................           --                --              --
                                                          --------           -------       ---------
          Total non-performing loans.................          117               126              44
                                                          --------           -------       ---------
  Total real estate owned............................           --                --              75
                                                          --------           -------       ---------
       Total non-performing assets...................     $    117           $    --       $     119
                                                          ========           =======       =========

 Performing troubled debt restructurings.............     $    107           $   199       $     154
                                                          ========           =======       =========
    Total non-performing assets and troubled
    debt restructurings..............................     $    224           $   325       $     273
                                                          ========           =======       =========
Total loans delinquent 90 days or more to
  net loans receivable...............................         0.00%             0.00%           0.00%
                                                          --------           -------       ---------
Total loans delinquent 90 days or more to
  total assets.......................................         0.00%             0.00%           0.00%
                                                          --------           -------       ---------
Total non-performing loans and REO
  to total assets....................................         0.30%             0.37%           0.38%
                                                          --------           -------       ---------
Total non-performing assets and troubled
  debt restructurings to total assets................         0.58%             0.97%           0.87%
                                                          --------           -------       ---------
</TABLE>
                                       12
<PAGE>
Delinquent Loans
----------------

         The following table sets forth  information  with respect to loans past
due 60-89 days in the Association's portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                         At December 31,
                                                          ------------------------------------------
                                                            1998               1997           1996
                                                          --------           -------       --------- 
                                                                          (In Thousands)
<S>                                                       <C>                <C>           <C>      
Loans past due 60-89 days:
  First mortgage loans:
    One- to four-family residential..................     $     --           $    --       $     105
    Other properties.................................           31                --               5
    Construction.....................................           50                54              --
  Consumer and other loans...........................           43                23               5

</TABLE>

         For the year ended December 31, 1998 gross interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their  original  terms  amounted  to $10,000.  The amount  that was  included in
interest income on such loans was $8,000 for the year ended December 31, 1998.

         Classified Assets.  Federal  regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered  "substandard"  if it is  inadequately  protected  by the current net
worth and paying  capacity of the  obligor or the  collateral  pledged,  if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard" with the added  characteristic  that
the weaknesses  present make "collection or liquidation in full" on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and  of  such  little  value  that  their  continuance  as  assets  without  the
establishment of a specific loss reserve is not warranted.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish  general  allowances for losses in an
amount  deemed  prudent  by  management.   General  allowances   represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem  assets as  "loss,"  it is  required  either  to  establish  a  specific
allowance for losses equal to 100% of that portion of the asset so classified or
to  charge-off  such  amount.   An   institution's   determination   as  to  the
classification  of its  assets  and the amount of its  valuation  allowances  is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.

         In connection with the filing of its periodic  reports with the OTS and
in  accordance  with  its  classification  of  assets  policy,  the  Association
regularly  reviews  loans in its  portfolio  to  determine  whether  such assets
require classification in accordance with applicable  regulations.  On the basis
of management's  review of its assets, at December 31, 1998, the Association had
classified a total of $326,000 of its assets as substandard, $0 as doubtful, and
$15,000 as loss.  At  December  31,  1998,  total  classified  assets  comprised
$341,000,  or 7.1% of the  Association's  capital,  or .88% of the Association's
total assets.
<PAGE>
         Other Loans of Concern.  Other than the non-performing  loans set forth
in the tables above, as of December 31, 1998,  there were no loans classified by
the  Association  with  respect to 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 doubts as to the ability of the borrowers to
comply  with  present  loan  repayment  terms and which may result in the future
inclusion of such items in the non-performing asset categories.


                                       13
<PAGE>
         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity,  including  those  loans  which are being  specifically  monitored  by
management.  Such  evaluation,  which  includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions,  historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.

         Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus  estimated  cost to sell. If fair value at the
date of  foreclosure  is  lower  than  the  balance  of the  related  loan,  the
difference  will be  charged-off to the allowance for loan losses at the time of
transfer.  Valuations  are  periodically  updated by management and if the value
declines,  a specific  provision for losses on such property is established by a
charge to operations.  At December 31, 1998, the Association had properties with
a net book value of $0 which were acquired through foreclosure.

         Although   management  believes  that  it  uses  the  best  information
available to determine the allowance,  unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.  Future additions to the Association's  allowance for loan losses
will be the result of periodic loan,  property and  collateral  reviews and thus
cannot be predicted in advance. In addition,  federal regulatory agencies, as an
integral part of the examination process,  periodically review the Association's
allowance for loan losses. Such agencies may require the Association to increase
the allowance based upon their judgment of the information  available to them at
the time of their examination. At December 31, 1998, the Association had a total
allowance   for  loan  losses  of   $304,000,   representing   259.8%  of  total
non-performing loans and 2.0% of the Association's loans, net. See Note 4 of the
Notes to Consolidated Financial Statements.

                                       14
<PAGE>
         The  following  table  sets  forth the  allocation  for loan  losses by
category for the periods indicated.
<TABLE>
<CAPTION>
                                                                               At December 31,
                                                   ----------------------------------------------------------------------
                                                           1998                     1997                     1996
                                                   -------------------      -------------------      --------------------
                                                             % of Loans               % of Loans              % of Loans
                                                               In Each                  In Each                 In Each
                                                             Category to              Category to             Category to
                                                   Amount    Total Loans    Amount    Total Loans    Amount   Total Loans
                                                   ------    -----------    ------    -----------    ------   -----------
                                                                           (Dollars in thousands)
<S>                                                <C>           <C>        <C>           <C>         <C>          <C>   
First mortgage loans
  One- to four-family residential................  $   228       52.88%     $  225        57.12%      $ 217        56.04%
  Other properties...............................       38       16.80          37        16.08          37        16.99
  Construction...................................       --        2.35          --         2.41          --         3.75
Consumer and other loans.........................       38       27.97          38        24.39          42        23.22
                                                   -------    --------      ------     --------       -----      -------
    Balance, end of period.......................  $   304      100.00%     $  300       100.00%      $ 296       100.00%
                                                   =======    ========      ======     ========       =====      =======
</TABLE>
         The  following  table  sets  forth  information  with  respect  to  the
Association's allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                            ------------------------------------------------------------
                                                              1998                      1997                      1996
                                                            --------                  --------                   ------
                                                                                 (Dollars in thousands)
<S>                                                         <C>                            <C>                   <C>    
Balance at beginning of period...................           $     300                      $  296                $   317
Charge-offs:
  First mortgage loans...........................                  --                        --                      (10)
  Consumer and other loans.......................                 (59)                        (33)                    (8)
Recoveries:
  First mortgage loans...........................                  --                         7                       --
  Consumer and other loans.......................                   4                         27                       5
                                                            ---------                       ----                 -------
    Net charge-offs..............................                 (55)                        1                      (13)
      Provision for loan losses (recoveries).....                  59                         3                       (8)
Balance, at end of period........................           $     304                      $  300                $   296
                                                            =========                      ======                =======
Allowance for loan losses as a per-
  cent of net loans receivable at
  end of period..................................                2.00%                        2.20%                 2.48%
Ratio of net loans charged off during
  the period to average loans outstanding
  during the period..............................              (0.39)%                        0.00%               (0.11)%
Ratio of allowance for loan losses
  to total non-performing loans
  at end of period...............................              259.83%                        238.70%             670.81%
Ratio of allowance for loan losses
  to total non-performing loans
  and REO at end of period.......................              259.83%                        238.70%             249.02%
</TABLE>
                                       15
<PAGE>
Investment Activities
---------------------

         General. First Federal must maintain minimum levels of investments that
qualify as liquid  assets  under OTS  regulations.  Liquidity  may  increase  or
decrease  depending upon the  availability  of funds and  comparative  yields on
investments in relation to the return on loans.  Historically,  the  Association
has generally  maintained liquid assets at levels above the minimum requirements
imposed  by the OTS  regulations  and at levels  believed  adequate  to meet the
requirements  of normal  operations,  including  repayments of maturing debt and
potential  deposit  outflows.  Cash flow projections are regularly  reviewed and
updated to assure that adequate  liquidity is maintained.  At December 31, 1998,
the  Association's  liquidity  ratio  (liquid  assets  as a  percentage  of  net
withdrawable savings deposits and current borrowings) was 11.8%.  See"Regulation
- Liquidity."

         Federally  chartered savings  institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities  of various  federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.

         Generally, the investment policy of the Association,  as established by
the  Board  of  Directors,  is to  invest  funds  among  various  categories  of
investments  and  maturities  based  upon  the  Association's  liquidity  needs,
asset/liability  management  policies,  investment  quality,  marketability  and
performance objectives.

         Mortgage-backed  and  Related  Securities.  The  Association  purchases
mortgage-backed and related securities to supplement residential loan production
and as part of its asset/liability strategy. The type of securities purchased is
based upon the  Association's  asset/liability  management  strategy and balance
sheet objectives.  For instance,  substantially all of the  mortgage-backed  and
related  investments  purchased by the  Association  over the last several years
have had adjustable rates of interest.  Management  believes that the adjustable
rate feature of the mortgages  underlying  adjustable rate  mortgage-backed  and
related  securities  generally  will help to reduce  changes in the value of the
mortgage-backed  and  related  security  in  response  to normal  interest  rate
fluctuations.  As the interest rates on the mortgages  underlying the adjustable
rate  mortgage-backed and related securities are reset periodically,  the yields
of such  securities  will gradually  align  themselves to reflect changes in the
market rates so that the market value of such securities will remain  relatively
constant as compared to fixed rate  instruments.  The  Association  has invested
primarily in federal agency  securities,  principally  Freddie Mac (formerly the
Federal  Home  Loan  Mortgage   Corporation),   Government   National   Mortgage
Association  ("GNMA"),  Federal National Mortgage Association ("FNMA") and Small
Business   Association   ("SBA")   obligations.   At  December  31,  1998,   the
Association's investment in mortgage-backed and related securities totaled $16.2
million or 41.9% of its total assets.  At December 31, 1998, $9.7 million of the
Association's   mortgage-backed   and  related  securities  were  classified  as
held-to-maturity  and $6.4 million were  classified as available  for sale.  See
Note 3 of the Notes to Consolidated Financial Statements.
<PAGE>
         The FNMA,  Freddie Mac and GNMA certificates are modified  pass-through
mortgage-backed  and related  securities that represent  undivided  interests in
underlying   pools  of   fixed-rate,   or  certain  types  of   adjustable-rate,
single-family   residential  mortgages  issued  by  these   government-sponsored
entities.  As a result, the interest rate risk characteristics of the underlying
pool of mortgages,  i.e.,  fixed rate or adjustable  rate, as well as prepayment
risk, are passed on to the certificate  holder. FNMA and Freddie Mac provide the
certificate  holder a guarantee  of timely  payments of  interest  and  ultimate
collection  of  principal,  whether  or not they  have  been  collected.  GNMA's
guarantee to the holder timely payments of principal and interest and are backed
by the full faith and credit of the U.S. government. The FNMA, Freddie Mac, GNMA
and SBA  certificates  are  modified  pass-through  mortgage-backed  and related
securities that represent undivided interests in underlying pools of fixed-rate,
or certain types of adjustable-rate,  single-family residential mortgages, or in
the case of the SBA  certificates,  the portion of commercial and/or real estate
loans guaranteed by the SBA. As a result,  the interest rate  characteristics of
the underlying pool of mortgages,  i.e., fixed-rate or adjustable-rate,  as well
as prepayment  risk, are passed on to the certificate  holder.  FNMA and Freddie
Mac provide the  certificate  holder a guarantee of timely  payments of interest
and ultimate collection of principal, whether or not they have been collected.


                                       16
<PAGE>
         Mortgage-backed  and related  securities  generally yield less than the
loans that underlie such securities,  because of the cost of payment  guarantees
or credit enhancements that reduce credit risk. In addition, mortgage-backed and
related  securities  are more liquid than  individual  mortgage loans and may be
used   to   collateralize   obligations   of  the   Association.   In   general,
mortgage-backed  securities  issued or  guaranteed  by FNMA and  Freddie Mac are
weighted   at  no  more  than  20%  for   risk-based   capital   purposes,   and
mortgage-backed  securities  issued or guaranteed by GNMA are weighted at 0% for
risk-based  capital  purposes,  compared to an assigned risk weighting of 50% to
100% for whole residential  mortgage loans. These types of securities thus allow
the  Association  to  optimize  regulatory  capital  to a  greater  extent  than
non-securitized  whole loans. The Association has sought to improve the yield on
its  mortgage-backed   securities  portfolio  by  investing  in  mortgage-backed
securities with maturities in excess of 10 years.

         While  mortgage-backed  securities  carry  a  reduced  credit  risk  as
compared  to whole  loans,  such  securities  remain  subject to the risk that a
fluctuating  interest  rate  environment,  along with other  factors such as the
geographic  distribution  of  the  underlying  mortgage  loans,  may  alter  the
prepayment rate of such mortgage loans and so affect both the prepayment  speed,
and value, of such securities.

         Set forth below is a table  showing  the  Association's  purchases  and
repayments  of  mortgage-backed   securities  for  the  periods  indicated.  The
Association did not sell any mortgage-backed securities during 1998.
<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                    1998              1997                 1996
                                                  --------        ----------             ---------
                                                               (In Thousands)
<S>                                               <C>             <C>                    <C>     
Mortgage-backed securities at beginning
 of period.................................       $ 17,147        $  17,186              $ 15,391
  Purchases.................................         2,444            2,870                 3,915
  Sales.....................................            --             (382)                   --
  Repayments................................        (3,405)          (2,470)               (2,078)
Discount (premium) amortization.............             9              (57)                  (42)
                                                  --------        ----------             ---------
Mortgage-backed securities
  at end of period..........................      $ 16,195        $  17,147              $ 17,186
                                                  ========        =========              ========
</TABLE>
         At December 31, 1998, the Association's investment securities consisted
solely of FHLB stock totaling $263,000. The Association invests excess liquidity
in FHLB overnight deposits.

         OTS  regulations  restrict  investments  in  corporate  debt and equity
securities by the Association.  These restrictions  include prohibitions against
investments  in the debt  securities  of any one  issuer in excess of 15% of the
Association's  unimpaired  capital and unimpaired  surplus as defined by federal
regulations,  plus an  additional  10% if the  investments  are fully secured by
readily  marketable  collateral.  At December 31, 1998, the  Association  was in
compliance with this regulation. See "Regulation - Federal Regulation of Savings
Associations"  for a discussion of additional  restrictions on the Association's
investment activities.
<PAGE>
         The following table sets forth the carrying value of the  Association's
FHLB stock and  mortgage-backed  securities at the dates indicated.  At December
31, 1998, the market value of the Association's  mortgage-backed  portfolios and
investment   securities   was   approximately   $16.2   million  and   $263,000,
respectively.
<TABLE>
<CAPTION>
                                                                     At December 31,
                                                      -------------------------------------------
                                                          1998           1997             1996
                                                      -----------      ---------        ---------
                                                                       (In Thousands)

<S>                                                    <C>             <C>              <C>      
Mortgage-backed securities.........................    $   16,195      $  17,147        $  17,186
Federal Home Loan Bank stock.......................           263            259              259
                                                       ----------      ---------        ---------
    Total investments..............................    $   16,458      $  17,406        $  17,448
                                                       ==========      =========        =========

</TABLE>

                                       17

<PAGE>
         Mortgage-Backed  and  Investment  Portfolio  Maturities.  The following
table sets forth the scheduled  maturities,  carrying values,  market values and
average yields for the Association's investment securities at December 31, 1998.
<TABLE>
<CAPTION>
                                                                          At December 31, 1998
                                  --------------------------------------------------------------------------------------------------
                                      One Year or Less          One to Five Years         Five to Ten Years    More than  Ten Years 
                                  ---------------------      ----------------------   ---------------------  -----------------------
                                  Carrying      Average      Carrying       Average     Carrying    Average   Carrying      Average 
                                    Value        Yield         Value         Yield       Value      Yield      Value        Yield   
                                    -----        -----         -----         -----       -----      -----      -----        -----   
                                                                          (Dollars in Thousands)
<S>                                    <C>          <C>      <C>              <C>     <C>           <C>      <C>             <C>   
Mortgage-backed and
 investment securities held
 to maturity:
  GNMA certificates...........          --           --      $       2        6.50%   $         5    8.00%   $       234     6.46%  
  Freddie Mac certificates....          --           --              7        7.25             76    8.25          3,203     6.12%  
  FNMA certificates...........          --           --             97        6.63             --      --          5,892     6.34%  
  Collateralized mortgage
    obligations...............          --           --             --          --             --      --             39     7.25%  
  FHLB Stock..................          --           --             --          --             --      --            263     5.81%  
  Municipal bonds.............          --           --             --          --             --      --            189     8.25%  
    Total.....................          --           --            106        6.67%            81    8.24%         9,820     6.30%  

Mortgage-backed and investment 
securities available for sale:
  GNMA certificates...........          --           --             --          --             --      --            388     6.66%  
  Freddie Mac certificates....          --           --              6        7.38%            --      --          2,221     6.39%  
  FNMA certificates...........          --           --             --          --             --      --          3,271     6.34%  
 SBA certificates.............          --           --             --          --             --      --            552     6.13%  
    Total.....................          --           --      $       6        7.38%   $        --      --%   $     6,432     6.36%  
<CAPTION>
                                             Total Investment Portfolio 
                                        -----------------------------------       
                                           Carrying     Market     Average  
                                             Value      Value       Yield   
                                             -----      -----       -----   
                                     
<S>                                     <C>          <C>             <C>     
Mortgage-backed and            
 investment securities held    
 to maturity:                  
  GNMA certificates...........          $       241  $       243     6.49%    
  Freddie Mac certificates....                3,286        3,290     6.17%    
  FNMA certificates...........                5,989        5,999     6.34%    
  Collateralized mortgage                                                     
    obligations...............                   39           36     7.25%    
  FHLB Stock..................                  263          263     5.81%    
  Municipal bonds.............                  189          202     8.25%    
    Total.....................               10,007       10,033     6.32%    
                                                                              
Mortgage-backed and investment                                                
securities available for sale:                                                
  GNMA certificates...........                  388          383     6.66%    
  Freddie Mac certificates....                2,228        2,231     6.39%    
  FNMA certificates...........                3,271        3,287     6.34%    
 SBA certificates.............                  552          550     6.13%    
    Total.....................          $     6,438  $     6,451     6.36%    
                                        
</TABLE>
                                       18
<PAGE>
         The Association's investment securities portfolio at December 31, 1998,
contained $188,561 of tax exempt securities and no securities of any issuer with
an aggregate book value in excess of 10% of the Association's retained earnings,
excluding those issued by the U.S. government, or its agencies.

Sources of Funds
----------------

         General.  The  Association's  primary  sources  of funds are  deposits,
receipt of  principal  and  interest on loans and  securities,  interest-earning
deposits  with  other  banks,  FHLB  advances,  and other  funds  provided  from
operations.

         FHLB advances are used to support  lending  activities and to assist in
the Association's  asset/liability  management strategy.  See "- Asset/Liability
Management." Typically,  the Association does not use other forms of borrowings.
At December 31, 1998, the Association had $0 in FHLB advances.

         Deposits.  First Federal offers a variety of deposit  accounts having a
wide range of interest rates and terms.  The  Association's  deposits consist of
passbook, commercial demand, NOW, money market deposit and certificate accounts.
The certificate accounts currently range in terms from 30 days to five years.

         The Association  relies primarily on advertising,  competitive  pricing
policies and customer  service to attract and retain these deposits.  Currently,
First  Federal  solicits  deposits  from its market area only,  and does not use
brokers to obtain deposits. The flow of deposits is influenced  significantly by
general  economic  conditions,  changes in money market and prevailing  interest
rates and competition.

         The Association has become more susceptible to short-term  fluctuations
in deposit  flows as customers  have become more interest  rate  conscious.  The
Association  endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability management.
Notwithstanding  the foregoing,  a significant  percentage of the  Association's
deposits  are for terms of less than one  year.  At  December  31,  1998,  $17.2
million or 51.2% of the Association's  deposits were in certificates of deposits
with terms of 11 months or less.  The  Association  believes  that upon maturity
most of these  deposits  will  remain at the  Association.  The  ability  of the
Association  to attract  and  maintain  savings  accounts  and  certificates  of
deposit, and the rates paid on these deposits,  has been and will continue to be
significantly affected by market conditions.


                                       19
<PAGE>
Savings Portfolio
-----------------

         Deposits in the Association as of December 31, 1998,  were  represented
by the various types of deposit programs described below.
<TABLE>
<CAPTION>
     Weighted
      Average                                                                                    Percentage
     Interest          Minimum               Checking and             Minimum                     of Total
       Rate             Term                  Savings                 Amount        Balances      Savings
       ----             ----                  -------                 ------        --------      -------
                                           (In thousands)
<S>    <C>        <C>                 <C>                             <C>           <C>               <C>  
       0.00%      None                Non interest-bearing demand     $  5,000      $  1,299          3.87%
       2.00       None                Passbook accounts                     50         2,253          6.71
       2.75       None                Money market                       2,500           604          1.80
       2.02       None                NOW accounts                         100         8,809         26.25

                                      Certificates of Deposit
                                      -----------------------

       5.14%      1-5  months         Fixed term, fixed rate             2,500        12,369         36.86%
       5.12       6-11 months         Fixed term, fixed rate             2,500         4,825         14.38
       5.33       12-17 months        Fixed term, fixed rate             1,000         1,427          4.25
       4.95       18-23 months        Fixed term, fixed rate             1,000         1,279          3.81
       5.84       24-29 months        Fixed term, fixed rate             1,000           289           .86
       5.97       30-35 months        Fixed term, fixed rate             1,000           260           .77
       6.00       36-47 months        Fixed term, fixed rate             1,000            74           .22
       5.82       48-53 months        Fixed term, fixed rate             1,000            30           .09
       5.67       54-59 months        Fixed term, fixed rate             1,000            35           .13
       5.25       60 months
                  or greater          Fixed term, fixed rate             1,000        33,553        100.00%  
</TABLE>
Deposit Activity
----------------

     The following  table sets forth the deposit  activities of the  Association
for the periods indicated:
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                         -------------------------------------------
                                                            1998            1997             1996
                                                         -----------    -----------      -----------
                                                                       (In Thousands)
<S>                                                      <C>            <C>              <C>       
Deposits, beginning of period.........................   $   28,656     $   25,750       $   26,583
Deposits..............................................       85,306         64,833           55,778
Withdrawals...........................................      (81,599)       (63,138)         (57,752)
                                                         -----------    -----------      -----------
  Net increase (decrease) before
    interest credited.................................        3,707          1,695           (1,974)
Interest credited.....................................        1,190          1,211            1,141
                                                         ----------     ----------       ----------
   Net increase (decrease) in deposits................        4,897          2,906             (833)
                                                         ----------     ----------       -----------
Deposits, end of period...............................   $   33,553     $   28,656       $   25,750
                                                         ==========     ==========       ==========
</TABLE>
                                       20
<PAGE>
Deposit Flow
------------

         The  following  table sets forth the change in dollar amount of savings
deposits in the various  types of savings  accounts  offered by the  Association
between the dates indicated.
<TABLE>
<CAPTION>
                                                                  At December 31,
                                   ---------------------------------------------------------------------------------------
                                                1998                   1997                               1996
                                   -------------------------------   ------------------     ------------------------------ 
                                   Balance    Percent      Change    Balance    Percent       Change     Balance   Percent
                                                             (Dollars  in  Thousands)

<S>                                <C>         <C>       <C>         <C>          <C>       <C>         <C>          <C>        
Non interest-bearing demand        $1,299      3.87%     $    387    $   912      3.18%     $    456    $   456      1.77%      
NOW Accounts.............           8,809     26.25         5,035      3,774     13.17           552      3,222     12.51       
Passbook savings.........           2,253      6.71          (331)     2,584      9.02          (174)     2,758     10.71       
Money market deposit                                                                                                            
  accounts...............             604      1.80          (118)       722      2.52          (111)       833      3.24       
Time deposits:                                                                                                                  
  which mature                                                                                                                  
  within 12 months.......          17,194     51.24          (648)    17,842     62.26         2,894     14,948     58.05       
  within 12-24 months....           2,706      8.06           593      2,113      7.37        (1,130)     3,249     12.62       
  beyond 24 months.......             688      2.07           (21)       709      2.48           425        284      1.10       
                                   ------     -----      ---------   -------     -----      --------    -------    ------       
         Total...........          $33,553    100.00%    $  4,897    $28,656     100.00%    $  2,906    $25.750    100.00%      
                                   =======    ------     ========    =======     ======     ========    =======    ======       
</TABLE>                           

         The  following  table   indicates  the  amount  of  the   Association's
certificates  of deposit of $100,000 or more by time remaining until maturity at
December 31, 1998.
<TABLE>
<CAPTION>
                                                              Certificates
                                                              of Deposits
                                                              -----------
                                                            (In thousands)
<S>                                                           <C>      
     Three months or less..................................   $   1,517
     Over three through six months.........................       1,282
     Over six through twelve months........................         900
     Over twelve months....................................         752
                                                              ---------
         Total.............................................   $   4,451
                                                              =========
</TABLE>
     Time Deposits by Rates

         The  following  table sets forth the time  deposits in the  Association
classified by rates as of the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
                                                                              December 31,
                                                              -------------------------------------------
                                                                 1998             1997             1996
                                                              ---------        --------          --------
                                                                            (In Thousands)

<S>                                                           <C>              <C>               <C>     
     3.99% or Less.........................................   $     313        $     --          $      5
     4.00 - 5.99%..........................................      15,342          16,919            18,409
     6.00 - 7.99%..........................................       4,811           3,627                --
     8.00 - 9.99%..........................................         122             118                67
                                                              ---------        --------          --------
                                                              $  20,588        $ 20,664          $ 18,481
                                                              =========        ========          ========
</TABLE>
                                       21
<PAGE>
Time Deposit Maturity Schedule
------------------------------

     The following  table sets forth the amount and  maturities of time deposits
at December 31, 1998.
<TABLE>
<CAPTION>
                                                               Amount Due
                           -----------------------------------------------------------------------------------
                           Less Than       1-2         2-3         3-4         4-5         After
                             1 Year       Years       Years       Years       Years       5 Years       Total
                           ---------      -----       -----      -------     -------      -------     --------
                                                             (In Thousands)
<S>                        <C>          <C>          <C>         <C>         <C>                       <C>     
     Rate
     3.99 or less........  $     --     $   313      $   --      $   --      $    --          --       $    313
     4.00 - 5.99%........    13,988       1,055         160          74           65          --         15,342
     6.00 - 7.99%........     3,206       1,216         389          --           --          --          4,811
     8.00 - 9.99%........        --         122                      --           --          --            122
                           --------     -------      ------      ------      -------      ------       --------
                           $ 17,194     $ 2,706      $  549      $   74      $    65          --       $ 20,588
                           ========     =======      ======      ======      =======      ======       ========
</TABLE>
         Borrowings.  First Federal's borrowings  historically have consisted of
advances  from  the  FHLB of  Dallas.  Such  advances  may be made  pursuant  to
different credit programs,  each of which has its own interest rate and range of
maturities.  Federal law limits an institution's  borrowings from the FHLB to 20
times the amount  paid for  capital  stock in the FHLB,  subject  to  regulatory
collateral requirements. At December 31, 1998, the Association had $0 million in
advances from the FHLB. The Association  has the ability to purchase  additional
capital stock from the FHLB.

         The  following  table  sets forth the  maximum  month-end  balance  and
average balance of FHLB advances.
<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                   ----------------------------------------
                                       1998          1997             1996
                                   --------       --------        ---------
                                               (In Thousands)
<S>                                <C>            <C>             <C>      

FHLB advances
    Maximum balance.............   $  1,000       $  2,000        $   1,500
    Average balance.............   $    119       $    282        $     175

</TABLE>
<PAGE>

Regulation
----------

General

         As a  federally  chartered  savings  institution,  the  Association  is
subject to extensive regulation by the OTS. Both the OTS and FDIC, as insurer of
deposit  accounts,  periodically  examine the  Association  for compliance  with
various regulatory requirements.  The Association must file reports with the OTS
describing  its  activities  and financial  condition.  The  Association is also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal  Reserve System  ("Federal  Reserve  Board").  This  supervision and
regulation  is  intended  primarily  for  the  protection  of  depositors.   The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the  establishment of adequate loan loss reserves for regulatory  purposes.  Any
change in such  regulation,  whether by the OTS, the FDIC or the Congress  could
have a  material  adverse  impact  on the  Company,  the  Association  and their
operations.  As a savings association holding company, the Company is subject to
OTS regulation, examination, supervision and reporting requirements.

                                       22
<PAGE>
Federal Regulation of Savings Associations

         The  OTS  has  extensive  authority  over  the  operations  of  savings
associations.  As part of this  authority,  the  Association is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of the Association were
as of December 1998.  When these  examinations  are conducted by the OTS and the
FDIC, the examiners may require the Association to provide for higher general or
specific loan loss reserves.

         All savings associations are subject to a semi-annual assessment, based
upon the savings  association's  total assets.  The Association's OTS assessment
for the fiscal year ended December 31, 1998, was approximately $11,300.

         The OTS also  has  extensive  enforcement  authority  over all  savings
institutions  and their holding  companies,  including the  Association  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 the
Association is prescribed by federal laws, and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations.  For
instance,  no savings  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  savings
associations are also generally authorized to branch nationwide. The Association
is in compliance with the noted restrictions.

         The    Association'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).  The Association is not in compliance with the
loans to one borrower limitation;  however, the Association is currently working
with the borrower to reduce its loans below the required limit.

         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 capital  compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the  institution to further  enforcement  action.  The OTS and the other federal
banking agencies have also proposed  additional  guidelines on asset quality and
earnings standards.  No assurance can be given as to whether or in what form the
proposed  regulations  will be  adopted.  The  guidelines  are not  expected  to
materially effect the Association.
<PAGE>
         Insurance of Deposits
         ---------------------

         Deposit  Insurance.  The FDIC is an  independent  federal  agency  that
insures deposits of banks and thrift institutions up to certain specified limits
and regulates such  institutions for safety and soundness.  The FDIC administers
two separate  insurance  funds,  the Bank  Insurance Fund ("BIF") for commercial
banks and state savings banks, and the SAIF for savings associations such as the
Association and banks that have acquired deposits from savings associations.
The FDIC is required to maintain designated levels of reserves in each fund.


                                       23
<PAGE>
         Assessments.  The  FDIC is  authorized  to  establish  separate  annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF.  The FDIC may  increase  assessment  rates for either fund if necessary to
restore the fund's  ratio of reserves  to insured  deposits to the target  level
within a reasonable  time,  and may decrease these rates if the target level has
been met. The FDIC has established a risk-based  assessment system for both SAIF
and BIF members.  Under this system,  assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's  risk level is
determined  based on its capital  levels,  and the FDIC's  level of  supervisory
concern about the institution.

         In 1996,  federal  legislation was enacted to recapitalize the SAIF and
eliminate the significant  premium disparity between the BIF and the SAIF. Under
that law, the Association and other institutions with SAIF-insured deposits were
charged a one-time  special  assessment  equal to $0.657 per $100 of  assessable
deposits at March 31,1995. The Association recognized this special assessment as
a charge to  noninterest  expense of $170,000  (or  $112,000  when  adjusted for
taxes)  during  the year ended  December  31,  1996.  The  assessment  was fully
deductible for both federal and state income tax purposes.  Assessment rates for
regular  ongoing,  deposit  insurance  premiums  currently  range  from  0.0% of
deposits for an institution in the highest category (i.e.,  well-capitalized and
financially  sound,  with no more  than a few  minor  weaknesses)  to  0.27%  of
deposits for an institution in the lowest category (i.e.,  undercapitalized  and
substantial supervisory consent). The Association's  assessment rate for deposit
insurance was 0.23% of deposits for 1996, and it was reduced to 0.0% of deposits
beginning on January 1, 1997.  The FDIC is  authorized  to raise the  assessment
rates as necessary to maintain the required reserve ratio of 1.25%, and both the
BIF and the SAIF  currently  satisfy the reserve ratio  requirement.  The annual
rate of  assessments  on  SAIF-assessable  deposits for the payments on the FICO
bonds was  0.0648%  for the  semi-annual  period  beginning  on January 1, 1997;
0.0630%  for the  semi-annual  period  beginning  on July 1, 1997;  and  0.0622%
currently.  The 1996 law also provides for the merger of the SAIF and the BIF by
1999,  but not until such time as bank and thrift  charters are combined.  Until
the charters  are  combined,  savings  associations  with SAIF  deposits may not
transfer  deposits to the BIF without paying various exit and entrance fees, and
SAIF institutions  will continue to pay higher FICO  assessments.  Such exit and
entrance fees need not be paid if a SAIF institution  converts to a bank charter
or merges with a bank, as long as the resulting bank continues to pay applicable
insurance  assessments to the SAIF, and as long as certain other  conditions are
met.

         While the legislation has reduced the disparity  between  premiums paid
on BIF deposits  and SAIF  deposits,  and has relieved the thrift  industry of a
portion of the contingent  liability  represented by the FICO bonds, the premium
disparity  between  SAIF-insured  institutions,  such  as the  Association,  and
BIF-insured institutions will continue until at least January 1, 1999.

Regulatory Capital Requirements

         Federally insured savings  associations,  such as the Association,  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 savings associations.  Generally,  these capital
requirements   must  be  generally  as  stringent  as  the  comparable   capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis.
<PAGE>

         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.  Further,  the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the  regulatory  capital  calculation.  At December 31, 1998,  the
Association  had no  intangible  assets  and an  unrealized  gain on  investment
securities available for sale net of tax of $8,447.


                                       24

<PAGE>
         At December  31, 1998,  the  Association  had tangible  capital of $3.7
million, or 9.88% of adjusted total assets,  which is approximately $3.2 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.

         The  capital  standards  also  require  core  capital of 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 savings  association 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 December 31, 1998, the
Association had no intangible assets which were subject to these tests.

         At December 31, 1998,  the  Association  had core capital equal to $3.7
million,  or 9.88% of adjusted  total  assets,  which is $2.6 million  above the
minimum leverage ratio requirement of 3% as in effect on that date.

          The OTS risk-based  requirement  requires savings associations 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  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and  the  risk  of  non-traditional   activities.  At  December  31,  1998,  the
Association had no capital instruments that qualify as supplementary capital and
$198,000 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% loan-to-value  ratio and
reciprocal  holdings of qualifying  capital  instruments.  The  Association  had
exclusions from capital and assets at December 31, 1998 of $18,500.

         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.

         The  OTS  has  adopted  a  final  rule  that  requires   every  savings
association 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 savings  association,  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,
<PAGE>
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between  calculating  interest rate risk and  recognizing any deduction from
capital.  Any savings  association  with less than $300  million in assets and a
total risk-based  capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.

         On December 31, 1998, the Association had total capital of $3.7 million
(including $3.7 million in core capital and $198,000 in qualifying supplementary
capital) and  risk-weighted  assets of $15.8 million  (including $0 in converted
off-balance  sheet assets);  or total capital of 24.8% of risk-weighted  assets.
This amount was 16.8% above the 8% requirement in effect on that date.

         Thrift Charter

         Congress has been  considering  legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to national
or state bank  charters.  Legislation  enacted  in 1996  required  the  Treasury
Department to prepare for Congress a  comprehensive  study on  development  of a
common charter for federal savings associations

                                       25

<PAGE>
and commercial banks; and provided for the merger of the BIF and the SAIF into a
single deposit insurance fund on January 1, 1999 provided the thrift charter was
eliminated.  The Association  cannot  determine  whether,  or in what form, such
legislation  may  eventually  be enacted and there can be no assurance  that any
legislation  that is enacted would not adversely  affect the Association and the
Company.

Prompt Corrective Regulatory Action

         Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized  institutions,  the
severity  of which  depends  upon the  institution's  degree of  capitalization.
Generally,  a savings institution that has total risk-based capital of less than
8.0% or a leverage  ratio or a Tier 1 core capital  ratio that is less than 4.0%
is  considered  to be  undercapitalized.  A savings  institution  that has total
risk-based  capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage  ratio that is less than 3.0% is  considered  to be
"significantly  undercapitalized," and a savings institution that has a tangible
capital to assets  ratio equal to or less than 2.0% is deemed to be  "critically
undercapitalized."  Subject to a narrow  exception,  the  banking  regulator  is
required  to  appoint a  receiver  or  conservator  for an  institution  that is
"critically  undercapitalized."  The  regulation  also  provides  that a capital
restoration  plan  must be  filed  with  the OTS  within  45 days of the date an
institution  receives  notice  that  it  is  "undercapitalized,"  "significantly
undercapitalized"  or  "critically   undercapitalized."  In  addition,  numerous
mandatory supervisory actions become immediately  applicable to the institution,
including,  but not limited to, restrictions on growth,  investment  activities,
capital distributions, and affiliate transactions. The OTS may also take any one
of a number of discretionary  supervisory  actions,  including the issuance of a
capital  directive  and  the  replacement  of  senior  executive   officers  and
directors.

         At  December  31,  1998,  the  Association  was  categorized  as  "well
capitalized,"  meaning that the  Association's  total  risk-based  capital ratio
exceeded 10.0%, Tier I risk-based capital ratio exceeded 6.0%,  leverage capital
ratio exceeded 5.0%, and the Association was not subject to a regulatory  order,
agreement or directive  to meet and  maintain a specific  capital  level for any
capital measure.

Dividend Limitations

         An OTS regulation imposes limitations upon all "capital  distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares,  payments to shareholders of another
institution  in a  cash-out  merger  and  other  distributions  charged  against
capital.  The regulation  establishes a three-tiered system of regulation,  with
the  greatest  flexibility  given to  well-capitalized  associations.  A savings
association  which  has total  capital  (immediately  prior to and after  giving
effect  to the  capital  distribution)  that  is at  least  equal  to its  fully
phased-in  capital   requirements  would  be  a  Tier  1  institution  ("Tier  1
Institution").  An  association  that has total  capital  at least  equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution  ("Tier 2 Institution").  An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution").  However,  an institution which otherwise qualifies as a
Tier  1  Institution  may be  designated  by  the  OTS  as a  Tier  2 or  Tier 3
Institution if the OTS determines  that the institution is "in need of more than
normal supervision." The Association is currently a Tier 1 Institution.
<PAGE>
         A Tier 1 Institution  may,  after prior notice but without the approval
of the OTS, make capital  distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" at the  beginning of
the calendar year (the smallest  excess over its capital  requirements),  or (b)
75% of its net income over the most recent  four-quarter  period. Any additional
amount of capital distributions would require prior regulatory approval.

         The OTS has proposed  revisions to these regulations which would permit
savings  associations  to declare  dividends in amounts  which would assure that
they remain adequately  capitalized following the dividend declaration.  Savings
associations  in a holding company system which are rated Camel 1 or 2 and which
are not in  troubled  condition  would need to file a prior  notice with the OTS
concerning such dividend declaration.


                                       26
<PAGE>
Liquidity

         All savings  associations,  including the Association,  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 the Association
includes in liquid assets,  see "Business - Investment  Activities." This liquid
asset  ratio  requirement  may  vary  from  time to time  (between  4% and  10%)
depending   upon   economic   conditions   and  savings  flows  of  all  savings
associations. At the present time, the minimum liquid asset ratio is 5%.

         In  addition,  short-term  liquid  assets  (e.g.,  cash,  certain  time
deposits,  certain  bankers  acceptances  and short-term  United States 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.  At December 31, 1998, the Association was in compliance with
both requirements,  with an overall liquid asset ratio of 11.8% and a short-term
liquid assets ratio of 11.5%.

Accounting

         An  OTS  policy  statement   applicable  to  all  savings  associations
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
association  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 and securities (i.e., whether held for investment,  sale or
trading) with appropriate documentation.

         The OTS has adopted an amendment to its accounting  regulations,  which
may be made more stringent than GAAP by the OTS, to 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. The  Association is in compliance
with these amended rules.

Qualified Thrift Lender Test

         All savings  associations,  including the Association,  are required to
meet a qualified  thrift lender  ("QTL") test to avoid certain  restrictions  on
their operations.  This test requires a savings association 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.  Such assets primarily  consist of residential  housing related loans and
investments.  At  December  31,  1998,  the  Association  complied  with the QTL
requirement.

         Any savings association 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  savings  association  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
<PAGE>
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 the credit needs of its entire  community,
including  low and moderate  income  neighborhoods.  The CRA does not  establish
specific lending

                                       27
<PAGE>
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 the Association,
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 the  Association.  An
unsatisfactory  rating may be used as the basis for the denial of an application
by the OTS.

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  the  Association  may be required  to devote  additional
funds for investment and lending in its local  community.  The  Association  was
examined for CRA compliance in 1996 and received a rating of "Satisfactory",  as
indicated in the OTS Community  Reinvestment Act Performance  Evaluation  public
disclosure dated June 3, 1998.

Transactions with Affiliates

         Generally,   transactions   between  a  savings   association   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 the Association  include the Holding
Company and any company which is under common control with the  Association.  In
addition,  a  savings  association  may not  lend to any  affiliate  engaged  in
activities not  permissible for a bank holding company or acquire the securities
of most affiliates.

         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 Company is a unitary  savings and loan holding  company  subject to
regulatory  oversight  by the OTS. As such,  the 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 Company and its
non-savings  association  subsidiaries which also permits the OTS to restrict or
prohibit  activities  that are determined to be a serious risk to the subsidiary
savings association.

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries  (other  than the  Association  or any other  SAIF-insured  savings
association)  would  become  subject  to such  restrictions  unless  such  other
associations  each  qualify  as  a  QTL  and  were  acquired  in  a  supervisory
acquisition.
<PAGE>
         If the  Association  fails the QTL test,  the  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 more limited than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "- Qualified Thrift Lender Test."

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


                                       28
<PAGE>
Federal Securities Law

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

         Company stock held by persons who are affiliates  (generally  officers,
directors and principal  stockholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  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  non-interest  bearing  reserves  at  specified  levels  against  their
transaction accounts (primarily checking,  NOW and Super NOW checking accounts).
At December 31, 1998,  the  Association  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."

         Savings  associations 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.

Federal Home Loan Bank System

         The  Association is a member of the FHLB of Dallas,  which is one of 12
regional FHLBs,  that  administers the home financing credit function of savings
associations.  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. These policies and procedures are subject
to the  regulation  and  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, the Association is required to purchase and maintain stock
in the FHLB of Dallas.  At December 31, 1998,  the  Association  had $263,000 of
FHLB stock,  which was in compliance with this  requirement.  In past years, the
Association has received substantial  dividends on its FHLB stock. Over the past
five fiscal years such dividends have averaged 5.25% and were 5.94% for the year
ended  December 31, 1998.  No assurance  can be given that such  dividends  will
continue in the future at such levels.

         Under  federal  law,  the FHLBs are  required to provide  funds for the
resolution  of  troubled  savings  associations  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 the Association's FHLB stock may result in a corresponding
reduction in the Association's capital.


                                       29
<PAGE>
Federal and State Taxation

         Federal  Taxation.  Historically,  savings  institutions  such  as  the
Association  which met certain  definitional  tests  primarily  related to their
assets and the nature of their business  ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual  additions  thereto,  which
may have been deducted in arriving at their taxable  income.  The  Association's
deductions with respect to "qualifying real property loans," which are generally
loans  secured by certain  interest in real  property,  were  computed  using an
amount based on the Association's actual loss experience,  or a percentage equal
to 8% of the Association's  taxable income,  computed with certain modifications
and  reduced  by the amount of any  permitted  additions  to the  non-qualifying
reserve.  Due to the Association's  loss experience,  the Association  generally
recognized a bad debt deduction equal to 8% of taxable income.

         In August 1996,  the  provisions  repealing the current thrift bad debt
rules were passed by Congress as part of "The Small  Business Job Protection Act
of 1996." The new rules  eliminate the 8% of taxable income method for deducting
additions to the tax bad debt  reserves for all thrifts for tax years  beginning
after  December  31,  1995.  These  rules  also  require  that all  institutions
recapture all or a portion of their bad debt reserves  added since the base year
(last taxable year beginning  before January 1, 1988).  As of December 31, 1998,
the  Association's  bad debt reserve subject to recapture over a six year period
totaled approximately  $119,000.  For taxable years beginning after December 31,
1995,  the  Association's  bad  debt  deduction  will be  determined  under  the
experience  method using a formula  based on actual bad debt  experience  over a
period of years or, if the  Association  is a  "large"  association  (assets  in
excess of $500 million) on the basis of net charge-offs during the taxable year.
The new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years  preceding 1996 adjusted for inflation.  For this purpose,
only home purchase or home  improvements  loans are included and the institution
can elect to have the tax years with the  highest  and lowest  lending  activity
removed from the average calculation. If an institution is permitted to postpone
the reserve  recapture,  it must begin its six year  recapture no later than the
1998 tax year.  The  unrecaptured  base year  reserves  will not be  subject  to
recapture  as long as the  institution  continues  to carry on the  business  of
banking. In addition,  the balance of the pre-1988 bad debt reserves continue to
be subject to provisions of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.

         Distributions.  To the extent that the Association  makes  "nondividend
distributions" to the Company,  such  distributions will be considered to result
in  distributions  from the balance of its bad debt  reserve as of December  31,
1987 (or a lesser amount if the  Association's  loan portfolio  decreased  since
December  31, 1987) and then from the  supplemental  reserve for losses on loans
("Excess  Distributions"),  and an amount based on the Excess Distributions will
be included  in the  Association's  taxable  income.  Nondividend  distributions
include  distributions  in excess of the  Association's  current and accumulated
earnings and profits,  distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividend paid out of the Association's
current or  accumulated  earnings and profits,  as calculated for federal income
tax  purposes,  will not be  considered  to  result in a  distribution  from the
Association's bad debt reserve.  The amount of additional taxable income created
from  an  Excess  Distribution  is an  amount  that,  when  reduced  by the  tax
attributable to the income, is equal to the amount of the distribution. Thus, if
<PAGE>
the Association makes a "nondividend  distribution,"  then approximately one and
one-half the times the Excess  Distribution  would be includable in gross income
for  federal  income  tax  purposes,  assuming a 34%  corporate  income tax rate
(exclusive of state and local taxes).  The Association does not presently intend
to pay  dividends  that wold result in a recapture of any portion of its tax bad
debt reserve.

         Corporate   Alternative   Minimum  Tax.  The  Code  imposes  a  tax  on
alternative  minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve  deduction  using the  percentage of taxable  income method
over the deduction that would have been allowable under the experience method is
treated as a preference  item for purposes of computing  the AMTI.  In addition,
only  90% of AMTI  can be  offset  by net  operating  loss  carryovers.  AMTI is
increased  by an amount  equal to 75% of the  amount by which the  Association's
adjusted current  earnings  exceeds its AMTI (determined  without regard to this
preference and prior to reduction for net operating  losses).  For taxable years
beginning after December 31, 1986, and before January 1, 1996, an  environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is  imposed  on  corporations,  including  the  Association,  whether  or not an
Alternative Minimum Tax is paid.


                                       30
<PAGE>
         The  Association  files  federal  income tax returns on a calendar year
basis  using the cash  method of  accounting.  The  Company has filed a separate
federal income tax return from the Association.  Savings  associations,  such as
the Association,  that file federal income tax returns as part of a consolidated
group are required by applicable  Treasury  regulations  to reduce their taxable
income for purposes of computing the  percentage  bad debt  deduction for losses
attributable  to  activities  of  the  non-savings  association  members  of the
consolidated  group  that are  functionally  related  to the  activities  of the
savings association member.

         The  Association was audited by the IRS in 1997 with respect to federal
income tax returns.  The audit did not result in material  changes that affected
the financial condition of the Association.

         State Taxation.  The Louisiana  Corporation Income Tax Act provides for
an exemption from the Louisiana  Corporation Income Tax for mutual savings banks
and for banking  corporations,  which  includes  stock  association  (e.g.,  the
Association).  However,  this exemption does not extend to non-banking  entities
such as the Company. The non-banking subsidiaries of the Association (as well as
the Company) are subject to the  Louisiana  Corporate  Income Tax based on their
Louisiana taxable income, as well as franchise taxes. The Louisiana  Corporation
Income  Tax  applies  at  graduated  rates  from 4% upon the  first  $25,000  of
Louisiana  taxable  income to 8% on all  Louisiana  taxable  income in excess of
$200,000. For these purposes,  "Louisiana taxable income" means net income which
is earned within or derived from sources  within the State of  Louisiana,  after
adjustments  permitted  under  Louisiana  law  including  a federal  income  tax
deduction and an allowance for net operating  losses,  if any. In addition,  the
Association  is  subject  to the  Louisiana  Shares  Tax which is imposed on the
assessed value of the Association's stock. The formula for deriving the assessed
value is to calculate 15% of the sum of (i) 20% of a  corporation's  capitalized
earnings,  plus (ii) 80% of a corporation's taxable stockholders' equity, and to
subtract  from that amount 50% of a  corporation's  real and  personal  property
assessment.  Other  various  items  may  also be  subtracted  in  calculating  a
corporation's capitalized earnings.

         Delaware  Taxation.  As a  Delaware  holding  company,  the  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 Company is also
subject to an annual franchise tax imposed by the State of Delaware.

Employees
---------

         At December 31, 1998, the Association had a total of 19 full-time and 3
part-time  employees.  The  Association's  employees are not  represented by any
collective  bargaining group.  Management considers its employee relations to be
excellent.

Executive Officers of the Association and the Company Who Are Not Directors
---------------------------------------------------------------------------

         Betty Jean Parker.  Mrs.  Parker,  age 54, is the  Treasurer  and Chief
Financial  Officer of the  Association.  Until June 1996,  Mrs.  Parker was also
Corporate  Secretary of the  Association.  Mrs.  Parker is  responsible  for the
supervision  of the  accounting  department  and  reporting  to  the  regulatory
authorities.

Item 2.  Description of Property
-------  -----------------------

         The Company  conducts  its  business  through two  offices,  located in
Oakdale,  Louisiana and Oberlin,  Louisiana in Allen Parish. The following table
sets forth information  relating to the Association's  office as of December 31,
1998.  The  total  net  book  value  of the  Company's  premises  and  equipment
(including land,  buildings and leasehold  improvements and furniture,  fixtures
and equipment) at December 31, 1998 was approximately $705,000.


                                       31
<PAGE>
<TABLE>
<CAPTION>
                                                                 Total
                                                              Approximate
                                           Year                  Square            Net Book Value at
                     Location             Opened                 Footage          December 31, 1998
---------------------------------         ------                 -------          ----------------- 
<S>                                        <C>                     <C>                <C>     
Main Office:                               1975                    4,100              $311,000
222 South 10th Street
Oakdale, Louisiana

Branch Office:                             1997                    3,000              $389,000
110 North Fifth Street
Oberlin, Louisiana 70655

Loan Production Office:                    1998                    1,000                $5,000
531 North Ninth Street, Suite A
Kinder, Louisiana  70655
</TABLE>

Item 3.  Legal Proceedings
--------------------------

         The Company is involved,  from time to time,  as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management,  after consultation with counsel  representing the
Company in the proceedings,  that the resolution of these proceedings should not
have a  material  effect on the  Company's  financial  position  or  results  of
operations on a consolidated basis.

Item 4.  Submission of Matters to a Vote of Security Holders
-------  ---------------------------------------------------

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year ended December 31, 1998.


                                     PART II
                                     -------


Item 5.  Market for the Registrant's Common Stock and Related Security 
         Holder Matters
---------------------------------------------------------------------- 

         Pages 48 to 49 of the attached  1998 Annual Report to  Shareholders  is
herein incorporated by reference.

Item 6.   Management's Discussion and Analysis of Financial Condition and 
          Results of Operations
-------------------------------------------------------------------------
         Pages 6 to 15 of the attached  1998 Annual Report to  Shareholders  are
herein incorporated by reference.
<PAGE>
Item 7.  Financial Statements
-------  --------------------

         Pages 16 to 47 of the attached 1998 Annual Report to  Shareholders  are
herein incorporated 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.


                                       32
<PAGE>
                                    PART III
                                    --------

Item 9.  Directors and Executive Officers of the Registrant
-------  --------------------------------------------------

         Information  concerning  Directors of the  Registrant  is  incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on April 30, 1999.

Item 10.  Executive Compensation
--------  ----------------------

         Information concerning executive compensation is incorporated herein by
reference from the Company's  definitive  Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on April 30, 1999.

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 Company's definitive
Proxy Statement for the Annual Meeting of  Shareholders  scheduled to be held on
April 30, 1999.

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

         Information   concerning  certain  relationships  and  transactions  is
incorporated  herein by reference from the Company's  definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on April 30, 1999.

Item 13.  Exhibits List and Reports on Form 8-K
--------  -------------------------------------

         (a) (1)  Financial Statements:

         The following  information  appearing in the Registrant's Annual Report
to  Shareholders  for the year ended  December  31,  1998,  is  incorporated  by
reference in this Form 10-KSB Annual Report as Exhibit 13.



                                       33

<PAGE>
                                                                         Page in
                                                                          Annual
               Annual Report Section                                      Report
               ---------------------                                      ------

Report of Independent Auditors..........................................      16

Consolidated Statements of Financial Condition at 
       December 31, 1998 and 1997.......................................      17

Consolidated Statements of Income for the Years
       ended December 31, 1998 and 1997.................................      18

Consolidated Statements of Stockholders' Equity for the Years ended
       December 31, 1998 and 1997.......................................      19

Consolidated Statements of Cash Flows for the Years ended 
       December 31, 1998 and 1997........................................  20-21

Notes to Consolidated Financial Statements...............................  22-47

         (a)(2)  Financial   Statement   Schedules  -  All  financial  statement
schedules  have been omitted as the  information is either  inapplicable  or not
required under the related instructions.

         (a)(3)  Exhibits - The following  exhibits are either filed or attached
as part of this report or are incorporated herein by reference.

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

3           Certificate of Incorporation and Bylaws                   *

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

9           Voting trust agreement                                   None

10.1        Employment Agreement with Charles L. Galligan             *

10.2        Employment Agreement with Betty Jean Parker               *
 
10.3        Employee Stock Ownership Plan                             *

10.4        Proposed 1998 Stock Option and Incentive Plan             **

10.5        Proposed Recognition and Retention Plan                   **

11          Statement re: computation of per                         None
              share earnings

12          Statement re: computation or ratios                  Not required


                                       34
<PAGE>
                                                                 Reference to
Regulation                                                     Prior Filing or
S-B Exhibit                                                     Exhibit Number
  Number                      Document                         Attached Hereto
  ------                      --------                         ---------------

13          Annual Report to Security Holders                        13

16          Letter re: change in certifying                         None
              accountant

18          Letter re: change in accounting                         None
              principles

21          Subsidiaries of Registrant                               21

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

23          Consent of experts and counsel                           23

24          Power of Attorney                                   Not Required

27          Financial Data Schedule                                  27

28          Information from reports furnished to                   None
             State insurance regulatory authorities

99          Additional exhibits                                     None

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

         *Filed on June 25,  1996,  as  exhibits to the  Registrant's  Form SB-2
registration statement  (Registration No. 333-6803),  pursuant to 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.

         **Filed on March 30,  1998,  as  exhibits  to the  Registrant's  Annual
Report on Form 10-KSB.  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 - No Form 8-K was filed during the last
                     quarter of the year covered by this Form 10-KSB.

                                       35

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         FIRST ALLEN PARISH BANCORP, INC.


Date: March 29, 1999                      By: /s/ Charles L. Galligan
                                              -----------------------
                                              Charles L. Galligan, President and
                                                Chief Executive Officer

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



By:    /s/ Charles L. Galligan               By:    /s/ Betty Jean Parker
       -----------------------                      ---------------------
       Charles L. Galligan, President and           Betty Jean Parker, Treasurer
         Chief Executive Officer                    (Principal Financial and 
       (Principal Executive Officer)                Accounting Officer)

Date:  March 29, 1999                        Date:  March 29, 1999


By:    /s/ Dr. James D. Sandefur             By:    /s/ Jesse Boyd, Jr.
       -------------------------                    -------------------
       Dr. James D. Sandefur, Chairman              Jesse Boyd, Jr., Director


Date:  March 29, 1999                        Date:  March 29, 1999


By:    /s/ James E. Riley                    By:    /s/ J. C. Smith
       ------------------                           ---------------
       James E. Riley, Director                     J. C. Smith,  Director

Date:  March 29, 1999                        Date:  March 29, 1999


By:    /s/ Leslie A. Smith
       -------------------
       Leslie A. Smith, Director

Date:  March 29, 1999




                                       36

<PAGE>



                                Index to Exhibits


Exhibit 13                1998 Annual Report to Stockholders
Exhibit 21                Subsidiaries of the Registrant
Exhibit 23                Consent of Accountants
Exhibit 27                Financial Data Schedule



                                       37