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

                                   FORM 10-KSB

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

            For the fiscal year ended September 30, 1998

                                       OR

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

            For the transition period from  __________ to ___________

     Commission File Number 0-23323

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

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

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

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

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

                                      None

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

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

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

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

     The Issuer had  $292,000 in net income for the fiscal year ended  September
30, 1998.

     As of December 29, 1998,  there were issued and outstanding  389,436 shares
of the Issuer's  Common  Stock.  The Issuer's  voting stock is not regularly and
actively traded,  and there are no regularly quoted bid and asked prices for the
Issuer's  voting  stock.  Accordingly,  the  Issuer is unable to  determine  the
aggregate market value of the voting stock held by non-affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

     PARTS II and IV of Form  10-KSB - Annual  Report  to  Stockholders  for the
Fiscal Year Ended  September 30, 1998.  Transitional  Small Business  Disclosure
Format: YES NO X

     PART  III of Form  10-KSB  - Proxy  Statement  for the  Annual  Meeting  of
Stockholders for the fiscal year ended September 30, 1998.

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<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

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

     First Federal is a federally  chartered,  independent  thrift  institution,
headquartered in Bryan-College  Station,  Texas, which began operations in 1965.
First Federal is predominantly a locally-based  home lender,  originating  loans
primarily in Bryan-College Station and the surrounding immediate trade area, and
to a lesser extent other  communities in the general trade area between Houston,
Austin and Dallas,  Texas. First Federal also originates a significant amount of
consumer loans primarily secured by automobile loans through selected automobile
dealers which are partially insured against loss by credit-default insurance. In
addition,  to  lesser  extent,  First  Federal  originates  construction,  Small
Business  Administration  ("SBA") partially  guaranteed loans,  small commercial
real estate and small to medium commercial business loans. New senior management
was  installed in early 1991 to  recapitalize  and convert  First Federal from a
mutual savings  institution to a federal stock institution,  which was completed
in April 1993.

     Beginning in fiscal 1994,  senior  management  of First  Federal  began its
transition to full-service  retail banking in order to compete more  effectively
and to increase the overall  profitability of First Federal.  In addition to its
core  single-family  lending  business,  since  fiscal  1994 First  Federal  has
increased its focus on the following products:

     o   Indirect  automobile   financing  through  select  automobile  dealers,
         including credit-default insured "second chance" auto finance lending
     o   Direct consumer lending
     o   SBA loans (partially government guaranteed) 
     o   Commercial lending to small and medium-sized businesses
     o   Commercial  real estate  lending,  primarily to small and  medium-sized
         businesses
     o   Home improvement loans

     First  Federal  funds these lending  products  using a retail  deposit base
gathered  in  its  home  market  of  Bryan-College  Station  as  well  as in the
surrounding  counties  of  Burleson,   Grimes,  Leon,  Madison,   Robertson  and
Washington,  which comprise its immediate  trade area.  First Federal  currently
operates  three  full-service  offices,  two  of  which  are  located  in  Bryan
(including its

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principal office, situated in the middle of the Bryan-College Station community,
and a new facility  located at a key highway  intersection in North Bryan),  and
one full-service  branch in adjacent  College Station,  which is the home of the
third largest university in the nation, Texas A&M University, and the new George
Bush  Presidential  Library.  First Federal has concentrated on the middle-class
population  as its  targeted  "niche" in order to provide  banking  products and
services,  which had led to its loan-to-deposit  ratio of 97.9% at September 30,
1998,  consisting  primarily of  residential  loans and consumer loans which are
secured  primarily  by  automobiles.  At  September  30,  1997 and  1996,  First
Federal's loan to deposit rate was 110.9% and 95.9%,  respectively.  These types
of loans have enabled  First  Federal to enjoy a spread  between the interest it
earns on its loans and the  interest it pays for  deposits of 5.10% at September
30,  1998 as  compared  to 4.56%  and  4.67% at  September  30,  1997 and  1996,
respectively.  In addition,  over the past three fiscal years, First Federal has
experienced  an average of only $21,000 in actual  annual net loan  charge-offs,
resulting  from an average  total loan  portfolio  of $57.4  million.  See "Loan
Delinquencies; Nonperforming Assets and Classified Assets."

FORWARD-LOOKING STATEMENTS

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

     The Company does not undertake,  and specifically disclaims any obligation,
to  publicly  release  the  result  of any  revisions  which  may be made to any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.

MARKET AREA

     As of  September  30,  1998,  Bryan-College  Station,  Texas had the lowest
unemployment  rate in the state of Texas.  Bryan-College  Station  is located in
Brazos County,  Texas and is centrally  located in the triangle between Houston,
Austin,  and  Dallas.  It is the  home of Texas  A&M  University,  which  has an
enrollment  of over 43,000  students.  Management  considers  the  Bryan-College
Station area, and the surrounding  Texas counties of Brazos,  Burleson,  Grimes,
Leon, Madison, Robertson and Washington to be its primary market and trade areas
for deposits and lending activities. The Bryan-College Station area is primarily
a college community, centered around Texas A&M University and Blinn College with
an enrollment of over 10,000 students. Recent diversification, however, includes
a new computer manufacturing plant now under construction,  a large new regional
poultry processing plant, a new juvenile detention center which

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is the  largest  in the  State of  Texas,  several  specialty  chemical  plants,
including one just announced by Koch Industries,  a new Compaq Computer Research
Center, one of the largest aluminum window and door manufacturing  plants in the
nation, and other  computer-related and high-tech  industries.  The University's
annual budget of over $622 million is  responsible  for the vast majority of the
government jobs in the area.

     Population  growth  trends  within First  Federal's  market area have shown
increases at rates exceeding those of the State and unemployment rates have been
consistently lower than those of the rest of the State. According to a 1996 Wall
Street Journal article, Brazos County, home of Bryan-College Station, was listed
as one of the top  metropolitan  areas and which is  expected  to have the third
highest  population  increase  in the  United  States  as  well  as the  fastest
household growth in the U.S. metropolitan area. Brazos County, was ranked by the
American  Demographics  as third  among "The 10 Hottest  Counties,"  in terms of
"market  potential."  Kiplinger's  Personal Finance of April 1997 indicated that
Bryan-College  will be the fifth  fastest  growing city in the United  States in
terms of population  growth.  In addition,  the 1997-98 American Almanac of Jobs
and  Salaries  named  Bryan-College  Station as the third  fastest  growing U.S.
metropolitan area in terms of job growth for the years 1995-2025.  Data from the
U.S. Census estimates that the Bryan-College metropolitan area should have a 20%
growth rate from 1990 to the year 2000.  The 1998  American  Chamber of Commerce
Researchers  Association  Cost of Living Index issue  indicated  that the Bryan-
College  Station  is one of the least  expensive  places  to live in the  United
States.  The city ranks as the second  least  expensive  city out of 29 surveyed
Texas cities and fifth least  expensive  city out of 329 surveyed  cities in the
nation.  Using 100% as the average cost of the living index for the 329 surveyed
cities,  Bryan-College  Station rated 87.0%,  13% below the national  average as
compared to cities like  Philadelphia  at 126.9%,  New York City at 226.2%,  and
Boston at 134.5%.

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

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

LENDING ACTIVITIES

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

     While a substantial  portion of the loans originated for portfolio by First
Federal are  conventional  mortgage  loans (i.e.,  not  guaranteed or insured by
agencies  of  the  federal   government),   which  are  secured  by  residential
properties,  most do not conform  with the  requirements  for sale to Fannie Mae
("FNMA") or the Federal Home Loan Mortgage  Corporation  ("FHLMC").  These loans
may not  conform  for  several  reasons.  Some  loans  may  exceed  the  maximum
loan-to-value ratio to

                                        4


<PAGE>



qualify for sale to FNMA or FHLMC,  or have some credit  deficiencies  (which in
certain  cases will  result in First  Federal  securing  the loan by  additional
collateral).  In  addition,  the  borrower  may have an  insufficient  length of
employment  history  for the  loan to  qualify  for sale to FNMA or FHLMC or the
residence  may not  qualify  because  of its  rural  location  or  there  exists
insufficient, recent sales of comparable properties for appraisal purposes. As a
result,  the loan may pose a higher  risk  than  secondary  market  conventional
mortgage loans. All long-term,  fixed rate conventional  mortgage loans are sold
immediately  to the  secondary  market.  Loans  which do not comply with FNMA or
FHLMC  underwriting  requirements  are held in First Federal's loan portfolio if
they meet First Federal's credit underwriting requirements.

     In recent  years,  First Federal has  significantly  increased its consumer
lending area,  consisting of direct consumer loans primarily secured by vehicles
or other collateral,  indirect lending from automobile  dealers,  and its Second
Chance Auto Lending Program,  which has as additional protection  credit-default
insurance  of up to  $6,000  per loss in the event  the  borrower  fails to make
timely payments and the vehicle is repossessed.  This Second Chance Auto Lending
Program has gradually been expanded to select auto dealers (primarily franchised
new car dealers)  located  throughout  First  Federal's  immediate trade area in
surrounding  counties,  and to a lesser extent,  throughout the triangle between
Houston,  Austin and Dallas.  First Federal also originates  construction loans,
small commercial real estate and small to medium  commercial  business loans. In
addition,  First Federal has begun  originating  SBA business  loans and Farmers
Home Administration rural home loans for moderate income home buyers.

     First  Federal's  policy  is  not  to  invest  in  long-term,   fixed  rate
mortgage-backed  securities or retain  long-term,  fixed rate loans. In order to
reduce First Federal's vulnerability to changes in interest rates, First Federal
originates   three-year   balloon  and  adjustable  rate,  one-  to  four-family
residential  mortgage loans,  consumer loans  (especially  automobile loans) and
short-term  construction  loans. At September 30, 1998,  First Federal had $20.1
million of three-year  balloon loans, $19.4 million of adjustable rate loans and
$26.8 million of consumer loans  (predominately  automobile loans with a term of
four years) out of a total of $73.8 million in gross loans.

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

     First  Federal's  total loan portfolio  increased $15.6 million from fiscal
years 1996 to 1997;  however, in order to maintain its regulatory capital ratios
in excess of the minimum regulatory  requirements,  First Federal  intentionally
slowed its loan growth to $6.7 million during the fiscal year from 1997 to 1998.

                                        5


<PAGE>



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

<TABLE>
<CAPTION>
                                                                                    September 30,
                                                         ------------------------------------------------------------------
                                                                  1998                  1997                   1996
                                                         ---------------------  --------------------   --------------------
                                                          Amount       Percent    Amount     Percent     Amount    Percent
                                                                                   (Dollars in Thousands)
Real Estate Loans
-----------------
<S>                                                       <C>           <C>      <C>          <C>      <C>          <C>   
  Residential .......................................     $ 32,846      44.50%   $ 35,541     51.72%   $ 30,477     58.70%
  Residential held for sale .........................          328        .44         204       .30         419       .80
  Commercial ........................................        4,616       6.26       4,166      6.06       4,175      8.04
  Construction ......................................        6,166       8.36      10,305     15.00       4,365      8.41
                                                          --------     ------    --------    ------    --------    ------
     Total real estate loans ........................       43,956      59.56      50,216     73.08      39,436     75.95

Other Loans:
------------
  Consumer loans:
    Secured by automobile ...........................       24,636      33.38      15,082     21.95       9,435     18.17
    Secured by deposit accounts .....................          951       1.29         925      1.34         967      1.86
    Other ...........................................        1,236       1.67         726      1.06       1,490      2.87
                                                          --------     ------    --------    ------    --------   ------
     Total consumer loans ...........................       26,823      36.34      16,733     24.35      11,892     22.90
  Commercial business loans .........................        3,024       4.10       1,766      2.57         595      1.15
                                                          --------     ------    --------    ------    --------   ------
     Total other loans ..............................       29,847      40.44      18,499     26.92      12,487     24.05
                                                          --------     ------    --------    ------    --------   ------
     Total loans ....................................       73,803     100.00      68,715    100.00      51,923    100.00

Less:
-----
  Undisbursed portion of construction loans .........        2,089       2.83       3,452      5.02       1,966      3.79
  Net deferred fees and discounts ...................           30        .04         131       .19         128       .25
  Deferred income ...................................            3        --            3       --            3       .01
  Allowance for losses on loans .....................          307        .42         273       .40         247       .48
  Premiums, net of discounts ........................         (620)      (.84)       (381)     (.55)       --         --
                                                          --------      ------   --------    ------    --------    ------
     Net loans ......................................     $ 71,994      97.55%   $ 65,237     94.94%   $ 49,579     95.47%
                                                          ========      ======   ========    ======    ========    ======
</TABLE>







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

<TABLE>
<CAPTION>
                                                                                    September 30,
                                                         ------------------------------------------------------------------
                                                                  1998                  1997                   1996
                                                         ---------------------  --------------------   --------------------
                                                          Amount       Percent    Amount     Percent     Amount    Percent
                                                                                   (Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
<S>                                                       <C>           <C>      <C>          <C>      <C>           <C>   
  Residential .......................................     $ 18,370      24.89%   $ 21,486     31.27%   $ 22,931      44.16%
  Residential held for sale .........................          328        .44         204       .30         419        .80
  Commercial ........................................        2,321       3.16       2,470      3.59       2,162       4.17
  Construction ......................................        5,924       8.02      10,305     15.00       4,365        .41
                                                          --------     ------    --------    ------    --------     ------
    Total real estate loans .........................       26,943      36.51      34,465     50.16      29,877      57.54
  Consumer loans ....................................       26,823      36.34      16,733     24.35      11,892      22.90
  Commercial business loans .........................          642        .87       1,271      1.85         595       1.15
                                                          --------     ------    --------    ------    --------     ------
    Total fixed-rate loans ..........................       54,408      73.72      52,469     76.36      42,364      81.59

Adjustable-Rate Loans:
  Real estate:
  Residential .......................................       14,476      19.61      14,055     20.45       7,546      14.54
  Commercial ........................................        2,295       3.10       1,696      2.47       2,013       3.87
  Construction ......................................          242        .34        --         --         --         --
  Commercial business loans .........................        2,382       3.23         495       .72        --         --
                                                          --------     ------    --------    ------    --------     ------
    Total adjustable rate loans .....................       19,395      26.28      16,246     23.64       9,559      18.41
                                                          --------     ------    --------    ------    --------     ------
    Total loans .....................................       73,803     100.00      68,715    100.00      51,923     100.00

Less:
  Undisbursed portion of construction loans .........        2,089       2.83       3,452      5.02       1,966       3.79
  Deferred fees and discounts .......................           30        .04         131       .19         128        .25
  Deferred income ...................................            3        --            3       --            3        .01
  Allowance for losses on loans .....................          307        .42         273       .40         247        .48
  Premiums, net of discounts ........................         (620)      (.84)       (381)     (.55)       --         --
                                                          --------     ------    --------    ------    --------     ------
    Net loans .......................................     $ 71,994      97.55%   $ 65,237     94.94%   $ 49,579      95.47%
                                                          ========     ======    ========    ======    ========     ======
</TABLE>






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

<TABLE>
<CAPTION>
                                                                                             Year Ended September 30,
                                                                                ----------------------------------------------------
                                                                                 1998                  1997                   1996
                                                                                ------                ------                -------
                                                                                                   (In Thousands)
Loans Funded:
-------------
<S>                                                                             <C>                  <C>                   <C>     
   Real estate - residential ......................................             $ 14,966             $ 18,468              $ 19,104
      - commercial ................................................                2,269                1,485                 1,026
      - construction or development ...............................               10,880               12,142                 5,697
   Non-real estate - consumer .....................................               20,384               13,052                 8,534
      - commercial business .......................................                7,615                2,446                 1,980
                                                                                --------             --------              --------
      Total loans originated ......................................               56,114               47,593                36,341

Loans Sold:
-----------
   Loans sold .....................................................                8,571                7,243                13,839
   Principal repayments and refinancings ..........................               42,455               23,558                21,255
                                                                                --------             --------              --------
   Total reductions ...............................................               51,026               30,801                35,094
   Change in other items, net .....................................                1,669               (1,134)                 (273)
                                                                                --------             --------              --------
   Net increase ...................................................             $  6,757             $ 15,658              $    974
                                                                                ========             ========              ========
</TABLE>



     At September  30, 1998,  First  Federal  serviced $2.0 million in loans for
others.

                                        8


<PAGE>



     The following  schedule  illustrates the maturities of First Federal's loan
portfolio, excluding loans held for sale at September 30, 1998. Loans which have
adjustable or  renegotiable  interest  rates and  amortizing  loans are shown as
maturing in the period during which the loan is contractually due. This schedule
does  not  reflect  the  effects  of  possible  prepayments  or  enforcement  of
due-on-sale clauses.

<TABLE>
<CAPTION>
                     Real Estate
                     ------------------------------------------------------  
                         Residential         Commercial      Construction        Consumer        Business            Total
                     -------------------   -------------    ---------------    -----------     -----------      ------------------
                              Weighted         Weighted            Weighted          Weighted           Weighted            Weighted
                              Average          Average             Average           Average            Average             Average
                      Amount   Rate    Amount   Rate    Amount      Rate     Amount    Rate    Amount     Rate    Amount     Rate
                     -------  -------- ------  -------  --------  ---------  ------- ------- ----------  ------  ---------  -------
                                                              (Dollars in Thousands)
Due During
Years Ended
September 30,
-------------
<S>                  <C>       <C>    <C>       <C>     <C>        <C>     <C>        <C>     <C>       <C>    <C>          <C>  
1999(1) ..........   $ 4,695   9.13%  $ 1,134    9.14%   $ 5,712    8.98%   $ 2,001    9.21%   $ 1,391   9.22%  $14,933      9.09%
2000 and 2001 ....    12,212   9.08     1,194    8.67         --      --      6,640   14.97        104  10.76    20,150     11.01
2002 and 2003 ....     1,831   8.73       233    9.28         90    8.88     17,712   14.70        581  10.22    20,447     13.95
2004 to 2008 .....     1,192   8.72       368    8.99        364    9.74        423    9.28        502  10.40     2,849      9.26
2009 to 2018 .....     2,361   8.60       828   10.41         --      --         19    8.00        326  11.10     3,534      9.25
2019 and following    10,883   8.57       859    8.91         --      --         28    8.87        120   8.75    11,890      8.60
                     -------          -------            -------            -------            -------          -------      
                     $33,174   8.85%  $ 4,616    9.20%   $ 6,166    9.02%   $26,823   14.26%   $ 3,024   9.85%  $73,803     10.90%
                     =======          =======            =======            =======            =======          =======
</TABLE>

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














                                        9


<PAGE>



     The total amount of loans due after  September  30,  1999,  that have fixed
rates of interest  (including  three-year  balloon home loans and other types of
loans with balloon  maturities) is $39.7 million while the total amount of loans
due after such date which have floating or adjustable rates of interest is $19.2
million.

     ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. One of First Federal's
primary  lending  programs is the  origination  of loans secured by mortgages on
owner-occupied  one-  to  four-family  residences,  and to a  lesser  degree  on
non-owner  occupied  one- to  four-family  residences.  In order to increase the
interest rate sensitivity of its residential  loan portfolio,  First Federal has
emphasized   since  1979  the  origination  of  non-FNMA  and  FHLMC  conforming
three-year  balloon loans (generally with 30 year  amortization  schedules).  At
September  30,  1998,  $17.8  million or 27.2%,  of First  Federal's  gross loan
portfolio   consisted  of  three-year   fixed-rate  balloon  loans  on  one-  to
four-family  residences.  On the same date,  First Federal had $900,000 of other
fixed-rate  residential loans or 1.2% of the gross loan portfolio.  All of these
loans were secured by residential properties located in the State of Texas, with
a majority of the property located in First Federal's primary market area.

     First Federal's residential loans are generally underwritten and documented
to permit their sale in the secondary  market.  In the event they do not conform
to FNMA and FHLMC secondary market standards, First Federal will underwrite such
loans to the extent feasible in accordance  with such  standards.  First Federal
evaluates  both the borrower's  ability to make principal and interest  payments
and the value of the property  (and any other  collateral)  that will secure the
loan. One- to four-family loan  originations are generally made in amounts up to
90% of the cost or appraised value of the security property, whichever is lower.
The  determination as to lend in excess of 80% of the appraised value is made on
a  case-by-case  basis  and is based on a  variety  of  factors,  including  the
borrower's  credit and payment history,  length of employment and debt to income
ratio, as well as the quality of the property  securing the loan.  First Federal
neither requires nor obtains private mortgage insurance on loans that it retains
in its  portfolio.  As a result,  in most  instances,  concerning its loans with
loan-to-value  ratios over 80% (but not exceeding the 90% maximum) which have no
private  mortgage  insurance,  in the event of a  foreclosure,  First Federal is
subject to a greater risk of loss on the  foreclosure  and  disposition  of such
property in the event of a decrease in the value of the property.  First Federal
has,  however,  had a very limited loss  experience  on such loans.  See "--Loan
Delinquencies;  Nonperforming Assets and Classified Assets." Over the past three
fiscal years, First Federal has experienced an average of only $21,000 in actual
annual net loan  charge-offs,  resulting from an average total loan portfolio of
$57.4 million.

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

                                       10


<PAGE>



     MORTGAGE-BACKED  SECURITIES.  First  Federal  has a  limited  portfolio  of
mortgage-backed  securities  that  are  held-to-maturity.  Such  mortgage-backed
securities can serve as collateral for borrowings and through  repayments,  as a
source of liquidity. For information regarding the carrying and market values of
First Federal's mortgage-backed securities portfolio, see Note 2 of the Notes to
Financial Statements.

     Consistent with First Federal's asset/liability policy to minimize interest
rate risk,  approximately  90.4% of First Federal's  mortgage-backed  securities
carry adjustable interest rates.

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

<TABLE>
<CAPTION>
                                                                             September 30,
                                                        ----------------------------------------------------------
                                                             1998                   1997                   1996
                                                        ----------------------------------------------------------

Issuers:
--------
<S>                                                          <C>                   <C>                   <C>    
Federal Home Loan Mortgage Corporation............           $655                  $  774                $   872
Federal National Mortgage Association.............            299                     376                    420
                                                             ----                 -------                -------
    Total.........................................           $954                  $1,150                 $1,292
                                                             ====                  ======                 ======
</TABLE>







                                       11


<PAGE>



     The  following  table sets forth the  contractual  maturities of the Bank's
mortgage-backed  securities  at  September  30,  1998.  Not  considered  in  the
preparation of the table below is the effect of prepayments,  periodic principal
repayments and the adjustable rate nature of these instruments.

<TABLE>
<CAPTION>
                                                                              Due in
                                        -----------------------------------------------------------------------
                                        6 Months  6 Months      1 to     3 to 5   5 to 10   10 to 20  Over 20        Balance
                                        or Less  to 1 Year    3 Years    Years    Years      Years    Years       Outstanding
                                        --------------------------------------------------------------------------------------------
                                                                        (Dollars in Thousands)

<S>                                      <C>       <C>       <C>        <C>        <C>        <C>      <C>          <C>       
Federal Home Loan Mortgage Corporation   $---      $--       $---       $---       $ 10       $167     $478         $655      
                                                                                                                      
Federal National Mortgage Association     --        --         --         --         --        123      176          299     
                                         -----   -----      -----       ----       ----       ----     ----         ----      
                                                                                                                      
     Total ...........................   $---    $---       $---        $---       $ 10       $290     $654         $954     
                                         =====   =====      =====       ====       ====       ====     ====         ====      
</TABLE>                                                                       



                                       12


<PAGE>



     First Federal's mortgage-backed and other securities portfolios are managed
in  accordance  with  a  written  investment  policy  adopted  by the  Board  of
Directors. Investments may be made in accordance with the policy and approval by
its Investment  Committee.  At the present time, First Federal does not have any
investments  that  are   available-for-sale   or  for  trading   purposes.   See
"Investments Activities."

     CONSUMER LENDING.  Federal laws and regulations permit federally  chartered
thrift institutions to make secured and unsecured consumer loans up to a maximum
of 35% of their total assets less  permissible  investments in commercial  paper
and  corporate  debt.  In addition,  federal  thrift  institutions  have lending
authority  above  the  35%  limit  for  certain  consumer  loans  such  as  home
improvement loans,  mobile home loans,  credit card loans and educational loans.
First Federal discourages unsecured loans.

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

     First Federal currently originates  substantially all of its consumer loans
in its primary market area,  except for loans originated  pursuant to its Second
Chance Auto Lending  Program.  Direct consumer loans are made when First Federal
extends  credit  directly to the  borrower  as  compared to indirect  loans made
through  automobile  dealers  selected by First Federal.  First Federal has more
recently  increased the  origination  of indirect  automobile  loans through its
Second Change Auto Lending Program.

     In September 1991, upon the initiative of present management, First Federal
began purchasing motor vehicle  installment sales contracts on an indirect basis
from selected  automobile dealers pursuant to an agreement  established  between
the dealer and First  Federal  ("Dealer  Agreement").  In December  1995,  First
Federal  expanded this type of lending by initiating a credit-  default  insured
indirect  automobile loan origination program for borrowers with less than prime
credit,  and involving  automobile  dealers  selected by First  Federal  located
primarily in First  Federal's  primary market area ("Second Chance Auto Loans").
Second  Chance  Auto Loans are  currently  insured  by The Royal & Sun  Alliance
Company  (which  carries a rating of A-14 by A.M.  Best's,  an insurance  rating
company) for credit-default by the borrower and for up to $6,000 per loan in the
event  there is a  deficiency  between  the  unpaid  balance of the loan and the
resale price of the repossessed  vehicle. At September 30, 1998, $5.3 million of
First Federal's  Second Chance Auto Loans was insured by other insurers  subject
to their  limitations.  On that date, Second Chance Auto Loans averaged,  at the
time of origination, $12,700 per loan. At September 30, 1998, Second Chance Auto
Loans totaled $13.5 million while total  automobile  loans totaled $24.6 million
or 33.4% of First Federal's gross loan portfolio.

     In the future,  First Federal may elect to make  credit-default  automobile
loans to sub-prime borrowers without credit-default  insurance,  although it has
no current plans to do so, but with  additional  special loan loss reserves at a
level which First  Federal  believes  will be adequate to absorb any future loan
losses.  First  Federal  may also elect to insure its Second  Chance  Auto Loans
against

                                       13


<PAGE>



credit-default   through   different  insurance  companies  which may  result in
different levels of insured coverage.

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

     Second  Chance Auto Loan's  retail  installment  automobile  contracts  are
reviewed by First  Federal's  internal  automobile  loan review  personnel,  and
monthly random sample reviews are conducted by an independent outside audit firm
specializing in these types of loans.  All monthly audits to date have reflected
First Federal's substantial  compliance with the credit underwriting  guidelines
of First Federal and the credit-default  insurance company.  Among other things,
the Bank  considers the market value,  durability and useful life of the vehicle
being financed in conjunction with the term of the loan along with the stability
and  creditworthiness  of the buyer.  Used  vehicles are  generally not financed
longer than 60 months.

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

     All  automobile  dealers enter into a Dealer  Agreement with First Federal.
First  Federal  has two  kinds of  Dealer  Agreements  which  are  substantially
similar.  Automobile  dealers  selling loans  pursuant to the Second Chance Auto
Lending Program are not required to establish dealer reserves; however, the loan
amount of the automobile  sales contract is discounted by First Federal prior to
purchase.  Otherwise,  the Dealer Agreement provides for a reserve account to be
established,  requiring a minimum balance to be maintained at First Federal. The
reserve  account is used by First  Federal to protect  against  excess  interest
payments  to the  automobile  dealer due to loan  prepayments,  payoffs,  or for
repossession expenses plus any related losses.  Minimum reserve balances and the
method of  disbursement  are outlined in each Dealer  Agreement.  If the reserve
account falls below the agreed upon levels, the automobile dealer is required to
increase the balance up to the agreed upon minimum  amount.  Automobile  dealers
are also required to make an immediate deposit to

                                       14


<PAGE>



cover any  shortages  under this type of a Dealer  Agreement.  At September  30,
1998,  First Federal had $2.8 million of automobile  loans requiring  automobile
dealer reserves.

     Consumer loans may entail greater risk than do residential  mortgage loans,
particularly  consumer loans that are secured by rapidly depreciable assets such
as  automobiles.  First Federal makes a very limited amount of unsecured  loans,
which entail an even greater risk.  Any  repossessed  collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan  balance  as a  result  of  the  greater  likelihood  of  damage,  loss  or
depreciation of the vehicle or other  collateral.  The remaining  deficiency may
not warrant further  substantial  collection  efforts  against the borrower.  In
addition,  consumer loan collections are dependent on the borrower's  continuing
financial  stability,  and thus, are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy.  Furthermore,  the application of
various  federal and state laws,  including  federal  and state  bankruptcy  and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give  rise to  claims  and  defenses  by a  borrower  against  an
assignee of the loan, who may then be able to assert  against the assignee,  the
claims and  defenses  that he or she has  against  the seller of the  underlying
collateral.  Consumer  loan  delinquencies  may often  increase over time as the
loans age. Lastly,  there can be no assurance that First Federal can collect any
amount due under the applicable insurance policy.

     At September 30, 1998,  less than one percent of First  Federal's  consumer
loans  were  nonperforming.  However,  there  can  be no  assurance  that  First
Federal's consumer loan delinquencies and repossessions will not increase in the
future.

     CONSTRUCTION LENDING. First Federal makes construction loans to individuals
for the  construction  of their  residences  and to builders  primarily  for the
construction of contracted-for (custom) residences, and also for residences that
have not been pre-sold when First  Federal  believes that the residence  will be
sold in the relatively short term.

     Construction loans to individuals for their residences generally have terms
of  nine  months  and are  made  on a  non-amortizing  (interest  only,  payable
monthly),  balloon basis, to be repaid from the permanent mortgage loan when the
construction is completed. First Federal's construction loans are generally made
either as the initial stage of a combination loan (i.e.,  with a commitment from
First Federal to provide permanent  financing upon completion of the project) or
with a takeout obligation  (commitment to provide permanent financing by a third
party).  Residential  construction loans are generally  underwritten pursuant to
the same  guidelines  used  for  originating  permanent  residential  loans.  At
September 30, 1998,  First Federal had $5.4 million in residential  construction
loans,  of which $2.8  million  are to  borrowers  who have  indicated  to First
Federal  that  they  intend  to  live  in  the  properties  upon  completion  of
construction.

     Residential   construction  loans  are  generally  made  up  to  a  maximum
loan-to-value  ratio of 80% based on an  independent  appraisal  and estimate of
costs.  Residential  construction  loans involve additional risk attributable to
the fact that loan funds are  advanced  upon the  security of the project  under
construction,  which is more  difficult  to value  prior  to the  completion  of
construction.  Because of the uncertainties inherent in estimating  construction
costs and the market for the home upon completion, it is relatively difficult to
evaluate  the total loan funds  required  to  complete  a project,  the  related
loan-to-value  ratios, and the likelihood of ultimate success of the project. In
evaluating a construction  loan,  First Federal  considers the reputation of the
borrower and the experience and

                                       15


<PAGE>



reputation of the contractor, the amount of the borrower's equity (down payment)
in the project,  independent  appraisal valuations and review of cost estimates,
and,  if  applicable,  pre-construction  sale and market  information.  Progress
payments during  construction of homes are generally made only after  inspection
by an  independent,  licensed real estate  inspector.  Residential  construction
loans to  borrowers  other than owner  occupants  also  involve many of the same
risks,  discussed below,  regarding  commercial real estate loans and tend to be
more sensitive to general economic conditions than many other types of loans.

     COMMERCIAL  REAL  ESTATE  LENDING.  In order to  enhance  the  yield of its
assets,  First Federal originates a limited amount of construction and permanent
loans secured by commercial real estate.  First Federal's  permanent  commercial
real estate loan  portfolio  includes  loans  secured by churches,  small office
buildings,  and other small business  properties.  First Federal generally makes
only  commercial  real estate loans secured by income  producing  property,  and
discourages  large  commercial real estate loans.  At September 30, 1998,  First
Federal  had one  commercial  real  estate  loan in excess of  $250,000  that is
secured by a building which contains several retail businesses.  This loan had a
balance of $296,000 at September 30, 1998 and is  performing in accordance  with
its loan repayment terms.

     The following  table presents  information as to the locations and types of
properties  securing First  Federal's  commercial real estate loans at September
30, 1998.

<TABLE>
<CAPTION>
                                Number
                                  of          Principal
                                Loans         Balance
                                ----------  ------------
                                  (Dollars in Thousands)

Bryan-College Station area:
<S>                               <C>         <C>   
  Churches ...............        7           $  846
  Land ...................       10              186
  Multi-family residential        3              837
  Retail .................       18            1,511
  Office .................        6              788
  Other ..................        4              448
                             ------           ------
  Total ..................       48           $4,616
                             ======           ======
</TABLE>
                                         



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

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

                                       16


<PAGE>



borrower as well as the ability of the  property  securing  the loan to generate
adequate funds to cover both operating expenses and debt service.

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

     COMMERCIAL  BUSINESS LENDING.  First Federal engages in a limited amount of
commercial business lending, primarily to small businesses.  Many of these loans
are SBA guaranteed;  however,  First Federal sells the guaranteed portion of the
loan.  At September  30, 1998,  First  Federal had $3.0 million or 4.1% of First
Federal's gross loan portfolio in commercial business loans outstanding of which
$800,000 represents the unguaranteed  portion of SBA loans. As of the same date,
First Federal's largest  commercial  business loan was a $207,000 line of credit
secured by the borrower's  residence and other real  property.  The next largest
commercial  business  loan was  $95,000  and was  secured  by a first  lien on a
grocery  store and  convenience  store.  Each of these loans are  performing  in
accordance with their respective loan repayment terms. First Federal discourages
large  commercial  business  lending  because of the larger risk exposure to the
Bank's capital if such loans do not perform.

     Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to repay from employment and other income and are secured
by real  property,  business  loans pose a higher risk and typically are made on
the basis of the borrower's  ability to make repayment from the cash flow of the
business and to a lesser  extent,  the  borrower's  net worth and liquid assets.
First  Federal's  commercial  business  loans are generally  secured by business
assets such as commercial  real estate,  and to a much lesser  extent,  accounts
receivable,  inventory and equipment. As a result, the availability of funds for
the repayment of business loans may be substantially dependent on the success of
the business itself.  Further,  the collateral  securing the loan may depreciate
over time,  may be  difficult  to  appraise  and may  fluctuate  in value  based
generally on the success of the business  and the  economy.  Partial  guarantees
(75% or more) by the SBA are generally  required for  commercial  business loans
primarily secured by accounts receivable, inventory and equipment.

                                       17


<PAGE>




LOAN DELINQUENCIES; NONPERFORMING ASSETS AND CLASSIFIED ASSETS

     When a borrower fails to make a required  payment on a loan,  First Federal
attempts to cause the  deficiency to be cured by contacting the borrower as soon
as possible. In most cases, deficien cies are cured promptly. After a payment is
three days past due, First  Federal's  collections  department  will contact the
borrower by telephone and letter and continue  that contact on a regular  basis.
Between  30-45  days past due,  First  Federal  may send the  borrower  a demand
letter.  When deemed appropriate by senior management,  First Federal institutes
action to foreclose on or  repossess  the  collateral.  If  foreclosed  on, real
property  is sold at a  public  sale  and may be  purchased  by  First  Federal.
Repossessed  vehicles are resold through First  Federal's  personnel and through
select auto dealers.  A decision as to whether and when to initiate  foreclosure
or  repossession  proceedings  is based on such  factors  as the  amount  of the
outstanding  loan in  relation  to the  original  indebtedness,  the  extent  of
delinquency  and the borrower's  ability and  willingness to cooperate in curing
delinquencies.  First Federal  aggressively  pursues  delinquent  loans and as a
result has  experienced  minimum  foreclosure  and losses  thereon over the past
three years.

     The following table sets forth information  concerning  delinquent mortgage
and other loans at September  30, 1998 in dollar  amounts and as a percentage of
First Federal's total loan portfolio.  The amounts presented represent the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                  Loans Delinquent at September 30, 1998
                                          --------------------------------------------------------
                                                                                        Total
                                                                          90 Days     Delinquent
                                            30-59 Days     60-89 Days     and Over      Loans
                                          --------------------------------------------------------
                                                              (Dollars in Thousands)

Residential Real Estate:
------------------------
<S>                                          <C>            <C>            <C>            <C>    
  Number of loans ......................       --               17             8              25 
  Amount ...............................     $ --           $1,003          $446          $1,449 
  Percent of total loans................       --%            3.02%         1.34%           4.36%
                                                                                                 
Commercial Real Estate:                                                                          
-----------------------                                                                          
  Number of loans ......................       --                1          --                 1 
  Amount ...............................      $--           $   88         $--            $   88 
  Percent of total loans................       --%            1.91%         --%             1.91%
                                                                                                 
Consumer:                                                                                        
---------                                                                                        
  Number of loans ......................         81             24            15             120 
  Amount ...............................       $839           $222          $135          $1,196 
  Percent of total loans ...............       3.13%           .83%          .50%           4.46%
                                                                                                 
Total:                                                                                           
------                                                                                           
  Number of loans ......................         81             42            23             146 
  Amount ...............................       $839         $1,313          $581          $2,733 
  Percent of total loans ...............       1.13%          1.78%          .79%           3.70%
</TABLE>                                                                        
                                                                                
                                                                                


                                       18


<PAGE>



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

<TABLE>
<CAPTION>
                                                      September 30,
                                               ---------------------------------
                                                1998      1997      1996
                                               ---------------------------------
                                                 (Dollars in Thousands)

Non-accruing loans:
<S>                                            <C>       <C>       <C>   
  Residential ..............................   $ --      $ --      $   18
  Consumer .................................     --           8        38
                                               ------    ------    ------
    Total ..................................     --           8        56
                                               ------    ------    ------

Accruing loans delinquent more than 90 days:
  Residential ..............................      446       370      --
  Commercial Real Estate ...................     --        --        --
  Consumer .................................      135       126       122
                                               ------    ------    ------
    Total ..................................      581       496       122
                                               ------    ------    ------

Foreclosed assets:
  Residential ..............................      282       520       577
  Commercial real estate ...................     --        --        --
  Other Repossessed Assets (Vehicles) ......      479       258       108
                                               ------    ------    ------
    Total ..................................      761       778       685
                                               ------    ------    ------

Total non-performing assets ................   $1,210    $1,282    $  863
                                               ======    ======    ======
Total as a percentage of  total assets
   at end of period ........................     1.46%     1.71%     1.50%
                                               ======    ======    ======
</TABLE>



     For the most part, nonperforming assets at September 30, 1998, consisted of
repossessed vehicles and residential homes.

     As of September  30,  1998,  there were no  concentrations  of loans in any
types of industry which exceeded 10% of First  Federal's  total loans,  that are
not included as a loan category in the table above.

     At  September  30, 1998 there were no  non-accruing  loans and there was no
interest  income  recognized  relative to  non-performing  loans during the year
ended September 30, 1998.

     OTHER LOANS OF CONCERN. As of September 30, 1998, there was an aggregate of
$1.3 million of loans which known information about the possible credit problems
of the  borrowers  or the cash  flows of the  security  properties  have  caused
management to have some doubts as to the ability of the borrowers to comply with
present  loan  repayment  terms and which may result in the future  inclusion of
such items in the nonperforming assets categories.

                                       19


<PAGE>



     Loans being monitored include nine, one- to four-family loans totaling $1.0
million, four construction loans totaling $145,000, one commercial business loan
of $60,000 and 15 consumer loans totaling  $112,000 at September 30, 1998. See "
-- Consumer Lending."

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

     In connection  with the filing of its periodic  reports with the OTS and in
accordance with its  classification  of assets policy.  First Federal's Board of
Directors has established an Asset Review Committee, which regularly reviews all
loans of any concern  with senior  management  and  applicable  loan  collection
personnel,  to  determine  which loans  should be  classified  under  applicable
regulations.  Classified  assets loans, as described  above, of First Federal at
September 30, 1998 were as follows:

<TABLE>
<CAPTION>
                                                                  (In Thousands)

<S>                                                                       <C> 
Substandard.............................                                  $847
Doubtful................................                                     7
Loss....................................                                   ---
                                                                         -----
                                                                          $854
                                                                          ====
</TABLE>

                                       20


<PAGE>



ALLOWANCE FOR LOSSES ON LOANS

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

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

<TABLE>
<CAPTION>
                                                   Year Ended September 30,
                                              ----------------------------------
                                               1998       1997      1996
                                              ---------- -------- --------------
                                                  (Dollars in Thousands)

<S>                                             <C>       <C>       <C>  
Balance at beginning of period ..............   $ 273     $ 247     $ 317
Charge-offs .................................     (75)       (5)      (23)
Recoveries ..................................      30         6         5

Provisions for losses on loans ..............      79        25       (52)
                                                -----     -----     -----
Balance at end of period ....................   $ 307     $ 273     $ 247
                                                =====     =====     =====

Ratio of net charge-offs during the period to
average loans outstanding during the period .     .06%      .01%      .04%
</TABLE>



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


<TABLE>
<CAPTION>
                                                                                   September 30,
                                                 -----------------------------------------------------------------------------------
                                                           1998                        1997                   1996
                                                 -----------------------------------------------------------------------------------
                                                                 Percent of                Percent of            Percent of
                                                                  Loan in                   Loan in               Loan in
                                                                    Each                      Each                  Each
                                                                 Category to               Category to           Category to
                                                       Amount    Total Loans    Amount     Total Loans  Amount   Total Loans
                                                 -----------------------------------------------------------------------------------


<S>                                                     <C>         <C>           <C>        <C>        <C>        <C>   
Real Estate......................................       $183        59.56%        $200       73.08%     $120       75.95%
Other............................................        124        40.44           73       26.92       127       24.05
                                                        ----       ------        -----      ------      ----      ------
   Total.........................................       $307       100.00%        $273      100.00%     $247      100.00%
                                                        ====       ======         ====      ======      ====      ======
</TABLE>



     For  information  on First  Federal's  allowance  for losses on real estate
owned,  see Note 1 of the Notes to Financial  Statements in the Annual Report to
Stockholders filed as Exhibit 13 hereto.

INVESTMENT ACTIVITIES

     The  Company's  liquid  assets  (other than loans and some  mortgage-backed
securities receivable), are invested primarily in interest-bearing deposits with
banks,  and the FHLB of Dallas,  and FHLB  stock.  First  Federal is required by
federal regulations to maintain a minimum amount of

                                       21


<PAGE>



liquid assets that may be invested in specified securities and is also permitted
to make certain other security investments. First Federal maintains liquidity in
excess of regulatory requirements.  Cash flow projections are regularly reviewed
and updated to assure that adequate  liquidity is provided.  As of September 30,
1998,  First  Federal's  liquidity  ratio (liquid  assets as a percentage of net
withdrawable  savings  and  current  borrowings)  was 5.98% as  compared  to the
regulatory  requirement of 4%. At September 30, 1998, First Federal had $800,000
in borrowings from the FHLB; however,  First Federal had the ability, if needed,
to borrow up to $23.6 million from the FHLB of Dallas for  additional  liquidity
purposes.

     The following table sets forth the composition of the Company's  investment
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                              At September 30,
                                                     -------------------------------------------------------------------------------
                                                           1998            1997              1996              1995
                                                     ----------------  ---------------  ----------------  ---------------------
                                                      Book     Market   Book    Market   Book     Market   Book      Market
                                                      Value    Value    Value   Value    Value     Value   Value     Value
                                                     -------------------------------------------------------------------------------
                                                                                    (Dollars in Thousands)
<S>                                                   <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>   
Interest-bearing deposits .........................   $3,892   $3,892   $3,675   $3,675   $1,145   $1,145   $5,666   $5,666

Federal agency obligations ........................     --       --       --       --      1,000    1,000    1,000      988

FHLB stock ........................................      382      382      896      896      845      845      796      796
                                                      ------   ------   ------   ------   ------   ------   ------   ------

     Total liquid assets, investment securities and
          FHLB stock ..............................   $4,274   $4,274   $4,571   $4,571   $2,990   $2,990   $7,462   $7,450
                                                      ======   ======   ======   ======   ======   ======   ======   ======
</TABLE>



SOURCES OF FUNDS

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

     DEPOSITS.  First Federal  attracts both  short-term and long-term  deposits
from its primary  market area and has not actively  sought  deposits  outside of
this area.  First  Federal  offers  regular  passbook  accounts,  NOW  accounts,
commercial and personal checking accounts  (including its special "Golden Eagle"
checking,  designed for persons of age 50 or more,  and its  relatively  new "30
Something"  checking account designed for persons between 30 and 49 years of age
and its new "Working People's" checking account designed for its new north Bryan
branch   facility),   money  market  deposit   accounts,   fixed  interest  rate
certificates of deposits with varying maturities, and negotiated rate $95,000 or
above jumbo  certificates of deposit ("Jumbo CDS"). At September 30, 1998, First
Federal  had $6.5  million  in  "Golden  Eagle"  accounts,  $841,000  in its "30
Something" accounts, and $44,000 in its "Working People's" checking accounts.

                                       22


<PAGE>



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

     In 1994, First Federal  attempted to increase its passbook accounts through
a marketing campaign emphasizing the community involvement of First Federal with
all segments of the  population  in its trade area.  The measures  undertaken in
connection with this marketing  campaign include increasing in the proportion of
First Federal's  employees that speak Spanish,  advertising in Spanish  language
publications,  making direct contact with local Hispanic community organizations
and the planned  opening of a new office at a later date in the north Bryan area
with a  significant  Hispanic  influence.  In the spring of 1995,  First Federal
increased its checking or transaction  accounts through an aggressive  marketing
campaign  aimed at, among  others,  local college  students and faculty,  with a
branch in College  Station,  Texas,  (immediately  south of Bryan) opened in the
first half of 1994 and its new north Bryan  full-service  branch opened in June,
1998, at a key intersection of a principal  north-south  highway and a principal
east-way highway through Bryan. This immediate area in north Bryan presently has
no other banking facility nearby to service its financial needs.

     The following  table sets forth the deposit  flows at First Federal  during
the periods indicated.  Net increase (decrease) refers to the amount of deposits
during a period less the amount of  withdrawals  during the period.  In order to
reduce  excess cash on hand,  First Federal  implemented a planned  reduction in
higher cost deposits from 1995 to 1996.

<TABLE>
<CAPTION>
                                 Year Ended September 30,
                             -------------------------------------
                               1998          1997       1996
                             -------------------------------------
                                     (Dollars in Thousands)
<S>                           <C>         <C>         <C>     
Opening balance ...........   $ 58,808    $ 51,677    $ 54,939
Net deposits (withdrawals).     12,557       5,308      (4,916)
Interest credited .........      2,189       1,823       1,654
                              --------    --------    --------

Ending balance ............   $ 73,554    $ 58,808    $ 51,677
                              ========    ========    ========

Net increase (decrease) ...   $ 14,746    $  7,131    $ (3,262)
                              ========    ========    ========

Percent increase (decrease)      25.07%      13.80%      (5.94)%
                                 =====       =====       =====
</TABLE>





                                       23


<PAGE>



     The following  table sets forth the dollar amount of savings  deposits,  by
interest rate range, in the various types of deposit  programs  offered by First
Federal at the dates indicated.
<TABLE>
<CAPTION>
                                                              At September 30,
                                    ------------------------------------------------------------------------------------------------
                                           1998                     1997                     1996
                                    ------------------------------------------------------------------------------------------------
                                                  Percent                Percent                    Percent
                                      Amount      of Total    Amount     of Total      Amount       of Total
                                    ------------------------------------------------------------------------------------------------
                                                                     (Dollars in Thousands)

Certificate Accounts:

<S>                                  <C>           <C>      <C>           <C>         <C>           <C>     
 0.00- 2.99% ......................   $    45        0.1%    $    88          .2%     $  --           ---%  
 3.00- 4.99% ......................     5,509        7.5       4,250         7.2       16,448         31.8  
 5.00- 6.99% ......................    43,093       58.6      34,489        58.6       17,505         33.9  
 7.00- 8.99% ......................       911        1.2         978         1.7          933          1.8  
                                      -------       -----     ------       -----       ------         ----- 
Total Certificate Accounts ........    49,558       67.4      39,805        67.7       34,886         67.5  
                                                                                                            
Other Accounts:                                                                                             
---------------                                                                                             
                                                                                                            
Passbook Accounts .................   $ 5,199        7.1       4,393         7.5        4,177          8.1  
NOW Accounts ......................     9,735       13.2       6,970        11.8        5,387         10.4  
Money Market Accounts .............     4,595        6.2       4,229         7.2        4,653          9.0  
Commercial Checking Accounts ......     2,178        3.0       1,232         2.1        1,185          2.3  
Other non-interest bearing accounts     2,289        3.1       2,179         3.7        1,389          2.7  
                                      -------      -----      ------       -----       ------         ----- 
Total Other Accounts ..............    23,996       32.6      19,003        32.3       16,791         32.5  
                                      -------      -----      ------       -----       ------         ----- 
Total Deposits ....................   $73,554      100.0%    $58,808       100.0%     $51,677        100.0% 
                                      =======      =====      ======       =====       ======         ===== 
</TABLE>

     At September 30, 1998 scheduled  maturities of  certificates of deposit are
as follows.
<TABLE>
<CAPTION>
                                         At September 30,

                                                  2001 and              
                                1999     2000    thereafter  Total
                               ---------------------------------------
<S>   <C>                     <C>       <C>       <C>       <C>       
0.00- 2.99% ..............    $  --     $    45   $  --     $    45   
3.00- 4.99% ..............      5,435        64        10     5,509   
5.00- 6.99% ..............     30,913     9,398     2,782    43,093   
7.00- 8.99% ..............       --         911      --         911   
                              -------   -------   -------   -------   
     Total                    $36,348   $10,418   $ 2,792   $49,558   
                              =======   =======   =======   =======   
</TABLE>
                                                                  
                              


     The following table indicates the amount of First Federal's certificates of
deposit by time remaining until maturity as of September 30, 1998.

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

<S>                                          <C>       <C>       <C>       <C>       <C>    
Certificates of deposit less than $100,000    $ 9,966   $ 7,674   $11,871   $10,938   $40,449
Certificates of deposit of $100,000 or more     2,176     2,233     2,428     2,272     9,109
                                              -------   -------   -------   -------   -------
Total .....................................   $12,142   $ 9,907   $14,299   $13,210   $49,558
                                              =======   =======   =======   =======   =======
</TABLE>

                                       24

<PAGE>

     BORROWINGS.  First Federal's  borrowings  primarily have been advances from
the FHLB of Dallas. As a member of the FHLB of Dallas, First Federal is required
to own  capital  stock in the FHLB of  Dallas  and is  authorized  to apply  for
advances from the FHLB of Dallas.  Each FHLB credit program has its own interest
rate,  which  may be fixed or  variable,  and range of  maturities.  The FHLB of
Dallas may prescribe the acceptable  uses to which these advances may be put, as
well as  limitations  on the  size of the  advances  and  repayment  provisions.
Federal law  requires  that all  long-term  FHLB  advances be for the purpose of
financing  residential housing and members must meet community lending standards
in order to have continued access to long-term FHLB advances. First Federal does
not expect that these  limitations will have a significant  impact on its access
to FHLB advances.

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

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

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

<TABLE>
<CAPTION>
                                 Year Ended September 30,
                             --------------------------------
                               1998      1997       1996
                             --------------------------------
                                     (In Thousands)

Maximum Balance:
----------------
<S>                           <C>       <C>       <C>     
FHLB advances ............    $10,000   $ 3,067   $    89 
Debentures ...............    $ 3,629   $    --   $    -- 
                                                          
Average Balance: .........                                
--------------------------                                
FHLB advances ............    $ 3,984   $ 3,067   $    89 
Debentures ...............    $ 1,815   $    --   $    -- 
</TABLE>
                                                          
                              
                  The following table sets forth certain information as to First
Federal's FHLB advances and other borrowings at the dates indicated.

<TABLE>
<CAPTION>
                                                         September 30,
                                              ----------------------------------
                                                   1998       1997      1996
                                              ----------------------------------
                                                         (In Thousands)

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

Weighted average interest rate of FHLB advances      5.43%      5.55%      ---%
Weighted average interest rate on Debentures ..      11.5       ---%       ---%
</TABLE>


                                       25


<PAGE>




SERVICE CORPORATION

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

     First Federal's service corporation, First Service Corporation of Bryan, is
currently inactive.  At September 30, 1998, First Federal had a total investment
of $13,260 in its service  corporation.  See "Regulation - Federal Regulation of
Thrift Institutions."

                                   REGULATION

GENERAL

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

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

PROPOSED FEDERAL LEGISLATION

     The United States  Congress is considering  legislation  that would require
all federal thrift  institutions,  such as First Federal, to either convert to a
national bank or a state chartered financial  institution by a specified date to
be determined.  However,  there can be no assurance that such legislation or any
similar  legislation  if enacted will be enacted,  or, would not have a material
adverse effect on the institution.

FEDERAL REGULATION OF THRIFT INSTITUTIONS

     The OTS has extensive authority over the operations of thrift institutions.
As part of this  authority,  First Federal is required to file periodic  reports
with the OTS and is subject to periodic

                                       26


<PAGE>



examination by the OTS and the FDIC.  The last regular OTS  examination of First
Federal was as of January 12, 1998. Under agency  scheduling  guidelines,  it is
likely that another  examination  will be initiated within 18 months of the last
exam.  When  these  examinations  are  conducted  by the OTS and the  FDIC,  the
examiners may require  First  Federal to provide for higher  general or specific
loan loss  reserves.  All  thrift  institutions  are  subject  to a  semi-annual
assessment,  based  upon the  thrift  institution's  total  assets,  to fund the
operations  of the OTS.  First  Federal's  OTS  assessment  for the  expense  of
examinations for the fiscal year ended September 30, 1998, was $25,000.

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

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

     First Federal's general permissible lending limit for loans-to-one-borrower
is equal to the  greater of $500,000  or 15% of  unimpaired  capital and surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998,  First Federal's legal lending limit under this  restriction
was  $788,000.  First Federal is in  compliance  with the  loans-to-one-borrower
limitation.

     The  OTS,  as well as the  other  federal  banking  agencies,  has  adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  internal controls and audit systems,  interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these  standards  must submit a  compliance  plan.  A
failure to submit a plan or to comply  with an  approved  plan will  subject the
institution to further enforcement  action.  First Federal has adopted these OTS
guidelines.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

     First Federal is a member of the SAIF,  which is  administered by the FDIC.
Deposits are insured up to applicable  limits by the FDIC and such  insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC  imposes  deposit  insurance  premiums  and is  authorized  to  conduct
examinations of and to require reporting by FDIC-insured  institutions.  It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate  enforcement  actions against thrift
institutions, after giving the OTS an opportunity to take

                                       27


<PAGE>



such action,  and may terminate the deposit  insurance if it determines that the
institution  has  engaged in unsafe or unsound  practices  or is in an unsafe or
unsound condition.

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

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

     Effective  January 1, 1997,  the premium  schedule for BIF and SAIF insured
institutions   ranged  from  0  to  27  basis  points.   However,   SAIF-insured
institutions are required to pay a Financing  Corporation (FICO) assessment,  in
order to fund the interest on bonds  issued to resolve bank and thrift  failures
in the 1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits,   while   BIF-insured   institutions   pay  an  assessment   equal  to
approximately  1.52  basis  points  for  each  $100 in  domestic  deposits.  The
assessment  is expected to be reduced to 2.43 basis points no later than January
1, 2000,  when BIF insured  institutions  fully  participate in the  assessment.
These  assessments,  which may be  revised  based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.

REGULATORY CAPITAL REQUIREMENTS

     Federally insured thrift institutions,  such as First Federal, are required
to  maintain a minimum  level of  regulatory  capital.  The OTS has  established
capital standards,  including a tangible capital  requirement,  a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such thrift  institutions.  These  capital  requirements  must be  generally  as
stringent as the comparable capital  requirements for national banks. The OTS is
also  authorized to impose capital  requirements in excess of these standards on
individual associations on a case-by-case basis.

     The  capital  regulations  require  tangible  capital  of at least  1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the  requirement.  At September 30, 1998,  the Bank did not have any  intangible
assets.

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<PAGE>



     The OTS  regulations  establish  special  capitalization  requirements  for
thrift  institutions that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.  First Federal was not subject to any such deduction at
September 30, 1998.

     At September 30, 1998,  First Federal had tangible capital of $5.3 million,
or 6.43% of adjusted total assets, which is approximately $4.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

     The capital  standards  also require  core capital  equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however,  a thrift  institution must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition  is such to allow it to maintain a 3% ratio.  At  September  30, 1998,
First Federal had no intangibles which were subject to these tests.

     At  September  30,  1998,  First  Federal  had core  capital  equal to $5.3
million,  or 6.43% of adjusted  total  assets,  which is $2.8 million  above the
minimum leverage ratio requirement of 3% as in effect on that date.

     The OTS risk-based  requirement  requires thrift institutions to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is also authorized to require a thrift institution to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of  non-traditional  activities.  At September  30, 1998,  First  Federal had no
capital  instruments  that  qualify as  supplementary  capital  and  $307,000 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. First Federal had no such
exclusions from capital and assets at September 30, 1998.

     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.

                                       29


<PAGE>



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

     On September 30, 1998,  First Federal had total capital of $5.6 million and
risk-weighted assets of $65.3 million, or total capital of 8.5% of risk-weighted
assets.  This amount was  $337,000  above the 8%  requirement  in effect on that
date.  First Federal has very recently  initiated a strategy to profitably  sell
some of its  100%  risk-weighted  loans in order  to  increase  its  risk-weight
capital ratio.

     The OTS and the  FDIC  are  authorized  and,  under  certain  circumstances
required,  to take certain actions against thrift institutions that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

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

     Any thrift  institution  that fails to comply with its  capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less  than 3% or a  risk-based  capital  ratio of less  than 6%) must be made
subject  to  one  or  more  of  additional   specified   actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
thrift  institution,  with certain limited  exceptions,  within 90 days after it
becomes critically undercapitalized.

     At September 30, 1998, First Federal fell within the regulatory  definition
of "adequately capitalized".

                                       30


<PAGE>



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

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

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

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

     OTS regulations impose various restrictions or requirements on associations
with respect to their ability to make  distributions  of capital,  which include
dividends,  stock  redemptions  or  repurchases,   cash-out  mergers  and  other
transactions  charged to the capital  account.  OTS regulations also prohibit an
association  from declaring or paying any dividends or from  repurchasing any of
its stock if, as a result,  the regulatory  capital of the association  would be
reduced below the amount required to be maintained for the  liquidation  account
established in connection with its mutual to stock conversion.

     Generally thrift institutions, such as First Federal, that before and after
the proposed  distribution  meet their  capital  requirements,  may make capital
distributions  during  any  calendar  year  equal to the  greater of 100% of net
income  for the  year-to-date  plus 50% of the amount by which the lesser of the
association's   tangible,   core  or  risk-based  capital  exceeds  its  capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However,  an association deemed to be in need of more than normal supervision by
the OTS may have its dividend  authority  restricted by the OTS. The Company may
pay dividends in accordance with this general authority.

     Thrift  institutions  proposing to make any capital  distribution need only
submit  written  notice to the OTS 30 days  prior to such  distribution.  Thrift
institutions  that do not,  or would  not meet  their  current  minimum  capital
requirements following a proposed capital distribution, however, must obtain OTS
approval  prior  to  making  such  distribution.  The  OTS  may  object  to  the
distribution  during that 30-day  notice  period  based on safety and  soundness
concerns. See " -- Regulatory Capital Requirements."

     The OTS has  proposed  regulations  that would  revise the current  capital
distribution  restrictions.  Under the proposal a thrift  institution may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory concern, and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Thrift  institutions  that would remain  adequately  capitalized  following  the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar  year. A thrift  institution  may not make a capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current rule,

                                       31


<PAGE>



the OTS may object to a capital distribution if it would constitute an unsafe or
unsound  practice.  No assurance  may be given as to whether or in what form the
regulations may be adopted.

     First  Federal  is not aware at this time of any  restriction  on a capital
distribution  and/or  dividends  that could be imposed upon it by the OTS or the
FDIC.

LIQUIDITY

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

     In addition,  short-term liquid assets (e.g.,  cash, certain time deposits,
certain bankers  acceptances and short-term 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 September 30, 1998,  First Federal was in compliance  with both
requirements,  with an  overall  liquid  asset  ratio of 5.98% and a  short-term
liquid assets ratio of 5.98%.

ACCOUNTING

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

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

QUALIFIED THRIFT LENDER TEST

     All thrift  institutions,  including  First  Federal are required to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations.  This test requires a thrift institution to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the thrift  institution  may  maintain  60% of its assets in those
assets  specified in Section  7701(a)(19)  of the Internal  Revenue Code.  Under
either test, such assets primarily consist of residential housing related

                                       32


<PAGE>



loans and investments. At September 30, 1998, First Federal met the test and has
always met the test since its effectiveness.

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

COMMUNITY REINVESTMENT ACT

     Under  the  Community   Reinvestment   Act  ("CRA"),   every  FDIC  insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking  practices to help meet the credit needs of its entire  community,
including  low and moderate  income  neighborhoods.  The CRA does not  establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's  discretion to develop the types of products and services
that it believes are best suited to its particular  community,  consistent  with
the CRA. The CRA requires the OTS, in connection  with the  examination of First
Federal,  to assess the institution's  record of meeting the credit needs of its
community  and to take such record  into  account in its  evaluation  of certain
applications,  such as a  merger  or the  establishment  of a  branch,  by First
Federal. An unsatisfactory  rating may be used as the basis for the denial of an
application by the OTS.

     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,  First  Federal  may be  required  to  devote  additional  funds for
investment and lending in its local community.

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

TRANSACTIONS WITH AFFILIATES

     Generally,  transactions  between a thrift  institution or its subsidiaries
and its affiliates  are required to be on terms as favorable to the  association
as transactions with non-affiliates. In addition, certain of these transactions,
such  as  loans  to  an  affiliate,  are  restricted  to  a  percentage  of  the
association's  capital.  Affiliates of First Federal include the Holding Company
and any company which is under common control with First Federal. In addition, a
thrift  institution  may not lend to any  affiliate  engaged in  activities  not
permissible for a bank holding company or acquire the

                                       33


<PAGE>



securities  of most  affiliates.  First  Federal's  subsidiaries  are not deemed
affiliates;  however, the OTS has the discretion to treat subsidiaries of thrift
institutions as affiliates on a case by case basis.

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

HOLDING COMPANY REGULATION

     The Company is a unitary savings and loan holding company and can engage in
any safe and sound  business  that is lawful to conduct,  subject to  regulatory
oversight  by the OTS. As such,  the  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-thrift
institution  subsidiaries  which also  permits  the OTS to  restrict or prohibit
activities  that are  determined to be a serious risk to the  subsidiary  thrift
institution.  Otherwise,  the Company can engage in any safe and sound business,
which is lawful to conduct for any type of  business.  The Company is  exploring
offering financial services through another subsidiary of the Holding Company.

     As a unitary savings and loan holding company, the Company generally is not
subject to activity  restrictions.  If the Company  acquires  control of another
thrift institution as a separate subsidiary,  it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries  (other  than  First  Federal  or  any  other  SAIF-insured  thrift
institution)  would  become  subject  to such  restrictions  unless  such  other
institutions  each  qualify  as  a  QTL  and  were  acquired  in  a  supervisory
acquisition.

     If First Federal  fails the QTL test,  the 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 Company must  register as, and will become  subject
to, the  restrictions  applicable  to bank  holding  companies.  The  activities
authorized  for a bank  holding  company  are  much  more  limited  than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "--Qualified Thrift Lender Test."

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

FEDERAL SECURITIES LAW

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

                                       34


<PAGE>



     The Holding  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 Holding Company meets specified current public information
requirements,  each  affiliate  of the  Holding  Company  is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board requires all depository  institutions to maintain
noninterest  bearing  reserves at specified  levels  against  their  transaction
accounts (primarily checking and NOW checking accounts).  At September 30, 1998,
First Federal was in compliance  with these reserve  requirements.  The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy  liquidity  requirements  that may be imposed by the OTS.
See "-- Liquidity."

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

FEDERAL HOME LOAN BANK SYSTEM

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

     As a member,  First  Federal is required to purchase and maintain  stock in
the FHLB of Dallas.  At September  30, 1998,  First Federal had $382,000 in FHLB
stock,  which was in  compliance  with this  requirement.  In past years,  First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such  dividends  have averaged 5.64% and were 5.98% for fiscal year
1998.

     Under  federal  law  the  FHLBs  are  required  to  provide  funds  for the
resolution  of  troubled  thrift  institutions  and to  contribute  to low-  and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction in value of First  Federal's FHLB stock may result in a  corresponding
reduction in First Federal's capital.

     For the year ended September 30, 1998, dividends paid by the FHLB of Dallas
to First Federal totaled  $38,428,  which constitute a $12,662 decrease from the
amount of dividends received

                                       35


<PAGE>



in fiscal year 1997. The $38,000 dividend  received for the year ended September
30,  1998  reflects  an  annualized  rate of 5.98%,  or 0.15% above the rate for
fiscal 1997.

FEDERAL AND STATE TAXATION

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

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

     In August 1996,  legislation  was enacted that  repealed the  percentage of
taxable  income  method  used by  many  thrifts,  including  First  Federal,  to
calculate  their bad debt reserve for federal income tax purposes.  As a result,
small thrifts such as First Federal must  recapture  that portion of the reserve
that exceeds the amount that could have been taken under the  experience  method
for tax years beginning after December 31, 1987. The recapture will occur over a
six-year  period,  the  commencement  of which will be  delayed  until the first
taxable year beginning after December 31, 1997,  provided the institution  meets
certain residential lending requirements. The management of the Company does not
believe that the  legislation  will have a material  impact on the  Company.  At
September  30,  1998,  First  Federal  had  approximately  $343,000  in bad debt
reserves subject to recapture for federal income tax purposes.  The deferred tax
liability related to the recapture has been previously established so there will
be no effect on future net income.

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

     A portion of First Federal's  reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of September  30,  1998,  the portion of First  Federal's  reserves
subject to this treatment for tax purposes totaled approximately $478,000.

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

     First Federal and its consolidated  subsidiary have been audited by the IRS
with respect to consolidated  federal income tax returns  through  September 30,
1987. With respect to years

                                       36


<PAGE>



examined by the IRS, either all  deficiencies  have been satisfied or sufficient
reserves have been established to satisfy asserted  deficiencies.  Management is
not aware of any examination of issues related to still open returns  (including
returns of subsidiaries  and  predecessors  of, or entities  merged into,  First
Federal) which would result in a deficiency  that could have a material  adverse
effect on the financial condition of the Company.

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

     The tax is the higher of 0.25% of taxable  capital  (usually  the amount of
paid in capital plus retained earnings) or 4.5% of "net taxable earned surplus."
"Net  taxable  earned  surplus"  is net income for federal  income tax  purposes
increased by the compensation of directors and executive officers.

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

COMPETITION

     First Federal's  deposits increased 25% in the fiscal year ending September
30, 1998,  and its  loan-to-deposit  ratio was 97.9%,  as of September 30, 1998;
however, First Federal faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks and mortgage companies who also make loans
located in First Federal's primary market area. First Federal competes for loans
principally  on the basis of the  interest  rates and loan fees it charges,  the
types  of loans  it  originates  and the  quality  of  service  it  provides  to
borrowers.

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

     New checking accounts have been introduced by First Federal. These accounts
are targeted to those  individuals  age 50 or over ("Golden Eagle  Account") and
age 30 to 49 ("30 Something  Account"),  both of which include special  benefits
and  planned  trips along with its new north Bryan  special  "Working  People's"
checking account designed for the majority of the population who live or work in
that area.

     First  Federal  considers  its  primary  market for  deposits  and  lending
activities  to be the Bryan-  College  Station  area  (Brazos  County),  and the
surrounding  counties  of  Burleson,   Grimes,  Leon,  Madison,   Robertson  and
Washington  county,  Texas.  This  area may be  characterized  principally  as a
college  community  centered around Texas A&M University and the new George Bush
Presidential  Library.  However,  during 1995 through 1998,  additional  private
businesses located to the area,

                                       37


<PAGE>



thereby  adding to the  diversification  of the  local  economy.  A  significant
portion of the region's deposit base is comprised of depositors  associated with
Texas A&M University. At September 30, 1998 there was one local, community-owned
thrift institution (First Federal),  one state savings bank and seven commercial
banks with retail offices in Bryan-College Station, Texas, where First Federal's
principal offices and full-service branches are located.

EMPLOYEES

     At  September  30,  1998,  the Company had a total of 60  full-time  and 15
part-time  employees.  None of the Company's  employees are  represented  by any
collective bargaining agreement.  Management considers its employee relations to
be good, with a staff committed to the goals of the Company.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

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

     Mary L. Hegar.  Ms. Hegar joined First Federal in 1977 and became Assistant
Secretary/Treasurer in 1987 and was promoted to Senior Vice  President/Financial
and Regulatory and Chief Financial  Officer in January 1993. Ms. Hegar primarily
coordinates  the  accounting  functions of the Bank,  monitors  First  Federal's
investments and is responsible for regulatory  reporting.  Ms. Hegar is a member
of the Asset/Liability and Personnel Committee.

ITEM 2.  DESCRIPTION OF PROPERTY

OFFICES

     First  Federal  owns  the  building  and  land  for the  Company's  and its
executive office at 2900 Texas Avenue, Bryan, Texas, which was built in 1956 and
acquired by First Federal in 1978.  This office now has 8,700 square feet and is
situated  on almost an acre of land with over 200 feet of  frontage  situated on
the principal  thoroughfare in Bryan-College  Station.  The depreciated net book
value of this  office  and land  (with  recent  parking  lot  improvements)  was
$426,000 at  September  30,  1998.  An expansion of 800 square feet was added in
1995, and additional drive-in facilities were added in 1994 and 1997. Additional
land was  acquired  in fiscal  1998,  located  near  First  Federal's  principal
offices,  to construct a new, larger  drive-in  facility when the need arises in
the future.

     First  Federal  also  opened and owns a branch  office at 2202  Longmire in
College  Station in March of 1994,  located  adjacent  to one of the key highway
intersections in College  Station.  This office was renovated and expanded after
its  acquisition  by First Federal from the FDIC.  The office has  approximately
2320  square feet and is  situated  on almost two acres of land,  with  adequate
expansion  space for the growth of the branch and the offices of First Federal's
expanding  Second  Chance Auto Loan  Program.  The book value of this office and
land was $311,000 at September 30, 1998.

                                       38


<PAGE>



     First Federal also acquired in fiscal 1998  approximately  one acre of land
at a key  intersection of two major highways in north Bryan, as the site for its
new north Bryan full-service branch. It opened in June 1998, with a special bank
modular  facility  pending  construction  of the  permanent  facility,  which is
tentatively  schedule to commence in early spring of 1999. First Federal is very
pleased to date with the acceptance by the community of this new facility.  This
branch is intended to better serve the Hispanic and minority community,  working
class population and other residents in this part of the community not presently
served by a nearby  banking  facility.  Management  believes  its current  check
clearing  capability can service these  additional  accounts.  The book value of
this office and land was $150,000 at September 30, 1998.

     The  Bank   maintains  a  database  of  depositor  and  borrower   customer
information.  The net book value of the data  processing and computer  equipment
and software utilized by the Bank at September 30, 1998 was $187,000.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation  of proxies or otherwise,  during the three months ended  September
30, 1998.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Pages 51 and 52 of the  Company's  1998 Annual  Report to  Stockholders  is
     incorporated herein by reference.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     Pages 6 through 24 of the Company's 1998 Annual Report to  Stockholders  is
     incorporated herein by reference.

ITEM 7.  FINANCIAL STATEMENTS

     Pages 25 through 50 of the Company's 1998 Annual Report to Stockholders are
     incorporated herein by reference.

                                       39


<PAGE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE

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

                                    PART III
                                    --------

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
           PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Information  concerning  Directors of the Company is incorporated herein by
reference  from  the  definitive  proxy  statement  for the  annual  meeting  of
stockholders  to be held on February 18, 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.

     To the Company's knowledge,  based solely on a review of the copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports are  required,  during the fiscal year ended  September  30,  1998,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than 10 percent beneficial owners were complied with.

ITEM 10.  EXECUTIVE COMPENSATION

     Information  concerning  executive  compensation is incorporated  herein by
reference  from  the  definitive  proxy  statement  for the  annual  meeting  of
stockholders  to be held on February 18, 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

     Information  concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  proxy
statement  for the annual  meeting of  stockholders  to be held on February  18,
1999,  a copy of which  will be filed not later than 120 days after the close of
the fiscal year.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference  from the definitive  proxy  statement for the
annual meeting of  stockholders to be held on February 18, 1999, a copy of which
will be filed not later than 120 days after the close of the fiscal year.

                                       40


<PAGE>



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(A)               EXHIBITS

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

<S>            <C>                                                          <C>           
      2         Plan of acquisition, reorganization, arrangement,            None
                liquidation or succession

      3(a)      Certificate of Incorporation                                   *

      3(b)      By-Laws                                                        *

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

      9         Voting Trust Agreement                                       None

     10         Material contracts                                             *

     11         Statement re:  computation of per share earnings             Not required

     12         Statement re:  computation of ratios                         Not required

     13         Annual Report to Security Holders                              13

     16         Letter re:  change in certifying accountants                 None

     18         Letter re:  change in accounting principles                  None

     21         Subsidiaries of Registrant                                     21

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

     23         Consents of Experts and Counsel                              Not required

     24         Power of Attorney                                            Not required

     27         Financial Data Schedule                                        27

     99         Additional Exhibits                                          None
</TABLE>

---------------------
*    Filed as exhibits to the Company's Form S-1  registration  statement  (File
     No.  333-28179)  filed  on  May  30,  1997  pursuant  to  Section  5 of the
     Securities Act of 1933. All of such  previously  filed documents are hereby
     incorporated  herein by reference in accordance with Item 601 of Regulation
     S-B.





                                       41


<PAGE>



(B)  REPORTS ON FORM 8-K

     There were no reports on Form 8-K filed the  quarter  ended  September  30,
1998.

                                       42


<PAGE>



                                   SIGNATURES

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

                                    THE BRYAN-COLLEGE STATION
                                    FINANCIAL HOLDING COMPANY

Date:  December 28, 1998            By:   /s/ J. Stanley Stephen         
      -----------------------           ---------------------------------
                                        J. Stanley Stephen, President and Chief
                                         Executive Officer
                                        (Duly Authorized Representative)

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

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

Date: December 28, 1998                     Date: December 28, 1998         
     ------------------------------               ---------------------------


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

Date: December 28, 1998                     Date: December 28, 1998
     ------------------------------               ---------------------------


By:   /s/ Charles Neelley                   By:   /s/ Jack W. Lester, Jr.       
     ------------------------------              -------------------------------
     Charles Neelley                             Jack W. Lester, Jr. Director,
     Director, Secretary and Treasurer            Assistant Secretary-Treasurer
       of the Board of Directors                  of the Board of Directors

Date: December 28, 1998                     Date: December 28, 1998             
      -----------------------------               ------------------------------





<PAGE>



By:   /s/ George Koenig                     By: /s/ Roland Ruffino              
     ------------------------------            --------------------------------
     George Koenig                             Roland Ruffino
     Director and Executive Vice               Director
      President

Date: December 28, 1998                     Date: December 28, 1998             
     ------------------------------               ------------------------------



By:   /s/ Arthur Davila                     By: /s/ Robert H. Conaway           
     ------------------------------            --------------------------------
     Arthur Davila                             Robert H. Conaway
     Director                                  Director

Date: December 28, 1998                     Date:  December 28, 1998            
     ------------------------------                -----------------------------



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

Date: December 28, 1998                     Date:  December 28, 1998            
     -------------------------------               -----------------------------



By:   /s/ Mary Lynn Hegar
     ------------------------------
     Mary Lynn Hegar
     (Principal Financial and Accounting
      Officer)

Date: December 28, 1998
      ------------------------------