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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

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**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, 2001

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

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|Delaware                                                      | 36-4153491                            
|------------------------------------------------------------- | --------------------------------------
|(State or Other Jurisdiction ofIncorporation or Organization) | (I.R.S. EmployerIdentification Number)
|2900 Texas AvenueBryan, Texas                                 | 77802                                 
|(Address of Principal Executive Offices)                      | (Zip Code)                            

Issuer's telephone number, including area code: (979) 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 a $533,000 net loss for the fiscal year ended September 30, 2001.

As of December 28, 2001, there were issued and outstanding 471,411 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.

Transitional Small Business Disclosure Format(Check One):	Yes	______;	              No	X

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**Item 1.  Description of Business**

**General**

The Bryan-College Station Financial Holding Company (the "Holding Company" and, when
referred to with First Federal Savings Bank, the "Company"), a Delaware corporation, was formed
as of April 1, 1998 to act as a unitary thrift holding company for First Federal Savings Bank, Bryan,
Texas ("First Federal" or the "Bank") by acquiring 100% of the stock of First Federal through the
exchange of approximately 32% of First Federal common stock for Holding Company common
stock and the purchase of approximately 68% of First Federal common stock for cash (the
"Acquisition").  The Holding Company received approval from the Office of Thrift Supervision (the
"OTS") to acquire all of the common stock of the Bank outstanding upon completion of the
Acquisition.  The Acquisition was completed on April 1, 1998.  All references to the Company,
unless otherwise indicated, at or before April 1, 1998 refer to the Bank.  First Federal converted from
the mutual to stock form of organization and recapitalized in 1993.

First Federal is a federally chartered, independent thrift institution, headquartered in Bryan-College Station, Texas, which began operations in 1965.  First Federal is predominantly a residential
mortgage lender, originating loans primarily in Bryan-College Station and the surrounding counties
of Burleson, Grimes, Leon, Madison, Robertson and Washington, which comprise its immediate
trade area.  To a lesser extent, First Federal also originates residential construction loans in its
immediate trade area, Small Business Administration ("SBA") partially guaranteed loans, and small
commercial real estate and small to medium commercial business loans.  Prior to June 2000, First
Federal had originated a significant amount of consumer loans primarily secured by automobiles
through selected automobile dealers.  These loans are partially insured against loss by credit-default
insurance.  The Company discontinued this program in response to an OTS examination completed
in June 2000, which resulted in First Federal being designated to be in "troubled condition" and a
"problem association" and First Federal entering into a Supervisory Agreement with the OTS.  On
March 2, 2001, the OTS notified First Federal that it was no longer designated to be in "troubled
condition" and a "problem association."  See "Regulation - Supervisory Agreement" for a discussion
of regulatory restrictions imposed and the Supervisory Agreement entered into with the OTS as a
result of the examination.

First Federal funds the above lending products using a retail deposit base gathered in its home
market of Bryan-College Station and its immediate trade area.  First Federal currently operates three
full-service offices, two of which are located in Bryan (including its principal executive office
which is situated in the middle of the Bryan-College Station community), a new facility located in
North Bryan, and one full-service branch in adjacent College Station.

The principal executive office of the Holding Company and First Federal is located at 2900
Texas Avenue, Bryan, Texas 77802 and the telephone number at that address is (979) 779-2900.

On November 5, 2001, the Holding Company entered into a definitive agreement to merge
into Texas United Bancshares, Inc. ("Texas United").  Texas United, headquartered in LaGrange
Texas, has 14 branch offices and had $410 million in assets and $356 million in deposits as of
September 30, 2001.   Texas United is the holding company for State Bank and Central Texas Bank.
Under the terms of the agreement, Texas United will exchange .31579 shares of Texas United
common stock for each share of Holding Company common stock outstanding in a tax free
exchange.  The transaction has been approved by the Board of Director's of both companies and  is
subject to approval by regulatory authorities and stockholders of the Holding Company.  The
transaction will be accounted for as a purchase and is expected to be completed early during the
second quarter of 2002.

**Forward-Looking Statements**

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

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

**Market Area**

Bryan-College Station is in Brazos County, Texas and is located in the center of the growing
area bordered by Houston, Austin-San Antonio, and Dallas-Ft. Worth.  It is the home of Texas A&M
University, which has an enrollment of over 43,000 students and is the third largest university in the
nation -- and is also the home of the George Bush Presidential Library.  It also is home to Blinn
College, which has a student body of approximately 10,000 students.  Management considers the
Bryan-College Station area, and the surrounding Texas counties of Brazos, Burleson, Grimes, Leon,
Madison, Robertson, and Washington to be its primary-market and trade areas for deposits and
lending activities.

**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, originating
residential construction loans secured by owner occupied one- to four-family residential property,
originating SBA and other small commercial loans and originating consumer loans.

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

Prior to fiscal year 2000, First Federal had increased its consumer lending area in order to
increase its risk-adjusted yield on these loans, consisting of consumer loans to individuals with less
than prime credit primarily secured by vehicles and originated through indirect lending from
automobile dealers under its recently terminated Second Chance Auto Lending Program.  At
September 30, 2001, the unpaid principal balance of Second Chance Auto Loans was $7.9 million.
First Federal also originates residential construction loans, small commercial real estate and small
to medium commercial business loans.  In addition, First Federal originates SBA business loans as
a Certified SBA lender.  Generally, First Federal sells the SBA guaranteed portion of SBA loans and
retains servicing for the entire loan.

First Federal's policy is not to invest its loan portfolio in long-term, fixed rate mortgage-backed securities or retain long-term, fixed rate loans.  In order to reduce First Federal's vulnerability
to changes in interest rates, First Federal generally originates short-term three-year balloon and
adjustable rate, one- to four-family residential mortgage loans, consumer loans (especially
automobile loans) and short-term construction loans.  At September 30, 2001, First Federal had
$20.6 million of fixed-rate residential mortgage loans (primarily consisting of three-year balloon
loans), $11.2 million of adjustable rate residential mortgage loans and $15.5 million of fixed rate consumer
loans (predominately automobile loans) out of a total of $67.6 million in total loans, including loans
held-for-sale.

Loan originations come primarily from advertising, walk-in customers, real estate brokers,
homebuilders and referrals from existing customers.  All loans that are originated for portfolio by
First Federal are reviewed and approved by the Board of Directors.

***Loan Portfolio Composition.***     The following table sets forth information concerning the
composition of First Federal's loan portfolio (including loans held-for-sale) in dollar amounts and
in percentages (before deductions for the undisbursed portion of construction loans, deferred fees
and discounts, deferred income, premiums, and allowances for losses) as of the dates indicated.

|                                          | September 30,         
|----------------------------------------- | ----------------------
|                                          | 2001                  
|                                          | Amount                
|                                          | (Dollars in Thousands)
|Real Estate Loans                         |                       
|Residential                               | $31,806               
|Residential held-for-sale                 | ---                   
|Commercial                                | 6,094                 
|Construction                              | 9,284                 
|Total real estate loans                   | 47,184                
|                                          |                       
|Other Loans:                              |                       
|Consumer loans:                           |                       
|Secured by automobile                     | 11,947                
|Secured by deposit accounts               | 601                   
|Held for sale                             | 2,355                 
|Other                                     | 583                   
|Total consumer loans                      | 15,486                
|Commercial business loans                 | 4,898                 
|Total other loans                         | 20,384                
|Total loans                               | 67,568                
|                                          |                       
|Less:                                     |                       
|Undisbursed portion of construction loans | 2,950                 
|Net deferred fees and discounts           | 109                   
|Deferred income                           | ---                   
|Allowance for losses on loans             | 417                   
|Premiums, net of discounts                | (120)                 
|Net loans                                 | $64,212               

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

|                                          | September 30,         
|----------------------------------------- | ----------------------
|                                          | 2001                  
|                                          | Amount                
|                                          | (Dollars in Thousands)
|Fixed-Rate Loans:                         |                       
|Real estate:                              |                       
|Residential                               | $20,594               
|Residential held-for-sale                 | ---                   
|Commercial                                | 2,628                 
|Construction                              | 6,938                 
|Total real estate loans                   | 30,160                
|Consumer loans                            | 13,131                
|Consumer held for sale                    | 2,355                 
|Commercial business loans                 | 2,825                 
|Total fixed-rate loans                    | 48,471                
|                                          |                       
|Adjustable-Rate Loans:                    |                       
|Real estate:                              |                       
|Residential                               | 11,212                
|Commercial                                | 3,466                 
|Construction                              | 2,346                 
|Commercial business loans                 | 2,073                 
|Total adjustable rate loans               | 19,097                
|Total loans                               | 67,568                
|                                          |                       
|Less:                                     |                       
|Undisbursed portion of construction loans | 2,950                 
|Deferred fees and discounts               | 109                   
|Deferred income                           | ---                   
|Allowance for losses on loans             | 417                   
|Premiums, net of discounts                | (120)                 
|Net loans                                 | $64,212               

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

|                                      | Years Ended September 30,
|------------------------------------- | -------------------------
|                                      | 2001                     
|                                      | (Dollars In Thousands)   
|Loans Funded:                         |                          
|Real estate - residential             | $  3,479                 
|- commercial                          | 2,190                    
|- construction or development         | 15,405                   
|Non-real estate - consumer            | 3,648                    
|- commercial business                 | 6,043                    
|Total loans originated                | 30,765                   
|                                      |                          
|Loans Sold:                           |                          
|Loans sold                            | ---                      
|Principal repayments and refinancings | 38,520                   
|Total reductions                      | 38,520                   
|Change in other items, net            | (534)                    
|Net increase (decrease)               | $(7,221)                 

At September 30, 2001, First Federal serviced $3.5 million in loans for others, consisting
primarily of SBA loans and loans originated under its Second Chance Auto Lending Program and
subsequently sold.

The following schedule illustrates the maturities of First Federal's loan portfolio, including loans held-for-sale at September 30,
2001.  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.

|                                   | Real Estate            |                     |              |                     |          |                     |         
|---------------------------------- | ---------------------- | ------------------- | ------------ | ------------------- | -------- | ------------------- | --------
|                                   | Residential            | Commercial          | Construction | Consumer(1)         | Business | Total              
|                                   | Amount                 | WeightedAverageRate | Amount       | WeightedAverageRate | Amount   | WeightedAverageRate | Amount  
|                                   | (Dollars in Thousands)
|Due DuringYears EndedSeptember 30, |                        |                     |              |                     |          |                     |         
|                                   |                        |                     |              |                     |          |                     |         
|2002(2)                            | $  6,627               | 8.78%               | $   371      | 9.32%               | $8,612   | 8.31%               | $  1,907
|2003 and 2004                      | 6,831                  | 8.84                | 1,208        | 9.43                | 672      | 7.67                | 7,974   
|2005 and 2006                      | 941                    | 8.81                | 1,327        | 6.73                | ---      | ---                 | 4,768   
|2007 to 2011                       | 659                    | 8.53                | 713          | 8.45                | ---      | ---                 | 448     
|2012 to 2021                       | 2,885                  | 7.88                | 1,077        | 8.72                | ---      | ---                 | ---     
|2022 and following                 | 3,863                  | 8.43                | 1,398        | 8.58                | ---      | ---                 | 389     
|                                   | $31,806                | 8.56                | $6,094       | 8.40                | $9,284   | 8.27                | $15,486 

(1)  Includes loans held for sale.(2)  Includes demand loans, loans having no stated maturity and overdraft loans.

The total amount of loans maturing after September 30, 2002, that have fixed rates of interest
(including three-year balloon home loans and other types of loans with balloon maturities) is $30.7
million while the total amount of loans due after such date which have floating or adjustable rates
of interest is $17.5 million.

***One- to Four-Family Residential Real Estate Lending.***First Federal's primary lending
program 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
the origination of non-FNMA and FHLMC conforming three-year balloon loans (generally with 30
year amortization schedules).  At September 30, 2001, $20.6 million or 30.5%, of First Federal's
gross loan portfolio consisted of fixed-rate loans on one- to four-family residences.  Most of these
loans were secured by residential properties located in the State of Texas, with a majority of the
properties located in First Federal's primary market area.  On September 30, 2001, 1.3% of all
portfolio residential loans were 90 days or more past due.

First Federal's residential loans are generally underwritten and documented to permit their
sale in the secondary market.  In the event they do not conform to FNMA and FHLMC secondary
market standards, First Federal will determine whether or not such loans meet its credit-underwriting
guidelines to be considered for approval for funding into First Federal's loan portfolio.  First Federal
evaluates both the borrower's ability to make principal and interest payments and the value of the
property (and any other collateral) that will secure the loan.  One- to four-family loan originations
are generally made in amounts up to 90% of the cost or appraised value of the security property,
whichever is lower.  The determination as to lend in excess of 80% of the appraised value is made
on a case-by-case basis and is based on a variety of factors, including the borrower's credit and
payment history, length of employment, length of residence and other factors relating to the
borrower's stability, debt-to-income ratio, as well as the quality of the property securing the loan.
First Federal may require private mortgage insurance for its loans with loan-to-value ratios over
80%, that it retains in its portfolio.  In those instances where First Federal does not require private
mortgage insurance, in the event of a foreclosure, First Federal can be subject to a greater risk of loss
on the foreclosure and disposition of such property.  First Federal has, however, had a very limited
loss experience on such loans.  See "--Loan Delinquencies; Nonperforming Assets and Classified
Assets."

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.

***Mortgage-Backed Securities***.  First Federal has a limited portfolio of mortgage-backed
securities.  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 Consolidated
Financial Statements.

Consistent with First Federal's asset/liability policy to minimize interest rate risk,
approximately 79.7% of First Federal's mortgage-backed securities carry adjustable interest rates.

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

|                                         | September 30,         
|---------------------------------------- | ----------------------
|                                         | 2001                  
|                                         | (Dollars in Thousands)
|Held-to-Maturity                         |                       
|Federal Home Loan Mortgage Corporation   | $   296               
|Federal National Mortgage Association    | 125                   
|Total                                    | $   421               
|Available-for-Sale                       |                       
|Government National Mortgage Association | $1,265                
|Total                                    | $1,265                

|                                         | Due in                
|---------------------------------------- | ----------------------
|                                         | 6 Monthsor Less       
|                                         | (Dollars in Thousands)
|                                         |                       
|Held-to-Maturity                         |                       
|Federal Home Loan Mortgage Corporation   | $ ---                 
|Federal National Mortgage Association    | ---                   
|                                         |                       
|Available-for-Sale                       |                       
|Government National Mortgage Association | ---                   
|                                         |                       
|Total                                    | $ ---                 

***Consumer Lending*.**
      Federal laws and regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans (First Federal generally discourages
unsecured lending) up to a regulatory-defined maximum of 35% of their total assets less permissible
investments in commercial paper and corporate debt.  At September 30, 2001, such regulatory-defined consumer loans represented approximately 21.2% of First Federal's total assets.  In addition,
federal thrift institutions have lending authority above the 35% limit for certain consumer loans such
as home improvement loans, mobile home loans, credit card loans and educational loans.  First
Federal generally discourages unsecured loans, or loans secured by "soft collateral" such as
inventory, accounts receivable and special-purpose equipment except where the borrower is credit-worthy and the loan is partially guaranteed by the SBA.

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

First Federal currently originates substantially all of its consumer loans in its primary market
area.  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.  In June,
2000, First Federal discontinued the origination of indirect automobile loans through its Second
Chance Auto Lending Program, although it continues to originate a limited amount of indirect
automobile loans through selected dealers.  At September 30, 2001, $1.5 million of our total
automobile loans were originated through selected dealers outside of the Second Chance Auto
Lending Program.

In December 1995, First Federal expanded its auto lending program by initiating a credit-default insured indirect automobile loan origination program for borrowers with less than prime
credit, and involving automobile dealers selected by First Federal and located in the area  bordered
by Houston, Austin, San Antonio and Dallas.  Automobile dealers
that sold loans pursuant to this Second Chance Auto Lending Program were not required to establish
dealer reserves pursuant to their Dealer Agreement; however, the loan amount of the automobile
sales contract was generally discounted from the dealer by First Federal  prior to purchase.

The Second Chance Auto Lending Program was underwritten according to the
credit-underwriting guidelines developed by First Federal and agreed to by First Federal's credit-default insurer.  Prior to this program being discontinued, Second Chance Auto Loans were insured
by The Royal & Sun Alliance Company ("Royal") (which carries a rating of A-1 "Superior" by A.M.
Best's, an insurance rating company) for credit-default by the borrower up to $6,000 per loan in the
event there is a deficiency between the unpaid balance of the loan and the resale price of the
repossessed vehicle.  At September 30, 2001, $497,000 of First Federal's Second Chance Auto
Loans were insured by other insurers subject to their limitations, if any.

At September 30, 2001, Second Chance Auto Loans totaled $7.9 million (including $2.4
million of Second Chance Auto Loans held for sale) and were secured by 1,213 automobiles.  Total
automobile loans, including loans held for sale, totaled $14.3 million or approximately 21.2% of
First Federal's gross loan portfolio.

Consumer loans may entail greater risk than do residential mortgage loans, particularly
consumer loans that are secured by rapidly depreciable assets such as automobiles.  First Federal
makes a very limited amount of unsecured loans, which entail an even greater risk.  Any repossessed
collateral for a defaulted consumer loan may not always provide an adequate source of repayment
of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation
of the vehicle or other collateral.  In certain circumstances, such as the borrower filing Chapter 7
bankruptcy or First Federal being unable to locate the borrower, the remaining deficiency may not
warrant further substantial collection efforts against the borrower.  In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and thus, are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the
application of various federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans.  Such loans may also give rise
to claims and defenses by a borrower against an assignee of the loan, who may then be able to assert
against the assignee, the  claims and defenses that he or she has against the seller of the underlying
collateral.  Consumer loan delinquencies may increase over time as the loans age.  Lastly, there can
be no assurance that First Federal can collect any amount due under the applicable insurance policy.

At September 30, 2001, 1.03% of First Federal's consumer loans were considered non-performing assets because they were past-due over 90 days.  There can be no assurance that First
Federal's consumer loan delinquencies and repossessions will not increase in the future.

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

Construction loans to individuals for their residences generally have terms of nine months
and are usually made on a non-amortizing (interest only, payable monthly), balloon basis, to be
repaid from the permanent mortgage loan when the construction is completed.  First Federal's
construction loans are generally made either as the initial stage of a combination loan (i.e., with a
commitment from First Federal to provide permanent financing upon completion of the project) or
with a takeout obligation (commitment to provide permanent financing by a third party lender).
Residential construction loans are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans.  At September 30, 2001, First Federal had $6.3 million in
residential construction loans, of which $1.2 million are to borrowers who have indicated to First
Federal that they intend to live in the properties upon completion of construction.

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

***Commercial Real Estate Lending.***  In order to enhance the yield of its assets, First Federal
originates a limited amount of construction and permanent loans secured by commercial real estate.
First Federal's permanent commercial real estate loan portfolio includes loans secured by churches,
small office buildings, and other small business properties. First Federal generally makes only
commercial real estate loans secured by income producing property, and discourages large
commercial real estate loans.  At September 30, 2001, First Federal had two commercial real estate
loans in excess of $500,000 that were secured by income-producing properties.  These loans were
originated in September 2001 and February 1999, had balances of $526,000 and $681,000,
respectively, at September 30, 2001 and are performing in accordance with their loan repayment
terms.

The following table presents information as to the locations and types of properties securing
First Federal's commercial real estate loans at September 30, 2001.

|                            | NumberofLoans          | PrincipalBalance
|--------------------------- | ---------------------- | ----------------
|                            | (Dollars in Thousands)
|Bryan-College Station area:
|Churches                    | 8                      | $1,018          
|Land                        | 34                     | 2,096           
|Multi-family residential    | 2                      | 602             
|Retail                      | 13                     | 1,731           
|Office                      | 2                      | 322             
|Other                       | 3                      | 325             
|Total                       | 62                     | $6,094          

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

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

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

***Commercial Business and SBA Lending.***     First Federal engages in a limited amount of
commercial business lending, primarily to small businesses. These loans are generally made with
adjustable interest rates, in order to limit interest rate risk.  Many of these loans are SBA guaranteed
and First Federal generally sells the guaranteed portion of the loan.  The SBA guarantees up to 90%
of the loan amount, which is backed by the full faith and credit of the U.S. Government.  This
guaranty generally ranges from 75% to 90% of the loan amount up to a maximum guaranteed loan
amount of $750,000 subject to the type and term of the loan.  The terms of these SBA loans generally
range from five to seven years for working capital loans and up to 25 years for loans secured by
income-producing real estate.  Interest rates for loans with maturities less than seven years cannot
exceed 2.25% over WSJ Prime, and for those over seven years, 2.75% of WSJ Prime.  These loans
are attractive to borrowers because of the extended loan maturities and to the Bank, as lender, as the
interest rates adjust and because the guaranteed portion of the loan can be sold in the secondary
market.  At September 30, 2001, First Federal had $4.9 million or 7.25% of First Federal's gross
loan portfolio in commercial business loans outstanding of which $652,000 represented the
unguaranteed portion of SBA loans.  As of the same date, First Federal's largest commercial business
loan was a $567,000 loan for the operation of a car wash.  The next three largest commercial
business loans were a $495,000 floor plan line of credit to an automobile dealer secured by vehicles,
a $489,000 loan to a restaurant located in Bryan, Texas, and a $416,000 loan for a commercial office
building located in College Station, Texas.  There were no other commercial real estate loans in excess of $400,000.    Each of these loans are performing in accordance with
their respective loan repayment terms.  First Federal discourages large commercial business lending
because of the larger risk exposure to the Bank's capital if such loans do not perform.

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

**Loan Delinquencies; Nonperforming Assets and Classified Assets**

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

The following table sets forth information concerning delinquent mortgage and other loans
at September 30, 2001 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.

|                         | Loans Delinquent at September 30,2001
|------------------------ | -------------------------------------
|                         | 30-89 Days                           
|                         | (Dollars in Thousands)               
|Residential Real Estate:
|Number of loans          | 4                                    
|Amount                   | $   301                              
|Percent of total loans   | 0.73%                                
|                         |                                      
|Commercial Real Estate:  |                                      
|Number of loans          | ---                                  
|Amount                   | ---                                  
|Percent of total loans   | ---                                  
|                         |                                      
|Consumer:                |                                      
|Number of loans          | 179                                  
|Amount                   | $1,369                               
|Percent of total loans   | 8.84%                                
|                         |                                      
|Total:                   |                                      
|Number of loans          | 183                                  
|Amount                   | $1,670                               
|Percent of total loans   | 2.47%                                

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

|                                                                 | September 30,         
|---------------------------------------------------------------- | ----------------------
|                                                                 | 2001                  
|                                                                 | (Dollars in Thousands)
|Non-accruing loans:                                              |                       
|Residential                                                      | $    52               
|Consumer                                                         | 46                    
|Total                                                            | 98                    
|                                                                 |                       
|Accruing loans delinquent more than    90 days:                  |                       
|Residential                                                      | 460                   
|Commercial Real Estate                                           | ---                   
|Consumer                                                         | 114                   
|Total                                                            | 574                   
|                                                                 |                       
|Foreclosed assets:                                               |                       
|Residential(1)                                                   | 691                   
|Commercial real estate                                           | ---                   
|Other Repossessed Assets (Vehicles)(1)                           | 469                   
|Total                                                            | 1,160                 
|                                                                 |                       
|Total non-performing assets                                      | $1,832                
|Total as a percentage of  total assets          at end of period | 2.19%                 

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

For the most part, nonperforming assets at September 30, 2001, consisted of foreclosed assets totaling $1.2 million.  Foreclosed assets consisted of six residential loans and repossessed vehicles.
Most of the loans on repossessed vehicles were made through the Second Chance Auto Lending
Program, which has been terminated.

As of September 30, 2001, 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.

Interest income recognized relative to non-performing loans during the year ended
September 30, 2001 was not material.

***Other Loans of Concern.***  As of September 30, 2001 there was an aggregate of $1.8 million
of loans which known information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have some questions and/or doubts as
to the ability of the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such items in the nonperforming assets categories.  Of these loans,
however, $143,000 were considered to be classified under federal regulations as substandard at
September 30, 2001.

***Classified Assets.***  Federal regulations require that each insured institution classify its own
assets on a regular basis.  First Federal classifies its assets no less than quarterly.   In addition, in
connection with examinations of insured institutions, the OTS has authority to identify problem
assets and, if appropriate, require them to be classified.  There are three classifications for problem
assets: substandard, doubtful and loss.  "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected.  "Doubtful" assets have the weaknesses of substandard assets, with
the additional characteristics that the weaknesses make collection or liquidation in full on the basis
of currently existing facts, conditions and values questionable, and there is a high possibility of loss.
An asset classified as "loss" is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted.  Assets classified as "substandard" or "doubtful" require the
institution to establish general allowances (reserves) for possible loan losses.  If an asset or portion
thereof is classified as "loss," the institution must either establish specific allowances (reserves)
for loan losses in the amount of 100% of the portion of the asset classified as "loss," or charge-off such
amount.  General loss allowances established to cover possible losses related to assets classified as
"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 assets of any concern with senior management and
applicable loan collection personnel, to determine which assets should be classified under applicable
regulations.  Classified assets, as described above, of First Federal at September 30, 2001 were as
follows:

|               |        | (In Thousands)
|-------------- | ------ | --------------
|Substandard(1) | $1,505
|Doubtful       | ---   
|Loss           | 55    
|Total          | $1,560

______________(1)	Includes $345,000 of "substandard loans" and also repossessed real estate (six residential loans) and
repossessed vehicles awaiting sale.

**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 specific 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.

Because some loans may not be repaid in full, the Company has established an allowance for
loan losses.  Increases to the allowance are recorded by a provision for loan losses charged to
expense.  Estimating the risk of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered adequate to cover
probable losses that are currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their financial position and
collateral values, and other factors and estimates that are subject to change over time.  While
management may periodically allocate portions of the allowance for specific problem loan situations,
the whole allowance is available for any loan charge-offs that occur.  A loan is charged-off against
the allowance by management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.

The Company measures impaired loans based on the present value of expected cash flows
discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of collateral if the loan is collateral dependent.  Loans considered to
be impaired are reduced to the present value of expected future cash flows or to the fair value of
collateral, by allocating a portion of the allowance for loan losses to such loans.  If these allocations
cause the allowance for loan losses to be increased, such increase is reported as a provision for loan
losses.

Smaller balance homogeneous loans include residential first mortgage loans secured
by one-to-four-family residences, residential construction loans, and consumer loans and are
evaluated collectively for impairment.  Commercial real estate loans are evaluated individually for
impairment.  Normal loan evaluation procedures, as described in the second preceding paragraph,
are used to identify loans that must be evaluated for impairment.  In general, loans classified as
"doubtful" or "loss" are considered impaired while loans classified as "substandard" are individually
evaluated for impairment.  Depending on the relative size of the credit relationship, late or
insufficient payments of 30 to 90 days will cause management to reevaluate the credit under its
normal loan evaluation procedures.   While the factors that identify a credit for consideration for
measurement of impairment or nonaccrual are similar, the measurement considerations differ.  A
loan is impaired when the economic value estimated to be received is less than the value implied in
the original credit agreement.  A loan is placed in nonaccrual when payments are more than 90 days
past due unless the loan is adequately collateralized and in the process of collection.  Although
impaired loan and nonaccrual loan balances are measured differently, impaired loan disclosures do
not differ significantly from nonaccrual and renegotiated loan disclosures.

Prior to fiscal year 2000, the Bank did not provide an allowance for anticipated loan losses
on Second Chance Auto Loans.  Management fully expected to collect any potential losses from the
credit default insurance coverage, based on their interpretation of the policy coverage and based upon
the expected recovery value of the vehicles.  During the year ended September 30, 2000, both the
insurance reimbursement realized on the repossessed vehicles and the actual recovery value of the
vehicles were lower than expected, resulting in actual losses that were greater than anticipated.  The
allowance for loan losses is now calculated taking into account the recent loss experience associated
on the Second Chance Auto Loans.  This change has resulted in a greater charge-off to the allowance
and an increase in the provision for loan losses.   During the year ended September 30, 2001, the
Company's allowance for loan losses remained relatively the same as in 2000.

In addition, because of the uncertainty of the fair value of the cars and collectability of
insurance in some cases, the Company also has allowances established for repossessed assets and
insurance claims.  Automobiles acquired through repossession are carried at the lower of cost or fair
value (including estimated insurance reimbursements) less estimated costs to sell and expenses for
repairs.  Credit-default insurance claims are carried at the amount for which the claim was filed.
Losses on disposition, including expenses incurred in connection with the disposition, and
uncollected insurance claims, are charged to operations.  Valuation allowances are recognized when
the fair value (including estimated insurance reimbursements) less estimated costs to sell the
repossessed asset or the insurance claim receivable is determined to be less than carrying value of
the asset.  Changes in the valuation allowance are charged or credited to income.

Real estate owned acquired through foreclosure and similar proceedings is carried at the
lower of cost or fair value less estimated costs to sell.  Losses on disposition, including expenses,
incurred in connection with the disposition, are charged to operations.  Valuation allowances are
recognized when the fair value less estimated selling expenses is determined to be less than the cost
of the asset.  Changes in the valuation allowance are charged or credited to income.

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

|                                                                                             | Year Ended September 30,
|-------------------------------------------------------------------------------------------- | ------------------------
|                                                                                             | 2001                    
|                                                                                             | (Dollars in Thousands)  
|                                                                                             |                         
|Balance at beginning of period                                                               | $415                    
|Charge-offs                                                                                  | (367)                   
|Recoveries                                                                                   | 45                      
|Provisions for losses on loans                                                               | 324                     
|Balance at end of period                                                                     | $417                    
|                                                                                             |                         
|Ratio of net charge-offs during the period to
   average loans outstanding during the period | .48%                    

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

|            | September 30,
|----------- | -------------
|            | 2001         
|            | Amount       
|            |              
|Real Estate | $182         
|Other       | 235          
|Total       | $417         

**Investment Activities**

First Federal must maintain a sufficient level of liquid assets to ensure its safe and sound
operation.  Historically, the Company has maintained liquid assets at levels above the minimum
requirements imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and potential deposit
outflows.  Cash flow projections are regularly reviewed and updated to assure that adequate liquidity
is maintained.  At September 30, 2001, First Federal's  liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was 5.81%.

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

The Company's liquid assets (other than loans, mortgage-backed securities receivable, and
non-interest bearing deposits with the Federal Reserve Bank of Dallas), are invested primarily in
interest-bearing deposits with the Federal Home Loan Bank of Dallas ("FHLB of Dallas"), a mutual fund and Federal Home Loan Bank ("FHLB") stock.

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

|                                   | At September 30,
|---------------------------------- | ----------------
|                                   | 2001            
|                                   | BookValue       
|                                   |                 
|Interest-bearing deposits          | $1,102          
|Mutual fund                        | 8,243           
|FHLB stock                         | 458             
|                                   |                 
|Total liquid assets and FHLB stock | $9,803          

***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, money market
deposit accounts, fixed interest rate certificates of deposit with varying maturities, and $90,000 or
above jumbo certificates of deposit.  At September 30, 2001, First Federal had $22.0 million in
checking and money market accounts.

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

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

|                            | Year Ended September 30,
|--------------------------- | ------------------------
|                            | 2001                    
|                            | (Dollars in Thousands)  
|                            |                         
|Opening balance             | $73,686                 
|Net deposits (withdrawals)  | (48)                    
|Interest credited           | 2,544                   
|                            |                         
|Ending balance              | $76,182                 
|                            |                         
|Net increase (decrease)     | $ 2,496                 
|                            |                         
|Percent increase (decrease) | 3.39%                   

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.

|                                    | At September 30,      
|----------------------------------- | ----------------------
|                                    | 2001                  
|                                    | Amount                
|                                    | (Dollars in Thousands)
|Certificate Accounts:               |                       
|                                    |                       
|0.00- 2.99%                         | $      56             
|3.00- 4.99%                         | 20,717                
|5.00- 6.99%                         | 27,630                
|7.00- 8.99%                         | 1,541                 
|Total Certificate Accounts          | 49,944                
|                                    |                       
|Other Accounts:                     |                       
|                                    |                       
|Passbook Accounts                   | 4,264                 
|NOW Accounts                        | 12,854                
|Money Market Accounts               | 4,219                 
|Commercial Checking Accounts        | 2,088                 
|Other non-interest bearing accounts | 2,813                 
|Total Other Accounts                | 26,238                
|Total Deposits                      | $76,182               

At September 30, 2001 scheduled maturities of certificates of deposit were as follows.

|            | At September 30,
|----------- | ----------------
|            | 2002            
|0.00- 2.99% | $     11        
|3.00- 4.99% | 16,695          
|5.00- 6.99% | 21,691          
|7.00- 8.99% | 438             
|Total       | $38,835         

The following table indicates the amount of First Federal's certificates of deposit by time
remaining until maturity as of September 30, 2001.

|                                            | Maturity              
|------------------------------------------- | ----------------------
|                                            | 3 Months or Less      
|                                            | (Dollars in Thousands)
|                                            |                       
|Certificates of deposit less than $100,000  | $ 9,289               
|Certificates of deposit of $100,000 or more | 1,611                 
|Total                                       | $10,900               

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

On April 1, 1998, the Holding Company issued $3,629,000 of 111⁄2% 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. The Debentures require quarterly interest payments of approximately
$105,000.

The Holding Company is dependent on dividends from the Bank in order to pay the interest
on the Debentures, and its operating expenses.  First Federal must obtain prior approval of the OTS
before declaring any dividends.  The OTS has approved the payment of dividends to the Holding Company which should permit the Holding Company to make interest
payments and cover foreseeable operating expenses through September 30, 2002.  See "Regulation - Limitations on Dividends and Other Capital
Distributions"  and "Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources."

For additional information relating to borrowings, see Notes 8 and 16 to the Notes  to
Consolidated Financial Statements of the Company filed as Item 7 to this Form 10-KSB.

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

|                 | Year Ended September 30,
|---------------- | ------------------------
|                 | 2001                    
|                 | (In Thousands)          
|Maximum Balance: |                         
|FHLB advances    | $3,000                  
|Debentures       | 3,629                   
|                 |                         
|Average Balance: |                         
|FHLB advances    | $   342                 
|Debentures       | 3,629                   

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

|                                                | September 30, 
|----------------------------------------------- | --------------
|                                                | 2001          
|                                                | (In Thousands)
|                                                |               
|FHLB advances                                   | $     ---     
|Debentures                                      | 3,629         
|Total borrowings                                | $3,629        
|                                                |               
|Weighted average interest rate of FHLB advances | ---%          
|Weighted average interest rate on Debentures    | 11.50%        

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 their 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
and has no material assets or liabilities.  In 1999, the Holding Company organized Best of Texas,
Inc., a proposed used car dealership organized for the purpose of selling used cars, including First
Federal's repossessed vehicles.  This corporation is currently inactive and has no material assets or
liabilities.  See "Regulation - Federal Regulation of Thrift Institutions."

**REGULATION**

**General**

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

**Federal Regulation of Thrift Institutions**

The OTS has extensive authority over the operations of thrift institutions.  As part of this
authority, First Federal is required to file periodic reports with the OTS and is subject to periodic
examination by the OTS and the FDIC.  The last regular OTS examination of First Federal began
August 13, 2001, and was concluded on September 7, 2001, for books and records as of June 30,
2001.  Under agency scheduling guidelines, it is likely that another examination will be initiated
within 12 months of the last exam.  When these examinations are conducted by the OTS and the
FDIC, the examiners may require First Federal to provide for higher general or specific loan loss
reserves.  All thrift institutions are subject to a semi-annual assessment, based upon the thrift
institution's total assets, to fund the operations of the OTS.  First Federal's OTS assessment for the
expense of examinations for the fiscal year ended September 30, 2001, was $36,000.

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, 2001, First Federal's legal lending limit under this restriction
was $753,000.  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 U.S. government.  As insurer, the FDIC imposes deposit insurance premiums and is authorized
to conduct examinations of and to require reporting by FDIC-insured institutions.  It also may
prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF.  The FDIC also has the authority
to initiate enforcement actions against thrift institutions, after giving the OTS an opportunity to take
such action, and may terminate the deposit insurance if it determines that the institution has engaged
in unsafe or unsound practices or is in an unsafe or unsound condition.

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

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

The premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis
points.  However, SAIF insured institutions and BIF insured institutions are required to pay a
Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s.  This amount is currently equal to about 1.88 points for each $100 in domestic
deposits for SAIF and BIF insured institutions.  These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature in 2017 through 2019.

**Supervisory Agreement**

The OTS, during an OTS examination completed in June, 2000, determined that the Bank
required special supervisory attention primarily due to its Second Chance Auto Lending Program.
The OTS formally designated the Bank to be in "troubled condition" and a "problem association"
due to its total capital to risk-weighted assets ratio being only marginally above the minimum
required amount after taking into account the losses associated with repossessed automobiles and
the increase in the allowance for loan losses related to its Second Chance Auto Lending Program.
This designation subjected the Bank to growth restrictions that limited any increase in total assets
during any quarter in excess of an amount equal to interest credited on deposits during the quarter
without the prior written approval of the OTS, prior OTS review of all executive compensation,
prior notice to OTS of all  transactions between the Bank and its affiliates, such as the Holding
Company, and receipt of OTS approval prior to paying a dividend from the Bank to the Holding
Company.  On March 2, 2001, the OTS notified the Bank that it was no longer designated to be in
"troubled condition" and a "problem association."

As a result of the OTS examination, however, the OTS required the Bank to enter into a
Supervisory Agreement on September 22, 2000.  The Supervisory Agreement generally addresses
the development and implementation of actions, plans, policies and procedures to improve the
operations and financial condition of the Bank, particularly in the areas of management, asset quality,
dispositions of assets, director and executive officer compensation and transactions with affiliates
and subsidiaries.  In particular the board of directors of the Bank was directed to increase its
participation in the affairs of the Bank and assume full responsibility for compliance with the
Supervisory Agreement.  The various plans, policies and procedures developed by the Bank have
been approved by the OTS except as noted below.

The Supervisory Agreement also required the Bank to submit a written business plan by
September 30, 2000, subject to the approval of the OTS, that covers the overall operation of the
Bank and sets forth (i) the Bank's plans to achieve "well capitalized" status by March 31, 2001; (ii)
a contingent capital plan to increase capital to avoid undercapitalization; (iii) strategies to reduce
non-interest expenses, especially general and administrative expenses; (iv) the development of
profitable lines of business; and (v) strategies for enhancing the viability of the North Bryan branch.
The OTS approved the Business Plan, however, there can be no assurance that each element
of the plan will be successfully completed.

Management believes that the Bank is currently in substantial
compliance with the Supervisory Agreement.  Compliance with the Supervisory
Agreement, however, is subject to a determination of compliance by the OTS at the time of the
Bank's next examination, and therefore no assurance can be given that the Bank will be in
compliance with the Supervisory Agreement.

The Supervisory Agreement will remain in effect until modified, terminated or suspended
by the OTS. A failure to comply with the Supervisory Agreement could result in the initiation of a
formal enforcement action by the OTS, including the imposition of civil money penalties.

**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, 2001, the Bank did not have any intangible assets.

The OTS regulations establish special capitalization requirements for thrift institutions that
own subsidiaries.  In determining compliance with the capital requirements, all subsidiaries engaged
solely in activities permissible for national banks or engaged in certain other activities solely as agents
for their 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, 2001.

At September 30, 2001, First Federal had tangible capital of $5.0 million, or 6.01% of
adjusted total assets, which is approximately $3.7 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.  At September 30, 2001, First Federal had core
capital equal to $5.0 million, or 6.01% of adjusted total assets, which is $2.5 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, 2001, First Federal had no
capital instruments that qualify as supplementary capital and $362,000 of general loss reserves,
which was less than 1.25% of risk-weighted assets.

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.

On September 30, 2001, First Federal had total capital of $5.4 million and risk-weighted
assets of $39.2 million, or total capital of 9.1% of risk-weighted assets.  This amount was $639,000
above the 8% requirement in effect on that date, however, this amount was $544,000 below the 10%
well capitalized requirement in effect on that date.  See "- Supervisory Agreement".

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, 2001, First Federal fell within the regulatory definition of "adequately capitalized."

**Limitations on Dividends and Other Capital Distributions**

The OTS imposes various restrictions on savings institutions with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.  The OTS also prohibits a savings
institution from declaring or paying any dividends or from repurchasing any of its stock if, as a result
of such action, the regulatory capital of the institution would be reduced below the amount required
to be maintained for the liquidation account established in connection with the institution's mutual
to stock conversion.

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

**Liquidity**

All savings associations, including First Federal, are required to maintain a sufficient level
of liquid assets to ensure their safe and sound operation.  For a discussion of what First Federal
includes in liquid assets, see "Item 6 - Management's Discussion and Analysis or Plan of Operation --
Liquidity and Capital Resources."

**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 of 1986, as amended (the "Code").  Under either test, such assets primarily consist of residential housing related
loans and investments.  At September 30, 2001, 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 Bank Insurance Fund ("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.  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 2000 and received a rating of
satisfactory.

**Transactions with Affiliates**

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

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

**Holding Company Regulation**

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

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

If First Federal fails the QTL test, the Holding Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other subsidiaries, any business activity
other than those approved for multiple savings and loan holding companies or their subsidiaries.  In
addition, within one year of such failure the Holding Company must register as, and will become
subject to, the restrictions applicable to bank holding companies.

**Federal Securities Law**

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

The Holding Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Holding Company may not be resold without registration or unless
sold in accordance with certain resale restrictions.  If the Holding Company meets specified current
public information requirements, each affiliate of the Holding Company is able to sell in the public
market, without registration, a limited number of shares in any three-month period.

**Federal Reserve System**

The Federal Reserve Board requires all depository institutions to maintain noninterest bearing
reserves at specified levels against their transaction accounts (primarily checking and NOW checking
accounts).  At September 30, 2001, First Federal was in compliance with these reserve requirements.

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, 2001, First Federal had $458,000 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 5.95% and were 4.99% for fiscal year
2001.

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, 2001, dividends paid by the FHLB of Dallas to First
Federal totaled $22,000, which constitute a $10,000 decrease from the amount of dividends received
in fiscal year 2000.

**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 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, 2001, First Federal had approximately $514,000 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, 2001, the portion of First Federal's reserves subject
to this treatment for tax purposes totaled approximately $643,000.

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

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

**Employees**

At September 30, 2001, the Company had a total of 42 full-time and 5 part-time employees.
None of the Company's employees are represented by any collective bargaining agreement.
Management considers its employee relations to be good.

**Item 2.  Description of Property**

**Offices**

First Federal owns the building and land for the Holding Company and its executive office
at 2900 Texas Avenue, Bryan, Texas.  This office now has approximately 8,700 square feet and is
situated on almost an acre of land with over 200 feet of frontage situated on the principal
thoroughfare in Bryan-College Station.  The depreciated net book value of this office and land (with
recent improvements) was $691,000 at September 30, 2001.

First Federal also opened and owns a branch office at 2202 Longmire in College Station,
Texas in March of 1994.  The office has approximately 2320 square feet and is situated on almost
two acres of land.  The book value of this office and land was $311,000 at September 30, 2001.

First Federal also acquired in fiscal 1998 approximately one acre of land at 1500 N. Texas
Avenue, Bryan, Texas, as the site for its north Bryan full-service branch.  It opened in June 1998,
with a special bank modular facility pending construction of the permanent facility, which was
completed in December, 1999.  The book value of this office and land was $583,000 at
September 30, 2001.

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, 2001 was $111,000.

**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 quarter ended September 30, 2001.



**Item 5.  Market for Common Equity and Related Stockholder Matters**

**Market Information**

The Holding Company's common stock is listed on the OTC Electronic Bulletin Board under
the symbol "BCSF."

The following table sets forth the high and low bid prices of the Holding Company's
common stock for the periods indicated.  The information in the table below was provided by the
OTC Electronic Bulletin Board.  The information reflects inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.  The Holding Company's common stock is not regularly and actively traded, and there are no regularly quoted bid and asked prices for the Holding Company's common stock.

|               | Fiscal 2001 | Fiscal 2000
|-------------- | ----------- | -----------
|               | High        | Low        
|               |             |            
|First Quarter  | $4.88       | $4.88      
|Second Quarter | 4.88        | 4.88       
|Third Quarter  | 4.88        | 4.88       
|Fourth Quarter | 4.88        | 4.88       

At December 31, 2001 there were 569 holders of the Holding Company's common stock and
471,411 shares of common stock issued and outstanding.  At December 31, 2001, the last known
sales price of the Holding Company's common stock was $4.88 per share.

The Holding Company pays dividends upon the determination of the Board of Directors in
its discretion that such payment is consistent with the long-term interests of the Company.  The
factors affecting this determination include the Company's consolidated financial condition and
results of operations, tax considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other relevant factors.  The Holding Company did not
declare cash dividends on its common stock during fiscal years 2001 and 2000.  However, First
Federal paid an aggregate of $87,000 in quarterly cash dividends on its preferred stock in fiscal year 2001.

First Federal may not declare or pay a cash dividend or repurchase shares of its stock if the
effect thereof would be to cause its regulatory capital to be reduced below the amount required for
the liquidation account or to meet applicable regulatory capital requirements.  Federal regulations
limit the Bank's capital distributions such that the proposed distribution, combined with dividends
already paid for the year, does not exceed its net income for the calendar year- to- date plus retained
net income for the previous two years.  The Bank must obtain the prior approval of the OTS before
declaring any dividends.

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

**General**

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

The Company is headquartered in Bryan, Texas and operates through its principal operating
subsidiary First Federal.  First Federal's major goals are to provide high quality full-service "niche"
retail banking on a profitable basis to primarily the middle-class and blue-collar population through
its offices located in Bryan-College Station, Texas.  First Federal intends to continue to focus
primarily on one-to four-family residential loans, and to a lesser degree on direct consumer
automobile and personal loans, home improvement loans, residential construction loans, and small
to medium size commercial business loans.  In addition, First Federal seeks to continue maintaining
and improving its asset quality and continuing to minimize to the extent possible, its vulnerability
to changes in interest rates in order to continue to maintain an attractive spread between its average
yield on loans and securities and its average cost of interest paid on deposits and borrowings.

First Federal's net interest income has historically been dependent largely upon the difference
("spread") between the average yield earned primarily on loans, and to a much lesser extent
mortgage-backed securities and other securities ("interest-earning assets") and the average interest
rate paid on savings and other deposits and borrowings ("interest-bearing liabilities"), as well as the
relative amounts of such assets and liabilities.  The interest rate spread between interest-earning
assets and interest-bearing liabilities is impacted by several factors, including economic and
competitive conditions that influence interest rates, loan demand, deposit flows, regulatory
developments and the types of assets and liabilities on its balance sheet.  At September 30, 2001,
2000 and 1999, the Company's interest rate spread was 4.52%, 5.26% and 4.84%, respectively.

Like all financial institutions, First Federal has always been subject to interest rate risk
because its interest-bearing liabilities (primarily deposits) mature or reprice at different times, or on
a different basis than its interest-earning assets (primarily loans).  First Federal's net income is also
affected by gains and losses on the sale of loans, loan servicing rights and investments, provision for
loan losses, and other losses on repossessed assets and insurance claims, service charge fees, loan
servicing income, fees for other financial services rendered, operating expenses and income taxes.

Since 1991, First Federal has relied primarily on its noninterest income for net income.
While First Federal's noninterest income has been a relatively steady source of income, it is highly
dependent upon the ability of First Federal to originate loans and realize profits on the sale of loans,
loan participations and related servicing rights to the secondary market and to increase its service
charges, and fee income from checking accounts.

**Asset/Liability Management**

First Federal, like all financial institutions, is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice more rapidly, or on a different basis, than its
interest-earning assets, some of which may be longer term or fixed interest rate.  Loans maturing
within five years total $44.6 million or 66.0% of total loans, while loans maturing over five years
total $23.0 million or 34.0% of total loans.  As a continuing part of its financial strategy, First
Federal continually considers methods of managing any such asset/liability mismatch, consistent
with maintaining acceptable levels of net interest income.

In order to monitor and manage interest rate sensitivity and interest rate spread, First Federal
created an Asset/Liability Committee ("ALCO"), composed of its President, Executive Vice
President, Senior Vice President/Accounting and three outside directors.  The responsibilities of the
ALCO are to assess First Federal's asset/liability mix and recommend strategies that will enhance
income while managing First Federal's vulnerability to changes in interest rates.

First Federal's asset/liability management strategy has two goals.  First, First Federal seeks
to build its net interest income and noninterest income while adhering to its underwriting and lending
guidelines.  Second, and to a lesser extent, First Federal seeks to increase the interest rate sensitivity
of its assets and decrease the interest rate sensitivity of its liabilities in order to reduce First Federal's
overall sensitivity to changes in interest rates.  First Federal places its primary emphasis on
maximizing net interest margin, while striving to better match the interest rate sensitivity of its assets
and liabilities.  There can be no assurance that this strategy will achieve the desired results and will
not result in substantial losses in the event of an increase in interest rate risk.

As part of this strategy, management has continued to emphasize growth in
noninterest-bearing deposits such as checking accounts or lower interest-bearing savings deposits
by offering full-service retail banking.  In order to minimize the possible adverse impact that a rise
in interest rates may have on net interest income, First Federal has developed several strategies to
manage its interest rate risk.  Primarily, First Federal is currently  selling all newly-originated one- to
four-family residential mortgage loans, which are saleable in the secondary market and most of
which are long-term fixed-rate loans.  In addition, First Federal currently offers three-year fixed rate
balloon loans and other adjustable rate loans and relatively short-term consumer loans, giving First
Federal an opportunity to reprice its loans on a more frequent basis.

**Net Portfolio Value**

Senior management and the Board of Directors review First Federal's exposure to interest
rate risk on a quarterly basis.  The interest rate risk is measured by computing estimated changes in
net interest income and the net portfolio value of cash flows from assets, liabilities and off-balance
sheet items within a range of assumed changes in market interest rates.  If estimated changes to net
portfolio value and net interest income are not within the limits established by the Board, the Board
may direct management to adjust First Federal's asset and liability mix to bring interest rate risk
within Board approved limits.  The Board limits have been established with consideration of the
dollar impact of various rate changes and First Federal's capital position.

The balance sheet consists of investments in interest-earning assets, primarily loans, which
are primarily funded by interest-bearing liabilities, deposits and borrowings.  These financial
instruments have varying levels of sensitivity to changes in market interest rates, resulting in market
risk.  Other than loans that are originated and held for sale, all of our financial instruments are for
other than trading purposes.  First Federal is subject to interest rate risk to the extent that its interest-bearing liabilities with short and intermediate-term maturities reprice more rapidly, or on a different
basis, than its interest-earning assets.

Presented below, as of September 30, 2001, is an analysis of First Federal's interest rate risk
as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in
100 basis point increments, up and down 300 basis points in accordance with OTS regulations.  As
illustrated in the table, NPV is more sensitive to rising rates than declining rates.  This occurs
principally because, as rates rise, the market value of fixed-rate loans declines due to both the rate
increase and slowing prepayments.  When rates decline, First Federal does not experience a
significant rise in market value for these loans because borrowers prepay at relatively high rates.
OTS assumptions are used in calculating the amounts in this table.

|Change inInterest Rate | Estimated | At September 30, 2001
|---------------------- | --------- | ---------------------
|(Basis Points)         | NPV       | $ Change             
|(Dollars in Thousands)
|                       |           |                      
|+300                   | $7,811    | $(1,372)             
|+200                   | 8,457     | (726)                
|+100                   | 8,908     | (275)                
|0                      | 9,183     | 0                    
|-100                   | 9,407     | 224                  
|-200                   | 9,627     | 444                  
|-300                   | n/m(1)    | n/m(1)               

In evaluating First Federal's exposure to interest rate risk, certain shortcomings inherent in
the method of analysis presented in the foregoing tables must be considered.  For example, although
certain assets and liabilities may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on
other types may lag behind changes in market rates.  Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed
in calculating the table.  For example, projected passbook, money market and checking account
maturities may also materially change if interest rates change.  Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.  First Federal considers
all of these factors in monitoring its exposure to interest rate risk.

**Average Balances, Interest Rates and Yields**

The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average interest-bearing liabilities and the interest rates, expressed both in dollars
and rates and the net interest margin.  No tax equivalent adjustments were made.  The yield includes fees which are considered adjustments
to yields.

|                                                             | For the Fiscal Year Ended September 30,
|------------------------------------------------------------ | ---------------------------------------
|                                                             | 2001                                   
|                                                             | AverageOutstandingBalance              
|                                                             | (Dollars in Thousands)                 
|Interest-earning assets:                                     |                                        
|Loans receivable, net                                        | $67,259                                
|Securities                                                   | 6,315                                  
|Interest bearing deposits        with Federal Home Loan Bank | 2,180                                  
|Other interest-earning assets                                | 501                                    
|                                                             |                                        
|Total interest-earning assets                                | 76,255                                 
|                                                             |                                        
|Noninterest-earning assets                                   | 7,441                                  
|                                                             |                                        
|Total assets                                                 | $83,696                                

|                                                                       | For the Fiscal Year Ended September 30,
|---------------------------------------------------------------------- | ---------------------------------------
|                                                                       | 2001                                   
|                                                                       | AverageOutstandingBalance              
|                                                                       | (Dollars in Thousands)                 
|Interest-bearing liabilities:                                          |                                        
|Deposits                                                               | $70,366                                
|FHLB advances                                                          | 342                                    
|Notes payable                                                          | 3,629                                  
|Total interest-bearing liabilities                                     | 74,337                                 
|                                                                       |                                        
|Other liabilities(2)                                                   | 8,094                                  
|Total liabilities                                                      | 82,431                                 
|Stockholders' equity                                                   | 1,265                                  
|                                                                       |                                        
|Total liabilities and          stockholders' equity                    | $83,696                                
|                                                                       |                                        
|Net interest income;  interest rate spread                             |                                        
|                                                                       |                                        
|Net interest margin(1)                                                 |                                        
|                                                                       |                                        
|Average interest-earning assets toaverage interest-bearing liabilities | 102.58%                                

The following table sets forth the yields on loans, securities, and other interest-earning assets,
the rates on deposits and borrowings and the resultant interest rate spreads at the dates and for the
periods indicated.

|                                                                    | At September 30,
|------------------------------------------------------------------- | ----------------
|                                                                    | 2001            
|Weighted average yield on:                                          |                 
|Loans receivable                                                    | 10.97 %         
|Securities                                                          | 6.67            
|Other interest-earning assets                                       | 5.24            
|Combined weighted average yield on interest-earning assets          | 10.01           
|Weighted average rate paid on:                                      |                 
|Deposits                                                            | 4.30            
|Borrowings                                                          | ---             
|Notes payable                                                       | 11.50           
|Combined weighted average rate paid on interest-bearing liabilities | 4.63            
|Spread                                                              | 5.38%           

|                                                                         | For the Fiscal Year EndedSeptember 30,
|------------------------------------------------------------------------ | --------------------------------------
|                                                                         | 2001                                  
|Weighted average yield on:                                               |                                       
|Loans receivable                                                         | 10.21%                                
|Securities                                                               | 5.81                                  
|Other interest-earning assets                                            | 4.89                                  
|                                                                         |                                       
|Combined weighted average yield on interest-earning assets               | 9.66                                  
|                                                                         |                                       
|Weighted average rate paid on:                                           |                                       
|Deposits                                                                 | 4.81                                  
|FHLB advances                                                            | 4.97                                  
|Notes payable                                                            | 11.66                                 
|                                                                         |                                       
|Combined weighted average rate paid on interest-bearing
     liabilities | 5.14                                  
|                                                                         |                                       
|Spread                                                                   | 4.52                                  
|                                                                         |                                       
|Net interest margin                                                      | 4.65%                                 

The following schedule presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets (primarily loans) and interest-bearing
liabilities (primarily deposits) for the periods shown.  It distinguishes between the increase in interest
income and interest expense related to higher outstanding balances and to the levels and volatility
of interest rates.  For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied
by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate).  For
purposes of this table, changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and rate.

|                                               | For the Fiscal Year Ended September 30,
|---------------------------------------------- | ---------------------------------------
|                                               | 2001 vs. 2000                          
|                                               | Increase
(Decrease)Due To              
|                                               |                                        
|                                               | Volume                                 
|                                               | (Dollars in Thousands)                 
|Interest-earning assets:                       |                                        
|Loans                                          | $  (568)                               
|Securities                                     | 313                                    
|Interest bearing deposits with FHLB            | 8                                      
|Other interest-earning assets                  | (6)                                    
|                                               |                                        
|Total interest-earning assets                  | (253)                                  
|                                               |                                        
|Interest-bearing liabilities:                  |                                        
|Deposits                                       | 9                                      
|FHLB advances                                  | (12)                                   
|Notes payable                                  | ---                                    
|                                               |                                        
|Total interest-bearing liabilities             | (3)                                    
|                                               |                                        
|Net interest income                            | $(250)                                 
|                                               |                                        
|Net increase (decrease) in net interest income |                                        

**Results of Operations**

The Company's results of operations are dependent on its net interest income which is the
difference between interest income on interest-earning assets (primarily loans) and interest expense
on interest-bearing liabilities (primarily deposits) and noninterest income.  Interest income is a
function of the average balances of interest-earning assets (primarily loans) outstanding during the
period and the average yields earned on such assets.  Interest expense is a function of the average
amount of interest-bearing liabilities outstanding (primarily deposits) during the period and the
average rates paid on such liabilities.  The Company's noninterest income includes income from
service charges and fees on checking accounts, loan servicing and other fees and charges, and gains
on sales of loans.  The Company's net income is also affected by the level of its noninterest expenses,
such as employee salaries and benefits, occupancy and equipment expenses, and federal deposit
insurance premiums.

**Comparison of Fiscal Year Ended September 30, 2001 to September 30, 2000**

The Company reported a consolidated net loss of $533,000 for the year ended September 30,
2001, as compared to a net loss of $738,000 for the year ended September 30, 2000.  The net loss
was primarily due to a decline in interest income, an increase in provisions for losses on loans, losses
on repossessed assets and insurance claims, and a reduction in the tax benefit.

Net interest income decreased by $529,000 to $3.5 million for the year ended September 30,
2001 from $4.1 million for the year ended September 30, 2000.  This decrease primarily resulted
from decreases in the average yield and volume of the loan portfolio and increases in the average rate
on deposits.  The yield on the loan portfolio is expected to decline in future periods due to declines
in market interest rates (which reduced the yield of adjustable rate loans in the portfolio upon
repricing and the yield received at the time of origination) and due to the payoff of higher yielding
Second Chance Auto Loans.  Because of the termination of the Second Chance Auto Loans, proceeds
received upon repayment of these loans will be deployed in lower yielding assets which is expected
to result in the Company achieving lower average yields and interest income in future operating
periods.  The average yield on First Federal's loans decreased 20 basis points as a result of the
decline in the Second Chance Auto Loan portfolio.  The overall impact of this decline was to reduce
the yield on interest earning assets by 56 basis points.  These decreases were also impacted by an
increase in the cost of funds resulting from an increase in the average rate paid on deposits of 20
basis points.  As a result, the Company's net interest margin decreased to 4.65% for the year ended
September 30, 2001 from 5.36% for the year ended September 30, 2000.  The ratio of average
interest-earning assets to average interest-bearing liabilities increased to 102.58% at September 30,
2001 from 102.18% at September 30, 2000.  The average net interest spread for fiscal year ended
September 30, 2001, decreased to 4.52% from 5.26% for the same periods.

The provision for loan losses is based on management's periodic review of the Company's
loan portfolio which considers, among other factors, past actual loan loss experience, the general
prevailing economic conditions, changes in composition and risks inherent in the loan portfolio,
independent third party loan reviews and specific borrower considerations such as the ability to repay
the loan and the estimated value of the underlying collateral.  In addition, various regulatory
agencies, as an integral part of their examination process, periodically review the Company's
allowance for estimated loan losses.

The Company recorded a $324,000 provision for loan losses for the year ended September
30, 2001, as compared to a $254,000 provision for loan losses for the year ended September 30,
2000.  Management increased the loan loss provision during fiscal 2001 largely as a result of
continuing losses experienced on Second Chance Auto loans.  The allowance for loan losses was
calculated, taking into account the most recent loss experience associated with Second Chance Auto
Loans.

Total non-performing assets remained relatively stable at $1.9 million or 2.22% of total assets
at September 30, 2001.

Non-interest income increased $29,000 to $1.1 million for the year ended September 30,
2001 from $1.1 million for the year ended September 30, 2000.  This increase was primarily a result
of the increase in service charges, the gain on the sale of mortgage loans, and the gain on the sale of
securities available-for-sale during the year ended September 30, 2001, as compared to the prior year.
This was offset by the fact that there were no gains on the sale of servicing rights during fiscal 2001.
The Company is substantially dependent on its non-interest income in order to achieve net income.
Gains on the sales of loans and servicing rights are dependent on various factors that are not
necessarily within the control of the Company, including market and economic conditions.  As a
result, there can be no assurance that the gains on sales of loans and servicing rights reported by the
Company in prior periods will be reported in future periods or that there will not be substantial
periodic variation in the results from such activities that would affect the level of net income or loss
reported by the Company.

Non-interest expense decreased $849,000 from $5.8 million for the year ended September
30, 2000 to $4.9 million for the year ended September 30, 2001.  This decrease was primarily the
result of approximately $366,000 of supplemental retirement expenses primarily related to the
termination of employment of the Company's former President and Chief Executive Officer being
recorded in fiscal 2000 and a $365,000 reduction in compensation and employee benefits because
of a reduction in personnel.  Due to the discontinuation of the Second Chance Auto Lending
Program, and the current run-off of the portfolio, the Company anticipates a further decline in
compensation and benefits in future periods.  These reductions were partially offset by an increase
in expenses related to repossessed assets, consisting of repossessed automobiles and data processing costs.  Data
processing is currently on a month-to-month contract which is more costly than a long-term contract.

Income tax benefits decreased $174,000 from $258,000 for the year ended September 30,
2000 to an income tax benefit of $84,000 for the year ended September 30, 2001.  This was due to
a valuation allowance related to repossessed automobiles being recorded for the deferred tax assets
of the Company as there is no assurance that the Company will be able to use these deductions in
the future.

**Comparison of Fiscal Year Ended September 30, 2000 to September 30, 1999**

The Company reported a consolidated net loss of $738,000 for the year ended
September 30, 2000, as compared to net income of $245,000 for the year ended September 30,
1999, a decrease of $983,000.  The decrease in net income was due to a decrease in gains on the
sale of consumer loans, costs related to the settlement of retirement benefits and other matters
with the Company's former President and Chief Executive Officer, provisions for losses on
loans, repossessed assets and insurance claims and the effect of a change in the Company's
method of accounting for organization costs to comply with new accounting guidance.

Net interest income increased by $88,000 to $4.1 million for the year ended September
30, 2000 from $4.0 million for the year ended September 30, 1999.  This increase primarily
resulted from increases in the average yield of the loan portfolio, offset in part by increases in the
average rate and volume of deposits and borrowings.  The yield on the loan portfolio is expected
to decline in future periods due to declines in market interest rates (which reduced the yield of
adjustable rate loans

in the portfolio upon repricing and the yield received at the time of origination) and due to the payoff of higher yielding Second Chance Auto Loans.  Because of the
termination of the Second Chance Auto Loans, proceeds received upon repayment of these loans
will be deployed in lower yielding assets which is expected to result in the Company achieving
lower average yields and interest income in future operating periods.  The average yield on First
Federal's loans increased 34 basis points as a result of an increase in the volume of consumer
automobile loans and commercial loans, which yield a higher rate than traditional residential
mortgage loans.  These increases were partially offset by an increase in the cost of funds resulting
from an increase in the average rate paid on deposits of 15 basis points and an increase in
borrowings.  As a result, the Company's interest margin increased to 5.36% for the year ended
September 30, 2000 from 5.10% for the year ended September 30, 1999.  The ratio of average
interest-earning assets to average interest-bearing liabilities declined to 102.18% at September
30, 2000 from 105.67% at September 30, 1999.  The average net interest spread for the fiscal
year ended September 30, 2000, increased to 5.26% from 4.84% for the same periods.

The Company recorded a $254,000 provision for loan losses for the year ended
September 30, 2000 as compared to a $104,000 provision for loan losses for the year ended
September 30, 1999.  Management increased the loan loss provision during fiscal 2000 largely as
a result of an increased loss experience on the Second Chance Auto Loans during the year.   As a
result of these loan losses, in June 2000, the Company has terminated its Second Chance Auto
Lending Program.  Prior to fiscal year 2000, the Company did not provide an allowance for
anticipated loan losses on Second Chance Auto Loans.  Management fully expected to collect
any potential losses from the credit default insurance coverage,  based on their interpretation of
the policy coverage and based upon the expected recovery value of the  vehicles.  During the year
ended September 30, 2000,  both the insurance reimbursement realized on the repossessed
vehicles and the actual recovery value of the vehicles were lower than  expected,  resulting in
actual losses that were greater  than  anticipated.  The  allowance  for loan losses is now
calculated, taking into account the recent loss  experience  associated with the Second Chance
Auto Loans.

Total non-performing assets decreased for the year ended September 30, 2000 to $1.9
million or 2.22% of total  assets as compared to $2.7 million or 3.31% of total assets at
September  30,  1999.  Much of the decrease in non-performing assets was primarily attributable
to a $300,000 reduction in loan delinquencies, a $174,000 reduction in real estate from
foreclosure and a $347,000 reduction in repossessed vehicles.

Noninterest income decreased $721,000 to $1.1 million for the year ended September 30,
2000 from $1.8 million for the year ended September 30, 1999.  This was primarily a result of
the absence of any sales of consumer loans during the year ended September 30, 2000 as
compared to  gain on sale of consumer loans of $478,000 during the prior fiscal year.  In
addition, other noninterest income decreased $167,000 because in fiscal 1999 the Company had
insurance reimbursements for casualty losses and insurance rebates taken on credit-default
insurance reserves.  During fiscal 2000, because of the number of Second Chance loan insurance
claims, the Company did not receive any rebates.  Also, there was a decrease in gains on sale of
servicing rights as a result of a decline in loan sales during fiscal 2000. The Company is
substantially dependent on its noninterest income in order to achieve net income.  Gains on the
sales of loans and servicing rights are

dependent on various factors that are not necessarily within the control of the Company, including market and economic conditions.  As a result, there can be
no assurance that the gains on sales of loans and servicing rights reported by the Company in
prior periods will be reported in future periods or that there will not be substantial periodic
variation in the results from such activities that would affect the level of net income or loss
reported by the Company.

Noninterest expense increased $557,000 from $5.2 million for the year ended September
30, 1999 to $5.8 million for the year ended September 30, 2000.  This increase was primarily the
result of approximately $325,000 of supplemental retirement expenses related to the termination
of employment of the Company's former President and Chief Executive Officer and $240,000 of
expenses related to valuation adjustments and losses for non-interest bearing assets (primarily
repossessed vehicles).  Due to the discontinuation of the Second Chance Auto Lending Program,
the Company anticipates a decline in compensation and benefits in future periods because of a reduction in personnel.

Income tax expense decreased $457,000 from $199,000 for the year ended September 30,
1999 to an income tax benefit of $258,000 for the year ended September 30, 2000 due to the net
loss incurred for the year ended September 30, 2000.

The Company recognized the cumulative effect of a change in accounting principle
relating to the treatment of organization costs as a long-lived asset.  Due to a new accounting
pronouncement, the remaining value of this asset, of $100,000, was fully amortized at October 1,
1999.

**Financial Condition**

The Company's total assets decreased by $1.4 million or 1.6% to $83.6 million at
September 30, 2001 from $84.9 million at September 30, 2000.

Securities available-for-sale increased to $9.5 million at September 30, 2001 from $5,000
at September 30, 2000, while securities held-to-maturity decreased from $522,000 at September
30, 2000 to $421,000 at September 30, 2001.  The increase in securities was primarily because of
the termination of the Second Chance Auto Lending Program.  As these loans are repaid the
proceeds are being invested in securities available-for-sale.

Net loans receivable (excluding loans held-for-sale) decreased from $67.6 million at
September 30, 2000 to $61.9 million at September 30, 2001.  The decrease resulted from the
discontinuation of the Second Chance Auto Lending Program.  Loans held-for-sale decreased as
a result of repayments and repossessions.

Repossessed assets and insurance claims increased to $1.0 million at September 30, 2001
from $889,000 at September 30, 2000.  This increase was a result primarily of increased
repossession of Second Chance Auto Loans.

Real estate owned increased from $377,000 at September 30, 2000 to $677,000 at
September 30, 2001.  This increase was primarily a result of  foreclosure of one commercial real
estate loan.

Deposits increased by $2.5 million to $76.2 million at September 30, 2001 from $73.7
million at September 30, 2000.  The increase was due to an increase in rates, which allowed the
Company to increase deposits and repay $3.0 million of outstanding Federal Home Loan Bank
advances.

Stockholders equity declined to $854,000 at September 30, 2001 from $1.4 million at
September 30, 2000.  This decrease of $523,000 was the result of the net loss of $533,000 for the
year ended September 30, 2001, offset by accumulated other comprehensive income for $10,000.

**Liquidity and Capital Resources**

The Bank's primary sources of funds are deposits, principal and interest payments on
loans and mortgage-related securities, proceeds from sales of long term, fixed-rate residential
mortgage loans, proceeds from sales of credit-default insured consumer automobile loans and
other funds provided from operations.  Additionally, the Bank has borrowed funds from the
FHLB of Dallas or utilized other sources of funds based on need, comparative costs and
availability at the time.

While scheduled loan and mortgage-backed securities repayments, short-term
investments, and FHLB borrowings are relatively stable sources of funds, deposit flows are
unpredictable and are a function of external factors including competition, the general level of
interest rates, and general economic conditions.

The Bank maintains investments in liquid assets based on management's assessment of
cash needs, expected deposit flows, availability of advances from the FHLB, available yield on
liquid assets (both short-term and long-term) and the objectives of its asset/liability management
program.  Several options are available to increase liquidity, including reducing loan
originations, increasing deposit marketing activities, and increasing borrowings from the FHLB.

Federal regulations require insured institutions to maintain sufficient levels of liquid
assets to ensure their safe and sound operation.  Management believes that we have and will
continue to have adequate liquidity for the foreseeable future.  At September 30, 2001, First
Federal's regulatory liquidity ratio was 5.81%.  First Federal uses its capital resources principally
to meet its ongoing commitments to fund maturing certificates of deposits and deposit
withdrawals, repay borrowings, fund existing and continuing loan commitments, maintain its
liquidity and meet operating expenses.  First Federal's core and risk-based capital ratios were
6.01% and 9.08%, which exceeded the minimum required capital ratios of 4% and 8%,
respectively.

At September 30, 2001, the Bank had commitments to originate loans, including loans in
process, totaling $6.1 million.  The Bank also had $1.2 million of outstanding unused lines of
credit and $103,000 of letters of credit.  The Bank considers its liquidity and capital resources to
be

The Bank's liquidity, represented by cash equivalents, is a product of its operating, investing and financing activities. These activities are summarized below for the periods
indicated.

|                                                                                              | Year Ended  September 30,
|--------------------------------------------------------------------------------------------- | -------------------------
|                                                                                              | 2001                     
|                                                                                              | (In Thousands)           
|Operating Activities:                                                                         |                          
|Net income (loss)                                                                             | $   (533)                
|Adjustment to reconcile net income or loss to net       cash provided by operating activities | 1,977                    
|Net cash used in operating activities                                                         | 1,444                    
|Net cash provided by (used in) investing activities                                           | (4,199)                  
|Net cash provided by (used in) financing activities                                           | (574)                    
|Net increase (decrease) in cash and cash equivalents                                          | (3,329)                  
|Cash and cash equivalents at beginning of period                                              | 7,448                    
|Cash and cash equivalents at end of period                                                    | $4,119                   

The primary investing activity of the Bank is lending.  Loans originated net of repayments
and sales provided $4.6 million and $3,000 in cash for the years ended September 30, 2001 and
September 30, 2000, respectively.  In addition, in 2001 the Company purchased $14.1 million of
securities and sold $4.6 million of securities.  Deposits increased $2.5 million during the year
ended September 30, 2001 as compared to a $446,000 decrease during the year ended September
30, 2000.  FHLB advances decreased by $3.0 million as compared to an increase of $3.0 million
in 2000.

The Holding Company's 111⁄2% debentures due March 31, 2003 require quarterly interest
payments of approximately $105,000.  The Holding Company is dependent on dividends from
the Bank in order to pay the interest on the debentures, next due in April 2001.  The Bank must
obtain prior approval of the OTS before declaring any dividends.  Failure to timely pay the
interest may result in a default under the indenture governing the debentures resulting in
acceleration of the maturity of the outstanding $3.6 million principal balance and a demand for
payment from debenture holders that the Holding Company could not currently meet.  The OTS has approved the payment of dividends to the Holding Company which should permit the Holding
Company to make interest payments and cover foreseeable
operating expenses through September 30, 2002.

**Impact of Inflation and Changing Prices**

The Consolidated Financial Statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles ("GAAP"), which
require the measurement of financial position and results of operations in terms of historical
dollars without considering changes in the relative purchasing power of money over time because
of inflation.

Unlike industrial companies, virtually all of the Company's assets and liabilities are
monetary in nature.  As a result, interest rates generally have a more significant impact on a
financial institution's performance than the effects of general inflation.  Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of goods and
services.  In the current interest rate environment, the liquidity, maturity structure and quality of
the Company's assets and liabilities are critical to the maintenance of acceptable performance
levels.

**Item 7. Financial Statements**

**CONSOLIDATED FINANCIAL STATEMENTS**September
30, 2001, 2000, and 1999

**CONTENTS**

|REPORT OF INDEPENDENT AUDITORS                        | 55
|----------------------------------------------------- | --
|FINANCIAL STATEMENTS                                 
|CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION  | 56
|CONSOLIDATED STATEMENTS OF
      INCOME (LOSS)        | 57
|CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY | 59
|CONSOLIDATED STATEMENTS OF
      CASH FLOWS           | 60
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS      | 62

**REPORT OF INDEPENDENT AUDITORS**

To the Stockholders and Board of DirectorsThe Bryan-College Station
Financial Holding Company

We have audited the accompanying consolidated statements of financial
condition of The Bryan-College Station Financial Holding Company as of September
30, 2001 and 2000 and the related consolidated statements of income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Bryan-College Station Financial Holding Company as of September 30, 2001 and 2000
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 2001 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, on October
1, 1999, The Bryan-College Station Financial Holding Company changed its method
of accounting for organization costs to comply with new accounting guidance.

/s/  Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP

Oak Brook, IllinoisNovember 16, 2001, except for Note
16   as to which the date is January 3, 2002

---

|                                                                                                                                                                                                                                   | 2001    | 2000   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------
|**ASSETS**                                                                                                                                                                                                                         |         |        
|Cash and due from banks                                                                                                                                                                                                            | $3,017  | $2,781 
|Interest-bearing deposits in other financial
      institutions                                                                                                                                                                    | 1,102   | 4,667  
|Total
      cash and cash equivalents                                                                                                                                                                                              | 4,119   | 7,448  
|                                                                                                                                                                                                                                   |         |        
|Securities available-for-sale                                                                                                                                                                                                      | 9,536   | 5      
|Securities held-to-maturity, at cost (fair value: 2001 -
      $415;   2000 - $502)                                                                                                                                                | 421     | 522    
|Loans held for sale                                                                                                                                                                                                                | 2,355   | 3,872  
|Loans receivable, net (net of allowance for loan
      losses:    2001 - $417; 2000 - $415)                                                                                                                                        | 61,857  | 67,561 
|Federal Home Loan Bank stock                                                                                                                                                                                                       | 458     | 436    
|Servicing rights                                                                                                                                                                                                                   | 110     | 279    
|Real estate owned (net of allowance for
      losses:   2001 - $15; 2000 - $22)                                                                                                                                                    | 677     | 377    
|Repossessed assets and insurance claims (net of
      allowance    for losses: 2001 - $100; 2000 -
    $96)                                                                                                                        | 1,023   | 889    
|Premises and equipment                                                                                                                                                                                                             | 2,004   | 2,180  
|Accrued interest receivable                                                                                                                                                                                                        | 544     | 647    
|Other assets                                                                                                                                                                                                                       | 467     | 710    
|                                                                                                                                                                                                                                   | $83,571 | $84,926
|**LIABILITIES AND STOCKHOLDERS'
      EQUITY**                                                                                                                                                                                     |         |        
|Liabilities                                                                                                                                                                                                                        |         |        
|Deposits                                                                                                                                                                                                                           | $76,182 | $73,686
|Advance
      payments by borrowers for insurance and taxes                                                                                                                                                                        | 709     | 779    
|Advances from
      Federal Home Loan Bank                                                                                                                                                                                         | -       | 3,000  
|Debentures                                                                                                                                                                                                                         | 3,629   | 3,629  
|Accrued
      supplemental retirement plan benefits                                                                                                                                                                                | 542     | 594    
|Accrued
      interest payable and other liabilities                                                                                                                                                                               | 782     | 988    
|                                                                                                                                                                                                                                   | 81,844  | 82,676 
|Minority
      interest                                                                                                                                                                                                            | 873     | 873    
|                                                                                                                                                                                                                                   |         |        
|Stockholders' equity                                                                                                                                                                                                               |         |        
|Common stock -
      par value $.01 per share;
      authorized          
      1,500,000 shares, issued 471,411
      shares           at
      September 30,
      2001           and
      471,411 shares at September 30, 2000 | 5       | 5      
|Additional
      paid-in capital                                                                                                                                                                                                   | 2,117   | 2,117  
|Retained
      deficit                                                                                                                                                                                                             | (1,278) | (745)  
|Accumulated
      other comprehensive income                                                                                                                                                                                       | 10      | -      
|                                                                                                                                                                                                                                   | 854     | 1,377  
|                                                                                                                                                                                                                                   | $83,571 | $84,926

---

---

|                                                                                                    | 2001   | 2000   | 1999  
|--------------------------------------------------------------------------------------------------- | ------ | ------ | ------
|Interest income                                                                                     |        |        |       
|Loans                                                                                               | $6,870 | $7,568 | $7,334
|Mortgage-backed
      securities                                                                    | 124    | 34     | 45    
|Mutual fund
      and other                                                                         | 374    | 161    | 164   
|Total
      interest income                                                                         | 7,368  | 7,763  | 7,543 
|                                                                                                    |        |        |       
|Interest expense                                                                                    |        |        |       
|Deposits                                                                                            | 3,384  | 3,234  | 3,125 
|Debentures                                                                                          | 423    | 424    | 425   
|FHLB
      advances                                                                                 | 17     | 32     | 8     
|Total
      interest expense                                                                        | 3,824  | 3,690  | 3,558 
|                                                                                                    |        |        |       
|**Net interest income**                                                                             | 3,544  | 4,073  | 3,985 
|                                                                                                    |        |        |       
|Provision for loan losses                                                                           | 324    | 254    | 104   
|                                                                                                    |        |        |       
|**Net interest income after provision for loan
      losses**                                       | 3,220  | 3,819  | 3,881 
|                                                                                                    |        |        |       
|Noninterest income                                                                                  |        |        |       
|Service
      charges                                                                               | 756    | 713    | 744   
|Gain on sale
      of mortgage loans                                                                | 271    | 198    | 167   
|Gain on sale
      of consumer loans                                                                | -      | -      | 478   
|Gain on sale
      of mortgage servicing rights                                                     | -      | 45     | 142   
|Gain on sale
      of securities                                                                    | 19     | -      | -     
|Servicing fee
      income, net of amortization                                                     | 48     | 85     | 66    
|Operation of
      foreclosed real estate                                                           | (11)   | (15)   | (17)  
|Other                                                                                               | 8      | 36     | 203   
|Total
      noninterest income                                                                      | 1,091  | 1,062  | 1,783 
|                                                                                                    |        |        |       
|Noninterest expense                                                                                 |        |        |       
|Compensation
      and benefits                                                                     | 2,070  | 2,435  | 2,406 
|Supplemental
      retirement plan                                                                  | 48     | 414    | 89    
|Occupancy and
      equipment expense                                                               | 610    | 597    | 547   
|Federal
      insurance premiums                                                                    | 76     | 44     | 65    
|Net (gain)
      loss on real estate owned, including provision                                     | (18)   | 18     | 26    
|Net loss on
      repossessed assets and insurance
      claims,         
      including provision | 469    | 405    | 165   
|Loan
      expense                                                                                  | (6)    | 16     | 44    
|Office
      supplies                                                                               | 74     | 141    | 142   
|Professional
      fees                                                                             | 305    | 322    | 313   
|Advertising                                                                                         | 24     | 62     | 77    
|Data
      processing                                                                               | 373    | 298    | 260   
|Telephone                                                                                           | 95     | 118    | 121   
|Postage                                                                                             | 134    | 125    | 106   
|Other                                                                                               | 674    | 782    | 859   
|Total
      noninterest expense                                                                     | 4,928  | 5,777  | 5,220 

---

---

|                                                                                                              | 2001    | 2000    | 1999
|------------------------------------------------------------------------------------------------------------- | ------- | ------- | ----
|**Income (loss) before income taxes
      and   cumulative effect of a change in accounting
      principle** | $(617)  | $(896)  | $444
|                                                                                                              |         |         |     
|Income tax (benefit) expense                                                                                  | (84)    | (258)   | 199 
|                                                                                                              |         |         |     
|Income (loss) before cumulative effect
      of   a change in accounting principle                            | (533)   | (638)   | 245 
|                                                                                                              |         |         |     
|Cumulative effect of a change in accounting
      principle                                                   | -       | (100)   | -   
|                                                                                                              |         |         |     
|**Net income (loss)**                                                                                         | $(533)  | $(738)  | $245
|                                                                                                              |         |         |     
|**Earnings (loss) per share - basic and
      diluted:**                                                      | ****    |         |     
|                                                                                                              |         |         |     
|**Earnings (loss) before cumulative effect of a
      change inaccounting principle**                         | $(1.13) | $(1.35) | $.52
|                                                                                                              |         |         |     
|Cumulative effect of a change in accounting
      principle                                                   | -       | (.21)   | -   
|                                                                                                              |         |         |     
|**Earnings (loss) per share, basic and
      diluted**                                                        | $(1.13) | $(1.56) | $.52

---

---

|                                                                                                                      | CommonStock | AdditionalPaid-InCapital | RetainedEarnings(Deficit) | AccumulatedOtherComprehensiveIncome | Total 
|--------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------ | ------------------------- | ----------------------------------- | ------
|                                                                                                                      |             |                          |                           |                                     |       
|Balance at October 1, 1998                                                                                            | $4          | $1,849                   | $17                       | $-                                  | $1,870
|                                                                                                                      |             |                          |                           |                                     |       
|Issuance of 10% stock dividend                                                                                        | -           | 211                      | (211)                     | -                                   | -     
|                                                                                                                      |             |                          |                           |                                     |       
|Net income                                                                                                            | -           | -                        | 245                       | -                                   | 245   
|                                                                                                                      |             |                          |                           |                                     |       
|Balance at September 30, 1999                                                                                         | 4           | 2,060                    | 51                        | -                                   | 2,115 
|                                                                                                                      |             |                          |                           |                                     |       
|Issuance of 10% stock dividend                                                                                        | 1           | 57                       | (58)                      | -                                   | -     
|                                                                                                                      |             |                          |                           |                                     |       
|Net loss                                                                                                              | -           | -                        | (738)                     | -                                   | (738) 
|                                                                                                                      |             |                          |                           |                                     |       
|Balance at September 30, 2000                                                                                         | 5           | 2,117                    | (745)                     | -                                   | 1,377 
|                                                                                                                      |             |                          |                           |                                     |       
|Comprehensive loss                                                                                                    |            
|                                                                                                                     
|Net loss                                                                                                              | -           | -                        | (533)                     | -                                   | (533) 
|                                                                                                                     
|Change in unrealized gains
      on   securities available-for-sale,
      net   of reclassifications and tax effects | -           | -                        | -                         | 10                                  | 10    
|                                                                                                                      |             |                          |                           |                                     |       
|                                                                                                                     
|                                                                                                                     
|                                                                                                                      |            
|Total
      comprehensive loss                                                                                        |             |                          |                           |                                     | $(523)
|Balance at September 30, 2001                                                                                         | $5          | $2,117                   | $(1,278)                  | $10                                 | $854  

---

---

|                                                                                                              | 2001     | 2000    | 1999   
|------------------------------------------------------------------------------------------------------------- | -------- | ------- | -------
|                                                                                                              |          |         |        
|**Cash flows from operating
      activities**                                                                |          |         |        
|Net income
      (loss)                                                                                       | $(533)   | $(738)  | $245   
|Adjustments to
      reconcile net income (loss) to net cash
                 from
      operating activities |          |         |        
|Depreciation                                                                                                  | 281      | 293     | 324    
|Amortization
      of premiums and discounts on
                     mortgage-backed
      securities, net    | 8        | 3       | 5      
|Amortization
      of debt issue costs                                                                        | 100      | 100     | 100    
|Cumulative
      effect of a change in accounting principle                                                   | -        | 100     | -      
|Net change in
      loans held for sale                                                                       | 1,517    | (1,210) | (1,491)
|Origination of
      loan servicing rights                                                                    | -        | -       | (642)  
|Amortization
      of loan servicing rights                                                                   | 169      | 266     | 97     
|Change in net
      deferred loan origination fees                                                            | (2)      | 27      | 52     
|Change in
      deferred income taxes                                                                         | (34)     | (330)   | (23)   
|Net
      (gains) losses on sales of                                                                          |          |         |        
|Foreclosed
      real estate                                                                                  | (18)     | 18      | 1      
|Repossessed
      assets                                                                                      | (39)     | 355     | 165    
|Mortgage
      loans                                                                                          | (271)    | (198)   | (167)  
|Mortgage
      servicing rights                                                                               | -        | (45)    | (142)  
|Consumer
      loans                                                                                          | -        | -       | (478)  
|Securities
      available-for-sale                                                                           | (19)     | -       | -      
|Provision for
      loan losses and foreclosed real estate                                                    | 324      | 276     | 129    
|Federal Home
      Loan Bank stock and mutual
      fund dividends                                            | (263)    | (32)    | (22)   
|Change
      in                                                                                               |          |         |        
|Repossessed
      assets                                                                                      | (95)     | 67      | (353)  
|Accrued
      interest receivable                                                                             | 103      | (34)    | (5)    
|Other
      assets                                                                                            | 143      | (11)    | (286)  
|Accrued
      interest payable and other liabilities                                                          | 73       | 306     | 172    
|Net
      cash from operating activities                                                                      | 1,444    | (787)   | (2,319)
|                                                                                                             
|**Cash flows from investing
      activities**                                                                |          |         |        
|Net change in
      loans receivable                                                                          | 4,574    | 3       | 3,291  
|Purchase of
      securities available-for-sale                                                               | (14,134) | -       | -      
|Principal
      payments on mortgage-backed securities                                                        | 433      | 167     | 257    
|roceeds from
      sales of securities available-for-sale                                                     | 4,538    | -       | -      
|Proceeds from
      sale of mortgage servicing rights                                                         | -        | 45      | 142    
|Capital
      expenditures on premises and equipment, net                                                     | (105)    | (374)   | (787)  
|Capital
      expenditures on foreclosed real estate                                                          | (13)     | (47)    | (77)   
|Proceeds from
      sale of foreclosed real estate                                                            | 508      | 329     | 30     
|Net
      cash from investing activities                                                                      | (4,199)  | 123     | 2,856  

---

---

|                                                                                                | 2001    | 2000   | 1999   
|----------------------------------------------------------------------------------------------- | ------- | ------ | -------
|                                                                                                |         |        |        
|**Cash flows from financing
      activities**                                                  |         |        |        
|Net change in
      deposits                                                                    | $2,496  | $446   | $(314) 
|Net change in
      advance payments by
      borrowers          
      for insurance and taxes | (70)    | (39)   | (45)   
|Net change in
      Federal Home Loan Bank Advances                                             | (3,000) | 3,000  | (800)  
|Net
      cash from financing activities                                                        | (574)   | 3,407  | (1,159)
|                                                                                                |         |        |        
|Change in cash and cash equivalents                                                             | (3,329) | 2,743  | (622)  
|                                                                                                |         |        |        
|Cash and cash equivalents at beginning of year                                                  | 7,448   | 4,705  | 5,327  
|                                                                                                |         |        |        
|**Cash and cash equivalents at end of
      year**                                              | $4,119  | $7,448 | $4,705 
|                                                                                                |         |        |        
|Supplemental disclosures of cash flow
    information                                           |         |        |        
|Cash paid
      (received) during the year for                                                  |         |        |        
|Interest                                                                                        | $3,836  | $3,625 | $3,550 
|Income
      taxes                                                                              | (163)   | 147    | 254    
|                                                                                                |         |        |        
|Supplemental disclosure of noncash investing
      activities                                   |         |        |        
|Net
      transfer between loans and foreclosed real estate                                     | 806     | 129    | 245    

---

---

Basis of Presentation: The accompanying consolidated financial
statements for the year ended September 30, 2001 include the accounts of The
Bryan-College Station Financial Holding Company ("the Company") and its wholly
owned subsidiaries, First Federal Savings Bank ("the Bank") and Best of Texas,
Inc. ("the Dealership"). On April 1, 1998, the Company was capitalized through
the issuance of 200,000 shares of common stock at $10 per share. The Bank
concurrently became a wholly owned subsidiary of the Company in a
stock-for-stock exchange with bank stockholders. Stock of dissenting
stockholders and fractional shares were purchased by the Company for $24.07 per
share. Since the transaction was an internal reorganization, the historical cost
basis of accounting is continued for the Bank. On August 30, 1999, the
Dealership was capitalized through the issuance of 500 shares of common stock to
the holding company at $.01 per share.

The consolidated financial statements include the accounts and results of
operations of the Company, the Bank, the Dealership, and the Bank's wholly owned
subsidiary, First Service Corporation of Bryan.

Nature of Operations: The only business of the Company is the
ownership of the Bank and the Dealership. The Bank is a federally chartered
stock savings bank and a member of the Federal Home Loan Bank ("FHLB") system
which maintains insurance on deposit accounts with the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. The Bank
makes residential, commercial real estate, and consumer loans primarily in
Brazos County, Texas. Substantially all loans are secured by specific items of
collateral, including real estate, residences, and consumer assets. The
Dealership had limited activity during the fiscal years ended September 30, 2001
and 2000.

Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates. The
collectibility of loans, value of repossessed assets and insurance claims, fair
value of financial instruments, and status of contingencies are particularly
subject to change.

Securities: Securities are classified as held-to-maturity when
management has the intent and the Company has the ability to hold those
securities to maturity. All other securities are classified as
available-for-sale since the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. These securities are carried
at fair value with unrealized gains and losses, net of income taxes reported in
accumulated other comprehensive income. Premiums and discounts are
recognized

---

---

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
(Continued)

in interest income using methods that approximate the level-yield method.
Realized gains and losses on disposition are based on the net proceeds and the
adjusted carrying amounts of the securities sold, using the specific
identification method.

Loans Receivable: Loans receivable are stated at unpaid principal
balances, less the allowance for loan losses and deferred loan origination fees
and discounts.

Allowance for Loan Losses: Because some loans may not be repaid in
full, the Company has established an allowance for loan losses. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of the loss and the amount of loss on any loan is
necessarily subjective. Accordingly, the allowance is maintained by management
at a level considered adequate to cover probable incurred losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates that
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the whole
allowance is available for any loan charge-offs that occur. A loan is
charged-off against the allowance by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.

****The Company measures impaired loans based on the present
value of expected cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of collateral if the loan is collateral dependent. Loans considered to be
impaired are reduced to the present value of expected future cash flows or to
the fair value of collateral, by allocating a portion of the allowance for loan
losses to such loans. If these allocations cause the allowance for loan losses
to be increased, such increase is reported as a provision for loan losses.

Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
and consumer loans and are evaluated collectively for impairment. Commercial
real estate loans are evaluated individually for impairment. Normal loan
evaluation procedures, as described in the second preceding paragraph, are used
to identify loans that must be evaluated for impairment. In general, loans
classified as "doubtful" or "loss" are considered impaired while loans
classified as "substandard" are individually evaluated for impairment. Depending
on the relative size of the credit relationship, late or insufficient payments
of 30 to 90 days will cause management to reevaluate the credit under its normal
loan evaluation procedures. While the factors that identify a credit for
consideration for measurement of impairment or nonaccrual are similar, the
measurement considerations differ. A loan is impaired when the economic value
estimated to be received is less than the value implied in the original credit
agreement. A loan is placed in nonaccrual when payments are more than 90 days
past due unless

---

---

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
(Continued)

the loan is adequately collateralized and in the process of collection.
Although impaired loan and nonaccrual loan balances are measured differently,
impaired loan disclosures do not differ significantly from nonaccrual and
renegotiated loan disclosures.

Recognition of Income on Loans: Interest on loans is accrued over the
term of the loans based on the principal balance outstanding. Where serious
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued.

Loan Fees and Costs: The Company defers loan origination fees, net of
certain direct loan origination costs. The net amount deferred is netted against
loans in the balance sheet and is recognized in interest income as a yield
adjustment over the contractual term of the loan, adjusted for prepayments.

Loan Sales: The Company sells a portion of its mortgage loan
production in the secondary market with servicing released. The Company obtains
sales commitments on these loans immediately prior to making the origination
commitment. The Company also sells a portion of its consumer indirect loans with
servicing retained on these loans. Loans classified as held for sale are carried
at the lower of cost or market value in the aggregate. Net unrealized losses are
recognized by charges to income.

Servicing Rights: The Company originates mortgage and consumer loans
for sale to the secondary market. When servicing on sold loans is retained, the
Company capitalizes the cost of servicing rights.

The consumer loans are sold at a rate less than the original coupon rate. The
servicing asset is recorded at the present value of the remaining payment stream
to the Company with assumptions such as estimated life, delinquencies, and other
risks factored into the discount rate. The capitalized cost of loan servicing
rights is amortized in proportion to and over the period of estimated net future
revenue.

Premises and Equipment: The Company's premises and equipment are
stated at cost less accumulated depreciation. The Company's premises and related
furniture and equipment are depreciated using the straight-line method over
their estimated useful lives. Maintenance and repairs are charged to expense,
and improvements are capitalized.

Repossessed Assets and Insurance Claims: Automobiles acquired through
repossession are carried at the lower of cost or fair value (including estimated
insurance reimbursements) less estimated costs to sell. Credit-default insurance
claims are carried at the amount for which the claim was filed. Losses on
disposition, including expenses incurred in connection with the disposition,
and

---

---

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
(Continued)

uncollected insurance claims, are charged to operations. Valuation allowances
are recognized when the fair value (including estimated insurance
reimbursements) less estimated costs to sell the repossessed asset or the
insurance claim receivable is determined to be less than carrying value of the
asset. Changes in the valuation allowance are charged or credited to income.

Real Estate Owned: Real estate owned acquired through foreclosure and
similar proceedings is carried at the lower of cost or fair value less estimated
costs to sell. Losses on disposition, including expenses incurred in connection
with the disposition, are charged to operations. Valuation allowances are
recognized when the fair less estimated selling expenses is determined to be
less than cost of the asset. Changes in the valuation allowance are charged or
credited to income.

Organization Costs: During 1999, a new accounting pronouncement was
effective that required the Company to charge the September 30, 1999 unamortized
balance of $100,000 to expense in the first quarter of the 2000 fiscal year. The
additional amortization was disclosed in the consolidated statements of income
(loss) as a cumulative effect of a change in accounting principle.

Statement of Cash Flows: Cash and cash equivalents are defined to
include the Company's cash on hand, demand balances, interest-bearing deposits
with financial institutions, and investments in certificates of deposit with
original maturities of less than three months.

Income Taxes: The Company records income tax expense based on the
amount of taxes due on its tax return plus deferred taxes computed on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.

Comprehensive Income (Loss): Comprehensive loss includes both net loss
and other comprehensive income (loss) elements, including the change in
unrealized gains and losses on securities available-for-sale, net of
tax.

---

---

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
(Continued)

Earnings Per Common Share: Amounts reported as earnings per common
share for each of the three years ended September 30, 2001 reflect earnings
available to common stockholders for the year divided by the weighted average
number of common shares outstanding during the year. Weighted average common
shares were 471,411, 471,411, and 471,411 for the years ended September 30,
2001, 2000, and 1999 adjusted for 10% stock dividends in 2000 and 1999. The
warrants attached to the 3,629 units issued by the Company on April 1, 1998 have
an exercise price of $12.50 per share and the stock options granted on May 25,
1999 have an exercise price of $8.00 per share. The warrants and stock options
are not included in diluted earnings per share since the exercise price exceeds
the market price of the stock.

In future years, outstanding stock options and warrants may be exercised,
which would increase the weighted average common shares outstanding and,
thereby, dilute earnings per share. In addition, if the average common stock
price were to exceed the exercise price of outstanding options and warrants in a
future year, the assumed exercise of the options and warrants would have a
dilutive effect on earnings per share for that future year. However, previously
reported earnings per share and diluted earnings per share would not be
restated.

Reclassifications: Certain items in the financial statements as of and
for the years ended September 30, 2000 and 1999 have been reclassified, with no
effect on net income, to conform to the current year presentation.

New Accounting Pronouncements: In 2001, new accounting guidance was
issued that requires the purchase method of accounting for all business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method of accounting after this time. The new guidance
revises the accounting for goodwill and intangible assets. Intangible assets
with indefinite lives and goodwill will no longer be amortized, but will
periodically be reviewed for impairment and written down if impaired. Additional
disclosures about intangible assets and goodwill may be required. Since the
Company does not have any intangibles for which the standard applies, the
standard will not currently have an impact on the financial
statements.

---

---

**NOTE 2 - SECURITIES**

The amortized cost and fair values of securities at September 30 are as
follows:

|                         | 2001         
|------------------------ | -------------
|                         | AmortizedCost
|                         |              
|Available-for-sale       |              
|GNMA
      certificates  | $1,273       
|Mutual
      fund        | 8,243        
|Equity
      stock       | 5            
|                         |              
|                         | $9,521       
|Held-to-maturity         |              
|FHLMC
      certificates | $   296      
|FNMA
      certificates  | 125          
|                         |              
|                         | $   421      

|                         | 2000         
|------------------------ | -------------
|                         | AmortizedCost
|                         |              
|Available-for-sale       |              
|Equity
      stock       | $       5    
|                         |              
|Held-to-maturity         |              
|FHLMC
      certificates | $   373      
|FNMA
      certificates  | 149          
|                         |              
|                         | $   522      

Mortgage-backed securities have varying maturities. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

Proceeds from the sale of securities available-for-sale in 2001, 2000, and
1999 and gross realized gains and losses are as follows:

|                      | 2001   | 2000   | 1999  
|--------------------- | ------ | ------ | ------
|                      |        |        |       
|Proceeds from sales   | $4,538 | $    - | $    -
|Gross realized gains  | 19     | -      | -     
|Gross realized losses | -      | -      | -     

---

---

Loans receivable at September 30 are summarized as follows:

|                                                | 2001    | 2000   
|----------------------------------------------- | ------- | -------
|First mortgage loans                            |         |        
|Principal balances                             
|Secured by
      one-to-four-family residences  | $31,806 | $33,319
|Secured by
      other properties               | 6,094   | 5,096  
|Construction                                    | 9,284   | 6,926  
|                                                | 47,184  | 45,341 
|Less                                           
|Undisbursed
      portion of construction loans | (2,950) | (2,486)
|Net
      deferred loan origination fees        | (113)   | (149)  
|Deferred
      gain                             | -       | (27)   
|Total
      first mortgage loans                | 44,121  | 42,679 
|                                               
|Consumer and other loans                        |         |        
|Principal
      balances                       
|Automobile                                      | 11,947  | 17,167 
|Home
      equity and second mortgage           | -       | 8      
|Loans
      secured by deposit accounts         | 601     | 872    
|Commercial                                      | 4,898   | 5,728  
|Other
      consumer                            | 583     | 1,267  
|                                                | 18,029  | 25,042 
|Net deferred
      loan origination costs       | 4       | 40     
|Net premiums
      on indirect loans            | 120     | 215    
|Total
      consumer and other loans            | 18,153  | 25,297 
|Less allowance for loan losses                  | (417)   | (415)  
|                                                | $61,857 | $67,561

A summary of the activity in the allowance for loan losses follows:

|                                | 2001  | 2000  | 1999
|------------------------------- | ----- | ----- | ----
|                                |       |       |     
|Balance at beginning of year    | $415  | $326  | $307
|Provision charged to operations | 324   | 254   | 104 
|Charge-offs                     | (367) | (183) | (92)
|Recoveries                      | 45    | 18    | 7   
|                                |       |       |     
|Balance at end
      of year    | $417  | $415  | $326

---

---

There were no impaired loans during the three years ended September 30, 2001.
Nonaccrual loans totaled approximately $98,000, $0, and $32,000 at September 30,
2001, 2000, and 1999, respectively. The approximate amounts of interest income
that would have been recorded under the original terms of such loans and the
interest income actually recognized for the years ended September 30 are not
material.

The largest portion of the Company's loans are originated for the purpose of
enabling borrowers to purchase residential real estate property secured by first
liens on such property. At September 30, 2001, approximately 51% of the
Company's loans were secured by owner-occupied, one-to-four-family residential
property. The Company requires collateral on all loans and generally maintains
loan-to-value ratios of 80% or less. The Company also has originated a
significant amount of automobile loans, which totaled approximately 19% of the
Company's loans at September 30, 2001. Approximately 66% of the automobile loans
are those originated under the Company's Second Chance Loan program which was
discontinued in June 2000. These loans were made to individuals with a less than
perfect credit history, which results in a higher interest rate to the Company.
These loans are insured for credit default as a means of reducing the risk of
loss to the Company.

The Company has granted loans to certain officers and directors of the Bank
and Company. Related-party loans are made on substantially the same terms as
comparable transactions with unrelated persons.

Activity in the loan accounts of executive officers, directors, and principal
stockholders is as follows:

|                             | 2001   | 2000  
|---------------------------- | ------ | ------
|                             |        |       
|Balance at beginning of year | $1,016 | $728  
|Loans disbursed              | 190    | 411   
|Principal repayments         | (202)  | (123) 
|                             |        |       
|Balance at end of
      year | $1,004 | $1,016

---

---

The Company's "Second Chance" loan program to originate loans to individuals
with less than prime credit was discontinued during June 2000. These loans are
insured by credit-default insurance. Repossessed assets are carried at the lower
of cost or fair value adjusted for expected credit-default insurance proceeds
and hazard insurance proceeds. The credit-default insurance claims are carried
at the filed claim amount. The activity in the reserve for repossessed assets
and insurance claims is as follows for the years ended September 30:

|                  | 2001  | 2000  | 1999 
|----------------- | ----- | ----- | -----
|                  |       |       |      
|Beginning balance | $  96 | $  21 | $  60
|Provision         | 225   | 147   | 140  
|Charge-offs       | (221) | (72)  | (179)
|                  |       |       |      
|Ending balance    | $100  | $  96 | $  21

The following summarizes the Company's secondary market activities:

|                                                | 2001         | 2000         | 1999     
|----------------------------------------------- | ------------ | ------------ | ---------
|                                                |              |              |          
|**Mortgage**                                    |              |              |          
|Proceeds from
      sale of mortgage loans      | $14,762      | $12,361      | $16,980  
|                                                |              |              |          
|Gain on sale
      of mortgage loans            | $     271    | $     198    | $     167
|                                                |              |              |          
|Gain on sale
      of mortgage servicing rights | -            | 45           | 142      
|                                                |              |              |          
|                                                | $     271    | $     243    | $     309
|                                                |              |              |          
|Loans serviced
      for others                 | $  2,099     | $  1,741     | $  1,819 
|                                                |              |              |          
|**Consumer**                                    |              |              |          
|Proceeds from
      sale of consumer loans      | $          - | $          - | $  5,693 
|                                                |              |              |          
|Gain on sale
      of consumer loans            | $          - | $          - | $     478
|                                                |              |              |          
|Loans serviced
      for others                 | $  1,426     | $  3,067     | $  4,959 

---

---

Following is an analysis of the change in servicing rights for the years
ended September 30, 2001 and 2000:

|                  | 2001  | 2000 
|----------------- | ----- | -----
|                  |       |      
|Beginning balance | $279  | $545 
|Amortization      | (169) | (266)
|                  |       |      
|Ending balance    | $110  | $279 

A summary of premises and equipment at September 30 is as follows:

|                           | 2001    | 2000   
|-------------------------- | ------- | -------
|                           |         |        
|Land                       | $   425 | $   423
|Buildings and improvements | 1,972   | 1,825  
|Furniture and equipment    | 1,863   | 1,932  
|Construction in process    | -       | 15     
|Total
      cost           | 4,260   | 4,195  
|Accumulated depreciation   | (2,256) | (2,015)
|                           | $2,004  | $2,180 

Certificate of deposit accounts with a minimum denomination of $100,000 or
more totaled $10,659,000 and $9,307,000 at September 30, 2001 and 2000,
respectively.

At September 30, 2001, scheduled maturities of certificates of deposit are as
follows:

|Year Ending         |        
|------------------- | -------
|                    |        
|2002                | $38,835
|2003                | 7,042  
|2004                | 1,031  
|2005                | 2,506  
|2006 and thereafter | 530    
|                    |        
|                    | $49,944

---

---

There were no outstanding advances as of September 30, 2001. At September 30,
2000, secured advances from the Federal Home Loan Bank were as follows:

|Interest Rate | Maturity Date   | Balance
|------------- | --------------- | -------
|              |                 |        
|6.63%         | October 6, 2000 | $3,000 

The maximum amount of credit available, secured by a blanket lien on first
mortgages, is the lesser of 75% of qualifying collateral or 35% of total assets
of the Bank. At September 30, 2001, the Bank had the ability, if needed, to
borrow up to approximately $23,300,000 from the Federal Home Loan Bank of
Dallas.

The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, first mortgage loans on residential property
(not more than 90 days delinquent), aggregating no less than 133% of the
outstanding secured advances from the Federal Home Loan Bank of Dallas.

Debentures consist of 3,629 units, each unit consisting of a $1,000 debenture
and nine detachable warrants exercisable at an exercise price of $12.50 per
share. At September 30, 2001 and 2000, debentures total $3,629,000, bear an
interest rate of 11.5%, and mature on March 31, 2003. The Company's
debentures require quarterly interest payments of approximately $105,000. See
Note 16 for additional discussion.

**NOTE 9 - BENEFIT PLANS**

During 1999, the Company's Board of Directors adopted a stock option and
incentive plan (the Plan) under the terms of which 40,000 shares of common stock
were reserved for issuance. The options become exercisable immediately upon date
of grant and expiration terms will be no greater than ten years for incentive
stock options and no greater than fifteen years for non-qualified stock
options.

---

---

**NOTE 9 - BENEFIT PLANS** (Continued)

A summary of the status of the Company's stock option plan and changes during
the year are presented below:

|                                                                  | 2001Shares    | 2000Shares    | 1999Shares   | Weighted-AverageExercisePrice
|----------------------------------------------------------------- | ------------- | ------------- | ------------ | -----------------------------
|Outstanding at beginning of year                                  | 27,250        | 27,250        | -            | $          -                 
|Granted                                                           | -             | -             | 27,250       | 8.00                         
|Exercised                                                         | -             | -             | -            | -                            
|Forfeited                                                         | -             | -             | -            | -                            
|                                                                 
|Outstanding at end
      of year                                  | 27,250        | 27,250        | 27,250       | $    8.00                    
|                                                                 
|Options exercisable at end of year                                | 27,250        | 27,250        | 27,250       |                              
|Weighted-average fair value
      of  options granted during year | $           - | $           - | $        .97 |                              
|Average remaining option term                                     | 9.9 years     | 10.9 years    | 11.9 years   |                              



The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been recognized
at the date of grant. Had compensation cost been determined based on the fair
value at the grant dates for awards under the plan consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma amounts
in the table below. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the options' vesting period,
which resulted in full amortization during the fiscal year ended September 30,
1999 as a result of the options immediate vesting per the plan.

|Net income as reported         | $245
|------------------------------ | ----
|Pro forma net income           | 225 
|Earnings per share as reported
|Basic and
diluted              | .52 
|Pro forma earnings per share  
|Basic and
diluted              | .48 



---

---

**NOTE 9 - BENEFIT PLANS** (Continued)

The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. The expected stock volatility has been considered not applicable
because, since the formation of the Company, there has been limited stock
transactions. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options. The fair value of options granted is estimated using the following
information:

|                                               | IncentiveStockOptions | NonqualifiedStockOptions
|---------------------------------------------- | --------------------- | ------------------------
|Date of grant                                  | May 25, 1999          | May 25, 1999            
|Options granted                                | 15,250                | 12,000                  
|Estimated fair value stock of options granted: | $.48                  | $1.60                   
|Assumptions used:                             
|Risk-free interest rate                        | 5.61%                 | 5.61%                   
|Expected option
    life                       | 10 years              | 15 years                
|Expected stock price
      volatility          | N/A                   | N/A                     
|Expected dividend
      yield                  | N/A                   | N/A                     



In 1999, the Company curtailed and initiated termination of its defined
benefit pension plan, which covered substantially all employees. A curtailment
loss of approximately $172,000 was recognized in 1999. During the year ended
September 30, 2000, the Company received approval from the Pension Benefit
Guaranty Corporation to terminate this plan and distribute the assets. The
Company terminated this plan and settled all of its obligations. There was no
additional settlement gain or loss recognized.

An employee 401(k) profit sharing plan was approved by the Board of Directors
effective January 1, 1999. The plan covers employees having completed three
months of service and who are at least 21 years of age. Discretionary and
matching contributions to the profit sharing plan are determined and approved
annually by the Company's Board of Directors. There was a contribution of $9,000
for the year ended September 30, 2001. There was no contribution for the
years ended September 30, 2000 and 1999.

The Bank entered into an employment, consulting, and supplemental retirement
agreement on July 1, 1997 with the President and Chief Executive Officer of the
Bank. The employment and consulting portions of the agreement have a combined
term of five years from the commencement date of July 1, 1997. The consulting
portion commences upon completion of the three-year employment period and calls
for annual consulting fees equal to $58,200 payable in equal monthly
installments. The supplemental retirement agreement commences on the later of
the retirement date or July 1, 2002 and is based on services commencing on July
1, 1997.

---

---

**NOTE 9 - BENEFIT PLANS (Continued)**

During the year ended September 30, 2000, the President and Chief Executive
Officer of the Bank resigned. In connection with his resignation, the Company
reached a settlement of the above agreement which required a one-time payment of
$95,000 and lifetime monthly payments of $5,900. The liability for the one-time
payment was recorded as of September 30, 2000. In addition, since all monthly
amounts due under this plan are fully vested, an additional liability of
approximately $414,000 was recorded as of September 30, 2000. The liability for
the monthly payments was recorded based on actuarial assumptions.

**NOTE 10 - REGULATORY AND CAPITAL MATTERS**

*Supervisory Agreemen***t**

In September of 2000, the Board of Directors received a Supervisory Agreement
("Agreement") from the OTS. The Agreement requires the Bank to (1) take all
necessary and appropriate actions to comply with various OTS regulations; (2)
make provisions, within 30 days prior to the termination of the interim
president and chief executive officer's employment contract, to retain or employ
an OTS approved president and chief executive officer; (3) not make any
severance payments to its former president except after receipt of a written
notice of non-objection from the Regional Director of the OTS. In addition, the
Board of Directors shall establish a workable committee structure that provides
for all committees to meet on a regular basis; (4) develop a one-year business
plan, which will be monitored by the Board of Directors and includes: (a) a
target date no later than March 31, 2001 for reaching well capitalized status,
(b) a contingent capital plan, (c) strategies for reducing noninterest expense,
(d) development of profitable lines of business, and (e) strategies for
improving branch profitability; (5) discontinue the subprime lending
program as well as dispose of repossessed assets in accordance with policy,
recognize losses in a timely manner, and review the allowance for loan losses
for adequacy at least quarterly; (6) comply with affiliates transaction rules;
and (7) comply with various provisions as related to changes in Directors
or Executive Officers, Terms of Employment, and Golden Parachute payments.

The various plans, policies, and procedures developed by the Bank were
approved by the OTS except that, although the Bank submitted the required
strategic plan and earnings projections on a timely basis, the Bank, due to the
settlement of the supplemental employee retirement plan, did not anticipate
being able to achieve a well capitalized status by March 31, 2001. As a part of
the original strategic plan, the Company developed various contingency plans in
case earnings and capital did not improve by March 31, 2001. These contingency
plans could include the (1) sale of real estate and/or the sale of Second Chance
auto loans, which would result in after-tax gains, (2) capital raising
initiatives, and (3) a strategic alliance. See Note 16 for additional
discussion.

---

---

******NOTE 10 - REGULATORY AND CAPITAL MATTERS**(Continued)

*Capital Matters*

The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital as defined in the regulations to risk-weighted assets as defined and of
Tier I capital to average assets as defined. As of September 30, 2001, the most
recent notification from the OTS categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios. At September 30, 2001 and 2000, the Bank
did not meet the minimum requirement to be well capitalized but was considered
adequately capitalized under prompt corrective action regulations.

At year end, actual capital levels of the Bank and minimum required levels
were:

|                                                     | Actual | Minimum Requiredfor
      CapitalAdequacy Purposes | Minimum Requiredto be
      WellCapitalized UnderPrompt CorrectiveAction Regulations
|---------------------------------------------------- | ------ | -------------------------------------------------- | ------------------------------------------------------------------------------------
|                                                     | Amount | Ratio                                              | Amount                                                                              
|2001                                                 |        |                                                    |                                                                                     
|Total capital (to risk-weighted assets)              | $5,371 | 9.08%                                              | $4,732                                                                              
|Tier 1 (core) capital (to risk-weighted
assets)      | 5,009  | 8.47                                               | 2,366                                                                               
|Tier 1 (core) capital (to adjusted total
    assets) | 5,009  | 6.01                                               | 3,331                                                                               
|                                                     |        |                                                    |                                                                                     
|2000                                                 |        |                                                    |                                                                                     
|Total capital (to risk-weighted assets)              | $5,973 | 8.99%                                              | $5,316                                                                              
|Tier 1 (core) capital (to risk-weighted
assets)      | 5,589  | 8.41                                               | 2,658                                                                               
|Tier 1 (core) capital (to adjusted total
    assets) | 5,589  | 6.59                                               | 3,392                                                                               



---

---

******NOTE 10 - REGULATORY AND CAPITAL MATTERS**(Continued)

Accordingly, management considers the capital requirements to have been met.
OTS regulations also include restrictions on loans to one borrower; certain
types of investments and loans; loans to officers, directors, and principal
stockholders; brokered deposits; and transactions with affiliates.

Federal regulations require the Bank to comply with a Qualified Thrift Lender
(QTL) test, which requires that 65% of assets be maintained in housing-related
finance and other specified assets. The QTL ratio at September 30, 2001 was
80.24%. If the QTL test is not met, limits are placed on growth, branching, new
investments, FHLB advances, and dividends or the institution must convert to a
commercial bank charter. Management considers the QTL test to have been met.

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

Delaware law generally limits dividends of the Company to an amount equal to
the excess of its net assets over its paid-in capital or, if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year. In addition, the Company is prohibited from paying dividends on junior
securities such as the Company's common stock unless all interest payments with
respect to the debentures have been made.

Bank Series A preferred stock has a $ .01 par value, is nonvoting, and
entitles the holder to a $10 per share liquidation preference. The stock bears
non-cumulative quarterly dividends at an annual rate of 10%. At the Bank's
option, the stock can be redeemed after two years. The Bank preferred stock is
reflected as minority interest in the consolidated statements of financial
condition.

---

---

**NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES, AND
CONCENTRATIONS**

The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to make loans and fund lines
of credit and loans-in-process. The Company's exposure to credit loss in the
event of nonperformance by the other party to these financial instruments is
represented by the contractual amount of these instruments. The Company follows
the same credit policy to make such commitments as it uses for on-balance-sheet
items.

At September 30, these financial instruments are summarized as follows:

|                                                                           | Contract Amount
|-------------------------------------------------------------------------- | ---------------
|                                                                           | 2001           
|Financial instruments whose contract
      amounts  represent credit risk:
|Commitments to make
      loans                                            | $3,182         
|Loans-in-process                                                           | 2,950          
|Lines of credit                                                            | 1,214          
|Letters of
credit                                                          | 103            



The Company had $2.3 million of fixed rate commitments to originate loans,
ranging from 7.0% to 10.50% at September 30, 2001. The commitments have terms of
75 days. Since many commitments to make loans expire without being used, the
amount above does not necessarily represent future cash commitments. Collateral
may be obtained upon exercise of a commitment. The amount of collateral is
determined by management and may include commercial and residential real estate
and other business and consumer assets.

Financial instruments that potentially subject the Company to concentrations
of credit risk include interest-bearing deposit accounts in other financial
institutions and loans. At September 30, 2001 and 2000, the Company had deposit
accounts with balances totaling approximately $1.1 and $4.6 million at the
Federal Home Loan Bank of Dallas. Concentrations of loans are described in Note
3.

---

---

**NOTE 11 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS**(Continued)

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

The Company entered into a noncancelable operating lease for office space for
the mortgage operations effective January 1, 1999 with a term of three years and
one option to renew for an additional three years. The Bank has closed this
location and subleased the property for the remaining term. The Company also
entered into an operating lease for premises to be used for the purpose of
automobile sales related to the Dealership. The lease became effective August 1,
1999 with a term to expire on May 14, 2001. The lease was terminated in February
of 2001. In addition, the Company paid $10,000 for an option to purchase the
property for a minimum price of $110,000 adjusted by any increase in the
Consumer Price Index. The Company did not exercise this option. Rental expense
was approximately $26,000 and $43,000 for the years ended September 30,
2001 and 2000, respectively.

**NOTE 12 - INCOME TAX EXPENSE (BENEFIT)**

The provision for income tax expense (benefit) consists of the following:

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|                                      | 2001                    
|Current income tax expense (benefit)  | $(150)                  
|Deferred income tax expense (benefit) | (34)                    
|Valuation allowance                   | 100                     
|                                      | $(84)                   

The provision for income tax differs from that computed at the statutory
corporate tax rate as follows:

|                                              | Year Ended September 30,
|--------------------------------------------- | ------------------------
|                                              | 2001                    
|Tax expense (benefit) at statutory rate (34%) | $(210)                  
|Nondeductible reorganization costs            | -                       
|Preferred stock dividends                     | 29                      
|Other tax effects                             | (3)                     
|Valuation allowance                           | 100                     
|                                              | $ (84)                  

---

---

**NOTE 12** **- INCOME TAX EXPENSE (BENEFIT)**(Continued)

Deferred tax assets (liabilities) are comprised of the following at September
30:

|                                               | 2001     | 2000   
|---------------------------------------------- | -------- | -------
|Supplemental employee retirement agreement     | $  184   | $  225 
|Pension liability                              | -        | 2      
|Loans, principally due to allowance for losses | 30       | 8      
|Depreciation and other                         | 11       | 12     
|Total deferred tax
      assets                | 225      | 247    
|                                               |          |        
|                                               |          |        
|Federal Home Loan Bank stock dividends         | (88)     | (80)   
|Servicing rights                               | (37)     | (95)   
|Total deferred tax
      liabilities           | (125)    | (175)  
|Valuation allowance                            | (100)    | -      
|Net deferred tax assets
      (liabilities)    | $      - | $    72

The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts that differs
from the provision charged to income in the financial statements. Retained
earnings at September 30, 2001 include approximately $643,000, representing tax
bad debt provisions through 1988, for which no deferred federal income tax
liability has been recorded.

A valuation allowance has been established as the Company has not generated
any taxable income in the prior two years; may not have taxable income in the
foreseeable future; and accordingly, may not be able to utilize the deferred tax
assets.

---

---

**NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS**

The approximate carrying amount and estimated fair value of financial
instruments at September 30 is as follows:

|                                                                       | 2001                      | 2000               
|---------------------------------------------------------------------- | ------------------------- | -------------------
|                                                                       | ApproximateCarryingAmount | EstimatedFair Value
|Financial assets                                                      
|Cash and cash
      equivalents                                        | $    4,119                | $    4,119         
|Securities                                                             | 9,957                     | 9,951              
|Loans, net of
      allowance      loan losses                         | 61,857                    | 63,079             
|Loans held for
    sale                                                | 2,355                     | 2,355              
|Federal Home Loan Bank
      stock                                     | 458                       | 458                
|Accrued interest
      receivable                                      | 544                       | 544                
|Financial liabilities                                                 
|Demand
      deposits                                                  | $(21,974)                 | $(21,974)          
|Savings deposits                                                       | (4,264)                   | (4,264)            
|Time deposits                                                          | (49,944)                  | (50,649)           
|Advance payments by
      borrowers      for taxes and
      insurance | (709)                     | (709)              
|Federal Home Loan Bank
      Advances                                  | -                         | -                  
|Debentures                                                             | (3,629)                   | (3,766)            
|Accrued interest
      payable                                         | (265)                     | (265)              

For the purposes of above, the following assumptions were used:

Cash and Cash Equivalents: The estimated fair values for cash and cash
equivalents are based on their carrying values due to the short-term nature of
these assets.

Securities: The fair values of securities are based on the quoted
market value for the individual security or its equivalent.

Loans: The estimated fair value for loans has been determined by
calculating the present value of future cash flows based on the current rate the
Company would charge for similar loans with similar maturities, applied for an
estimated time period until the loan is assumed to be repriced or
repaid.

---

---

**NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS**
(Continued)

Federal Home Loan Bank Stock: The fair value of Federal Home
Loan Bank stock is assumed to approximate its carrying value.

Deposit Liabilities: The estimated fair value for time deposits has
been determined by calculating the present value of future cash flows based on
estimates of rates the Company would pay on such deposits, applied for the time
period until maturity. The estimated fair values of interest-bearing demand and
savings deposits are assumed to approximate their carrying values as management
establishes rates on these deposits at a level that approximates the local
market area. Additionally, these deposits can be withdrawn on demand.

Loans Held for Sale: The fair value of loans held for sale is based on
market quotes.

Accrued Interest: The fair values of accrued interest receivable and
payable are assumed to equal their carrying values.

Federal Home Loan Bank Advances and Advance Payments by Borrowers for
Taxes and Insurance: The fair values are assumed to approximate the carrying
values.

Debentures: The estimated fair value of debentures is based on
calculating the present value of future cash flows using the current rate for a
note with similar risk characteristics and similar length to maturity. The
current rate was obtained from inquiry of investment bankers familiar with the
thrift industry and the risk associated with debentures based on recent issuance
of similar debentures.

Off-Balance-Sheet Instruments: Off-balance-sheet items consist
principally of unfunded loan commitments. The fair value of these commitments is
not material.

Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits and
similar items.

While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that if the Company disposed of these
items on September 30, 2001, the fair value would have been achieved, because
the market value may differ depending on the circumstances. The estimated fair
values at September 30, 2001 should not necessarily be considered to apply at
subsequent dates.

---

---

**NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION**

CONDENSED BALANCE SHEETSSeptember 30, 2001 and 2000

|                                               | 2001    | 2000   
|---------------------------------------------- | ------- | -------
|**ASSETS**                                    
|Cash                                           | $    33 | $   112
|Equity interest in bank subsidiary             | 5,019   | 5,589  
|Equity interest in nonbank subsidiary          | -       | (27)   
|Other assets                                   | 419     | 437    
|                                               | $5,471  | $6,111 
|**LIABILITIES AND STOCKHOLDERS'
      EQUITY**
|Debentures                                     | $3,629  | $3,629 
|Accrued interest and other liabilities         | 115     | 232    
|Total
liabilities                              | 3,744   | 3,861  
|Minority interest                              | 873     | 873    
|Stockholders' equity                          
|Common stock                                   | 5       | 5      
|Additional paid-in
      capital               | 2,117   | 2,117  
|Retained deficit                               | (1,278) | (745)  
|Accumulated other
      comprehensive income   | 10      | -      
|Total
      stockholders' equity               | 854     | 1,377  
|                                               | $5,471  | $6,111 

---

---

**NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION**
(Continued)

CONDENSED STATEMENTS OF INCOMEFor the years ended September
30, 2001, 2000, and 1999

|                                                                                                                | 2001     | 2000    | 1999   
|--------------------------------------------------------------------------------------------------------------- | -------- | ------- | -------
|Income                                                                                                         
|Interest income                                                                                                 | $      - | $     3 | $     8
|Dividends from bank
      subsidiary                                                                            | 480      | 604     | 156    
|Other income                                                                                                    | -        | 10      | -      
|Total
      income                                                                                              | 480      | 617     | 164    
|                                                                                                               
|
|Expenses                                                                                                       
|
|Interest expense                                                                                                | 423      | 424     | 425    
|Other expenses                                                                                                  | 294      | 403     | 290    
|Total
      expenses                                                                                            | 717      | 827     | 715    
|**Loss before equity in
      undistributed  earnings of subsidiary**                                           | (237)    | (210)   | (551)  
|                                                                                                               
|Equity in undistributed
      (overdistributed)  earnings (loss) of subsidiaries                                | (510)    | (658)   | 572    
|                                                                                                                |          |         |        
|Income (loss) before income tax benefit
      and  cumulative effect of a change in
      accounting  principle | (747)    | (868)   | 21     
|                                                                                                               
|Income tax benefit                                                                                              | (214)    | (230)   | (224)  
|Income (loss) before cumulative effect of
      a  change in accounting principle                               | (533)    | (638)   | 245    
|                                                                                                               
|Cumulative effect of a change in accounting
      principle                                                     | -        | 100     | -      
|                                                                                                               
|Net income (loss)                                                                                               | $(533)   | $(738)  | $245   

---

---

**NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION**
(Continued)

CONDENSED STATEMENTS OF CASH FLOWSFor the years ended
September 30, 2001, 2000, and 1999

|                                                                                                   | 2001   | 2000   | 1999 
|-------------------------------------------------------------------------------------------------- | ------ | ------ | -----
|**Cash flows from operating
      activities**                                                    
|Net income
(loss)                                                                                  | $(533) | $(738) | $245 
|Adjustments to reconcile
      net income to      net cash provided by
      operating activities:
|Equity
      in undistributed earnings of subsidiary                                               | 510    | 658    | (572)
|Amortization
      of debt issuance and reorganization costs                                       | 100    | 100    | 100  
|Cumulative
      effect of a change in accounting principle                                        | -      | 100    | -    
|Increase
      in other assets, net of liabilities                                                 | (156)  | (35)   | (187)
|                                                                                                  
|Change in cash and cash equivalents                                                                | (79)   | 85     | (414)
|                                                                                                  
|Cash and cash equivalents at beginning of
      period                                             | 112    | 27     | 441  
|                                                                                                  
|**Cash and cash equivalents at end of
      period**                                               | $   33 | $  112 | $27  
|                                                                                                  
|Supplemental disclosures of cash flow
      information                                           
|Cash paid during the
      period
      for          Interest                                      | $417   | $417   | $417 

**NOTE 15 - OTHER COMPREHENSIVE INCOME**

Other comprehensive income components and related taxes were as follows:

|                                                                        | 2001  | 2000 | 1999
|----------------------------------------------------------------------- | ----- | ---- | ----
|Realized and unrealized gains
      on  securities available-for-sale   | $  34 | $  - | $  -
|Less reclassification adjustments
      for  gains recognized in income | 19    | -    | -   
|                                                                        |       |      |     
|Net unrealized
    gains                                                | 15    | -    | -   
|Tax expense                                                             | 5     | -    | -   
|Other comprehensive
      income                                        | $  10 | $  - | $  -

---

---

**NOTE 16 - MANAGEMENT'S PLANS AND MERGER**

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
continuation of operations in the ordinary course of business and does not
reflect any adjustments that might result if the Company is unable to operate as
a going concern. The Company is dependent on operating cash and dividends from
the Bank in order to pay interest on the debentures and operating expenses.
Failure to timely pay the interest on the debentures may result in a default
under the indenture governing the debentures, resulting in acceleration of the
maturity of the principal balance and a demand for payment from debenture
holders that the Company could not currently meet. As discussed in Note 10, the
Bank is required to apply to the OTS for approval to pay dividends to the
Company. As of January 3, 2002, the Bank has received OTS approval to pay
dividends of $487,000 to the Company. Management has projected that these
dividends will allow the Company to make all of the necessary interest payments
and pay expected operating expenses for the year ending September 30,
2002.

Also, as discussed in Note 10, if the Company did not reach a well
capitalized status by March 31, 2001 and earnings had not improved, various
contingency plans would be contemplated. As a result, on November 5, 2001, Texas
United Bancshares, Inc. ("Texas United") and Bryan-College Station Financial
Holding Company ("Bryan") entered into a definitive agreement for Texas United
to acquire Bryan and merge the respective banking operations. The agreement
provides that the stockholders of Bryan will receive .31579 shares of Texas
United common stock for each Bryan common share. The proposed transaction is
subject to regulatory approval and the approval of the Bryan stockholders. The
transaction is expected to be completed in the second calendar quarter of 2002.
In the event this transaction is not completed, the Company will continue to
look at other alternatives.

---

**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.



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

**Executive Officers**

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

***Wilson L. Fletcher.***   Mr. Fletcher, age 61, joined the Company on November 5, 2001, as
President and Chief Executive Officer of the Holding Company and the Bank.  Mr. Fletcher has
over 25 years of banking experience having served as Chief Executive Officer in three financial
institutions and Chief Financial Officer in three financial institutions.  For the past five years, Mr.
Fletcher has been engaged in financial consulting engagements with such companies as Ultamar
Diamond Shamrock, Mobil Corporation, NCR Corporation, and John Floyd and Associates.  Mr.
Fletcher has a Master's Degree and is a Certified Public Accountant in the State of Texas.

***Mary L. Hegar.***     Ms. Hegar, age 47, joined First Federal in 1977 and became Assistant
Secretary/Treasurer in 1987 and was promoted to Senior Vice President/Financial and Regulatory
in 1992. 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
Company's Asset/Liability Committee.

**Directors**

The table below sets forth certain information regarding the Company's directors.  Except
as otherwise indicated, all positions listed below are with the Holding Company and the Bank.

|Name               | Age(1) | Position(s) Held                                   | Director Since(2) | Term toExpire
|------------------ | ------ | -------------------------------------------------- | ----------------- | -------------
|                  
|Helen Chavarria    | 64     | Director                                           | 1999              | 2002         
|Robert H. Conaway  | 48     | Vice Chairman of the Board                         | 1995              | 2002         
|Ken L. Hayes       | 62     | Director                                           | 1993              | 2002         
|George Koenig      | 57     | Director and Executive Vice President  of the Bank | 1996              | 2002         
|Joseph W. Krolczyk | 62     | Director, Secretary/Treasurer                      | 1998              | 2002         
|Charles E. Neelley | 72     | Director                                           | 1993              | 2002         
|Richard L. Peacock | 83     | Director                                           | 1965              | 2002         
|Roland Ruffino     | 51     | Director                                           | 1995              | 2002         
|Gary A. Snoe       | 43     | Chairman of the Board                              | 1998              | 2002         
|Ernest A. Wentrcek | 73     | Director                                           | 1965              | 2002         

The principal occupation of each director is set forth below.  All directors have held their
present position for at least five years unless otherwise indicated.

***Helen Chavarria***.  Ms. Chavarria is a retired Housing Management Specialist for the
Brazos Valley Council of Government.

***Robert H. Conaway.***  Mr. Conaway is Vice Chairman of the Boards of the Holding
Company and the Bank, positions he has held since May 2000.  He is also the founder and
President of Progress Supply Inc., located in Bryan, Texas, a distributor of wholesale supply
plumbing fixtures and contractors' supplies.

***Ken L. Hayes.***  Mr. Hayes is the owner of Aggieland Travel, located in College Station,
Texas, a full-service travel agency.

***George Koenig.***  Mr. Koenig is currently serving as Executive Vice President of  the
Bank.  Mr. Koenig was previously employed as an executive operations officer with a local
financial institution located in Bryan, Texas.

***Joseph W. Krolczyk.***  Mr. Krolczyk is Secretary/Treasurer of the Boards of the Holding
Company and the Bank, positions he has held since May 2000.  He has served as the owner and
President of KESCO Supply, Inc., a food service equipment and supply firm located in Bryan,
Texas, for over 20 years.

***Charles E. Neelley.***  Mr. Neelley served as Secretary/Treasurer of the Board of the Bank
from November 1995 until May 2000 and as Secretary/Treasurer of the Board of the Holding
Company from April 1998 to May 2000.  Mr. Neelley is retired from Texas A&M University and
the travel agency business.  He is currently active in the mini-storage business.

***Richard L. Peacock.***  Mr. Peacock served as Chairman of the Board of the Bank from
November 1995 to May 2000 and as Chairman of the Board of the Holding Company from April
1998 to May 2000.  Mr. Peacock has been retired since 1983 from a privately owned retail office
supply and furniture business located in Bryan, Texas.  Prior to that time, he was in the restaurant
business for approximately 12 years and the soft-drink bottling business for five years.  He has
also managed a health resort and clinic located in Marlin, Texas.

***Roland Ruffino.***  Mr. Ruffino is a partner of Readfield Meats, Inc., a long-time leading
wholesale and retail meat distributor located in Bryan, Texas.

***Gary A. Snoe.***  Mr. Snoe is Chairman of the Boards of the Holding Company and the
Bank, positions he has held since May 2000.  He is also the owner and President of Snoe Inc., a
precision, speciality machining and welding plant located in the Bryan, Texas trade area.  He was
previously the owner of a machine and welding plant for over 19 years in Houston, Texas.

***Ernest A. Wentrcek, Sr.***  Mr. Wentrcek was one of the organizers of First Federal and is
one of only two members of the original Board of Directors that has served on that Board since
1965.  Mr. Wentrcek was Secretary/Treasurer of the Bank's Board of Directors until 1995 when
he was elected Vice Chairman of the Bank's Board of Directors, and later was elected Vice
Chairman of the Holding Company's Board of Directors when it was formed in 1998.  He held
those positions until May 2000.  He continues to serve on the Boards of the Holding Company
and the Bank.  In September 1988, he retired as the Associate Director for Business Affairs of the
Texas Engineering Extension Service, Texas A&M University System, a vocational education
organization.  He is a former member of the Finance Committee of the Supreme Lodge of the
Slavonic Benevolent Order of the State of Texas (SPJST), serving from January 1981 through
December 2000.  Mr. Wentrcek is a licensed Real Estate Broker.  He is also a member of the
American Legion Post 159-Bryan.

**Section 16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) of the Exchange Act of 1934 requires the Holding Company's
directors and executive officers, and persons who own more than 10% of the Holding Company's
common stock to report their initial ownership of the Holding Company's common stock and any
subsequent changes in that ownership to the Securities and Exchange Commission (the "SEC").
Specific due dates for these reports have been established by the SEC and the Holding Company
is required to disclose in this proxy statement any late filings or failures to file.

To the Holding Company's knowledge, based solely on a review of the copies of such
reports furnished to the Holding Company and written representations that no other reports are
required, during the fiscal year ended September 30, 2001, 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**

**Director Compensation**

Outside directors receive $300 for each board meeting and $100 for each committee
meeting attended, not to exceed a maximum of $400 per month.

**Executive Compensation**

The following table sets forth information concerning the compensation paid or granted
to the person who served as the Company's Chief Executive Officer during fiscal year 2001 and
to one other executive officer of the Bank who made in excess of $100,000 in salary and bonus
during fiscal year 2001.  Neither Mr. Rinehart nor Mr. McCrady exercised or held any stock
options during fiscal 2001.

|SUMMARY COMPENSATION TABLE                                    
|--------------------------------------------------------------
|                                                              
|                                                              
|Name andPrincipal Position                                    
|David D. Rinehart,(1)*President and Chief   Executive Officer*
|James D. McCrady, Jr.(2)*Senior Vice President*               

**Employment Agreements**

On October 2, 2000, the Bank entered into an employment agreement with David
Rinehart.  Under the terms of the agreement, Mr. Rinehart was entitled to receive an annual base
salary in an amount not less than his salary of $135,000 in effect as of the commencement date of
the agreement, and to participate in discretionary bonuses as authorized and declared by the
Bank's Board of Directors.  The agreement also guaranteed participation in an equitable manner
in employee benefits applicable to executive personnel.  The employment agreement was for an
initial term of two years and provided for annual extensions of one year, in addition to the then-remaining term thereunder, on each anniversary of the commencement date of the agreement
(*i.e.*, each October 2) upon written approval by the Bank's Board of Directors.  The agreement
provided for termination upon the employee's death, for cause, in certain events specified by
Office of Thrift Supervision regulations, or by Mr. Rinehart upon 90 days written notice to the
Bank.

In the event there was a "change in control" (as defined in the employment agreement) of
the Bank where Mr. Rinehart's employment was terminated in connection with, or twelve
months after the change in control, the employment agreement provided for a lump sum payment
to Mr. Rinehart of 299% of his base average annual compensation over the most recent five year
period or such shorter period since employment and continuation of health benefits for the
remaining term of the employment agreement.  Based on his compensation at September 30,
2001, if Mr. Rinehart was terminated under circumstances entitling him to severance pay as
described above, he would have been entitled to receive a lump sum cash payment of
approximately $403,650.  Mr. Rinehart resigned effective November 2, 2001.

**Item 11.  Security Ownership of Certain Beneficial Owners and Management**

**Stock Ownership of Significant Shareholders, Directors and Executive Officers**

The following table presents information regarding the beneficial ownership of the
Company's common stock as of December 31, 2001, by those persons or entities (or group of
affiliated persons or entities) known by management to beneficially own more than five percent
of the outstanding common stock of the Company, each director of the Company, each executive
officer of the Company, and all of the executive officers and directors of the Company as a
group.

The persons named in the following table have sole voting power for all shares of
common stock shown as beneficially owned by them, subject to community property laws where
applicable and except as indicated in the footnotes to this table.  The address of each of the
beneficial owners, except where otherwise indicated, is the same address as that of the Company.
An asterisk (*) in the table indicates that an individual beneficially owns less than one percent of
the outstanding common stock of the Company.  Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission (the "SEC").  As of
December 31, 2001, there were 471,411 shares of the Company's common stock outstanding.

|Name of Beneficial Owner                                                                   | BeneficialOwnership | Percent of Common StockOutstanding
|------------------------------------------------------------------------------------------ | ------------------- | ----------------------------------
|***Significant Shareholder***                                                              |                     |                                   
|J. Stanley Stephen and Jean Stephen(1)2514 Memorial DriveBryan, TX  77802                  | 36,388              | 7.72%                             
|                                                                                           |                     |                                   
|***Directors and Named Executive Officers****(2)*                                          |                     |                                   
|Helen Chavarria                                                                            | 330                 | *                                 
|Robert H. Conaway                                                                          | 8,121               | 1.72                              
|Ken L. Hayes                                                                               | 2,410               | *                                 
|George Koenig                                                                              | 1,330               | *                                 
|Joseph W. Krolczyk                                                                         | 6,038               | 1.28                              
|James D. McCrady, Jr.                                                                      | ---                 | ---                               
|Charles E. Neelley                                                                         | 14,916              | 3.15                              
|Richard L. Peacock                                                                         | 9,147               | 1.93                              
|David D. Rinehart                                                                          | ---                 | ---                               
|Roland Ruffino                                                                             | 13,820              | 2.92                              
|Gary A. Snoe                                                                               | 14,086              | 2.98                              
|Ernest A. Wentrcek                                                                         | 9,809               | 2.07                              
|Directors and executive officers of the Company and the Bank as a
   group (13 persons)(3) | 82,881              | 17.11                             

|Mr. Conaway - 1,500 shares  | Mr. Hayes - 1,500 shares   | Mr. Koenig - 1,000 shares  
|--------------------------- | -------------------------- | ---------------------------
|Mr. Krolczyk - 1,500 shares | Mr. Neelley - 1,500 shares | Mr. Peacock - 1,500 shares 
|Mr. Ruffino - 1,500  shares | Mr. Snoe - 1,500 shares    | Mr. Wentrcek - 1,500 shares

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

The Bank, like many financial institutions, has followed a policy of granting to officers,
directors and employees, loans secured by the borrower's residence, along with certain consumer
loans and business loans, if the borrower is credit-worthy.  All loans to the Bank's officers and
directors are made in the ordinary course of business and generally on the same terms, including
interest rate and collateral, and conditions as those of comparable transactions prevailing at the
time, and do not involve more than the normal risk of collectibility or present other unfavorable
features.

All loans by the Bank to its directors and executive officers are subject to the OTS
regulations restricting loans and other transactions with affiliated persons of the Bank.  Federal
law currently requires that all loans to directors and executive officers generally be made on
terms and conditions comparable to those for similar transactions with non-affiliates.  Loans to
all directors and executive officers and their associates totaled $1.0 million at September 30,
2001, which was 20% of the Bank's equity capital at that date.  All loans to directors and
executive officers were performing in accordance with their terms at September 30, 2001.

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

**(a)	Exhibits**

|RegulationS-B ExhibitNumber | Document                                                                                                                                     | Reference toPrior FIlingor ExhibitNumberAttachedHereto                                                                                                                                                                                                                                                                                                                           
|--------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2                           | Plan of acquisition, reorganization, arrangement,liquidation or succession                                                                   | None                                                                                                                                                                                                                                                                                                                                                                             
|3(a)                        | Certificate of Incorporation                                                                                                                 | *                                                                                                                                                                                                                                                                                                                                                                                
|3(b)                        | By-Laws                                                                                                                                      | ***                                                                                                                                                                                                                                                                                                                                                                              
|4                           | Instruments defining the rights of securityholders, including debentures                                                                     | *                                                                                                                                                                                                                                                                                                                                                                                
|9                           | Voting Trust Agreement                                                                                                                       | None                                                                                                                                                                                                                                                                                                                                                                             
|10.1                        | Supervisory Agreement                                                                                                                        | **                                                                                                                                                                                                                                                                                                                                                                               
|10.2                        | David D. Rinehart employment agreement                                                                                                       | ***                                                                                                                                                                                                                                                                                                                                                                              
|10.3                        | Compromise Settlement Agreement and MutualRelease dated March 8, 2001 betweenJ. Stanley Stephen, Jean Stephen and First Federal	Savings Bank | ***                                                                                                                                                                                                                                                                                                                                                                              
|11                          | Statement re:  computation of per share earnings                                                                                             | Not required

13Annual Report to Security HoldersNot required16Letter re:  change in certifying accountantsNone18Letter re:  change in accounting principlesNone21Subsidiaries of Registrant2122Published report regarding matters submitted	to vote of security holdersNone23Consents of Experts and CounselNot required24Power of AttorneyNot required99Additional ExhibitsNone
|13                          | Annual Report to Security Holders                                                                                                            | Not required                                                                                                                                                                                                                                                                                                                                                                     
|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	to vote of security holders                                                                     | None                                                                                                                                                                                                                                                                                                                                                                             
|23                          | Consents of Experts and Counsel                                                                                                              | Not required                                                                                                                                                                                                                                                                                                                                                                     
|24                          | Power of Attorney                                                                                                                            | Not required                                                                                                                                                                                                                                                                                                                                                                     
|99                          | Additional Exhibits                                                                                                                          | None                                                                                                                                                                                                                                                                                                                                                                             

**(b)	Reports on Form 8-K**

On September 21, 2001, the Company filed a Current Report on Form 8-K attaching a
press release, which disclosed the Company's intent to discontinue its active search for a
strategic alliance.

**SIGNATURES**

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

|                         | **THE BRYAN-COLLEGE STATION
       	FINANCIAL HOLDING COMPANY**                                                                                   
|------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------
|Date:   January 14, 2002 | By:   /s/     Wilson L. Fletcher
       Wilson L. Fletcher, 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 persons in the capacities and on the dates indicated.

|By:      /s/    Gary A. Snoe          Gary A. Snoe
            Chairman of the Board                                                                                           | By:       /s/     Wilson L. Fletcher
             Wilson L. Fletcher, President                and Chief Executive Officer
             *(Principal Executive Officer)*
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date:   January 14, 2002                                                                                                                                                       | Date:   January 14, 2002                                                                                                                                               
|By:      /s/    Joseph W. Krolczyk           Joseph W. Krolczyk, Director           and Secretary/Treasurer           *(Principal Financial and           Accounting Officer)* | By:       /s/     Ken L. Hayes
             Ken L. Hayes, Director                                                                                                     
|Date:   January 14, 2002                                                                                                                                                       | Date:   January 14, 2002                                                                                                                                               
|By:      /s/    Charles E. Neelley            Charles E. Neelley, Director                                                                                                     | By:       /s/     George Koenig
             George Koenig, Director                                                                                                   
|Date:   January 14, 2002                                                                                                                                                       | Date:   January 14, 2002                                                                                                                                               

|By:      /s/    Roland Ruffino            Roland Ruffino, Director                   | By:       /s/     Robert H. Conaway
             Robert H. Conaway, Vice Chairman                of the Board
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------
|Date:   January 14, 2002                                                             | Date:   January 14, 2002                                                                                     
|By:      /s/    Ernest A. Wentrcek            Ernest A. Wentrcek,  Director          | By:       /s/     Richard L. Peacock
            Richard L. Peacock,  Director                               
|Date:   January 14, 2002                                                             | Date:   January 14, 2002                                                                                     
|By:       /s/     Helen Chavarria
             Helen Chavarria
             Director |                                                                                                              
|Date:   January 14, 2002                                                             |                                                                                                              



|**SUBSIDIARIES OF THE REGISTRANT**                
|--------------------------------------------------
|                                                  
|Parent                                            
|                                                  
|The Bryan-College StationFinancial Holding Company
|                                                  
|The Bryan-College StationFinancial Holding Company
|                                                  
|First Federal Savings Bank,Bryan, Texas