EXHIBIT 13







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                               1998 ANNUAL REPORT

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               THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY
                                  BRYAN, TEXAS

<PAGE>




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                                TABLE OF CONTENTS

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President's Message............................................................1

Selected Consolidated Financial Information....................................4

Management's Discussion and Analysis of Financial

  Condition and Results of Operations..........................................6

Consolidated Financial Statements.............................................25

Corporate Information.........................................................51


<PAGE>

                            [THE COMPANY LETTERHEAD]

                                             January 4, 1999


Dear Stockholder of The Bryan-College Station Financial Holding Company:

         These past  twelve  months  have been most  interesting,  exciting  and
challenging!  During this past year (and  particularly  during the first half of
the  year),  your  Board of  Directors  and  staff  worked  very  hard  with our
regulatory attorneys, auditors, investment bankers and regulatory agencies -- to
organize a new holding  company for First  Federal  Savings  Bank,  so that good
friends like you would have an opportunity to invest in the common stock of this
holding company.

         Then,  after  the sale of the  common  stock and the  placement  of the
debentures  of the  holding  company,  the  proceeds  received  were used by the
holding  company to  purchase  approximately  68% of the  common  stock of First
Federal - with the owners of the remaining 32% of First  Federal's  common stock
electing  to  exchange  their  stock  for the  common  stock in the new  holding
company. We thank these stockholders for their continued support.

         We had a vision for this  institution  in the early 90's- to transition
First Federal into a widely owned, independent, full-service banking institution
-- to provide the best  service  possible to our targeted  "niche",  the largest
segment of our population who have been basically  neglected -- the hard working
middle-class people in the Bryan-College  Station trade area and in the triangle
between Houston,  Dallas,  and Austin,  Texas.  That vision is in the process of
being realized.

         In this  past  year,  First  Federal  made some  significant,  positive
changes and additions in order to prepare  itself for future growth and in order
to provide more convenient  banking  services to its customers.  Not unlike 1994
and 1995, when we committed significant time and expenses in order to transition
this  institution  from an  old-fashioned  savings  and  loan  to a more  modern
full-service  banking  environment  and also opened our first  branch in College
Station -- this past year we (i)  upgraded  our tellers  with more  experienced,
full-time  professionals,  (ii) opened a new full-service  branch in North Bryan
adjacent to a key  intersection of two major  highways,  in the heart of a large
area where many of our targeted "niche" customers live and an area not presently
served  by a  banking  facility,  (iii)  doubled  the  size of our  staff in our
expanding Second Chance Auto Lending Program (which is partially insured against
credit-default),  (iv)  hired  new  management  and  added  to the  staff of our
all-important  residential  lending department and provided this department with
new and larger  offices on the main  east-west  artery in College  Station,  (v)
provided 24-hour telephone banking,  (vi) continued to address the challenges of
the Year 2000 computer issue, with much time and expense, and (vii) did our very
best to  retain  quality  people  in our  dedicated  staff,  in one of the  most
competitive and tight labor markets we have seen in years.

         With all of the  accomplishments  referred  to above,  we believe  that
First Federal and its new holding  company are now positioned to attain the next
level of growth and achieve the vision for its customers and  stockholders.  The
enthusiasm  and dedication of our staff and our customers is hard to describe in
words,  and we feel very  blessed to have them as a part of First  Federal.  Our
loan demand  continues  to be very  strong,  giving us the ability to loan out a
larger  percentage of our deposits than any other  financial  institution in the
Bryan-College  Station  area and with only  $21,000 in  average  annual net loan
losses over the past three years, on an average loan portfolio of


<PAGE>

$57.4 million. We enjoy good relationships with our principal regulatory agency,
and our liquidity remains above the regulatory requirement.

         The real  challenges we have now are to control our growth,  manage our
expenses  closely and continue to maximize the efficiency and  profitability  of
your holding  company and First Federal -- while  maintaining  adequate  capital
ratios as a percentage of our total assets. To assist in these opportunities and
challenges,  we have  just  hired an  experienced  banker/CPA  as our new  Chief
Financial Officer - who will be joining us this next February 1st.

         We are not unmindful of the status of the world economy, especially the
economies  of Japan and  Brazil,  which  could  significantly  impact the United
States economy.  However, we intend to continue to work to improve  productivity
and profitability and also take cautious advantage of the unique, stable economy
of the Bryan-College Station area -- which contains the third largest university
in the nation, a fast-growing community college, a new regional computer-related
manufacturing  plant, a new large  computer  service  company,  the new juvenile
prison  facility  (largest  in the State of  Texas),  an  ever-growing  regional
medical complex and other attractive and diverse industries.

         Your Board of Directors and staff remain  cautiously  optimistic  about
this next year.  As we work towards the  completion  of the  transition of First
Federal and its new holding  company to the next highest level of opportunity --
with First Federal's  diverse and unique range of products and services which we
offer to our targeted  "niche" of customers -- we intend to constantly "go after
what the customer wants", to aim for the top ("there's more room there"), and to
go confidently  in the direction of our vision and dreams.  We believe in making
it happen  for all of us -- and in  particular  for you,  our  stockholders  and
owners.

         We genuinely  appreciate your investment in our stock and your personal
support  and belief in our  future.  We promise  and commit to you our very best
efforts in order to maximize the return on your  investment  in our stock in the
immediate year ahead.

                                               Sincerely,


                                               /s/ Stan Stephen
                                               ----------------
                                               Stan Stephen
                                               President/Chief Executive Officer

                                        2


<PAGE>

BOARD OF DIRECTORS:

<TABLE>
<S>                                                                  <C>
Richard L. Peacock, Chairman of the Board/Retired                     Roland Ruffino, Co-Owner/Readfield Wholesale Meats
/Owner/Office Supply                                                  & Readfield Retail Meats                          
Ernest Wentrcek, Vice Chairman of the Board/Retired                   Robert Conaway, Owner/Progress Supply             
Texas A&M and Owner/W&W Realty                                        George Koenig, Executive Vice President & Manager/
Charles Neelley, Secretary-Treasurer of the Board/                    Manufactured Housing Loan Department/First Federal
Retired Texas A&M and Travel/Business                                 Savings Bank                                      
Jack W. Lester, Jr., Assistant Secretary-Treasurer                    Arthur Davila, Retired, Texas A&M University,     
of the Board/Retired Owner/Ladies Wear Fashion                        Physical Plant                                    
Business                                                              Joseph W. Krolczyk, Owner/President, KESCO        
J. Stanley Stephen, President/CEO, First Federal                      Restaurant Equipment Supply Inc.                  
Savings Bank                                                          Gary A. Snoe, Owner/President, Snoe Inc. Specialty
Ken Hays, Owner, Aggieland Travel                                     Tool & Die                                        
</TABLE>
                                                                      













                                        3


<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

         The following tables present selected  consolidated  financial data for
The  Bryan-College  Station  Financial  Holding  Company (the "Company") and its
wholly-owned  subsidiary,  First  Federal  Savings Bank at the dates and for the
periods indicated.  This information is derived in part from, and should be read
in  conjunction  with,  the  Consolidated  Financial  Statements  of the Company
included elsewhere in this 1998 Annual Report.
<TABLE>
<CAPTION>
                                                   At September 30,
                                     -------------------------------------------
                                       1998    1997      1996     1995     1994
                                     -------------------------------------------
                                                    (In Thousands)

Selected Financial Condition Data:
----------------------------------
<S>                                  <C>      <C>      <C>      <C>      <C>    
Total assets.........................$82,634  $75,089  $57,597  $61,432  $56,089
Loans receivable, net(1)............. 71,994   65,237   49,579   48,605   43,127
Mortgage-backed securities...........    954    1,150    1,292    2,278    2,693
Investment securities................    ---      ---    1,000    1,000    1,000
Deposits............................. 73,554   58,808   51,677   54,939   50,846
Debentures...........................  3,629      ---      ---      ---      ---
Other borrowings.....................  4,429   10,000      ---    1,088      ---
Stockholders' equity.................  1,870    4,834    4,316    4,170    4,047
</TABLE>
--------------
(1)  Including loans held for sale of $328,000, $204,000, $419,000, $1.8 million
     and $2.1  million  at  September  30,  1998,  1997,  1996,  1995 and  1994,
     respectively.

<TABLE>
<CAPTION>
                                                                                      Year Ended September 30,
                                                                      --------------------------------------------------------------
                                                                       1998          1997         1996         1995        1994
                                                                      --------------------------------------------------------------
                                                                                            (In Thousands)

Selected Operations Data:
-------------------------
<S>                                                                    <C>          <C>         <C>          <C>          <C>   
Total interest income.............................................     $6,891       $5,597      $4,828       $4,698       $4,020
Total interest expense............................................      3,417        2,659       2,363        2,294        1,758
                                                                      -------   ----------      ------      -------       ------
  Net interest income.............................................      3,474        2,938       2,465        2,404        2,262
Provision for loan losses.........................................         79           25         (52)          27         (401)(1)
                                                                      -------   ----------     -------     --------       ------    

  Net interest income after provision for loan losses.............      3,395        2,913       2,517        2,377        2,663

Service charges...................................................        602          585         527          355          202
Gain on sales of loans, mortgage servicing rights, mortgage-
  backed securities and investment securities.....................        229          148         343          213          908
Income from operation of foreclosed real estate...................        (20)         (20)         (9)          (2)         ---
Other noninterest income..........................................        120           62          12           26           14
SAIF Special Assessment...........................................        ---          ---         333          ---          ---
Other noninterest expenses (operating expenses)...................      3,870        2,771       2,715        2,648        3,096
                                                                      -------   ----------      ------       ------       ------
  Income before income taxes......................................        456          917         342          321          691
Income tax expense ...............................................        164          312         108          110          234
                                                                      -------   ----------      ------       ------       ------
  Income before extraordinary item and cumulative effect of
    change in accounting for income taxes.........................        292          605         234          211          457
Income tax benefit from utilizing net operating loss
  carryforwards and cumulative effect of change in accounting                 
  for income taxes................................................       ---           ---         ---          ---          ---
                                                                      -------   ----------     -------       ------       ------
Net income........................................................    $   292   $      605      $  234        $ 211       $  457(1)
                                                                      =======   ==========      ======        =====       ======   
</TABLE>


                                        4


<PAGE>
<TABLE>
<CAPTION>
                                                                           At or for the
                                                                     Year Ended September 30,
                                                ----------------------------------------------------------------
                                                    1998          1997         1996          1995         1994
                                                ----------      --------     --------      --------     --------
Other Data:
-----------
Interest rate spread information:
<S>                                                  <C>           <C>          <C>           <C>          <C>  
  Average during period(2)......................     4.49%         4.47%        4.11%         3.97%        4.20%
  End of period(3)..............................     5.10          4.56         4.67          4.17         4.29
Net interest margin for the period(4)...........     4.80          4.85         4.45          4.29         4.40

Average interest-earning assets as a percentage
of average interest- bearing liabilities........   106.51        108.61       108.01        107.95       106.00

Non-performing assets to total assets at end of
  period(5).....................................     1.46          1.71         1.50           .62          .87

Total equity to total assets (end of period)....     2.26          6.44         7.49          6.79         7.22
Total equity to assets ratio (ratio of
 average equity to average total assets)........     4.54          7.23         7.26          6.91         7.11
Return on assets (ratio of net income to
average total assets)...........................      .38           .94          .40           .36          .84
Return on assets, excluding special SAIF
  assessment....................................      .38           .94          .77           .36          .84
Return on total equity (ratio of net income
 to average equity).............................     8.40         13.03         5.46          5.15        11.87
Return on total equity, excluding special
 SAIF assessment................................      ---           ---        10.60           ---          ---
Non-interest expenses to average total assets...     5.05          4.32         5.17          4.47         5.71
Non-interest expense to average total assets            
 excluding special SAIF assessment..............      ---           ---         4.60           ---          ---
Ratio of earnings to fixed charges including
 interest on deposits(6)........................     1.12          1.30         1.10          1.10         1.33
Ratio of earnings to fixed charges excluding
 interest on deposits(6)........................     1.86          4.25         3.73          1.99         5.19
Earnings per share(7)...........................      .55           .86          .24           .21          .62
Number of deposit accounts......................   10,203         8,783        7,903         7,266        5,073
Number of full-service offices..................        3             2            2             2            2
</TABLE>

(1)  Reflects a negative  loan loss  expense  from the  settlement  of a lawsuit
     filed by First Federal which  favorably  impacted net income in fiscal 1994
     by $265,000.
(2)  Represents   the   difference   between  the  average  yield   received  on
     interest-earning  assets  (primarily  loans) and the  average  rate paid on
     interest-bearing liabilities (primarily deposits).
(3)  Represents the weighted average yield on interest-earning assets (primarily
     loans)  at the  end of the  period  minus  the  weighted  average  cost  of
     liabilities (primarily deposits) at the end of the period.
(4)  Net interest income divided by average  interest-earning  assets (primarily
     loans).
(5)  Non-performing  assets include loans that are 90 days or more delinquent as
     well as repossessed  assets.  
(6)  The ratio of  earnings  to fixed  charges is  computed  by  dividing  fixed
     charges into earnings from  continuing  operations  before income taxes and
     extraordinary  items plus fixed  charges.  Fixed charges  include  interest
     expensed or capitalized and Bank preferred stock dividends.
(7)  Adjusted  to  reflect  stock  dividends  paid to the  stockholders,  and to
     reflect the 2.5  exchange  ratio of Holding  Company  common stock for Bank
     common stock.


                                        5


<PAGE>



                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 First Federal  common stock for Company  common
stock  and  the   purchase  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
subsidiary  First  Federal.  First  Federal's  major  goals are to provide  high
quality  full-service  retail  banking on a  profitable  basis to its  customers
through its offices  located in  Bryan/College  Station and its loan  production
offices located in its expanded trade area between  Dallas,  Houston and Austin,
Texas.   First  Federal  intends  to  continue  to  focus  primarily  on  one-to
four-family  residential loans, direct and indirect consumer lending,  including
automobile loans and home improvement loans,  construction loans, and commercial
business  loans,  some of which  are  partially  guaranteed  by the  U.S.  Small
Business  Administration  ("SBA").  In  addition,  First  Federal  also seeks to
continue improving its asset quality and minimizing to the extent possible,  its
vulnerability  to changes in interest  rates in order to  maintain a  reasonable
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 lesser extent mortgage-backed  securities and other
securities  ("interest-earning assets") and the average 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.

         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,  provisions  expensed  for loan and  other  losses  on  repossessed
assets,  service charge fees,  loan servicing  income,  fees for other financial
services  rendered,  operating expenses and income taxes. First Federal believes
that building its earnings from net interest income and noninterest income, such
as the profitable  sale of long-term,  fixed rate loans to the secondary  market
utilizing a  fully-staffed  residential  loan  department  and SBA business loan
staff, along with income from service charges and fees on checking accounts from
its recent transition to full-service retail banking, while continuing to reduce
operating expenses, can provide a stable foundation for successful operations.

                                        6


<PAGE>

Noninterest  income can provide an excellent  source of secondary income through
fees charged to customers for services  rendered and the sale of loans,  without
requiring additional capital.

         During this past fiscal year, management has transitioned First Federal
to prepare for future  growth and in order to provide  more  convenient  banking
services to its customers,  by (i) upgrading its tellers with more  experienced,
full-time professionals;  (ii) opening a new full-service branch in north Bryan,
adjacent to a key  intersection  between two major  highways,  in the heart of a
larger area, where many of First Federal's targeted middle class customers live,
and an area not presently served by a banking facility;  (iii) doubling the size
of its staff in its expanding Second Chance Auto Lending Program (which requires
up to $6,000 of insurance for losses due to the borrower's  loan default);  (iv)
hiring  new  management  and  adding  to the  staff of its  Residential  Lending
Department and providing this department with new and larger offices on the main
east-west artery in College Station;  (v) providing 24-hour  telephone  banking;
(vi)  addressing  the  challenges  of the Year  2000  issue,  with much time and
expense, and (vii) increasing salaries to retain quality people on its staff. As
a result,  noninterest  expenses increased slightly from 4.32% of average assets
for the year ended September 30, 1997 to 5.05% for the year ending September 30,
1998.  Management  believes  that this  strategy  will enable  First  Federal to
enhance  profitability  in the future and meet the needs of its  customers  in a
highly competitive market.

         First Federal's  restructuring  and expansion,  as described  above, in
order  to  provide  additional  full-service  banking  and  convenience  to  its
customers  in fiscal 1998 has caused an increase  in First  Federal's  operating
expense  levels  which,  despite  the recent  increase in net  interest  income,
resulted in First Federal's operating expenses exceeding its net interest income
for the fiscal year ending September 30, 1998.

         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 these loans
and related servicing rights to the secondary market and to increase its service
charge and fee income  from  additional  checking  accounts  resulting  from its
transition to full-service  banking.  Total  noninterest  income  increased from
$775,000 in 1997 to $931,000 in 1998, while  noninterest  expense increased $1.1
million to $3.9 million in 1998  primarily due to the factors  described  above.
Noninterest  expense  (operating  expenses which do not include interest paid on
deposit accounts and other borrowings)  increased to 4.32% of average assets for
the year ended  September  30,  1997 to 5.05% for the year ended  September  30,
1998.

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 $55.5  million or 75.2% of total loans,  while loans  maturing  over
five years total $18.3 million or 24.8% 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.

                                        7


<PAGE>

         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,  Senior  Vice  President/Financial,  Executive  Vice
President of Operations and one outside Director.  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--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 has  implemented an active,  diversified
short-term  consumer  lending  program,  giving First Federal an  opportunity to
reprice its loans on a more frequent basis.

NET PORTFOLIO VALUE

        The OTS, First Federal's  primary  regulator, has issued a proposed rule
for the calculation of an interest rate risk component for  institutions  with a
greater  than  "normal"  (i.e.,  greater  than 2%) level of  interest  rate risk
exposure  ("NPV").  The OTS has not yet  implemented  the capital  deduction for
interest  rate  risk.  NPV is  the  difference  between  incoming  and  outgoing
discounted cash flows from assets,  liabilities and off-balance sheet contracts.
This approach  calculates the  difference  between the present value of expected
cash  flows  from  assets  and the  present  value of  expected  cash flows from
liabilities,  as well as cash flows from off-balance sheet contracts.  Under OTS
regulations,  an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not  exceeding  2% of the present  value of its assets.  The amount of
that  deduction  is one-half  of the  difference  between (a) the  institution's
actual  calculated  exposure  to a 200 basis  point  interest  rate  increase or
decrease  (whichever  results in the greater pro forma  decrease in NPV) and (b)
its "normal"  level of exposure  which is 2% of the present value of its assets.
If a capital  deduction was required for the September,  1998 reporting  period,
the deduction for  risk-based  capital  purposes  would not be material to First
Federal.

                                        8


<PAGE>



         It has been, and continues to be, an objective of First Federal's Board
of Directors  and  management  to manage  interest  rate risk.  First  Federal's
asset/liability  policy,  established  by  the  Board  of  Directors,   dictates
acceptable  limits on the  amount of change  in NPV  given  certain  changes  in
interest rates. See "-- Asset/Liability Management."

         Presented  below,  as of September  30,  1998,  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 400 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.

<TABLE>
<CAPTION>
                                                              Acceptable Limits
                                                              Established by   
    Change in                       At September 30, 1998    Board of Directors
  Interest Rate     Estimated       ---------------------    -------------------
 (Basis Points)        NPV          $ Change      % Change         % Change
----------------   -----------      ----------   ---------   -------------------

               (Dollars in Thousands)

<S>    <C>            <C>            <C>             <C>               <C> 
      +400            $7,937         $ 73             1%               75% 
      +300             8,068          204             3               (50) 
      +200             8,099          235             3               (30) 
      +100             7,998          134             2               (15) 
         0             7,864          ---           ---               ---  
      -100             7,872            8           ---               (15) 
      -200             8,105          243             3               (30) 
      -300             8,409          545             6               (50) 
      -400             8,703          839            10               (75) 
</TABLE>

         Management  reviews  the OTS  measurements  on a  quarterly  basis.  In
addition to  monitoring  selected  measures  on NPV,  management  also  monitors
effects on net interest  income  resulting from increases or decreases in rates.
This  measure is used in  conjunction  with NPV  measures to identify  excessive
interest rate risk. In the event of a 400 basis point change in interest  rates,
First  Federal  would  experience  a 9.6%  increase in NPV in a  declining  rate
environment and a 15% decrease in a rising rate environment. As of September 30,
1998, an increase in interest rates of 200 basis points would have resulted in a
2.9% decrease in the present value of First Federal's assets,  while a change in
the interest rates of negative 200 basis points would have resulted in no change
in the present value of First Federal's assets.

         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

                                        9


<PAGE>



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.

                                       10


<PAGE>

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.  Average  balances  are the
beginning balance for the year plus the ending balance for each month divided by
thirteen,  and include the balances of  non-accruing  loans.  The yield includes
fees which are considered adjustments to yields.

<TABLE>
<CAPTION>
                                                                   For the Fiscal Year Ended September 30,
                                   -------------------------------------------------------------------------------------------------
                                                 1998                             1997                             1996
                                   -------------------------------- ------------------------------  --------------------------------
                                     Average                           Average                        Average
                                   Outstanding  Interest             Outstanding Interest           Outstanding   Interest
                                     Balance     Earned      Yield     Balance    Earned    Yield     Balance      Earned     Yield
                                    ----------  --------    ------   ----------- --------  -------  -----------   ---------   ------
                                                                        (Dollars in Thousands)
Interest-earning assets:
<S>                                 <C>         <C>          <C>      <C>        <C>        <C>      <C>          <C>        <C>  
  Loans receivable, net.............$68,050     $6,686       9.83%    $56,090    $5,351      9.54%   $48,185      $4,407      9.15%
  Mortgage-backed securities........  1,053         63       5.98       1,221        73      5.98      1,573          99      6.29
  Securities........................    ---        ---        ---         ---       ---       ---      1,000          46      4.60
  Interest bearing deposits
   with Federal Home Loan Bank......  2,613         96       3.67       2,402       115      4.79      3,870         227      5.87
  Other interest-earning assets.....    640         46       7.19         864        58      6.71        817          49      6.00
                                    -------     ------               --------   -------              -------      ------

    Total interest-earning assets... 72,356      6,891       9.52      60,577     5,597      9.24     55,445       4,828      8.71

 Noninterest-earning assets.........  4,248                             3,620                          3,478
                                    -------                          --------                        -------

  Total assets......................$76,604                           $64,197                        $58,923
                                    =======                           =======                        =======
</TABLE>


                                       11


<PAGE>

<TABLE>
<CAPTION>
                                                                            For the Fiscal Year Ended September 30,
                                           -----------------------------------------------------------------------------------------
                                                         1998                          1997                           1996
                                           -----------------------------------------------------------------------------------------
                                             Average                       Average                      Average
                                          Outstanding  Interest         Outstanding  Interest         Outstanding   Interest
                                            Balance     Earned   Yield     Balance     Earned  Yield    Balance      Earned   Yield
                                           ----------  --------  -----  -----------  --------  -----  -----------   --------  -----
                                                                               (Dollars in Thousands)

Interest-bearing liabilities:
<S>                                         <C>        <C>        <C>     <C>        <C>       <C>      <C>       <C>          <C>  
 Deposits ................................  $62,133    $ 2,981    4.80%   $52,707    $ 2,491   4.73%    $51,243   $ 2,358      4.60%
 FHLB advances ...........................    3,984        226    5.67      3,067        168   5.48          89         5      5.62
 Notes payable ...........................    1,815        210   11.57        ---        ---    ---         ---       ---       ---
                                            -------    -------   -----    -------    -------  ------    -------   -------     ------
   Total interest-bearing liabilities ....   67,932      3,417    5.03     55,774      2,659   4.77      51,332     2,363      4.60
                                                       -------                       -------            -------   -------          

 Other liabilities(2) ....................    5,195                         3,780                         3,306
                                            -------                       -------                       -------
 Total liabilities .......................   73,127                        59,554                        54,638
 Stockholders' equity ....................    3,477                         4,643                         4,285
                                            -------                       -------                       -------

 Total liabilities and
  stockholders' equity ...................  $76,604                       $64,197                       $58,923
                                            -------                       =======                       =======

Net interest income; interest rate spread              $ 3,474    4.49%              $ 2,938   4.47%              $ 2,465      4.11%
                                                       =======    =====              =======   =====              =======      =====

Net interest margin(1) ...................                        4.80%                        4.85%                           4.45%

Average interest-earning assets to average
  interest-bearing liabilities ...........   106.51%                       108.61%                       108.01%
</TABLE>

(1)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets (primarily loans).

(2)  Including noninterest-bearing deposits.

                                       12


<PAGE>

         The  following  table sets  forth the yields on loans,  mortgage-backed
securities,  securities and other interest-earning  assets, the rates on savings
deposits and borrowings and the resultant interest rate spreads at the dates and
for the periods indicated.
<TABLE>
<CAPTION>
                                                                                              At September 30,
                                                                                -----------------------------------------
                                                                                   1998             1997           1996
                                                                                  ------           ------          -----
Weighted average yield on:
<S>                                                                               <C>               <C>            <C>  
Loans receivable...........................................................       10.55%            9.75%          9.35%
 Mortgage-backed securities................................................         6.63            6.63           6.59
 Securities................................................................          ---             ---           4.51
 Other interest-earning assets.............................................         5.37            6.13           5.79

 Combined weighted average yield on interest-earning assets................        10.23            9.48           9.00

Weighted average rate paid on:
Deposits...................................................................         4.81            4.80           4.33
Borrowings.................................................................         5.43            5.55            ---
Notes payable..............................................................        11.50             ---            ---

Combined weighted average rate paid on interest-bearing liabilities........         5.13            4.92           4.33

Spread.....................................................................         5.10%           4.56%          4.67%
</TABLE>

<TABLE>
<CAPTION>
                                                                                        For the Fiscal Year Ended
                                                                                               September 30,
                                                                                -----------------------------------------
                                                                                   1998             1997           1996
                                                                                  ------           ------          -----
Weighted average yield on:
<S>                                                                                 <C>             <C>            <C>  
 Loans receivable.............................................................      9.83%           9.54%          9.15%
 Mortgage-backed securities...................................................      5.98            5.98           6.29
 Securities...................................................................       ---             ---           4.60
 Other interest-earning assets................................................      4.37            5.30           5.89
  Combined weighted average yield on interest-earning assets..................      9.52            9.24           8.71
Weighted average rate paid on:
 Deposits.....................................................................      4.80            4.73           4.60
 FHLB advances................................................................      5.67            5.48           5.62
 Notes payable................................................................     11.57             ---            ---

  Combined weighted average rate paid on interest-bearing liabilities.........      5.03            4.77           4.60

Spread........................................................................      4.49            4.47           4.11

Net interest margin (net interest-earnings  divided by average  interest-earning
  assets, with net interest-earnings  equaling the difference between the dollar
  amount of interest-earned on assets and interest paid on deposits and FHLB
  advances).....................................................................    4.80%           4.85%          4.45%
</TABLE>

                                       13


<PAGE>



         The  following  schedule  presents  the  dollar  amount of  changes  in
interest income and interest  expense for major  components of  interest-earning
assets and interest-bearing  liabilities for the periods shown. It distinguishes
between the increase in interest  income and interest  expense related to higher
outstanding  balances  and that due 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.

<TABLE>
<CAPTION>
                                                                     For the Fiscal Year Ended September 30,
                                                 ------------------------------------------------------------------------
                                                              1998 vs. 1997                           1997 vs. 1996
                                                 ------------------------------------------------------------------------
                                                          Increase              Total             Increase          Total
                                                         (Decrease)           Increase           (Decrease)       Increase
                                                           Due To            (Decrease)            Due To        (Decrease)
                                                 --------------------------------------------------------------------------
                                                    Volume         Rate                     Volume         Rate
                                                 -----------     -------                  --------       -------
                                                                              (Dollars in Thousands)

Interest-earning assets:
<S>                                                <C>             <C>        <C>            <C>           <C>      <C> 
 Loans...........................................  $1,171          $164       $1,335         $748          $196     $944
 Mortgage-backed securities......................     (11)          ---          (11)         (21)           (5)     (26)
 Securities......................................     ---           ---          ---          (46)          ---      (46)
 Interest bearing deposits with Federal          
   Home Loan Bank................................       9           (28)         (19)         (75)          (37)    (112)

 Other interest-earning assets...................     (16)            5          (11)           3             6        9
                                                  --------       ------      --------      ------        ------    -----

  Total interest-earning assets..................   1,153           141        1,294          609           160      769

Interest-bearing liabilities:
 Deposits........................................     444            46          490           68            65      133
 FHLB advances ..................................      52             6           58          163           ---      163
 Notes payable...................................     210           ---          210          ---           ---      ---
                                                  -------        ------       ------       ------        ------    -----

   Total interest-bearing liabilities............     706            52          758          231            65      296
                                                  -------          ----       ------         ----          ----     ----

Net interest income..............................  $  447          $ 89                      $378          $ 95
                                                   ======          ====                      ====          ====

Net increase in net interest income..............                             $  536                                $473
                                                                              ======                                ====
</TABLE>

RESULTS OF OPERATIONS

         The Company's results of operations are primarily  dependent on its net
interest   income  which  is  the   difference   between   interest   income  on
interest-earning  assets and interest expense on  interest-bearing  liabilities.
Interest income is a function of the average balances of interest-earning assets
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  during the period and the  average  rates paid on such
liabilities.  The Company also generates noninterest income, such as income from
service charges and fees on checking accounts, loan servicing and other fees and
charges and gains on sales of loans and  servicing  rights.  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.

                                       14


<PAGE>

COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997

         The  Company   (including  its  subsidiary,   First  Federal)  reported
consolidated  net income of $292,000  for the year ended  September  30, 1998 as
compared  to  $605,000  for the year ended  September  30,  1997,  a decrease of
$313,000,  or 51.7%.  The decrease in net income was  primarily due to increased
costs and expenses  related to the formation of the Holding  Company,  including
interest expense on debentures of $138,000, amortization of debt issue costs and
organizational  costs of $50,000,  and franchise taxes of $21,000,  all of which
are  after  tax.  In  addition,  compensation  and  benefits  at the Bank  level
increased  as a result of an  increase  in the  number of  employees  due to the
restructuring and expansion of First Federal.

         Net interest income  increased by $536,000 to $3.5 million for the year
ended  September  30, 1998 from $2.9  million for the year ended  September  30,
1997. This increase primarily resulted from increases in the average balance and
yield of the loan portfolio,  offset in part by increases in the volume and cost
of deposits and advances. In addition, the Company issued debentures in April of
1998,  resulting in an increased  volume of notes payable.  The average yield on
loans  increased  29 basis  points as a result of an  increase  in the volume of
insured consumer automobile loans and direct consumer loans which yield a higher
rate  than  traditional  mortgage  loans.  The  average  balance  of loans  also
increased  as a result of a  concerted  effort to  increase  the  consumer  loan
portfolio through building relationships with auto dealerships and promoting the
Second Chance Auto Loan Program.  These  increases were  partially  offset by an
increase  in the cost of funds  resulting  from a $9.4  million  increase in the
average  balance of deposits and a $2.7 million  increase in the average balance
of FHLB  advances  and notes  payable.  In  addition,  the average cost of funds
increased  26 basis  points  as a result of  increased  rates in order to remain
competitive  and due to the 11 1/2%  debentures  due March  2003  ("Debentures")
issued in connection with the acquisition of the Bank by the Holding Company. As
a result,  the Company's  interest margin  decreased to 4.80% for the year ended
September 30, 1998 from 4.85% for the year ended  September 30, 1997.  The ratio
of interest-earning  assets to interest-bearing  liabilities declined to 106.51%
at  September  30, 1998 from 108.61% at  September  30,  1997.  The net interest
spread increased slightly to 4.49% from 4.47% for the same periods.

         The Company  recorded a $75,000  provision  (expense)  for reserves for
loan  losses  for the year  ended  September  30,  1998  compared  to a  $25,000
provision  for reserves for loan losses for the year ended  September  30, 1997.
The  increase  in the  provision  for loan losses was largely a result of a $5.1
million  increase in gross loans during the year.  This  increase was  partially
offset by continued low levels of charge-offs relative to the allowance for loan
losses and the use of credit-default  insurance  coverage for certain automobile
loans to limit the Company's loan loss  exposure.  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 the size,  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 on loans.  Such agencies may
require the Company to provide  additions to the allowance  based upon judgments
which differ from those of management.

                                       15


<PAGE>


         Noninterest  income  increased  $156,000 to $931,000 for the year ended
September 30, 1998 from $775,000 for the year ended September 30, 1997. This was
primarily a result of increased  gains on sales of loans and mortgage  servicing
rights of $81,000  combined with an increase in service  charges of $17,000 as a
result of an increase in  transactional  deposit  accounts.  In addition,  other
income  increased  $58,000  primarily as a result of the  recognition  of excess
dealer  reserves  maintained  on older  insured  automobile  loans that paid off
during the year.

         Noninterest  expense  increased  $1.1 million from $2.8 million for the
year ended  September 30, 1997 to $3.9 million for the year ended  September 30,
1998. The increase  primarily  resulted from the  restructuring and expansion of
the  Company.  Compensation  and benefits  increased  $438,000 as a result of an
increase in the number of employees due primarily to the opening of a new branch
and  increased  expenses  related to the  expansion of the mortgage  lending and
second  chance  automobile  lending  departments.  Occupancy  expense  increased
$115,000 primarily as a result of the opening of the new branch. Office supplies
increased $48,000 and data processing fees also increased $21,000 as a result of
increased  production and increased number of transactions.  The increase in the
volume of consumer loans has resulted in additional  telephone and postage costs
of $62,000,  related largely to collections.  Other expense increased  $334,000,
which  consisted of various items,  including  $67,000 of  amortization  of debt
issue costs and  organizational  costs  related to the  formation of the Holding
Company  and  franchise  tax expense of $32,000  for the  Holding  Company.  The
Company had  increased  expenses of $86,000  related to the  establishment  of a
$59,000  reserve  for  repossessed  assets  and  the  remainder  for  losses  on
repossessed  assets.  Various other expenses have also increased  primarily as a
result of the overall growth and increased loan production of the Company.

         Income tax expense decreased  $148,000 from $312,000 for the year ended
September 30, 1997 to $164,000 for the year ended  September 30, 1998  primarily
as a result of the  $461,000  decrease  in pretax  income.  Income  tax  expense
reflected a tax rate of 35.9% for the year ended  September 30, 1998 compared to
34.0% for the year ended September 30, 1997.

COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996

         The  Company  reported  net  income  of  $605,000  for the  year  ended
September  30, 1997 as compared to  $234,000  for the year ended  September  30,
1996, an increase of $371,000,  or 158.5%. The increase was primarily due to the
absence of a $220,000  after tax charge due to the special  Savings  Association
Insurance  Fund ("SAIF")  assessment in 1996. In addition,  net interest  income
increased  $473,000  which was  partially  offset by a decrease  in  noninterest
income of $98,000. These items are more fully discussed below.

         Net  interest  income  increased  $473,000 to $2.9 million for the year
ended  September  30, 1997 from $2.5  million for the year ended  September  30,
1996. This increase resulted primarily from an increase in the yield and average
balance of the loan  portfolio,  offset in part by an  increase in the volume of
Federal Home Loan Bank ("FHLB")  advances and an increase in the average cost of
funds  for  deposits.  The  average  yield on loans  increased  39 basis  points
primarily as a result of an increase in the average balance of insured  consumer
automobile loans which yield a higher rate than traditional  mortgage loans. The
average  balance of loans also  increased  as a result of a concerted  effort to
increase  construction  and  commercial  loans.  These  increases were partially
offset  by an  increase  in the  cost of  funds  resulting  from a $3.0  million
increase in the  average  balance of FHLB  advances  and an increase in interest
rates on deposits to

                                       16


<PAGE>



remain competitive in the market. As a result, the Company's net interest margin
increased to 4.85% for the year ended September 30, 1997 from 4.45% for the year
ended September 30, 1996. The net interest spread  increased to 4.47% from 4.11%
for the same periods.

         The Company  recorded a $25,000  provision for loan losses for the year
ended September 30, 1997 compared to a $52,000  negative  provision for the year
ended  September  30, 1996.  The increase in the  provision  for loan losses was
largely  a result  of a $17.2  million  increase  in the  gross  loan  portfolio
combined with an increase in nonperforming assets as compared to the prior year.
These  factors  were  offset in part by  continued  low  levels  of  charge-offs
relative  to the  allowance  for  loan  losses  and  the  use of  credit-default
insurance  coverage for new  automobile  loans to limit the Company's  loan loss
exposure. 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 the size,  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 on loans. Such agencies may require the Company to provide additions
to the allowance based upon judgments which differ from those of management.

         Noninterest  income  decreased  $98,000 to $775,000  for the year ended
September  30, 1997 from  $873,000 for the year ended  September  30, 1996.  The
decrease  was  primarily a result of a $182,000  decrease in gains on loan sales
and loan  servicing  rights.  In the prior year,  the Company sold all servicing
rights  on loans  sold to  Freddie  Mac, which  resulted  in  increased  gain on
servicing  rights.  This decrease was partially offset by an increase in service
charges and fees of $58,000  primarily  resulting  from  increased  volume and a
concerted effort by management to collect all service charges and fees assessed.

         Noninterest  expense  decreased  $277,000 to $2.8  million for the year
ended September 30, 1997 from $3.0 million for the year ended September 30, 1996
primarily as a result of a $333,000  special  FDIC  assessment  on  SAIF-insured
deposits as of  September  30,  1996.  This was offset in part by an increase in
other  expense  in  1997  related  primarily  to data  processing,  advertising,
postage, and expenses related to the new loan production office opened in August
1996 in College Station.

         Income tax expense increased  $204,000 from $108,000 for the year ended
September 30, 1996 to $312,000 for the year ended  September 30, 1997  primarily
as a result  of a  $575,000  increase  in  pretax  income.  Income  tax  expense
reflected a tax rate of 34.0% for the year ended  September 30, 1997 compared to
31.6% for the year ended September 30, 1996.

FINANCIAL CONDITION

         The Company's total assets  increased $7.5 million,  or 10.0%, to $82.6
million at  September  30, 1998 from $75.1  million at September  30, 1997.  The
increase  was a result of an  increase  in loan  originations  under the  Second
Chance Auto Loan Program  resulting in an increase in the loan portfolio of $6.7
million,  funded  primarily  through  increased  deposits  of 

                                       17


<PAGE>



$14.8 million and  Debentures of $3.6  million.  This was partially  offset by a
decrease in advances from the FHLB of $9.2 million.

         Net loans  receivable  (excluding  loans held for sale)  increased $6.7
million to $71.7  million at September  30, 1998 from $65.0 million at September
30, 1997. The increase resulted  primarily from continued growth in originations
of credit-default insured automobile loans and other direct consumer loans.

         Deposits increased $14.8 million or 25.1%, consisting primarily of $9.8
million in  certificate  of deposits  and $4.2 million in demand  deposits.  The
increase  in  certificates  of  deposit  was a result  of  increased  rates  and
promotion.  In  addition,  the Company  issued $3.6 million in  Debentures.  The
increase in deposits from the Debentures allowed the Company to pay off advances
from the FHLB.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary sources of funds are deposits, checking accounts,
principal  and  interest  payments  on loans and  mortgage  related  securities,
proceeds  from sales of long term,  fixed-rate  residential  mortgage  loans and
other funds  provided from  operations.  Additionally,  the Company has borrowed
funds from the FHLB of Dallas or utilize  particular  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,  general  economic
conditions  and  most  recently,  the  restructuring  occurring  in  the  thrift
institutions industry.

         The  Company   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 minimum
levels of liquid  assets.  At September  30, 1998,  First  Federal's  regulatory
liquidity  ratio was 5.98% or 1.98% above the 4% regulatory  requirement.  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  tangible,  core and
risk-based  capital  ratios were $5.3  million,  $5.5 million and $5.5  million,
which  exceeded  the minimum  required  capital  ratios of 1.2%,  3.1% and 5.3%,
respectively.

         At September 30, 1998, the Company had commitments to originate  loans,
including loans in process,  totaling $ 5.31 million.  The Company also had $1.0
million of outstanding  unused lines of credit and $73,000 of letters of credit.
The Company considers its liquidity and

                                       18


<PAGE>



capital  resources to be adequate to meet its  foreseeable  short and  long-term
needs.  The Company expects to be able to fund or refinance,  on a timely basis,
its material  commitments  and long-term  liabilities.  First Federal intends to
expand its Second  Chance Auto Loan Program with  additional  select  automobile
dealers  throughout  the State of Texas,  retaining a portion of these loans for
its own  portfolio,  and selling excess loan  originations  in order to maintain
capital  compliance and liquidity  needs.  The Company also has the ability,  if
needed,  to borrow up to $23.6  million  from the FHLB of Dallas  for  liquidity
purposes.   At  September  30,  1998,  the  Company  had  $800,000  in  advances
outstanding from the FHLB.

         The Company'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.

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

Operating Activities:
<S>                                                        <C>           <C>    
 Net income............................................    $  292        $   605
 Adjustment to reconcile net income or loss to net
  cash provided by operating activities................       836         (1,108)
                                                          -------      ----------
 Net cash provided by operating activities.............     1,128           (503)
 Net cash used in investing activities.................    (6,524)       (14,995)
 Net cash provided by (used in) financing activities...     6,292         17,123
                                                          -------        -------
 Net increase (decrease) in cash and cash equivalents..       896          1,625
 Cash and cash equivalents at beginning of period......     4,431          2,806
                                                          -------      ---------
 Cash and cash equivalents at end of period............    $5,327        $ 4,431
                                                           ======        =======
</TABLE>

         The  primary  investing  activity  of the  Company  is  lending.  Loans
originated  net of  repayments  and sales used $6.7 million and $15.7 million in
cash  for  the  years  ended   September   30,  1998  and  September  30,  1997,
respectively.  During the years  ended  September  30,  1998 and 1997,  deposits
increased $14.8 million and $7.1, respectively.  FHLB advances decreased in 1998
by $9.2 million compared to an increase of $10.0 million in 1997.

YEAR 2000 ISSUE

         General.  The year 2000 ("Y2K") issue  confronting  the Company and its
suppliers,  customers,  customers'  suppliers  and  competitors  centers  on the
inability of computer systems to recognize the year 2000. Many existing computer
programs  and  systems  originally  were  programmed  with six digit  dates that
provided only two digits to identify the calendar  year in the date field.  With
the impending new  millennium,  these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.

         Financial  institution  regulators  recently have increased their focus
upon  Y2K   compliance   issues  and  have  issued   guidance   concerning   the
responsibilities  of senior  management  and  directors.  The Federal  Financial
Institutions  Examination Council has issued several  interagency  statements on
Y2K  project   management   awareness.   These  statements   require   financial
institutions  to,  among other  things,  examine the Y2K  implications  of their
reliance  on vendors and with  respect to the data  exchange  and the  potential
impact of the Y2K issue on their

                                       19


<PAGE>



customers,   suppliers,  and  borrowers.  These  statements  also  require  each
federally  regulated  institution  to survey its exposure,  measure its risk and
prepare a plan to address  the Y2K  issue.  In  addition,  the  federal  banking
regulators have issued safety and soundness guidelines to be followed by insured
depository  institutions,  such as the  Bank,  to assure  resolution  of any Y2K
problems.  The  federal  banking  agencies  have  assessed  that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and thus, that an institution's  failure to address  appropriately the Y2K
issue  could  result  in  supervisory   action,   including   reduction  of  the
institution's  supervisory  ratings,  the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.

         Risks.  Like most  financial  service  providers,  the  Company and its
operations may be significantly  affected by the Y2K issue due to its dependence
on technology and date-sensitive  data. Computer software and hardware and other
equipment,  both within and  outside the  Company's  direct  control,  and third
parties  with  whom  the  Company  electronically  or  operationally  interfaces
(including  without limitation its customers and third party vendors) are likely
to be  affected.  If computer  systems  are not  modified in order to be able to
identify  the  year  2000,  many  computer  applications  could  fail or  create
erroneous  results.  As a result,  many  calculations,  which rely on date field
information such as interest, payment on due dates, and all operating functions,
could generate results which are significantly  misstated, and the Company could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities.  Likewise,  under certain  circumstances,  a
failure to adequately address the Y2K issue could adversely affect the viability
of the  Company's  suppliers  and  creditors  and  the  creditworthiness  of its
borrowers.  Thus, if not adequately  addressed,  the Y2K issue could result in a
significant  adverse  impact  on the  Company's  operations  and,  in turn,  its
financial condition and results of operations.

         State of Readiness.  During  October 1997,  the Company  formulated its
plan to  addressthe  Y2K  issue.  Since  that time,  the  Company  has taken the
following steps:

        o   Established senior management advisory and review responsibilities;
        o   Completed  a  company-wide  inventory  of  applications  and  system
            software;
        o   Built an internal  tracking  database  for  applications  and system
            software;
        o   Developed compliance plans and schedules for all lines of business;
        o   Completed a computer network, hardware, and software upgrade;
        o   Completed in-house testing of all systems;
        o   Obtained data processor vendor compliance certification;
        o   Completed data processor vendor testing;
        o   Began  awareness and  educational  activities for employees  through
            existing internal communication channels; and
        o   Developed a process to respond to customer inquiries as well as help
            educate customers on the Y2K issue.

         The  following  paragraphs  summarize  the phases of the  Company's Y2K
plan:

         Awareness Phase.  The Company  formally  established a Y2K plan that is
headed by a senior  manager,  and a project team was assembled for management of
the Y2K  project.  The  project  team  created  a plan of action  that  includes
milestones, budget estimates,  strategies, and

                                       20


<PAGE>



methodologies  to track and  report the  status of the  project.  Members of the
project team also attended  conferences and information sharing sessions to gain
more insight into the Y2K issue and potential strategies for addressing it. This
phase is substantially complete.

         Assessment Phase. The Company's  strategies were further developed with
respect  to how the  objectives  of the Y2K plan  would be  achieved,  and a Y2K
business risk  assessment  was conducted to quantify the extent of the Company's
Y2K  exposure.  A  corporate  inventory  (which is  periodically  updated as new
technology is acquired and as systems  progress through  subsequent  phases) was
developed  to  identify  and  monitor  Y2K  readiness  for  information  systems
(hardware,  software,  vendors, and utilities) as well as environmental  systems
(security systems, facilities, etc.). Systems were prioritized based on business
impacts and available alternatives. Mission critical systems supplied by vendors
were  researched  to determine  Y2K  readiness.  If Y2K ready  versions were not
available,  the Company began  identifying  functional  replacements  which were
either  upgradable  or Y2K ready,  and a formal  plan was  developed  to repair,
upgrade or replace all mission  critical  systems.  This phase is  substantially
complete.

         The Company will begin Y2K discussions with its larger  borrowers.  All
credits   greater  than  $50,000  will  be  evaluated  for  Y2K  exposure  by  a
relationship  account officer using a  questionnaire  developed by the Company's
credit administration staff. As part of the current credit approval process, all
new and renewed  loans are  evaluated  for Y2K risk.  During the course of these
evaluations,  Company  personnel will meet  individually with each of its larger
borrowers to discuss and obtain information regarding each borrower's dependence
on information  technology and third party vendors and the nature of steps being
taken by the borrowers to address their own Y2K issues.

         Renovation Phase. The Company's  corporate  inventory revealed that Y2K
upgrades were available for all vendor supplied  mission critical  systems,  and
all these Y2K ready versions have been delivered and placed into  production and
have entered the validation process.

         Validation  Phase. The validation phase is designed to test the ability
of hardware and software to accurately process  date-sensitive data. The Company
has  substantially  completed the  validation  testing of each mission  critical
system.  The Company hired two outside firms to perform this phase.  These firms
tested  independent  of each  other  verifying  the  other's  validation  of all
systems. During the validation testing process, no significant Y2K problems have
been identified relating to any modified or upgraded mission critical systems.

         Implementation  Phase.  The Company's  plan calls for placing Y2K ready
code into production  before having actually  completed Y2K validation  testing.
Y2K ready  modified or upgraded  versions  have been  installed  and placed into
production with respect to all mission critical systems.

         Company  Resources  Invested.  The  Company's Y2K project team has been
assigned  the  task  of  ensuring  that  all  systems  across  the  Company  are
identified,  analyzed for Y2K compliance,  corrected if necessary,  tested,  and
have the changes into  service by the end of 1998.  The Y2K project team members
represent  all  functional  areas  of  the  Company,  including  branches,  data
processing,  loan  administration,  accounting,  item processing and operations,
compliance,  internal audit, human resources,  and marketing.  An assistant vice
president who

                                       21


<PAGE>



reports directly to a member of the Company's senior  management heads the team.
The Company's Board of Directors oversees the Y2K plan and provides guidance and
resources to, and receives quarterly updates from, the Y2K team.

         The Company is expensing  all costs  associated  with  required  system
changes as those costs are  incurred,  and such costs are being  funded  through
operating  cash  flows.  The  total  cost of the Y2K  conversion  project  since
commencement  in October 1997 for the Company is  estimated to be $200,000.  The
Company does not expect  significant  increases in future data processing  costs
related to Y2K compliance.

         Contingency  Plans.  During the  assessment  phase,  the Company  began
developing  back-up  or  contingency  plans  for  each of its  mission  critical
systems.  Virtually all of the Company's  mission critical systems are dependent
upon third party  vendors or service  providers.  Therefore,  contingency  plans
include  selecting a new vendor or service provider and converting their system.
In the event a current  vendor's system fails during the validation phase and it
is determined that the vendor is unable or unwilling to correct the failure, the
Company will  convert to a new system from a  pre-selected  list of  prospective
vendors.  In each case,  realistic  trigger dates have been established to allow
for orderly and  successful  conversions.  For some systems,  contingency  plans
consist of using  spreadsheet  software or  reverting  to manual  systems  until
system problems can be corrected.

         The majority of the Company's  mission  critical  system falls into the
categories of its core- banking  software and its proof of deposit  system.  The
Company has  received  warranties  from  vendors to the effect that the proof of
deposit and core-banking system is Y2K ready.

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.

EFFECT OF NEW ACCOUNTING STANDARDS

         In June 1996,  the FASB  released  Statement  of  Financial  Accounting
Standards   No.  125  ("SFAS  No.   125"),   "Accounting   for   Transfers   and
Extinguishments of Liabilities." SFAS No. 125 provides  accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities.   SFAS  No.   125   requires   a   consistent   application   of  a


                                       22


<PAGE>



financial-components  approach  that  focuses on control.  Under that  approach,
after a transfer of financial  assets,  an entity  recognizes  the financial and
servicing  assets  it  controls  and  the  liabilities  it  has  incurred,   and
derecognizes  liabilities when  extinguished.  SFAS No. 125 also supersedes SFAS
No. 122 and requires  that  servicing  assets and  liabilities  be  subsequently
measured by  amortization  in proportion to and over the period of estimated net
servicing  income  or loss and  requires  assessment  for  asset  impairment  or
increases  obligation  based on their  fair  values.  SFAS No.  125  applies  to
transfers and  extinguishments  occurring  after  December 31, 1996 and early or
retroactive  application  is not  permitted.  Because  the volume and variety of
certain  transactions  will make it difficult for some entities to comply,  some
provisions have been delayed by SFAS No. 127.  Management  anticipates  that the
adoption  of SFAS  No.  125 will not have a  material  impact  on the  financial
condition or operations of the Company.

         In March  1997,  the FASB  issued  statement  of  Financial  Accounting
Standard  No. 128 ("SFAS No.  128")  "Earnings  Per Share."  Under SFAS No. 128,
basic earnings per share for 1998 and later will be calculated solely on average
common shares outstanding. Diluted earnings per share will reflect the potential
dilution  of stock  options  and  other  common  stock  equivalents.  All  prior
calculations  will be restated to be  comparable  to the new  methods.  As First
Federal has not had significant dilution from stock options, the new calculation
methods  will not  significantly  affect  future  basic  earnings  per share and
diluted earnings per share.

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No. 130 ("SFAS  No.  130")  "Reporting  Comprehensive  Income".  This
statement  establishes  standards  for  reporting  and display of  comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of general-purpose financial statements.  This statement requires that all items
that are required to be recognized under  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  Income tax effects must also
be shown.  This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 is not expected to have a material impact
on the results of operations or financial condition of the Company.

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 131 ("SFAS No. 131")  "Disclosures about Segments of an Enterprise
and Related  Information".  SFAS No. 131 establishes  standards for the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services,  geographic areas, and major customers. This statement is
effective for financial  statements  for periods  beginning  after  December 15,
1997. The adoption of SFAS No. 131 is not expected to have a material  impact on
the results of operations or financial condition of the Company.

         In June 1998,  the FASB issued  SFAS 133,  "Accounting  for  Derivative
Instruments and Hedging  Activities."  SFAS No. 133  standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other  contracts.  Under  the  standard,  entities  are  required  to carry  all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e.  gains or losses) of a derivative


                                       23


<PAGE>



instrument  depends on whether it has been designated and qualifies as part of a
hedging  relationship  and,  if so, on the  reason  for  holding  it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair value, cash flows, or foreign  currencies.
If the  hedged  exposure  is a fair  value  exposure,  the  gain  or loss on the
derivative instrument is recognized in earnings in the period of change together
with the  offsetting  loss or gain on the hedged item  attributable  to the risk
being  hedged.  If the hedged  exposure is a cash flow  exposure,  the effective
portion of the gain or loss on the derivative  instrument is reported  initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount  excluded  from  the  assessment  of hedge  effectiveness  as well as the
ineffective  portion of the gain or loss is reported  in  earnings  immediately.
Accounting for foreign  currency  hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is  recognized  in  earnings  in the  period  of  change.  This
statement is effective  for fiscal years  beginning  after June 15, 1999.  Early
adoption is permitted as of the beginning of an entities  fiscal  quarter.  This
statement will have no effect on the Company.

FORWARD-LOOKING STATEMENTS

         When used in this Annual Report to  shareholders  or future  filings by
the Company with the Securities and Exchange Commission (the  "Commission"),  in
the Company's press releases or other public or shareholder  communications,  or
in oral  statements made with the approval of an authorized  executive  officer,
the words or phrases "will likely result",  "are expected to", "will  continue",
"is anticipated",  "estimated",  "project", "believe" or similar expressions are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities  Litigation Reform Act of 1995. The Company wishes to caution
readers not to place  undue  reliance  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,  acceptance of new products,
and  competitive  and  regulatory  factors could affect the Company's  financial
performance  and could cause the Company's  actual results for future periods to
differ  materially  from those  anticipated or projected.  Additional  risks and
factors are detailed from time to time in the  Company's  reports filed with the
Commission, including the report on Form 10-KSB for the year ended September 30,
1998.

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

                                       24


<PAGE>



                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors

The Bryan-College Station Financial Holding Company
Bryan, Texas

We have audited the accompanying  consolidated statements of financial condition
of The  Bryan-College  Station  Financial  Holding Company and its  wholly-owned
subsidiary,  First Federal  Savings Bank of Bryan,  as of September 30, 1998 and
1997 and the related consolidated  statements of income,  stockholders'  equity,
and cash flows for each of the three  years in the period  ended  September  30,
1998.  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  generally   accepted  auditing
standards.  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  and  its  wholly-owned  subsidiary,  as of
September  30,  1998 and 1997,  and the results of its  operations  and its cash
flows for each of the three  years in the period  ended  September  30,  1998 in
conformity with generally accepted accounting principles.

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

Oak Brook, Illinois
November 14, 1998


                                       25

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           September 30, 1998 and 1997
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                        1998            1997
                                                                                        ----            ----
<S>                                                                                 <C>            <C>        
ASSETS

Cash and due from banks                                                             $     1,435    $       756
Interest-bearing deposits in other financial institutions                                 3,892          3,675
                                                                                    -----------    -----------
     Total cash and cash equivalents                                                      5,327          4,431

Securities available-for-sale                                                                 5              -
Securities held-to-maturity (fair value:
  1998 - $945; 1997 - $1,129)                                                               954          1,150
Loans held for sale                                                                         328            204
Loans receivable, net                                                                    71,666         65,033
Federal Home Loan Bank stock                                                                382            896
Foreclosed real estate                                                                      282            520
Premises and equipment                                                                    1,636          1,117
Accrued interest receivable                                                                 608            537
Other assets                                                                              1,446          1,201
                                                                                    -----------    -----------

                                                                                    $    82,634    $    75,089
                                                                                    ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
     Deposits                                                                       $    73,554    $    58,808
     Advance payments by borrowers for insurance and taxes                                  863            862
     Advances from Federal Home Loan Bank                                                   800         10,000
     Debentures                                                                           3,629              -
     Deferred income taxes                                                                  198            219
     Accrued interest payable and other liabilities                                         847            366
                                                                                    -----------    -----------
                                                                                         79,891         70,255

     Minority interest                                                                      873              -

     Commitments and contingent liabilities

Stockholders' equity
     Preferred  stock - par value  $.01 per  share  (liquidation  preference  of
       $873,000); authorized 1,000,000 shares,
       issued 87,263 shares                                                                   -              1
     Common stock - par value $.01 per share; authorized
       3,000,000 shares, issued 389,436 shares at September 30,
       1998 and 239,612 shares at September 30, 1997                                          4              2
     Additional paid-in capital                                                           1,849          2,743
     Retained earnings, substantially restricted                                             17          2,088
                                                                                    -----------    -----------
                                                                                          1,870          4,834
                                                                                    -----------    -----------

                                                                                    $    82,634    $    75,089
                                                                                    ===========    ===========
-------------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       26

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                 Years ended September 30, 1998, 1997, and 1996
                 (In thousands, except share and per share data)


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                               1998         1997         1996
                                                                               ----         ----         ----
<S>                                                                        <C>          <C>          <C>       
Interest income
    Loans                                                                  $    6,686   $    5,351   $    4,407
    Securities                                                                      -            -           46
    Mortgage-backed securities                                                     63           73           99
    Other                                                                         142          173          276
                                                                           ----------   ----------   ----------
       Total interest income                                                    6,891        5,597        4,828

Interest expense
    Deposits                                                                    2,981        2,491        2,358
    Debentures                                                                    210            -            -
    FHLB advances                                                                 226          168            5
                                                                           ----------   ----------   ----------
       Total interest expense                                                   3,417        2,659        2,363
                                                                           ----------   ----------   ----------


NET INTEREST INCOME                                                             3,474        2,938        2,465

Provision for loan losses                                                          79           25          (52)
                                                                           ----------   ----------   ----------


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                             3,395        2,913        2,517

Noninterest income
    Service charges                                                               602          585          527
    Gain on sale of loans                                                         116           54          125
    Gain on sale of mortgage servicing rights                                     113           94          205
    Gain on sale of mortgage-backed securities                                      -            -           13
    Operation of foreclosed real estate                                           (20)         (20)          (9)
    Other                                                                         120           62           12
                                                                           ----------   ----------   ----------
       Total noninterest income                                                   931          775          873

Noninterest expense
    Compensation and benefits                                                   1,806        1,368        1,337
    Occupancy and equipment expense                                               471          356          335
    SAIF special assessment                                                         -            -          333
    Federal insurance premiums                                                     43           45          125
    Net (gain) loss on real estate owned,
      including provision for losses                                               27          (12)           8
    Loan expense                                                                   56           24           33
    Office supplies                                                               122           74           73
    Professional fees                                                             141          134          179
    Advertising                                                                    83           78           57
    Data processing                                                               192          171          148
    Telephone                                                                      99           61           57
    Postage                                                                       108           84           62
    Other                                                                         722          388          301
                                                                           ----------   ----------   ----------
       Total noninterest expense                                                3,870        2,771        3,048
                                                                           ----------   ----------   ----------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
                                   (Continued)

                                       27

<PAGE>





       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                 Years ended September 30, 1998, 1997, and 1996
                 (In thousands), except share and per share data

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                               1998         1997         1996
                                                                               ----         ----         ----

<S>                                                                        <C>          <C>          <C>       
INCOME BEFORE INCOME TAX EXPENSE                                           $      456   $      917   $      342

Income tax expense                                                                164          312          108
                                                                           ----------   ----------   ----------


NET INCOME                                                                        292          605          234

Dividends on Bank preferred stock                                                 (44)         (87)         (88)
                                                                           ----------   ----------   ----------

Net income available to common stockholders                                $      248   $      518   $      146
                                                                           ==========   ==========   ==========

Earnings per common share                                                  $      .50   $      .86   $      .24
                                                                           ==========   ==========   ==========


-------------------------------------------------------------------------------------------------------------------
</TABLE>
          See accompanying notes to consolidated financial statements.


                                       28

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 Years ended September 30, 1998, 1997, and 1996
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                      Additional
                                       Preferred        Common          Paid-In         Retained
                                         Stock           Stock          Capital         Earnings        Total
                                         -----           -----          -------         --------        -----
<S>                                   <C>            <C>             <C>            <C>            <C>        
Balance at
  October 1, 1995                     $         1    $         2     $     2,630    $     1,537    $     4,170

Issuance of 11,330
  common shares as
  5% stock dividend                             -              -             113           (113)             -

Net income                                      -              -               -            234            234

Dividends ($1.00 per
  preferred share)                              -              -               -            (88)           (88)
                                      -----------    -----------     -----------    -----------    -----------


Balance at
  September 30, 1996                            1              2           2,743          1,570          4,316

Net income                                      -              -               -            605            605

Dividends ($1.00 per
  preferred share)                              -              -               -            (87)           (87)
                                      -----------    -----------     -----------    -----------    -----------


Balance at
  September 30, 1997                            1              2           2,743          2,088          4,834

Issuance of 200,000
 shares of Company common
 stock, net of stock issue
 cost of $276,000                               -              2           1,722              -          1,724

Purchase of fractional shares of
  Bank stock and stock of
  dissenting stockholders                       -              -          (1,744)        (2,199)        (3,943)

Minority interest                              (1)             -            (872)             -           (873)

Cash dividends paid by Bank
  ($.50 per common share,
  $.50 per preferred share)                     -              -               -           (164)          (164)

Net income                                      -              -               -            292            292
                                      -----------    -----------     -----------    -----------    -----------

Balance at
  September 30, 1998                  $         -    $         4     $     1,849    $        17    $     1,870
                                      ===========    ===========     ===========    ===========    ===========
-------------------------------------------------------------------------------------------------------------------
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       29

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 Years ended September 30, 1998, 1997, and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                               1998         1997         1996
                                                                               ----         ----         ----
<S>                                                                        <C>          <C>          <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                             $      292   $      605   $      234
    Adjustments to reconcile net income to net cash provided by
      (used in) operating activities
       Depreciation                                                               232          166          167
       Amortization of premiums and discounts on mortgage-
         backed securities, net                                                     4            4            5
       Amortization of debt issue costs                                            67            -            -
       Net change in loans held-for-sale                                           (8)         269        1,546
       Change in deferred loan origination fees                                   124           39          (41)
       Change in deferred income taxes                                            (21)         133          (60)
       Net (gains) losses on sales of
          Real estate owned                                                        27          (12)           1
          Mortgage-backed securities                                                -            -          (13)
          Mortgage loans                                                         (116)         (54)        (125)
          Mortgage servicing rights                                              (113)         (94)        (205)
       Provision for losses on loans and real estate owned                         79           25          (45)
       Federal Home Loan Bank stock dividend                                      (38)         (51)         (49)
       Change in
          Accrued interest receivable                                             (71)        (208)          48
          Other assets                                                            190         (956)          26
          Accrued interest payable and other liabilities                          480         (369)         556
                                                                           ----------   ----------   ----------
              Net cash provided by (used in) operating activities               1,128         (503)       2,045

CASH FLOWS FROM INVESTING ACTIVITIES
    Net increase in loans receivable                                           (6,613)     (15,960)      (2,677)
    Purchase of available-for-sale securities                                      (5)           -            -
    Principal payments on mortgage-backed securities                              192          138          418
    Proceeds from sale of mortgage-backed securities                                -            -          576
    Proceeds from maturities of held-to-maturity securities                         -        1,000            -
    Proceeds from sale of mortgage servicing rights                               113           94          205
    Proceeds from redemption of Federal Home Loan Bank stock                      552            -            -
    Capital expenditures on premises and equipment, net                          (751)        (359)         (57)
    Capital expenditures on foreclosed real estate                                (40)         (67)         (83)
    Proceeds from sale of real estate owned                                        28          159            3
                                                                           ----------   ----------   ----------
       Net cash used in investing activities                                   (6,524)     (14,995)      (1,615)

CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase (decrease) in deposits                                        14,746        7,131       (3,262)
    Net increase (decrease) in advance payments by borrowers
      for insurance                                                                 1           79         (127)
    Net increase (decrease) in Federal Home Loan Bank Advances                 (9,200)      10,000            -
    Net proceeds from issuance of debentures                                    3,128            -            -
    Repayment of other borrowings                                                   -            -       (1,088)
    Net proceeds from issuance of common stock                                  1,724            -            -
    Purchase and retirement of Bank stock                                      (3,943)           -            -
    Dividends paid on preferred and common stock                                 (164)         (87)         (88)
                                                                           ----------   ----------   ----------
       Net cash provided by (used in) financing activities                      6,292       17,123       (4,565)
                                                                           ----------   ----------   ----------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
                                   (Continued)

                                       30

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 Years ended September 30, 1998, 1997, and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                               1998         1997         1996
                                                                               ----         ----         ----

<S>                                                                        <C>          <C>          <C>        
Change in cash and cash equivalents                                        $      896   $    1,625   $   (4,135)

Cash and cash equivalents at beginning of year                                  4,431        2,806        6,941
                                                                           ----------   ----------   ----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                   $    5,327   $    4,431   $    2,806
                                                                           ==========   ==========   ==========

Supplemental disclosures of cash flow information
    Cash paid during the year for
       Interest                                                            $    3,305   $    2,628   $    2,369
       Income taxes                                                               156          165          139

Supplemental  disclosure of noncash  investing  activities
    Net transfer  between loans and real estate acquired through
      foreclosure                                                                 223           23         (375)
    Transfer of securities to available-for-sale at fair value                      -            -          563

-------------------------------------------------------------------------------------------------------------------
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       31

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:  The accompanying  consolidated  financial statements for
the year ended  September  30, 1998  include the  accounts of The  Bryan-College
Station   Financial   Holding  Company  (the  "Company")  and  its  wholly-owned
subsidiary  First  Federal  Savings  Bank (the  "Bank").  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.

The 1998 consolidated  financial  statements include the accounts and results of
operations  of the Company,  the Bank,  and the Bank's  wholly-owned  subsidiary
First Service Corporation of Bryan. The September 30, 1997 and 1996 consolidated
financial  statements  include  the  accounts  of the Bank and its  wholly-owned
subsidiary.  All significant  intercompany  transactions  and balances have been
eliminated in consolidation.

Nature of  Operations:  The only business of the Company is the ownership of the
Bank.  The Bank is a federally  chartered  stock  savings bank and 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 of Texas.  Substantially
all loans are secured by specific  items of  collateral,  including real estate,
residences, and consumer assets.

Use of Estimates in the Preparation of Financial Statements:  The preparation of
financial statements in conformity with generally accepted accounting principles
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,  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  charged or  credited,  net of income  taxes,  to a  valuation  allowance
included as a separate component of stockholders' equity. Premiums and discounts
are recognized in
--------------------------------------------------------------------------------

                                   (Continued)

                                       32

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 possible 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  which 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 which 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  which  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
--------------------------------------------------------------------------------

                                   (Continued)

                                       33

<PAGE>


       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.   The  Company  obtains  sales  commitments  on  these  loans
immediately prior to making the origination commitment. 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.

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.

Foreclosed  Real Estate:  Real estate acquired  through  foreclosure and similar
proceedings is carried at the lower of cost (fair value of the asset at the date
of  foreclosure)  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  selling  expenses  is less  than the  cost of the  asset.  Changes  in the
valuation allowance are charged or credited to income.

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.
--------------------------------------------------------------------------------

                                   (Continued)

                                       34

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Common Share:  Earnings per share is computed  under the provisions
of Statement of Financial  Accounting  Standards No. 128,  "Earnings Per Share,"
which was adopted  retroactively  by the Company at the  beginning  of the first
quarter of fiscal 1998.  Amounts  reported as Earnings Per Common Share for each
of the three years ended September 30, 1998 reflect earnings available to common
stockholders  for the year  divided  by the  weighted  average  number of common
shares  outstanding  during  the year.  Earnings  per share for the years  ended
September 30, 1997 and 1996 have been restated to reflect the 2.5 exchange ratio
of Company  common stock for Bank common stock.  Weighted  average common shares
were  494,233  for the year ended  September  30, 1998 and 599,030 for the years
ended  September  30, 1997 and 1996.  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.  The warrants  are not  included in diluted  earnings per share since the
exercise price exceeds the market price of the stock.

NOTE 2 - SECURITIES

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

<TABLE>
<CAPTION>
                                                     ---------------------------1 9 9 8-----------------------
                                                                         Gross          Gross
                                                        Amortized     Unrealized     Unrealized        Fair
                                                          Cost           Gains         Losses          Value
                                                          ----           -----         ------          -----
<S>                                                  <C>             <C>            <C>            <C>        
Available-for-sale
     Equity stock                                    $         5     $         -    $         -    $         5
                                                     ===========     ===========    ===========    ===========

Held-to-maturity
     FHLMC certificates                              $       655     $         2    $       (14)   $       643
     FNMA certificates                                       299               4             (1)           302
                                                     -----------     -----------    -----------    -----------

                                                     $       954     $         6    $       (15)   $       945
                                                     ===========     ===========    ===========    ===========

<CAPTION>

                                                     ---------------------------1 9 9 7-----------------------
                                                                         Gross          Gross
                                                        Amortized     Unrealized     Unrealized        Fair
                                                          Cost           Gains         Losses          Value
                                                          ----           -----         ------          -----
<S>                                                  <C>             <C>            <C>            <C>        
Held-to-maturity
     FHLMC certificates                              $       774     $         5    $       (27)   $       752
     FNMA certificates                                       376               3             (2)           377
                                                     -----------     -----------    -----------    -----------

                                                     $     1,150     $         8    $       (29)   $     1,129
                                                     ===========     ===========    ===========    ===========
</TABLE>
--------------------------------------------------------------------------------

                                   (Continued)

                                       35

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)

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

NOTE 2 - SECURITIES (Continued)

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.

NOTE 3 - LOANS

Loans receivable at September 30 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                       1998            1997
                                                                                       ----            ----
<S>                                                                                 <C>            <C>        
     First mortgage loans Principal balances:
              Secured by one-to-four-family residences                              $    32,846    $    35,541
              Secured by other properties                                                 4,616          4,166
              Construction loans                                                          6,166         10,305
                                                                                    -----------    -----------
                                                                                         43,628         50,012

         Less:
              Undisbursed portion of loans                                               (2,089)        (3,452)
              Net deferred loan origination fees                                           (140)          (167)
              Deferred gain                                                                  (3)            (3)
                                                                                    -----------    -----------
                  Total first mortgage loans                                             41,396         46,390

     Consumer and other loans
       Principal balances:  
              Automobile loans                                                           24,636         15,082
              Home equity and second mortgage                                                37             54
              Loans secured by deposit accounts                                             951            925
              Commercial loans                                                            3,024          1,766
              Other consumer loans                                                        1,199            672
                                                                                    -----------    -----------
                                                                                         29,847         18,499
              Net deferred loan origination costs                                           110             36
              Net premiums on indirect loans                                                620            381
                                                                                    -----------    -----------
                  Total consumer and other loans                                         30,577         18,916

     Less allowance for loan losses                                                        (307)          (273)
                                                                                    -----------    -----------

                                                                                    $    71,666    $    65,033
                                                                                    ===========    ===========
</TABLE>
--------------------------------------------------------------------------------

                                   (Continued)

                                       36

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 3 - LOANS (Continued)

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

<TABLE>
<CAPTION>
                                                                        1998            1997            1996
                                                                        ----            ----            ----
<S>                                                                  <C>            <C>            <C>        
     Balance at beginning of year                                    $       273    $       247    $       317
     Provision charged to operations                                          79             25            (52)
     Charge-offs                                                             (75)            (5)           (23)
     Recoveries                                                               30              6              5
                                                                     -----------    -----------    -----------

         Balance at end of year                                      $       307    $       273    $       247
                                                                     ===========    ===========    ===========
</TABLE>

There were no impaired and  nonaccrual  loans at September 30, 1998.  Nonaccrual
loans totaled  approximately $8,000, and $56,000 at September 30, 1997 and 1996,
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,  1998,  approximately  45% 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 has granted loans to certain  officers and directors of the Bank and
Company. Related-party loans are made on substantially the same terms, including
interest rates and  collateral,  as those  prevailing at the time for comparable
transactions  with unrelated persons and do not involve more than normal risk of
collectibility.  All loans are current in their  contractual  payments  for both
principal and interest.

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

<TABLE>
<CAPTION>
                                                                                       1998            1997
                                                                                       ----            ----
<S>                                                                                 <C>            <C>        
     Balance at beginning of year                                                   $       678    $       699
     Loans disbursed                                                                        379             54
     Principal repayments                                                                  (251)           (56)
     Change in persons classified as related parties                                       (157)           (19)
                                                                                    -----------    -----------

         Balance at end of year                                                     $       649    $       678
                                                                                    ===========    ===========
</TABLE>
--------------------------------------------------------------------------------

                                   (Continued)

                                       37

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS

The following summarizes the Company's secondary mortgage market activities:

<TABLE>
<CAPTION>
                                                                        1998           1997           1996
                                                                        ----           ----           ----

<S>                                                                  <C>            <C>            <C>        
     Proceeds from sale of mortgage loans                            $    11,526    $     7,821    $    13,839
                                                                     ===========    ===========    ===========

     Gain on sale of mortgage loans                                  $       116    $        54    $       125
     Gain on sale of mortgage servicing rights                               113             94            205
                                                                     -----------    -----------    -----------

                                                                     $       229    $       148    $       330
                                                                     ===========    ===========    ===========

     Loans serviced for others                                       $     1,966    $     1,588    $       966
                                                                     ===========    ===========    ===========
</TABLE>


NOTE 5 - PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                                        1998            1997
                                                                                        ----            ----

<S>                                                                                 <C>            <C>        
     Land                                                                           $       423    $       358
     Buildings and improvements                                                             987            771
     Furniture and equipment                                                              1,730          1,218
                                                                                    -----------    -----------
         Total cost                                                                       3,140          2,347
     Accumulated depreciation                                                            (1,504)        (1,230)
                                                                                    -----------    -----------

                                                                                    $     1,636    $     1,117
                                                                                    ===========    ===========
</TABLE>
--------------------------------------------------------------------------------

                                   (Continued)

                                       38

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 6 - DEPOSITS

Certificate of deposit accounts with a minimum  denomination of $100,000 or more
totaled $9,109,000 and $5,210,000 at September 30, 1998 and 1997, respectively.

At September 30, 1998,  scheduled  maturities of  certificates of deposit are as
follows:

                        Year Ending
                        -----------
                           1999                            $      36,348
                           2000                                   10,418
                           2001                                    2,085
                           2002                                      468
                           2003                                      239
                                                           -------------
                                                           $      49,558
                                                           =============

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND DEBENTURES

At  September  30,  secured  advances  from the  Federal  Home Loan Bank were as
follows:

<TABLE>
<CAPTION>
                                                                                    Balance
                                                                           -----------------------
                    Interest Rate              Maturity Date                  1998         1997
                    -------------              -------------                  ----         ----
<S>                   <C>                        <C>                       <C>          <C>      
                      5.52%                      10/2/98                   $     500    $       -
                      5.29                       10/5/98                         300            -
                      5.55                       10/1/97                           -        5,500
                      5.55                       10/7/97                           -        4,500
                                                                           ---------    ---------

                                                                           $     800    $  10,000
                                                                           =========    =========
</TABLE>

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, 1998,  the Bank had the ability,  if needed,  to
borrow up to $23.6 million 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.

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

                                   (Continued)

                                       39

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND DEBENTURES

  (Continued)

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, 1998, notes payable are summarized as follows:

      Interest Rate                  Maturity Date                 Balance
      -------------                  -------------                 -------

          11.5%                      March 31, 2003              $ 3,629,000


NOTE 8 - BENEFIT PLANS

During 1993, the Bank's Board of Directors  adopted a stock option and incentive
plan (the Plan) that was subsequently  ratified by the  stockholders.  Under the
Plan, options for 18,479 shares of common stock at $10.00 per share were granted
to the  directors and officers of the Bank.  During the fiscal year 1997,  1,553
stock options  expired due to the  resignation  of an officer and a director who
did not exercise  their  options.  At September  30, 1997,  13,461  options were
outstanding.  Concurrent with the merger and formation of the Holding Company on
April 1, 1998, all outstanding stock options were cancelled.

The Bank has a defined  benefit pension plan covering  substantially  all of the
employees.  The  benefits  are  based  on  years of  service  and an  employee's
compensation  during  the  highest  five  years  out of the  last  ten  years of
employment. The Bank's funding policy is to contribute each year an amount which
satisfies the regulatory funding standards.  The contributions are invested in a
Lincoln National Group Variable Annuity Contract.

The funded status of the plan at September 30 is as follows:

<TABLE>
<CAPTION>
                                                                                       1998            1997
                                                                                       ----            ----
<S>                                                                                 <C>            <C>        
     Change in benefit obligation:
         Beginning benefit obligation                                               $       595    $       499
         Service cost                                                                        82             69
         Interest cost                                                                       41             35
         Actuarial (gain) loss                                                               (6)            18
         Benefits paid                                                                      (36)           (26)
                                                                                    -----------    -----------
              Ending benefit obligation                                             $       676    $       595
                                                                                    ===========    ===========

     Change in plan assets:
         Beginning fair value                                                       $       437    $       333
         Actual return                                                                       21             21
         Employer contribution                                                              120            109
         Benefits paid                                                                      (36)           (26)
                                                                                    -----------    -----------
              Ending fair value                                                     $       542    $       437
                                                                                    ===========    ===========

     Funded status                                                                  $      (134)   $      (158)
     Unrecognized net actuarial loss                                                         55             62
     Unrecognized net transition obligation                                                 104            111
     Additional minimum liability                                                             -            (30)
                                                                                    -----------    -----------
         Prepaid (accrued) benefit cost                                             $        25    $       (15)
                                                                                    ===========    ===========
</TABLE>
--------------------------------------------------------------------------------

                                   (Continued)

                                       40

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 8 - BENEFIT PLANS (Continued)

<TABLE>
<CAPTION>
                                                                     --------Year Ended September 30,---------
                                                                        1998           1997            1996
                                                                        ----           ----            ----
<S>                                                                  <C>            <C>            <C>        
Net pension cost includes the following components:
     Service cost earned during the period                           $        82    $        69    $        73
     Interest cost                                                            42             35             25
     Expected return on plan assets                                          (31)           (23)           (16)
     Net amortization and deferral                                            16              9              7
                                                                     -----------    -----------    -----------

         Net periodic pension cost                                   $       109    $        90    $        89
                                                                     ===========    ===========    ===========
</TABLE>

The assumptions used to develop the net periodic pension cost were:

<TABLE>
<CAPTION>
                                                                     --------Year Ended September 30,---------
                                                                        1998           1997            1996
                                                                        ----           ----            ----
<S>                                                                      <C>            <C>             <C>
     Discount rate                                                       7%             7%              7%
     Expected long-term rate of return on assets                         7%             7%              7%
     Rate of increase in compensation levels                             5%             5%              5%
</TABLE>

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.  The  President's  salary  is  reduced  by 50% of  the  amount  of the
retirement expense incurred each month by the Bank.

NOTE 9 - REGULATORY AND 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. 

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

                                   (Continued)

                                       41

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)

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, 1998, the most
recent  notification from the Office of Thrift Supervision  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,  1998 and 1997,  the Bank did not meet the  minimum  requirement  to be well
capitalized under prompt corrective action regulations.

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

<TABLE>
<CAPTION>
                                                                                                  Minimum Required
                                                                                                     to Be Well
                                                                          Minimum Required        Capitalized Under
                                                                             for Capital          Prompt Corrective
                                                         Actual           Adequacy Purposes      Action Regulations
                                                         ------           -----------------      ------------------
                                                   Amount      Ratio     Amount       Ratio       Amount      Ratio
                                                   ------      -----     ------       -----       ------      -----

1998
----
<S>                                               <C>          <C>      <C>           <C>        <C>         <C>   
Total capital (to risk-weighted assets)           $   5,563    8.52%    $   5,226     8.00%      $   6,533   10.00%
Tier 1 (core) capital (to risk-weighted assets)       5,256    8.04         2,615     4.00           3,922    6.00
Tier 1 (core) capital (to adjusted total assets)      5,256    6.43         2,453     3.00           4,088    5.00
Tier 1 (leverage) capital (to average assets)         5,256    6.86         3,064     4.00           3,830    5.00
Tangible capital (to adjusted total assets)           5,256    6.43         1,226     1.50             N/A      N/A

1997
----
Total capital (to risk-weighted assets)           $   5,107    9.11%    $   4,486     8.00%      $   5,608   10.00%
Tier 1 (core) capital (to risk-weighted assets)       4,834    8.62         2,243     4.00           3,365    6.00
Tier 1 (core) capital (to adjusted total assets)      4,834    6.43         2,256     3.00           3,760    5.00
Tier 1 (leverage) capital (to average assets)         4,834    7.53         2,568     4.00           3,210    5.00
Tangible capital (to adjusted total assets)           4,834    6.43         1,128     1.50             N/A      N/A
</TABLE>

Accordingly,  management  considers the capital  requirements  to have been met.
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.  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.

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

                                   (Continued)

                                       42

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 9 - REGULATORY AND CAPITAL MATTERS (Continued)

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  statement  of  financial
condition.

NOTE 10 - 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:

<TABLE>
<CAPTION>
                                                                                             Contract
                                                                                              Amount
                                                                                              ------
                                                                                       1998            1997
                                                                                       ----            ----
<S>                                                                                 <C>            <C>        
     Financial instruments whose contract amounts represent credit risk:
         Commitments to make loans                                                  $     3,197    $     8,610
         Loans-in-process                                                                 2,089          3,452
         Lines of credit                                                                    974          1,371
         Letters of credit                                                                   73            175
</TABLE>

The Company had $3,197,000 of fixed rate commitments to originate loans, ranging
from 6.125% to 12.99% at September 30, 1998.  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 which potentially subject the Company to concentrations of
credit  risk  include  interest-bearing  deposit  accounts  in  other  financial
institutions  and loans. At September 30, 1998, the Company had deposit accounts
with balances totaling approximately $3,667,000 at the Federal Home Loan Bank of
Dallas. Concentrations of loans are described in Note 3.


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

                                   (Continued)

                                       43

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 10 - 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.

During September 1996, the Company entered into a noncancelable  operating lease
for office space relating to mortgage  operations.  The lease expired August 31,
1998 and the  Company is leasing the space  month-to-month  until  December  31,
1999. The Company has entered into a new  noncancelable  operating lease for the
mortgage operations effective January 1, 1999 with a term of three years and one
option to renew for an additional three years.  Rental expense on this space was
approximately  $29,000 for the year ended September 30, 1998.  Projected minimum
payments under the terms of the lease, not including  insurance and maintenance,
are as follows:

                           1999                         $     16
                           2000                               21
                           2001                               21
                           2002                                5
                                                        --------

                                                        $     63
                                                        ========

NOTE 11 - INCOME TAX EXPENSE

The provision for income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                                     ---------Year Ended September 30,---------
                                                                        1998            1997            1996
                                                                        ----            ----            ----
<S>                                                                  <C>            <C>            <C>        
     Current income tax expense                                      $       185    $       179    $       168
     Deferred income tax expense (benefit)                                   (21)           133            (60)
                                                                     -----------    -----------    -----------

                                                                     $       164    $       312    $       108
                                                                     ===========    ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                     ---------Year Ended September 30,---------
                                                                        1998            1997            1996
                                                                        ----            ----            ----
<S>                                <C>                               <C>            <C>            <C>        
     Tax expense at statutory rate (34%)                             $       155    $       312    $       116
     Other tax effects                                                         9              -             (8)
                                                                     -----------    -----------    -----------

                                                                     $       164    $       312    $       108
                                                                     ===========    ===========    ===========
</TABLE>


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

                                   (Continued)

                                       44

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 11 - INCOME TAX EXPENSE (Continued)

The Bank has  qualified  under  provisions  of the  Internal  Revenue Code which
permit it to deduct from taxable  income a provision for bad debts which differs
from the  provision  charged  to income in the  financial  statements.  Retained
earnings at September 30, 1998 include approximately $478,000,  representing tax
bad debt  provisions  through  1986,  for which no deferred  federal  income tax
liability has been recorded.

Tax  legislation  passed in August 1996 now requires all thrift  institutions to
deduct  a  provision  for bad  debts  for tax  purposes  based  on  actual  loss
experience  and  recapture  the excess bad debt reserve  accumulated  in the tax
years after 1986.  The related  amount of deferred tax  liability  which must be
recaptured  is $175,000  and is payable  over a six-year  period,  beginning  in
fiscal year 1997. The remaining  amount of deferred tax liability  which must be
recaptured at September 30, 1998 is $116,000.

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

<TABLE>
<CAPTION>
                                                                                       1998            1997
                                                                                       ----            ----
<S>                                                                                 <C>            <C>        
     Supplemental employee retirement agreement                                     $        34    $         -
     Depreciation                                                                             8              -
     Other                                                                                    -              3
                                                                                    -----------    -----------
         Total deferred tax assets                                                           42              3

     Depreciation                                                                             -            (23)
     Federal Home Loan Bank stock dividends                                                (141)          (128)
     Loans, principally due to allowance for losses                                         (99)           (71)
                                                                                    -----------    -----------
         Total deferred tax liabilities                                                    (240)          (222)
                                                                                    -----------    -----------

              Net deferred tax liabilities                                          $      (198)   $      (219)
                                                                                    ===========    ===========
</TABLE>


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

                                   (Continued)

                                       45

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                                   -------------1998------------   ------------1997------------
                                                     Approximate                     Approximate
                                                      Carrying        Estimated       Carrying        Estimated
                                                       Amount        Fair Value        Amount        Fair Value
                                                       ------        ----------        ------        ----------
<S>                                                  <C>             <C>            <C>            <C>        
     Financial assets
         Cash and cash equivalents                   $     5,327     $     5,327    $     4,431    $     4,431
         Securities                                          959             950          1,150          1,129
         Loans, net of allowance for
          loan losses                                     71,666          72,589         65,033         65,683
         Loans held for sale                                 328             328            204            204
         Federal Home Loan Bank stock                        382             382            896            896
         Accrued interest receivable                         608             608            537            537

     Financial liabilities
         Demand deposits                                 (18,797)        (18,797)       (14,610)       (14,610)
         Savings deposits                                 (5,199)         (5,199)        (4,393)        (4,393)
         Time deposits                                   (49,558)        (49,719)       (39,805)       (39,891)
         Advance payments by borrowers
          for taxes and insurance                           (863)           (863)          (862)          (862)
         Federal Home Loan Bank Advances                    (800)           (800)       (10,000)       (10,000)
         Debentures                                       (3,629)         (3,752)             -              -
         Accrued interest payable                           (168)           (168)           (56)           (56)
</TABLE>

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.


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

                                   (Continued)

                                       46

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 12 - 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.

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, 1998,  the fair value would have been  achieved,  because
the market value may differ depending on the  circumstances.  The estimated fair
values at September  30, 1998 should not  necessarily  be considered to apply at
subsequent dates.

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

                                   (Continued)

                                       47

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 13 - MERGER AND FORMATION OF HOLDING COMPANY

On April 1, 1998, First Federal Savings Bank became a wholly-owned subsidiary of
The  Bryan-College  Station  Financial  Holding Company through an agreement and
plan of merger.  The Company issued 200,000 shares of common stock at a price of
$10 per share and  3,629  units,  each  unit  consisting  of a $1,000  debenture
bearing  an  interest  rate of 11.5%  due  March  31,  2003 and nine  detachable
warrants. Each warrant entitles the unit holder to purchase one share of Company
common stock for $12.50 through March 31, 2003.  Existing  stockholders of First
Federal  Savings Bank exchanged one share of existing First Federal common stock
for two and one-half  shares of new holding  company  stock or sold their common
stock for cash of $24.07 per share. The Bank preferred stock was not affected by
the  reorganization  and is recorded as  minority  interest in the  consolidated
statement of financial condition.

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.

Merger costs  totaling  $276,000  were  deducted from the proceeds of the shares
sold in the formation of the new holding company.

NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                             CONDENSED BALANCE SHEET
                               September 30, 1998
<S>                                                                                             <C>           

     ASSETS
     Cash                                                                                       $          441
     Equity interest in bank subsidiary                                                                  5,256
     Other assets                                                                                          764
                                                                                                --------------
                                                                                                $        6,461
                                                                                                ==============

     LIABILITIES AND STOCKHOLDERS' EQUITY
     Notes payable                                                                              $        3,629
     Accrued interest and other liabilities                                                                 89
                                                                                                --------------
         Total liabilities                                                                               3,718

     Minority interest                                                                                     873

     Stockholders' equity

         Common stock                                                                                        4
         Additional paid-in capital                                                                      1,849
         Retained earnings                                                                                  17
                                                                                                --------------
              Total stockholders' equity                                                                 1,870
                                                                                                --------------

                                                                                                $        6,461
                                                                                                ==============
</TABLE>

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

                                   (Continued)

                                       48

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)

<TABLE>
<CAPTION>
                          CONDENSED STATEMENT OF INCOME
             For the period April 1, 1998 through September 30, 1998

<S>                                                                                             <C>           
     Income
         Interest income                                                                        $            3
         Other income                                                                                       10
                                                                                                --------------
              Total income                                                                                  13

     Expenses
         Interest expense                                                                                  210
         Other expenses                                                                                    300
                                                                                                --------------

              Total expenses                                                                               510
                                                                                                --------------

     LOSS BEFORE EQUITY IN UNDISTRIBUTED
       EARNINGS OF SUBSIDIARY                                                                             (497)

     Equity in undistributed earnings of Bank subsidiary                                                   354
                                                                                                --------------


Loss before income tax benefit                                                                            (143)

Income tax benefit                                                                                        (160)
                                                                                                --------------

Net income                                                                                      $           17
                                                                                                ==============
</TABLE>

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

                                   (Continued)

                                       49

<PAGE>



       THE BRYAN-COLLEGE STATION FINANCIAL HOLDING COMPANY AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 Years ended September 30, 1998, 1997, and 1996
                          (Table amounts in thousands)
--------------------------------------------------------------------------------

NOTE 14 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)

<TABLE>
<CAPTION>
                        CONDENSED STATEMENT OF CASH FLOWS
             For the period April 1, 1998 through September 30, 1998

<S>                                                                                             <C>           
     CASH FLOWS FROM OPERATING ACTIVITIES
         Net income                                                                             $           17
         Adjustments to reconcile net income to
           net cash provided by operating activities:
              Equity in undistributed earnings of subsidiary                                              (310)
              Amortization of debt issuance and reorganization costs                                        67
              Increase in other assets, net of liabilities                                                (242)
                                                                                                --------------
                  Net cash used in operating activities                                                   (468)

     CASH FLOWS FROM FINANCING ACTIVITIES
         Net proceeds from issuance of common stock                                                      1,724
         Net proceeds from issuance of debentures                                                        3,128
         Purchase and retirement of Bank stock                                                          (3,943)
                                                                                                --------------
              Net cash provided by financing activities                                                    909
                                                                                                --------------

     Change in cash and cash equivalents                                                                   441

     Cash and cash equivalents at beginning of period                                                        -
                                                                                                --------------

     CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 $          441
                                                                                                ==============

     Supplemental disclosures of cash flow information
         Cash paid during the period for
              Interest                                                                          $          121
</TABLE>

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

                                   (Continued)

                                       50

<PAGE>



                              CORPORATE INFORMATION

================================================================================



ANNUAL MEETING

         The annual meeting of the Company, will be held on February 18, 1999 at
3:00 p.m., Bryan,  Texas time, at the main office of the Company located at 2900
Texas Avenue, Bryan, Texas.

MARKET INFORMATION

         The  Company's  common  stock is  listed on the  bulletin  board of the
NASDAQ and is only traded infrequently. The Company's common stock was issued at
$10.00  per share in  connection  with the  acquisition  of the Bank on April 1,
1998. At December 24, 1998 there were 562 holders of the Company's  common stock
and 389,436 shares of common stock issued and outstanding. At December 24, 1998,
the last known sales price of the Company's common stock was $10 per share.

DIVIDENDS

         The  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 Company
did not declare cash dividends on its common stock during fiscal 1998.  However,
First  Federal paid an aggregate of $88,000 in quarterly  cash  dividends on its
preferred stock in 1997.

         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  during a calendar year to one hundred percent
of its net income plus one-half of its capital surplus ratio at the beginning of
the calendar  year.  In addition,  the Bank must give the OTS thirty days notice
prior to the declaration of a dividend.

                                       51


<PAGE>

ANNUAL REPORT ON FORM 10-KSB AND OTHER INVESTOR INFORMATION

         The  Bryan-College  Station Financial Holding Company will furnish upon
written  request at no charge to any  stockholder a copy of its Annual Report on
Form  10-KSB for the year ended  September  30,  1998 and the  exhibits  thereto
required to be filed with the SEC under the  Securities  Exchange Act of 1934 by
writing to:

                  Kay Watson
                  Stockholder Relations Officer
                  The Bryan-College Station Financial Holding Company
                  2900 Texas Avenue
                  Bryan, Texas  77802
                  (409) 779-2900

TRANSFER AGENT AND REGISTRAR

                  The Bryan-College Station Financial Holding Company
                  Attention: Kay Watson
                  Stockholder Relations Officer
                  2900 Texas Avenue
                  Bryan, Texas  77802
                  (409) 779-2900

AUDITORS

                  Crowe, Chizek and Company LLP
                  One Mid America Plaza
                  P.O. Box 3697
                  Oak Brook, Illinois  60522-3697

SPECIAL COUNSEL

                  Silver Freedman & Taff, L.L.P.
                  (a partnership including professional corporations)
                  1100 New York Avenue, N.W.
                  Suite 700
                  Washington, D.C.  20006

                                       52


<PAGE>


                            THE BRYAN-COLLEGE STATION
                            FINANCIAL HOLDING COMPANY
================================================================================

<TABLE>
<CAPTION>
BOARD OF DIRECTORS:                                                       OFFICERS OF THE BRYAN-COLLEGE
                                                                          STATION FINANCIAL HOLDING COMPANY

<S>                                                                      <C>
Richard L. Peacock, Chairman of the Board/Retired                         J. Stanley Stephen, President and Chief Executive 
Owner/Office Supply                                                       Officer                                           
Ernest Wentrcek,  Vice Chairman of the                                                                                      
Board/Retired  Texas A&M and Owner/W&W Realty                             George Koenig, Executive Vice President and       
Charles  Neelley,  Secretary-Treasurer of the  Board/                     Manager/Manufactured Housing Loan                 
Retired  Texas A&M and Travel/Business                                    Department/First Federal Savings Bank             
Jack W. Lester, Jr.,  Assistant Secretary-Treasurer of                                                                      
the Board/Retired/Owner/Ladies Wear Fashion                               Mary Lynn Hegar, Senior Vice President and Chief  
Business                                                                  Financial Officer                                 
J. Stanley Stephen, President/CEO,  First Federal                                                                           
Savings Bank                                                              Brad Stephen, Vice President                      
Ken L. Hays, Owner,  Aggieland Travel                                     
Roland Ruffino,  Co-Owner/Readfield Meats 
Robert Conaway,  Owner/Progress Supply
George Koenig, Executive Vice President,
 First Federal Savings Bank
Arthur Davila, Retired, Texas A&M University,
Physical Plant
Joseph W. Krolczyk, Owner/President, KESCO
Restaurant Equipment Supply Inc.
Gary A. Snoe, Owner/President, Snoe Inc. Specialty
Tool and Die
</TABLE>













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