<PAGE>   1

                      SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.
                                    20549
                                  Form 10-Q



             Quarterly Report Pursuant to Section 13 or 15(d) of
                     The Securities Exchange Act of 1934

For the quarter ended                             Commission file number 0-20754
September 30, 1996

                        MIDLAND FINANCIAL GROUP, INC.
                  (Exact name of registrant as specified in
                  its charter)

Tennessee                                   62-1104818
(State of Incorporation)                    (I.R.S. Employer Identification No.)



825 Crossover Lane, Suite 112
Memphis, Tennessee                          38117
(address of principal executive offices)    (Zip Code)




Registrants telephone number including area code: (901) 680-9100




Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   X    Yes          No       
                                          ------      ------   
                                              

As of November 13, 1996 there were 5,550,198 shares of Common Stock
outstanding.







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<PAGE>   2

                                    Part I

Item 1.  Financial Statements

                        MIDLAND FINANCIAL GROUP, INC.
                           CONSOLIDATED CONDENSED
                               BALANCE SHEETS
                               (in thousands)


<TABLE>
<CAPTION>
                                             (Unaudited)
           ASSETS                           September 30,    December 31,
                                                1996             1995
                                            -------------    ------------
<S>                                           <C>              <C>          
Cash and short term investments               $  1,014         $ 12,479     
Investments held for resale                    151,652          162,324     
                                              --------         --------     
                                               152,666          174,803     
                                                                            
                                                                            
Agent and direct bill receivables               32,372           39,741     
Finance contracts receivable                       227              365     
Reinsurance recoverable                         37,059           17,819     
Prepaid reinsurance premium                     30,690           21,207     
Accrued interest receivable                      2,073            2,296     
Deferred policy acq. costs                       8,420            9,617     
Furniture, equip, fixtures, net                  3,562            3,398     
Intangibles, net                                 2,621              571     
Notes receivable                                 2,432            2,158     
Subsidiary investments                             324              293     
Income taxes recoverable                         8,589            9,227     
Other assets                                     4,209            2,036     
                                              --------         --------     
Total Assets                                  $285,244         $283,531     
                                              ========         ========     
                                                                            
           LIABILITIES                                                        
                                                                            
Unpaid losses and loss adjustment expense     $115,235         $104,516     
Unearned premiums and fees                      74,502           82,473     
Due to reinsurers                               18,951            7,946     
Notes payable                                   23,000           27,000     
Accrued premium taxes and other expenses         6,634           12,751     
                                              --------         --------     
Total Liabilities                              238,322          234,686     
                                              --------         --------     
                                                                            
           EQUITY   
                                                                            
Common stock                                    41,623           39,420     
Additional paid-in capital                       1,887            1,887     
Retained earnings                                3,308            5,796     
Unrealized appreciation on equity securities       104            1,742     
                                              --------         --------     
Total Equity                                    46,922           48,845     
                                              --------         --------     
                                                                            
Total Liabilities and Equity                  $285,244         $283,531     
                                              ========         ========     
</TABLE>





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<PAGE>   3

                        MIDLAND FINANCIAL GROUP, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                   (In thousands except per share amounts)
                                 (Unaudited)



<TABLE>
<CAPTION>
                                                        Three Months Ended              Nine Months Ended
                                                           September 30,                  September 30,
                                                           -------------                  -------------
                                                       1996            1995            1996            1995
                                                       ----            ----            ----            ----
<S>                                                  <C>              <C>            <C>             <C>
Gross premiums written                               $ 42,907         $57,761        $146,668        $164,420
                                                     --------         -------        --------        --------
Net premiums written                                 $ 14,049         $34,327        $ 90,494        $138,408
                                                     --------         -------        --------        --------
 Income:
   Premiums earned                                   $ 29,919         $48,983        $107,948        $132,848
   Policy fees                                          2,618           2,998           8,948           7,755
   Investment income                                    2,317           2,998           6,811           7,815
   Net realized investment gains (losses)                 (84)            302             363             308
   Other income                                            17              40              57             156
                                                     --------         -------        --------        --------
                                                       34,787          55,321         124,127         148,882
                                                     --------         -------        --------        --------

Expenses:

   Losses & loss adjustment exp.                       32,557          46,421          97,297         108,381
   Policy acquisition costs                             7,166          15,134          26,116          36,156
   Operating expenses                                   1,387           2,388           4,771           4,973
   Interest                                               527             576           1,738           1,356
   Amort. of intangible assets                            290              35             364             103
                                                     --------         -------        --------        --------
                                                       41,927          64,554         130,286         150,969
                                                     --------         -------        --------        --------
Income before provision for income
   taxes and equity interest                           (7,140)         (9,233)         (6,159)         (2,087)
Income tax provision (benefit)                         (3,210)         (3,585)         (3,662)         (1,966)
                                                     --------         -------        --------        --------

Income before equity interests                         (3,930)         (5,648)         (2,497)           (121)
Equity interests                                           25             (75)             10            (199)
                                                     --------         -------        --------        --------

Net income                                           $ (3,905)        $(5,723)       $ (2,487)       $   (320)
                                                     --------         -------        --------        --------
Net income per common share                          $   (.70)        $ (1.05)       $   (.45)       $   (.06)
                                                     ========         =======        ========        ========
Weighted average common shares                          5,547           5,471           5,547           5,458
       outstanding                                   ========         =======        ========        ========

</TABLE>






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<PAGE>   4

                         MIDLAND FINANCIAL GROUP, INC.
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                      Three Months Ended           Nine Months Ended
                                                         September 30,                September 30,
                                                      ------------------           -----------------
                                                     1996            1995         1996          1995
                                                     ----            ----         ----          ----
<S>                                               <C>              <C>          <C>            <C>
Net cash flows from operating activities          $ (6,204)        $  9,289     $(15,807)      $ 30,674
                                                  --------         --------     --------       --------

Cash flows investing activities:
  Sales of investments                              31,808           16,462       69,442         18,050
  Purchase of investments                          (20,864)         (22,210)     (61,949)       (39,873)
  Other                                                194             (631)         528           (952)
                                                  --------         --------     --------       --------  
     Net cash used by investing activities          11,138           (6,379)       8,021        (22,775)


Cash flows from financing activities:
  Exercise of warrants and options                     -0-               -0-         -0-            153      
   Bank credit facility transactions                (3,000)          (1,000)      (4,000)       (12,000)     
   Other                                               889             (269)         321         (1,134)     
                                                  --------         --------     --------       --------  
   Net cash provided (used) by                      (2,111)          (1,269)      (3,679)       (12,981)     
                                                  --------         --------     --------       --------  
   financing activity and options                                                                           


Cash, beginning of period                           (1,809)          22,473       12,479         29,196      
                                                  --------         --------     --------       --------  
Cash, end of period                               $  1,014         $ 24,114     $  1,014       $ 24,114      
                                                  ========         ========     ========       ========
</TABLE>        








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<PAGE>   5

                         MIDLAND FINANCIAL GROUP, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)


1.   The accompanying unaudited consolidated financial statements have been
     prepared in accordance with the accounting policies in effect as of
     December 31, 1995, as set forth in the annual consolidated financial
     statements of Midland Financial Group, Inc. (the "Company"), of such date.
     In the opinion of Management, all adjustments necessary for a fair
     presentation of the consolidated financial statements have been included.
     Certain 1995 amounts have been reclassified to conform with the 1996
     presentation.  The results of operations for the three-month and
     nine-month periods ended September 30, 1996, are not necessarily
     indicative of the results to be expected for the full year.

     The computations of earnings per share are based upon the weighted
     average number of common shares outstanding each period adjusted for the
     assumed exercise of outstanding dilutive stock options using the treasury
     stock method.
     
2.   Subsequent Events
     
     On November 6, 1996, the Company entered an Agreement and Plan of Merger
     with The Progressive Corporation ("Progressive") Under the agreement,
     Progressive will acquire all of the Company's outstanding stock at a
     price of $9.00 per share in cash.  The transaction is expected to be
     completed during the first quarter of 1997, subject to regulatory
     approval.






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<PAGE>   6

Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Changes in Financial Condition September 30, 1996 compared to December 31,
1995.

      The operating cash requirements of the Company primarily relate to the
      payment of claims, policy acquisition costs and operating expenses.  Due
      to the nature of risks the Company insures, the Company's liabilities can
      be estimated.  The liabilities generally develop and are resolved over a
      period of less than three years.  Therefore, the Company generally has a
      predictable schedule of cash needs.  The Company manages its investment
      activities to maintain adequate liquidity for operating purposes and to
      protect its policyholders and stockholders (i.e., "matching" of liquidity
      and cash requirements).  The Company generally invests in investment
      grade securities and has a policy of not acquiring real estate
      investments.  Historically, the Company has not experienced any
      "mismatches" related to liquidity management and none are anticipated.

      The Company's objective is to maintain a premiums-to-surplus ratio within
      the industry standard  maximum of 3:1.  For the quarter and nine months
      ended September 30, 1996, the premiums-to-surplus ratios were 1.0:1 and
      2.2:1, respectively, compared to 1.9:1 and for 2.6:1 the same periods of
      1995.

      The Company's permanent credit facility was increased to $30 million in
      December 1994, with the increase being utilized to expand underwriting
      capacity during 1995.  At September 30, 1995, the Company defaulted on
      certain financial covenants contained in the related loan agreement.
      This default was not cured prior to December 31, 1995.  The loan
      agreement was amended, including revised financial covenants, effective
      March 1, 1996.  The Company was not in compliance with certain revised
      financial covenants at September 30, 1996.  The Company anticipates full
      payment of the credit facility balance and termination of the facility in
      connection with the closing of the Progressive acquisition transaction.

Results of Operations for the quarter and nine-months ended September 30, 1996,
compared to the quarter and nine-months ended September 30, 1995.

      Gross premiums written for the quarter and nine-months ended September
      30, 1996, were 26% and 11% less, respectively, than for the same periods
      of 1995 due to deliberate changes made in underwriting guidelines and
      elimination of certain of the Company's programs.  This is in line with
      management's stated goals for 1996.

      Net premiums written for the quarter and nine-months ended September 30,
      1996, were 59% and 35% less, respectively, than the same periods of the
      prior year due to the personal auto 30% quota share reinsurance in-force
      in the first half of 1996 and not in the same period of 1995.  In
      addition, the Company entered into a new reinsurance agreement effective
      July 1, 1996, whereby the Company's net retention of in-force, new and
      renewal commercial business has been ceded, thus, effectively eliminating
      the Company from the commercial market.

      Earned premiums decreased for the quarter and nine-months ended September
      30, 1996, compared to those same periods of 1995 due to the decrease in
      premiums written.

      Fee income for the quarter compared to the same period of 1995 was lower
      due to decreased premium volume.  In contrast, fee income for the
      nine-months ended September 30, 1996, was higher than for the same
      periods of 1995 due to increases in amounts of fees charged in certain
      programs and due to a larger percentage of the Company's in-force
      business being direct billed during the period.  Direct bill programs
      complement policy fees with installment billing fees.  The installment
      fees track in-force premium more directly than premiums written.
      In-force premium has declined at a slower pace than the decline in
      premium written, thus, installment fee






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<PAGE>   7

      income has increased during 1996 and has offset the reduction in policy   
      fees, which bear a direct relationship to premium written.

      Investment income decreased for the quarter and nine months ended
      September 30, 1996, compared to the same periods of 1995 due to lower
      invested assets for the periods.

      Losses for the quarter ended September 30, 1996, were lower than losses
      for the same period of 1995 due to the personal auto cession of 30%
      during 1996 and the 100% cession of commercial business for losses
      occurring subsequent to June 30, 1996.  The loss ratio, however,
      increased to 108.8% from 94.8% for the quarters ended September 30, 1996,
      and 1995, respectively, due to the continued effects of the in-force
      policies from unprofitable programs written in 1995 and loss development
      on discontinued commercial auto programs.  The loss ratio for the first
      nine-months of 1996 was 90.01% compared to 81.6% for the same period of
      1995 due to the effects of the same.

      Policy acquisition costs for the quarter and first nine months ended
      September 30, 1996, decreased compared to the same periods of 1995 due to
      the decrease in premium and the effects of ceding commission income.  The
      expense ratio for the quarter and first nine months of 1996 were to 24.7%
      and 23.4% compared to 30.0% and 26.0% for the year earlier periods,
      respectively.







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<PAGE>   8

                                   PART II

Item 1.  Legal Proceedings

      In August 1994, the Company and three of its wholly-owned subsidiaries
      were named in a civil lawsuit on behalf of two Chapter 13 debtors and as
      putative representatives of a plaintiffs' class challenging the validity
      of the Chapter 13 automobile insurance program in Alabama.  The
      plaintiffs sought certification of a class, a declaration that the
      insurance policies violate Alabama statutes, a permanent injunction
      against further implementation of the Chapter 13 automobile insurance
      program in Alabama, and reimbursement of premiums received by the Company
      under the Chapter 13 automobile program in Alabama.  The Company and its
      subsidiaries denied the material allegations of the complaint and were
      awarded Dismissal by Summary Judgment in August 1995.  The plaintiff's
      filed a motion for reconsideration, which was denied in October 1995.
      The plaintiffs have appealed this determined and no decision has been
      rendered to date.  The lawsuit was filed in the United States District
      Court for the Northern District of Alabama, Western Division, and is
      presently pending in the United States Court of Appeals, Eleventh
      Circuit.

      In May 1995, the Company, one of its officers and one of its subsidiaries
      were named in a wrongful termination lawsuit by a former employee.  This
      lawsuit is pending in the State of Illinois Circuit Court, Seventh
      Judicial Circuit.  The matter is in the discovery stages.  Management of
      the Company also believes that it had valid cause for the dismissal of
      this employee and presently intends to vigorously defend the case.
      Management of the Company also believes that the resolution of this
      matter will not have a material impact on the Company's operations.

Item 2.  Changes in Securities.

      There were no changes in securities.

Item 3.  Default by the Company upon its Senior Securities.

      The Company has no senior securities.

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

      There were no matters submitted to a vote by security holders.

Item 5.  Other Information.

Item 6a.
      Exhibits and Reports in Form 8-K.

a)    Exhibits required by item 601 of Regulations S-K.
      11.1 Statement Regarding Computation of Net Income Per share.
      27 Financial Data Schedule (SEC use only)

b)    Reports on Form 8-K.
      The Company did not file a report on Form 8-K during the quarter ended
      September 30, 1996.








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<PAGE>   9

                                  Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                          Midland Financial Group, Inc.
                                                  (Registrant)




November 13, 1996                          /s/ Joseph W. McLeary
                                           ---------------------------------
                                           By: Joseph W. McLeary
                                           Chairman and CEO



November 13, 1996                          /s/ Elena Barham
                                           ---------------------------------
                                           By: Elena Barham
                                           Senior Vice-President and
                                           Chief Financial Officer








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