<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                             ____________________
                                  FORM 10-KSB
(Mark One)

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

For the fiscal year ended September 30, 1999

[ ]       TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

                          Commission File No. 0-25704
                                              -------

                         FIRST FEDERAL BANCORPORATION
                 --------------------------------------------
                (Name of Small Business Issuer in Its Charter)

          Minnesota                                     41-1796238
 ------------------------------                      ----------------
 (State or other jurisdiction of                      (I.R.S. employer
 incorporation or organization)                      identification no.)

    214 5th Street, Bemidji, Minnesota                     56601
 ----------------------------------------             ----------------
 (Address of principal executive offices)                (Zip Code)

      Registrant's telephone number, including area code:  (218) 751-5120

          Securities registered pursuant to Section 12(b) of the Act:
                                Not Applicable

          Securities registered pursuant to Section 12(g) of the Act:

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

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

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year:  $9.32 million.

As of December 10, 1999, the aggregate market value of the 642,564 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $4,979,871 based on the closing sale price of $7.75
per share of the registrant's Common Stock on December 10, 1999 as listed on the
National Association of Securities Dealers Automated Quotation SmallCap Market.
For purposes of this calculation, it is assumed that the 780,705 shares held by
directors, officers, the Employee Stock Ownership Plan (unallocated shares
only), the Stock Ownership Plan and Management Recognition Plan Trusts, and
beneficial owners of more than 10% of the registrant's outstanding voting stock,
are shares held by affiliates.

Number of shares of Common Stock outstanding as of December 10, 1999: 1,423,269.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The following lists the documents incorporated by reference and the Part
of the Form 10-KSB into which the document is incorporated:

     1.   Portions of the Annual Report to Stockholders for the fiscal year
          ended September 30, 1999. (Parts I and II)
     2.   Portions of Proxy Statement for 2000 Annual Meeting of Stockholders.
          (Part III)
<PAGE>

                                    PART I

Item 1.  Business
-----------------

General

     First Federal Bancorporation. First Federal Bancorporation (the "Company")
was incorporated under the laws of the State of Minnesota in September 1994 at
the direction of the Board of Directors of First Federal Banking and Savings,
FSB ("First Federal" or the "Bank") for the purpose of serving as a savings and
loan holding company of the Bank upon the acquisition of all of the capital
stock issued by the Bank upon its conversion from the mutual to the stock form
of ownership (the "Conversion"). The Conversion was completed on April 3, 1995.
The Company's principal business is the business of the Bank. The Company has no
significant assets other than the outstanding capital stock of the Bank,
$281,000 of cash and cash equivalents, $2.10 million in securities available for
sale, and $236,000 in other assets. At September 30, 1999, the Company had total
consolidated assets of $132.29 million, deposits of $88.11 million and
stockholders' equity of $13.06 million. Because substantially all of the
Company's operations consist of the operations of the Bank, this Form 10-KSB
largely is a discussion of the Bank's operations.

     The Company's executive offices are located at 214 5th Street, Bemidji,
Minnesota 56601, and its main telephone number is (218) 751-5120.

     First Federal Bank. First Federal was originally chartered in 1910 as
Beltrami County Savings and Building Association, a state-chartered savings
institution, and commenced operations in that same year. First Federal has been
a member of the Federal Home Loan Bank ("FHLB") of Des Moines since 1933, and
its deposits have been federally insured since 1938. In August 1997, the Bank
changed its name from "First Federal Banking and Savings, FSB" to its current
name; "First Federal Bank." First Federal currently operates as a federally
chartered savings bank through its main office located in Bemidji, Minnesota and
four branch offices, which are located in Bemidji, Bagley, Baudette and Walker,
Minnesota. The Bank's market area is located approximately 200 miles north of
Minneapolis, Minnesota. At September 30, 1999, First Federal had total assets of
$129.98 million, deposits of $88.29 million, mortgage-backed and related
securities and investment securities totaling $62.99 million and stockholders'
equity of $10.46 million.

     First Federal is primarily engaged in the business of attracting deposits
from the general public and originating loans secured by first mortgages on
owner occupied one- to four-family residences in First Federal's market area.
First Federal also originates consumer loans, including automobile and home
improvement loans, as well as other consumer loans, loans on commercial real
estate and multi-family real estate, and commercial business loans. Due to
limited loan demand in its market area, First Federal has invested excess funds
in mortgage-backed and related securities and in other investment securities,
and during fiscal 1999 continued to be active in originating and purchasing
participation interests in commercial real estate loans. First Federal has also,
in recent years, increased its consumer lending activities in its local markets.

     The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), and the Bank's savings deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of, and owns capital stock in the Federal Home
Loan Bank ("FHLB") of Des Moines, which is one of 12 regional banks in the FHLB
System. The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") governing reserves to
be maintained and certain other matters.

     The Bank's executive offices are located at 214 5th Street, Bemidji,
Minnesota 56601, and its main telephone number is (218) 751-5120.

                                       2
<PAGE>

Recent Regulatory and Legislative Changes

     On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law. The
Act calls for the modernization of the banking system and which could have a
far-reaching effect on the financial services industry and significantly affect
First Federal's operations. For additional information on the provisions of this
Act, see "Regulation -- Recently Enacted Legislation."

Market Area

     First Federal serves the Bemidji, Minnesota marketplace, which is located
in northwestern Minnesota approximately 200 miles north of Minneapolis,
Minnesota. The primary market area of First Federal consists of the five
counties of Beltrami, Cass, Hubbard, Clearwater and Lake of the Woods in
Minnesota. These counties are served by the Bank's main office and branch office
located in Bemidji and three branch offices located in Bagley, Baudette and
Walker, Minnesota. These communities are the county seats and largest towns in
each of the counties where the branches are located. No branch office is located
in Hubbard County, but the northern border of Hubbard County is only four miles
from the Bank's main office. Bemidji is the largest community in the market
area, while the balance of the Bank's market area consists primarily of rural
areas and small towns. The primary market area also includes three Indian
reservations, a portion of which land is owned by the federal government in
trust for the Native Americans. This portion of the area is not open to mortgage
lending, therefore, an enforceable lien is not possible. The Bank does receive a
limited number of consumer loan applications from the area. In addition, the
Bank's primary market area also includes large tracts of land covered by water
and national and state forests and, thus, not available for home building.

     In the Bank's most critical market, Beltrami County, median household
income of $28,200, based on estimates released February 1999, was 75.2% of the
median for the state of Minnesota and 72.5% of the United States at large.
National, state and local medians show modest household income growth, the
result of projected low inflation and continued modest economic growth.

     The Bank's limited lending opportunities are primarily a function of
Bemidji's economy, which exhibits moderate growth. For the period from 1990 to
1998, the population of the Bank's market area increased 13.75%, as compared to
an increase of 7.99% for the State of Minnesota, and an increase of 8.36% for
the United States as a whole. Lacking growth in local residential loan
originations, First Federal has been forced to turn toward out-of-area real
estate lending, multi-family and commercial real estate lending, and to
investment in mortgage-backed and other securities. Such "out-of-area" real
estate lending constituted 8.78% of the Bank's gross loan portfolio at September
30, 1999 while loans on multi-family and commercial real estate constituted
21.16% of the Bank's gross loan portfolio at that date.

Lending Activities

     General. First Federal's principal lending activity consists of the
origination of loans secured by first mortgages on owner occupied one- to four-
family residences in the Bank's market area, which consists of the Minnesota
Counties of Beltrami, Cass, Hubbard, Clearwater and Lake of the Woods. First
Federal serves these counties through its main office and a branch office
located in Bemidji and three branch offices located in Bagley, Baudette and
Walker, Minnesota. The largest concentration of First Federal's loans are within
a ten mile radius of the main office in Bemidji. To a lesser extent, First
Federal also originates loans secured by multi-family properties such as
apartment houses and commercial properties such as motels and retail
developments. In recent years, First Federal has become active in originating
consumer loans, including automobile loans and home equity and home improvement
loans. First Federal also makes a limited amount of commercial business loans.

     First Federal attempts to manage interest rate risk by emphasizing the
origination of one-year adjustable-rate mortgage loans and short-term (15 years
or less) fixed-rate mortgage loans. Fixed-rate mortgage loans continue to be
offered by the Bank, but substantially all such loans in excess of 15 year terms
are sold in the secondary market. To date, such loan sale activities have not
been a significant contributor to the Bank's profitability. First Federal offers
a full range of mortgage products, including conventional adjustable-rate and
fixed-rate mortgage loans, short-term

                                       3
<PAGE>

mortgages, and FHA and VA insured loans. First Federal has also participated in
the Minnesota Housing Finance Agency ("MHFA") housing program, and has
originated and purchased participation interests in multi-family and commercial
mortgage loans.

     Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of First Federal's loan portfolio by type of loan at
the dates indicated. At September 30, 1999, First Federal had no concentrations
of loans exceeding 10% of total loans other than as disclosed below.

<TABLE>
<CAPTION>
                                                        At September 30,
                                           ------------------------------------------
                                                   1999                  1998
                                           --------------------   -------------------
                                            Amount          %        Amount       %
                                           --------      ------   ----------   -------
                                                       (Dollars in thousands)
Type of Loan:
------------
<S>                                        <C>           <C>      <C>          <C>
Real estate loans --
 Construction loans......................  $ 1,130         1.94%    $ 2,115      3.67%
 One- to four-family residential.........   26,432        45.28      26,981     46.77
 Multi-family residential................    3,232         5.54       2,939      5.10
 Commercial..............................    9,117        15.62      10,411     18.05

Consumer loans --
 Automobiles.............................    7,757        13.29       5,199      9.01
 Mobile home loans.......................      367         0.63         458      0.79
 Savings account loans...................      467         0.80         415      0.72
 Home improvement loans..................    1,978         3.39       1,939      3.36
 Home equity lines of credit.............      277         0.47         513      0.89
 Other consumer loans....................    6,678        11.44       5,273      9.14

Commercial business loans................      936         1.60       1,441      2.50
                                           -------       ------     -------    ------
                                           $58,371       100.00%    $57,684    100.00%
                                           =======       ======     =======    ======
Less:
 Loans in process........................      631                    1,222
 Deferred fees and discounts (premiums)..      (72)                    (100)
 Allowance for loan losses...............      555                      498
                                           -------                  -------
  Total..................................  $57,257                  $56,064
                                           =======                  =======
</TABLE>

                                       4
<PAGE>

     Loan Maturity. The following table sets forth certain information at
September 30, 1999, regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity. Loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Scheduled contractual principal repayments of loans do
not necessarily reflect the actual life of such assets. The average life of
long-term loans is substantially less than their contractual terms, due to
prepayments. The average life of mortgage loans tends to increase when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.

<TABLE>
<CAPTION>
                                                                  Due after             Due
                                    Due in the year ending    1 through 5 years     after 5 years
                                           9/30/00             after 9/30/99        after 9/30/99       Total
                                    ----------------------   ------------------   -----------------    -------
<S>                                 <C>                      <C>                  <C>                  <C>
Real estate mortgage......                $  1,223                $ 7,876                $29,682        $38,781
Real estate construction..                   1,048                     82                      0          1,130
Consumer..................                   1,832                 10,517                  5,175         17,524
Commercial................                     336                    565                     35            936
                                          --------                -------                -------        -------

     Total................                $  4,439                $19,040                $34,892        $58,371
                                          ========                =======                =======        =======
</TABLE>

     Loan Repricing. The following table sets forth at September 30, 1999, the
dollar amount of all loans due one year after September 30, 1999 which have
predetermined interest rates and have floating or adjustable interest rates.


                                          Predetermined         Floating or
                                              Rate            Adjustable Rates
                                          -------------       ----------------
                                                    (In thousands)

          Real estate mortgage......          $12,095               $25,463
          Real estate construction..                0                    82
          Consumer..................            6,927                 8,765
          Commercial................              403                   197
                                              -------               -------
                                              $19,425               $34,507
                                              =======               =======

                                       5
<PAGE>

     Loan Originations, Purchases and Sales. The following table sets forth
certain information with respect to First Federal's loan originations during the
periods indicated.

<TABLE>
<CAPTION>

                                                Year Ended September 30,
                                                ------------------------
                                                    1999         1998
                                                ------------  ----------
                                                     (In thousands)
<S>                                               <C>          <C>
Loans originated:
 Real estate loans:
  Construction loans...........................    $   823      $   653
  One- to four-family residential..............      5,925        6,943
  Multi-family residential.....................        665           --
  Commercial...................................         --          341
 Consumer loans................................     12,269        8,453
 Commercial business...........................        142          225
                                                   -------      -------
                                                   $19,824      $16,615
                                                   =======      =======
Loans purchased:
 Real estate loans:
  One-to-four-family residential...............    $   609      $ 1,728
  Multi-family residential.....................      2,189        1,675
  Commercial...................................        764        2,296
 Commercial business...........................        387          750
                                                   -------      -------
   Total loans purchased.......................    $ 3,958      $ 6,449
                                                   =======      =======

Loans sold:
 Whole loans...................................    $   707      $   475
 Participation loans...........................         --           --
                                                   -------      -------
   Total loans sold............................    $   707      $   475
                                                   =======      =======
</TABLE>

     First Federal's primary lending activity has been the origination of
residential and commercial mortgages as well as consumer loans (including
automobile and home equity loans) for its loan portfolio. The Bank has
aggressively pursued mortgages in its market area in recent years but has been
constrained in building its portfolio by a combination of lack of economic
growth in the Bemidji area and prepayments, which generally equaled or exceeded
loan originations. First Federal sells substantially all long-term, fixed-rate
mortgage loans it originates in the secondary market. For the five years ended
September 30, 1999, 63 fixed-rate mortgage loans, secured by single-family homes
totaling $3.93 million were sold in the secondary market, with servicing rights
released.

     Due to limited demand for one- to four-family residential real estate loans
in its market area, First Federal has also purchased participation interests in
multi-family and commercial mortgage loans in recent years. Specifically, during
the last five years, First Federal purchased participation interests in 67
commercial real estate and multi-family residential real estate loans originated
by other lenders totaling $16.27 million, 23 of these loans totaling $3.79
million were participation interests in commercial real estate loans on
properties outside the Bank's primary market area, with a total loan balance at
September 30, 1999 of $2.22 million. Of the 34 participation interests in
commercial real estate loans, five loans totaling $764,000 were purchased during
the year ended September 30, 1999. See "Commercial and Multi-Family Real Estate
Lending." First Federal has not sold any whole or participation interests in
commercial real estate or multi-family loans within the past five years.

                                       6
<PAGE>

     One- to Four-Family Residential Lending.  The Bank historically has been
and continues to be an originator of owner occupied, one- to four-family
residential properties located in its market area.  At September 30, 1999,
approximately $26.43 million or 45.28% of the Bank's loan portfolio consisted of
loans secured by one- to four-family residential properties.

     First Federal began originating adjustable-rate residential mortgage loans
in 1980.  Since that time, substantially all one- to four-family mortgage loans
originated by the Bank for retention in the Bank's portfolio have been
adjustable-rate loans which provide for annual interest rate adjustments, and
have terms to maturity of from 15 to 30 years.  While the Bank does offer
"teaser" or reduced interest rates for the initial one-year adjustment period,
all borrowers are qualified at the fully-indexed interest rate.  After the
initial one-year period, the rate adjustments on the Bank's adjustable-rate
loans are indexed to the rate paid on one-year U.S. Treasury Bills.  The
interest rates on these mortgages include limitations on adjustments of two
percentage points per adjustment period, and a lifetime cap of six percentage
points.

     At September 30, 1999, the Bank's loan portfolio included $14.34 million in
adjustable-rate one- to four-family residential mortgage loans, or 24.57% of the
Bank's loan portfolio.

     The retention of adjustable-rate loans in First Federal's portfolio
mitigates First Federal's exposure to increases in market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of adjustable-
rate loans.  It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate loans may increase due to increases in
interest costs to borrowers.  Further, although adjustable-rate loans allow
First Federal to increase the sensitivity of its interest-earning assets to
changes in interest rates, the extent of this interest sensitivity is limited by
the repricing frequency and the periodic and lifetime interest rate adjustment
limitations.  Accordingly, there can be no assurance that yields on First
Federal's adjustable-rate loans will fully adjust to compensate for increases in
First Federal's cost of funds.  Finally, adjustable-rate loans increase First
Federal's exposure to decreases in market interest rates, although decreases in
First Federal's cost of funds tend to offset this effect.

     In general, First Federal originates residential mortgage loans with loan-
to-value ratios of up to 95%, with private mortgage insurance required for loans
with loan-to-value ratios greater than 80%.  The Bank also originates FHA and VA
loans and participates in the MHFA housing programs.  The majority of these
loans are long-term, fixed-rate loans, which are primarily originated for sale
in the secondary market or sold to the MHFA.

     Construction and Land Lending.  First Federal offers construction loans to
qualified borrowers for construction of one- to four-family residences in First
Federal's market area.  Typically, First Federal limits its construction lending
to single-settlement, construction-permanent loans to individuals building their
primary residences and second homes or vacation homes.  These loans generally
have adjustable interest rates and are underwritten in accordance with the same
standards as First Federal's mortgages on existing properties, except the loans
generally provide for disbursement in stages during a construction period of up
to twelve months, during which period the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance.  Construction
loans generally have a maximum loan-to-value ratio of 80%.  Borrowers must
satisfy all credit requirements which would apply to First Federal's permanent
mortgage loan financing for the subject property.

     Construction lending is considered to involve a higher degree of risk of
loss than long-term financing on improved, occupied real estate.  Risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of development or construction
and the estimated cost (including interest) thereof.  During the construction
phase, a number of factors could result in delays and cost overruns.  If the
estimate of construction costs proves to be inaccurate, First Federal may be
required to advance funds beyond the amount originally committed to permit
completion of the project.  If the estimate of value proves to be inaccurate,
First Federal may be confronted, at or prior to the maturity of the loan, with a
project having a value which is insufficient to assure full repayment.  The
ability of a developer to sell developed lots or a builder to sell completed
dwelling units will depend on, among other things, demand, pricing, availability
of comparable properties and economic conditions.  First Federal

                                       7
<PAGE>

has sought to minimize this risk by limiting construction lending to qualified
borrowers in First Federal's market area and by limiting the aggregate amounts
of outstanding construction loans.

     Commercial and Multi-Family Real Estate Lending.  The Bank is active in the
origination and purchase of commercial and multi-family real estate loans, in
part due to limited residential lending opportunities in the Bank's market area.
The Bank's primary emphasis in its commercial and multi-family real estate
lending has been loans on motel properties which totaled $2.17 million, or
3.72%, of gross loans at September 30, 1999, and loans on apartment houses,
which constituted $3.23 million, or 5.54%, of gross loans at September 30, 1999.
Commercial real estate loans (including motel loans) totaled $9.12 million, or
15.62%, of gross loans at September 30, 1999, a decrease of 12.43% from the
balance of $10.41 million at September 30, 1998.  Mortgages secured by multi-
family real estate (including apartment houses) had a balance of $3.23 million
at September 30, 1999, compared to $2.94 million at the same date in 1998.

     As discussed above, in recent years, the Bank has become more active in the
origination and purchase of multi-family and commercial real estate lending.
During the year ended September 30, 1999, the Bank did not originate any
commercial real estate loans, but purchased participation interests in five
loans secured by commercial real estate projects or properties, in amounts
ranging from $60,000 to $497,000 and totaling $764,000. These loans are secured
by four motels and one manufacturing company. Four of these projects are located
in Colorado and one is located in Wisconsin. The lead lenders on each of these
loans are institutions with whom the Bank is familiar, and has done business in
the past. While the Bank believes that in purchasing these participation
interests, it has taken the appropriate steps consistent with lending policies
and procedures it uses in originating loans, there are significant additional
risks attendant to loan purchases, and to this type of lending.

     At September 30, 1999, the Bank's portfolio includes both originated
mortgages and purchased loan participations on commercial and multi-family
properties generally located in the State of Minnesota.  On both participations
and on loan originations, the Bank lends based on a project's cash flow and
ability to meet debt service requirements.  Each property is appraised by a
Board of Directors-approved appraiser.  Credit verification on the borrower is
obtained and personal guarantees are generally required of all borrowers.
Annual financial statements or tax returns are required on the securing
property.

     As of September 30, 1999, the Bank's largest loan was for $675,000 and was
one of eight loans secured by motels, four of which are located in either the
western suburbs of Minneapolis or in Bemidji, Minnesota.  The other four motel
loans are secured by properties in North Dakota, South Dakota, Colorado and
Iowa.  The other seven loans secured by motels had outstanding balances ranging
from $35,000 to $634,000 at September 30, 1999.  The Bank has several loans in
the $300,000 to $500,000 range secured by an assortment of properties, which are
described above.

     As noted above, included in the Bank's $9.12 million in commercial real
estate loans at September 30, 1999 were eight loans on motel properties, with
balances outstanding totaling $2.17 million at September 30, 1999.  The higher
loan amounts and dependence on income and cash flow of the property to cover
operating expenses and debt service means these loans involve significantly more
credit risk than loans on one- to four-family properties.  While the Bank has
not in recent years experienced losses from its loans secured by motel
properties or other commercial real estate, such losses are possible, and if
incurred, could have a significant effect on the Bank's net income and capital
position.  All of the Bank's loans secured by multi-family and commercial real
estate are performing within their terms except one in the amount of $290,000.

     Commercial and multi-family real estate lending entails significant
additional risks compared with one- to four-family residential lending.  For
example, commercial and multi-family real estate loans typically involve large
loan balances to single borrowers or groups of related borrowers, the payment
experience on such loans typically is dependent on the successful operation of
the real estate project, and these risks can be significantly impacted by supply
and demand conditions in the market for multi-family residential units and
commercial office, retail and warehouse space, and for motel loans, tourism and
general economic conditions.  While the Bank has not experienced significant
losses from its multi-family residential and commercial real estate lending
activities in recent years, the higher loan

                                       8
<PAGE>

balances on each of these loans means that if the Bank experiences problems with
any one of these loans, its net income and financial condition could be severely
impacted.

     The aggregate amount of loans which federally chartered savings
institutions may make on the security of liens on commercial real estate may not
exceed 400% of the institution's capital; however, the limits on commercial real
estate lending do not require divestiture of any loan or investment that was
lawful when made.  See "-- Loan Solicitation and Processing."

     Consumer Lending.  First Federal offers consumer loans as part of a broad
commitment to be a full-service consumer-oriented banking institution.  Such
lending activities have increased in recent years as the Bank has used its
excess funds to increase its consumer loan origination activities.  The consumer
loans originated by the Bank include automobile loans, savings account loans and
mobile home loans, as well as home equity loans and home improvement loans, and
unsecured consumer loans.  At September 30, 1999, the Bank's consumer loan
balance totaled $17.52  million, or 30.02%, of its total loan portfolio.  Of the
consumer loan balance at September 30, 1999, $7.76 million were automobile
loans, $277,000 were home equity lines of credit, $1.98 million were home
improvement loans, $367,000 were mobile home loans and $467,000 were savings
account loans.  The Bank has more aggressively pursued consumer loans outside
its customer base but within the markets it serves.

     In addition, included in the Bank's consumer loan portfolio at September
30, 1999 were $6.68 million in other consumer loans, which included:  $5.63
million in home equity loans; $403,000 in loans secured by recreational vehicles
such as RVs, boats, motorcycles or snowmobiles; $203,000 in other secured loans;
$168,000 in unsecured overdraft protection; and $276,000 in unsecured loans.

     The Bank's automobile loans are generally underwritten in amounts up to 90%
of the purchase price or the N.A.D.A. book value.  The terms of the loan
generally do not exceed 60 months for new vehicles or 48 months for used
vehicles.  The Bank requires that the vehicles be insured and the Bank be listed
as loss payee on the insurance policy.

     The Bank's home equity lines of credit are made on the security of
residential real estate, do not exceed 80% of the estimated value of the
property, less the outstanding principal of the first mortgage, and have terms
of up to fifteen years.  The Bank makes loans secured by savings accounts for up
to 90% of the depositor's savings account balance.  The interest rate is
normally three percentage points above the rate paid on the savings account, and
the account must be pledged as collateral to secure the loan.

     Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by rapidly depreciable assets, such as automobiles.  Consumer loans are
generally priced relative to the Bank's assessment of the risk associated with
the loan.  Virtually all consumer loans in the Bank's portfolio are either
adjustable-rate or of short or intermediate term.  Adjustable-rate consumer
loans are priced off the prime rate and increments are added based on risk
assessment as determined by the Bank's senior lending and executive officers.

     Commercial Business Lending.  The Bank maintains in portfolio a small
amount of commercial business loans as an additional service to its already
existing banking relationships.  At September 30, 1999, these loans amounted to
$936,000, or 1.60%, of gross loans.  These loans are for a variety of commercial
purposes and are secured by inventories, receivables and other business assets
from companies in the Bemidji area, including retail establishments and
restaurants.  The Bank underwrites commercial business loans based on the
financial condition of the business and the creditworthiness of the borrower.
The Bank seeks personal guarantees whenever possible and, as appropriate, will
cross-collateralize business loans with other assets tied to the business.

     Commercial business loans generally involve more credit risk than first
mortgage loans.  Repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding credit obligation as a result of
damage, loss or depreciation.  In such circumstances, the remaining deficiency
often does not warrant further substantial collection efforts against the
obligor.  In addition, collections are dependent on the obligor's continuing

                                       9
<PAGE>

financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy.  Further, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered.  These financings
may also give rise to claims and defenses by an obligor against First Federal,
and an obligor may be able to assert against First Federal claims and defenses
which it has against the seller of the underlying collateral.  First Federal's
risks associated with commercial loans have been minimized by the immaterial
amount of such loans made by First Federal.

     Loan Solicitation and Processing.  First Federal's loan originations are
derived from a number of sources, including promotional activity, real estate
brokers, walk-in customers and current customers of the Bank.  Construction
loans are often originated through existing customers.

     The Bank's Loan Committee is responsible for review and approval of all
loans originated or purchased by the Bank.  Loans in excess of $250,000 may be
approved by the Bank's President, but usually receive the pre-approval of a
committee consisting of four members of the Board of Directors or the entire
Board of Directors.  The list of outside appraisers is approved annually by the
Board of Directors.  All appraisers are fee appraisers and not members of the
Bank's staff.

     Under the Bank's loan policy, the loan officer processing an application is
responsible for ensuring that all documentation is obtained prior to submission
of the application to the Loan Committee.  In addition, the loan officer
verifies that the application meets the underwriting guidelines of the Bank.
All of the Bank's lending is subject to its written underwriting standards and
to loan origination procedures.  Decisions on loan applications are made on the
basis of detailed applications and property valuations.  The loan applications
are designed primarily to determine the borrower's ability to repay the loan.
More significant items on the application are verified through use of credit
reports, financial statements, tax returns and written confirmations.

     Each individual loan officer is subject to a maximum lending authority
established by the Board of Directors.  Loans in excess of an individual's
lending authority are submitted to an officer with sufficient lending authority,
or the Loan Committee for approval.  After a loan is closed, it is assigned to a
reviewing officer who reviews the file to assure its accuracy and completeness.

     The Bank generally relies on attorneys' opinions of title in its loan
processing.  Title insurance is required on all mortgage loans closed for sale
in the secondary market.  The Bank also requires title insurance for loans
secured by properties exhibiting unique title conditions which may involve
additional risk.  The Bank requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan.  The Bank
also requires flood insurance to protect the property securing its interest when
the property is located on a flood plain, although generally the Bank's primary
market area is not within a designated flood plain.

     The Bank makes up to a 90-day loan commitment for each loan approved.  If
the borrower desires a longer commitment, the commitment may be extended for
good cause and upon written approval.  No fees are charged in connection with
the issuance of a commitment letter.

     Under applicable law, with certain limited exceptions, loans and extensions
of credit by a savings institution to a person outstanding at one time shall not
exceed 15% of the institution's unimpaired capital and surplus.  Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus.  Applicable law
additionally authorizes savings institutions to make loans to one borrower, for
any purpose, in an amount not to exceed $500,000 or in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided (1) the purchase price of each single-family
dwelling in the development does not exceed $500,000, (2) the savings
institution is and continues to be in compliance with its capital requirements
as prescribed by OTS regulations, (3) the loans comply with applicable loan-to-
value requirements, (4) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus, and (5) the Director of
OTS, by order, permits the savings institution to avail itself of this higher
limit.  Under these limits,

                                      10
<PAGE>

the Bank's loans to one borrower were limited to $2.04 million at September 30,
1999. At that date, the Bank had no lending relationships in excess of the OTS's
loans-to-one-borrower limit. The Bank's five largest loans ranged from $497,000
to $675,000 at September 30, 1999. All of these loans were current as of
September 30, 1999.

     Interest Rates and Loan Fees.  Interest rates charged by First Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and First Federal's yield objectives.  Mortgage loan rates reflect
factors such as prevailing market interest rate levels, the supply of money
available to the savings industry and the demand for such loans.  These factors
are in turn affected by general economic conditions, the monetary and fiscal
policies of the federal government, including the Federal Reserve Board, the
general supply of money in the economy, tax policies and governmental budget
matters.

     First Federal receives fees in connection with loan modifications, late
payments and for miscellaneous services related to its loans.  Such loan fees
have not been significant in recent years.

     Asset Classification, Allowances for Losses and Non-Performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis.  An asset is classified as substandard if
it is determined to be inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.  An asset
is classified as doubtful if full collection is highly questionable or
improbable.  An asset is classified as loss if it is considered uncollectible,
even if a partial recovery could be expected in the future.  The regulations
also provide for a special mention designation, described as assets which do not
currently expose a savings institution to a sufficient degree of risk to warrant
classification, but do possess credit deficiencies or potential weaknesses
deserving management's close attention.  Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses.  If an asset or portion thereof is classified loss, a savings
institution must either establish a specific allowance for loss in the amount of
the portion of the asset classified loss, or charge off such amount.  Federal
examiners may disagree with a savings institution's classifications.  If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director.  First
Federal regularly reviews its assets to determine whether any assets require
classification or reclassification.  The Board of Directors reviews and approves
all classifications.  At September 30, 1999, First Federal had no assets
classified as loss, $4,000 of assets classified as doubtful and $1.21 million of
assets classified as substandard.  At September 30, 1999, there were none
designated as special mention.

     Management will continue to actively monitor First Federal's asset quality
and will establish loan loss reserves and will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary.  Although management believes it uses the best information
available to make determinations with respect to the allowances for losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.

     The Bank's allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in it's entire loan portfolio and changes in the nature and volume of
its loan activity.  Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers specific
occurrences, general and local economic conditions, loan portfolio composition,
historical and local experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses.  In determining the general
reserves under these policies, historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, net realizable values, the
current loan portfolio and current economic conditions are considered.  The
Bank's Asset Classification Policy establishes rates for establishing a general
valuation allowance on risk assets.  Each risk asset receives a percentage of
asset rate, which is then the multiplier used in determining the required
reserve for that specific asset in the composition of the general valuation
reserve.  These reserve rates vary from 0.05% to 2.00% in establishing the
amount of reserve necessary for unclassified assets.  Special mention assets
have a reserve rate of 2.00%.  Substandard assets have a 15.0% reserve rate,
while doubtful assets currently have a 50.00% reserve rate.  The Bank may also
require additional or specific reserves for certain classified assets.

                                      11
<PAGE>

     The above reserve rates establish a minimum general valuation allowance.
As of September 30, 1999, the Bank maintained a general valuation allowance that
the reserve rates dictated.  Reserves determined by using the reserve rating
system were $512,000.  The general valuation allowance on September 30, 1999,
was in the amount of $512,000.  The increase in the provision for losses on
loans relates primarily to an increase in non-performing assets.  At September
30, 1999 the Bank had a $43,500 specific reserve established on a commercial
real estate loan.

     Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate in-judgment for the six months or one
year redemption period, and thereafter, as real estate owned until sold.  When
property is acquired through the foreclosure process, it is recorded at the
lower of cost or estimated fair value, less the estimated cost of disposition.
After acquisition, all costs incurred in maintaining the property are expensed.
Costs relating to improvement of the property, however, are capitalized to the
extent of fair value, less estimated costs of disposition.

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

<TABLE>
<CAPTION>
                                          Year Ended September 30,
                                         --------------------------
                                             1999          1998
                                         ------------  ------------
                                           (Dollars in thousands)
<S>                                      <C>           <C>
Balance at beginning of period.........        $ 498         $ 427
                                               -----         -----

Loans charged-off:
  Real estate -- mortgages:
    Residential........................           (9)           --
    Commercial.........................           --            --
  Real estate -- construction..........           --            --
  Commercial business..................           --            --
  Consumer.............................          (43)         (109)
                                               -----         -----
Total charge-offs......................          (52)         (109)
                                               -----         -----

Recoveries:
  Real estate -- mortgages:
    Residential........................           --            --
    Commercial.........................           --            --
  Real estate -- construction..........           --            --
  Commercial business..................           --            --
  Consumer.............................           11            27
                                               -----         -----
Total recoveries.......................           11            27
                                               -----         -----
Net loans charged-off..................          (41)          (82)
                                               -----         -----
Provision for loan losses..............           98           153
                                               -----         -----
Balance at end of period...............        $ 555         $ 498
                                               =====         =====

Ratio of net charge-offs to average
  loans outstanding during the period..         0.07%         0.15%
                                               =====         =====
</TABLE>

                                      12
<PAGE>

     The following table allocates the allowance for loan losses by loan
category at the dates indicated.  The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.

<TABLE>
<CAPTION>
                                                      September 30,
                                       ------------------------------------------
                                               1999                 1998
                                       -------------------- ---------------------
                                                Percent of            Percent of
                                                 Loans in              Loans in
                                               Category to           Category to
                                       Amount  Total Loans   Amount  Total Loans
                                       ------  ------------  ------  ------------
                                                (Dollars in thousands)
<S>                                    <C>     <C>           <C>     <C>
Real estate - mortgage:
  Residential........................    $ 91        50.82%   $ 123        51.87%
  Commercial.........................     191        15.62      132        18.05
Real estate - construction...........      20         1.94       34         3.67
Commercial business..................       8         1.60        8         2.50
Consumer.............................     245        30.02      201        23.91
                                         ----       ------    -----       ------
    Total allowance for loan losses..    $555       100.00%   $ 498       100.00%
                                         ====       ======    =====       ======
</TABLE>

     While management believes First Federal has established its existing loss
allowances in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing First Federal's assets, will
not make First Federal increase its loss allowance, thereby negatively affecting
First Federal's reported financial condition and results of operations.

     The following table sets forth information with respect to First Federal's
non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                          September 30,
                                                                     ----------------------
                                                                      1999             1998
                                                                     -----             ----
                                                                     (Dollars in thousands)
<S>                                                                  <C>              <C>
Loans accounted for on a non-accrual basis: (1)
  Real estate:
     Residential..................................................   $  71            $ 154
     Commercial...................................................     246               --
  Commercial business.............................................      --               --
  Consumer........................................................      --               --
                                                                     -----            -----
       Total......................................................   $ 317            $ 154
                                                                     =====            =====

Accruing loans which are contractually past due 90 days or more:
  Real Estate:
     Residential..................................................   $  --            $   3
     Commercial...................................................      --              283
  Commercial business.............................................      --               --
  Consumer........................................................      79               78
                                                                     -----            -----
       Total......................................................   $  79            $ 364
                                                                     =====            =====
       Total of non-accrual and 90 days past due loans............   $ 396            $ 518
                                                                     =====            =====
Percentage of total loans.........................................    0.68%            0.90%
                                                                     =====            =====
Other non-performing assets (2)...................................   $ 188            $ 152
                                                                     =====            =====
</TABLE>

______________
(1)  Non-accrual status denotes loans on which, in the opinion of management,
     the collection of additional interest is unlikely. Payments received on a
     non-accrual loan are either applied to the outstanding principal balance or
     recorded as interest income, depending on assessment of the collectibility
     of the loan. Generally, loans contractually past due 90 days or more are
     placed on non-accrual except for loans insured for credit loss.
(2)  Other non-performing assets represents property acquired by First Federal
     through foreclosure or repossession or accounted for as a foreclosure in-
     substance. These properties are carried at the lower of fair market value,
     less estimated costs of disposition, or the principal balance of the
     related loan, whichever is lower.

                                      13
<PAGE>

     At September 30, 1999, First Federal's non-performing assets included six
residential mortgage loans, with balances outstanding ranging from $18,000 to
$71,000, one commercial real estate loan, with a balance outstanding of
$246,000, and consumer loans (secured primarily by automobiles) with balances
outstanding ranging from $500 to $25,000.

     The one commercial real estate loan accounted for on a non-accrual basis is
a gaming establishment located in Colorado. The outstanding balance of the
Bank's participation interest is $290,000. The Bank has established a specific
reserve against this loan in the amount of $43,500, resulting in a book value of
$246,500.

     At September 30, 1999, the Bank had no loans which were not currently
classified as non-accrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers causes management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms.

Investment Activities

     General.  First Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Des
Moines, certificates of deposits in federally insured institutions, certain
bankers' acceptances and federal funds.  First Federal may also invest, subject
to certain limitations, in commercial paper having one of the four highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds.  Federal regulations
require First Federal to maintain an investment in FHLB of Des Moines stock and
a minimum amount of liquid assets which may be invested in cash and specified
securities.  The Bank is also permitted to invest in related securities.  From
time to time, the OTS adjusts the percentage of liquid assets which savings
associations are required to maintain.  For additional information, see
"Regulation -- Regulation of the Bank -- Liquidity Requirements."

     First Federal makes investments in order to diversify its assets, manage
cash flow, obtain yields and maintain the minimum levels of liquid assets
required by regulatory authorities.  Under the Bank's current investment policy,
the amount invested with any one issuer may not exceed the lesser of $500,000 or
the net worth of the issuing corporation, except for U.S. Treasury and U.S.
Government Agency Securities and mutual fund investments.  The Board of
Directors reviews all securities purchased on a monthly basis.

     The investment activities of the Bank consist primarily of investments in
mortgage-backed and related securities and other investment securities,
consisting primarily of securities issued or guaranteed by the United States
Government or agencies thereof.  Typical investments include federally sponsored
agency mortgage pass-throughs, and federally sponsored agency and related
securities.  Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Bank's investment
policy.  The Bank performs analyses on related securities prior to purchase and
on an ongoing basis to determine the impact on earnings and market value under
various interest rate and prepayment conditions.  First Federal also invests in
mortgage-related products, which include collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs").  The CMOs and
REMICs purchased by the Bank comply fully with regulatory requirements
concerning this type of investment.  Both the REMICs and CMOs owned by the Bank
are of short- or intermediate-term targeted amortization class securities rated
AA or better.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, the Bank categorizes the securities it purchases as "Trading Securities,"
"Available for Sale Securities" and "Held to Maturity Securities."  Securities
that are categorized as "Held to Maturity" are securities that the Bank has the
ability and intent to hold to maturity.  Upon acquisition, securities are
classified as to the Bank's intent.  Securities "Held to Maturity" are held for
investment purposes and are carried at amortized cost.  Securities categorized
as "Available for Sale" are securities that the Bank may not hold to maturity
and thus are carried at aggregate market value with unrealized gains and losses,
net of taxes, recognized in stockholders' equity.

                                      14
<PAGE>

     As of September 30, 1999, in accordance with SFAS No. 115, the Company
classified $16.07 million of its investment securities and $15.20 million of its
mortgage-backed and related securities as "Available for Sale".  Such
classification gives the Company the ability to sell these securities.  At
September 30, 1999 the Company classified $33.57 million of investment
securities and $234,000 of its mortgage-backed and related securities as "held
to maturity." The Company has no "Trading Securities."

     Investment Securities.  The following table sets forth the carrying value
of the Company's investment securities portfolio, other than mortgage-backed
securities, at the dates indicated.
<TABLE>
<CAPTION>

                                           At September 30,
                                           ----------------
                                            1999     1998
                                           -------  -------
                                            (In thousands)
<S>                                        <C>      <C>
Investment securities:
  U.S. government and agency securities..  $43,036  $36,402
  Corporate bonds and notes..............    5,142    4,815
  Municipal obligations..................      505      515
  Mutual funds and equity stock..........      962      993
                                           -------  -------
     Total investment securities.........  $49,645  $42,725
                                           =======  =======

</TABLE>

                                      15
<PAGE>

     The following table sets forth information regarding the scheduled
maturities, market value and weighted average yields for First Federal's
investments, other than mortgage-backed securities, at September 30, 1999.

<TABLE>
<CAPTION>
                                            One Year or Less   One to Five Years   Five to Ten Years
                                           ------------------  ------------------  ------------------
                                           Carrying  Average   Carrying  Average   Carrying  Average
                                            Value     Yield     Value     Yield     Value     Yield
                                           --------  --------  --------  --------  --------  --------
                                                                              (Dollars in thousands)
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>
Investment Securities:
   U.S. government and agency
      securities (1).....................    $  250     5.52%    $  915     6.57%   $41,871     6.45%
   Corporate bonds and notes.............     2,539     6.50      2,268     6.72        252     6.31
   Municipal obligations (2).............       250     6.11         --       --         --       --
                                             ------              ------            --------

     Total...............................    $3,039     6.39     $3,183     6.68    $42,123     6.45
                                             ======              ======            ========

Securities with no stated maturity:
  Mutual funds and equity stock..........

Total investment securities..............

<CAPTION>
                                                 More than Ten        Total Investment
                                                     Years                Portfolio
                                              ------------------  ---------------------------
                                              Carrying  Average   Carrying  Market   Average
                                               Value     Yield     Value     Value    Yield
                                              --------  --------  --------  -------  --------
<S>                                           <C>       <C>       <C>       <C>      <C>
Investment Securities:
   U.S. government and agency
      securities (1).....................         $ --       --%   $43,036  $41,402     6.45%
   Corporate bonds and notes.............           83     7.45      5,142    5,142     6.61
   Municipal obligations (2).............          255     9.50        505      505     7.82
                                              --------             -------  -------

     Total...............................         $338     8.99    $48,683  $47,049     6.48
                                              ========             =======  =======

Securities with no stated maturity:
  Mutual funds and equity stock..........                          $   962  $   962     5.86
                                                                   -------  -------

Total investment securities..............                          $49,645  $48,011     6.47
                                                                   =======  =======
</TABLE>


_________
(1)  Approximately $20 million of U.S. government and agency securities have
     call features which give the option to prepay the debt in one year or less.
(2)  Yield on tax exempt investments are not presented at the tax equivalent
     yield.

                                      16

<PAGE>

     Mortgage-Backed Securities.  Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators through intermediaries that pool and repackage the participation
interest in the form of securities to investors such as the Bank.  Such
intermediaries may include quasi-governmental agencies such as Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA")
and Government National Mortgage Association ("GNMA") which guarantee the
payment of principal and interest to investors.  Mortgage-backed securities
generally increase the quality of the Bank's assets by virtue of the guarantees
that back them, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Bank.

     Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities.  The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable rate mortgage ("ARM") loans.  Mortgage-backed securities generally
are referred to as mortgage participation certificates or pass-through
certificates.  As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder.  The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages.

     The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages.  Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security.  The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security.  Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method.  The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security and these assumptions are reviewed
periodically to reflect the actual prepayment.  The actual prepayment experience
of the underlying mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates.  The difference between the interest rates on the underlying mortgages
and the prevailing mortgage interest rates is an important determinant in the
rate of prepayments.  During periods of falling mortgage interest rates,
prepayments generally increase.  If the coupon rate of the underlying mortgage
significantly exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages.  Prepayment experience is more difficult to estimate for
adjustable-rate mortgage-backed securities.

     The Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate and adjustable-rate mortgage-backed securities.  At
September 30, 1999, the Bank had $9.73 million in mortgage-backed securities
(representing 99.29% of the Bank's gross mortgage-backed securities portfolio or
7.36% of total assets) insured or guaranteed by FNMA, FHLMC or GNMA.  At
September 30, 1999, $69,000 (representing 0.71% of the Bank's gross mortgage-
backed securities portfolio, or 0.05% of total assets) consisted of privately
issued securities which are not guaranteed by FHLMC, FNMA, GNMA or any
governmental or quasi-governmental agency.

     The Bank's mortgage-backed securities portfolio contains fixed-rate and
floating rate securities.  Certain of the Bank's mortgage-backed securities
yield above-market rates of interest and are subject to prepayment.  In a
declining interest rate environment, the Bank may experience prepayments of both
fixed-rate and adjustable-rate mortgage-backed and related securities.  In a
rising interest rate environment, the prepayments may cease, market yields of
these securities may be less attractive, and the market value of the Bank's
mortgage-backed securities may decline.

                                      17
<PAGE>

     Mortgage-Related Securities.  CMOs and REMICs are typically issued by a
special purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership.  The entity aggregates pools of
mortgage loans or pass-through securities, which are used to collateralize the
related securities.  Once combined, the cash flows can be divided into
"tranches" or "classes" of individual securities, thereby creating more
predictable average lives for each security than the underlying pass-through
pools.  Accordingly, under this security structure all principal paydowns from
the various mortgage pools are allocated to a related securities' class or
classes structured to have priority until it has been paid off.  These
securities generally have fixed interest rates, and as a result, changes in
interest rates generally would affect the market value and possibly the
prepayment rates of such securities.

     Some related securities instruments are like traditional debt instruments
due to their stated principal amounts and traditionally defined interest rate
terms.  Purchasers of certain other related securities instruments are entitled
to the excess, if any, of the issuer's cash inflows.  These related securities
instruments may include instruments designated as residual interest and are
riskier in that they could result in the loss of a portion of the original
investment.  Cash flows from residual interests are very sensitive to
prepayments and, thus, contain a high degree of interest rate risk.

     At September 30, 1999, the Bank had $5.63 million in CMOs and REMICs or
4.26% of total assets.  The Bank's CMOs and REMICs had a weighted average yield
of 6.33% at September 30, 1999.  The Bank's current policy is to purchase CMOs
and REMICs rated AA or better at the time of purchase by nationally recognized
rating services or issued by U.S. government agencies.  As of September 30,
1999, $69,000 of the securities in the Bank's mortgage-backed and related
securities portfolio were privately issued securities, $69,000 were rated as
AAA.

     The following table sets forth the carrying value of the Bank's mortgage-
backed and related securities at the dates indicated.
<TABLE>
<CAPTION>

                                       At September 30,
                                       ----------------
                                        1999     1998
                                       -------  -------
                                        (In thousands)
<S>                                    <C>      <C>

GNMA.................................  $   860  $ 1,061
FNMA.................................    4,450    3,224
FHLMC................................    4,422    3,909
FHA..................................       69       90
Collateralized mortgage obligations..    5,634    9,124
                                       -------  -------
     Total...........................  $15,435  $17,408
                                       =======  =======
</TABLE>

                                      18
<PAGE>

   The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's mortgage-backed and related
securities at September 30, 1999.

<TABLE>
<CAPTION>
                                One Year or Less              One to Five Years             Five to Ten Years
                             -----------------------       -----------------------       -----------------------
                             Carrying       Average        Carrying       Average        Carrying       Average
                              Value          Yield          Value          Yield          Value          Yield
                             --------       --------       --------       --------       --------       --------
                                                                                          (Dollars in thousands)
<S>                          <C>            <C>            <C>            <C>            <C>            <C>
GNMA.......................  $     --            --%       $     --            --%       $    218          7.49%
FNMA.......................        64          6.18             543          6.11           1,165          6.61
FHLMC......................        79          5.77             442          6.55           1,803          6.71
FHA........................        --            --              69         10.39              --            --
Collateralized mortgage
  obligations..............        --            --              16          6.23           2,280          6.22
                             --------                      --------                      --------

     Total.................  $    143          5.95        $  1,070          6.57        $  5,466          6.51
                             ========                      ========                      ========

<CAPTION>
                               More than Ten Years              Total Investment Portfolio
                             -----------------------       -------------------------------------
                             Carrying       Average        Carrying       Market        Average
                              Value          Yield          Value          Value         Yield
                             --------       --------       --------      --------       --------
<S>                          <C>            <C>            <C>           <C>            <C>
GNMA.......................  $    642          6.63%       $    860      $    861          6.87%
FNMA.......................     2,678          6.46           4,450         4,449          6.45
FHLMC......................     2,098          6.59           4,422         4,423          6.62
FHA........................        --            --              69            69         10.39
Collateralized mortgage
  obligations..............     3,338          6.40           5,634         5,631          6.33
                             --------                     ---------      --------

     Total.................  $  8,756          6.48       $  15,435      $ 15,433          6.50
                             ========                     =========      ========
</TABLE>

                                      19
<PAGE>

Deposit Activity and Other Sources of Funds

     General.  Deposits are the primary source of First Federal's funds for
lending and other investment activities and general operational purposes.  In
addition to deposits, First Federal derives funds from loan and mortgage-backed
and related securities principal repayments, maturities of investment securities
and interest payments.  Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by prevailing market interest rates and money market conditions.
Borrowings may be used to supplement First Federal's available funds.  First
Federal has access to borrow from the FHLB of Des Moines and the Federal Reserve
Bank.

     Deposits.  First Federal attracts deposits principally from within its
market area by offering a variety of deposit instruments, including savings
accounts, money market accounts, retirement savings accounts and certificates of
deposit which range in term from three to 60 months.  Deposit terms vary
principally on the basis of the minimum balance required, the length of time the
funds must remain on deposit and the interest rate.  Maturities, terms, service
fees and withdrawal penalties for its deposit accounts are established by the
Bank on a periodic basis.  The Bank reviews its deposit mix and pricing on an
ongoing basis.  In determining the characteristics of its deposit accounts, the
Bank considers the rates offered by competing institutions, funds acquisition
and liquidity requirements, growth goals, and federal regulations.  The Bank
does not accept brokered deposits.

     The Bank competes for deposits, including individual retirement accounts
("IRA") and Keogh Plan funds, with other institutions in its market area by
offering deposit instruments that are competitively priced and by providing
customer service through convenient and attractive offices, knowledgeable and
efficient staff and hours of service that meet customers' needs.  The Bank
generally does not use premiums to attract savings deposits.

                                      20
<PAGE>

     The following table sets forth the average balances and interest rates
based on daily balances for interest-bearing demand and savings deposits and
time deposits as of the dates indicated.

<TABLE>
<CAPTION>
                                                                    September 30,
                   ---------------------------------------------------------------------------------------------------------------
                                           1999                                                      1998
                   ------------------------------------------------------   ------------------------------------------------------
                   Interest-Bearing   Interest-Bearing   Interest-Bearing   Interest-Bearing   Interest-Bearing   Interest-Bearing
                   Demand Deposits    Savings Deposits   Time Deposits      Demand Deposits    Savings Deposits   Time Deposits
                   ----------------   ----------------   ----------------   ----------------   ----------------   ----------------
                                                                (Dollars in thousands)
<S>                <C>                <C>                <C>                <C>                <C>                <C>
Average Balance..  $  23,397            $   7,877           $   55,757         $   20,273          $   7,899          $  56,199
Average Rate.....       2.18%                1.67%                5.53%              2.16%              1.99%              5.79%
</TABLE>

                                      21
<PAGE>

     The following table indicates the amount of the certificates of deposit of
$100,000 or more in First Federal by time remaining until maturity at September
30, 1999.

<TABLE>
<CAPTION>
                                                             Certificates
                Maturity Period                              of Deposits
                ---------------                             -------------
                                                            (In thousands)
                <S>                                         <C>
                Three months or less....................    $       1,652
                Over three through six months...........            2,092
                Over six through 12 months..............            2,914
                Over 12 months..........................            1,779
                                                            -------------
                  Total.................................    $       8,437
                                                            =============
 </TABLE>

     Borrowings.  Savings deposits historically  have been the primary source of
funds for First Federal's lending, investment and general operating activities.
First Federal is authorized, however, to use advances from the FHLB of Des
Moines to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  The FHLB of Des Moines functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions.  As a member of the FHLB System, First Federal is required to own
stock in the FHLB of Des Moines and is authorized to apply for advances.
Advances are made pursuant to several different programs, each of which has its
own interest rate and range of maturities.  The Bank is also eligible to borrow
from the Federal Reserve Bank.  At September 30, 1999, the Bank had $24.96
million in advances outstanding with the FHLB.

     From time to time the Bank utilizes repurchase agreements issued primarily
to local government units.  The form of repurchase agreement used by the Bank
involves the sale of securities owned by the Bank with a commitment to
repurchase the same or substantially the same securities at a predetermined
price at a future date, typically one to 180 days thereafter.  At September 30,
1999, the Bank had $4.70 million in repurchase agreements outstanding.

     The following table presents a summary of the Bank's borrowings, which were
greater than 30% of stockholders' equity as of September 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                                                  September 30,
                                                          ----------------------------
                                                             1999              1998
                                                          ----------        ----------
                                                              (Dollars in thousands)
<S>                                                       <C>               <C>
Federal Home Loan Bank advances
  outstanding at period end............................   $   24,957        $   20,457
Weighted average rate at period end....................         5.06%             5.22%
Daily average outstanding for the period...............   $   22,554        $   15,677
  Weighted average rate for the period.................         5.16%             5.60%
Highest outstanding at any month end...................   $   24,957        $   20,959

Repurchase agreements
  outstanding at period end............................   $    4,701        $    3,135
  Weighted average rate at period end..................         5.06%             5.22%
Daily average outstanding for the period...............   $    4,779        $    3,321
  Weighted average rate for the period.................         5.14%             5.42%
Highest outstanding at any month end...................   $    6,800        $    4,300
</TABLE>

     For more information on borrowings, see "Note 12 - Borrowings" of the Notes
to Consolidated Financial Statements included under Item 7, and part of Exhibit
13 to this Form 10-KSB.

                                      22
<PAGE>

Subsidiary Activities

     As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries, with an additional investment
of 1% of assets where such investment serves primarily community, inner-city and
community development purposes.  Under such limitations, as of September 30,
1999, the Bank was authorized to invest up to approximately $3.90 million in the
stock of or loans to subsidiaries, including the additional 1% investment for
community inner-city and community development purposes.

     The Bank has one wholly owned subsidiary: First Federal Service Corporation
("First Federal Service").  First Federal Service, a Minnesota corporation,
sells credit, life and disability insurance and retail non-deposit investment
products.  At September 30, 1999, the Bank's total investment in First Federal
Service was $116,000.

     SAIF-insured savings institutions must give the FDIC and OTS 30 days' prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary.  Both the FDIC and OTS have authority
to order termination of subsidiary activities determined to pose a risk to the
safety or soundness of the institution.  In addition, capital requirements
require savings institutions to deduct from capital the amount of their
investments in and extensions of credit to subsidiaries engaged in activities
not permissible to national banks in determining regulatory capital compliance.
The activities of First Federal Service are not permissible for national banks.
See "-- Regulation of the Bank -- Regulatory Capital Requirements."

Competition

     First Federal faces strong competition for deposits and loans.  First
Federal's principal competitors for deposits are other banking institutions,
such as commercial banks, credit unions and other savings institutions, as well
as mutual funds and other investments.  First Federal principally competes for
deposits by offering a variety of deposit accounts, convenient business hours
and branch locations, customer service and a well trained staff, in addition to
a substantial ATM network.  First Federal competes for loans with other
depository institutions, as well as specialty mortgage lenders and brokers and
consumer finance companies.  First Federal principally competes for loans on the
basis of interest rates and the loan fees it charges, the types of loans it
originates and the convenience and quick service it provides to borrowers.  In
addition, First Federal believes it has developed strong relationships with the
businesses, realtors, builders and general public in its market area.  First
Federal is the fourth largest financial institution in its market area, based on
deposit and asset information at September 30, 1999.  Of the three larger
institutions, two are located in Bemidji, within two blocks of the Bank's main
office.

Employees

     As of September 30, 1999, the Company and the Bank had 35 full-time and 14
part-time employees, none of whom was represented by a collective bargaining
agreement.

Regulation

     General.  As a federally chartered savings bank, the Bank is subject to
extensive regulation by the OTS and FDIC and to OTS regulations governing such
matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities and general investment authority.  The
lending activities and other investments of the Bank must comply with various
federal regulatory requirements.  The OTS periodically examines the Bank for
compliance with various regulatory requirements.  The FDIC also has the
authority to conduct special examinations of the Bank because its deposits are
insured by the SAIF.  The Bank must file reports with OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.  This supervision and
regulation is intended primarily for the protection of depositors.  Certain of
these regulatory requirements are referred to below or appear elsewhere herein.

                                      23
<PAGE>

     Recently Enacted Legislation.  On November 12, 1999, the Gramm-Leach-Bliley
("G-L-B") Act was signed into law.  The G-L-B Act authorizes affiliations
between banking, securities and insurance firms and authorizes bank holding
companies and national banks to engage in a variety of new financial activities.
Among the new activities that will be permitted to bank holding companies are
securities and insurance brokerage, securities underwriting, insurance
underwriting and merchant banking.  The Federal Reserve Board, in consultation
with the Department of Treasury, may approve additional financial activities.
National bank subsidiaries will be permitted to engage in similar financial
activities but only on an agency basis unless they are one of the 50 largest
banks in the country.  National bank subsidiaries will be prohibited from
insurance underwriting, real estate development and merchant banking.  The G-L-B
Act, however, prohibits future acquisitions of existing unitary savings and loan
holding companies, like the Company, by firms that are engaged in commercial
activities and prohibits the formation of new unitary holding companies.

     The G-L-B Act also imposes new requirements on financial institutions with
respect to customer privacy.  The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act. The G-L-B Act directs the federal banking agencies, the National Credit
Union Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.

     The G-L-B Act contains significant revisions to the Federal Home Loan Bank
System.  The G-L-B Act imposes new capital requirements on the Federal Home Loan
Banks and authorizes them to issue two classes of stock with differing dividend
rates and redemption requirements.  The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute $300 million to
pay interest on certain government obligations in favor of a 20% of net earnings
formula.  The G-L-B Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small agri-
businesses.  The G-L-B Act makes membership in the Federal Home Loan Bank System
voluntary for federal savings associations.

     The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act.  The G-L-B Act also eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The Company and Bank are unable to predict the impact of the G-L-B Act on
their operations and competitive environment at this time.

Regulation of the Bank

     Federal Home Loan Bank System.  The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB").  The FHLBs provide a central credit
facility primarily for member institutions.  As a member of the FHLB of Des
Moines, the Bank is required to acquire and hold shares of capital stock in the
FHLB of Des Moines in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the end of each year, or 1/20 of its advances (borrowings) from
the FHLB of Des Moines, whichever is greater.  The Bank was in compliance with
this requirement with an investment in FHLB of Des Moines stock at September 30,
1999 of $1.25 million.

                                      24
<PAGE>

     The FHLB of Des Moines serves as a reserve or central bank for its member
institutions within its assigned district.  It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System.  It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Des Moines.  Long-term
advances may only be made for the purpose of providing funds for residential
housing finance.  At September 30, 1999, the Bank had $24.96 million in advances
outstanding from the FHLB of Des Moines.  See "-- Deposit Activity and Other
Sources of Funds -- Borrowings."

     Liquidity Requirements.  The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptance,
highly rated corporate debt and commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to the average daily balance of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings.  Monetary penalties may be imposed for failure to meet
liquidity requirements.  The average daily liquidity ratio of the Bank for the
month of September 1999 was 35.49% with respect to liquid assets.

     Qualified Thrift Lender Test.  A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank.  In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the "BHCA") and other
statutes applicable to bank holding companies.  Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for both a national bank
and a savings institution and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).

     To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets.   All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home equity loans,
loans made for educational purposes, small business loans, credit card loans and
shares of stock issued by an FHLB.  Subject to a 20% of portfolio assets limit,
savings institutions are also able to treat the following as Qualified Thrift
Investments: (i) 50% of the dollar amount of residential mortgage loans subject
to sale under certain conditions, (ii) investments, both debt and equity, in the
capital stock or obligations of and any other security issued by a service
corporation or operating subsidiary, provided that such subsidiary derives at
least 80% of its annual gross revenues from activities directly related to
purchasing, refinancing, constructing, improving or repairing domestic
residential housing or manufactured housing, (iii) 200% of their investments in
loan to finance "starter homes" and loans for construction, development or
improvement of housing and community service facilities or for financing small
businesses in "credit-needy" areas, (iv) loans for the purchase, construction,
development or improvement of community service facilities, (v) loans for
personal, family, household or educational purposes, and (vi) shares of stock
issued by FNMA or FHLMC.

     A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months.  A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.  At September 30,
1999, the Bank qualified as a QTL.

     Uniform Lending Standards.  Under OTS regulations, savings banks must adopt
and maintain written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens or interests in real estate
or are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan

                                      25
<PAGE>

portfolio diversification standards, prudent underwriting standards, including
loan-to-value limits, that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal bank regulators.

     The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied, one- to four-family property), the limit
is 85%.  Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.

     The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors.  The aggregate amount of loans in excess of the supervisory loan-to-
value limits, however, should not exceed 100% of total capital and the total of
such loans secured by commercial, agricultural, multifamily and other non-one-
to-four family residential properties should not exceed 30% of total capital.
The supervisory loan-to-value limits do not apply to certain categories of loans
including loans insured or guaranteed by the U.S. government and its agencies or
by financially capable state, local or municipal governments or agencies, loans
backed by the full faith and credit of a state government, loans that are to be
sold promptly after origination without recourse to a financially responsible
party, loans that are renewed, refinanced or restructured without the
advancement of new funds, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.

     Management believes that the Bank's current lending policies conform to the
Interagency Guidelines and does not anticipate that the Interagency Guidelines
will have a material effect on its lending activities.

     Regulatory Capital Requirements.  Under the OTS's regulatory capital
requirements, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to at least 4.0% or 3.0% (if
the institution is rated composite 1 CAMELS under the OTS examination rating
system) of adjusted total assets and "total" capital (a combination of "core"
and "supplementary" capital) equal to 8.0% of risk-weighted assets.  In
addition, the OTS has adopted regulations which impose certain restrictions on
savings associations that have a total risk-based capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the institution is rated composite 1 CAMELS under the OTS examination rating
system).  For purposes of these regulations, Tier 1 capital has the same
definitions as core capital.  See "--Prompt Corrective Regulatory Action."

     Core capital is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill."  Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists.  Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill.  Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights.  Both core and tangible capital are further reduced
by an amount

                                      26
<PAGE>

equal to a savings institution's debt and equity investments in subsidiaries
engaged in activities not permissible to national banks (other than subsidiaries
engaged in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies).
Investments in and extensions of credit to such subsidiaries are required to be
fully netted against tangible and core capital. At September 30, 1999, the Bank
had no such investments.

     Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includable subsidiaries in which the savings association holds a minority
interest.  Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the portion of savings association's investments in
unconsolidated includable subsidiaries, and, for purpose of the core capital
requirement, qualifying supervisory goodwill.  At September 30, 1999, the Bank's
adjusted total assets for the purposes of the core and tangible capital
requirements were approximately $130.54 million.

     In determining compliance with the risk-based capital requirement, a
savings association is allowed to include both core capital and supplementary
capital in its total capital provided the amount of supplementary capital
included does not exceed the savings association's core capital.  Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments, a portion of the
savings association's general loss allowances and up to 45% of unrealized gains
on equity securities.  Total core and supplementary capital are reduced by the
amount of capital instruments held by other depository institutions pursuant to
reciprocal arrangements, all equity investments and that portion of the
institution's land loans and non-residential construction loans in excess of 80%
loan-to-value ratio.  As of September 30, 1999, the Bank had no high ratio land
or non-residential construction loans and no equity investments for which OTS
regulations require a deduction from total capital.

     The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight.  Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%.  Consumer and residential construction loans are assigned a risk weight of
100%.  Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FNMA or FHLMC are assigned a 20% risk weight.  Cash and
U.S. Government securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight. As of September 30, 1999, the Bank's
risk-weighted assets were approximately $62.64 million.

                                      27
<PAGE>

     The table below provides information with respect to the Bank's compliance
with its regulatory capital requirements at September 30, 1999.


<TABLE>
<CAPTION>
                                                                To Be Well Capitalized
                                                                                                   Under Prompt
                                        Actual             For Capital Adequacy Purposes   Corrective Action Provisions
                                --------------------------------------------------------------------------------------------
                                        Amount                Amount                          Amount
                                        (000's)    Ratio     (000's)           Ratio          (000's)        Ratio
------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>       <C>               <C>             <C>           <C>
As of September 30, 1999:
  Total capital (to risk-
      weighted assets)              $11,302          18.04%      $5,011             8.00%          $6,264         10.00%
  Tier 1 capital (to risk-
     weighted assets)                10,790          17.23        2,506             4.00            3,758          6.00
Tier 1 capital (to average
     assets)                         10,790           8.49        5,084             4.00            6,356          5.00
As of September 30, 1998:
  Total capital (to risk-
     weighted assets)                11,549          19.00        4,855             8.00            6,069         10.00
Tier 1 capital (to risk-
     weighted assets)                11,051          18.20        2,428             4.00            3,641          6.00
Tier 1 capital (to average
     assets)                         11,051           9.40        4,700             4.00            5,874          5.00

</TABLE>

     The risk-based capital standards of the OTS require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital.  A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities.  A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than 2.0% of the current estimated economic value of
its assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS.  The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier.  Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports.  However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be subject to
an additional capital requirement based upon its level of interest rate risk as
compared to its peers.  The Bank has determined that, on the basis of current
financial data, it will not be deemed to have more than normal level of interest
rate risk under the rule and believes that it will not be required to increase
its total capital as a result of the rule.

     In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution.  Such circumstances
would include a high degree of exposure to interest rate risk, prepayment risk,
credit risk, concentration of credit risk and certain risks arising from non-
traditional activities.  The OTS may treat the failure of any savings
institution to maintain capital at or above such level as an unsafe or unsound
practice and may issue a directive requiring any savings institution which fails
to maintain capital at or above the minimum level required by the OTS to submit
and adhere to a plan for increasing capital.  Such an order may be enforced in
the same manner as an order issued by the FDIC.

                                      28
<PAGE>

     At September 30, 1999, the Bank exceeded all regulatory minimum capital
requirements.

     Prompt Corrective Regulatory Action.  Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements.  All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements.  An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan.  A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution.  Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries.  The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt.  In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions.  If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund.  Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.

     Under regulations jointly adopted by the federal banking regulators,
including the OTS, a depository institution's capital adequacy for purposes of
the prompt corrective action rules is determined on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets).  Under the regulations, a depository
institution that is not subject to an order or written directive by its primary
federal regulator to meet or maintain a specific capital level will be deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater.  An "adequately capitalized" depository
institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMELS rating).  An "undercapitalized" depository institution is an
institution that has: (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating).  A "significantly undercapitalized" institution is defined as a
depository institution that has: (i) a total risk-based capital ratio of less
than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii)
a leverage ratio of less than 3.0%.  A "critically undercapitalized" institution
is defined as a depository institution that has a ratio of "tangible equity" to
total assets of less than 2.0%.  "Tangible equity" is defined as core capital
plus the institution's outstanding cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights.  The appropriate federal
banking agency may reclassify a well capitalized depository institution as
adequately capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory actions

                                      29
<PAGE>

applicable to institutions in the next lower capital category (but may not
reclassify a significantly undercapitalized institution as critically
undercapitalized) if the OTS determines, after notice and an opportunity for a
hearing, that the depository institution is in an unsafe or unsound condition or
that the institution has received and not corrected a less-than-satisfactory
rating for any CAMELS rating category. As of September 30, 1999, the Bank was
classified as "well capitalized" under the prompt corrective action regulations.

     Deposit Insurance.  The Bank is required to pay assessments, based on a
percentage of its insured deposits, to the FDIC for insurance of its deposits by
the FDIC through the SAIF.  Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits, or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

     Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations.  Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations.  See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority, and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor weaknesses.  Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.

     Historically, institutions with SAIF-assessable deposits, like the Bank,
were required to pay higher deposit insurance premiums than institutions with
deposits insured by the Bank Insurance Fund ("BIF").  In order to recapitalize
the SAIF and address the premium disparity, in November 1996 the FDIC imposed a
one-time special assessment on institutions with SAIF-assessable deposits based
on the amount determined by the FDIC to be necessary to increase the reserve
levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995.

     The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates to zero for "well
capitalized" institutions with the highest supervisory ratings and 0.27% of
insured deposits for institutions in the highest risk-based premium category.
Until December 31, 1999, SAIF-insured institutions will be required to pay
assessments to the FDIC at the rate of 6.5 basis points to help fund interest
payments on certain bonds issued by the Financing Corporation ("FICO"), an
agency of the federal government established to finance takeovers of insolvent
thrifts.  During this period, BIF members will be assessed for these obligations
at the rate of 1.3 basis points.  After December 31, 1999, both BIF and SAIF
members will be assessed at the same rate for FICO payments, or sooner if the
two funds are merged.

     Substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive.  In the past the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank.  The
reduction of SAIF deposit insurance premiums effectively eliminated this
disparity and could have the effect of increasing the net earnings of the Bank
and restoring the competitive equality between BIF-insured and SAIF-insured
institutions.

                                      30
<PAGE>

     The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings.  The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate.  Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries.  Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level.  The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the savings institution is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.

     Federal Reserve System.  Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
net transaction accounts between $4.9 million and $46.5 million, plus 10% on the
remainder.  This percentage is subject to adjustment by the Federal Reserve
Board.  Because required reserves must be maintained in the form of vault cash
or in a non-interest bearing account at a Federal Reserve Bank, the effect of
the reserve requirement is to reduce the amount of the institution's interest-
earning assets.  As of September 30, 1999, the Bank met its reserve
requirements.

     Dividend Restrictions.  Under the OTS prompt corrective action regulations,
the Bank would be prohibited from making any capital distributions if, after
making the distribution, it would have: (i) a total risk-based capital ratio of
less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a Tier 1 leverage ratio of less than 4.0%.  See "Prompt Corrective
Regulatory Action."  The OTS, after consultation with the FDIC, however, may
permit an otherwise prohibited stock repurchase if made in connection with the
issuance of additional shares in an equivalent amount and the repurchase will
reduce the institution's financial obligations or otherwise improve the
institution's financial condition.  Under OTS regulations, the Bank is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time of its
conversion to stock form.

     Savings institutions must submit notice to the OTS prior to making a
capital distribution if (a) they would not be well-capitalized after the
distribution, (b) the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its regulatory
capital, or (c) the institution is a subsidiary of a holding company.  A savings
institution must make application to the OTS to pay a capital distribution if
(x) the institution would not be adequately capitalized following the
distribution, (y) the institution's total distributions for the calendar year
exceeds the institution's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or (z) the distribution
would otherwise violate applicable law or regulation or an agreement with or
condition imposed by the OTS.

     In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.  See "Taxation."  The Company
intends to make full use of this favorable tax treatment afforded to the Bank
and the Company and does not contemplate use of any post-Conversion earnings of
the Bank in a manner which would limit either institution's bad debt deduction
or create federal tax liabilities.

     Transactions with Related Parties.  Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution.  In a holding company context,

                                      31
<PAGE>

the parent holding company of a savings institution (such as the Company) and
any companies which are controlled by such parent holding company are affiliates
of the savings institution. Generally, Sections 23A and 23B (i) limit the extent
to which the savings institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, OTS regulations provide that no savings institution may
(i) make a loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution. Section 106 of the BHCA which applies
to the Bank, prohibits the Bank from extending credit to or offering any other
services, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from
the institution or certain of its affiliates or not obtain services of a
competitor of the institution, subject to certain exceptions.

     Loans to Directors, Executive Officers and Principal Stockholders.  Savings
institutions are also subject to the restrictions contained in Section 22(h) and
Section 22(g) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders.  Under Section 22(h), loans to a director,
executive officer and to a greater than 10% stockholder of a savings institution
and certain affiliated entities of such persons, may not exceed, together with
all other outstanding loans to such person and affiliated entities, the
institution's loans-to-one-borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by readily marketable collateral).
Section 22(h) also prohibits loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
stockholders of a savings institution, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting.  The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person) as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000).  Further, Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.

     Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval by the board of directors
of the depository institution for such extensions of credit to executive
officers of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers.  In addition, Section 106 of the BHCA prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.

     Safety and Soundness Standards.  Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for depository institutions under its authority.  On July 10, 1995,
the federal banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans.  The final rule and the guidelines went into effect on August
9, 1995.  The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business.  The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth.  The guidelines
further provide that savings institutions should maintain

                                      32
<PAGE>

safeguards to prevent the payment of compensation, fees and benefits that are
excessive or that could lead to material financial loss, and should take into
account factors such as comparable compensation practices at comparable
institutions. If the OTS determines that a savings institution is not in
compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines. A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions. Management believes that the Bank already meets substantially all the
standards adopted in the interagency guidelines, and therefore does not believe
that implementation of these regulatory standards will materially affect the
Bank's operations.

     Under federal banking regulations, savings institutions must also adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements.  A savings institution's  real estate lending policy
must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Real Estate Lending Guidelines") that have been adopted by the
federal banking regulators.  The Real Estate Lending Guidelines, among other
things, call upon savings institutions to establish internal loan-to-value
limits for real estate loans that are not in excess of the specified loan-to-
value limits for the various types of real estate loans.  The Real Estate
Lending Guidelines state, however, that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.

     Additionally, under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate.  On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings.  Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.

Regulation of the Company

     General.  The Company is a unitary savings and loan holding company as
defined by the Home Owners' Loan Act ("HOLA").  As such, the Company is
registered with the OTS and is subject to OTS regulation, examination,
supervision and reporting requirements.  As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.  The Company is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Securities and Exchange Commission ("SEC") under federal securities laws.

     Activities Restrictions.  The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company.  However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution.  Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding

                                      33
<PAGE>

companies and, unless the savings institution requalifies as a QTL within one
year thereafter, register as, and become subject to, the restrictions applicable
to a bank holding company.  See "-- Regulation of the Bank -- Qualified Thrift
Lender Test."

     If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions.  Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies.  Those activities described in (vii)
above must also be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.

     Restrictions on Acquisitions.  The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary.  Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.

     The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if:  (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).

     OTS regulations permit federal savings institutions to branch in any state
or states of the United States and its territories.  Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal savings institution may not establish an out-of-
state branch unless (i) the federal savings institution qualifies as a QTL or as
a "domestic building and loan institution" under section 7701(a)(19) of the
Internal Revenue Code and the total assets attributable to all branches of the
savings institution in the state would qualify such branches taken as a whole
for treatment as a QTL or for a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings institution subsidiaries of
banking holding companies. Federal savings institutions generally may not
establish new branches unless the savings institution meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the savings
institution's record of compliance with the Community Reinvestment Act of 1977
in connection with any branch application.

                                      34
<PAGE>

Taxation

     General.  The Company and its subsidiaries (including the Bank) file a
consolidated federal income tax return on a fiscal year basis.  Consolidated
returns have the effect of eliminating intercompany distributions, including
dividends, from the computation of taxable income for the taxable year in which
the distributions occur.

     Federal Income Taxation.  Included in the Small Business Job Protection Act
of 1996 are provisions which repeal the special bad debt reserve method for
savings and loan associations for taxable years beginning after December 31,
1995.  The legislation requires institutions to recapture the portion of the tax
bad debt reserves that exceeds the pre-1988 tax bad debt reserve over a period
of six to eight years.  The recapture can be deferred for one to two years if
the institution meets a residential loan origination requirement.

     For taxable years beginning after December 31, 1995, the bad debt method
for savings and loan associations is conformed to that of banks.  Institutions
that qualify as a "small bank" will be able to use the reserve method for bad
debts.  Reasonable additions to the reserve for bad debts are calculated using
the experience method.  A small bank is an institution with assets less than
$500 million.  Institutions that do not qualify as a small bank will not be
allowed to use the reserve method for bad debts.

     Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.

     The Bank's federal corporate income tax returns have not been audited in
the last five years.

     State Income Taxation.  The State of Minnesota imposes a corporate
franchise tax at the rate of 9.8% on income which is considered Minnesota
taxable income.  Taxable income for the State of Minnesota is substantially the
same as federal taxable income.

     For additional information regarding taxation, see Note 11 of Notes to
Consolidated Financial Statements.

Item 2.  Properties
-------------------

     The following table sets forth information regarding the Company's offices
at September 30, 1999.


<TABLE>
<CAPTION>

                                Year   Owned or    Book Value at      Approximate       Deposits at
                               Opened   Leased   September 30, 1999  Square Footage  September 30, 1999
                               ------  --------  ------------------  --------------  ------------------
                                                                                        (In thousands)
<S>                            <C>     <C>       <C>                 <C>             <C>
Main Office:
214 5th Street                   1910   Owned         $1.31 million          10,990             $52,352
Bemidji, Minnesota  56601

Branch Offices:
22 First Street, NE              1977   Owned               180,000           1,789              18,401
Bagley,  Minnesota  56621

109 Main Street West             1983   Owned               294,000           3,083              10,530
Baudette, Minnesota  56623

527 Minnesota Avenue             1987   Owned               107,000           1,700               4,609
Walker, Minnesota  56484

550 Paul Bunyan Drive, N.W.      1995   Leased              234,000           2,158               2,219
Bemidji, Minnesota  56601
</TABLE>

                                      35
<PAGE>

        The book value of the Company's investment in premises and equipment
totaled $2.12 million at September 30, 1999.  See Note 9 of Notes to
Consolidated Financial Statements.

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

        At September 30, 1999, there were no legal proceedings to which the
Company or First Federal was a party, or to which any of their property was
subject, which were expected by management to result in a material loss to the
Company or the Bank.

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

        No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1999.


                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholders'
---------------------------------------------------------------------------
Matters
-------

        The information contained under the sections captioned "Market and
Dividend Information" in the Company's Annual Report to Stockholders for the
Fiscal Year Ended September 30, 1999 (the "Annual Report") filed as Exhibit 13
hereto is incorporated herein by reference.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

        The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item 7. Financial Statements
----------------------------

        The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors' Report in the Annual Report, which are
listed under Item 13 herein, are incorporated herein by reference.

Item 8. Changes in and Disagreements With Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------

     None.

                                    PART III

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

        For information concerning the Board of Directors and executive officers
of the Company, the information contained under the section captioned "Proposal
I -- Election of Directors" in the Company's definitive proxy statement for the
Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.

        For information regarding delinquent filers, as required by Item 405 of
Regulation S-B, reference is made to "Security Ownership of Management" in the
Proxy Statement, which is incorporated herein by reference.

                                      36
<PAGE>

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

          The information contained under the sections captioned "Proposal I --
Election of Directors -- Executive Compensation" "-- Director Compensation," "--
Employment Agreements" and "-- Supplemental Executive Retirement Agreement" in
the Proxy Statement is incorporated herein by reference.

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

     (a)  Security Ownership of Certain Beneficial Owners

          Information required by this item is incorporated herein by reference
          to the section captioned "Voting Securities and Principal Holders
          Thereof" in the Proxy Statement.

     (b)  Security Ownership of Management

          Information required by this item is incorporated herein by reference
          to the sections captioned "Voting Securities and Principal Holders
          Thereof" and "Proposal I -- Election of Directors" in the Proxy
          Statement.

     (c)  Changes in Control

          Management of the Company knows of no arrangements, including any
          pledge by any person of securities of the Company, the operation of
          which may at a subsequent date result in a change in control of the
          registrant.

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

          The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Transactions with Management" in the Proxy Statement.

                                    PART IV

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

     (a)  List of Documents Filed as Part of this Report
          ----------------------------------------------

     (1)  Financial Statements.  The following consolidated financial statements
are incorporated by reference from Item 8 hereof (see Exhibit 13):

          Independent Auditors' Report

          Consolidated Statements of Financial Condition - September 30, 1999
          and 1998

          Consolidated Statements of Income - Years ended September 30, 1999 and
          1998

          Consolidated Statements of Stockholders' Equity - Years ended
          September 30, 1999 and 1998

          Consolidated Statements of Cash Flows - Years ended September 30, 1999
          and 1998

          Notes to Consolidated Financial Statements

     (2)  Financial Statement Schedules.  All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which

                                      37
<PAGE>

they are required or because the required information is included in the
consolidated financial statements and related notes thereto.

     (3)  Exhibits.  The following is a list of exhibits filed as part of this
Annual Report on Form 10-K and is also the Exhibit Index.

<TABLE>
<CAPTION>
No.           Description
---           -----------
<S>           <C>                                                             <C>
3.1            Articles of Incorporation of First Federal Bancorporation      *
3.2            Bylaws of First Federal Bancorporation                         *
4              Form of Common Stock Certificate of First Federal
               Bancorporation                                                 **
10.1           First Federal Bancorporation 1995 Stock Option and
               Incentive Plan                                                 **
10.2           First Federal Bancorporation Management Recognition Plan       *
10.3(a)        Employment Agreement between First Federal Bancorporation
               and William R. Belford                                         *
10.3(b)        Employment Agreement between First Federal Banking & Savings,
               FSB and William R. Belford                                     *
10.4           First Federal Banking & Savings, FSB Retirement Plan
               for Non-Employee Directors                                     *
10.5           First Federal Banking & Savings, FSB Deferred Compensation
               Plan, as Amended and Restated                                  *
10.6           First Federal Banking & Savings, FSB Supplemental
               Retirement plan                                                *
10.7           First Federal Bancorporation 1998 Stock Option Plan
13             Annual Report to Stockholders
21             Subsidiaries of the Registrant
23             Consent of McGladrey & Pullen LLP
27             Financial Data Schedule
</TABLE>

---------------------
(*)    Incorporated herein by reference from Registration Statement on Form S-1
       filed February 8, 1995 (File No. 33-86964).
(**)   Incorporated herein by reference from Registration Statement on Form 8-A
       filed March 15, 1995 (File No. 0-25704).


     (b)  Reports on Form 8-K.  During the quarter ended September 30, 1999, the
          -------------------
Registrant did not file any Current Reports on Form 8-K.

     (c)  Exhibits.  The exhibits required by Item 601 of Regulation S-B are
          --------
either filed as part of this Annual Report on Form 10-KSB or incorporated by
reference herein.

     (d)  Financial Statements and Schedules Excluded from Annual Report.  There
          --------------------------------------------------------------
are no other financial statements and financial statement schedules which were
excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which
are required to be included herein.

                                      38
<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                     FIRST FEDERAL BANCORPORATION



December 20, 1999
                                     By: /s/ William R. Belford
                                         -----------------------------------
                                         William R. Belford
                                         President and Chief Executive Officer


     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.


/s/  William R. Belford                             December 20, 1999
----------------------------------
William R. Belford
President, Chief Executive Officer
and Director
(Principal Executive Officer)

/s/  Dennis M. Vorgert                              December 20, 1999
----------------------------------
Dennis M. Vorgert
Vice President and Treasurer
(Principal Financial and Accounting Officer)

/s/  Ralph T. Smith                                 December 20, 1998
----------------------------------
Ralph T. Smith
Chairman of the Board

/s/ Martin R. Sathre                                December 20, 1998
----------------------------------
Martin R. Sathre
Vice Chairman of the Board

/s/ Walter R. Fankhanel                             December 20, 1998
----------------------------------
Walter R. Fankhanel
Director

/s/ James R. Sharp                                  December 20, 1998
----------------------------------
James R. Sharp
Director

/s/ Dean J. Thompson                                December 20, 1998
----------------------------------
Dean J. Thompson
Director