<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 1996
                                       OR
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

       For the transition period from                    to
                                        ----------------      -----------------

       Commission file number       0-20620

                            MIDWEST BANCSHARES, INC.
-------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

                 Delaware                               42-1390587
-------------------------------             -----------------------------------
(State or other jurisdiction of             I.R.S. Employer Identification No.)
incorporation or organization)

3225 Division Street, Burlington, Iowa                                 52601
-------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)

Issuer's telephone number, including area code:        (319) 754-6526
                                                 ------------------------------

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
                                      ----
           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) filed all reports required to be filed 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 requirements for the past 90 days.
YES X   NO
   ---     ---

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, 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: $10.5 million.

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the Nasdaq Stock Market as of February 28, 1997, was $7.1
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)

     As of March 21, 1997, there were issued and outstanding 349,379 shares of
the Issuer's Common Stock.

       Transitional Small Business Disclosure Format (check one): Yes    No X

                       DOCUMENTS INCORPORATED BY REFERENCE

         Parts II and IV of Form 10-KSB - Annual Report to Stockholders
            for the fiscal year ended December 31, 1996. Part III of
     Form 10-KSB - Proxy Statement for 1997 Annual Meeting of Stockholders.



<PAGE>



                                     PART I

Item 1.  Business

General

         Midwest Bancshares, Inc. (the "Company" or "Midwest") is a Delaware
corporation which was organized in 1992 by Midwest Federal Savings and Loan
Association of Eastern Iowa (the "Association" or "Midwest Federal") for the
purpose of becoming a savings and loan holding company. The Company owns all of
the outstanding stock of the Association issued on November 10, 1992 in
connection with the completion of the conversion of the Association from the
mutual to the stock form of organization (the "Conversion"). The Company issued
455,000 shares of common stock at a price of $10.00 per share in the Conversion.
All references to the Company at or before November 10, 1992 refer to the
Association. The Association, the Company's only operating subsidiary, was
initially chartered in 1919 and became a federal savings and loan association in
1934.

         The Company serves Des Moines, Lee and Louisa Counties in southeastern
Iowa through the Association's four retail banking offices located in
Burlington, Wapello and Ft. Madison, Iowa. At December 31, 1996, the Company had
total assets of $136.4 million, deposits of $101.9 million, and stockholders'
equity of $9.6 million.

         As a community-oriented financial institution, the Association offers a
variety of financial services to meet the needs of the communities it serves.
The Association is principally engaged in attracting retail deposits from the
general public and investing those funds primarily in first mortgages on
owner-occupied, single-family residential loans and mortgage-backed securities.
To a much lesser extent, the Association also originates residential
construction, small business commercial loans, land development, agricultural
land and consumer loans in the Association's market area and a limited amount of
loans secured by multi-family and non-residential real estate. Through a wholly
owned subsidiary, the Association also offers for sale tax-deferred annuities
and other financial products.

         Like all federally chartered savings associations, Midwest Federal's
operations are regulated by the Office of Thrift Supervision (the "OTS"). The
Association is a member of the Federal Home Loan Bank System ("FHLBank System")
and a stockholder in the Federal Home Loan Bank ("FHLBank") of Des Moines. The
Association is also a member of the Savings Association Insurance Fund ("SAIF")
and its deposit accounts are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC").

         The principal sources of funds for the Association's lending activities
include deposits, advances from the FHLBank of Des Moines, amortization and
prepayment of loan principal (including mortgage-backed securities), sales or
maturities of investment securities, mortgage-backed securities and short-term
investments, borrowings and funds provided from operations.

         The Association's revenues are derived principally from interest on
mortgage loans and mortgage-backed securities, interest and dividends on
investment securities, loan origination income and income from deposit account
service charges and from subsidiary activities.

         The executive offices of the Association are located at 3225 Division
Street, Burlington, Iowa 52601 and its telephone number is (319) 754-6526.
Unless the context otherwise requires, all references herein to the Association
or the Company include the Company and the Association on a consolidated basis.


                                        2

<PAGE>



Lending Activities

         General. Historically, the Association originated fixed-rate mortgage
loans. Since 1989, however, the Association has emphasized the origination and
holding of adjustable-rate mortgage ("ARM") loans and loans with shorter terms
to maturity than traditional 30 year, fixed-rate loans. Management's strategy
has been to increase the percentage of assets in its portfolio with more
frequent repricing or shorter maturities. In response to customer demand,
however, the Association continues to originate fixed-rate mortgages with terms
generally not greater than 15 years.

         The Association's primary focus in lending activities is on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. To a much lesser extent, the Association also originates
residential construction, small business commercial loans, land development,
agricultural land and consumer loans in the Association's market area. See "-
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." At
December 31, 1996, the Association's net loan and mortgage-backed securities
portfolio totalled $109.6 million.

         Generally, all loans must be approved by a committee comprised of the
three top officers in the Association's lending department, with the
Association's President acting as an alternate member. A majority vote is
required for the approval of any loan. All loan approvals are ratified by the
Board of Directors.

         Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), the Association's loans-to-one-borrower limit was reduced,
generally to the greater of $500,000 or 15% of unimpaired capital and surplus.
See "Regulation - Federal Regulation of Savings Associations." At December 31,
1996, the maximum amount which the Association could have lent to any one
borrower and the borrower's related entities was approximately $1.3 million. At
December 31, 1996, the Association had no loans which exceeded this amount.

         At December 31, 1996, the principal balance of the largest lending
relationship with any one borrower or group of related borrowers, was $1,289,000
and consists of two participation loans secured by a 192-unit apartment building
located in Bettendorf, Iowa. The principal balance of the second largest lending
relationship with one borrower was $975,000 at December 31, 1996, and is a
participation loan secured by a 92-bed nursing home located in Oskaloosa, Iowa.
This loan was paid off on March 14, 1997. The third largest lending relationship
with one borrower had a principal balance of $971,000 at December 31, 1996, and
consists of two participation loans, secured by two assisted, congregate-care
facilities. One is a 68-unit facility located in Cedar Rapids, Iowa, and the
other is a 46-unit facility located in Dubuque, Iowa. The fourth largest lending
relationship with one borrower had a principal balance of $812,000 at December
31, 1996, and consists of two participation loans, secured by two apartment
complexes located in Madison, Wisconsin, one 20-unit and one 23-unit. See "-
Commercial/Multi-Family Real Estate Lending" for details regarding these loan
participations. Each of the loans discussed above was current as of December 31,
1996. At December 31, 1996, the Association had no other loans to one borrower
or group of related borrowers which had an existing balance at December 31,
1996, in excess of $500,000.

                                        3

<PAGE>



         Loan Portfolio Composition. The following information concerning the
composition of the Association's loan portfolio in dollar amounts and in
percentages (before deductions (or additions) for loans in process, deferred
fees (premiums) and discounts and allowances for losses) as of the dates
indicated.
<TABLE>
<CAPTION>

                                                                           December 31,
                                                      1996                     1995                     1994
                                               ---------------------------------------------------------------------------
                                                   Amount        Percent     Amount      Percent    Amount        Percent
<S>                                              <C>            <C>         <C>          <C>       <C>           <C>
                                                                     (Dollars in Thousands)
Real Estate Loans:
 One- to
  four-family..............................      $63,209          75.85%    $61,839        80.03%  $61,849          85.54%
 Commercial/multi-family...................       10,363          12.44       7,820        10.12     3,992           5.52
 Construction or                                                              1,151                  2,342
  development(1)...........................          828            .99                     1.49                     3.24
                                                --------         ------                   ------                    -----
     Total real estate loans...............       74,400          89.28      70,810        91.64    68,183          94.30
                                                --------         ------     -------       ------   -------         ------

Consumer and Other Loans:
 Deposit account...........................          354            .43         383          .50       344            .47
 Automobile................................        1,001           1.20       1,033         1.34       810           1.12
 Home equity/home
  improvement..............................        4,093           4.91       3,886         5.03     2,745           3.80
 Other.....................................        3,484           4.18       1,155         1.49       224            .31
                                                --------         ------     -------       ------    ------         ------
     Total consumer and
      other loans..........................        8,932          10.72       6,457         8.36     4,123           5.70
                                                --------        -------     -------       ------    ------         ------
     Total loans...........................       83,332         100.00%     77,267       100.00%   72,306         100.00%
                                                                 ======                   ======                   ======

Less:
 Loans in process..........................        1,274                      2,347                  1,096

 Deferred fees and discounts...............          147                        209                    216
 Allowance for losses......................          686                        676                    650
                                                --------                    -------                -------
 Total loans receivable, net...............      $81,225                    $74,035                $70,344
                                                 =======                    =======                =======

                                                              December 31,
                                             -----------------------------------------------
                                                     1993                    1992
                                             -----------------------------------------------
                                              Amount      Percent     Amount      Percent
<S>                                          <C>         <C>         <C>         <C>
                                                     (Dollars in Thousands)
Real Estate Loans:
 One- to
  four-family..............................  $58,405         86.64%  $51,808         84.86%
 Commercial/multi-family...................    4,535          6.73     6,017          9.86
 Construction or                               1,677                   1,469
  development(1)...........................                   2.49                    2.40
                                                            ------                  ------
     Total real estate loans...............   64,617         95.86    59,294         97.12
                                             -------        ------   -------        ------

Consumer and Other Loans:
 Deposit account...........................      257           .38       287           .47
 Automobile................................      568           .84       198           .32
 Home equity/home
  improvement..............................    1,798          2.67     1,267          2.08
 Other.....................................      168           .25         4           .01
                                              ------        ------    ------        ------
     Total consumer and
      other loans..........................    2,791          4.14     1,756          2.88
                                              ------        ------    ------        ------
     Total loans...........................   67,408        100.00%   61,050        100.00%
                                                            ======                  ======

Less:
 Loans in process..........................                  1,417                     946

 Deferred fees and discounts...............                    125                      78
 Allowance for losses......................                    652                     587
                                                           -------                 -------
 Total loans receivable, net...............                $65,214                 $59,439
                                                           =======                 =======
</TABLE>

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

    (1)  Consists primarily of residential construction loans.



                                        4

<PAGE>



      The following table shows the composition of the Association's loan
portfolio by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
                                                                                   December 31,
                                                    ---------------------------------------------------------------------------
                                                               1996                     1995                     1994
                                                    ---------------------------------------------------------------------------
                                                       Amount       Percent     Amount        Percent    Amount        Percent
<S>                                                 <C>             <C>        <C>            <C>        <C>           <C>
                                                                              (Dollars in Thousands)
Fixed-Rate Loans:
 Real estate:
  One- to four-family...........................      $26,595         31.91%   $24,218          31.34%  $25,319          35.01%
Commercial/multi-family.........................        1,230          1.48      1,522           1.97     1,603           2.22
  Construction or development...................           65           .08        274            .36       504            .70
                                                    ---------       -------    -------        ------- ---------        -------
     Total real estate loans....................       27,890         33.47     26,014          33.67    27,426          37.93
                                                     --------        ------    -------         ------  --------         ------
  Consumer and other loans......................        6,104          7.32      5,332           6.90     4,123           5.70
                                                    ---------        ------    -------         ------  --------        -------
     Total fixed-rate loans.....................       33,994         40.79     31,346          40.57    31,549          43.63
                                                     --------        ------    -------         ------  --------        -------
Adjustable-Rate Loans:
 Real estate:
  One- to four-family...........................       36,614         43.94     37,621          48.69    36,530          50.52
  Commercial/multi-family.......................        9,133         10.96      6,298           8.15     2,389           3.31
  Construction or development                             763           .92        877           1.13     1,838           2.54
     Total adjustable-rate                           --------       -------   --------         ------ ---------         ------
      real estate loans.........................       46,510         55.82     44,796          57.97    40,757          56.37
     Consumer and other loans...................        2,828          3.39      1,125           1.46       ---            ---
                                                     --------       -------   --------         ------ ---------         ------
     Total adjustable-rate
      loans.....................................       49,338         59.21     45,921          59.43    40,757          56.37
                                                       ------       -------   --------         ------   -------         ------

     Total loans................................       83,332        100.00%    77,267         100.00%   72,306         100.00%
                                                                     ======                    ======                   ======

Less:
 Loans in process...............................        1,274                    2,347                    1,096
 Deferred fees and discounts....................          147                      209                      216
 Allowance for loan losses......................          686                      676                      650
                                                     --------                 --------                ---------
    Total loans receivable, net.................      $81,225                  $74,035                  $70,344
                                                      =======                  =======                  =======

                                                                      December 31,
                                                   ------------------------------------------------
                                                             1993                     1992
                                                   ------------------------  ----------------------
                                                     Amount        Percent    Amount       Percent
<S>                                                  <C>           <C>        <C>          <C>
                                                                (Dollars in Thousands)
Fixed-Rate Loans:
 Real estate:
  One- to four-family...........................    $25,279          37.50%  $28,252         46.28%
Commercial/multi-family.........................      4,294           6.37     5,916          9.69
  Construction or development...................        458            .68       ---           ---
                                                   --------         ------   -------        ------
     Total real estate loans....................     30,031          44.55    34,168         55.97
                                                   --------         ------  --------        ------
  Consumer and other loans......................      2,791           4.14     1,756          2.88
                                                   --------        ------- ---------        ------
     Total fixed-rate loans.....................     32,822          48.69    35,924         58.85
                                                   --------        -------  --------        ------
Adjustable-Rate Loans:
 Real estate:
  One- to four-family...........................     33,126          49.14    23,556         38.58
  Commercial/multi-family.......................        241            .36       101           .16
  Construction or development                         1,219           1.81     1,469          2.41
                                                    -------         ------   -------        ------
     Total adjustable-rate                           34,586          51.31    25,126         41.15
      real estate loans.........................        ---            ---       ---           ---
     Consumer and other loans...................    -------         ------   -------        ------
     Total adjustable-rate
      loans.....................................     34,586          51.31    25,126         41.15
                                                    -------         ------   -------        ------

     Total loans................................     67,408         100.00%   61,050        100.00%
                                                                    ======                  ======
Less:
 Loans in process...............................      1,417                      946
 Deferred fees and discounts....................        125                       78
 Allowance for loan losses......................        652                      587
                                                    -------                  -------
    Total loans receivable, net.................    $65,214                  $59,439
                                                    =======                  =======
</TABLE>
                                        5
<PAGE>

         The following table illustrates the contractual maturity of the
Association's loan portfolio at December 31, 1996. Mortgages which have
adjustable or renegotiable interest rates are shown as repricing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
                                                                             Real Estate
                                             --------------------------------------------------------------------------
                                                   One- to four-              Commercial/             Construction
                                                       Family                Multi-family            or Development
                                              --------------------      --------------------     ----------------------
                                                      Weighted                 Weighted                 Weighted
                                                      Average                  Average                   Average
                                              Amount          Rate      Amount          Rate      Amount          Rate
                                              ------          ----      ------          ----      ------          ----
<S>                                          <C>              <C>       <C>             <C>       <C>             <C>
                                                                       (Dollars in Thousands)
Due During Year(s) Ended
     December 31,

1997(1)................................      $ 2,465           8.18%   $   303           8.72%      $ 13           8.09%
1998...................................        2,676           8.19        329           8.72         14           8.08
1999...................................        2,905           8.19        359           8.72         16           8.10
2000 and 2001..........................        6,569           8.21        821           8.72         36           8.09
2002 to 2006...........................       21,643           8.19      1,731           8.45        119           8.09
2007 to 2016...........................       25,264           7.78      5,284           8.25        401           8.05
2017 and following.....................        1,687           7.55      1,536           8.25        229           8.01
                                            --------                  --------                     -----
    Total..............................      $63,209                   $10,363                      $828
                                             =======                   =======                      ====




                                                     Consumer
                                                     and Other                   Total
                                              ----------------------   ------------------------
                                                     Weighted                  Weighted
                                                      Average                   Average
                                               Amount           Rate    Amount            Rate
                                               ------           ----    ------            ----
<S>                                            <C>              <C>     <C>               <C>
                                                          (Dollars in Thousands)

Due During Year(s) Ended
     December 31,

1997(1)................................        $1,975           8.37%  $  4,756           8.29%
1998...................................         2,148           8.37      5,167           8.30
1999...................................         1,053           8.30      4,333           8.26
2000 and 2001..........................         1,831           8.27      9,257           8.27
2002 to 2006...........................         1,616           8.00     25,109           8.20
2007 to 2016...........................           309           8.00     31,258           7.86
2017 and following.....................           ---          ---        3,452           7.89
                                            ---------                  --------
    Total..............................        $8,932                   $83,332
                                               ======                   =======
</TABLE>
---------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.

         As of December 31, 1996, the total amount of loans due or repricing
after December 31, 1997 which had predetermined interest rates was $30.4
million, while the total amount of loans due or repricing after such date which
had floating, adjustable or renegotiable interest rates was $48.2 million.


                                        6

<PAGE>



         One-to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Association's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders. The Association has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, single-family
residences in its market area. At December 31, 1996, the Association's one- to
four-family residential mortgage loans, excluding mortgage-backed securities,
totalled $63.2 million, or 75.85% of the Association's loan portfolio,
substantially all of which are conventional loans.

         The Association currently makes adjustable-rate one- to four-family
residential mortgage loans in amounts up to 95% of the appraised value, or
selling price, of the secured property, whichever is less. Generally, for loans
with a loan-to-value ratio in excess of 80%, the Association requires private
mortgage insurance to reduce exposure levels below the 80% level. The
Association currently offers one-year ARM loans at rates determined in
accordance with market and competitive factors for a term of up to 30 years. The
loans provide for a 2% annual cap and floor, and a 6% lifetime cap and floor on
the interest rate over the rate in effect at the date of origination. The
Association also offers loans with a fixed rate for three, five or seven years
which automatically convert to the one-year ARM terms discussed above at the end
of the fixed-rate term. These loans' annual and lifetime caps on interest rate
increases reduce the extent to which they can help protect the Association
against interest rate risk. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" in
the Company's Annual Report to Stockholders filed as Exhibit 13 hereto (the
"Annual Report"). Approximately 37% of the loans originated in 1996 by the
Association were originated with adjustable rates of interest. See "-
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities."

         Adjustable-rate loans decrease the risks associated with changes in
interest rates, as indicated above. They do, however, involve other risks,
primarily because as interest rates rise, the payment by the borrower rises to
the extent permitted by the terms of the loan, thereby increasing the potential
for default. At the same time, the marketability of the underlying property may
be adversely affected by higher interest rates. The Association believes that
these risks, which have not had a material adverse effect on the Association to
date, generally are less than the risks associated with holding fixed-rate loans
in an increasing interest rate environment.

         The Association also originates fixed-rate mortgage loans for its
portfolio. These loans are predominantly for terms of 15 years. Interest rates
charged on these fixed-rate loans are competitively priced according to market
conditions.

         In underwriting residential real estate loans, the Association
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Potential borrowers are qualified for fixed-rate
loans based upon the initial or stated rate of the loan. On ARM loans, the
borrower is generally qualified on at least the maximum second year rate.

         An appraisal of the security property is obtained on all loan
applications from Board-approved independent fee appraisers. The Association
requires, in connection with the origination of residential real estate loans,
an opinion of counsel regarding title, and fire and casualty insurance coverage,
as well as flood insurance where appropriate, to protect the Association's
interest. The cost of this insurance coverage is paid by the borrower.

         At December 31, 1996, approximately $5.5 million, or 8.7% of the
Association's one- to four-family residential mortgage loan portfolio had been
purchased by the Association. These loans are secured by property located
primarily in California, Colorado, Arizona, Virginia and Texas, and have been in
the Association's portfolio for several years. The majority of the loans secured
by property located in California were purchased from the Association's former
mortgage banking subsidiary. The Association has purchased only a limited amount
of one- to four-family residential mortgage loans over the last five years.
Despite a decrease in the Association's portfolio of purchased one- to
four-family loans from $5.9 million in 1995, $6.9 million in 1994 and $10.1 in
1993, the level of delinquencies in this portion of the Association's portfolio
was higher than that of the loans originated and retained by the Association at
December 31, 1996 and accounted for 31% of the total dollar amount of delinquent
one- to four-family loans at that date compared to 45% at December 31, 1995. The
Association believes that the higher level of delinquencies, when compared to
the rest of the loan portfolio, was due to general economic conditions in
California during the recent past, where most of the properties securing
delinquent purchased loans are located. See also "- Asset Quality -
Non-Performing Assets."

                                        7

<PAGE>



         The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise disposes of the property subject to the mortgage and the loan is
not repaid. The Association has enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield. The yield
increase is obtained through the authorization of assumptions of existing loans
at higher rates of interest and the imposition of assumption fees. ARM loans may
be assumed provided home buyers meet the Association's underwriting standards
and the loan terms are modified, to the extent necessary, to conform with
present yield and maturity requirements.

         The Association also maintains an escrow account for most of its loans
secured by real estate, in order to ensure that the borrower provides funds to
cover property taxes in advance of the required payment. These accounts are
analyzed annually to confirm that adequate funds are available. For loans which
do not include an escrow requirement, an annual review of tax payments is
performed by the Association in order to confirm payment. In order to monitor
the adequacy of cash flows on income-producing properties, the borrower or lead
lender is notified annually, requesting financial information including rental
rates and income, maintenance costs and an update of real estate property tax
payments.

         Commercial/Multi-Family Real Estate Lending. At December 31, 1996, the
Association had $10.4 million in commercial/multi-family real estate loans,
representing 12.44% of the Association's loan portfolio. Most of these loans
have been purchased or are participations with other lenders. Substantially all
of the Association's commercial/multi-family real estate loan portfolio is
secured by multi-family residential property, primarily apartment buildings.
Many of these properties are located outside the Association's market area,
primarily Des Moines and Cedar Rapids, Iowa, and the States of Wisconsin and
Washington.

         At December 31, 1996, the principal balance of the largest lending
relationship with any one borrower or group of related borrowers, was $1,289,000
and consists of two participation loans originated in 1995 and 1996, secured by
a 192-unit apartment building located in Bettendorf, Iowa. The Association's
participation represents approximately 50.0% of the first loan of approximately
$1.8 million and approximately 7.0% of the second loan amount of approximately
$5.7 million. The first loan is amortized over 26 years, at a rate of 9.25% for
the first three years and thereafter at a rate equal to the Federal Cost of
Funds index plus 3.75%, adjusted annually. The second loan is a 10-year balloon
loan, at a rate of 9.0% for the first three years and thereafter at a rate equal
to the National Monthly Median Cost of Funds of SAIF Institutions plus 3.75%.

         The principal balance of the second largest lending relationship was
$975,000 and is a participation loan originated in 1994, secured by a 92-bed
nursing home located in Oskaloosa, Iowa. The Association's participation
represents approximately 55.5% of the total outstanding loan amount of $1.8
million. The loan is amortized over 20 years, at a rate of 7.75% (representing
the New York prime rate plus, 1.75%) for the first three years and thereafter at
a rate equal to the New York prime rate plus 1.25%, adjusted annually. This loan
was paid in full on March 14, 1997.

         The third largest lending relationship had a principal balance of
$971,000 and consists of two participation loans originated in 1995, secured by
two assisted, congregate-care facilities. One is a 68-unit facility located in
Cedar Rapids, Iowa, and the other is a 46-unit facility located in Dubuque,
Iowa. The Association's participation represents approximately 14% of the first
loan amount of approximately $3.5 million and approximately 16% of the second
loan amount of approximately $3.0 million. The first loan is amortized over 25
years, at a rate of 9.00% for the first three years and thereafter at a rate
equal to the Federal Cost of Funds index plus 3.50%. The second loan is
amortized over 25 years, at a rate of 9.50% for the first three years and
thereafter at a rate equal to the Federal Cost of Funds plus 3.25%.

         The fourth largest lending relationship had a principal balance of
$812,000 and consists of two participation loans originated in 1996, secured by
two apartment complexes located in Madison, Wisconsin, one 20-unit and one
23-unit. The Association's participation represents approximately 40% of the
first loan amount of approximately $1.1 million and approximately 40% of the
second loan amount of approximately $1.0 million. The first loan is amortized
over 25 years, at a rate of 8.875% for the first three years and thereafter at a
rate equal to the Federal Cost of Funds index plus 3.50%. The second loan is
amortized over 15 years, at a rate of 8.75% for the first three

                                        8

<PAGE>



years and thereafter at a rate equal to the Federal cost of Funds index plus
3.50%. Each of these loans was current as of December 31, 1996.

         The Association has no other commercial/multi-family real estate loans
to one borrower, or group of borrowers, which have an existing net balance in
excess of $500,000.

         Commercial/multi-family real estate lending affords the Association an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger and involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by commercial/multi-family real estate properties are often dependent on
the successful operation or management of the properties, repayment of such
loans may be subject to adverse conditions in the real estate market or the
economy. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. The Association has attempted to minimize these risks through its
underwriting standards. For the years 1996, 1995 and 1994, the Association
purchased participations in commercial/multi-family real estate loans totaling
$3.4 million, $4.3 million and $2.5 million, respectively. See also "-
Originations Purchases and Sales of Loans and Mortgage- Backed Securities."

         Residential Construction Lending. The Association originates a limited
number of loans to finance the construction of single-family residences. These
loans are primarily made to individuals who will ultimately be the
owner-occupier of the house. Such loans are generally made as a permanent
financing on the constructed property with the initial six month term on an
interest-only basis. At December 31, 1996, the Association had loans to finance
the construction of single-family residences totaling $828,000, or 0.99% of the
Association's loan portfolio.

         Residential construction loans are generally underwritten using the
same criteria as for one- to four-family residential loans. Payouts during the
construction phase are only made after inspection by the Association's
personnel. Authority for payouts is also required from the borrower and the
general contractor.

         The Association has also originated a limited amount of land
development loans in its local market area. As of December 31, 1996, the
Association had only one such loan outstanding, totalling $19,000, which was
current at such date.

         Consumer and Other Lending. Management considers consumer lending to be
an important component of its strategic plan. Specifically, consumer loans
generally have shorter terms to maturity (thus reducing Midwest Federal's
exposure to changes in interest rates) and carry higher rates of interest than
do one- to four-family residential mortgage loans. In addition, management
believes that the offering of consumer loan products helps to expand and create
stronger ties to its existing customer base, by increasing the number of
customer relationships and providing cross-marketing opportunities. At December
31, 1996, the Association's consumer loan portfolio totalled $8.9 million, or
10.72 of its loan portfolio. Under applicable federal law, the Association is
authorized to invest up to 35% of its assets in consumer loans.

         Midwest Federal offers a variety of secured consumer loans, including
home equity, home improvement, auto, boat and recreational vehicle loans and
loans secured by savings deposits. The Association has also originated one loan
secured by inventory of a mobile home dealer with a balance of $22,000 as of
December 31, 1996. The Association also offers a limited amount of unsecured
loans. The Association currently originates all of its consumer loans in its
market area. The Association's home equity and home improvement loans comprised
approximately 46% of the Association's total consumer loan portfolio at December
31, 1996. These loans are generally originated in amounts, together with the
amount of the existing first mortgage, of up to 80% of the appraised value of
the property securing the loan. The term to maturity on such loans may be up to
ten years. Other consumer loan terms vary according to the type of collateral,
length of contract and creditworthiness of the borrower. The Association's
consumer loans generally have a fixed-rate of interest.

         The Association does not originate any consumer loans on an indirect
basis (i.e., where loan contracts are purchased from retailers of goods or
services which have extended credit to their customers).

                                        9

<PAGE>



         The underwriting standards employed by the Association for consumer
loans include a determination of the applicant's payment history on other debts
and an assessment of the ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.

         In 1995, the Association began purchasing participations in FmHA loans.
Generally, the Association only purchases the 90% guaranteed portion of the
loan. For the years 1996 and 1995, the Association purchased FmHA participations
totaling $2.8 million and $1.1 million, respectively. See also "- Originations,
Purchases and Sales of Loans and Mortgage-Backed Securities."

         Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Although the level of delinquencies in the Association's consumer loan portfolio
has generally been low (at December 31, 1996, $50,000, or approximately .56% of
the consumer loan portfolio, was 30 days or more delinquent), there can be no
assurance that delinquencies will not increase in the future.

         Mortgage-Backed Securities. The Association has a substantial portfolio
of mortgage-backed securities and has utilized such investments to complement
its mortgage lending activities. At December 31, 1996, mortgage-backed
securities totalled $28.4 million. At such date, $9.0 million of these
mortgage-backed securities (all of which were issued by the Government National
Mortgage Association ("GNMA")) were available for sale. For information
regarding the carrying and market values of Midwest Federal's mortgage-backed
securities portfolio, see Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report.

         The Association purchases mortgage-backed securities in order to
supplement the Association's loan originations. At December 31, 1996, $6.0
million, or 21.0%, and $9.4 million, or 33.3%, of the Association's
mortgage-backed securities carried adjustable rates of interest and balloon
maturities, respectively. Under the OTS' risk-based capital requirements, GNMA
mortgage-backed securities have a zero percent risk weighting for the risk-
based capital requirement of the OTS and Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.


                                       10

<PAGE>



         The following table sets forth the contractual maturities of the
Association's mortgage-backed securities at December 31, 1996. The table does
not reflect normal monthly amortization payments or anticipated prepayments.
<TABLE>
<CAPTION>

                                                                        Due in                              December 31,
                                          -----------------------------------------------------------------         1996
                                         6 Months    6 Months  1 to     3 to 5  5 to 10 10 to 20    Over 20      Balance
                                          or Less   to 1 Year 3 Years    Years   Years    Years      Years   Outstanding
                                          --------  --------- --------  ---------------  --------   -------  -----------
<S>                                       <C>       <C>       <C>       <C>    <C>       <C>        <C>      <C>
                                 (In Thousands)

Adjustable-rate mortgage-backed securities:
  Federal Home Loan
   Mortgage Corporation..................    $---     $    --- $   --- $    --- $   ---     ---   $   847     $    847
  Federal National
   Mortgage Association..................     ---          ---     ---      ---     ---     ---     4,542        4,542
  Resolution Trust Corporation...........     ---          ---     ---      ---     ---     ---       561          561
                                            -----      -------   -----    ----- -------   -----    ------    ---------

     Total adjustable-rate...............     ---          ---     ---      ---     ---     ---     5,950        5,950
                                            -----      -------  ------    ----- -------   -----    ------     --------

Fixed-rate mortgage-backed securities:
  Federal Home Loan
   Mortgage Corporation..................     432        1,404   4,920    2,689     ---     ---       ---        9,445
  Federal National
   Mortgage Association..................     ---          ---     ---      ---   1,982   1,977       ---        3,959
  Government National
   Mortgage Corporation..................     ---          ---     ---      ---     ---   6,983     2,013        8,996
                                           ------     ---------------- ----------------  ------   -------    ---------
     Total fixed-rate....................     432        1,404   4,920    2,689   1,982   8,960     2,013       22,400
                                            -----       ------ -------   ------  ------  ------   -------     --------

Total mortgage-backed
 securities..............................    $432       $1,404  $4,920   $2,689  $1,982  $8,960    $7,963      $28,350
                                             ====       ======  ======   ======  ======  ======    ======      =======

</TABLE>

                                       11

<PAGE>



Originations, Purchases and Sales of Loans and Mortgage-Backed Securities

         As described above, the Association originates real estate loans
through marketing efforts, the Association's customer base, walk-in customers,
and referrals from real estate brokers and builders. The Association originates
both adjustable-rate and fixed-rate loans. Its ability to originate loans is
dependent upon the relative customer demand for fixed-rate or ARM loans in the
origination market, which is affected by the term structure (short-term compared
to long-term) of interest rates as well as the current and expected future level
of interest rates.

         The Association purchases loans, to the extent favorable opportunities
arise, on a selected basis, predominantly in multi-family real estate loans and,
to a more limited extent, in small commercial real estate loans and FmHA
guaranteed loan participations. Generally, the Association's purchased loans
meet the criteria established by the Association for the loans it originates.

         During fiscal 1996, the Association recorded gains of $45,000 from the
sale of mortgage-backed securities. During fiscal 1995, the Association recorded
no gains or losses from the sale of loans and mortgage-backed securities. At
December 31, 1996, the Association had no commitments to sell loans.

         The Association had no loans serviced for others as of December 31,
1996, and $18.4 million in loans serviced by others at that date.

                                       12

<PAGE>



         The following table sets forth the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                      ---------------------------------------
                                                                         1996           1995           1994
                                                                      ---------       ---------      --------
<S>                                                                   <C>             <C>            <C>
                                                                                  (In Thousands)
Originations by Type:
 Adjustable-rate:
  Real estate - one- to four-family...........................         $ 6,469         $ 4,462        $ 6,905
                - construction................................             841           1,450          3,191
                                                                       -------         -------        -------
         Total adjustable-rate................................           7,310           5,912         10,096
                                                                       -------         -------        -------
 Fixed-rate:
  Real estate - one- to four-family...........................           7,445           4,333          5,112
                - construction................................             883             134          1,580
  Consumer and other loans....................................           3,901           4,112          3,811
                                                                      --------         -------        -------
         Total fixed-rate.....................................          12,229           8,579         10,503
                                                                      --------         -------        -------

         Total loans originated(1)............................          19,539          14,491         20,599
                                                                       -------         -------        -------

Purchases:
  Real estate - commercial/multi-family.......................           3,434           4,261          2,495
  Consumer and other loans....................................           2,846           1,052            ---
  Mortgage-backed securities..................................           4,051             ---          6,241
                                                                      --------       ---------        -------
         Total purchased......................................          10,331           5,313          8,736
                                                                      --------         -------        -------

Sales:
  Real estate - one- to four-family...........................             ---              95            520
  Mortgage-backed securities..................................           1,285             ---            ---
                                                                      --------       ---------       --------
  Total sales ................................................           1,285              95            520
                                                                      --------        --------        -------

Principal repayments..........................................          21,375          18,198         23,378
                                                                      --------         -------        -------
(Decrease) in other items, net................................          (4,463)         (1,462)        (1,532)
                                                                      --------         -------        -------

         Net increase.........................................         $ 2,747         $    49        $ 3,905
                                                                       =======         =======        =======

</TABLE>
-----------
(1)  $ 4,104,000, $1,285,000 and $1,177,000 of these originations for the years
     ended December 31, 1996, 1995 and 1994, respectively, were to refinance
     existing loans held by the Association.


                                       13

<PAGE>



Asset Quality

         When a borrower fails to make a required payment on a loan, the
Association attempts to cause the delinquency to be cured by contacting the
borrower. In the case of residential loans, a late notice is sent 15 days after
the due date. If the delinquency is not cured by the 30th day, contact with the
borrower is made by phone. Additional written and verbal contacts are made with
the borrower to the extent the borrower appears to be cooperative. If not, the
Association will send a 30-day default letter and, once that period elapses,
usually institutes appropriate action to foreclose on the property. Interest
income on loans at this point is reduced by the full amount of accrued and
uncollected interest. If foreclosed, the property is sold at public auction and
may be purchased by the Association. Delinquent consumer loans are handled in a
generally similar manner, except that initial contacts are made when the payment
is 10 days past due and telephone contact begins when a loan is 25 days past
due. If these efforts fail to bring the loan current, appropriate action may be
taken to collect any loan payment that remains delinquent. The Association's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Iowa consumer protection laws.


                                       14

<PAGE>



         Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at December 31, 1996 and 1995. The amounts
presented represent the total remaining principal balances of the related loans,
rather than the actual payment amounts which are overdue. Percentages are
exclusive of mortgage-backed securities.
<TABLE>
<CAPTION>
                                                                   Real Estate
                                            ----------------------------------------------------------
                                              One- to four-family           Commercial/Multi-Family
                                            ------------------------     -----------------------------
                                            Number   Amount  Percent     Number     Amount     Percent
                                            ------   ------  -------     ------     ------     -------
<S>                                         <C>      <C>     <C>         <C>        <C>        <C>
                                                            (Dollars in Thousands)
Loans delinquent for:

December 31, 1996:
 30-59 days..........................         23       $263     .42%        ---      $ ---        ---%
 60-89 days..........................         11        399      .63        ---        ---        ---
 90 days and over....................          7        245      .38          3        874       8.43
                                              --       ----    -----        ---       ----       ----
     Total...........................         41       $907     1.43%         3       $874       8.43%
                                              ==       ====     ====        ===       ====       ====


December 31, 1995:
 30-59 days..........................         30       $380         .61%    ---      $ ---        ---%
 60-89 days..........................         21        568         .92     ---        ---        ---
 90 days and over....................          3         51         .09     ---        ---        ---
                                              --      -----        ----     ---       ----        ---
     Total...........................         54       $999        1.62%    ---       $---        ---%
                                              ==       ====        ====     ===       ====        ===




                                                  Consumer and Other                 Total
                                             -----------------------------  --------------------------
                                             Number    Amount      Percent  Number   Amount    Percent
                                             ------    ------      -------  ------   ------    -------
<S>                                          <C>       <C>         <C>      <C>      <C>       <C>
                                                                (Dollars in Thousands)
Loans delinquent for:

December 31, 1996:
 30-59 days..........................           8        $49         .55%     31     $   312      .37%
 60-89 days..........................         ---        ---         ---      11         399      .48
 90 days and over....................           1          1         .01      11       1,120     1.35
                                               --       ----         ---     ---      ------     ----
     Total...........................           9        $50         .56%     53      $1,831     2.20%
                                              ===        ===         ===     ===      ======     ====


December 31, 1995:
 30-59 days..........................           5       $ 20         .31%     35      $  400      .52%
 60-89 days..........................           1          1         .02      22         569      .74
 90 days and over....................         ---        ---         ---       3          51      .06
                                              ---       ----         ---     ---     -------     ----
     Total...........................           6       $ 21         .33%     60      $1,020     1.32%
                                              ===       ====         ===     ===      ======     ====
</TABLE>


                                       15

<PAGE>



         Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Association's loan portfolio at the
dates indicated. Loans are placed on non-accrual status when the collection of
principal and/or interest become doubtful. As a matter of policy, the
Association does not accrue interest on loans past due 90 days or more. For all
periods presented, the Association has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Real estate
owned includes assets acquired in settlement of loans, and reflect the lower of
cost or fair value.
<TABLE>
<CAPTION>
                                                                    December 31,
                                                       ----------------------------------
                                                         1996          1995         1994
                                                       -------        ------       ------
<S>                                                    <C>            <C>          <C>
                                                              (Dollars in Thousands)
Non-accruing loans:
  One- to four-family............................       $  245         $  51        $ 164
  Commercial/multi-family real estate............          874           ---          ---
  Consumer and other.............................            1           ---          ---
                                                       -------         -----        -----
     Total.......................................        1,120            51          164
                                                       -------         -----        -----

Real estate owned:
  One- to four-family............................           12            28           20
  Commercial/multi-family real estate............          ---           ---          274
  Residential land...............................          ---             5            5
                                                       -------         -----        -----
     Total.......................................           12            33          299
                                                       -------         -----        -----

Total non-performing assets......................       $1,132         $  84        $ 463
                                                       =======         =====        =====
Total as a percentage of total assets............         .83%          .06%         .35%
                                                          ===           ===          ===
</TABLE>

         For the year ended December 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms totalled $103,000. The amount that was included in interest
income on such loans was $56,000 for the year ended December 31, 1996.

         The Company's ratio of non-performing assets to total assets increased
to .83% at December 31, 1996 from .06% at December 31, 1995. Total
non-performing assets increased $1,048,000 resulting primarily from an $874,000
increase in non-accruing commercial/multi-family real estate loans as a result
of three loans becoming more than 90 days delinquent. The largest of the three
loans is a participation loan, which totaled $476,000 at December 31, 1996 and
is secured by a 104 unit apartment complex in Madison, Wisconsin. The
Association owns approximately 17% of a $2.8 million loan. The other two loans
are participation loans to one borrower, which totaled approximately $398,000 at
December 31, 1996 and are secured by a 96-unit apartment complex in Madison,
Wisconsin. The Association owns approximately 8% of a $5.1 million loan. All
three loans are in the foreclosure process, however the foreclosure has been
halted on the first loan as the borrower has filed bankruptcy. It is unknown how
long the foreclosure process will be postponed; however, the Association
believes there is adequate collateral in the properties to minimize the losses
on disposition.

         Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1996 there was also an aggregate of
$1,287,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers or the cash flows of the
security properties have caused management to have doubts as to the ability of
the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such items in the non-performing asset categories.
See "Classified Assets" for a discussion of the loans in this category.

         Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as

                                       16

<PAGE>



"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" by
management.

         When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.

         In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
Classified assets (including those considered to be "special mention") of the
Association at December 31, 1996, 1995 and 1994 were as follows:



                                                    December 31,
                              --------------------------------------------------
                                      1996              1995              1994
                              --------------------------------------------------

Special Mention...............    $  876,000          $302,000        $  357,000
Substandard...................     1,543,000           455,000           749,000
Doubtful......................           ---               ---               ---
Loss..........................           ---               ---            22,000
                                  ----------         ---------        ----------

  Total classified assets.....    $2,419,000          $757,000        $1,128,000
                                  ==========          ========        ==========


         The increase in loans designated "special mention" from 1995 to 1996
was primarily the result of including one commercial/multi-family loan
participation amounting to $492,000 which is secured by a 68-unit congregate
care facility in Cedar Rapids, Iowa. The loan has been designated "special
mention" since several mechanics liens have been filed on the property. Despite
the filing of such liens, the loan payments were current as of December 31,
1996.

         The increase in loans designated "substandard" from 1995 to 1996 was
primarily the result of the three commercial/multi-family loans discussed under
"- Asset Quality - Non-Performing Assets."

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its 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 among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Although management believes it
uses the best information available to make such determinations, future
adjustments to reserves may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations. At December 31, 1996, the Association had an
allowance for loan losses of $686,000. See also Notes 1 and 4 of the Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparison of Years Ended
December 31, 1996 and 1995 - Provision for Losses on Loans" in the Annual
Report.


                                       17

<PAGE>



         The following table sets forth an analysis of the Association's
allowance for loan losses at the dates indicated.


                                                      Year Ended December 31,
                                                     ------------------------
                                                      1996     1995     1994
                                                     -----    ------   ------
                                                       (Dollars in Thousands)

Balance at beginning of period...................    $ 676    $  650   $  652
                                                     -----    ------   ------

Charge-offs:
 One- to four-family.............................      (37)      (22)     (10)
 Commercial/Multi-family.........................      ---       ---      (35)
 Consumer and other..............................       (1)      ---      ---
                                                     -----    ------   ------
                                                       (38)      (22)     (45)
                                                     -----    ------   ------

Recoveries:
  One- to four-family............................      ---       ---        1
                                                     -----    ------   ------
                                                       ---       ---        1
                                                     -----    ------   ------

Net (charge-offs) recoveries.....................      (38)      (22)     (44)
                                                     -----    ------   ------
Additions charged to operations..................       48        48       42
                                                     -----    ------   ------
Balance at end of period.........................    $ 686    $  676   $  650
                                                     =====    ======   ======

Ratio of net charge-offs (recoveries) during the
 period to average loans, excluding mortgage-
 backed securities outstanding during the period.     .05%      .03%     .06%
                                                     ====      ====     ====

Allowance for loan losses to non-performing
 loans at end of period..........................   61.25% 1,325.49%  396.34%

Allowance for loan losses to total loans,
 excluding mortgage-backed securities
 at end of period................................     .82%      .87%     .90%



                                       18

<PAGE>



         The distribution of the Association's allowance for losses on loans at
the dates indicated is summarized as follows:


                                                December 31,
                              --------------------------------------------------
                                   1996              1995              1994
                              ---------------- ----------------- ---------------
                                      Percent           Percent          Percent
                                      of Loans         of Loans         of Loans
                                      in Each           in Each         in Each
                                     Category          Category         Category
                                     to Total          to Total         to Total
                              Amount   Loans   Amount   Loans    Amount   Loans
                              ------ --------  ------  --------  ------ --------
                                             (Dollars in Thousands)

One- to four-family..........  $225    75.9%    $ 199    80.0%    $ 221   85.5%
Commercial/multi-family
 real estate.................   246    12.4        47    10.1        55    5.5
Construction or development..     2     1.0         3     1.5         6    3.3
Consumer and other...........    60    10.7        66     8.4        42    5.7
Unallocated..................   153    N/A(1)     361    N/A(1)     326   N/A(1)
                              -----   ------    -----   -----     -----  -----
     Total...................  $686   100.00%   $ 676   100.0%    $ 650  100.0%
                               ====   ======    =====   =====     =====  =====


(1)  Not applicable.


Investment Activities

         Midwest Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Association
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. For December 1996, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 9.78%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report and "Regulation - Liquidity."

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

         Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the
Association's asset/liability management policies, investment quality and
marketability, liquidity needs and performance objectives.

         At December 31, 1996, Midwest Federal's interest-bearing deposits with
banks totalled $3.1 million, or 2.3% of total assets, and its investment
securities totalled $16.5 million, or 12.1% of total assets. As of such date,
the Association also had a $2.0 million investment in FHLBank stock, satisfying
its requirement for membership in the FHLBank of Des Moines. It is the
Association's general policy to purchase investment securities which are U.S.
Government securities and federal agency obligations and other issues that are
rated investment grade or have credit enhancements. At December 31, 1996, the
average term to maturity or repricing of the investment securities

                                       19

<PAGE>



portfolio was 11.6 years. However, most of the securities have call features,
and if called, the remaining term would be 4 months. See also "- Mortgage-Backed
Securities" and Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report.

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

<TABLE>
<CAPTION>
                                                                            December 31,
                                                        ------------------------------------------------------
                                                               1996             1995              1994
                                                        ------------------------------------------------------
                                                           Book    % of    Book      % of     Book    % of
                                                          Value    Total   Value     Total    Value   Total
                                                        ------------------------------------------------------
<S>                                                     <C>        <C>     <C>       <C>     <C>       <C>
                                                                        (Dollars in Thousands)

Interest-bearing deposits with banks..............      $ 3,127    100.0%  $ 1,861   100.0%  $ 2,813   100.0%
                                                        =======    =====   =======   =====   =======   =====

Investment securities:
 U.S. Government securities.......................    $     ---      ---%  $ 1,007     4.7   $ 4,061    23.4%
 Federal agency obligations.......................       16,535     86.1    18,545    86.2    11,153    64.2
 Other marketable equity securities(1)............          710      3.7       ---     ---       237     1.3
                                                       --------    -------  ------   -----   -------   -----

     Subtotal.....................................       17,245     89.8    19,552    90.9    15,451    88.9

FHLBank stock.....................................        1,960     10.2     1,960     9.1     1,921    11.1
                                                       --------   ------   -------   -----   -------   -----

     Total investment securities and FHLBank
      stock.......................................      $19,205    100.0%  $21,512   100.0%  $17,372   100.0%
                                                        =======    =====   =======   =====   =======   =====

Average remaining life or term to repricing,
 excluding FHLBank stock and other
 marketable equity securities (assuming call
 feature are exercised)...........................          0.3 years        0.8 years          2.3 years
</TABLE>
(1)  Represents primarily investments in common stock of non-related thrift
     institutions.


         The composition and maturities, assuming the call features are not
exercised, of the investment securities portfolio, excluding FHLBank of Des
Moines stock and other marketable equity securities, are indicated in the
following table.
<TABLE>
<CAPTION>
                                                                        December 31, 1996
                                                     ---------------------------------------------------------------
                                                     1 to 5         5 to 10      After 10         Total Investment
                                                      Years          Years        Years              Securities
                                                     -------         ------       -------       --------------------
                                                      Book           Book         Book          Book        Market
                                                      Value          Value        Value         Value        Value
                                                     -------         ------       -------       -------      -------
<S>                                                  <C>            <C>         <C>            <C>         <C>
                                                                     (Dollars in Thousands)

U.S. Government securities..................        $    ---       $    ---     $     ---      $    ---    $     ---
Federal agency obligations..................           2,456          1,977        12,102        16,535       16,510
                                                     -------         ------       -------       -------      -------

Total investment securities.................          $2,456         $1,977       $12,102       $16,535      $16,510
                                                      ======         ======       =======       =======      =======

Weighted average yield......................           5.44%          7.30%         7.34%         7.06%

</TABLE>
                                       20

<PAGE>



         The Association's investment securities portfolio at December 31, 1996
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Association's retained earnings,
excluding securities issued by the United States Government, or its agencies.

         The Association's investment securities portfolio is managed in
accordance with a written investment policy adopted by the Board of Directors.
Investments may be made by the Association's officers within specified limits
and must be approved in advance by the Board of Directors for transactions over
certain limits. For information regarding the carrying and market values of
Midwest Federal's investment securities portfolio, see Note 2 of the Notes to
Consolidated Financial Statements in the Annual Report.

Sources of Funds

         General. The Association's primary sources of funds are deposits,
amortization and prepayment of loan principal (including mortgage-backed
securities), sales or maturities of investment securities, mortgage-backed
securities and short-term investments, borrowings, and funds provided from
operations.

         Borrowings, predominantly from the FHLBank of Des Moines, may be used
to compensate for seasonal reductions in deposits or deposit inflows at less
than projected levels, and have been used on a longer-term basis to support
lending activities. See "--Borrowings."

         Deposits. Midwest Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Association's deposits consist of
passbook accounts, NOW accounts, and money market and certificate accounts. The
Association relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Midwest Federal solicits
deposits from its market area only, and does not use brokers to obtain deposits.

         The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Association has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. The Association has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Association manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, the Association believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of the Association to attract and maintain
certificate deposits, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.

         On December 15, 1995, the Association sold all of the deposits of its
Keokuk branch, totalling $7.7 million, terminated the office rental agreement,
and closed the branch office.


                                       21

<PAGE>



         The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association for the periods
indicated.

<TABLE>
<CAPTION>
                                                                Year Ended  December 31,
                                       ---------------------------------------------------------------------------------
                                                  1996                        1995                    1994
                                       ---------------------------------------------------------------------------------
                                                        Percent                        Percent                  Percent
                                          Amount       of Total      Amount           of Total  Amount          of Total
                                       ---------------------------------------------------------------------------------
<S>                                    <C>             <C>           <C>              <C>       <C>             <C>
                                                                 (Dollars in Thousands)
Interest Rate Range:

Money Market Deposit
 Accounts 2.75-4.00%................    $  13,590         13.3%     $ 13,282            13.1%  $ 16,736            15.7%
Passbook Accounts 2.75-3.00%.               8,609           8.5        8,887             8.8      9,812             9.2
NOW Accounts 1.50-2.00%.............        6,738           6.6        7,841             7.8      7,185             6.7
Non-interest checking accounts......          399            .4          351              .3        304              .3
                                       ----------        ------    ---------          ------ ----------           -----

Total Non-Certificates..............       29,336          28.8       30,361            30.0     34,037            31.9
                                        ---------         -----     --------           -----   --------           -----

Certificates:

 3.00 - 3.99%.......................          ---           ---          ---           ---        8,152             7.6
 4.00 - 4.99%.......................        9,133           9.0       20,609            20.3     46,735            43.7
 5.00 - 5.99%.......................       49,464          48.5       40,357            39.8     10,860            10.2
 6.00 - 6.99%.......................       10,466          10.2        6,564             6.5      2,328             2.2
 7.00 - 7.99%.......................        3,235           3.2        3,161             3.1      4,233             3.9
 8.00 - 8.99%.......................          284            .3          282              .3        549              .5
                                       ----------        ------   ----------           ----- ----------          ------

Total Certificates..................       72,582          71.2       70,973            70.0     72,857            68.1
                                        ---------         -----    ---------           -----  ---------           -----
Total Deposits......................     $101,918        100.0%     $101,334           100.0%  $106,894           100.0%
                                         ========        =====      ========           =====   ========           =====
</TABLE>

         The following table sets forth the savings flows at the Association
during the periods indicated. Net deposits (withdrawals) refers to the amount of
deposits during a period less the amount of withdrawals during the period.
Deposit flows at savings institutions may also be influenced by external factors
such as governmental credit policies and, particularly in recent periods,
depositors' perceptions of the adequacy of federal insurance of accounts.


                                              Year Ended December 31,
                                   -----------------------------------------
                                      1996            1995            1994
                                   ---------       ---------        --------
                                              (Dollars in Thousands)

Opening balance................     $101,334        $106,894        $106,723
Deposits sold..................          ---          (7,709)            ---
Net deposits (withdrawals).....       (3,260)         (1,558)         (3,083)
Interest credited..............        3,844           3,707           3,254
                                   ---------       ---------        --------

Ending balance.................     $101,918        $101,334        $106,894
                                    ========        ========        ========

Net increase (decrease)........    $     584       $  (5,560)       $    171
                                   =========        ========        ========

Percent increase (decrease)....        .58 %         (5.20)%            .16%
                                       ===           =====              ===



                                       22

<PAGE>



         The following table shows rate and maturity information for the
Association's certificates of deposit as of December 31, 1996.

<TABLE>
<CAPTION>
                                          4.00-       5.00-       6.00-      7.00-       8.00-                    Percent
                                          4.99%       5.99%       6.99%      7.99%       8.99%       Total       of Total
                                         ------      ------       -----      -----       -----      -------      --------
<S>                                      <C>         <C>          <C>        <C>         <C>        <C>          <C>
                                                                   (Dollars in Thousands)
Certificate accounts maturing
 in quarter ending           :

March 31, 1997.....................      $3,727     $12,693      $  600     $   16       $ 134      $17,170            23.7%
June 30, 1997......................       1,735       9,548         740        ---         ---       12,023            16.6
September 30, 1997.................         739       6,156         374         77         ---        7,346            10.1
December 31, 1997..................       1,089       6,262       1,394        475         ---        9,220            12.7
March 31, 1998.....................       1,090       2,987         602        153         ---        4,832             6.7
June 30, 1998......................         619       3,414          46          9         ---        4,088             5.6
September 30, 1998.................          13       2,742         389        ---          49        3,193             4.4
December 31, 1998..................          67       2,093         395          9           9        2,573             3.5
March 31, 1999.....................          54       1,639         162        ---           4        1,859             2.6
June 30, 1999......................         ---         892       3,366        ---         ---        4,258             5.9
September 30, 1999.................         ---         212       1,849        ---          65        2,126             2.9
December 31, 1999..................         ---         249         222      2,415          23        2,909             4.0
Thereafter.........................         ---         577         327         81         ---          985             1.3
                                       --------    --------    --------    -------      ------     --------           -----

     Total.........................      $9,133     $49,464     $10,466     $3,235        $284      $72,582           100.0%
                                         ======     =======     =======     ======        ====      =======           =====

     Percent of total..............       12.6%       68.1%       14.4%       4.5%        0.4%       100.0%
                                          ====        ====        ====        ===         ===        =====
</TABLE>

         The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 1996.
<TABLE>
<CAPTION>
                                                                       Maturity
                                                   -------------------------------------------------
                                                                 Over          Over
                                                   3 Months     3 to 6       6 to 12         Over
                                                    or Less     Months        Months       12 months       Total
                                                   --------   ---------      --------      ---------      --------

<S>                                                <C>        <C>            <C>           <C>            <C>
                                                                         (In Thousands)

Certificates of deposit less
 than $100,000..............................        $16,106     $11,493       $16,466       $25,315        $69,380

Certificates of deposit of
 $100,000 or more...........................          1,064         530           100         1,508          3,202
                                                   --------   ---------      --------      --------       --------

Total certificates of deposit...............        $17,170     $12,023       $16,566       $26,823        $72,582
                                                    =======     =======       =======       =======        =======
</TABLE>

         From time to time the Association has had public funds. The Association
is required to pledge collateral against such funds equal to 110% of such funds.
The Association had $357,000, $211,000, and no such funds on deposit at December
31, 1996, 1995 and 1994, respectively.

         Borrowings. Although deposits are the Association's primary source of
funds, the Association's policy has been to utilize borrowings when they are a
less costly source of funds or can be invested at a positive rate of return. In
addition, the Association has relied upon selected borrowings for short-term
liquidity needs.

                                       23

<PAGE>



         Midwest Federal may obtain advances from the FHLBank of Des Moines upon
the security of its capital stock of the FHLBank of Des Moines and certain of
its mortgage loans and investments. Such advances may be made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. At December 31, 1996, the Association had $24.0 million of
fixed-rate advances from the FHLBank of Des Moines. The Association also had a
$3.0 million open line of credit with the FHLBank, which expired in December
1996. The Association may renew the line of credit at any time. Although the
Association has also used securities sold under agreements to repurchase in the
past, no such borrowings have been made during the last three years.

         The following table sets forth the maximum month-end balance and
average balance of FHLBank advances at and for the dates indicated.



                                  At and For the Year Ended December 31,
                              --------------------------------------------
                                1996            1995                1994
                              -------         --------             -------
                                          (In Thousands)
Maximum Balance:
FHLBank advances.........     $28,000         $20,500              $16,000

Average Balance:
FHLBank advances.........     $25,256         $16,596              $13,725


         The following table sets forth certain information as to the
Association's FHLBank advances at the dates indicated.


                                                        December 31,
                                             ---------------------------------
                                              1996          1995         1994
                                            ----------------------------------
                                                 (Dollars in Thousands)

FHLBank advances........................... $24,000       $20,500      $14,000
                                            -------       -------      -------

     Total borrowings...................... $24,000       $20,500      $14,000
                                            =======       =======      =======

Weighted average interest rate during the
 period of FHLBank advances................   6.00%         5.89%        5.15%

Weighted average interest rate at end of
 period of FHLBank advances................   5.87%         6.03%        5.44%


Subsidiary and Other Activities

         As a federally chartered savings and loan association, Midwest Federal
is permitted by OTS regulations to invest up to 2% of its assets, or $2.7
million at December 31, 1996, in the stock of, or unsecured loans to, service
corporation subsidiaries. As of such date, the net book value of Midwest
Federal's investment in and unsecured loans to its service corporation was
$26,557. Midwest Federal may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes.

         Midwest Federal has one active wholly owned subsidiary, Midwest
Financial Products, Inc. ("MFP"), engaged in the sale of tax-deferred annuities
and other financial products. For the year ended December 31, 1996, MFP had net
earnings of $14,284. MFP has an expense-sharing agreement with Midwest Federal
whereby MFP reimburses Midwest Federal for its share of common expenses such as
personnel and occupancy expenses. This expense reimbursement is paid quarterly.


                                       24

<PAGE>



         At December 31, 1996, the Association had an equity investment in MFP
of $26,557 (equal to its $100 capital plus $26,457 retained earnings), with no
loans outstanding.

Regulation

         General. Midwest Federal is a federally chartered stock savings and
loan association, the deposits of which are insured by the FDIC up to applicable
limits. Such insurance is backed by the full faith and credit of the United
States Government. Accordingly, Midwest Federal is subject to broad federal
regulation and oversight extending to all its operations. The Association is a
member of the FHLBank of Des Moines and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As the savings and loan holding company of Midwest Federal, the Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations. The Association is a member of the Savings Association
Insurance Fund ("SAIF") of the FDIC. As a result, the FDIC has certain
regulatory and examination authority over Midwest Federal.

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

         Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Midwest Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. Under agency
scheduling guidelines, it is likely that another examination will be initiated
in the near future. When these examinations are conducted by the OTS and the
FDIC, the examiners may require Midwest Federal to provide for higher general or
specific loan loss reserves. All savings associations are subject to a
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. Midwest Federal's OTS assessment for the fiscal
year ended December 31, 1996, was $41,962. The last regular examinations of the
Association by the OTS and the FDIC were as of March 11, 1996 and November 30,
1991, respectively.

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

         In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. As of December 31, 1996, Midwest Federal is in compliance
with the noted restrictions.

         The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1996, the Association's lending
limit under this restriction was approximately $1.3 million. As of December 31,
1996, Midwest Federal is in compliance with the loans-to-one-borrower
limitation.

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


                                       25

<PAGE>



         Insurance of Accounts and Regulation by the FDIC. Midwest Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the Bank Insurance Fund (the "BIF").
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
For the first six months of 1995, the assessment schedule for Bank Insurance
Fund ("BIF") members and SAIF members ranged from .23% to .31% of deposits.

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

         As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27%. The SAIF rates, however, were not adjusted. At the time
the FDIC revised the BIF premium schedule, it noted that, absent legislative
action (as discussed below), the SAIF would not attain its designated reserve
ratio until the year 2002. As a result, SAIF insured members would continue to
be generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.

         In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$670,861 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected Midwest Federal's results
of operations for the year ended December 31, 1996. As a result of the special
assessment, Midwest Federal's deposit insurance premiums was reduced to $16,439
for the first quarter of 1997, based upon its current risk classification and
the new assessment schedule for SAIF insured institutions. These premiums are
subject to change in future periods.

         Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980's. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires

                                       26

<PAGE>



assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment will be limited to 20% of the rate imposed on
SAIF assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as Midwest Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC- insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.

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

         The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for this purpose. At December 31,
1996, Midwest Federal had no unamortized purchased mortgage servicing rights
which were required to be deducted from tangible capital. At December 31, 1996,
Midwest Federal had no intangible assets which were subject to these tests.

         The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes and others are excluded from
assets and capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks,
engaged solely in mortgage-banking activities, or engaged in certain other
activities solely as agent for its customers are "includable" subsidiaries that
are consolidated for capital purposes in proportion to the association's level
of ownership, including the assets of includable subsidiaries in which the
association has a minority interest that is not consolidated for purposes of
generally accepted accounting principles ("GAAP"). The Association's subsidiary
is an includable subsidiary.

         At December 31, 1996, the Association had tangible capital of $8.7
million, or 6.4% of adjusted total assets, which is approximately $6.7 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.

         The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of credit card relationships. As a result of the prompt corrective action
provisions discussed below, however, a savings association must maintain a core
capital ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At December
31, 1996, the Association had no intangibles which were subject to these tests.

         At December 31, 1996, the Association had core capital equal to $8.7
million, or 6.4% of adjusted total assets, which is $4.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.

         The OTS risk-based requirement requires savings associations to have
total capital of at least 8.0% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, Midwest
Federal had $686,000 of general loss reserves, which was equal to 1.16% of
risk-weighted assets. As a result, all of such reserves may be used to satisfy
the capital requirement.

                                       27

<PAGE>



         Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Midwest Federal had no
such exclusions from capital and assets at December 31, 1996.

         In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.

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

         On December 31, 1996, the Association had total capital of $9.4 million
(including $8.7 million in core capital and $686,000 in qualifying supplementary
capital) and risk-weighted assets of $59.1 million (and no converted off-balance
sheet assets); or total capital of 15.9% of risk-weighted assets. This amount
was $4.7 million above the 8.0% requirement in effect on that date.

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

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

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


                                       28

<PAGE>



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

         The imposition by the OTS or the FDIC of any of these measures on
Midwest Federal may have a substantial adverse effect on its operations and
profitability. Stockholders of the Company do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.

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

         The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "--Regulatory Capital
Requirements").

         Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. Midwest Federal meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over the
most recent four quarter period.

         Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Holding Company, Midwest Federal will
also be required to give the OTS 30 days' notice prior to declaring any dividend
on its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. See "- Regulatory Capital Requirements."

         The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL rating of 1 or 2, is not of
supervisory concern; and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.


                                       29

<PAGE>



         Liquidity. All savings associations, including Midwest Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Association includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.

         In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 9.8% and a short-term
liquid assets ratio of 2.8%.

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

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

         Qualified Thrift Lender Test. All savings associations, including the
Association, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which consists of
total assets less intangibles, properties used to conduct the savings
association's business and liquid assets not exceeding 20% of total assets) in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 770(a)(19) of
the Internal Revenue Code. Under either test such assets primarily consist of
residential housing related loans and investments. At December 31, 1996, the
Association met the test and has always met the test since its effectiveness.

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

Community Reinvestment Act

         Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types

                                       30

<PAGE>



of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of Midwest Federal, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by Midwest Federal. An unsatisfactory rating may be used as the
basis for the denial of an application by the OTS.

         The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
last examined for CRA compliance in 1995 and received a rating of satisfactory.

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

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

         Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.

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

         If the Association fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."

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

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

         Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions.

                                       31

<PAGE>



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

         Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At December 31, 1996, the
Association was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "- Liquidity."

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

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

         As a member, Midwest Federal is required to purchase and maintain stock
in the FHLBank of Des Moines. At December 31, 1996, Midwest Federal had $2.0
million in FHLBank stock, which was in compliance with this requirement. In the
past years, the Association has received substantial dividends on its FHLBank
stock. Over the past five calendar years such dividends have averaged 7.93% and
were 7.00% for calendar year 1996.

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

         For the year ended December 31, 1996, dividends paid by the FHLBank of
Des Moines to Midwest Federal totalled $137,192, which constituted a $2,120
decrease from the amount of dividends received in 1995. The $34,482 dividend
received for the quarter ended December 31, 1996 reflects an annualized rate of
7.00%, compared to a rate of 7.25% for calendar 1995.

         Federal and State Taxation.

         Federal Taxation. Savings associations such as the Association that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).

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


                                       32

<PAGE>



         The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction and exclusive of any environmental tax or
minimum tax).

         If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. As of December 31,
1996, at least 60% of the Association's assets were qualifying assets as defined
in the Code. No representation can be made as to whether the Association will
meet the 60% test for subsequent taxable years.

         Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
December 31, 1996, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Association. It is not expected that these
limitations would be a limiting factor in the foreseeable future.

         In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Association, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts such as the Association
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the specific charge-off method for post-1987 tax years.
The legislation also requires thrifts to account for bad debts for federal
income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Company does not believe
that the legislation will have a material impact on the Company or the Bank,
except to the extent that future tax bad debt deductions will be reduced because
the percentage of income method generally provided a larger deduction than the
experience method.

         In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.

         To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, the Association's Excess for tax purposes
totalled approximately $2.8 million.


                                       33

<PAGE>



         The Company, the Association and the Association's subsidiary file
consolidated federal income tax returns on a calendar year basis using the
accrual method of accounting. Savings associations, such as the Association,
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.

         The Association and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns through 1981.
With respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Association) would not result in a deficiency which could have
a material adverse effect on the financial condition of the Association and its
consolidated subsidiaries.

         Iowa Taxation. The Company and the Association's subsidiary file an
Iowa corporation tax return while the Association files the Iowa franchise tax
return, each on a calendar year basis.

         Iowa imposes a franchise tax on the taxable income of both mutual and
stock savings and loan associations. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.

         Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.

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

         Effect of New Accounting Standards.  See Note 1 of the Notes to
Consolidated Financial Statements in the Annual Report.

         SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," will be effective for the Association for
transactions occurring after December 31, 1996, and provides standards for
accounting recognition or derecognition of assets and liabilities. The
Association expects to adopt SFAS 125 when required, and management believes
adoption will not have a material effect on the financial position and results
of operations, nor will adoption require additional capital resources. See Note
1 of the Notes to Consolidated Financial Statements in the Annual Report.

Competition

         Midwest Federal faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other savings institutions, commercial
banks, credit unions and mortgage bankers making loans secured by real estate
located in the Association's market areas. Other savings institutions,
commercial banks and credit unions provide vigorous competition in consumer
lending.


                                       34

<PAGE>



         The Association attracts all of its deposits through its branch
offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from other
savings institutions and commercial banks located in the same communities. The
Association competes for these deposits by offering a variety of deposit
accounts at competitive rates, convenient business hours, and convenient branch
locations with interbranch deposit and withdrawal privileges at each. Automated
teller machine ("ATM") facilities are available at the main office in Burlington
and the Ft. Madison and Wapello branches. The Association also has one off-site
drive-up ATM located at a convenience store in West Burlington. The Association
estimates its share of the savings market in its primary market area to be
approximately 10%.

Executive Officers of the Registrant Who Are Not Directors

         The following information as to the business experience during the last
five years is supplied with respect to executive officers of the Association who
do not serve on the Company's or Association's Board of Directors.

         Thomas A. Jacobs - Mr. Jacobs, age 47, is Senior Vice President in
charge of loan operations for the Association. His primary responsibilities
include overall administration of the Association's lending operations,
including real estate, consumer and commercial lending. Mr. Jacobs joined the
Association in 1984 and served in several capacities in the Association's
lending department prior to being promoted to his present position in 1989.

         Dennis L. Dietzman - Mr. Dietzman, age 47, joined the Association in
1988 as Vice President and marketing and business development manager. Mr.
Dietzman is primarily responsible for planning and directing the Association's
marketing function as well as establishing marketing objectives and programs
designed to promote the growth of the Association. In addition, Mr. Dietzman
serves as managing officer of MFP. Prior to joining Midwest Federal, Mr.
Dietzman served as a Vice President, Consumer Loan Manager and Marketing
Director of Hawkeye Bank & Trust for 15 years.

         Michele L. Schnicker - Ms. Schnicker, age 36, has been Vice President
in charge of data processing and customer service operations with the
Association since 1989. In this capacity, she is responsible for the overall
administration of operations and data processing of the Association. Ms.
Schnicker has been employed by the Association since 1980.

Employees

         At December 31, 1996, the Association and its subsidiaries had a total
of 38 employees, including 2 part-time employees. The Association's employees
are not represented by any collective bargaining group.
Management considers its employee relations to be good.

Item 2.  Properties

         The following table sets forth information relating to each of the
Association's current offices, all of which are owned by the Association. The
total net book value of the Association's premises and equipment at December 31,
1996 was $2.4 million.


                                       35

<PAGE>




                              Date         Owned or           Net Book Value
         Location           Acquired        Leased         at December 31, 1996
-------------------------------------------------------------------------------
                                                             (In Thousands)
Main Office:

3225 Division Street          1974           Owned               $1,281
Burlington, IA

Branch Offices:

323 Jefferson Street          1974           Owned                  184(1)
Burlington, IA

926 Avenue G                  1975           Owned                  251
Ft. Madison IA

Highway 61                    1974           Owned                   34
Wapello, IA

------------------
(1)    Includes 319 Jefferson Street.


         The Association maintains depositor and borrower customer files on an
on-line basis with the Financial Information Trust, Des Moines, Iowa. The net
book value of the data processing and computer equipment utilized by the
Association at December 31, 1996 was $244,000.

Item 3.  Legal Proceedings

         Midwest Federal and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Midwest Federal in the proceedings, that the resolution of these
proceedings should not have a material effect on Midwest Federal's consolidated
results of operations.

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

         No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.

                                       36

<PAGE>



                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters

         Page 40 of the Annual Report is herein incorporated by reference.

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

         Pages 4 through 15 of the Annual Report is herein incorporated by
         reference.

Item 7.  Financial Statements

         (a) Financial Statements

         The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.

Annual Report Section                                   Pages in Annual Report

Common Stock and Related Information                            40

Selected Financial and Other Data                                2

Management's Discussion and Analysis                             4
 of Financial Condition and Results
 of Operations

Independent Auditors' Report                                    17

Consolidated Balance Sheets as of                               18
  December 31, 1996 and 1995

Consolidated Statements of Operations                           19
  for Years Ended December 31, 1996,
  1995 and 1994

Consolidated Statements of Stockholders'                        20
 Equity for Years Ended December 31,
 1996, 1995 and 1994

Consolidated Statements of Cash Flows                           21
 for Years Ended December 31, 1996,
 1995 and 1994

Notes to Consolidated Financial                                 22
 Statements

         With the exception of the aforementioned information, the Corporation's
Annual Report to Stockholders for the year ended December 31, 1996 is not deemed
filed as part of this Annual Report on Form 10-KSB.


                                       37

<PAGE>



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

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


                                    PART III


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

         Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.

Item 10.  Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.

Item 11.  Security Ownership of Certain Beneficial Owners and
            Management

         Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

Item 12.  Certain Relationships and Related Transactions

         Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.

                                       38

<PAGE>



                                     PART IV

Item 13.  Exhibits and Reports on Form 8-K

         (a)  Exhibits
<TABLE>
<CAPTION>
                                                                                                  Reference to Prior
Regulation                                                                                        filing or Exhibit
S-K Exhibit                                                                                        Number Attached
  Number                                          Document                                             Hereto
-----------       ---------------------------------------------------------------------------     ------------------
<S>               <C>                                                                             <C>
2                 Plan of acquisition, reorganization, arrangement, liquidation or succession              None
3(i)              Articles of Incorporation                                                                  *
3(ii)             By-Laws                                                                                    *
4                 Instruments defining the rights of security holders, including debentures                  *
9                 Voting Trust Agreement                                                                   None
10                Material contracts:
                    Employment Agreements                                                                   **
                    1992 Stock Option and Incentive Plan                                                   10.1
                    Recognition and Retention Plan and Trust                                                 *
                    Employee Stock Ownership Plan                                                            *
11                Statement re: computation of per share earnings                                          None
13                Annual Report                                                                             13
16                Letter re: change in certifying accountants                                              None
21                Subsidiaries of Registrant                                                                21
22                Published report regarding matters submitted to vote of security holders                 None
23                Consent of Experts and Counsel                                                            23
24                Power of attorney                                                                    Not required
27                Financial Data Schedule                                                                   27
28                Information from reports furnished to state insurance regulatory authorities             None
99                Additional Exhibits                                                                      None
</TABLE>
----------------

*   Filed as exhibit to the Company's Form S-1 registration statement filed on
    August 5, 1992 (File No. 33-50494) pursuant to Section 5 of the Securities
    Act of 1933. All of such previously filed documents are hereby incorporated
    herein by reference in accordance with Item 601 of Regulation S-B.

**  Filed as Exhibit 10 to the Company's Annual Report on Form 10-KSB filed on
    March 30, 1994 (File No. 0-20620). All of such previously filed documents
    are hereby incorporated by reference in accordance with Item 601 of
    Regulation S-B.

         (b)  Reports on Form 8-K

         The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1996.

                                       39

<PAGE>



                                  Exhibit Index



                                                                  Sequential
Exhibit No.                    Document                           Page Number
-----------       ----------------------------------------        -----------
10.1              1992 Stock Option and Incentive Plan
13                Annual Report
21                Subsidiaries of Registrant
23                Consent of KPMG Peat Marwick LLP
27                Financial Data Schedule