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, 1998
                                       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 incorporation             (I.R.S. Employer
               or organization)                          Identification No.)

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: $12.0 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 March 1, 1999, was $11.0 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 1, 1999, there were issued and outstanding  1,098,523 shares of
the Issuer's Common Stock.

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



<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").  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  five retail banking  offices  located in Burlington,
Wapello and Ft.  Madison,  Iowa.  At December  31,  1998,  the Company had total
assets of $162.3 million,  deposits of $106.0 million,  and stockholders' equity
of $12.0 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  and  purchases
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.

     On February 2, 1999,  the Company  entered  into an  Agreement  and Plan of
Merger by and between the Company and Mahaska  Investment  Company  ("Mahaska"),
providing  for the merger of the  Company  with  Mahaska  (the  "Merger").  Upon
consummation  of the Merger,  the  surviving  corporation  of the Merger will be
Mahaska.  The Merger will be  accomplished  through a fixed  exchange of one (1)
share of Mahaska common stock for each share of outstanding  common stock of the
Company. The transaction is intended to qualify as a tax-free reorganization and
be accounted for as a pooling of interests.  The  transaction  is expected to be
completed  in  the  third  quarter  of  1999,  after  customary  regulatory  and
shareholder approvals have been received.

     When used in this Form 10-KSB and in future filings by the Company with the
Securities and Exchange  Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications,  and in oral statements made with
the approval of an  authorized  executive  officer,  the words or phrases  "will
likely   result,"  "are  expected  to,"  "will   continue,"  "is   anticipated,"
"estimate,"   "project"  or  similar   expressions   are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions

                                        2

<PAGE>



in the  Company's  market  area,  changes in  policies by  regulatory  agencies,
fluctuations  in interest rates,  demand for loans in the Company's  market area
and  competition,  that could cause  actual  results to differ  materially  from
historical  earnings and those presently  anticipated or projected.  The Company
wishes  to  caution   readers   not  to  place   undue   reliance  on  any  such
forward-looking  statements  which  speak only as of the date made.  The Company
wishes  to advise  readers  that the  factors  listed  above  could  affect  the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

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

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,
1998,  the  Association's  net loan  and  mortgage-backed  securities  portfolio
totaled $123.5 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,
1998,  the  maximum  amount  which the  Association  could  have lent to any one
borrower and the borrower's related entities was approximately $1.6 million.  At
December 31, 1998, the Association had no loans which exceeded this amount.

     At  December  31,  1998,  the  principal  balance  of the  largest  lending
relationship  with any one  borrower  or group of  related  borrowers,  was $1.3
million and consists of one participation  loan secured by a 192-unit  apartment
building located in Bettendorf,  Iowa. This loan was prepaid in full on February
5,  1999.  The second  largest  lending  relationship  with one  borrower  had a
principal  balance of  $948,000  at  December  31,  1998,  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 third largest lending  relationship with
one  borrower  had a principal  balance of $772,000 at December  31,  1998,  and
consists of two participation  loans, secured by two apartment complexes located
in Madison,  Wisconsin,  one 20-unit and one 23-unit. The fourth largest lending
relationship  with one borrower had a principal  balance of $588,000 at December
31, 1998, and consists of one  participation  loan secured by a 61-unit motel in
Germantown,  Wisconsin. 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, 1998. At December 31, 1998, the  Association  had
no other  loans to one  borrower  or group of  related  borrowers  which  had an
existing balance 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,
                                     -----------------------------------------------------------------------------------------------
                                           1998                1997               1996                1995                1994
                                     ----------------    ----------------   ----------------    ----------------    ----------------
                                     Amount   Percent    Amount   Percent   Amount   Percent    Amount   Percent    Amount   Percent
                                     ------   -------    ------   -------   ------   -------    ------   -------    ------   -------
                                                                             (Dollars in Thousands)
<S>                                 <C>        <C>      <C>        <C>     <C>        <C>      <C>        <C>      <C>        <C>
Real Estate Loans:
------------------
 One- to four-family .............. $71,535    73.39%   $66,549    71.75%  $63,209    75.85%   $61,839    80.03%   $61,849    85.54%
 Commercial/multi-family ..........   9,653     9.90     11,210    12.09    10,363    12.44      7,820    10.12      3,992     5.52
 Construction or development(1) ...   1,863     1.91        818      .88       828      .99      1,151     1.49      2,342     3.24
                                    -------   ------    -------   ------   -------   ------    -------   ------    -------   ------
     Total real estate loans ......  83,051    85.20     78,577    84.72    74,400    89.28     70,810    91.64     68,183    94.30
                                    -------   ------    -------   ------   -------   ------    -------   ------    -------   ------

Consumer and Other Loans:
-------------------------
 Deposit account ..................     317      .33        306      .33       354      .43        383      .50        344      .47
 Automobile .......................   1,332     1.37      1,158     1.25     1,001     1.20      1,033     1.34        810     1.12
 Home equity/home improvement .....   6,394     6.56      5,464     5.89     4,093     4.91      3,886     5.03      2,745     3.80
 Other(2) .........................   6,380     6.54      7,239     7.81     3,484     4.18      1,155     1.49        224      .31
                                    -------   ------    -------   ------   -------   ------    -------   ------    -------   ------
     Total consumer and other loans  14,423    14.80     14,167    15.28     8,932    10.72      6,457     8.36      4,123     5.70
                                    -------   ------    -------   ------   -------   ------    -------   ------    -------   ------
     Total loans ..................  97,474   100.00%    92,744   100.00%   83,332   100.00%    77,267   100.00%    72,306   100.00%
                                              ======              ======             ======              ======              ======

Less:
-----
 Loans in process .................     563                 836              1,274               2,347               1,096
 Deferred fees and discounts.......      83                  64                147                 209                 216
 Allowance for losses .............     480                 568                686                 676                 650
                                    -------             -------            -------             -------             -------
 Total loans receivable, net....... $96,348             $91,276            $81,225             $74,035             $70,344
                                    =======             =======            =======             =======             =======
</TABLE>

----------------
(1)   Consists primarily of residential construction loans.
(2)   Approximately   $6.0   million  and  $7.0   million  of  these  loans  are
      participations guaranteed by the Farmer's Home Administration for 1998 and
      1997, respectively. See "- Consumer and Other Lending."



                                        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,
                                   -------------------------------------------------------------------------------------------------
                                          1998                1997                1996                1995                1994
                                   -----------------    ----------------    ----------------    ----------------    ----------------
                                    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent
                                   -------   -------    ------   -------    ------   -------    ------   -------    ------   -------
                                                                         (Dollars in Thousands)
<S>                                <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
FIXED-RATE LOANS:
 Real estate:
  One- to four-family ..........   $34,819    35.72%   $27,804    29.98%   $26,595    31.91%   $24,218    31.34%   $25,319    35.01%
  Commercial/multi-family ......     1,567     1.61      1,285     1.38      1,230     1.48      1,522     1.97      1,603     2.22
  Construction or development ..       969      .99         --       --         65      .08        274      .36        504      .70
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------
     Total real estate loans ...    37,355    38.32     29,089    31.36     27,890    33.47     26,014    33.67     27,426    37.93
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------
  Consumer and other loans .....     8,397     8.62      7,955     8.58      6,104     7.32      5,332     6.90      4,123     5.70
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------
     Total fixed-rate loans ....    45,752    46.94     37,044    39.94     33,994    40.79     31,346    40.57     31,549    43.63
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------

ADJUSTABLE-RATE LOANS:
 Real estate:
  One- to four-family ..........    36,716    37.67     38,745    41.78     36,614    43.94     37,621    48.69     36,530    50.52
  Commercial/multi-family ......     8,086     8.30      9,925    10.70      9,133    10.96      6,298     8.15      2,389     3.31
  Construction or development ..       894      .91        818      .88        763      .92        877     1.13      1,838     2.54
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------
     Total adjustable-rate
        real estate loans ......    45,696    46.88     49,488    53.36     46,510    55.82     44,796    57.97     40,757    56.37
  Consumer and other loans .....     6,026     6.18      6,212     6.70      2,828     3.39      1,125     1.46         --       --
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------
     Total adjustable-rate loans    51,722    53.06     55,700    60.06     49,338    59.21     45,921    59.43     40,757    56.37
                                   -------   ------    -------   ------    -------   ------    -------   ------    -------   ------

     Total loans ...............    97,474   100.00%    92,744   100.00%    83,332   100.00%    77,267   100.00%    72,306   100.00%
                                             ======              ======              ======              ======              ======

LESS:
  Loans in process .............       563                 836               1,274               2,347               1,096
  Deferred fees and discounts ..        83                  64                 147                 209                 216
  Allowance for loan losses ....       480                 568                 686                 676                 650
                                   -------             -------             -------             -------             -------
    Total loans receivable, net.   $96,348             $91,276             $81,225             $74,035             $70,344
                                   =======             =======             =======             =======             =======
</TABLE>


                                        5

<PAGE>



     The following table  illustrates the contractual  maturity and amortization
of the Association's  loan portfolio at December 31, 1998.  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           Consumer
                                Family            Multi-family          or Development          and Other              Total
                         ------------------   -------------------    -------------------    ------------------    ------------------
                                   Weighted              Weighted               Weighted              Weighted              Weighted
                                   Average               Average                Average               Average               Average
                         Amount     Rate      Amount      Rate       Amount      Rate       Amount     Rate       Amount     Rate
                         ------    --------   ------     --------    ------     --------    ------    --------    ------    --------
                                                                      (Dollars in Thousands)
Due During Year(s) Ended
December 31,
------------------------
<S>                     <C>         <C>      <C>          <C>       <C>          <C>       <C>         <C>       <C>         <C>
1999(1) ..........      $ 3,757     7.62%    $   277      8.19%     $    49      6.99%     $ 1,847     8.24%     $ 5,930     7.83%
2000 .............        4,057     7.63         301      8.19           52      6.99        2,005     8.24        6,415     7.84
2001 .............        4,377     7.63         327      8.19           57      6.99        1,942     8.16        6,703     7.81
2002 and 2003 ....        9,818     7.64         739      8.20          125      6.99        3,361     7.93       14,043     7.73
2004 to 2008 .....       26,496     7.64       2,473      8.20          401      6.99        5,268     7.61       34,638     7.67
2009 to 2018 .....       21,298     7.58       5,536      8.09          680      6.98           --       --       27,514     7.67
2019 and following        1,732     7.70          --        --          499      6.94           --       --        2,231     7.53
                        -------              -------                -------                -------               -------
    Total ........      $71,535              $ 9,653                $ 1,863                $14,423               $97,474
                        =======              =======                =======                =======               =======
</TABLE>


(1) Includes demand loans, loans having no stated maturity and overdraft loans.

     As of December 31, 1998,  the total amount of loans due or repricing  after
December  31, 1999 which had  predetermined  interest  rates was $41.5  million,
while the  total  amount of loans due or  repricing  after  such date  which had
floating, adjustable or renegotiable interest rates was $50.0 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, 1998, the  Association's  one- to
four-family  residential mortgage loans, excluding  mortgage-backed  securities,
totaled  $71.5  million,   or  73.39%  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. The annual and lifetime caps on interest rate increases
for these loans 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."
Approximately  36.1% of the loans  originated  in 1998 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,  1998,   approximately  $3.3  million,  or  4.6%  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.

     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,

                                        7
<PAGE>

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,  1998,  the
Association  had $9.7  million in  commercial/multi-family  real  estate  loans,
representing 9.90% 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
Bettendorf,  Dubuque and Cedar  Rapids,  Iowa,  and the States of Wisconsin  and
Washington.

     At  December  31,  1998,  the  principal  balance  of the  largest  lending
relationship  with any one  borrower  or group of  related  borrowers,  was $1.3
million and consists of one participation loan originated in 1996 and refinanced
in 1997, secured by a 192-unit  apartment building located in Bettendorf,  Iowa.
The  Association's  participation  represents  approximately  15.0%  of the loan
(which had an outstanding  balance of approximately  $8.6 million).  The loan is
being amortized over 30 years, at a rate of 8.625% for the first three years and
thereafter  at a rate  equal to the  Federal  Cost of Funds  index  plus  3.75%,
adjusted annually. This loan was prepaid in full on February 5, 1999.

     The second largest lending relationship had a principal balance of $948,000
at December 31, 1998,  and consists of two  participation  loans  originated  in
1995,  secured  by two  assisted,  congregate-care  facilities.  The  first 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  (which  had an  outstanding  balance  of
approximately  $3.4 million) and approximately 16% of the second loan (which had
an  outstanding  balance  of  approximately  $2.9  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 third largest lending  relationship had a principal balance of $772,000
at December 31, 1998 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 (which had an outstanding  balance of approximately $1.0 million)
and  approximately  40% of the second  loan  (which had an  outstanding  balance
amount of  approximately  $0.9  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  years and
thereafter at a rate equal to the Federal Cost of Funds index plus 3.50%.

     The fourth largest lending relationship had a principal balance of $588,000
at December  31,  1998,  and consists of one  participation  loan,  secured by a
61-unit  motel  in  Germantown,   Wisconsin.  The  Association's   participation
represents  40% of the loan (which had an outstanding  balance of  approximately
$1.5 million).  The loan is amortized over 20 years, at a rate of 9.375% for the
first three years and thereafter adjusts annually to a rate equal to the Federal
Cost of Funds index plus  3.75%.  Each of these loans was current as of December
31, 1998.

     The Association has no other  commercial/multi-family  real estate loans to
one  borrower,  or group of  borrowers,  which have an  existing  net balance at
December 31, 1998 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  1998,  1997 and 1996,  the  Association
purchased participations in  commercial/multi-family  real estate loans totaling
$0.2  million,  $2.8  million  and  $3.4  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

                                        8
<PAGE>

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, 1998, the Association had loans to finance
the construction of single-family  residences totaling $1.9 million, or 1.91% 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.

     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, 1998,  the  Association's  consumer and other loan  portfolio  totaled $14.4
million,  or 14.80% 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 lines of credit,  home improvement,  auto, boat and recreational  vehicle
loans and loans  secured by savings  deposits.  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  44%  of  the  Association's  total
consumer  loan  portfolio  at  December  31,  1998.  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,  except for the home-equity line of credit which adjusts monthly based
on the prime rate.

     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).

     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 Farmer's Home
Administration ("FmHA") loans. Generally, the Association only purchases the 90%
guaranteed  portion  of the  loan.  For the  years  1998,  1997  and  1996,  the
Association  purchased FmHA participations  totaling $1.0 million,  $4.1 million
and $2.8 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, 1998,  $89,000, or approximately 0.62% 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, 1998,  mortgage-backed  securities
totaled  $27.1  million.  At such date,  $5.8  million of these  mortgage-backed
securities (all of which were issued by Ginnie Mae) 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.

     The Association purchases mortgage-backed securities in order to supplement
the  Association's  loan  originations.  At December 31, 1998, $3.5 million,  or
13.1%, and $6.3 million, or 23.3%, of the Association's

                                        9
<PAGE>



mortgage-backed  securities  carried  adjustable  rates of interest  and balloon
maturities, respectively. Under the OTS' risk-based capital requirements, Ginnie
Mae mortgage-backed  securities have a zero percent risk weighting for the risk-
based capital  requirement  of the OTS and Fannie Mae,  Freddie Mac 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, 1998.  The table does
not reflect normal monthly amortization payments or anticipated prepayments.



<TABLE>
<CAPTION>
                                                                               Due in                                     December
                                              -------------------------------------------------------------------------   31, 1998
                                              6 Months  6 Months     1 to     3 to 5     5 to 10    10 to 20    Over 20  Outstanding
                                              or Less   to 1 Year  3 Years     Years      Years       Years       Years    Balance
                                              -------   ---------  -------     -----      -----       -----       -----  -----------
                                                                               (In Thousands)
<S>                                           <C>       <C>        <C>         <C>       <C>         <C>         <C>     <C>
   
Adjustable-rate mortgage-backed securities:
  Federal Home Loan
   Mortgage Corporation..................       $ --      $ --      $   --      $ --      $   --     $    --     $  305     $   305
  Federal National
   Mortgage Association..................         --        --          --        --          --       1,992        915       2,907
  Resolution Trust Corporation...........         --        --          --        --          --          --        337         337
                                                ----      ----      ------      ----      ------     -------     ------     -------

     Total adjustable-rate...............         --        --          --        --          --       1,992      1,557       3,549
                                                ----      ----      ------      ----      ------     -------     ------     -------

Fixed-rate mortgage-backed securities:
  Federal Home Loan
   Mortgage Corporation..................         --        --       1,531        --       4,788       6,823         --      13,142
  Federal National
   Mortgage Association..................         --        --          --        --       1,050       2,166      1,463       4,679
  Government National
   Mortgage Corporation..................         --        --          --        --       2,194       2,164      1,412       5,770
                                                ----      ----      ------      ----      ------     -------     ------     -------
     Total fixed-rate....................         --        --       1,531        --       8,032      11,153      2,875      23,591
                                                ----      ----      ------      ----      ------     -------     ------     -------

Total mortgage-backed
 securities..............................      $  --      $ --      $1,531      $ ==      $8,032     $13,145     $4,432     $27,140
                                               =====      ====      ======      ====      ======     =======     ======     =======
</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.

     The  Association  sold no  mortgage-backed  securities  in fiscal 1998.  At
December 31, 1998, the Association had no commitments to sell loans.

     The  Association  had no loans serviced for others as of December 31, 1998,
and $17.4 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,
                                               --------------------------------------
                                                 1998            1997           1996
                                               --------       --------       --------
                                                              (In Thousands)
<S>                                            <C>            <C>            <C>
ORIGINATIONS BY TYPE:
 Adjustable-rate:
  Real estate - one- to four-family .....      $ 10,409       $  7,185       $  6,469
                - construction ..........         1,202          2,525            841
  Consumer and other loans ..............           781            489             --
                                               --------       --------       --------
         Total adjustable-rate ..........        12,392         10,199          7,310
                                               --------       --------       --------
 Fixed-rate:
  Real estate - one- to four-family .....        14,809          5,979          7,445
                - commercial/multi-family           468             --             --
                - construction ..........         1,372            370            883
  Consumer and other loans ..............         5,300          5,312          3,901
                                               --------       --------       --------
         Total fixed-rate ...............        21,949         11,661         12,229
                                               --------       --------       --------

         Total loans originated(1) ......        34,341         21,860         19,539
                                               --------       --------       --------

PURCHASES:
  Real estate - commercial/multi-family .           180          2,841          3,434
  Consumer and other loans ..............           985          4,114          2,846
  Mortgage-backed securities ............        12,023          3,484          4,051
                                               --------       --------       --------
         Total purchased ................        13,188         10,439         10,331
                                               --------       --------       --------

SALES:
  Mortgage-backed securities ............            --             --          1,285
                                               --------       --------       --------
Principal repayments ....................        30,975         22,216         21,375
                                               --------       --------       --------
Decrease in other items, net ............       (10,152)        (3,553)        (4,463)
                                               --------       --------       --------

         Net increase ...................      $  6,402       $  6,530       $  2,747
                                               ========       ========       ========
</TABLE>

---------------------
(1)      $9,360,000,  $3,122,000  and $4,104,000 of these  originations  for the
         years ended  December 31, 1998,  1997 and 1996,  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, 1998 and 1997.  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     Consumer and Other             Total
                         ------------------------  ------------------------  -----------------------  -----------------------
                         Number   Amount  Percent  Number   Amount  Percent  Number  Amount  Percent  Number  Amount  Percent
                         ------   ------  -------  ------   ------  -------  ------  ------  -------  ------  ------  -------
                                                                      (Dollars in Thousands)
Loans delinquent for:

December 31, 1998:
------------------
<S>                         <C>  <C>       <C>         <C> <C>      <C>          <C> <C>       <C>       <C>  <C>       <C>
 30-59 days .........       24   $  403    .56%        2   $  489   5.07%        8   $   66    .46%      34   $  958    .98%
 60-89 days .........        4      121    .17        --       --     --         1       16    .11        5      137    .14
 90 days and over ...        6      173    .24        --       --     --         3        7    .05        9      180    .19
                        ------   ------   ----    ------   ------   ----    ------   ------   ----   ------   ------   ----
     Total ..........       34   $  697    .97%        2   $  489   5.07%       12   $   89    .62%      48   $1,275   1.31%
                        ======   ======   ====    ======   ======   ====    ======   ======   ====   ======   ======   ====

December 31, 1997:
------------------
 30-59 days .........       25   $  791   1.19%       --   $   --     --%        6   $   33    .23%      31   $  824    .89%
 60-89 days .........        8      258    .39        --       --     --         1        9    .07        9      267    .29
 90 days and over ...        9      370    .55         2      399   3.56        --       --     --       11      769    .83
                        ------   ------   ----    ------   ------   ----    ------   ------   ----   ------   ------   ----
     Total ..........       42   $1,419   2.13%        2   $  399   3.56%        7   $   42    .30%      51   $1,860   2.01%
                        ======   ======   ====    ======   ======   ====    ======   ======   ====   ======   ======   ====

</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.

                                                         December 31,
                                            ------------------------------------
                                              1998          1997         1996
                                            -------       -------       -------
                                                   (Dollars in Thousands)
Non-accruing loans:
  One- to four-family ...................   $  165        $  370        $  245
  Commercial/multi-family real estate....       --           399           874
  Consumer and other ....................        7            --             1
                                            ------        ------        ------
     Total ..............................      172           769         1,120
                                            ------        ------        ------
Real estate owned:
  One- to four-family ...................      189            --            12
  Commercial/multi-family real estate....        3           315            --
                                            ------        ------        ------
     Total ..............................      192           315            12
                                            ------        ------        ------

Total non-performing assets .............   $  364        $1,084        $1,132
                                            ======        ======        ======
Total as a percentage of total assets....      .22%          .73%          .83%
                                            ======        ======        ======

     For the year ended  December 31, 1998,  gross  interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms totaled  $15,000.  The amount that was included in interest
income on such loans was $9,000 for the year ended December 31, 1998.

     The Company's ratio of  non-performing  assets to total assets decreased to
0.22% at December 31, 1998 from 0.73% at December 31, 1997. Total non-performing
assets for 1998  decreased  $720,000  primarily  due to a $399,000  decrease  in
non-accruing  commercial/multi-family real estate loans as a result of two loans
which were foreclosed upon and sold, resulting in a charge-off of $120,000. Real
estate  owned with a carrying  value of $315,000  at December  31, 1997 was also
sold.

     OTHER LOANS OF CONCERN. In addition to the non-performing  assets set forth
in the table  above,  as of  December  31, 1998 there was also an  aggregate  of
$1,741,000  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  "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

                                       16
<PAGE>



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, 1998, 1997 and 1996 were as follows:


                                                  December 31,
                                ------------------------------------------------
                                   1998              1997             1996
                                ----------       ----------       ----------
Special Mention ............    $1,289,000       $  969,000       $  876,000
Substandard ................       816,000        1,524,000        1,543,000
Doubtful ...................            --           10,000               --
Loss .......................            --               --               --
                                ----------       ----------       ----------

  Total classified assets...    $2,105,000       $2,503,000       $2,419,000
                                ==========       ==========       ==========


     The increase in loans  designated  "special  mention" from 1997 to 1998 was
primarily the result of two  multi-family  loans placed on the watch list due to
lower occupancy than projected on one loan and slow pay on the other loan.

     The increase in loans  designated  "special  mention" from 1997 to 1998 was
primarily  the  result of  including  in this  category  one  multi-family  loan
participation  amounting  to $493,000  which is secured by a 128-unit  apartment
complex  in  Madison,  Wisconsin.  The  loan  was  classified  based on a recent
property inspection and concerns about occupancy and renovation progress.

     The  decrease  in  loans  designated  "substandard"  from  1997 to 1998 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, 1998, the Association had an
allowance  for loan losses of  $480,000.  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, 1998 and 1997 - Provision for Losses on Loans."


                                       17

<PAGE>


     The following table sets forth an analysis of the  Association's  allowance
for loan losses at the dates indicated.
<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                      ------------------------------------
                                                        1998          1997          1996
                                                      ------------------------------------
                                                                 (Dollars in Thousands)
<S>                                                    <C>           <C>           <C>
Balance at beginning of period ....................    $ 568         $ 686         $ 676
                                                       -----         -----         -----
Charge-offs:
 One- to four-family ..............................      (14)           (8)          (37)
 Commercial/Multi-family ..........................     (120)         (158)           --
 Consumer and other ...............................       (2)           --            (1)
                                                       -----         -----         -----
                                                        (136)         (166)          (38)
               
  One- to four-family .............................       --            --            --
                                                       -----         -----         -----
                                                          --            --            --
                                                       -----         -----         -----

Net (charge-offs) recoveries ......................     (136)         (166)          (38)

Additions charged to operations ...................       48            48            48
                                                       -----         -----         -----
Balance at end of period ..........................    $ 480         $ 568         $ 686
                                                       =====         =====         =====

Ratio of net charge-offs (recoveries) during the
 period to average loans, excluding mortgage-
 backed securities outstanding during the period...      .14%          .19%          .05%
                                                       =====         =====         =====

Allowance for loan losses to non-performing
 loans at end of period ...........................    279.07%       73.86%        61.25%

Allowance for loan losses to total loans,
 excluding mortgage-backed securities
 at end of period .................................      .49%          .61%          .82%
</TABLE>


     The distribution of the Association's  allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
                                                              December 31,
                                 --------------------------------------------------------------------
                                          1998                   1997                   1996
                                 ---------------------    -------------------    --------------------
                                              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)
<S>                               <C>         <C>         <C>         <C>         <C>         <C>
One- to four-family .......       $167        73.4%       $163        71.7%       $225        75.9%
Commercial/multi-family
 real estate ..............        124         9.9         269        12.1         246        12.4
Construction or development          2         1.9           1         0.9           2         1.0
Consumer and other ........         18        14.8          28        15.3          60        10.7
Unallocated ...............        169          --         107          --         153          --
                                  ----       -----        ----       -----        ----       -----
     Total ................       $480       100.0%        568       100.0%       $686       100.0%
                                  ====       =====        ====       =====        ====       =====
</TABLE>


                                       18

<PAGE>



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 31, 1998, the Association's
liquidity  ratio  (liquid  assets as a percentage  of net  withdrawable  savings
deposits and current  borrowings)  was 8.52.  See  "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources" 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, 1998,  Midwest  Federal's  interest-bearing  deposits  with
banks  totaled  $3.0  million,  or  1.8% of  total  assets,  and its  investment
securities totaled $28.1 million, or 17.3% of total assets. As of such date, the
Association also had a $2.2 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 federal agency obligations, municipal bonds and other issues that are
rated  investment grade or have credit  enhancements.  At December 31, 1998, the
average term to maturity or repricing of the investment securities portfolio was
10.1 years. However,  most of the securities have call features,  and if called,
the remaining term would be aproximately 4.0 years. See also "-  Mortgage-Backed
Securities" and Note 2 of the Notes to Consolidated Financial Statements.


                                       19

<PAGE>


     The  following  table  sets  forth  the  composition  of the  Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                            December 31,
                                                -----------------------------------------------------------
                                                        1998                1997                 1996
                                                -----------------------------------------------------------
                                                  Book      % of      Book      % of       Book      % of
                                                  Value     Total     Value     Total      Value     Total
                                                -----------------------------------------------------------
                                                                       (Dollars in Thousands)
<S>                                             <C>        <C>       <C>        <C>       <C>        <C>
Interest-bearing deposits with banks .......    $ 2,978    100.0%    $ 1,088    100.0%    $ 3,127    100.0%
                                                =======    =====     =======    =====     =======    =====
Investment securities:
 U.S. Government securities ................    $    --       --%    $    --       --%    $    --       --%
 Federal agency obligations ................     15,521     50.5      18,375     75.7      16,535     86.1
 Municipal bonds ...........................     12,622     41.1       3,108     12.8          --       --
 Other marketable equity securities(1) .....        387      1.2         824      3.4         710      3.7
                                                -------    -----     -------    -----     -------    -----

     Subtotal ..............................     28,530     92.8      22,307     91.9      17,245     89.8

FHLBank stock ..............................      2,200      7.2       1,960      8.1       1,960     10.2
                                                -------    -----     -------    -----     -------    -----

     Total investment securities and FHLBank
      stock ................................    $30,730    100.0%    $24,267    100.0%    $19,205    100.0%
                                                =======    =====     =======    =====     =======    =====

Average remaining life or term to repricing,
excluding  FHLBank stock and other
 marketable equity securities (assuming call
 feature are exercised).....................        4.0 years             1.7 years            0.3 years
</TABLE>

--------------------- 
(1)  Represents   primarily   investments   in  common   stock  of   non-related
     publicly-traded companies.


     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.  Weighted average yields are calculated on a taxable equivalent
basis.
<TABLE>
<CAPTION>
                                                           December 31, 1998
                               -------------------------------------------------------------------
                                 1 Year      1 to 5     5 to 10    After 10      Total Investment
                                 or Less     Years       Years       Years          Securities
                               ---------     ------     -------    --------    -------------------
                                 Book        Book        Book       Book        Book        Market
                                 Value       Value       Value      Value       Value       Value
                               -------     --------    -------     -------     -------     -------
                                                       (Dollars in Thousands)
<S>                            <C>         <C>         <C>         <C>         <C>         <C>
Federal agency obligations     $   456     $10,072     $ 2,003     $ 2,990     $15,521     $15,521
Municipal bonds .............       --         307       1,957      10,358      12,622      12,622
                               -------     -------     -------     -------     -------     -------

Total investment securities..  $   456     $10,379     $ 3,960     $13,348     $28,143     $28,143
                               =======     =======     =======     =======     =======     =======

Weighted average yield ......     5.79%       5.65%       6.42%       7.05%       6.42%

</TABLE>

     In 1997, the  Association  began  purchasing  tax-exempt,  rated or general
obligation bonds of  municipalities.  The  Association's  investment  securities
portfolio at December 31, 1998 did not contain  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.


                                       20
<PAGE>


     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.

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.

     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,
                                  ----------------------------------------------------------------
                                           1998                  1997                  1996
                                  --------------------  --------------------  --------------------
                                               Percent               Percent               Percent
                                    Amount    of Total    Amount    of Total    Amount    of Total
                                  ---------   --------  --------    --------  --------    --------
                                                         (Dollars in Thousands)
Interest Rate Range:
--------------------
<S>                               <C>          <C>      <C>          <C>      <C>          <C>
Money Market Deposit
 Accounts 2.25-4.00% ...........  $ 14,798     14.0%    $ 14,282     13.6%    $ 13,590     13.3%
Passbook Accounts 2.25-3.00% ...     9,003      8.5        8,373      7.9        8,609      8.5
NOW Accounts 1.00-2.00% ........     7,964      7.5        7,266      6.9        6,738      6.6
Non-interest checking accounts..       579       .5          649       .6          399       .4
                                  --------    -----     --------    -----     --------    -----

Total Non-Certificates .........    32,344     30.5       30,570     29.0       29,336     28.8
                                  --------    -----     --------    -----     --------    -----
Certificates:
-------------

 4.00 - 4.99% ..................    16,351     15.5        4,252      4.0        9,133      9.0
 5.00 - 5.99% ..................    40,315     38.0       51,543     49.0       49,464     48.5
 6.00 - 6.99% ..................    14,188     13.4       16,026     15.2       10,466     10.2
 7.00 - 7.99% ..................     2,689      2.5        2,730      2.6        3,235      3.2
 8.00 - 8.99% ..................        95       .1          157       .2          284       .3
                                  --------    -----     --------    -----     --------    -----

Total Certificates ...........      73,638     69.5       74,708     71.0       72,582     71.2
                                  --------    -----     --------    -----     --------    -----
Total Deposits ...............    $105,982    100.0%    $105,278    100.0%    $101,918    100.0%
                                  ========    =====     ========    =====     ========    =====
</TABLE>

                                       21
<PAGE>



     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,
                              ----------------------------------------
                                 1998           1997           1996
                              ----------     ----------     ----------
                                        (Dollars in Thousands)

Opening balance ..........    $ 105,278      $ 101,918      $ 101,334
Net deposits (withdrawals)       (3,310)          (734)        (3,260)
Interest credited ........        4,014         4 ,094          3,844
                              ---------      ---------      ---------

Ending balance ...........    $ 105,982      $ 105,278      $ 101,918
                              =========      =========      =========

Net increase .............    $     704      $   3,360      $     584
                              =========      =========      =========

Percent increase .........          .67%          3.30%           .58%
                              =========      =========      =========


     The  following   table  shows  rate  and  maturity   information   for  the
Association's certificates of deposit as of December 31, 1998.

<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
                           --------      --------      --------      --------      --------      --------     --------
                                                           (Dollars in Thousands)
Certificate accounts maturing
In Quarter Ending:
------------------
<S>                        <C>           <C>           <C>           <C>           <C>           <C>            <C>
March 31, 1999 ......      $ 6,192       $ 6,530       $   241       $    --       $     4       $12,967        17.6%
June 30, 1999 .......        4,477         5,905         3,530            --            --        13,912        18.9
September 30, 1999 ..          659         4,978         2,067            --            65         7,769        10.5
December 31, 1999 ...        2,722         2,926         2,504         2,635            26        10,813        14.7
March 31, 2000 ......           55         5,092         1,302             5            --         6,454         8.8
June 30, 2000 .......        1,043         2,857           220            --            --         4,120         5.6
September 30, 2000 ..           --         3,467         1,784             2            --         5,253         7.1
December 31, 2000 ...          414         1,629         1,546            47            --         3,636         4.9
March 31, 2001 ......           --         1,925           226            --            --         2,151         2.9
June 30, 2001 .......          613         1,349            71            --            --         2,033         2.8
September 30, 2001 ..            2         1,346           101            --            --         1,449         2.0
December 31, 2001 ...          108           684            37            --            --           829         1.1
Thereafter ..........           66         1,627           559            --            --         2,252         3.1
                           -------       -------       -------       -------       -------       -------       -----

     Total ..........      $16,351       $40,315       $14,188       $ 2,689       $    95       $73,638       100.0%
                           =======       =======       =======       =======       =======       =======       =====

     Percent of total         22.2%         54.7%         19.3%          3.7%          0.1%        100.0%
                           =======       =======       =======       =======       =======        ======
</TABLE>




                                       22

<PAGE>


     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, 1998.

<TABLE>
<CAPTION>
                                                        Maturity
                                   -----------------------------------------------
                                                  Over         Over
                                   3 Months      3 to 6       6 to 12      Over
                                    or Less      Months       Months     12 Months      Total
                                   --------     -------      --------    ---------     -------
                                                         (In Thousands)
<S>                                <C>          <C>          <C>          <C>          <C>
Certificates of deposit less
 than $100,000 ................    $11,721      $12,894      $17,135      $27,169      $68,919

Certificates of deposit of
 $100,000 or more .............      1,246        1,018        1,447        1,008        4,719
                                   -------      -------      -------      -------      -------

Total certificates of deposit..    $12,967      $13,912      $18,582      $28,177      $73,638
                                   =======      =======      =======      =======      =======
</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 $753,000,  $775,000 and $357,000 of such funds on deposit at
December 31, 1998, 1997 and 1996, 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.

     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,  1998,  the  Association  had  $43.0  million  of
fixed-rate  advances from the FHLBank of Des Moines.  The Association also had a
$1.0  million  open line of  credit  with the  FHLBank  with a zero  balance  at
December 31, 1998,  which expires in March 1999. The Association does not intend
to renew the line of credit at that 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,
                            ---------------------------------------------
                              1998               1997               1996
                            -------            -------            -------
                                            (In Thousands)
Maximum Balance:
----------------
FHLBank advances.......     $43,700            $34,000            $28,000

Average Balance:
----------------
FHLBank advances.......     $40,755            $28,451            $25,256



                                       23

<PAGE>


     The following table sets forth certain  information as to the Association's
FHLBank advances at the dates indicated.
<TABLE>
<CAPTION>
                                                                  December 31,
                                               ---------------------------------------------
                                                   1998             1997             1996
                                               -----------      -----------      -----------
                                                             (Dollars in Thousands)
<S>                                            <C>              <C>              <C>
FHLBank advances ........................      $   43,000       $   30,500       $   24,000
                                               ----------       ----------       ----------

     Total borrowings ...................      $   43,000       $   30,500       $   24,000
                                               ==========       ==========       ==========

Weighted average interest rate during the
 period of FHLBank advances .............            5.65%            5.91%            6.00%

Weighted average interest rate at end of
 period of FHLBank advances .............            5.50%            5.86%            5.87%

</TABLE>

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 $3.2 million
at  December  31,  1998,  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
$26,273.  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, 1998, MFP had a net loss of
$426.  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.

     At December 31, 1998, the  Association  had an equity  investment in MFP of
$26,273  (equal to its $100  capital plus $26,173  retained  earnings),  with no
loans outstanding.

REGULATION

     GENERAL.  Midwest  Federal is a federally  chartered stock savings and loan
association,  the deposits of which are federally insured and 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"),  which together with
the Bank  Insurance  Fund  (the  "BIF"),  are the two  deposit  insurance  funds
administered  by 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. The last regular examinations of
the  Association by the OTS and the FDIC were as of October 2, 1997 and November
30, 1991,  respectively.  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,  1998,  was
$46,275.

     The  OTS  also  has  extensive   enforcement  authority  over  all  savings
institutions  and their holding  companies,  including  Midwest  Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money

                                       24
<PAGE>

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, 1998, 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, 1998, the Association's lending
limit under this restriction was approximately $1.6 million.  As of December 31,
1998,   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 such matters 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.  The OTS and the other  federal  banking  agencies  have  also  proposed
additional guidelines on asset quality and earnings standards.  No assurance can
be given as to whether or in what form the proposed regulations will be adopted.

     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 up
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  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 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 is made by the FDIC for each semi-annual assessment period.

     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.

     Effective  January 1, 1997,  the premium  schedule for BIF and SAIF insured
institutions   ranged  from  0  to  27  basis  points.   However,   SAIF-insured
institutions are required to pay a Financing  Corporation (FICO) assessment,  in
order to fund the  interest on bonds  issued to resolve  thrift  failures in the
1980s,  equal to  approximately  6.48  basis  points  for each $100 in  domestic
deposits,   while   BIF-insured   institutions   pay  an  assessment   equal  to
approximately  1.52  basis  points  for  each  $100 in  domestic  deposits.  The
assessment  is expected to be reduced to 2.43 basis points no later than January
1, 2000,  when  BIF-insured  institutions  fully  participate in the assessment.
These  assessments,  which may be  revised  based upon the level of BIF and SAIF
deposits, will continue until the bonds mature in the year 2017.

                                       25
<PAGE>

     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,
1998,  Midwest Federal had no unamortized  purchased  mortgage  servicing rights
which were required to be deducted from tangible capital.  At December 31, 1998,
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.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.  All  subsidiaries  of the  Association  are includable
subsidiaries.

     At  December  31,  1998,  the  Association  had  tangible  capital of $10.8
million,  or 6.7% of adjusted total assets,  which is approximately $8.4 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.

     The capital  standards  also require  core capital  equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased 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, 1998, the
Association had no intangibles which were subject to these tests.

     At December  31, 1998,  the  Association  had core  capital  equal to $10.8
million,  or 6.7% of adjusted  total  assets,  which is $6.0  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% 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,  1998,  Midwest
Federal had  $480,000  of general  loss  reserves,  which was less than 1.25% of
risk-weighted assets that qualify as supplementary  capital. As a result, all of
such reserves may be used to satisfy the capital requirement.

     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, 1998.

     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 Fannie Mae or Freddie Mac.

     OTS  regulations  also  require that  savings  associations  with more than
normal  interest  rate risk  exposure  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 will not become effective until the OTS
evaluates

                                       26

<PAGE>

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 risk-based  capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.

     On December 31, 1998, the Association had total risk-based capital of $11.3
million  (including  $10.8  million in core capital and  $480,000 in  qualifying
supplementary  capital)  and  risk-weighted  assets  of  $73.0  million  (and no
converted  off-balance sheet assets); or total capital of 15.5% of risk-weighted
assets.  This amount was $5.5 million above the 8% requirement in effect on that
date.

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

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

     Any 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 conservator or a receiver.

     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  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.

     Generally, savings associations,  such as the Association,  that before and
after the  proposed  distribution  meet  their  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 capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar  year,  or 75% of their net income  for the most  recent  four  quarter
period.  However,  an  association  deemed  to be in need of  more  than  normal
supervision  by the OTS may have its dividend  authority  restricted by the OTS.
The Association may pay dividends in accordance with this general authority.

     Savings  associations  proposing to make any capital distribution need only
submit  written  notice to the OTS 30 days prior to such  distribution.  Savings
associations  that do not,  or would  not meet  their  current  minimum  capital
requirements following a proposed capital distribution, however, must obtain OTS
approval  prior  to  making  such  distribution.  The  OTS  may  object  to  the
distribution  during that 30-day period based on safety and soundness  concerns.
See "- Regulatory Capital Requirements."


                                       27

<PAGE>

     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.

     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 4%.

     Penalties  may be imposed upon  associations  for  violations of the liquid
asset ratio requirement. At December 31, 1998, the Association was in compliance
with the requirement, with an overall liquid asset ratio of 8.52%.

     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 generally
accepted  accounting  principles.  Under the policy  statement,  management must
support its  classification  of and accounting  for loans and securities  (i.e.,
whether held for investment,  sale or trading) with  appropriate  documentation.
Midwest Federal is in compliance with these amended 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  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section 7701 (a)(19)
of the Internal Revenue Code.  Under either test, such assets primarily  consist
of residential housing related loans and investments.  At December 31, 1998, 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 an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  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 FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

     COMMUNITY  REINVESTMENT ACT. Under the Community  Reinvestment Act ("CRA"),
every FDIC insured  institution  has a  continuing  and  affirmative  obligation
consistent  with safe and sound banking  practices to help meet the credit needs
of its entire community,  including low and moderate income  neighborhoods.  The
CRA does not establish  specific lending  requirements or programs for financial
institutions nor does it limit an institution's  discretion to develop the types
of products  and  services  that it believes  are best suited to its  particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the  examination  of  Midwest  Federal,  to assess the  institution's  record of
meeting the credit needs of its community and to take

                                       28

<PAGE>

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 1997 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,  such as loans to an  affiliate,  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.  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, 1998, 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."

                                       29
<PAGE>

     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  FHLB
borrowings, before borrowing from the Federal Reserve Bank.

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

     As a member,  Midwest Federal is required to purchase and maintain stock in
the FHLB of Des Moines.  At December 31, 1998,  Midwest Federal had $2.2 million
in FHLB stock, which was in compliance with this requirement. In the past years,
the Association has received  substantial  dividends on its FHLB stock. Over the
past five calendar  years such  dividends have averaged 7.25% and were 6.63% for
calendar year 1998.

     Under  federal  law  the  FHLBs  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  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in Midwest Federal's capital.

     For the year ended  December  31, 1998,  dividends  paid by the FHLB of Des
Moines to Midwest Federal totaled $140,526,  which constituted a $3,347 increase
from the amount of dividends received in 1997. The $36,044 dividend received for
the quarter  ended  December  31, 1998  reflects  an  annualized  rate of 6.50%,
compared to a rate of 7.00% for calendar 1997.

     FEDERAL AND STATE TAXATION.

     FEDERAL  TAXATION.  Savings  associations such as the Association that meet
certain  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  is  computed  under  the  experience
method.

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

     In August 1996,  legislation  was enacted that  repealed 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  experience  method
for tax years beginning after December 31, 1987. The recapture will occur over a
six-year  period,  the  commencement  of which will be  delayed  until the first
taxable year beginning after December 31, 1998,  provided the institution  meets
certain residential lending requirements.  At December 31, 1998, the Association
had  approximately  $3,745 in bad debt reserves subject to recapture for federal
income tax  purposes.  The deferred tax  liability  related to the recapture has
been previous established so there will be no effect on future net income.

     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.

     A  portion  of the  Association's  reserves  for  losses  on loans may not,
without adverse tax consequences,  be utilized for the payment of cash dividends
or other distributions to a shareholder (including  distributions on redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of December 31,  1998,  the portion of the  Association's  reserves
subject to this treatment for tax purposes totaled approximately $2,819,000.

                                       30
<PAGE>

     The Company  and its  subsidiaries  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.

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.

     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, at its office in Wal- Mart in West Burlington and at 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 49, 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.

                                       31
<PAGE>



     DENNIS L. DIETZMAN - Mr.  Dietzman,  age 49, 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 38, 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, 1998, the Association and its  subsidiaries  had a total of
43 employees,  including 3 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.  The total net book value of the  Association's
premises and equipment at December 31, 1998 was $2.4 million.


                             Date
                           Acquired/         Owned or         Net Book Value
Location                 Lease Expires        Leased       At December 31, 1998
--------                 -------------        ------       --------------------
                                                             (In Thousands)
MAIN OFFICE:

3225 Division Street         1974             Owned              $1,211
Burlington, IA

BRANCH OFFICES:

323 Jefferson Street         1974             Owned                 177
Burlington, IA

926 Avenue G                 1975             Owned                 242
Ft. Madison IA

Highway 61                   1974             Owned                  29
Wapello, IA

Wal-Mart                     2002(2)          Leased                179
324 W. Agency Road
West Burlington, IA

------------------
(1)  Includes 319 Jefferson Street.
(2)  Plus a five year option to extend.


     The  Association  maintains  depositor  and borrower  customer  files on an
on-line basis with the FiServ, West Des Moines,  Iowa. The net book value of the
data processing and computer  equipment  utilized by the Association at December
31, 1998 was $191,000.


                                       32

<PAGE>


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,
1998.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  stock is traded on the Nasdaq  Small Cap Market tier of the
Nasdaq  Stock  Market  under the symbol  "MWBI." As of December  31,  1998,  the
Company had approximately  320 stockholders of record and 1,077,738  outstanding
shares of common stock.

     The table  below  shows the range of high and low bid prices for the common
stock as well as information  regarding the Company's  payment of dividends with
all such prices and dividends adjusted to reflect the three-for-one  stock split
effective November 18, 1997. The bid prices do not necessarily  represent actual
transactions  and do not  include  retail  markups,  markdowns  or  commissions.
Beginning  with the first quarter of 1993,  the Company has paid  quarterly cash
dividends to stockholders  and intends to continue paying  quarterly  dividends,
dependent on the future earnings and financial  condition of the Company as well
as other relevant  factors.  The Company's ability to pay dividends is dependent
on the  dividend  payments  it receives  from its  subsidiary,  Midwest  Federal
Savings and Loan  Association  of Eastern Iowa,  which are subject to regulation
and  the  Association's   continued   compliance  with  all  regulatory  capital
requirements.  The Company is also subject to the  requirements of Delaware law,
which generally limits  dividends to an amount in excess of a corporation's  net
assets over paid-in capital,  or, if there is no such excess, to its net profits
for the current and immediately preceding fiscal year.

                                       Bid
                          ------------------------------          Dividends Per
Quarter Ended              High                    Low            Share Declared
-------------             ------                --------          --------------

   03/31/97               $10.00                $  8.75               $0.05
   06/30/97                10.67                   9.33                0.05
   09/30/97                13.58                  10.42                0.06
   12/31/97                18.37                  13.50                0.06
   03/31/98                18.25                  16.00                0.07
   06/30/98                17.00                  14.50                0.08
   09/30/98                15.25                  10.75                0.09
   12/31/98                12.75                  11.75                0.10


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

     Midwest Bancshares, Inc. ("Midwest" or the "Company") was formed in July of
1992 by Midwest  Federal  Savings  and Loan  Association  of  Eastern  Iowa (the
"Association")  to  become  the  thrift  institution   holding  company  of  the
Association.  The  acquisition of the Association by the Company was consummated
on November 10, 1992 in connection  with the  Association's  conversion from the
mutual to the stock form of ownership (the "Conversion").

     Historically,  the  primary  business  of  the  Company  has  consisted  of
attracting  deposits  from the general  public and using such funds,  along with
other borrowed  funds,  as necessary,  to provide  financing for the purchase of
residential properties. The operations of the Company are significantly affected
by  prevailing  economic  conditions,  as well  as by  government  policies  and
regulations  relating  to monetary  and fiscal  affairs,  housing and  financial
institutions.

                                       33
<PAGE>

YEAR 2000 COMPLIANCE

     The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" problem. The Year
2000  problem is the result of computer  programs  using two digits  rather than
four to define the year.  Any of the Company's  programs that are time sensitive
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could  result  in  a  major  system  failure  or   miscalculations.   Management
anticipates  that the  enhancements  necessary  to prepare its mission  critical
systems for the year 2000 will be completed in early 1999.

     The Company is also aware of the risks to third parties,  including vendors
(and to the extent  appropriate,  depositors  and  borrowers)  and the potential
adverse  impact on the  Company  resulting  from  failures  by these  parties to
adequately  address the Year 2000  problem.  The Company has been  communicating
with its outside data processing  service  bureau,  as well as other third party
service  providers,  to assess their progress in evaluating and implementing any
corrective  measures required by them to be prepared for the year 2000. To date,
the Company has not been advised by any of its primary  vendors that they do not
have plans in place to address and correct the Year 2000  problem;  however,  no
assurance can be given as to the adequacy of such plans or to the  timeliness of
their implementation.

     The Company  anticipates that it will incur internal staff costs as well as
consulting and other expenses related to the  enhancements  necessary to prepare
its systems for the year 2000.  Based on the Company's  current  knowledge,  the
expense of the year 2000 project as well as the related  potential effect on the
Company's  earnings is not expected to have a material  effect on the  Company's
financial  position or results of operations . The Company estimates that it has
spent  approximately  $20,000  through  December  31,  1998  on  the  awareness,
assessment,  renovation,  and  validation  phases of its year 2000  effort.  The
Company  is well into the  validation  (testing)  phase  with its  outside  data
processing  service  bureau and will complete  testing by the second  quarter of
1999. To date, the test results from the data  processing  bureau have been used
to verify that all mission  critical  systems with the bureau are currently year
2000 compliant or to determine what needs to be done to make them compliant.

     The worst-case  year 2000 scenario for the Company is that major  suppliers
of electricity,  communication  links, and data processing  services may fail in
spite of their best efforts to remediate  their systems and in spite of our best
effort to test their systems.  The major risk as a result of these possibilities
would be the loss of customer  confidence.  The Company has developed a business
resumption contingency plan to address these possibilities and minimize the loss
of confidence.

FINANCIAL CONDITION

     Total assets  increased by $14.6 million to $162.3  million at December 31,
1998  compared to $147.7  million at December 31, 1997.  Total loans  receivable
increased  $5.0 million to $96.3 million at December 31, 1998 from $91.3 million
at December 31, 1997.  During 1998, the Association  originated $34.3 million in
loans while loan  repayments  totaled  $20.7  million.  This compares with $21.9
million in  originations  and $15.8 million in repayments in fiscal 1997. Of the
loans originated in 1998 and 1997, $9.4 million and $3.1 million,  respectively,
represented  refinancings of existing loans.  Loan  originations  were up due to
favorable  lending rates and generally  good economic  conditions  for borrowers
during 1998.  The Company also  purchased $1.2 million in loans in 1998 compared
with $7.0 million in 1997.

     Investment  securities  held to  maturity  increased  to $21.8  million  at
December 31, 1998 from $19.8 million at December 31, 1997.  Securities available
for sale  increased to $33.8  million at December 31, 1998 from $27.9 million at
December 31, 1997,  due to purchases of securities for both the held to maturity
portfolio and the available for sale portfolio.

     Total deposits increased from $105.3 million at December 31, 1997 to $106.0
million at  December  31,  1998.  Advances  from the FHLB  increased  from $30.5
million at December 31, 1997 to $43.0  million at December 31, 1998,  due to new
advances of $33.7 million (net of $21.2 million of repayments).

     The Company's ratio of  non-performing  assets to total assets decreased to
0.22% at December 31, 1998 from 0.73% at December 31, 1997. Total non-performing
assets  decreased  $720,000 to $364,000 at December  31,  1998.  The majority of
non-performing assets consist of one- to four- family residential loans and real
estate owned.

                                       34
<PAGE>

RESULTS OF OPERATIONS

     The Company's net income is primarily  dependent  upon the  difference  (or
"spread") between the average yield earned on loans,  mortgage-backed securities
and investments and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates,  loan  demand and  deposit  flows.  The  Association,  like other  thrift
institutions,  is  subject  to  interest  rate  risk  to  the  degree  that  its
interest-bearing  liabilities  mature or reprice  at  different  times,  or on a
different basis, than its interest-earning assets.

     The Company's  interest  expense has been a product of the interest paid on
deposits  and  borrowed  funds.  The  Association  emphasizes  and  promotes its
consumer and  passbook,  money  market and NOW  accounts,  principally  from its
market area.  The NOW accounts tend to be less  susceptible  to rapid changes in
volume and interest rate.

     The  Company's  net income has also been  affected by, among other  things,
gains and losses on sales of loans,  mortgage-backed securities and investments,
provisions for possible loan losses, service charge fees, subsidiary activities,
operating expenses and income taxes. Midwest Financial Products,  Inc., a wholly
owned  subsidiary of the  Association,  generates  revenues  through the sale of
tax-deferred annuities and other financial products to its customers.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997

     GENERAL.  The Company had net earnings of  $1,372,000  in 1998  compared to
$1,265,000 in 1997, an increase of approximately $107,000, or 8.5%. The increase
in net earnings was primarily a result of an increase in net interest income, an
increase in fees and  service  charges,  and an  increase in other  non-interest
income  as a  result  of  recognizing  a  previously-deferred  gain of  $135,000
(pre-tax)  on  the  sale  of  the  Association's   mortgage-banking  subsidiary,
partially  offset by an increase in non-interest  expense and a decrease in gain
on the sale of securities.

     NET INTEREST INCOME. Net interest income increased by $85,000 to $4,115,000
in 1998 from  $4,030,000  in 1997.  The  increase  in net  interest  income  was
primarily the result of the  Association's  growth in earning  assets as the net
interest margin actually  decreased from 2.89% in 1997 to 2.83% in 1998. For the
year ended December 31, 1998, the Company's  interest rate spread decreased four
basis  points from 2.63% in 1997 to 2.59% in 1998.  The increase in net interest
income on a tax equivalent basis was approximately $276,000 due to the fact that
the 1998  period  included  considerably  more  interest  income  on  tax-exempt
municipal  bonds.  (See also the discussion of "TAXES ON INCOME" below.  The net
interest rate spread and net interest  margin  ratios have been  calculated on a
tax-equivalent basis.

     During  fiscal  1998,   average   interest-earning   assets   increased  by
approximately  $12.6  million  over the 1997 average  balances.  The increase in
average  interest-earning  assets  was  primarily  due to an  increase  in loans
receivable  and an increase  in  investment  securities  and was the result of a
planned  growth  strategy  in an effort to increase  net  interest  income.  The
average yield on interest-earning assets decreased by twelve basis points during
1998  compared to 1997.  The decrease in average yield was primarily due to loan
refinance activity and investment  purchases at rates which were generally lower
in response to lower market interest rates.

     During  fiscal  1998,  average  interest-bearing  liabilities  increased by
approximately $12.3 million, primarily due to an increase in borrowings from the
FHLB.  The average rate paid on  interest-bearing  liabilities  decreased  eight
basis points  compared to 1997.  The decrease in average rate paid was primarily
due to deposits and FHLB  advances  repricing to lower rates offered in response
to lower market  interest  rates.  The Company  increased its borrowing from the
FHLB to fund asset growth, at rates which were generally higher than the overall
cost of deposits.

     PROVISION FOR LOSSES ON LOANS.  The provision for losses on loans  remained
constant at $48,000 for both 1998 and 1997. The amount of provision was a result
of the determination by management to maintain the allowance for losses on loans
at an adequate level to absorb  potential loan losses.  At December 31, 1998 and
1997, the Company's allowance for losses on loans totaled $480,000 and $568,000,
respectively,  or 0.49%  and  0.61% of total  loans,  excluding  mortgage-backed
securities,  and 279.07% and 73.86% of total non-performing loans, respectively.
The decline in the former ratio was impacted by charge-offs  in 1998,  primarily
as a result of the foreclosure of two  multi-family  properties,  with the first
resulting in a charge-off  of $120,000.  This  property,  combined  with another
related   multi-family   participation   loan,  made  up  the  majority  of  the
non-performing  assets in 1997. These properties were sold in 1998 and accounted
for $120,000 and $158,000,  respectively,  of total  net-charge-offs of $136,000
and  $166,000  for the years ended  December  31,  1998 and 1997,  respectively.
Excluding  these  large,  unusual  charge-offs,  the $48,000  provision  appears
adequate to absorb normal loan losses when added to the remaining allowance.

                                       35
<PAGE>

     NON-INTEREST  INCOME.  Total non-interest  income increased by $110,000 for
1998  compared to 1997.  The  increase was  primarily  due to (i) an increase of
$94,000  in fees  and  service  charges,  primarily  as a  result  of  increased
transaction  volumes;  and (ii) an  increase in other  non-interest  income as a
result of recognizing a  previously-deferred  gain of $135,000  (pre-tax) on the
sale of the  Association's  mortgage-banking  subsidiary;  partially offset by a
$102,000 decrease in gain on the sale of securities.

     NON-INTEREST  EXPENSES.  Total non-interest  expenses increased by $228,000
for 1998  compared to 1997.  The  increase  was  primarily  due to  increases of
$63,000 in  compensation  and benefits  expense,  $58,000 in office property and
equipment,  and $87,000 in other  non-interest  expenses.  These  increases were
primarily  due to  start-up  costs of the  Company's  new  branch  office in the
Wal-Mart Supercenter located in West Burlington, Iowa, which opened for business
in December of 1997.

     TAXES ON INCOME.  Taxes on income  decreased  $140,000 for 1998 compared to
1997,  primarily due to increased  investment in  tax-exempt  securities,  which
resulted in  approximately  $207,000 of tax benefit for 1998 compared to $16,000
for  1997.  Taxes on  income  would  have  increased  if not for the  tax-exempt
interest income on investments discussed above at "NET INTEREST INCOME."

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996

     GENERAL.  The Company had net earnings of  $1,265,000  in 1997  compared to
$630,000 in 1996,  an increase of  approximately  $635,000.  The increase in net
earnings was primarily due to: (i) reduced operating expenses as a result of the
$671,000 FDIC special  assessment in the quarter ended  September 30, 1996,  and
subsequent  reduction in FDIC  insurance  premiums;  (ii) increased net interest
income,  due to earning asset growth; and (iii) increased  non-interest  income,
primarily  due to pre-tax  gain of $220,000 on the sale of  securities  for 1997
compared  to $45,000  for 1996,  and  increased  fee income due to a revised fee
structure,  partially offset by a $50,000  reduction in the $59,000 pre-tax gain
distribution  from the Company's data processor  reported in 1996, which totaled
$9,000 in 1997.

     Excluding the unusual or non-recurring items from net earnings, such as the
$671,000  FDIC special  assessment,  the gains on sales of  securities,  and the
distributions from the Company's data processor,  "core" net earnings would have
been approximately $1,112,000 in 1997, compared to $986,000 in 1996.

     NET INTEREST INCOME. Net interest income increase by $110,000 to $4,030,000
in 1997 from  $3,920,000  in 1996.  The  increase  in net  interest  income  was
primarily the result of the  Association's  growth in earning  assets as the net
interest margin actually  decreased from 2.94% in 1996 to 2.89% in 1997. For the
year ended  December  31,  1997,  the  Company's  average  interest  rate spread
decreased five basis points from 2.68% in 1996 to 2.63% in 1997.

     During  fiscal  1997,   average   interest-earning   assets   increased  by
approximately  $6.8  million  over the 1996  average  balances.  The increase in
average  interest-assets was primarily due to an increase in loans receivable as
the Association  successfully deployed cash flow into lending. The average yield
on interest-earning assets increased by six basis points during 1997 compared to
1996. The increase in average yield was primarily due to loan  originations  and
purchases at rates which are generally higher than investment securities.

     During  fiscal  1997,  average  interest-bearing  liabilities  increased by
approximately  $6.7  million,  primarily  due to an increase of $3.5  million in
average deposits and an increase of $3.2 million in average  borrowings from the
FHLB. The average rate paid on  interest-bearing  liabilities  increased  eleven
basis points  compared to 1996.  The increase in average rate paid was primarily
due  to  time  deposits  repricing  to  higher  rates  offered  in  response  to
marketplace  competition  and  due  to  increased  FHLB  advances.  The  Company
increased its borrowing from the FHLB to fund asset growth,  at rates which were
generally higher than the overall cost of deposits.

     PROVISION FOR LOSSES ON LOANS.  The provision for losses on loans  remained
constant at $48,000 for both 1997 and 1996. The amount of provision was a result
of the determination by management to maintain the allowance for losses on loans
at an adequate level to absorb  potential loan losses.  At December 31, 1997 and
1996, the Company's allowance for losses on loans totaled $568,000 and $686,000,
respectively,  or 0.61%  and  0.82% of total  loans,  excluding  mortgage-backed
securities,  and 73.86% and 61.25% of total non-performing loans,  respectively.
The decline in the former ratio was impacted by charge-offs in 1997, primarily a
result of foreclosure of one multi-family property, resulting in a charge-off of
$158,000.  This  property,  now in real estate owned,  with a carrying  value of
$315,000  combined with two related  multi-family  participation  loans totaling
$399,000,  also in  foreclosure,  makes  up the  majority  of the  nonperforming
assets.  The Company had net  charge-offs  of $166,000 and $38,000 for the years
ended December 31, 1997 and 1996, respectively.

     NON-INTEREST  INCOME.  Total non-interest  income increased by $205,000 for
1997 compared to 1996. The increase was primarily due to an increase of $175,000
in gains on the sales of  securities  and due to an increase of $103,000 in fees
and service

                                       36
<PAGE>

charges,  primarily as a result of a new fee schedule  implemented  in September
1996.  These increases were partially offset by a $50,000 decrease in the amount
recognized  as gain  from the  sale of the  Association's  share  of their  data
processing cooperative.

     NON-INTEREST  EXPENSES.  Total non-interest  expenses decreased by $636,000
for 1997  compared  to 1996.  The  decrease  was  primarily  due to the  Deposit
Insurance  Funds Act of 1996  passed on  September  30,  1996.  The  legislation
resulted  in a  one-time  pre-tax  charge  of  approximately  $671,000  in 1996,
representing  a special  assessment  of 65.7 basis  points on the  Association's
deposits held as of March 31, 1995 to recapitalize the SAIF insurance fund. As a
result of the  special  assessment,  the SAIF is fully  funded.  Therefore,  the
Company's  ongoing FDIC premiums were reduced,  resulting in a $183,000 decrease
in premiums in 1997 as compared to 1996.  Partially  offsetting  these decreases
were  increases of $104,000 in  compensation  and benefits  expense,  $16,000 in
office property and equipment, and $99,000 in other non-interest expenses. These
increases in expenses are, in part,  due to start-up  costs of the Company's new
branch  office in the Wal-Mart  Supercenter  located in West  Burlington,  Iowa,
which opened for business in December of 1997.

     TAXES ON INCOME.  Taxes on income  increased  $315,000 for 1997 compared to
1996, primarily due to increased taxable income,  partially offset by the effect
of investing in tax-exempt municipal bonds for the first time in 1997, resulting
in approximately $16,000 of tax benefit for 1997.




                                       37

<PAGE>

     The  following  table  presents for the periods  indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates,  and the net interest  margin.  All average
balances are daily  average  balances  and include the balances of  non-accruing
loans.  The yields and costs for the periods  indicated  include  fees which are
considered adjustments to yields.

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                           -------------------------------------------------------------------------
                                                                             1998                                  1997
                                                           -------------------------------------  ----------------------------------
                                            Yield/Rate at    Average       Interest                 Average     Interest
                                            December 31,   Outstanding      Earned/      Yield/   Outstanding    Earned/      Yield/
                                                1998         Balance         Paid        Rate       Balance       Paid        Rate
                                            -------------  -----------     ---------     ------   -----------   ---------     ------
                                                                                (Dollars in Thousands)
Interest-Earning Assets:

<S>                                              <C>       <C>             <C>            <C>       <C>          <C>           <C>
 Loans receivable..........................      7.79%     $  93,895       $  7,537       8.03%     $ 87,358     $  7,075      8.10%
 Mortgage-backed securities................      6.71         23,501          1,672       7.11        27,612        1,951      7.07
 Investment securities(1)..................      6.58         30,887          2,101       6.80        21,372        1,528      7.15
 Deposits in other banks...................      4.56          2,037             99       4.84         1,562           75      4.82
 Other interest-earning  assets............      6.50          2,121            140       6.62         1,960          137      7.00
                                                            --------       --------                 --------     --------
   Total interest-earning assets...........      7.31        152,441         11,549       7.58       139,864       10,766      7.70
                                                -----       --------       --------       ----      --------     --------     -----

Interest-Bearing Liabilities:
  Savings deposits, money market
   deposit and NOW accounts................      2.63      $  30,654       $    844       2.75        30,162          870      2.88
  Time deposits............................      5.45         73,555          4,081       5.55        74,042        4,169      5.63
                                                            --------       --------                 --------     --------
    Total deposits.........................      4.62        104,209          4,925       4.73       104,204        5,039      4.84

  FHLB advances and other borrowings.......      5.50         40,755          2,302       5.65        28,451        1,681      5.91
                                                            --------       --------                 --------     --------
    Total interest-bearing liabilities.....      4.90       $144,964          7,227       4.99      $132,655     $  6,720      5.07
                                                -----       --------       --------       ----      --------     --------     -----
Net interest income; interest rate
  spread...................................      2.41%                      $ 4,322       2.59%                  $  4,046      2.63%
                                                =====                       =======       ====                   ========     =====
Net earning assets/net interest margin(2)..               $    7,477                      2.83%     $  7,209                   2.89%
                                                          ==========                      ====      ========                  =====
Average interest-earning assets to
   average interest-bearing liabilities....                   105.2%                                  105.4%
                                                              =====                                  ======
</TABLE>
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                            --------------------------------------------
                                                                  1996
                                            --------------------------------------------
                                              Average          Interest
                                            Outstanding        Earned/           Yield
                                              Balance            Paid            Rate
                                            -----------        --------          ------
(Dollars in Thousands)
Interest-Earning Assets:
<S>                                          <C>               <C>                <C>
 Loans receivable..........................  $ 79,219          $ 6,444            8.13%
 Mortgage-backed securities................    30,841            2,162            7.01
 Investment securities(1)..................    19,654            1,351            6.87
 Deposits in other banks...................     1,401               69            4.90
 Other interest-earning  assets............     1,960              137            7.00
                                             --------          -------
   Total interest-earning assets...........   133,075           10,163            7.64
                                             --------           ------            ----

Interest-Bearing Liabilities:
  Savings deposits, money market
   deposit and NOW accounts................  $ 29,562          $   864            2.92
  Time deposits............................    71,104            3,863            5.43
                                             --------           ------
    Total deposits.........................   100,666            4,727            4.70

  FHLB advances and other borrowings.......    25,256            1,516            6.00
                                             --------           ------
    Total interest-bearing liabilities.....  $125,922            6,243            4.96
                                             --------           ------            ----
Net interest income; interest rate
  spread...................................                    $ 3,920            2.68%
                                                               =======            ====
Net earning assets/net interest margin(2)..  $  7,153                             2.94%
                                             ========                             ====
Average interest-earning assets to
   average interest-bearing liabilities....    105.7%
                                               =====
</TABLE>
------------
(1)   Interest income and yield/rate on tax-exempt securities are presented on a
      tax-equivalent  basis  utilizing a federal tax rate of 34%,  resulting  in
      additional  earnings of $207,000  for 1998,  $16,000 for 1997 and none for
      1996.
(2)   Net   interest   margin  is  net  interest   income   divided  by  average
      interest-earning assets.

                                       38

<PAGE>



RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

     The  following  table  presents  the extent to which  changes in volume and
changes  in  interest  rates of  interest-earning  assets  and  interest-bearing
liabilities have affected the Association's interest income and interest expense
during the  periods  indicated.  The table  distinguishes  between  the  changes
related to higher  outstanding  balances  and that due to  changes  in  interest
rates.  For  each  category  of  interest-earning  assets  and  interest-bearing
liabilities,  information is provided on changes  attributable to (i) changes in
volume (I.E., changes in volume multiplied by old rate) and (ii) changes in rate
(I.E.,  changes in rate multiplied by old volume).  Changes attributable to both
rate and volume which cannot be segregated  have been allocated  proportionately
to the change due to volume and the change due to rate.

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                             --------------------------------------------------------------------
                                                       1998 vs. 1997                      1997 vs. 1996
                                             --------------------------------   ---------------------------------
                                                                        (Dollars in Thousands)
                                                   Increase                           Increase
                                                  (Decrease)                         (Decrease)
                                                    Due to            Total            Due to             Total
                                             ------------------     Increase    -------------------     Increase
                                             Volume       Rate     (Decrease)   Volume        Rate     (Decrease)
                                             ------      ------    ----------   ------       ------    ----------
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>
Interest-Earning Assets:
 Loans receivable .....................      $ 524       $ (62)      $ 462       $ 659       $ (28)      $ 631
 Mortgage-backed securities ...........       (293)         14        (279)       (228)         17        (211)
 Investment securities ................        643         (70)        573         121          56         177
 Deposits in other banks ..............         23           1          24           8          (2)          6
 Other interest-earning assets ........         10          (7)          3          --          --          --
                                             -----       -----       -----       -----       -----       -----

   Total interest-earning assets ......        907        (124)        783         560          43         603
                                             -----       -----       -----       -----       -----       -----

Interest-Bearing Liabilities:
 Savings deposits, money market deposit           
  and NOW accounts ....................         14         (40)        (26)         17         (11)          6
 Time deposits ........................        (27)        (61)        (88)        163         143         306
                                             -----       -----       -----       -----       -----       -----
   Total deposits .....................        (13)       (101)       (114)        180         132         312
 FHLB advances and other borrowings ...        691         (70)        621         188         (23)        165
                                             -----       -----       -----       -----       -----       -----
   Total interest-bearing liabilities .        678        (171)        507         368         109         477
                                             -----       -----       -----       -----       -----       -----
Net change in net interest income .....      $ 229       $  47       $ 276       $ 192       $ (66)      $ 126
                                             =====       =====       =====       =====       =====       =====
</TABLE>




                                       39

<PAGE>



ASSET/LIABILITY MANAGEMENT

     The  Association,  like other thrift  institutions,  is subject to interest
rate risk to the extent that its interest-bearing  liabilities mature or reprice
at different times, or on a different basis, than its interest-earning assets, a
portion of which consists of long-term,  fixed-rate  loans and securities.  As a
continuing part of its strategy,  the Association  considers methods of managing
this asset/liability mismatch,  consistent with maintaining acceptable levels of
net interest income.

     The Association has an Asset/Liability  Committee  composed  principally of
its President and the lending and finance department heads. The responsibilities
of this  Committee are to assess the  Association's  asset/liability  mix and to
recommend  strategies to the Board of Directors  that will enhance  income while
managing the Association's vulnerability to changes in interest rates.

     In managing its asset/liability mix, the Association,  at times,  depending
on  the  relationship  between  long-  and  short-term  interest  rates,  market
conditions and consumer preference, may place greater emphasis on maximizing its
net interest margin than on matching the interest rate sensitivity of its assets
and liabilities,  in an effort to improve its spread.  Management  believes that
the increased net income  resulting from a mismatch in the maturity of its asset
and liability  portfolios  can,  during periods of declining or stable  interest
rates,  provide high enough  returns to justify the increased  vulnerability  to
sudden and  unexpected  increases in interest rates which can result from such a
mismatch.

     A negative gap for a given period means that the amount of interest-earning
assets  maturing  or  otherwise  repricing  within  such period is less than the
amount of  interest-bearing  liabilities  maturing or otherwise repricing within
the same period.  Accordingly,  in a declining  interest  rate  environment,  an
institution with a negative gap generally  experiences a greater decrease in the
cost of its liabilities  than in the yield on its assets.  Conversely,  a rising
interest  rate  environment  will  generally  have an  unfavorable  impact on an
institution  with a  negative  gap  because  its  cost of funds  will  generally
increase more than the yield on its assets.  Changes in interest rates generally
have the  opposite  effect on an  institution  with a positive  gap. A declining
interest rate  environment  imposes risks on an institution with a positive gap,
because the decreased  yield on its assets  generally  will exceed the decreased
cost of its liabilities.

     The following table sets forth the repricing  periods of the  Association's
interest-earning  assets and  interest-bearing  liabilities at December 31, 1998
and the  Association's  interest rate sensitivity "gap" percentages at the dates
indicated.  The interest rate  sensitivity gap is defined as the amount by which
assets  repricing  within the respective  periods exceed  liabilities  repricing
within  such  periods.  One-  to  four-family   fixed-rate  mortgage  loans  and
mortgage-backed  securities  are assumed to prepay at annual rates  ranging from
10% to 33% per year,  depending  on the stated  interest  rate.  Adjustable-rate
mortgage  loans are assumed to prepay at a rate of 8% to 9% per year,  depending
on the  property  type and index rate the loan is priced on. All other loans are
assumed to prepay at a rate of 8%.  Securities with call features are assumed to
be extended to maturity and not called,  which is unlikely  over the life of the
security.  However, it presents a worst case scenario for gap analysis. Passbook
accounts are assumed to be withdrawn at annual rates of 17%,  17%,  17%, 16% and
14%,  respectively,  during the periods shown. Money market deposit accounts are
assumed  to  reprice  immediately  in the  first  period.  Finally,  transaction
accounts  are assumed to decay at annual  rates of 37%,  37%,  32%, 17% and 17%,
respectively,  in  each of the  periods  shown.  All  prepayment  and  liability
repricing  assumptions  are the most recent  supplied by the FHLB of Des Moines,
Iowa, based on a model for the quarter ended December 31, 1998.

     The effect of these  assumptions  is to quantify the dollar amount of items
that are  interest-sensitive  and can be  repriced  within  each of the  periods
specified.  Such  repricing  can  occur  in one of three  ways:  (1) the rate of
interest  to be paid on an asset or  liability  may adjust  periodically  on the
basis of an  index,  (2) an  asset  or  liability  such as a  mortgage  loan may
amortize,  permitting reinvestment of cash flows at the then-prevailing interest
rates,  or (3) an asset or liability may mature,  at which time the proceeds can
be reinvested at current market rates.

                                       40

<PAGE>

     The  following  table  sets  forth the  interest  rate  sensitivity  of the
Association's  assets and  liabilities  (excluding  non-performing  assets)  and
certain associated weighted average yields and costs at December 31, 1998 on the
basis of the factors and assumptions set forth above.

<TABLE>
<CAPTION>
                                                                                           Maturing or Repricing
                                                                 -------------------------------------------------------------------
                                                                                                                        Over 1-3
                                                                          0-3 Months                   4-12 Months        Years
                                                                 -------------------------    ----------------------    ---------
                                                                    Amount          Rate         Amount       Rate       Amount
                                                                 -------------------------    ----------     -------    ---------
                                                                                                    (Dollars in Thousands)
<S>                                                              <C>                 <C>      <C>              <C>      <C>
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
  family real estate and construction loans......................$    3,928          7.22%    $  10,797        7.44%    $ 26,925

Adjustable-rate one- to four-family (including
  mortgage-backed securities), commercial/multi-
  family real estate and construction loans......................     7,217          7.68        15,392        7.80       10,657

Consumer and other loans.........................................     1,002          8.59         2,909        8.59        6,310

Investment securities and other..................................     5,634          5.33         2,015        5.28        3,005
                                                                 ----------                   ---------                 --------
     Total interest-earning assets...............................    17,781          6.94        31,113        7.49       46,897
                                                                 ----------                   ---------                 --------

Savings deposits, money market deposit and NOW
  accounts, excluding non-interest bearing checking
  accounts.......................................................    15,918          3.54         3,104        1.44        6,421
Time deposits....................................................    12,967          5.00        32,494        5.51       25,925
                                                                 ----------                   ---------                 --------
  Total interest-bearing deposits................................    28,885          4.20        35,598        5.16       32,346
FHLB advances....................................................     2,000          6.15            --          --       12,000
                                                                 ----------                   ---------                 --------
     Total interest-bearing liabilities..........................    30,885          4.33        35,598        5.16       44,346
                                                                 ----------                   ---------                 --------

Interest-earning assets less interest-bearing
  liabilities....................................................$  (13,104)                  $  (4,485)                $  2,551
                                                                 ==========                   =========                 ========
Cumulative interest rate sensitivity gap.........................$  (13,104)                  $ (17,589)                $(15,038)
                                                                 ==========                   =========                 ========
Cumulative interest rate sensitivity gap as a
  percentage of total assets at December 31, 1998................    (8.1)%                     (10.8)%                   (9.3)%
                                                                    =====                       =====                     ====
Cumulative interest rate sensitivity gap as a percentage of
   total assets at December 31, 1997 ............................   (13.2)%                     (20.0)%
                                                                    =====                       =====
Cumulative interest rate sensitivity gap as a percentage of
   total assets at December 31, 1996.............................    (9.2)%                     (10.9)%
                                                                    =====                       =====
Cumulative interest rate sensitivity gap as a percentage of
   total assets at December 31, 1995.............................      7.1%                        1.9%
                                                                     =====                       =====
Cumulative interest rate sensitivity gap as a percentage of                                 
  total assets at December 31, 1994.............................      (.5)%                        9.1%
                                                                      ====                         ===
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                Maturing or Repricing
                                                                 -------------------------------------------------
                                                                    Over 3-5             Over
                                                                      Years             5 Years            Total
                                                                    --------           --------          ---------
                                                                     Amount             Amount             Amount
                                                                    --------           --------          ---------
                                                                                          (Dollars in Thousands)
<S>                                                                 <C>                <C>               <C>
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
  family real estate and construction loans......................   $  8,036           $10,754           $ 60,440

Adjustable-rate one- to four-family (including
  mortgage-backed securities), commercial/multi-
  family real estate and construction loans......................      2,692            12,880             48,838

Consumer and other loans.........................................      2,616             1,673             14,510

Investment securities and other..................................      5,359            17,308             33,321
                                                                    --------            ------           --------
     Total interest-earning assets...............................     18,703            42,615            157,109
                                                                    --------            ------           --------

Savings deposits, money market deposit and NOW
  accounts, excluding non-interest bearing checking
  accounts.......................................................      2,693             3,629             31,765
Time deposits....................................................      1,046             1,206             73,638
                                                                    --------           -------           --------
  Total interest-bearing deposits................................      3,739             4,835            105,403
FHLB advances....................................................     10,000            19,000             43,000
                                                                    --------            ------           --------
     Total interest-bearing liabilities..........................     13,739            23,835            148,403
                                                                    --------            ------           --------

Interest-earning assets less interest-bearing
  liabilities....................................................   $  4,964           $18,780           $  8,706
                                                                    ========           =======           ========
Cumulative interest rate sensitivity gap.........................   $(10,074)          $ 8,706
                                                                    ========           =======
Cumulative interest rate sensitivity gap as a
  percentage of total assets at December 31, 1998................     (6.2)%              5.4%
                                                                      ====               ====
Cumulative interest rate sensitivity gap as a percentage of
   total assets at December 31, 1997 ............................

Cumulative interest rate sensitivity gap as a percentage of
   total assets at December 31, 1996.............................

Cumulative interest rate sensitivity gap as a percentage of
   total assets at December 31, 1995.............................

Cumulative interest rate sensitivity gap as a percentage of

  total assets at December 31, 1994..............................

</TABLE>

                                       41
<PAGE>

     The  shift  in the  Association's  one-year  gap from a  negative  20.0% at
December 31, 1997 to a negative  10.8% at December 31, 1998 was primarily due to
the decrease in the amount of FHLB advances maturing or repricing in one year or
less to $2.0 million in 1998 from $14.5 million in 1997.

     Office of Thrift Supervision  ("OTS")  regulations  currently provide a Net
Portfolio Value ("NPV") approach to the quantification of interest rate risk. In
essence,  this approach  calculates the difference  between the present value of
expected  cash flows from  assets and the present  value of expected  cash flows
from liabilities,  as well as cash flows from off balance sheet contracts. Under
OTS regulations,  an  institution's  "normal" level of interest rate risk in the
event  of  this  assumed   change  in  interest  rates  is  a  decrease  in  the
institution's  NPV in an amount not  exceeding  2% of the  present  value of its
assets.  Beginning July 1, 1994, thrift  institutions with greater than "normal"
interest rate exposure must take a deduction from their total capital  available
to meet their risk-based  capital  requirement.  The amount of that deduction is
one-half of the  difference  between  (a) the  institution's  actual  calculated
exposure to the 200 basis point  interest rate  increase or decrease  (whichever
results in the greater pro forma  decrease in NPV) and (b) its "normal" level of
exposure which is 2% of the present value of its assets. 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.  At December  31,  1998,  2% of the present  value of the
Association's  assets was approximately  $3.3 million,  which was more than $0.9
million,  the amount of the greatest  decrease in NPV resulting from a 200 basis
point change in interest rates. As a result, the Association would not have been
required to make a deduction  from total capital in  calculating  its risk-based
capital requirement, had the requirement been applicable to the Association.

     The Board of Directors  dictates  acceptable limits on the amount of change
in NPV given certain changes in interest rates.  Presented below, as of December
31, 1998, is an analysis of the Association's  interest rate risk as measured by
changes in NPV for  instantaneous  and  sustained  parallel  shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points.  Assumptions
used in calculating the amounts in this table are OTS assumptions.


        Change In                         Net Portfolio Value
      Interest Rate     ----------------------------------------------------
     (Basis Points)     $ Amount            $ Change             % Change
----------------------------------------------------------------------------
                             (Dollars in Thousands)

      +400             $  9,337              $(3,256)               (26)%
      +300               10,631               (1,962)               (16)
      +200               11,660                 (932)                (7)
      +100               12,363                 (229)                (2)
         0               12,592                   --                 --
      -100               12,369                 (223)                (2)
      -200               12,006                 (586)                (5)
      -300               11,898                 (695)                (6)
      -400               11,694                 (898)                (7)

     Management's   policy  involves   structuring  the  Company's   assets  and
liabilities  to accept modest  exposure to interest rate risk. In the event of a
400 basis point change in interest rates, the Association  would experience a 7%
decrease in NPV in a declining rate  environment  and a 26% decrease in a rising
rate  environment.  During periods of rising rates, the value of monetary assets
and monetary liabilities decline.  Conversely,  during periods of falling rates,
the value of monetary assets and liabilities  increase.  However,  the amount of
change in value of specific  assets and  liabilities  due to changes in rates is
not the same in a rising  rate  environment  as in a  falling  rate  environment
(I.E.,  the amount of value increase under a specific rate decline may not equal
the amount of value  decrease  under an  identical  upward rate  movement due to
embedded options in loan contracts and callable securities).

     Certain  shortcomings are inherent in the methods of analysis  presented in
the "gap" and NPV tables presented  above. For example,  although certain assets
and  liabilities may have similar  maturities or periods to repricing,  they may
react in  different  degrees to  changes in market  interest  rates.  Also,  the
interest  rates on certain  types of assets and  liabilities  may  fluctuate  in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Certain investment  securities with call
option  features are not  adequately  modeled by the gap table or the OTS model.
Further,  in the  event of a change in  interest  rates,  prepayments  and early
withdrawal  levels  would likely  deviate  significantly  from those  assumed in
calculating the tables.  Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate  increase.  As a result,  the
actual effect of changing  interest  rates may differ from that presented in the
foregoing tables.

                                       42
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The  Company's   principal  sources  of  funds  are  deposits,   borrowings
(including  FHLB  advances),  amortization  and  prepayment  of  loan  principal
(including  mortgage-backed  securities),  sales  or  maturities  of  investment
securities,   mortgage-backed   securities   and  short-term   investments   and
operations.  While  scheduled  loan  repayments  and  maturing  investments  are
relatively  predictable,  deposit  flows  and  early  loan  repayments  are more
influenced by interest rates,  general economic  conditions,  competition,  and,
most recently,  the restructuring of the thrift industry.  The Company generally
manages the pricing of its deposits to maintain a steady  deposit  balance,  but
has from time to time decided not to pay deposit rates that are as high as those
of its competitors, and, when necessary, to supplement deposits with longer term
and/or less expensive alternative sources of funds.

     Federal  regulations require the Association to maintain a minimum level of
liquid assets.  The required  percentage has varied from time to time based upon
economic  conditions  and savings flows and is currently 4% of net  withdrawable
savings deposits and borrowings  payable on demand or in one year or less during
the preceding calendar quarter. Liquid assets for purposes of this ratio include
cash, certain time deposits,  U.S.  Government,  government agency and corporate
securities and other obligations  generally having remaining  maturities of less
than five years. The Association has historically maintained its liquidity ratio
at levels in excess of those  required.  For December  1998,  the  Association's
liquidity  ratio was 8.5%,  compared to 8.1% for December  1997. The increase in
the  Association's  liquidity ratio was the result,  in part, of the increase in
cash and cash  equivalents,  as a result of the maturity and call of  investment
securities  which was temporarily not reinvested at year end. It is management's
intent to continue  its efforts to deploy  excess  liquidity  into  mortgage and
other  loans  and  participations;  however,  the  success  of such  efforts  is
dependent upon the availability of favorable lending opportunities.

     During fiscal 1998, the primary  source of cash from  operating  activities
was net income,  and the net cash  provided  by  operating  activities  was $1.4
million.

     The primary investing  activities of the Company are lending and purchasing
loans,  mortgage-backed securities and investment securities. Loan originations,
net of principal  repayments,  used $4.5 million  during the year ended December
31, 1998.  Loan  purchases  used $1.2 million during the year ended December 31,
1998.  There were $12.0  million  mortgage-backed  securities  purchased,  while
mortgage-backed securities principal repayments totaled $10.2 million. Purchases
of investment securities of $33.2 million were partially offset by maturities of
$20.0 million during the year ended December 31, 1998. Proceeds from the sale of
investment  securities provided $7.3 million. If general interest rates decline,
the Company would expect to experience an increase in prepayments,  particularly
in its investment securities with call option features, adjustable-rate mortgage
loans and adjustable-rate  mortgage-backed  securities. The increased funds from
this source could not  necessarily  be  re-invested at yields and on terms which
would  allow the Company to maintain  the net  interest  margins the Company has
experienced during recent periods.

     The primary  financing  activity of the Company is  deposits.  For the year
ended December 31, 1998 deposits grew by $0.7 million. The Company also utilizes
advances from the FHLB, and increased such advances by $12.5 million in 1998.

     Liquidity  management  is  both a daily  and  long-term  responsibility  of
management.  The Company  adjusts its  investments  in liquid  assets based upon
management's  assessment of (i) expected loan demand,  (ii) the projected amount
of loans and  mortgage-backed  securities  held for sale by the  Company,  (iii)
expected deposit flows, (iv) yields available on interest-bearing  deposits, and
(v) the objective of its asset/liability management program. Excess liquidity is
invested generally in  interest-bearing  overnight deposits and other short-term
government  and agency  obligations.  If the Company  requires  funds beyond its
ability to generate them internally,  it has additional  borrowing capacity with
the FHLB.

     The Company  anticipates  that it will have  sufficient  funds available to
meet current loan commitments.  At December 31, 1998 the Company had outstanding
commitments  to extend credit and purchase  loans which amounted to $3.7 million
and no commitments to sell loans or  participations  in loans. See Note 3 of the
Notes to Consolidated Financial Statements.

     Certificates of deposit scheduled to mature in one year or less at December
31, 1998 totaled approximately $45.5 million. Based on the level of retention of
such deposits in the recent past, management believes that a significant portion
of such deposits will remain with the Company. At December 31, 1998, the Company
had $43.0 million of advances outstanding from the FHLB of Des Moines.

     At December 31, 1998,  the  Company's  stockholders'  equity  totaled $12.0
million,  or  7.41% of  assets.  During  the past  several  years,  the  capital
requirements applicable to all savings institutions,  including the Association,
have been substantially  increased. At December 31, 1998, the Association was in
compliance with all three of its regulatory capital requirements.


                                       43

<PAGE>


     At December  31,  1998,  the  Association  had tangible and core capital of
$10,847,000,  or 6.72% of total  adjusted  assets which  exceeded the regulatory
requirements  of 1.5% and 3.0%,  respectively,  by  $8,424,000  and  $6,001,000,
respectively.   The   risk-based   capital   requirement   is  currently  8%  of
risk-weighted  assets.  As of  December  31,  1998,  the  Association  had risk-
weighted  assets of  $72,977,000,  a risk-based  requirement  of $5,838,000  and
risk-based capital of $11,327,000,  or 15.52%,  which exceeds the requirement by
$5,489,000.

                                             Tangible      Core      Risk-based
                                             Capital      Capital      Capital
                                             -------      -------      -------
                                                    (Dollars In Thousands)

Association's capital ...................    $10,847      $10,847      $10,847
Additional capital - general allowances..         --           --          480
                                             -------      -------      -------
Regulatory capital ......................     10,847       10,847       11,327
Minimum capital requirement .............      2,423        4,846        5,838
                                             -------      -------      -------
Excess regulatory capital ...............    $ 8,424      $ 6,001      $ 5,489
                                             =======      =======      =======

     The unrealized gain on investments available for sale, which is a component
of stockholders'  equity, is a result of the application of Statement No. 115 of
the  Financial  Accounting  Standards  Board.  At  December  31,  1998,  the net
unrealized  gain of $420,000,  up from $373,000 at December 31, 1997,  consisted
primarily  of  the  net   unrealized   market  gain,  net  of  tax,  on  certain
mortgage-backed  securities and investment securities which have been identified
as available for sale by management.

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated  Financial  Statements and Notes thereto  presented herein
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of  historical  dollars  without  considering  the change in the  relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected  in the  increased  cost  of the  Company's  operations.  Unlike  most
industrial  companies,  nearly all the assets and liabilities of the Company are
monetary.  As a result,  interest  rates have a greater  impact on the Company's
performance  than do the effects of general levels of inflation.  Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.

EFFECT OF NEW ACCOUNTING STANDARDS

     SFAS 125,  "Accounting for Transfers and Servicing of Financial  Assets and
Extinguishments  of  Liabilities,"  was  effective  for the Company for the year
beginning  January 1, 1997, and did not have a material  effect on the financial
position  and results of  operations,  nor did the adoption  require  additional
capital resources.

     SFAS 128,  "Earnings  Per  Share,"  was  adopted by the  Company  effective
December 31, 1997. This statement  replaces the primary earnings per share (EPS)
disclosure  with basic and diluted EPS  disclosures to simplify the  calculation
and improve international comparability. The adoption of SFAS 128 did not have a
material effect on the financial position and results of operations, nor did the
adoption require additional capital resources.

     The Company adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE
INCOME,  effective  January 1, 1998.  SFAS No. 130 establishes the standards for
the reporting and display of comprehensive  income in the financial  statements.
Comprehensive income represents net income and certain amounts reported directly
in  stockholders'   equity,   such  as  the  net  unrealized  gain  or  loss  on
available-for-sale  securities. The statement requires additional disclosures in
the  consolidated  financial  statements;  it  does  not  effect  the  Company's
financial positions or results of operations.  Prior year consolidated financial
statements  have been  reclassified  to conform to the  requirements of SFAS No.
130.

     The  Company  adopted the  provisions  of SFAS No.  131,  Disclosure  About
Segments of an Enterprise and Related  Information,  effective  January 1, 1998.
SFAS No. 131 establishes  disclosure  requirements for segment  operations.  The
adoption had no effect on the Company's financial statement disclosures.

     The Company adopted the provisions of SFAS No. 132, Employers'  Disclosures
about Pensions and Other  Postretirement  Benefits,  effective  January 1, 1998.
SFAS  No.  132  revises  the  disclosure  requirements  for  pension  and  other
postretirement  benefit  plans.  The  adoption  had no effect  on the  Company's
financial statement disclosures.

                                       44
<PAGE>


     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
will be effective for the Company for the year  beginning  January 1, 2000.  The
Company expects to adopt SFAS No. 133 when required. Adoption is not expected to
have a material effect on the financial position and results of operations.

ITEM 7.  FINANCIAL STATEMENTS

         (A) FINANCIAL STATEMENTS


                          INDEPENDENT AUDITORS' REPORT



    The Board of Directors



    Midwest Bancshares, Inc.
    Burlington, Iowa:


     We have audited the  accompanying  consolidated  balance  sheets of Midwest
     Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
     related  consolidated  statements of operations,  stockholders'  equity and
     comprehensive  income,  and  cash  flows  for  each  of  the  years  in the
     three-year  period ended December 31, 1998.  These  consolidated  financial
     statements  are  the  responsibility  of  the  Company's  management.   Our
     responsibility  is to express an  opinion on these  consolidated  financial
     statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
     present fairly, in all material respects, the financial position of Midwest
     Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
     results of their  operations  and their cash flows for each of the years in
     the three-year period ended December 31, 1998, in conformity with generally
     accepted accounting principles.



     /s/ KPMG Peat Marwick LLP


    Des Moines, Iowa
    January 22, 1999, except for note 16,
        which is as of February 2, 1999

                                       45


<PAGE>
                 MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                        Consolidated Balance Sheets

                        December 31, 1998 and 1997




                     ASSETS                          1998          1997
                     ------
                                                  ------------  ------------

Cash and cash equivalents                        $  4,087,677     2,523,983
Securities available for sale (note 2)             33,842,698    27,934,974
Securities held to maturity (estimated fair
   value of $22,116,475 and $20,055,364) (notes    21,826,889    19,839,678
   2 and 7)
Loans receivable, net (notes 3, 4, and 8)          96,347,716    91,276,434
Real estate acquired through foreclosure              191,741       314,583
Federal Home Loan Bank (FHLB) stock, at cost        2,200,000     1,959,700
Office property and equipment, net (note 5)         2,444,356     2,560,749
Accrued interest receivable (note 6)                1,237,155     1,203,471
Other assets                                          139,736       110,869
                                                 ------------   -----------

         Total assets                            $162,317,968   147,724,441
                                                  ===========   ===========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Deposits (note 7)                             $105,982,327   105,278,292
   Advances from FHLB (note 8)                     43,000,000    30,500,000
   Advances from borrowers for taxes and              412,903       387,881
   insurance
   Accrued interest payable                            65,566        80,175
   Accrued expenses and other liabilities             822,428       802,632
                                                  -----------   -----------

         Total liabilities                        150,283,224   137,048,980
                                                  -----------   -----------

Stockholders' equity (notes 10 and 11):
   Serial preferred stock, $.01 par value;
    authorized 500,000 shares; none issued                 --            --
   Common stock, $.01 par value;
    2,000,000 shares authorized;
    1,077,738 shares issued and outstanding in
    1998 and 1,020,762 shares issued and
    outstanding in 1997                                10,777        10,208
   Additional paid-in capital                       1,771,495     1,530,430
   Retained earnings, substantially restricted      9,832,094     8,821,782
   Employee Stock Ownership Plan (ESOP)                    --       (60,000)
   Accumulated other comprehensive income -
   unrealized gains
    on securities available for sale, net of
    taxes on income
    of $250,000 in 1998 and $222,000 in 1997          420,378       373,041
                                                   ----------   -----------

         Total stockholders' equity                12,034,744    10,675,461

   Contingencies (note 15)                        -----------   -----------

         Total liabilities and stockholders'        
         equity                                  $162,317,968   147,724,441
                                                 ============   ===========

See accompanying notes to consolidated financial statements.





                                       46
<PAGE>
                   MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                 Years ended December 31, 1998, 1997, and 1996




                                              1998         1997        1996
                                           -----------  ----------- -----------
Interest income:
   Loans receivable                      $  7,536,716    7,074,649   6,444,056
   Securities available for sale            2,361,999    2,073,271   1,902,576
   Securities held to maturity              1,202,933    1,388,444   1,609,591
   Deposits in other financial                100,210       75,365      68,717
   institutions
   Other interest-earning assets              140,526      138,271     137,496
                                            ----------  ----------  ----------

                                           11,342,384   10,750,000  10,162,436
                                           ----------   ----------  ----------
Interest expense:
   Deposits (note 7)                        4,924,651    5,039,036   4,726,637
   Advances from FHLB and other borrowings  2,302,514    1,681,261   1,516,060
                                           ----------   ----------  ----------

                                            7,227,165    6,720,297   6,242,697
                                           ----------   ----------  ----------

         Net interest income                4,115,219    4,029,703   3,919,739

Provision for losses on loans (note 4)         47,907       48,000      47,972
                                           ----------   ----------  ----------
         Net interest income after         
         provision for losses on loans      4,067,312    3,981,703   3,871,767
                                           ----------   ----------  ----------

Noninterest income:
   Fees and service charges                   375,891      282,249     179,326
   Gain on sale of securities available for   117,920      220,223      29,213
   sale (note 2)
   Other                                      170,078       51,214     140,481
                                           ----------   ----------  ----------

                                              663,889      553,686     349,020
                                           ----------   ----------  ----------
Noninterest expenses:
   Compensation and benefits (note 10)      1,348,638    1,285,960   1,181,748
   Office property and equipment              423,224      364,804     349,156
   Deposit insurance premiums                  64,596       53,687     236,989
   Deposit insurance special assessment            --           --     670,861
   (note 12)
   Data processing                            173,964      164,087     164,939
   Other                                      799,521      712,937     613,436
                                           ----------   ----------  ----------
                                            2,809,943    2,581,475   3,217,129
                                           ----------   ----------  ----------

         Earnings before taxes on income    1,921,258    1,953,914   1,003,658

Taxes on income (note 9)                      549,000      689,000     374,000
                                           ----------   ----------  ----------
         Net earnings                    $  1,372,258    1,264,914     629,658
                                          ===========   ==========  ==========

Earnings per share - basic               $       1.31         1.23        0.59
                                           ==========   ==========  ==========

Earnings per share - diluted             $       1.25         1.14        0.56
                                           ==========   ==========  ==========


See accompanying notes to consolidated financial statements.

                                       47



<PAGE>

<TABLE>
<CAPTION>

                                             MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
                            Consolidated Statements of Stockholders' Equity and Comprehensive Income
                                           Years ended December 31, 1998, 1997, and 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                                   EMPLOYEE
                                                                                    STOCK
                                                                                   OWNERSHIP RECOGNITION  ACCUMULATED
                                              ADDITIONAL                             PLAN       AND         OTHER
                                     COMMON    PAID-IN     RETAINED    TREASURY    BORROWING RETENTION   COMPREHENSIVE
                                     STOCK     CAPITAL     EARNINGS     STOCK      GUARANTEE   PLAN         INCOME       TOTAL
---------------------------------- ---------- ----------- ----------- ----------- ----------- ---------- ------------ -------------

<S>                                <C>         <C>         <C>        <C>          <C>         <C>          <C>         <C>
Balance at December 31,            $  4,550    4,037,058   7,403,062  (1,699,533)  (180,000)   (9,725)      340,526     9,895,938
1995

Net earnings                             --           --     629,658          --         --         --           --       629,658
Unrealized losses during the year
on securities available for sale                                                                           (307,852)     (307,852)
Realized gains on securities
available for sale, net of taxes         --           --          --          --         --         --       19,800        19,800
                                    -------  ----------- ----------- -----------  --------- ----------    ---------   -----------

       Total comprehensive income        --           --     629,658          --         --         --     (288,052)      341,606

Dividends declared ($.187 per            --           --    (195,912)         --         --         --           --      (195,912)
     share*)
Treasury stock acquired                  --           --          --    (511,109)        --         --           --      (511,109)
ESOP loan payment                        --           --          --          --     60,000         --           --        60,000
Amortization of recognition
    and retention plan                   --           --          --          --         --      9,725           --         9,725
                                     ------   ----------  ----------  ----------   --------  ---------     --------    ----------

Balance at December 31, 1996          4,550    4,037,058   7,836,808  (2,210,642)  (120,000)        --       52,474     9,600,248

Net earnings                             --           --   1,264,914          --         --         --           --     1,264,914
Unrealized gains during the year
    on securities available for
    sale                                 --           --          --          --         --         --      463,717       463,717
Realized gains on securities
    available for sale, net of
    taxes                                --           --          --          --         --         --     (143,150)     (143,150)
                                     ------   ----------  ----------  ----------   --------  ---------     --------    ----------

       Total comprehensive income        --           --   1,264,914          --         --         --      320,567     1,585,481

Dividends declared ($.22 per
    share*)                              --           --    (225,624)         --         --         --           --      (225,624)
Treasury stock acquired                  --           --          --    (393,659)        --         --           --      (393,659)
ESOP loan payment                        --           --          --          --     60,000         --           --        60,000
Issuance of shares of common stock
     under the stock option plan
     (note 10)                           28       26,237     (54,316)     77,066         --         --           --        49,015
3-for-1 stock split effected in the
     form of a 200% stock dividend
     (note 11)                        5,630   (2,532,865)         --   2,527,235         --         --           --            --
                                     ------   ----------  ----------  ----------   --------  ---------     --------    ----------

Balance at December 31, 1997         10,208    1,530,430   8,821,782          --    (60,000)        --      373,041    10,675,461

Net earnings                             --           --   1,372,258          --         --         --           --     1,372,258
Unrealized gains during the year on
    securities available for sale        --           --          --          --         --         --      123,987       123,987
Realized gains on securities
    available for sale, net of
    taxes                                --           --          --          --         --         --      (76,650)      (76,650)
                                     ------   ----------  ----------  ----------   --------  ---------     --------    ----------

       Total comprehensive income        --           --   1,372,258          --         --         --       47,337     1,419,595

Dividends declared ($.34 per share)      --           --    (361,946)         --         --         --           --      (361,946)
ESOP loan payment                        --           --          --          --     60,000         --           --        60,000
Issuance of shares of common stock
     under the stock option plan
     (note 10)                          569      241,065          --          --         --         --           --       241,634
                                     ------   ----------  ----------  ----------   --------  ---------     --------    ----------

Balance at December 31, 1998       $ 10,777    1,771,495   9,832,094          --         --         --      420,378    12,034,744
                                     ======   ==========  ==========  ==========   ========  =========     ========    ==========
</TABLE>

*  Reflects  the  3-for-1  stock  split  effected  in the form of a 200  percent
dividend in November 1997.

See accompanying notes to consolidated financial statements.

                                      48
<PAGE>
<TABLE>
<CAPTION>

                                  MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
                                    Consolidated Statements of Cash Flows
                                Years ended December 31, 1998, 1997, and 1996
-------------------------------------------------------------------------------------------

                                                         1998         1997         1996
                                                      ------------ ------------ -----------
<S>                                                 <C>              <C>           <C>
Cash flows from operating activities:
    Net earnings                                    $   1,372,258    1,264,914     629,658
    Adjustments to reconcile net earnings to net
       cash provided by operating activities:
         Provision for losses on loans                     47,907       48,000      47,972
         Depreciation                                     190,663      161,250     144,301
         Provision for deferred taxes                     170,000       96,000      24,000
         Gain on sale of securities available for
             sale                                        (117,920)    (220,223)    (29,213)
         Gain on sale of securities held to
             maturity                                          --           --     (15,950)
         Amortization of recognition and retention
             plan benefits                                     --           --       9,725
         ESOP expense                                      60,100       56,482      53,938
         Amortization of premiums and discounts           (31,594)     (25,496)     76,778
         Increase in accrued interest receivable          (33,684)    (195,924)   (133,035)
         (Increase) decrease in other assets              (28,867)      (9,961)     90,050
         (Decrease) increase in accrued interest
             payable                                      (14,609)       6,432       2,236
         (Decrease) increase in accrued expenses and
             other liabilities                           (224,832)     160,229    (194,335)
                                                      -----------  -----------  ----------

         Net cash provided by operating activities      1,389,422    1,341,703     706,125
                                                      -----------  -----------  ----------

Cash flows from investing activities:
    Purchase of securities                            (33,196,242) (14,680,737) (5,568,000)
    Proceeds from maturities of securities             20,000,000    9,490,000   8,323,885
    Proceeds from sale of securities available
        for sale                                        7,297,627      798,473     550,239
    Loans purchased                                    (1,164,815)  (6,955,215) (5,555,413)
    Purchase of mortgage-backed securities            (12,022,831)  (3,484,096) (4,051,131)
    Purchase of FHLB stock                               (240,300)          --          --
    Repayments of principal on mortgage-backed
        securities                                     10,247,389    6,464,986   5,862,203
    Increase in loans receivable                       (4,479,351)  (3,505,057) (1,800,202)
    Proceeds from sale of real estate owned, net          651,792       47,235     155,042
    Purchase of office property and equipment             (74,270)    (275,016)   (276,470)
                                                      -----------  -----------  ----------

         Net cash used in investing activities        (12,981,001) (12,099,427) (2,359,847)
                                                      -----------  -----------  ----------
Cash flows from financing activities:
    Increase in deposits                                  704,035    3,360,527     583,328
    Proceeds from advances from  FHLB                  33,700,000    8,500,000   8,000,000
    Repayment of advances from FHLB                   (21,200,000)  (2,000,000) (4,500,000)
    Net increase (decrease) in advances from
       borrowers for taxes and  insurance                  25,022        9,446     (33,992)
    Treasury stock acquired                                    --     (393,659)   (511,109)
    Stock options exercised                               241,634       24,015          --
    Payment of cash dividends                            (315,418)    (216,785)   (191,453)
                                                      -----------  -----------  ----------

         Net cash provided by financing activities     13,155,273    9,283,544   3,346,774
                                                      -----------  -----------  ----------

         Net increase (decrease) in cash and cash
              equivalents                               1,563,694   (1,474,180)  1,693,052

Cash and cash equivalents at beginning of year          2,523,983    3,998,163   2,305,111
                                                      -----------  -----------  ----------

Cash and cash equivalents at end of year            $   4,087,677    2,523,983   3,998,163
                                                      ===========  ===========  ==========

Supplemental disclosures of cash flow information:
    Cash paid during the year for:
       Interest                                     $   7,241,774    6,713,865   6,240,461
       Taxes on                                           351,760      485,140     531,654
       income
    Transfers from loans to real estate acquired
        through foreclosure                               528,950      349,818     134,098
                                                      ===========  ===========  ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       49
<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



(1)  Summary of Significant Accounting Policies

     Description of Business

     Midwest  Bancshares,  Inc.  (the  Company or Parent  Company) is a Delaware
corporation  operating as a savings and loan holding  company.  The Company owns
all of the outstanding  stock of Midwest Federal Savings and Loan Association of
Eastern Iowa (the Association).

     The Association serves Des Moines, Lee, and Louisa Counties in southeastern
Iowa through its five retail banking offices located in Burlington, Wapello, and
Ft.  Madison,  Iowa. The Association is primarily  engaged in attracting  retail
deposits from the general public and investing those funds in first mortgages on
owner-occupied,  single-family residential loans and mortgage-backed securities.
Midwest Financial Products,  Inc., a wholly owned subsidiary of the Association,
is engaged in the marketing of financial products.

     Principles of Consolidation

     The  consolidated  financial  statements  include  the  accounts of Midwest
Bancshares,  Inc. and its wholly owned  subsidiary;  Midwest Federal Savings and
Loan Association of Eastern Iowa and its subsidiary; Midwest Financial Products,
Inc. All material intercompany accounts and transactions have been eliminated.

     The consolidated financial statements have been prepared in accordance with
generally   accepted   accounting   principles.   In  preparing  such  financial
statements, management is required to make estimates and assumptions that affect
the reported  amounts of assets and  liabilities  and  disclosure  of contingent
assets and  liabilities  as of the date of the balance  sheet and  revenues  and
expenses for the period.  Actual results could differ  significantly  from those
estimates.  Material estimates that are particularly  susceptible to significant
change relate to the determination of the allowance for loan losses.

     Regulatory Capital

     The  Association is required by the Office of Thrift  Supervision  (OTS) to
maintain  prescribed  levels of regulatory  capital.  At December 31, 1998,  the
Association  met  the  requirements,  and  management  anticipates  meeting  the
requirements at December 31, 1999 (see note 11).

     Cash and Cash Equivalents

     For purposes of reporting  cash flows,  the Company  includes  cash and due
from other financial  institutions and  interest-bearing  deposits with original
maturities  of three  months or less in cash and cash  equivalents.  Amounts  of
interest-bearing  deposits included as cash equivalents at December 31, 1998 and
1997, were $2,977,766 and $1,088,237, respectively.

     Earnings Per Share

     Basic earnings per share amounts are computed by dividing net income by the
weighted average number of common shares  outstanding  during the year.  Diluted
earnings  per share  amounts are computed by dividing net income by the weighted
average number of shares and all dilutive  potential shares  outstanding  during
the year. As further  discussed in note 11, the Company declared a 3-for-1 stock
split  effected in the form of a stock  dividend in 1997.  The average number of
shares and dilutive

                                       50

                                                                     (Continued)

<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements




potential  shares  have  been  restated  for  the  stock  split.  The  following
information  was used in the  computation  of earnings per share on both a basic
and diluted basis for the years ended December 31, 1998, 1997, and 1996.

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

Basic EPS Computation:
   Numerator -
      Net income                 $1,372,258         1,264,914           629,658
   Denominator -
      Weighted average
          shares outstanding      1,048,233         1,032,310         1,061,442
                                 ----------        ----------        ----------

Basic EPS                        $     1.31              1.23              0.59
                                 ==========        ==========        ==========

Diluted EPS Calculation:
   Numerator -
      Net income                 $1,372,258         1,264,914           629,658
                                 ----------        ----------        ----------

Denominator:
   Weighted average
      shares outstanding          1,048,233         1,032,310         1,061,442
   Stock options                     53,750            75,631            62,941
                                 ----------        ----------        ----------
                                  1,101,983         1,107,941         1,124,383
                                 ----------        ----------        ----------
Diluted EPS                      $     1.25              1.14              0.56
                                 ==========        ==========        ==========


     Securities

     The  Company's  method  of  classifying  debt  securities  is  based on the
intended holding period.  Securities which may be sold prior to maturity to meet
liquidity needs, to respond to market changes,  or to adjust the asset-liability
position are  classified  as available  for sale.  Securities  which the Company
intends to hold to maturity are classified as held to maturity.

     Securities  available  for sale are recorded at fair value.  The  aggregate
unrealized gains or losses, net of the effect of taxes on income are recorded as
a component of stockholders'  eSecurities for which the Company has the positive
intent and  ability to hold to  maturity  are  reported  at cost,  adjusted  for
amortization of premium or accretion of discount,  over the term of the security
using the interest method. Original issue discounts on short-term securities are
accreted as accrued interest receivable over the lives of such securities.

     Mortgage-backed  securities  for which the Company has the positive  intent
and ability to hold to maturity  are reported at  amortized  cost.  Premiums and
discounts  are  amortized  and  accreted  using  the  interest  method  over the
remaining  period to  contractual  maturity,  adjusted for  prepayments.  Actual
prepayment  experience  is  periodically  reviewed,  and  the  amortization  and
accretion is adjusted accordingly.  In 1996, certain mortgage-backed  securities
with remaining  principal  balances of less than 15 percent of original purchase
amounts were sold (see note 2).

                                       51
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Gain or loss on sale is recognized in the statement of operations using the
specific identification method.

     Allowances for Losses on Loans and Real Estate

     The allowance for losses on loans is increased by charges to operations and
decreased by net charge-off and is maintained at an amount  considered  adequate
to  provide  for such  losses.  The  allowance  for  losses on loans is based on
management's  periodic  evaluation of the loan  portfolio and reflects an amount
that,  in  management's  opinion,  is adequate to absorb  losses in the existing
portfolio.  In evaluating the  portfolio,  management  takes into  consideration
numerous  factors,  including  current  economic  conditions,  prior  loan  loss
experience,  the composition of the loan portfolio, and management's estimate of
anticipated credit losses.

     Real  estate  acquired  is  carried at the lower of cost or fair value less
estimated costs of disposition.  When a property is acquired through foreclosure
or a loan is considered impaired, any excess of the loan balance over fair value
of the property plus disposition costs is charged to the allowance for losses on
loans. When  circumstances  indicate  additional loss on the property,  a direct
charge to the provision  for losses on real estate is made,  and the real estate
is recorded net of such provision.

     Accrued  interest  receivable  in  arrears  which  management  believes  is
doubtful of collection  (generally  when a loan becomes 90 days  delinquent)  is
charged to income.  Subsequent  interest  income is not recognized on such loans
until collected or until determined by management to be collectible.

     Under the Company's credit policies,  all nonaccrual and restructured loans
are  considered to meet the  definition of impaired  loans.  Loan  impairment is
measured based on the present value of expected future cash flows, discounted at
the  loan's  effective  interest  rate  except,  where  more  practical,  at the
observable  market price of the loan or the fair value of the  collateral if the
loan is collateral dependent.

     Unearned Loan Fees and Discounts

     Loan  origination  and  commitment  fees charged to  borrowers  and certain
direct costs related to  originations  are deferred and amortized  into interest
income using the interest method.  Direct loan origination costs for other loans
are expensed, as such costs are not material in amount.

     Premiums and discounts on loans are amortized  primarily  over the expected
remaining life of the related loans using the interest method.

     Concentrations of Credit Risk

     The  Association  grants  residential  and commercial real estate loans and
other consumer and commercial loans,  primarily in its central Iowa market area.
Although the Company has a diversified loan portfolio,  a substantial portion of
its  borrowers'  ability  to  repay  their  loans  is  dependent  upon  economic
conditions in the Company's market area.

                                       52
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Financial Instruments with Off Balance Sheet Risk

     In the  normal  course  of  business  to meet  the  financing  needs of its
customers,  the  Company is a party to  financial  instruments  with off balance
sheet risk, which include  commitments to extend credit.  The Company's exposure
to  credit  loss in the  event  of  nonperformance  by the  other  party  to the
commitments to extend credit is represented by the  contractual  amount of those
instruments.  The Company uses the same credit policies in making commitments as
it does for on balance sheet instruments.

     Commitments  to extend credit are  agreements to lend to a customer as long
as there  are no  violations  of any  conditions  established  in the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent  future cash  requirements  (see note 3). The Company  evaluates  each
customer's  creditworthiness  on a case-by-case  basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty.

     Office Property and Equipment

     Office  property and equipment are recorded at cost,  and  depreciation  is
provided primarily using the straight-line basis over the estimated useful lives
of the related assets,  which range from 25 to 50 years for office buildings and
from 5 to 15 years for furniture, fixtures, and equipment.

     Maintenance  and  repairs  are  charged  against  income.  Betterments  are
capitalized and subsequently depreciated.  The cost and accumulated depreciation
of properties retired or otherwise disposed of are eliminated from the asset and
accumulated depreciation accounts. Related profit or loss from such transactions
is credited or charged to income.

     Taxes on Income

     The Company files a consolidated federal income tax return.  Federal income
taxes are allocated based on taxable income or loss included in the consolidated
return.  For state tax purposes,  the Association  files a franchise tax return.
The Parent Company and the  Association's  subsidiary file corporate  income tax
returns.

     Under the asset and liability  method,  deferred tax assets and liabilities
are  recognized  for the future tax  consequences  attributable  to  differences
between  the  financial  statement  carrying  amounts  of  existing  assets  and
liabilities and their respective tax bases.  Deferred tax assets and liabilities
are measured  using enacted tax rates expected to apply to taxable income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The  effect  of a change  in tax  rates on  deferred  tax  assets  and
liabilities  is  recognized  in income in the period that includes the enactment
date.

     Stock Option Plan

     The company  provides pro forma net income and pro forma earnings per share
disclosures  for material  employee  stock option grants made in 1996 and future
years as if the  fair-value-based  method,  which recognizes as expense over the
vesting  period the fair  value of  stock-based  at the date of grant,  had been
applied.

                                       53
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Fair Value of Financial Instruments

     The  Company   discloses  the  estimated  fair  values  for  its  financial
instruments. Fair value estimates, methods, and assumptions are set forth below.

     Cash and Cash Equivalents

     The carrying amount is a reasonable estimate of fair value.

     Securities Available for Sale and Held to Maturity

     The fair value of securities is estimated based on bid prices  published in
financial newspapers, bid quotations received from securities dealers, or quoted
market  prices of similar  instruments,  adjusted  for  differences  between the
quoted instruments and the instruments being valued.

     Loans

     Fair values are  estimated for  portfolios of loans with similar  financial
characteristics.  Loans are segregated by type,  such as real estate,  consumer,
and commercial.

     The  fair  value of  single  family  residential  loans  is  calculated  by
obtaining  quoted market  prices of similar  loans that are sold in  conjunction
with securitization transactions.

     The fair value of all other loans is  calculated by  discounting  scheduled
cash flows through the estimated  maturity using estimated market discount rates
that  reflect  the credit  and  interest  rate risk  inherent  in the loan.  The
estimate of  maturity  is based on the  Company's  historical  experience,  with
repayments for each loan classification,  modified,  as required, by an estimate
of the  effect  of  current  economic  and  lending  conditions.  The  effect of
nonperforming  loans is  considered in assessing the credit risk inherent in the
fair value estimate.

     FHLB Stock

     The fair value of FHLB stock is equivalent to its carrying  value,  because
it is redeemable at par value.

     Deposits

     The fair value of deposits with no stated maturity, such as passbook; money
market;  noninterest-bearing checking; and checking accounts, is estimated to be
the amount payable on demand. The fair value of certificates of deposit is based
on the  discounted  value  of  contractual  cash  flows.  The  discount  rate is
estimated  using the rates currently  offered for deposits of similar  remaining
maturities.  The fair value  estimates  do not include the benefit  that results
from the low-cost  funding provided by the deposit  liabilities  compared to the
cost of borrowing funds in the market.

     Advances from FHLB

     The fair value of advances from the FHLB is calculated by  discounting  the
scheduled  payments through  maturity.  The discount rate is estimated using the
rates currently offered for similar instruments.

                                       54
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     Off Balance Sheet Assets (Liabilities)

     The  unrealized  gains and losses of  commitments  to external  credits are
estimated  using the  difference  between  current  levels of interest rates and
committed  rates. The unrealized gains and losses of letters of credit are based
on fees currently charged for similar agreements.

     Limitations

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information and  information  about the financial  instrument.
Because no market  exists for a significant  portion of the Company's  financial
instruments,  fair  value  estimates  are based on  judgments  regarding  future
expected loss experience,  current economic conditions,  risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve  uncertainties  and matters of  significant  judgment and,
therefore,  cannot be determined  with precision.  Changes in assumptions  could
significantly affect the estimates.

     Effect of New Financial Accounting Standards

     The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income,  effective  January 1, 1998.  SFAS No. 130 establishes the standards for
the reporting and display of comprehensive  income in the financial  statements.
Comprehensive income represents net income and certain amounts reported directly
in  stockholders'   equity,   such  as  the  net  unrealized  gain  or  loss  on
available-for-sale  securities. The statement requires additional disclosures in
the  consolidated  financial  statements;  it  does  not  effect  the  Company's
financial positions or results of operations.  Prior year consolidated financial
statements  have been  reclassified  to conform to the  requirements of SFAS No.
130.

     The Company  adopted the  provisions  of SFAS No.  131,  Disclosures  About
Segments of an Enterprise and Related  Information,  effective  January 1, 1998.
SFAS No. 131 establishes  disclosure  requirements for segment  operations.  The
adoption had no effect on the Company's financial statement disclosures.

     SFAS 125,  "Accounting for Transfers and Servicing of Financial  Assets and
Extinguishments  of  Liabilities,"  was  effective  for the Company for the year
beginning  January 1, 1997, and did not have a material  effect on the financial
position  and results of  operations,  nor did the adoption  require  additional
capital resources.

     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
will be  effective  for the  Company  for the year  beginning  January  1, 2000.
Management  is  evaluating  the impact the adoption  will have on the  Company's
consolidated  financial  statements.  The Company  expects to adopt SFAS No. 133
when  required.  Adoption  is not  expected  to have a  material  effect  on the
financial position and results of operations.

     Reclassifications

     Certain amounts previously  reported have been reclassified to conform with
the presentation in these financial statements.

                                       55
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(2)  Debt and Equity Securities

     Debt and equity securities have been classified in the consolidated balance
sheets according to management's  intent.  The carrying amount of securities and
their approximate fair values at December 31, 1998 and 1997, follow.

     Securities available for sale:

<TABLE>
<CAPTION>
                                                                             Gross             Gross
                                                      Amortized            unrealized        unrealized           Fair
                    Description                          cost                gains             losses            values
                    -----------                      -----------           ----------        ----------        ----------
<S>                                                 <C>                    <C>               <C>               <C>
1998:
     Government National Mortgage Association
          (GNMA) mortgage-backed securities          $ 5,461,021            309,023               --            5,770,044
     Marketable equity securities                        308,750            137,500             59,825            386,425
     Municipal bonds:
          Due from one to five years                     300,000              6,750               --              306,750
          Due from five to ten years                   1,910,000             47,175               --            1,957,175
          Due after ten years                         10,189,357            168,574               --           10,357,931
     U.S. agency obligations:
          Due from one to five years                  10,014,384             57,489               --           10,071,873
          Due from five to ten years                   2,000,000              3,125               --            2,003,125
          Due after ten years                          2,988,807                568               --            2,989,375
                                                     -----------            -------             ------         ----------
                                                     $33,172,319            730,204             59,825         33,842,698
                                                     ===========            =======             ======         ==========
1997:
     GNMA mortgage-backed securities                 $ 7,641,683            442,566               --            8,084,249
     Marketable equity securities                        654,030            253,750             84,030            823,750
     Municipal bonds:
          Due from one to five years                     440,000              3,850               --              443,850
          Due from five to ten years                   1,605,000             18,638               --            1,623,638
          Due after ten years                          1,021,115             19,622               --            1,040,787
     U.S. agency obligations:
          Due from one to five years                   2,990,163             24,865              3,778          3,011,250
          Due from five to ten years                   2,000,000                ---             10,000          1,990,000
          Due after ten years                         10,987,943              1,202             71,645         10,917,500
                                                     -----------            -------            -------         ----------
                                                     $27,339,934            764,493            169,453         27,934,974
                                                     ===========            =======            =======         ==========
</TABLE>



                                       56
                                                                     (Continued)

<PAGE>

                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     There  were  no  sales  of  mortgage-backed  securities,  which  were  held
available for sale, in 1998 or 1997.  Proceeds from the sale of  mortgage-backed
securities  amounted to $550,239,  resulting in gains of $29,213 during the year
ended December 31, 1996.  Proceeds from the sale of marketable equity securities
amounted  to  $440,123,  $798,473,  and  $-0-,  resulting  in gains of  $93,550,
$220,223,  and $-0- and losses of $28,707, $-0-, and $-0- during the three years
ended December 31, 1998, respectively. Proceeds from the sale of municipal bonds
amounted to $3,833,285, $-0-, and $-0-, resulting in gains of $20,820, $-0-, and
$-0- during the three years ended December 31, 1998, respectively. Proceeds from
the sale of U.S.  agency  obligations  amounted to  $3,024,219,  $-0-, and $-0-,
resulting  in gains of  $32,257,  $-0-,  and $-0-  during the three  years ended
December 31, 1998, respectively.

                                       57
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     Securities held to maturity:

<TABLE>
<CAPTION>

                                                                             Gross             Gross
                                                      Amortized            unrealized        unrealized           Fair
                    Description                          cost                gains             losses            values
                    -----------                      -----------           ----------        ----------        ----------
<S>                                                  <C>                   <C>               <C>               <C>
1998:
Mortgage-backed securities:
     Federal Home Loan Mortgage
          Corporation (FHLMC)                          $13,447,847            133,691              4,969         13,576,569
     Federal National Mortgage
          Association (FNMA)                             7,585,614            176,020             15,156          7,746,478
     Resolution Trust Corporation (RTC)                    336,906               --                 --              336,906
U.S. agency obligations-
     Due in one year or less                               456,522               --                 --              456,522
                                                       -----------        -----------        -----------        -----------
                                                       $21,826,889            309,711             20,125         22,116,475
                                                       ===========        ===========        ===========        ===========

1997:
Mortgage-backed securities:
     FHLMC                                             $ 8,829,148             75,772             25,190          8,879,730
     FNMA                                                8,115,716            175,497               --            8,291,213
     RTC                                                   438,579                461               --              439,040
U.S. agency obligations-
     Due in one year                                     2,456,235               --               10,854          2,445,381
                                                       -----------        -----------        -----------        -----------
                                                       $19,839,678            251,730             36,044         20,055,364
                                                       ===========        ===========        ===========        ===========

</TABLE>


     At December 31, 1998 and 1997, mortgage-backed securities were comprised of
fixed rate securities of $11,501,289 and  $6,673,987,  respectively;  adjustable
rate  securities  of  $3,549,772  and  $4,631,763,   respectively;   fixed  rate
seven-year  balloon securities of $6,319,306 and $2,273,558,  respectively;  and
fixed rate five-year balloon securities of $-0- and $3,804,135, respectively.

                                       58
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(3)  Loans Receivable

     Loans receivable at December 31, 1998 and 1997, are summarized as follows:


                                                      1998               1997
                                                  -----------        -----------
Real estate loans:
     One- to four-family                          $71,535,021         66,549,359
     Commercial/multi-family                        9,653,163         11,209,675
     Construction                                   1,862,300            817,905
                                                  -----------        -----------
          Total real estate loans                  83,050,484         78,576,939

Consumer and other loans                           14,423,441         14,167,194
                                                  -----------        -----------
                                                   97,473,925         92,744,133
                                                  -----------        -----------
Less:
     Loans in process                                 563,542            835,737
     Unearned discounts and
          deferred loan fees                           82,667             63,962
     Allowance for losses on loans                    480,000            568,000
                                                  -----------        -----------
                                                    1,126,209          1,467,699
                                                  -----------        -----------
                                                  $96,347,716         91,276,434
                                                  ===========        ===========



     The Company  originates  residential  and commercial  real estate loans and
other  consumer  and  commercial  loans,  primarily  in its Iowa market area and
adjacent counties in Illinois.  In addition,  the Company purchases  residential
loans located in other states. At December 31, 1998, the geographic  location of
the Company's  loan portfolio was as follows:  local market area,  90.4 percent;
Wisconsin, 5.7 percent;  California, 3.1 percent; and other states, 0.8 percent.
Although the Company has a diversified loan portfolio,  a substantial portion of
its  borrowers'  ability  to  repay  their  loans  is  dependent  upon  economic
conditions in the Company's market area.

     At December  31, 1998,  the  Association  had  outstanding  commitments  to
originate  loans totaling  $740,000,  which  included fixed rate  commitments of
$529,000 at 7.05  percent  weighted-average  interest  rate and  commitments  to
purchase  loans  totaling  $719,000.  The  Association  also had unused lines of
credit totaling $2,228,000 at a variable rate indexed to the Bank Prime rate.

     Loans on nonaccrual status and considered impaired amounted to $172,000 and
$769,000 at December 31, 1998 and 1997,  respectively.  The  allowance  for loan
losses   related  to  these   nonaccrual   loans  were  $17,000  and   $157,000,
respectively.  There were no  nonaccrual  loans that were not subject to related
allowances for loan losses at December 31, 1998 and 1997.  The average  balances
of nonaccrual  loans for the years ended December 31, 1998, 1997, and 1996, were
$355,000; $885,000; and $429,000, respectively. For the years ended December 31,
1998,  1997, and 1996,  interest income which would have been recorded under the
original terms of the loans was approximately  $15,000;  $79,000;  and $103,000,
respectively,  and interest income actually  recorded  amounted to approximately
$9,000; $25,000; and $56,000, respectively.

                                       59
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     Loan customers of the Association  include certain  executive  officers and
directors and their related  interests and  associates.  All loans to this group
were made in the ordinary course of business at prevailing terms and conditions.
Such loans at December  31, 1998 and 1997,  amounted to $868,974  and  $852,861,
respectively.  During  the year  ended  December  31,  1998,  new loans  totaled
$435,865 and repayments totaled $419,752.

(4)  Allowance for Losses on Loans

     A summary of the  allowance  for losses on loans for the three  years ended
December 31, 1998, follows:


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

Balance at beginning of year         $ 568,000         686,000         676,000
Provision for losses on loans           47,907          48,000          47,972
Charge-offs                           (135,907)       (166,000)        (37,972)
                                     ---------       ---------        --------
Balance at end of year               $ 480,000         568,000         686,000
                                     =========       =========        ========


(5)  Office Property and Equipment

     The cost and  accumulated  depreciation of office property and equipment at
December 31, 1998 and 1997, were as follows:


                                             1998              1997
                                          ----------        ----------

Land                                      $  312,320           312,320
Office buildings                           2,403,081         2,403,081
Furniture, fixtures, and equipment         1,390,707         1,316,437
Vehicles                                      41,905            41,905
                                          ----------        ----------
                                           4,148,013         4,073,743
Less accumulated depreciation              1,703,657         1,512,994
                                          ----------        ----------
                                          $2,444,356         2,560,749
                                          ==========        ==========

(6)  Accrued Interest Receivable

     Accrued interest receivable at December 31, 1998 and 1997, is summarized as
follows:


                                        1998              1997
                                     ----------        ----------
Loans receivable                     $  778,481           768,460
Securities available for sale           332,444           305,645
Securities held to maturity             126,230           129,366
                                     ----------        ----------
                                     $1,237,155         1,203,471
                                     ==========        ==========


                                       60
                                                                     (Continued)

<PAGE>

                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(7)  Deposits

     Deposits at December 31, 1998 and 1997, are summarized as follows:


                                     1998                1997
                                ------------        ------------

Passbook                        $  9,002,836           8,372,800
Noninterest checking                 579,619             649,162
Money market investments          14,797,945          14,281,692
Regular checking                   7,963,533           7,266,643
Certificates of deposit           73,638,394          74,707,995
                                ------------        ------------
                                $105,982,327         105,278,292
                                ============        ============


     At December 31, 1998, the scheduled  maturities of  certificates of deposit
were as follows:


               1999                        $45,460,923
               2000                         19,462,813
               2001                          6,462,205
               2002                            683,516
               2003 and thereafter           1,568,937
                                           -----------
                                           $73,638,394
                                           ===========

     Interest  expense on deposits for the three years ended  December 31, 1998,
is summarized as follows:


                                    1998              1997              1996
                                 ----------        ----------        ----------
Passbook                         $  211,378           234,586           244,988
Money market and checking           632,695           635,551           618,377
Certificates of deposit           4,080,578         4,168,899         3,863,272
                                 ----------        ----------        ----------
                                 $4,924,651         5,039,036         4,726,637
                                 ==========        ==========        ==========


     The aggregate amount certificates of deposit with a minimum denomination of
$100,000 was  approximately  $4,719,000  and $4,844,000 at December 31, 1998 and
1997, respectively.

     At December 31, 1998,  mortgage-backed  securities with carrying amounts of
$734,490 were pledged as collateral for deposits of approximately $753,000.

                                       61
                                                                     (Continued)

<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(8)  Advances from FHLB

     A summary at December 31, 1998 and 1997, follows:


                                            1998                   1997
                                  ----------------------  ----------------------

                                               Weighted-               Weighted-
                                                average                 average
                                     Amount      rate       Amount       rate
                                  -----------  ---------  -----------  ---------

Advance maturity (A):
  Within 1 year                   $ 2,000,000    6.15%    $13,000,000    5.45%
  Beyond 1 year but within
     5 years                       22,000,000    5.75      14,000,000    6.09
  Beyond 5 years                   19,000,000    5.14       2,000,000    5.62
                                  -----------             -----------
                                   43,000,000    5.50      29,000,000    5.77
Line of credit with FHLB (B)             --    Variable     1,500,000  Variable
                                  -----------  ========   -----------  ========
                                  $43,000,000             $30,500,000
                                  ===========             ===========


     (A)  Advances  from the FHLB are secured by stock in the FHLB. In addition,
          the Bank has agreed to maintain  unencumbered  additional  security in
          the form of certain  residential  mortgage  loans  aggregating no less
          than 150 percent of outstanding advances.

     (B)  Line of credit  with the FHLB with a limit of  $1,000,000  maturing in
          March of 1999. The Bank does not intend to renew the agreement at that
          time.  The line has an interest rate which  fluctuates  daily.  During
          1998,  the interest  rate ranged from 4.70 percent to 6.25 percent and
          at December 31, 1998, was 4.88 percent.  The line is collateralized as
          described in (A) above.


(9)  Taxes on Income

     Taxes on income for the three years ended December 31, 1998, were comprised
as follows:


                          1998                                1997
            --------------------------------    --------------------------------
            Federal      State       Total      Federal      State       Total
            --------    --------    --------    --------    --------    --------
Current     $322,000      57,000     379,000     524,000      69,000     593,000
Deferred     148,000      22,000     170,000      83,000      13,000      96,000
            --------    --------    --------    --------    --------    --------
            $470,000      79,000     549,000     607,000      82,000     689,000
            ========    ========    ========    ========    ========    ========

                          1996
            --------------------------------
            Federal      State       Total
            --------    --------    --------
Current     $307,000      43,000     350,000
Deferred      22,000       2,000      24,000
            --------    --------    --------
            $329,000      45,000     374,000
            ========    ========    ========


                                       62
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     Taxes on income  differ from the amounts  computed by applying  the federal
income  tax rate of 34  percent  to  earnings  before  taxes on  income  for the
following reasons:


                                      1998          1997          1996
                                   ---------     ---------     ---------
Computed "expected" tax expense    $ 653,228       664,331       341,126
State income tax                      52,140        54,120        29,903
Tax-exempt investment income        (132,460)      (11,418)         --
Other                                (23,908)      (18,033)        2,971
                                   ---------     ---------     ---------
                                   $ 549,000       689,000       374,000
                                   =========     =========     =========


     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax  liabilities as of December
31, 1998 and 1997, are presented below:


                                                            1998         1997
                                                         ---------    ---------
Deferred tax assets:
     General allowance for loan losses                   $ 179,000      212,000
     Accrued expenses not deducted                          15,000       72,000
                                                         ---------    ---------
           Total gross deferred tax assets                 194,000      284,000
                                                         ---------    ---------

Deferred tax liabilities:
     Unrealized gains on securities available for sale     250,000      222,000
     Office property and equipment                         195,000      167,000
     FHLB stock                                             99,000      101,000
     Tax bad debt reserve                                   86,000       32,000
                                                         ---------    ---------
           Total gross deferred tax liabilities            630,000      522,000
                                                         ---------    ---------
           Net deferred tax liability                    $(436,000)    (238,000)
                                                         =========    =========

     There were no valuation  allowances  for deferred tax assets as of December
31, 1998 and 1997.

(10) Employee Benefit Plans

     Pension Plan

     The Company is a participant in the Financial Institutions  Retirement Fund
(FIRF),  and  substantially all of its officers and employees are covered by the
plan. FIRF does not segregate the assets, liabilities, or costs by participating
employer.  According to FIRF's administrators,  as of June 30, 1998, the date of
the latest  actuarial  valuation,  the book and market values of the fund assets
exceeded  the value of vested  benefits in the  aggregate.  In  accordance  with
FIRF's instructions, there wer no pension contributions in 1998, 1997, and 1996,
because the plan was fully funded.

                                       63
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     ESOP

     All  employees  meeting the age and service  requirements  are  eligible to
participate in an ESOP established in September 1992.  Contributions made by the
Association  to the ESOP are  allocated to  participants  by a formula  based on
compensation. Participant benefits become 100 percent vested after five years of
service.  At December 31, 1997 and 1996,  18,000 shares (all shares amounts have
been restated for the 1997 stock split  discussed in note 11), were committed to
be released and 18,000; and 36,000 shares,  respectively,  were unallocated.  At
December 31, 1998,  the were no unallocated  shares.  The fair value on unearned
shares at December 31, 1997, and 1996, was approximately  $324,000 and $325,500,
respectively. ESOP expense was $60,100; $56,482; and $53,938 for the years ended
December 31, 1998, 1997, and 1996, respectively.

     Stock Options

     The  Company's  stock option plan (the Plan) permits the board of directors
to grant  options to purchase  up to 136,500  shares of the  Company's  $.01 par
value common stock.  The options may be granted to directors and officers of the
Company.  The price at which  options may be  exercised  cannot be less than the
fair market value of the shares at the date the options are granted. The options
are subject to certain vesting  requirements  and maximum exercise  periods,  as
established by the board of directors.

     The  Company  applies  APB  Opinion  25 in  accounting  for the Plan,  and,
accordingly,  no compensation  expense has been recognized for its stock options
in the consolidated financial statements. Under SFAS 123, the Company determined
compensation  cost based on the fair value of options  granted in 1997 using the
Black-Scholes  method,  using a risk-free  interest rate of  approximately  6.64
percent,  an expected life of 6 years,  and historical  dividend rates.  The pro
forma effect of the  compensation  cost on 1998 and 1997  earnings per share was
approximately one cent, respectively.

     Changes in options  outstanding and exercisable during 1998, 1997, and 1996
(as restated for the 1997 stock split discussed in note 11) were as follows:


                                    Exercisable    Outstanding    Option price
                                      options        options        per share
                                    -----------    -----------    ------------

December 31, 1995                      75,075        102,375         $3.33
Vested                                 13,650             --          3.33
                                      -------        -------
December 31, 1996                      88,725        102,375          3.33
Granted                                    --         13,650          9.08
Vested                                 18,204             --       3.33 - 9.08
Exercised                             (10,205)       (10,205)         3.33
                                      -------        -------
December 31, 1997                      96,724        105,820       3.33 - 9.08
Vested                                  2,274             --          9.08
Forfeited                                  --         (4,548)         9.08
Exercised                             (59,537)       (59,537)      3.33 - 9.08
                                      -------        -------
December 31, 1998                      39,461         41,735       3.33 - 9.08
                                      =======        =======


                                       64
                                                                     (Continued)
<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



     Recognition and Retention Plan

     The  Association  has a recognition  and  retention  plan (RRP) for certain
executive officers. The Association contributed funds to the RRP, which acquired
approximately 3 percent of shares of the common stock of the Parent Company. The
employees  became fully  vested in the shares of stock during 1997.  RRP expense
for the year ended  December  31, 1996 was $9,725;  there was no RRP expense for
the years ended December 31, 1998 and 1997.

(11) Stockholders' Equity

     Stock Conversion

     At the time of the  conversion  from a mutual to a stock  savings  and loan
association,  the  Association  established a  liquidation  account in an amount
equal to the  regulatory  capital as of December 31, 1991, to grant  priority to
eligible  account  holders in the event of future  liquidation.  In the event of
such  liquidation,  eligible  account  holders who  continue  to maintain  their
deposit  accounts  shall  be  entitled  to  receive  a  distribution   from  the
liquidation  account.  The  total  amount  of the  liquidation  account  will be
decreased as the balance of eligible  account  holders is reduced  subsequent to
the conversion, based on an annual determination of such balances.

     Stock Split Effected in the Form of a Dividend

     In October 1997, the Company declared a 3-for-1 stock split effected in the
form of a 200 percent  stock  dividend.  The  dividend  was paid out of treasury
shares and authorized but unissued shares,  resulting in the issuance of 562,933
new shares and  reissuance  of 115,689  treasury  shares on November 18, 1997 to
stockholders of record on November 4, 1997.

     Regulatory Capital Requirements

     The Financial  Institution  Reform,  Recovery,  and Enforcement Act of 1989
(FIRREA), and the capital regulations of the OTS promulgated thereunder, require
institutions to have a minimum regulatory  tangible capital equal to 1.5 percent
of total assets; a minimum 3 percent core capital ratio; and, after December 31,
1992, a minimum 8 percent  risk-based capital ratio. These capital standards set
forth in the capital  regulations  must  generally be no less stringent than the
capital  standards  applicable  to national  banks.  FIRREA also  specifies  the
required  ratio of  housing-related  assets  in order to  qualify  as a  savings
institution. The Association met the regulatory capital requirements at December
31, 1998 and 1997.

     The Federal Deposit Insurance Corporation Improvement Act of 1991 (FIDICIA)
established  additional  capital  requirements  which require  regulatory action
against  depository  institutions  in  one of  the  undercapitalized  categories
defined in  implementing  regulations.  Institutions,  such as the  Association,
which are defined as well  capitalized,  must generally have a leverage  capital
(core)  ratio of at least 5 percent,  a tier 1  risk-based  capital  ratio of at
least 6 percent,  and a total  risk-based  capital ratio of at least 10 percent.
FIDICIA also provides for increased  supervision by federal regulatory agencies,
increased reporting requirements for insured depository institutions,  and other
changes  in the legal and  regulatory  environment  for such  institutions.  The
Association  met the regulatory  capital  requirements  at December 31, 1998 and
1997.

                                       65
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements




     The  Association's  actual and  required  capital  amounts and ratios as of
December 31, 1998, were as follows:

<TABLE>
<CAPTION>
                                                                                 TO BE WELL
                                                                                 CAPITALIZED
                                                           FOR CAPITAL          UNDER PROMPT
                                                             ADEQUACY            CORRECTIVE
                                         ACTUAL              PURPOSES         ACTION PROVISIONS
                                 ---------------------------------------------------------------
                                    AMOUNT    PERCENT     AMOUNT    PERCENT    AMOUNT    PERCENT
                                 -----------  -------   ----------  -------  ----------  -------
<S>                              <C>           <C>      <C>          <C>     <C>          <C>
Tangible capital                 $10,847,000    6.72%   $2,423,000   1.50%       n/a       n/a
Tier I leverage (core) capital    10,847,000    6.72     4,846,000   3.00    $8,076,000    5.00%
Risk-based capital                11,327,000   15.52%    5,838,000   8.00     7,298,000   10.00
Tier I risk-based capital         10,847,000   14.86%       n/a       n/a     4,379,000    6.00
                                 ===========   ======   ==========   =====   ==========   ======
</TABLE>


     At December 31, 1998 and 1997, the  Association  had federal income tax bad
debt reserves of approximately  $2,819,000,  which constitute allocations to bad
debt  reserves for federal  income tax purposes for which no provision for taxes
on income had been made. If such allocations are charged for other than bad debt
losses,   taxable  income  is  created  to  the  extent  of  the  charges.   The
Association's   retained   earnings  at  December   31,  1998  and  1997,   were
substantially restricted because of the effect of these tax bad debt reserves.

     Dividend Restrictions

     Federal  regulations impose certain limitations on the payment of dividends
and other capital  distributions  by the Association.  Under the regulations,  a
savings institution, such as the Association, that will meet the fully phased-in
capital requirements (as defined by the OTS regulations) subsequent to a capital
distribution is generally  permitted to make such capital  distribution  without
OTS approval,  subject to certain  limitations and  restrictions as described in
the regulations.  A savings  institution with total capital in excess of current
minimum  capital   requirements  but  not  in  excess  of  the  fully  phased-in
requirements  is permitted by the  regulations  to make,  without OTS  approval,
capital  distributions  of between 25 and 75 percent of its net earnings for the
previous four quarters less  dividends  already paid for such period.  A savings
institution  that  fails  to  meet  current  minimum  capital   requirements  is
prohibited from making any capital distributions without prior approval from the
OTS.

(12) Federal Deposit Insurance Corporation (FDIC) Special Assessment

     On September 30, 1996, the United States Congress passed, and the President
signed,  legislation that imposed a one-time  assessment of 65.7 basis points on
deposits insured by the Savings Association Insurance Fund (SAIF). Substantially
all of the  deposits  of  the  Association  are  SAIF-insured.  The  Association
incurred  a  one-time  pre-tax  expense  of  $670,861  that is  recorded  in the
Association's statement of operations for the year ended December 31, 1996.

                                       66
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(13) Fair Value of Financial Instruments

     The  estimated  fair  values  of the  Company's  financial  instruments  at
December 31, 1998 and 1997, were as follows:

<TABLE>
<CAPTION>


                               -------------------------------------------------
                                          1998                    1997
                               -------------------------  ----------------------
                                Carrying        Fair      Carrying      Fair
                                 Amount         Value      Amount       Value
                               ------------  -----------  ---------  -----------
<S>                            <C>           <C>         <C>         <C>
Financial assets:
 Cash and cash equivalents     $  4,087,677    4,087,677   2,523,983   2,523,983
 Securities available for sale   33,842,698   33,842,698  27,934,974  27,934,974
 Securities held to maturity     21,826,889   22,116,475  19,839,678  20,055,364
 Loans receivable                96,347,716   98,056,675  91,276,434  92,552,734
 FHLB stock                       2,200,000    2,200,000   1,959,700   1,959,700
 Accrued interest receivable      1,237,155    1,237,155   1,203,471   1,203,471
Financial liabilities:
 Deposits                       105,982,327  106,894,736 105,278,292 105,472,882
 Advances from FHLB              43,000,000   42,632,130  30,500,000  30,376,708
 Accrued interest payable            65,566       65,566      80,175      80,175
                               ============  ===========  ==========  ==========


<CAPTION>
                                Notional    Unrealized   Notional    Unrealized
                                 Amount     Gain (Loss)   Amount     Gain (Loss)
                               -----------  -----------  ---------  ------------
<S>                            <C>          <C>          <C>        <C>
Off balance sheet commitments:
 Commitments to extend credit  $ 2,968,000         -     2,211,000         -
 Commitments to purchase loans     719,000         -       410,000         -
 Commitments to purchase
   investments                         -           -     1,110,000         -
                               ===========  ==========  ==========  ==========

</TABLE>

                                       67
                                                                     (Continued)



<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(14) Midwest Bancshares, Inc. (Parent Company Only) Financial Information


                            Condensed Balance Sheets

                           December 31, 1998 and 1997


                                              1998                1997
                                         -------------        ------------

Cash and cash equivalents                 $    503,789        $    236,836
Securities available for sale                  386,425             823,750
Loans receivable and other                      63,001              60,965
Investment in subsidiary                    11,218,303           9,680,915
                                          ------------        ------------
        Total assets                        12,171,518          10,802,466
                                          ============        ============

Dividends payable                         $    107,774        $     61,246
Income taxes payable
   (deferred and current)                       29,000              65,759
Stockholders' equity:
    Common stock                                10,777              10,208
    Additional paid-in capital               1,771,495           1,530,430
    Retained earnings                        9,832,094           8,821,782
    ESOP                                          --               (60,000)
    Accumulated other
       comprehensive income                    420,378             373,041
                                          ------------        ------------
        Total stockholders' equity          12,034,744          10,675,461
                                          ------------        ------------
        Total liabilities and
              stockholders' equity        $ 12,171,518        $ 10,802,466
                                          ============        ============


                            Condensed Statement of Operations

                      Years ended December 31, 1998, 1997, and 1996


                                        1998            1997            1996
                                    -----------     -----------     -----------
Gain on sale of securities
 available for sale                 $    64,843         220,223            --
Interest income                           3,449          11,609          16,366
Noninterest income                        9,574          15,950           7,925
Income - equity in undistributed
 earnings of subsidiary               1,373,006       1,151,475         657,200
Noninterest expenses                    (84,385)        (76,375)        (70,469)
                                    -----------     -----------     -----------
     Net earnings before income
        tax (benefit) expense         1,366,487       1,322,882         611,022
Income tax (benefit) expense             (5,771)         57,968         (18,636)
                                    -----------     -----------     -----------
         Net earnings               $ 1,372,258       1,264,914         629,658
                                    ===========     ===========     ===========


                                       68
                                                                     (Continued)


<PAGE>


                    MIDWEST BANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


                       Condensed Statements of Cash Flows

                  Years ended December 31, 1998, 1997, and 1996


                                              1998         1997         1996
                                          -----------  -----------  -----------
Operating activities:
   Net earnings                           $ 1,372,258    1,264,914      629,658
   Equity in undistributed
     earnings of subsidiary                (1,373,006)  (1,151,475)    (657,200)
   Gain on sale of investments                (64,843)    (220,223)        --
   Other, net                                 (63,795)      28,675       (1,863)
                                          -----------  -----------  -----------
       Net cash used in operating
         activities                          (129,386)     (78,109)     (29,405)
                                          -----------  -----------  -----------
Investing activities:
   Proceeds from sale of securities           440,123      798,473         --
   Purchase of securities available
     for sale                                 (30,000)    (661,530)    (570,750)
   Decrease in loans receivable                60,000       60,000       60,000
                                          -----------  -----------  -----------
        Net cash provided by (used
          in) investing activities            470,123      196,943     (510,750)
                                          -----------  -----------  -----------
Financing activities:
   Dividends from subsidiary                     --        500,000    1,200,000
   Treasury stock acquired                       --       (393,659)    (511,109)
   Stock options exercised                    241,634       24,015         --
   Dividends paid                            (315,418)    (216,785)    (191,453)
                                          -----------  -----------  -----------
        Net cash (used in) provided by
           financing activities               (73,784)     (86,429)     497,438
                                          -----------  -----------  -----------
        Net increase (decrease) in cash
           and cash equivalents               266,953       32,405      (42,717)
Cash and cash equivalents at beginning
   of year                                    236,836      204,431      247,148
                                          -----------  -----------  -----------
Cash and cash equivalents at end of year  $   503,789      236,836      204,431
                                          ===========  ===========  ===========




(15) Contingencies

     The Company is involved with various  claims and legal  actions  arising in
the ordinary  course of  business.  In the opinion of  management,  the ultimate
disposition  of these  matters  will not have a material  adverse  effect on the
Company's consolidated financial statements.

(16) Subsequent Event

     On February 2, 1999,  the Company  announced  the execution of a definitive
merger  agreement  with  Mahaska   Investment   Company.   The  merger  will  be
accomplished  through  a  tax-free  fixed  exchange  of  one  share  of  Mahaska
Investment  Company common stock for each share of  outstanding  common stock of
the Company. The transaction is expected to be completed in the third quarter of
1999, after customary regulatory and shareholder approvals have been received.

                                       69




<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

DIRECTORS

     The business  experience of each director is set forth below. All directors
have held their  present  positions  for at least five  years  unless  otherwise
indicated.  Each  individual  has served as a director of the Company  since its
organization  in July 1992,  with the exception of Directors  Maschmann and Lin,
who joined the Company's Board later that same year.  Information regarding each
person's term of office as a director and the period during which the person has
served  contained in Item 11 of this Part III of the Form 10-KSB is incorporated
herein by reference.

     HENRY L.  HIRSCH,  age 83,  has been of  counsel to the law firm of Hirsch,
Adams,  Krekel,  Putnam,  Cahill & Miller since 1994,  where he was previously a
partner since 1948. Mr. Hirsch has served as the  Association's  General Counsel
since 1958. Mr. Hirsch served as President of Midwest  Federal from 1971 to 1977
and has served as Chairman of the Board since 1977.

     WILLIAM D. HASSEL,  age 50, joined the  Association in 1972 as Comptroller,
before being  promoted to Treasurer  in 1974 and to Chief  Financial  Officer in
1983.  Mr.  Hassel has served as President  and Chief  Executive  Officer of the
Association  since  1989 and as  President  and Chief  Executive  Officer of the
Company since its organization in 1992.

     ROBERT D. MASCHMANN,  age 43, was appointed Executive Vice President of the
Company and the Association in April 1994.  Prior thereto,  Mr. Maschmann served
as Vice President and Treasurer of the Association since 1989 and of the Company
since 1992. Mr. Maschmann is the Company's and the Association's chief financial
and accounting  officer,  responsible for developing and implementing  financial
plans  and  policies,   supervising  the  accounting  functions  and  overseeing
asset/liability   activities.   Mr.  Maschmann  served  as  Vice  President  and
Controller of the Association from 1985 to 1989.

     YUH-FEN  (BONI) LIN, age 51, has been a clinical  dietician  at  Burlington
Medical Center since 1985. She has also been an  owner/partner in several motels
in the state of Washington since 1979.

     JAMES R. WALKER,  age 51, has been a shareholder in the accounting  firm of
Walker & Egerton, P.C. since 1973.

     EDWARD C. WHITHAM,  JR., age 59, has been the owner of Financial Management
Accounting,  an accounting and tax  consulting  firm,  since 1989.  From 1987 to
1989,  Mr.  Whitham was the President of Financial  Management  Consultants,  an
accounting and tax consulting  firm.  Since 1989, Mr. Whitham has also served as
the business  manager/treasurer  of Employee Benefit Systems,  Inc., a firm that
administers  employee  benefit plans for governmental  bodies,  corporations and
businesses.

     JAMES E. WITTE,  age 64, has been employed by Komick  Construction,  a real
estate construction,  management and maintenance company since 1988, for whom he
has  been  the  maintenance   supervisor  for  the  Windsor  Beach   Homeowners'
Association  since 1991. For the two years prior thereto,  Mr. Witte was engaged
part-time in farming, and from 1965 to 1985 was the owner/manager of a grain and
livestock farming operation.

                                       70
<PAGE>



EXECUTIVE OFFICERS

     Information  regarding the business experience of the executive officers of
the Company who are not also Directors contained in Part I of the Form 10-KSB is
incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

     The following table sets forth the cash compensation paid or accrued by the
Association for services rendered during the fiscal year ended December 31, 1998
to the  Association's  Chief Executive Officer and Chief Financial  Officer.  No
other  officer  made in excess of $100,000  during  fiscal 1998.  The  Company's
officers do not receive any compensation from the Company for services performed
in their capacities as officers of the Company.

<TABLE>
<CAPTION>

                                             SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
                                                                                Long Term
                                                                               Compensation
                                                                        --------------------------
                         Annual Compensation                                     Awards
----------------------------------------------------------------------- --------------------------
                                                                                       Securities
                                                                        Restricted     Underlying
           Name and                                                        Stock        Options/       All Other
           Principal                              Salary         Bonus   Award(s)         SARS        Compensation
           Position                   Year          ($)          ($)(1)     ($)           (#)             ($)
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>            <C>          <C>           <C>         <C>
William D. Hassel                     1998       $114,278       $25,152      --            --          $12,229(2)
President, Chief Executive            1997        115,119         6,152      --            --           12,489
 Officer and Director                 1996        111,930         2,652      --            --           12,733

Robert D. Maschmann                   1998        $87,278       $20,152      --            --          $10,445(2)
Executive Vice President,             1997         85,143         3,152      --            --           10,054
  Treasurer and Director              1996         81,930         2,652      --            --           10,407
</TABLE>

(1)   Includes a  Christmas  bonus of $152 paid to all  full-time  employees  in
      1998, 1997 and 1996.

(2)   Represents  pre-tax medical insurance  premiums of $4,222 and $4,222,  and
      ESOP allocations of $8,007 and $6,223 paid on behalf of Mr. Hassel and Mr.
      Maschmann, respectively.


                                       71

<PAGE>



     The following table sets forth information  concerning the number and value
of  unexercised  stock options held by the Company and the  Association's  Chief
Executive  Officer and Chief  Financial  Officer at December 31, 1998.  No stock
option  awards were made under the  Company's  Stock  Option Plan during  fiscal
1998.  All  options  granted to date expire ten years from the date of grant and
have exercise prices per share equal to the market price per share of the Common
Stock on the date of grant.  The Stock Option Plan pursuant to which all options
were granted was ratified by stockholders on April 26, 1993.

<TABLE>
<CAPTION>
==============================================================================================================================

                          AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
                                                 OPTION/SAR VALUES
------------------------------------------------------------------------------------------------------------------------------
                                                                                                        VALUE OF
                                                                 NUMBER OF SECURITIES                 UNEXERCISED
                                                                UNDERLYING UNEXERCISED               IN-THE-MONEY
                                                                    OPTIONS/SARS AT                 OPTIONS/SARS AT
                                                                        FY-END (#)                      FY-END ($)
                                                          ---------------------------------  -------------------------------
                                  SHARES
                                 ACQUIRED
                                    ON             VALUE
                                 EXERCISE         REALIZED
            NAME                    (#)             ($)         EXERCISABLE     UNEXERCISABLE    EXERCISABLE      UNEXERCISABLE
-----------------------------    --------    ----------------   -------------   -------------    -----------     --------------
<S>                              <C>         <C>                <C>             <C>              <C>             <C>

William D. Hassel                 10,000        $129,200          17,300              ---          $158,641(1)       $ ---
Robert D. Maschmann               16,000         201,845             ---              ---               ---            ---
================================================================================================================================
</TABLE>

--------------
(1)  Represents  the  aggregate  market  value of  incentive  stock  options  to
     purchase  17,300  shares of Common  Stock  (market  price less the exercise
     price of $3.33 per share), respectively,  awarded to Mr. Hassel, based upon
     the  average  of the bid and asked  price of $12.50 per share of the Common
     Stock on December 31, 1998.

EMPLOYMENT AGREEMENT

     The Association has entered into employment  agreements with Messrs. Hassel
and Maschmann.  The employment agreements are designed to assist the Association
and the Company in  maintaining  a stable and  competent  management  base.  The
continued  success of the  Association  and the Company depends to a significant
degree on the skills and competence of their officers. Each employment agreement
provides  for an annual  base  salary in an amount not less than the  employee's
current  salary,  and  has an  initial  term  of  three  years.  The  employment
agreements  also  provide for a one year  extension  on each  anniversary  date,
subject to review and approval of the extension by the disinterested  members of
the  Board  of  Directors  of  the  Association.  Each  agreement  provides  for
termination upon the employee's death, for cause, or in certain events specified
by OTS  regulations.  The  employment  agreements are terminable by the employee
upon 90 days notice to the Association.  Each employment  agreement provides for
payment to the  employee  of up to 299% of the  employee's  then-current  annual
compensation in the event there is a change in control of the Association  where
employment terminates involuntarily in connection with such change in control or
within  twelve  months  thereafter.  This  termination  payment  is  subject  to
reduction by the amount of all other  compensation  to the  employee  deemed for
purposes of the Internal Revenue Code of 1986, as amended, to be contingent on a
change in control.  Such  termination  payment is provided on a similar basis in
connection  with a  voluntary  termination  of  employment,  where the change in
control was at any time opposed by the  Company's  Board of  Directors.  For the
purposes of the  employment  agreements,  a change in control is defined to mean
any acquisition of control (other than by a trustee or other  fiduciary  holding
securities  under an employee benefit plan of the Company or a subsidiary of the
Company) as defined in 12 C.F.R.  ss.574.4,  or any  successor  regulation . The
agreements provide, among other things, for participation in an equitable manner
in employee benefits applicable to executive personnel.

     Based on their current  salaries,  if Mr. Hassel or Mr.  Maschmann had been
terminated  as of December  31,  1998,  under  circumstances  entitling  them to
severance  pay as described  above,  they would have been  entitled to receive a
lump sum cash payment of approximately $354,000 and $274,000, respectively.


                                       72

<PAGE>



ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth, as of March 1, 1999, certain information as
to those persons who (i) were known by  management  to be  beneficial  owners of
more than 5% of the Company's outstanding shares of Common Stock (except for Mr.
Hassel  and  Mr.  Maschmann  whose  beneficial  ownership  is  disclosed  on the
following  page) and (ii) the shares of Common Stock  beneficially  owned by all
directors and executive officers of the Company and the Association as a group.

<TABLE>
<CAPTION>

                                                        SHARES
        NAME AND ADDRESS OF                          BENEFICIALLY                       PERCENT
          BENEFICIAL OWNER                              OWNED                           OF CLASS
---------------------------------------           ----------------                   -------------
<S>                                                  <C>                                <C>
Midwest Bancshares, Inc.
 Employee Stock Ownership Plan                        91,279(1)                           8.31%
 3225 Division Street
 Burlington, Iowa  52601

Jeffrey L. Gendell ET AL.                            104,700(2)                           9.53%
 Tontine Partners, L.P. 
 31 West 52nd Street, 17th Floor
 New York, New York 10019

All directors and executive
 officers as a group (10 persons)                    395,790(3)                          35.36%

</TABLE>

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

(1)  The trustee of the ESOP has shared voting  power with respect to the 91,279
     shares allocated to the account of ESOP participants.

(2)  The above information  regarding beneficial ownership by Jeffrey L. Gendell
     and Tontine  Partners,  L.P.  ("Tontine") is as reported by Mr. Gendell and
     Tontine in an Amendment to Schedule  13D dated April 7, 1997.  Mr.  Gendell
     reported  sole voting and  dispositive  power with respect to 54,000 shares
     and shared voting and dispositive power with Tontine with respect to 50,700
     shares.  Such shares have been adjusted to reflect the subsequent three for
     one stock split. Mr. Gendell is the Managing Member of Tontine  Management,
     L.L.C. which is the general partner of Tontine.

(3)  This amount  includes  shares  held  directly,  shares  held in  retirement
     accounts,  including  the ESOP,  and held by  certain  members of the named
     individuals' families, or held by trusts of which the named individual is a
     trustee  or  substantial  beneficiary,  with  respect  to which  shares the
     respective  directors  and  officers  may be  deemed to have sole or shared
     voting and/or  investment  power. This amount also includes an aggregate of
     20,950  shares  subject  to  options  granted to  directors  and  executive
     officers  under the  Company's  1992 Stock Option and  Incentive  Plan (the
     "Stock Option Plan") which are exercisable within 60 days of March 1, 1999.



                                       73

<PAGE>



     The table  below  sets  forth  certain  information,  as of March 1,  1999,
regarding the shares of Common Stock  beneficially  owned by the Company's Board
of Directors.

<TABLE>
<CAPTION>
                                                                                              Shares of
                                                                                            Common Stock
                                       Position(s)             Director        Term         Beneficially            Percent
             Name                 Held with the Company        Since(1)      Expires          Owned(2)             of Class
-------------------------   -----------------------------   --------------  ----------   -------------------    ----------------
<S>                              <C>                              <C>           <C>             <C>                <C>
Henry L. Hirsch                  Chairman of the Board            1958          1999            29,325             2.67%
William D. Hassel                President, Chief Executive       1985          2001            73,534             6.65
                                 Officer and Director
Robert D. Maschmann              Executive Vice President,        1992          1999            66,208             6.03
                                 Treasurer and Director
Yuh-Fen (Boni) Lin               Director                         1992          2000            45,225             4.12
James R. Walker                  Director                         1979          2001            43,077             3.92
Edward C Whitham, Jr.            Director                         1974          2001            13,281             1.21
James E. Witte                   Director                         1979          2000            36,825             3.33

</TABLE>

--------------------
(1)  Includes service as a director of the Association.

(2)  Amounts  include shares held directly,  as well as shares which are held in
     retirement accounts,  including the ESOP, or held by certain members of the
     named  individuals'  families,  or  held  by  trusts  of  which  the  named
     individual is a trustee or substantial  beneficiary,  with respect to which
     shares the respective directors may be deemed to have sole or shared voting
     and/or investment power.  Included in the shares  beneficially owned by the
     named individuals are currently  exercisable  options to purchase shares of
     Common Stock as follows:  Mr. Hirsch - 0 shares; Mr. Hassel - 7,300 shares;
     Mr. Maschmann - 0 shares;  Ms. Lin - 0 shares;  Mr. Walker - 0 shares;  Mr.
     Whitman - 0 shares; and Mr. Witte - 6,825 shares.



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Association has followed a policy of granting  consumer loans and loans
secured  by  the  borrower's  personal  residence  to  officers,  directors  and
employees.  Loans to officers,  directors and their affiliates have been made in
the ordinary course of business and on the same terms and conditions as those of
comparable   transactions  prevailing  at  the  time,  in  accordance  with  the
Association's  underwriting guidelines,  and do not involve more than the normal
risk of collectibility or present other unfavorable features.  Loans to officers
and directors must be approved by a majority of the disinterested  directors and
loans to other employees must be approved by the  Association's  loan committee.
All loans by the Association to its directors and executive officers are subject
to OTS  regulations  restricting  loans and other  transactions  with affiliated
persons of the Association.  Current law requires that all such loans be made on
terms  and  conditions   comparable  to  those  for  similar  transactions  with
non-affiliates.



                                       74

<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
                    Agreement and Plan of Merger                                                             *
                    Letter Agreement                                                                         *
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                                                   ****
                    Recognition and Retention Plan and Trust                                                **
                    Employee Stock Ownership Plan                                                           **
11                Statement re: computation of per share earnings                                          None
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 an exhibit  to the  Company's  Current  Report on form 8-K
             filed on February 18, 1999.

**           Filed  as  an  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.

****         Filed as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB
             filed on March 31,  1997 (File No.  0-20620).  All 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, 1998.

                                       75
<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the  Securities  Exchange Act of
1934,  the  Registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

                                       MIDWEST BANCSHARES, INC.


Date: March 31, 1999                   By:  /s/ William D. Hassel
      ------------------              ------------------------------------------
                                      William D. Hassel
                                      President, Chief Executive
                                       Officer and Director
                                      (DULY AUTHORIZED REPRESENTATIVE)

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the  following  persons on behalf of the  Registrant in the
capacities and on the dates indicated.

/s/ William D. Hassel                   /s/ Henry L. Hirsch
------------------------------          ----------------------------------------
William D. Hassel                       Henry L. Hirsch
President, Chief Executive              Chairman of the Board
  Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)


Date:  March 31, 1999                    Date: March 31, 1999
      ----------------------                   --------------------------


/s/ Edward C. Whitham, Jr.               /s/ Robert D. Maschmann
------------------------------          ----------------------------------------
Edward C. Whitham, Jr.                   Robert D. Maschmann
Director                                 Executive Vice President and
                                         Treasurer (PRINCIPAL FINANCIAL
                                          AND ACCOUNTING OFFICER)

Date:  March 31, 1999                     Date:  March 31, 1999
      ----------------------                     ----------------------------


/s/ James R. Walker                      /s/ James E. Witte
------------------------------           ---------------------------------------
James R. Walker                            James E. Witte
Director                                   Director

Date:  March 31, 1999                       Date: March 31, 1999
      ---------------------                       ---------------------------


/s/ Yuh-Fen Lin
----------------------------
Yuh-Fen Lin
Director

Date: March 31, 1999
      ------------------------

                                       76

<PAGE>



                                  EXHIBIT INDEX

                                                                    SEQUENTIAL
EXHIBIT NO.                       DOCUMENT                         PAGE NUMBER
---------------     ---------------------------------------      ---------------

21                Subsidiaries of Registrant

23                Consent of KPMG Peat Marwick LLP

27                Financial Data Schedule