<PAGE>

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

                                  FORM 10-KSB

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                  For the fiscal year ended December 31, 1997
                                      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)
<TABLE>
<CAPTION>
<S>                                                             <C>
               Delaware                                              42-1390587
---------------------------------------------          ------------------------------------
(State or other jurisdiction of incorporation          (I.R.S. Employer Identification No.)
            or organization)
</TABLE>
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: $11.3 million.

         The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the Nasdaq Stock Market as of February 20, 1998, was
$12.5 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 February 20, 1998, there were issued and outstanding 1,028,199
shares of the Issuer's Common Stock.

   Transitional Small Business Disclosure Format (check one): Yes____ No _X_

                      DOCUMENTS INCORPORATED BY REFERENCE

      Parts II and IV of Form 10-KSB - Annual Report to Stockholders for
                   the fiscal year ended December 31, 1997.

Part III of Form 10-KSB - Proxy Statement for1998 Annual Meeting of
Stockholders.

<PAGE>


                                    PART I

Item 1.  Business

General

         Midwest Bancshares, Inc. (the "Company" or "Midwest") is a Delaware
corporation which was organized in 1992 by Midwest Federal Savings and Loan
Association of Eastern Iowa (the "Association" or "Midwest Federal") for the
purpose of becoming a savings and loan holding company. The Company owns all
of the outstanding stock of the Association issued on November 10, 1992 in
connection with the completion of the conversion of the Association from the
mutual to the stock form of organization (the "Conversion"). 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, 1997,
the Company had total assets of $147.7 million, deposits of $105.3 million,
and stockholders' equity of $10.7 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.

         When used in this Form 10-K 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 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

                                       2

<PAGE>


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, 1997, the Association's net loan and
mortgage-backed securities portfolio totalled $116.7 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, 1997, the maximum amount which the Association could have lent to
any one borrower and the borrower's related entities was approximately $1.4
million. At December 31, 1997, the Association had no loans which exceeded
this amount.

         At December 31, 1997, 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. The second largest lending relationship
with one borrower had a principal balance of $960,000 at December 31, 1997,
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
$793,000 at December 31, 1997, 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 $686,000 at December 31, 1997, and consists of two
participation loans, secured by two apartment complexes located in Madison,
Wisconsin, one 18-unit and one 15-unit. The fifth largest lending relationship
with one borrower had a principal balance of $599,000 at December 31, 1997,
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, 1997. At December 31, 1997, the Association had
no other loans to one borrower or group of related borrowers which had an
existing balance at December 31, 1997, 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>

                                         --------------------------------------------
                                                  1997                   1996
                                         ----------------------- --------------------
                                          Amount      Percent    Amount    Percent
                                          -------     -------   -------    -------
<S>                                         <C>         <C>       <C>        <C>

Real Estate Loans:
 One- to four-family....................  $66,549      71.75%   $63,209     75.85%
 Commercial/multi-family................   11,210      12.09     10,363     12.44
 Construction or development(1).........      818        .88        828       .99
                                          -------     ------    -------    ------
     Total real estate loans............   78,577      84.72     74,400     89.28
                                          -------      -----    -------    ------

Consumer and Other Loans:
 Deposit account........................      306        .33        354       .43
 Automobile.............................    1,158       1.25      1,001      1.20
 Home equity/home improvement...........    5,464       5.89      4,093      4.91
 Other..................................    7,239(2)    7.81      3,484      4.18
                                          -------     ------    -------    ------
     Total consumer and other loans.....   14,167      15.28      8,932     10.72
                                          -------     ------    -------    ------
     Total loans........................   92,744     100.00%    83,332    100.00%
                                                      ======               ======

Less:
 Loans in process.......................      836                 1,274
 Deferred fees and discounts............       64                   147
 Allowance for losses...................      568                   686
                                          -------             - -------
 Total loans receivable, net............  $91,276               $81,225
                                          =======               =======
------------------
(1)  Consists primarily of residential construction loans.
(2)  Approximately $7.0 million of these loans are participations guaranteed by the Farmer's Home Administration.
     See "- Consumer and Other Lending."
</TABLE>
<PAGE>

[RESTUBED TABBLE FOR ABOVE]
<TABLE>
<CAPTION>

                                          December 31,
                                          ------------------------------------------------------------------
                                                 1995                   1994                  1993
                                          ------------------------------------------------------------------
                                           Amount     Percent    Amount      Percent    Amount      Percent
                                          -------     -------    -------     -------    ------      -------
                                                                   (Dollars in Thousands)
<S>                                        <C>          <C>        <C>         <C>       <C>           <C>
Real Estate Loans:                        $61,839      80.03%    $61,849      85.54%    58,405        86.64%
 One- to four-family....................    7,820      10.12       3,992       5.52      4,535         6.73
 Commercial/multi-family................    1,151       1.49       2,342       3.24      1,677         2.49
 Construction or development(1).........  -------      -----     -------     ------    -------       ------
                                           70,810      91.64      68,183      94.30     64,617        95.86
     Total real estate loans............  -------     ------     -------     ------    -------       ------


Consumer and Other Loans:                     383        .50         344        .47        257          .38
 Deposit account........................    1,033       1.34         810       1.12        568          .84
 Automobile.............................    3,886       5.03       2,745       3.80      1,798         2.67
 Home equity/home improvement...........    1,155       1.49         224        .31        168          .25
 Other..................................  -------     ------     -------     ------   --------
                                            6,457       8.36       4,123       5.70      2,791         4.14
     Total consumer and other loans.....  -------     ------     -------     ------    -------       ------
                                           77,267     100.00%     72,306     100.00%    67,408       100.00%
     Total loans........................              ======                 ======                  ======


Less:                                       2,347                  1,096                 1,417
 Loans in process.......................      209                    216                   125
 Deferred fees and discounts............      676                    650                   652
 Allowance for losses...................  -------                -------               -------
                                          $74,035                $70,344               $65,214
 Total loans receivable, net............  =======                =======               =======
</TABLE>

                                       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>


                                                                        1997         1996
                                                       -----------------------------------------------
                                                           Amount      Percent      Amount     Percent

<S>                                                          <C>         <C>         <C>         <C>
Fixed-Rate Loans:
 Real estate:
  One- to four-family..................................    $27,804        29.98%    $26,595      31.91%
  Commercial/multi-family..............................      1,285         1.38       1,230       1.48
  Construction or development..........................        ---          ---          65        .08
                                                           -------       ------     -------     ------
     Total real estate loans...........................     29,089        31.36      27,890      33.47
                                                           -------       ------     -------     ------
  Consumer and other loans.............................      7,955         8.58       6,104       7.32
                                                          --------       ------     -------     ------
     Total fixed-rate loans............................     37,044        39.94      33,994      40.79
                                                           -------       ------     -------     ------

Adjustable-Rate Loans:
 Real estate:
  One- to four-family..................................     38,745        41.78      36,614      43.94
  Commercial/multi-family..............................      9,925        10.70       9,133      10.96
  Construction or development..........................        818          .88         763        .92
                                                         ---------      -------     -------     ------
     Total adjustable-rate real estate loans...........     49,488        53.36      46,510      55.82
  Consumer and other loans.............................      6,212         6.70       2,828       3.39
                                                          --------      -------     -------     ------
     Total adjustable-rate loans.......................     55,700        60.06      49,338      59.21
                                                           -------      -------     -------    -------

     Total loans.......................................     92,744       100.00%     83,332     100.00%
                                                                         ======                 ======

Less:
  Loans in process.....................................        836                    1,274
  Deferred fees and discounts..........................         64                      147
  Allowance for loan losses............................        568                      686
                                                         ---------                 --------
    Total loans receivable, net........................    $91,276                  $81,225
                                                           =======                  =======
</TABLE>

<PAGE>

[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>

                                                            December 31,
                                                       -----------------------------------------------------------------
                                                                1995                  1994                   1993
                                                       -----------------------------------------------------------------
                                                        Amount       Percent    Amount     Percent     Amount    Percent
                                                        -------      -------    -------    -------     -------   -------
                                                                              (Dollars in Thousands)
<S>                                                      <C>            <C>       <C>         <C>         <C>       <C>
Fixed-Rate Loans:
 Real estate:
  One- to four-family.................................. $24,218        31.34%   $25,319      35.01%    $25,279     37.50%
  Commercial/multi-family..............................   1,522         1.97      1,603       2.22       4,294      6.37
  Construction or development..........................     274          .36        504        .70         458       .68
                                                        -------       ------    -------     ------     -------    ------
     Total real estate loans...........................  26,014        33.67     27,426      37.93      30,031     44.55
                                                        -------       ------   --------     ------     -------    ------
  Consumer and other loans.............................   5,332         6.90      4,123       5.70       2,791      4.14
                                                        -------       ------   --------     ------     -------    ------
     Total fixed-rate loans............................  31,346        40.57     31,549      43.63      32,822     48.69
                                                        -------       ------   --------    -------     -------    ------

Adjustable-Rate Loans:
 Real estate:
  One- to four-family..................................  37,621        48.69     36,530      50.52      33,126     49.14
  Commercial/multi-family..............................   6,298         8.15      2,389       3.31         241       .36
  Construction or development..........................     877         1.13      1,838       2.54       1,219      1.81
                                                        -------       ------    -------     ------     -------    ------
     Total adjustable-rate real estate loans...........  44,796        57.97     40,757      56.37      34,586     51.31
  Consumer and other loans.............................   1,125         1.46        ---        ---         ---       ---
                                                        -------       ------  ---------       ----     -------    ------
     Total adjustable-rate loans.......................  45,921        59.43     40,757      56.37      34,586     51.31
                                                        -------       ------    -------     ------     -------    ------

     Total loans.......................................  77,267       100.00%    72,306     100.00%     67,40     100.00%
                                                                      ======                ======                ======

Less:
  Loans in process.....................................                2,347                 1,096                 1,417
  Deferred fees and discounts..........................                  209                   216                   125
  Allowance for loan losses............................                  676                   650                   652
                                                                     -------               -------               -------
    Total loans receivable, net........................              $74,035               $70,344               $65,214
                                                                     =======               =======               =======
</TABLE>

                                       5


<PAGE>



         The following table illustrates the contractual maturity and
amortization of the Association's loan portfolio at December 31, 1997.
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/
                                                 Family                 Multi-family
                                             -----------------------------------------
                                                       Weighted               Weighted
                                                        Average                Average
                                             Amount      Rate     Amount        Rate
                                             -------   --------   -------     --------
                                                         (Dollars in Thousands)
<S>                                           <C>         <C>       <C>        <C>
Due During Year(s) Ended
     December 31,

1998(1)................................      $ 2,810      8.04%   $   265      8.45%
1999...................................        3,044      8.04        289      8.45
2000...................................        3,298      8.05        315      8.45
2001 and 2002..........................        7,447      8.06        715      8.46
2003 to 2007...........................       22,672      8.06      2,415      8.46
2008 to 2017...........................       24,742      7.86      7,047      8.29
2018 and following.....................        2,536      7.77        164      8.25
                                             -------               ------
    Total..............................      $66,549              $11,210
                                             =======              =======

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

         As of December 31, 1997, the total amount of loans due or repricing after December 31, 1998 which had predetermined
interest rates was $32.7 million, while the total amount of loans due or repricing after such date which had floating,
adjustable or renegotiable interest rates was $54.1 million.
</TABLE>

[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>


                                                  Construction                Consumer
                                                 or Development               and Other                   Total
                                               ----------------------   ----------------------    ----------------------
                                                             Weighted                 Weighted                  Weighted
                                                              Average                  Average                   Average
                                               Amount          Rate      Amount         Rate        Amount        Rate
                                               ------        --------    -------      --------     -------      --------
<S>                                             <C>            <C>         <C>           <C>          <C>          <C>
Due During Year(s) Ended
     December 31,

1998(1)................................         $   9           7.87%    $ 2,830        8.44%      $ 5,914        8.25%
1999...................................            10           7.87       3,077        8.45         6,420        8.25
2000...................................            11           7.87       1,527        8.16         5,151        8.11
2001 and 2002..........................            24           7.87       2,660        8.00        10,846        8.07
2003 to 2007...........................            81           7.87       4,073        7.79        29,241        8.05
2008 to 2017...........................           297           7.87         ---         ---        32,086        7.95
2018 and following.....................           386           7.87         ---         ---         3,086        7.81
                                                 ----                    -------                   -------
    Total..............................          $818                    $14,167                   $92,744
                                                 ====                    =======                   =======
</TABLE>

                                       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, 1997, the
Association's one- to four-family residential mortgage loans, excluding
mortgage-backed securities, totalled $66.5 million, or 71.75% 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" in the Company's Annual Report to Stockholders filed as Exhibit 13
hereto (the "Annual Report"). Approximately 46.7% of the loans originated in
1997 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, 1997, approximately $4.5 million, or 6.8% of the
Association's one- to four-family residential mortgage loan portfolio had been
purchased by the Association. These loans are secured by property located
primarily in California, Colorado, Arizona, Virginia and Texas, and have been
in the Association's portfolio for several years. The majority of the loans
secured by property located in California were purchased from the
Association's former mortgage banking subsidiary. The Association has
purchased only a limited amount of one- to four-family residential mortgage
loans over the last five years. Despite a decrease in the Association's
portfolio of purchased one- to four-family loans from $5.5 million in 1996,
$5.9 million in 1995 and $6.9 million in 1994, the level of delinquencies in
this portion of the Association's portfolio was higher than that of the one-
to four-family loans originated and retained by the Association at December
31, 1997 and accounted for 44.0% of the total dollar amount of delinquent one-
to four-family loans at that date, compared to 31.0% at December 31, 1996. The
Association believes that the higher level of delinquencies, when compared to
the rest of the loan portfolio, was due to general

                                       7

<PAGE>



economic conditions in California during the recent past, where most of the
properties securing delinquent purchased loans are located. See also "- Asset
Quality - Non-Performing Assets."

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

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

         Commercial/Multi-Family Real Estate Lending. At December 31, 1997,
the Association had $11.2 million in commercial/multi-family real estate
loans, representing 12.09% 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, 1997, 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.

         The second largest lending relationship had a principal balance of
$960,000 at December 31, 1997, 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 $3.5 million) and approximately 16% of the second
loan (which had an outstanding balance of approximately $3.0 million). The
first loan is amortized over 25 years, at a rate of 9.00% for the first three
years and thereafter at a rate equal to the Federal Cost of Funds index plus
3.50%. The second loan is amortized over 25 years, at a rate of 9.50% for the
first three years and thereafter at a rate equal to the Federal Cost of Funds
plus 3.25%.

         The third largest lending relationship had a principal balance of
$793,000 at December 31, 1997 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 $1.1 million) and approximately 40% of the second
loan (which had an outstanding balance amount of approximately $1.0 million).
The first loan is amortized over 25 years, at a rate of 8.875% for the first
three years and thereafter at a rate equal to the Federal Cost of Funds index
plus 3.50%. The second loan is amortized over 15 years, at a rate of 8.75% for
the first three 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
$686,000 at December 31, 1997 and consists of two participation loans, secured
by two apartment complexes located in Madison, Wisconsin; one 18-unit and one

                                       8

<PAGE>


15-unit. The Association's participation represents 22% of the first loan
(which had an outstanding balance of approximately $1.9 million) and 19% of
the second loan (which had an outstanding balance of approximately $1.4
million). The first loan is amortized over 25 years, at a rate of 9.0% for the
first three years and thereafter, adjusts annually to 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 8.875% for the first three years and thereafter adjusts
annually to a rate equal to the Federal Cost of Funds index plus 3.50%.

         The fifth largest lending relationship had a principal balance of
$599,000 at December 31, 1997, 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, 1997.

         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, 1997 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 1997, 1996 and
1995, the Association purchased participations in commercial/multi-family real
estate loans totaling $2.8 million, $3.4 million and $4.3 million,
respectively. See also "- Originations Purchases and Sales of Loans and
Mortgage-Backed Securities."

         Residential Construction Lending. The Association originates a
limited number of loans to finance the construction of single-family
residences. These loans are primarily made to individuals who will ultimately
be the owner-occupier of the house. Such loans are generally made as a
permanent financing on the constructed property with the initial six month
term on an interest-only basis. At December 31, 1997, the Association had
loans to finance the construction of single-family residences totaling
$818,000, or 0.88% 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, 1997, the Association's consumer and other loan portfolio
totalled $14.2 million, or 15.28% 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 39% of the
Association's total consumer loan portfolio at December 31, 1997. 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

                                       9

<PAGE>


the type of collateral, length of contract and creditworthiness of the
borrower. The Association's consumer loans generally have a fixed-rate of
interest.

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

         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 1997, 1996 and 1995, the
Association purchased FmHA participations totaling $4.1 million, $2.8 million
and $1.1 million, respectively. See also "- Originations, Purchases and Sales
of Loans and Mortgage-Backed Securities."

         Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Although the level of delinquencies in the Association's consumer
loan portfolio has generally been low (at December 31, 1997, $42,000, or
approximately 0.30% 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, 1997,
mortgage-backed securities totalled $25.5 million. At such date, $8.1 million
of these mortgage-backed securities (all of which were issued by the
Government National Mortgage Association ("GNMA")) were available for sale.
For information regarding the carrying and market values of Midwest Federal's
mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements in the Annual Report.

         The Association purchases mortgage-backed securities in order to
supplement the Association's loan originations. At December 31, 1997, $4.6
million, or 18.2%, and $6.1 million, or 23.9%, of the Association's
mortgage-backed securities carried adjustable rates of interest and balloon
maturities, respectively. Under the OTS' risk-based capital requirements, GNMA
mortgage-backed securities have a zero percent risk weighting for the
risk-based capital requirement of the OTS and Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
AA-rated mortgage-backed securities have a 20% risk weighting, in contrast to
the 50% risk weighting carried by one- to four-family performing residential
mortgage loans.


                                      10

<PAGE>


         The following table sets forth the contractual maturities of the
Association's mortgage-backed securities at December 31, 1997. The table does
not reflect normal monthly amortization payments or anticipated prepayments.
<TABLE>
<CAPTION>


                                                                                       Due in
                                            6 Months     6 Months      1 to       3 to 5     5 to 10     10 to 20       Over 20
                                            or Less      to 1 Year    3 Years     Years       Years        Years         Years
                                          ------------------------------------------------------------------------------------------
                                                                                               (In Thousands)
<S>                                           <C>          <C>        <C>        <C>          <C>          <C>            <C>
Adjustable-rate mortgage-
 backed securities:
  Federal Home Loan
   Mortgage Corporation.................     $   ---     $   ---     $   ---    $   ---      $   ---      $   ---        $  513
  Federal National
   Mortgage Association.................         ---         ---         ---        ---          ---          691         2,989
  Resolution Trust Corporation..........         ---         ---         ---        ---          ---          ---           439
                                             -------     -------     -------    -------       ------      -------        ------

     Total adjustable-rate..............         ---         ---         ---        ---          ---          691         3,941
                                             -------     -------     -------    -------       ------      -------        ------

Fixed-rate mortgage-backed securities:
  Federal Home Loan
   Mortgage Corporation.................       3,804         ---         ---      2,274          ---        2,238           ---
  Federal National
   Mortgage Association.................         ---         ---         ---        ---        1,560        2,876           ---
  Government National
   Mortgage Corporation.................         ---         ---         ---        ---        1,930        4,211         1,943
                                             ------      -------     -------    -------       ------       ------        ------
     Total fixed-rate...................      3,804          ---         ---      2,274        3,490        9,325         1,943
                                             ------      -------     -------    -------       ------      -------        ------

Total mortgage-backed
 securities.............................     $3,804      $   ---     $   ---    $ 2,274       $3,490      $10,016        $5,884
                                             ======      =======     =======    =======       ======      =======        ======
</TABLE>



[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>

                                         December 31,
                                            1997
                                           Balance
                                         Outstanding
                                        -------------

<S>                                         <C>
Adjustable-rate mortgage-
 backed securities:
  Federal Home Loan
   Mortgage Corporation.................   $   513
  Federal National
   Mortgage Association.................     3,680
  Resolution Trust Corporation..........       439
                                           -------

     Total adjustable-rate..............     4,632
                                           -------

Fixed-rate mortgage-backed securities:
  Federal Home Loan
   Mortgage Corporation.................     8,316
  Federal National
   Mortgage Association.................     4,436
  Government National
   Mortgage Corporation.................     8,084
                                           -------
     Total fixed-rate...................    20,836
                                           -------

Total mortgage-backed
 securities.............................   $25,468
                                           =======
</TABLE>

                                      11

<PAGE>



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

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

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

         During fiscal 1996, the Association recorded gains of $45,000 from
the sale of mortgage-backed securities. The Association sold no
mortgage-backed securities in fiscal 1997. At December 31, 1997, the
Association had no commitments to sell loans.

         The Association had no loans serviced for others as of December 31,
1997, and $22.0 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,
                                                                      ---------------------------------------
                                                                        1997            1996           1995
                                                                      --------         -------        -------
                                                                                    (In Thousands)
<S>                                                                     <C>             <C>              <C>
Originations by Type:
 Adjustable-rate:
  Real estate - one- to four-family...........................         $ 7,185         $ 6,469        $ 4,462
                - construction................................           2,525             841          1,450
  Consumer and other loans....................................             489             ---            ---
                                                                       -------         -------        -------
         Total adjustable-rate................................          10,199           7,310          5,912
                                                                       -------         -------        -------
 Fixed-rate:
  Real estate - one- to four-family...........................           5,979           7,445          4,333
                - construction................................             370             883            134
  Consumer and other loans....................................           5,312           3,901          4,112
                                                                       -------         -------        -------
         Total fixed-rate.....................................          11,661          12,229          8,579
                                                                       -------         -------        -------

         Total loans originated(1)............................          21,860          19,539         14,491
                                                                       -------         -------        -------

Purchases:
  Real estate - commercial/multi-family.......................           2,841           3,434          4,261
  Consumer and other loans....................................           4,114           2,846          1,052
  Mortgage-backed securities..................................           3,484           4,051            ---
                                                                       -------         -------        -------
         Total purchased......................................          10,439          10,331          5,313
                                                                       -------         -------        -------

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

Principal repayments..........................................          22,216          21,375         18,198
                                                                       -------         -------        -------
(Decrease) in other items, net................................         (3,553)          (4,463)        (1,462)
                                                                       -------         -------        -------

         Net increase.........................................         $ 6,530         $ 2,747        $    49
                                                                       =======         =======        =======
-------------------
(1)      $3,122,000, $4,104,000 and $1,285,000 of these originations for the years ended December 31, 1997, 1996 and
         1995, respectively, were to refinance existing loans held by the Association.
</TABLE>

                                      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, 1997 and 1996.
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
                                           ---------------------------   ---------------------------    --------------------------
                                           Number    Amount    Percent   Number    Amount    Percent    Number    Amount   Percent
                                           ------    ------    -------   ------    ------    -------    ------    ------   -------
                                                                                      (Dollars in Thousands)
<S>                                          <C>      <C>        <C>      <C>       <C>        <C>        <C>      <C>       <C>
Loans delinquent for:

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

December 31, 1996:
------------------
 30-59 days..........................         23     $  263       .42%     ---      $---        ---%        8        $49     .55%
 60-89 days..........................         11        399       .63      ---       ---        ---       ---        ---     ---
                                                                                                                             ---
 90 days and over....................          7        245       .38        3       874       8.43         1          1     .01
                                            ----    -------      ----      ---      ----       ----       ---       ----     ---
     Total...........................         41     $  907      1.43%       3      $874       8.43%        9        $50     .56%
                                             ===    =======      ====      ===      ====       ====       ===        ===     ===
</TABLE>

[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
                                                  Total
                                       -----------------------------
                                       Number    Amount      Percent
                                       ------    ------      -------
<S>                                     <C>        <C>          <C>
Loans delinquent for:

December 31, 1997:
------------------
30-59 days..........................     31      $  824        .89%
60-89 days..........................      9         267        .29
90 days and over....................     11         769        .83
                                         --      ------       ----
    Total...........................     51      $1,860       2.01%
                                         ==      ======       ====

December 31, 1996:
------------------
                                         31      $  312        .37%
30-59 days..........................     11         399        .48
60-89 days..........................
                                         11       1,120       1.35
90 days and over....................     --      ------       ----
                                         53      $1,831       2.20%
    Total...........................     ==      ======       ====
</TABLE>

                                      15
<PAGE>



         Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Association's loan portfolio at the
dates indicated. Loans are placed on non-accrual status when the collection of
principal and/or interest become doubtful. As a matter of policy, the
Association does not accrue interest on loans past due 90 days or more. For
all periods presented, the Association has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Real estate
owned includes assets acquired in settlement of loans, and reflect the lower
of cost or fair value.
<TABLE>
<CAPTION>

                                                                   December 31,
                                                         --------------------------------
                                                          1997         1996         1995
                                                         ------       ------       ------
                                                              (Dollars in Thousands)
<S>                                                        <C>         <C>          <C>
Non-accruing loans:
  One- to four-family............................        $  370       $  245        $ 51
  Commercial/multi-family real estate............           399          874         ---
  Consumer and other.............................           ---            1         ---
                                                         ------       ------        ----
     Total.......................................           769        1,120          51
                                                         ------       ------        ----

Real estate owned:
  One- to four-family............................           ---           12          28
  Commercial/multi-family real estate............           315          ---        ----
  Residential land...............................           ---          ---           5
                                                         ------       ------        ----
     Total.......................................           315           12          33
                                                         ------       ------        ----

Total non-performing assets......................        $1,084       $1,132        $ 84
                                                         ======       ======        ====
Total as a percentage of total assets............           .73%         .83%        .06%
                                                         ======       ======        ====
</TABLE>

         For the year ended December 31, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms totalled $79,000. The amount that was included in
interest income on such loans was $25,000 for the year ended December 31,
1997.

         The Company's ratio of non-performing assets to total assets
decreased to 0.73% at December 31, 1997 from 0.83% at December 31, 1996. Total
non-performing assets for 1997 and 1996 increased $1.0 million above 1995
levels primarily from an $874,000 increase in non-accruing
commercial/multi-family real estate loans as a result of three loans becoming
more than 90 days delinquent. The largest of the three loans is now in real
estate owned with a carrying value of $315,000 at December 31, 1997 and is a
104 unit apartment complex in Madison, Wisconsin. The Association owns
approximately 17% of the property valued at approximately $1.9 million. The
other two loans are participation loans to one borrower, which totaled
approximately $399,000 at December 31, 1997 and are secured by a 96-unit
apartment complex in Madison, Wisconsin. The Association's participation
represents approximately 8% of the total $5.1 million loan. These two loans
are in the foreclosure process, however, the Association believes there is
adequate allowance for loan losses to absorb any anticipated losses on
disposition.

         Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1997 there was also an aggregate
of $1,419,000 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"

                                      16

<PAGE>


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

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

         In connection with the filing of its periodic reports with the OTS
and in accordance with its classification of assets policy, the Association
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
Classified assets (including those considered to be "special mention") of the
Association at December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
                                                                 December 31,
                                                -----------------------------------------------
                                                1997                 1996                1995
                                                -----------------------------------------------
<S>                                                 <C>               <C>                <C>
Special Mention..........................        $  969,000        $  876,000          $302,000
Substandard..............................         1,524,000         1,543,000           455,000
Doubtful.................................            10,000               ---               ---
Loss.....................................               ---               ---               ---
                                                 ----------        ----------          --------

  Total classified assets................        $2,503,000        $2,419,000          $757,000
                                                 ==========        ==========          ========
</TABLE>

         The increase in loans designated "special mention" from 1996 to 1997
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 increase in loans designated "special mention" from 1995 to 1996
was primarily the result of including in this category one
commercial/multi-family loan participation amounting to $492,000 which is
secured by a 68-unit retirement facility in Cedar Rapids, Iowa. The loan was
designated "special mention" since several mechanics liens had been filed on
the property. The liens have been cured, and consequently this loan was
removed from special mention in July of 1997. As of December 31, 1997, the
loan payments continued to be current.

         The increase in loans designated "substandard" from 1995 to 1996 and
1997 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,

                                      17

<PAGE>



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, 1997,
the Association had an allowance for loan losses of $568,000. 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, 1997 and 1996 - Provision for Losses on
Loans" in the Annual Report.

         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,
                                                            -------------------------------------
                                                              1997           1996          1995
                                                            -------         ------       --------
                                                                 (Dollars in Thousands)
<S>                                                            <C>           <C>           <C>
Balance at beginning of period.......................       $   686         $  676       $    650
                                                            -------         ------       --------

Charge-offs:
 One- to four-family.................................            (8)           (37)           (22)
 Commercial/Multi-family.............................          (158)        ------            ---
 Consumer and other..................................           ---             (1)           ---
                                                            -------         ------       --------
                                                               (166)           (38)           (22)
                                                            -------         ------       --------

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

Net (charge-offs) recoveries.........................          (166)           (38)           (22)
                                                            -------         ------       --------
Additions charged to operations......................            48              48            48
                                                            -------         ------       --------
Balance at end of period.............................       $   568         $  686       $    676
                                                            =======         ======       ========

Ratio of net charge-offs (recoveries) during the
 period to average loans, excluding mortgage-
 backed securities outstanding during the period.....          .19%            .05%           .03%
                                                            ======          ======           ====

Allowance for loan losses to non-performing
 loans at end of period..............................        73.86%          61.25%      1,325.49%

Allowance for loan losses to total loans,
 excluding mortgage-backed securities
 at end of period....................................          .61%            .82%           .87%
</TABLE>
                                      18

<PAGE>

         The distribution of the Association's allowance for losses on loans
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
                                                                             December 31,
                                                  ------------------------------------------------------------------
                                                         1997                     1996               1995
                                                  ------------------------------------------------------------------
<S>                                                 <C>            <C>                  <C>                   <C>
                                                                 Percent               Percent              Percent
                                                                of Loans              of Loans              of Loans
                                                                 in Each               in Each              in Each
                                                                 Category             Category              Category
                                                                 to Total             to Total              to Total
                                                   Amount         Loans      Amount     Loans    Amount      Loans
                                                   ------       ---------    ------   --------   ------     --------
                                                                        (Dollars in Thousands)

One- to four-family.........................        $163           71.7%      $225       75.9%    $ 199        80.0%
Commercial/multi-family
 real estate................................         269           12.1        246       12.4        47        10.1
Construction or development.................           1            0.9          2        1.0         3         1.5
Consumer and other..........................          28           15.3         60       10.7        66         8.4
Unallocated.................................         107            ---        153        ---       361         ---
                                                    ----          -----       ----      -----     -----       -----
     Total..................................         568          100.0%      $686      100.0%    $ 676       100.0%
                                                    ====          =====       ====      =====     =====       =====
</TABLE>

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,
1997, the Association's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 8.07. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Annual Report and
"Regulation - Liquidity."

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

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

         At December 31, 1997, Midwest Federal's interest-bearing deposits
with banks totalled $1.1 million, or 0.7% of total assets, and its investment
securities totalled $21.5 million, or 14.6% of total assets. As of such date,
the Association also had a $2.0 million investment in FHLBank stock,
satisfying its requirement for membership in the FHLBank of Des Moines. It is
the Association's general policy to purchase investment securities which are
U.S. Government securities federal agency obligations, municipal bonds and
other issues that are rated investment grade or have credit enhancements. At
December 31, 1997, the average term to maturity or repricing of the investment
securities portfolio was 9.8 years. However, most of the securities have call
features, and if called, the remaining term would be 20 months. See also "-
Mortgage-Backed Securities" and Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report.

                                      19

<PAGE>

         The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                    ---------------------------------------------------------------------------
                                                          1997                       1996                         1995
                                                    --------------------       ----------------------      --------------------
                                                      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............     $ 1,088      100.0%        $ 3,127         100.0%     $ 1,861       100.0%
                                                     =======      =====         =======         =====      =======       =====

Investment securities:
 U.S. Government securities.....................     $   ---        ---%        $   ---           ---%     $ 1,007         4.7%
 Federal agency obligations.....................      18,375       75.7          16,535          86.1       18,545        86.2
 Municipal bonds................................       3,108       12.8             ---           ---          ---         ---
 Other marketable equity securities(1)..........         824        3.4             710           3.7          ---         ---
                                                     -------      -----         -------         -----      -------       -----

     Subtotal...................................      22,307       91.9          17,245          89.8       19,552        90.9

FHLBank stock...................................       1,960        8.1           1,960          10.2        1,960         9.1
                                                     -------      -----         -------         -----      -------       -----

     Total investment securities and FHLBank
      stock.....................................     $24,267      100.0%        $19,205         100.0%     $21,512       100.0%
                                                     =======      =====         =======         =====      =======       =====

Average remaining life or term to repricing,
 excluding FHLBank stock and other marketable equity securities (assuming call
 feature are exercised).........................       1.7 years                       0.3 years           0.8 years

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

         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, 1997
                                                 ------------------------------------------------------------------
                                                 1 Year     1 to 5       5 to 10     After 10     Total Investment
                                                 or Less     Years        Years       Years          Securities
                                                 -------    ------       -------     --------     -----------------
                                                  Book       Book         Book        Book        Book        Book
                                                  Value      Value        Value       Value       Value       Value
                                                 -------    ------       -------     --------     -----       -----

                                                                      (Dollars in Thousands)

<S>                                                <C>         <C>          <C>          <C>        <C>         <C>
Federal agency obligations..................     $ 2,456     $ 3,011      $ 1,990     $10,918     $18,375     $18,364
Municipal bonds.............................         ---         444        1,624       1,040       3,108       3,108
                                                 -------     -------      -------     -------     -------     -------

Total investment securities.................     $ 2,456     $ 3,455      $ 3,614     $11,958     $21,483     $21,472
                                                 =======     =======      =======     =======     =======     =======

Weighted average yield......................       5.44%       6.44%        7.04%       7.24%       6.87%

</TABLE>

                                      20

<PAGE>


         In 1997, the Association began purchasing tax-exempt, rated or
general obligation bonds of municipalities. The Association's investment
securities portfolio at December 31, 1997 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.

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

Sources of Funds

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

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

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

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




                                      21

<PAGE>



         The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Association for the
periods indicated.
<TABLE>
<CAPTION>
                                                              Year Ended  December 31,
                                       -----------------------------------------------
                                                 1997                   1996                    1995
                                       ------------------------   ---------------------   ----------------------
                                                       Percent                Percent                   Percent
                                           Amount      of Total    Amount     of Total     Amount       of Total
                                          -------     ---------   --------   ----------   --------     ---------
                                                               (Dollars in Thousands)

<S>                                            <C>        <C>        <C>        <C>         <C>             <C>
Interest Rate Range:

Money Market Deposit
 Accounts 2.50-4.00%...................    $ 14,282       13.6$     13,590       13.3%    $ 13,282         13.1%
Passbook Accounts 2.50-3.00%...........       8,373        7.9       8,609        8.5        8,887          8.8
NOW Accounts 1.25-2.00%................       7,266        6.9       6,738        6.6        7,841          7.8
Non-interest checking accounts.........         649         .6         399         .4          351           .3
                                           --------      -----   ---------      ------    --------        -----

Total Non-Certificates.................      30,570       29.0      29,336       28.8       30,361         30.0
                                           --------      -----    --------      ------    --------        -----

Certificates:

 4.00 - 4.99%..........................       4,252        4.0       9,133        9.0       20,609         20.3
 5.00 - 5.99%..........................      51,543       49.0      49,464       48.5       40,357         39.8
 6.00 - 6.99%..........................      16,026       15.2      10,466       10.2        6,564          6.5
 7.00 - 7.99%..........................       2,730        2.6       3,235        3.2        3,161          3.1
 8.00 - 8.99%..........................         157         .2         284         .3          282           .3
                                           --------      -----    --------      ------    --------        -----

Total Certificates.....................      74,708       71.0      72,582       71.2       70,973         70.0
                                           --------      -----    --------      -----     --------        -----
Total Deposits.........................    $105,278      100.0%   $101,918      100.0%    $101,334        100.0%
                                           ========      =====    ========      =====     ========        =====
</TABLE>

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

                                                                Year Ended December 31,
                                                 ---------------------------------------------- -----
                                                    1997                  1996                 1995
                                                 ---------              --------             --------
                                                                (Dollars in Thousands)
<S>                                                  <C>                 <C>                    <C>
Opening balance......................             $101,918              $101,334             $106,894
Deposits sold........................                  ---                   ---              (7,709)
Net deposits (withdrawals)...........                (734)               (3,260)              (1,558)
Interest credited....................               4 ,094                 3,844                3,707
                                                  --------             ---------            ---------

Ending balance.......................             $105,278              $101,918             $101,334
                                                  ========              ========             ========

Net increase (decrease)..............             $  3,360              $    584             $ (5,560)
                                                  ========              ========             ========

Percent increase (decrease)..........                 3.30%                  .58%               (5.20)%
                                                  ========              ========             ========
</TABLE>

                                      22

<PAGE>


         The following table shows rate and maturity information for the
Association's certificates of deposit as of December 31, 1997.
<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)
<S>                                       <C>         <C>        <C>        <C>           <C>        <C>             <C>
Certificate accounts maturing
 in quarter ending :
------------------------------
March 31, 1998.....................      $2,381     $13,459    $    999     $  152      $  ---      $16,991           22.7%
June 30, 1998......................       1,439      11,715         453          9         ---       13,616           18.2
September 30, 1998.................         106       7,861         578        ---          53        8,598           11.5
December 31, 1998..................         271       6,429         457        ---          10        7,167            9.6
March 31, 1999.....................          55       3,171         229        ---           4        3,459            4.6
June 30, 1999......................         ---       2,308       3,522        ---         ---        5,830            7.8
September 30, 1999.................         ---       1,544       2,001        ---          65        3,610            4.8
December 31, 1999..................         ---       1,817       2,409      2,518          25        6,769            9.1
March 31, 2000.....................         ---       1,115       1,286          4         ---        2,405            3.2
June 30, 2000......................         ---         785         215        ---         ---        1,000            1.3
September 30, 2000.................         ---         531       1,729          2         ---        2,262            3.0
December 31, 2000..................         ---         185       1,481         45         ---        1,711            2.4
Thereafter.........................         ---         623         667        ---         ---        1,290            1.8
                                        -------     -------     -------     ------      ------     --------          -----

     Total.........................      $4,252     $51,543     $16,026     $2,730      $  157      $74,708          100.0%
                                         ======     =======     =======     ======      ======      =======         ======

     Percent of total..............        5.7%      69.0 %       21.5%       3.7%        0.1%      100.00%
                                        ======      ======       =====       ====        ====       ======
</TABLE>


         The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 1997.
<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..............................        $15,458     $12,616       $14,861       $26,929        $69,864

Certificates of deposit of
 $100,000 or more...........................          1,533       1,000           904         1,407          4,844
                                                   --------    --------     ---------      --------       --------

Total certificates of deposit...............        $16,991     $13,616       $15,765       $28,336        $74,708
                                                    =======     =======       =======       =======        =======
</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 $775,000, $357,000 and $211,000 of such
funds on deposit at December 31, 1997, 1996 and 1995, respectively.


                                      23

<PAGE>



         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, 1997, the Association
had $29.0 million of fixed-rate advances from the FHLBank of Des Moines. The
Association also had a $3.0 million open line of credit with the FHLBank with
a $1.5 million balance at December 31, 1997, which expires in March 1998. The
Association intends 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.
<TABLE>
<CAPTION>

                                                             At and For the Year Ended December 31,
                                                           --------------------------------------------
                                                            1997                 1996            1995
                                                           -------              -------         -------
                                                                            (In Thousands)
<S>                                                          <C>                  <C>             <C>
Maximum Balance:
FHLBank advances.............................              $34,000              $28,000         $20,500

Average Balance:
FHLBank advances.............................              $28,451              $25,256         $16,596
</TABLE>


         The following table sets forth certain information as to the
Association's FHLBank advances at the dates indicated.
<TABLE>
<CAPTION>
                                                                        December 31,
                                                       -------------------------------------------
                                                         1997              1996              1995
                                                       --------------------------------------------
                                                                  (Dollars in Thousands)
<S>                                                       <C>               <C>               <C>
FHLBank advances.............................           $30,500           $24,000           $20,500
                                                        -------           -------           -------

     Total borrowings........................           $30,500           $24,000           $20,500
                                                        =======           =======           =======

Weighted average interest rate during the
 period of FHLBank advances..................             5.91%             6.00%             5.89%

Weighted average interest rate at end of
 period of FHLBank advances..................             5.86%             5.87%             6.03%
</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
$2.9 million at December 31, 1997, 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 $26,699. 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.

                                      24

<PAGE>



         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, 1997,
MFP had net earnings of $142. 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, 1997, the Association had an equity investment in MFP
of $26,699 (equal to its $100 capital plus $26,599 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, and the deposits of Midwest Federal
are insured 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, 1997, was $42,763.

         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 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, 1997, 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, 1997, the Association's
lending limit under this restriction was approximately $1.4 million. As of
December 31, 1997, Midwest Federal is in compliance with the
loans-to-one-borrower limitation.

                                      25

<PAGE>


         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.

         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.

         For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates
for banks that are insured by the BIF of the FDIC in order to maintain the
reserve ratio of the BIF at 1.25% of BIF insured deposits. As a result of the
BIF reaching its statutory reserve ratio the FDIC revised the premium schedule
for BIF insured institutions to provide a range of .04% to .31% of deposits.
The revisions became effective in the third quarter of 1995. In addition, the
BIF rates were further revised, effective January 1996, to provide a range of
0% to .27%. The SAIF rates, however, were not adjusted. At the time the FDIC
revised the BIF premium schedule, it noted that, absent legislative action (as
discussed below), the SAIF would not attain its designated reserve ratio until
the year 2002. As a result, SAIF insured members would continue to be
generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.

         In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF. It also provided for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special
assessment rate was established at .657% of deposits by the FDIC and the
resulting assessment of $670,861 was paid in November 1996. This special
assessment significantly increased noninterest expense and adversely affected
Midwest Federal's results of operations for the year ended December 31, 1996.
As a result of the special assessment, Midwest Federal's deposit insurance
premiums was reduced to $53,687 for 1997 based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.

         All SAIF-insured institutions are required to pay an assessment for
the repayment of interest on obligations issued by a federally chartered
corporation to provide financing ("FICO") for resolving the thrift crisis in
the 1980s,

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<PAGE>



in an amount equal to 6.48 basis points for each $100 in domestic deposits. As
a result of the recent legislation discussed above, BIF-insured institutions
are also required to pay an assessment for the repayment of interest on the
FICO bonds, in an amount equal to 1.52 basis points for each $100 in domestic
deposits. The assessment on SAIF-insured institutions is expected to be
reduced to 2.43 basis points for each $100 in domestic deposits no later than
January 1, 2000, by which point BIF-insured institutions will participate
fully in the FICO bond interest repayment. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue until the
bonds mature in 2017.

         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, 1997, Midwest Federal had no unamortized purchased mortgage servicing
rights which were required to be deducted from tangible capital. At December
31, 1997, 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, 1997, the Association had tangible capital of $9.4
million, or 6.4% of adjusted total assets, which is approximately $7.2 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, 1997, the Association had no intangibles which were subject to these
tests.

         At December 31, 1997, the Association had core capital equal to $9.4
million, or 6.4% of adjusted total assets, which is $5.0 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,
1997, Midwest Federal had $568,000 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.


                                      27

<PAGE>


         Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital. Such exclusions consist of
equity investments (as defined by regulation) and that portion of land loans
and nonresidential construction loans in excess of an 80% loan-to-value ratio
and reciprocal holdings of qualifying capital instruments. Midwest Federal had
no such exclusions from capital and assets at December 31, 1997.

         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 the FNMA
or FHLMC.

         OTS regulations also require that every savings association 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 the process by which savings associations may appeal an interest
rate risk deduction determination. It is uncertain as to when this evaluation
may be completed. Any savings association with less than $300 million in
assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.

         On December 31, 1997, the Association had total capital of $10.0
million (including $9.4 million in core capital and $568,000 in qualifying
supplementary capital) and risk-weighted assets of $67.4 million (and no
converted off-balance sheet assets); or total capital of 14.8% of
risk-weighted assets. This amount was $4.6 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 receivor.

         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.

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<PAGE>



         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."

         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. If adopted, the regulation would have the effect of relieving the
Association of the responsibility of notifying the OTS prior to making a
capital distribution.

         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, 1997, the Association was in
compliance with requirements, with an overall liquid asset ratio of 8.1%.

         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

                                      29

<PAGE>



policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment,
available for sale or trading) with appropriate documentation. The Association
is in compliance with these 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, 1997, 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 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

                                      30

<PAGE>



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, 1997,
the Association was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be
imposed by the OTS. See "-Liquidity."

         Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including 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 FHLB, that administers the
home financing credit function of savings associations. Each FHLB serves

                                      31

<PAGE>


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, 1997, Midwest Federal had
$2.0 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 7.53%
and were 7.00% for calendar year 1997.

         Under federal law, the FHLB 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, 1997, dividends paid by the FHLB of
Des Moines to Midwest Federal totalled $137,179, which constituted a $13
decrease from the amount of dividends received in 1996. The $34,577 dividend
received for the quarter ended December 31, 1997 reflects an annualized rate
of 7.00%, compared to a rate of 7.00% for calendar 1996.

         Federal and State Taxation.

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

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

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

         If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally
must include existing reserves in income over a four year period.

         Under the percentage of taxable income method, the percentage bad
debt deduction cannot exceed the amount necessary to increase the balance in
the reserve for "qualifying real property loans" to an amount equal to 6% of
such loans outstanding at the end of the taxable year or the greater of (i)
the amount deductible under the experience method or (ii) the amount which
when added to the bad debt deduction for "non-qualifying loans" equals the
amount by which

                                      32

<PAGE>



12% of the amount comprising savings accounts at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. At
December 31, 1997, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Association. It is not expected that these
limitations would be a limiting factor in the foreseeable future.

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

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

         To the extent earnings appropriated to a savings association's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed
under the experience method and to the extent of the association's
supplemental reserves for losses on loans ("Excess"), such Excess may not,
without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions on
redemption, dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). As of December 31, 1997, the Association's Excess for
tax purposes totalled approximately $2.8 million.

         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

                                      33

<PAGE>


taxable income includes interest on state and municipal obligations. Interest
on U.S. obligations is taxable under the Iowa franchise tax and under the
federal corporate income tax.

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

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

         Effect of New Accounting Standards.

         See Note 1 of the Notes to Consolidated Financial Statements in the
Annual Report.

         SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," 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.

         SFAS 130, "Reporting Comprehensive Income," will be effective for the
Company for the year beginning January 1, 1998, and establishes the standards
for the reporting and display of comprehensive income in the financial
statements. Comprehensive income represents net earnings and certain amounts
reported directly in stockholders' equity, such as the net unrealized gain or
loss on available-for-sale securities.

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 and the Ft. Madison and Wapello branches. The Association also
has one off-site drive-up ATM located at a convenience store in West
Burlington. The Association estimates its share of the savings market in its
primary market area to be approximately 10%.


                                      34

<PAGE>



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

         Dennis L. Dietzman - Mr. Dietzman, age 48, 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 37, 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, 1997, the Association and its subsidiaries had a
total of 43 employees, including 2 part-time employees. The Association's
employees are not represented by any collective bargaining group. Management
considers its employee relations to be good.



                                      35

<PAGE>


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, 1997 was $2.6 million.


                                Date
                              Acquired/       Owned or         Net Book Value
      Location             Lease Expires       Leased       at December 31, 1997
--------------------       -------------      --------      --------------------
                                                                (In Thousands)
Main Office:

3225 Division Street            1974           Owned                $1,246
Burlington, IA

Branch Offices:

323 Jefferson Street            1974           Owned                   181
Burlington, IA

926 Avenue G                    1975           Owned                   246
Ft. Madison IA

Highway 61                      1974           Owned                    32
Wapello, IA

Wal-Mart                        2002(2)       Leased                   178
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, 1997 was $244,000.

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

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

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

         No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
                                      36

<PAGE>



                                    PART II


Item 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

         Page 43 of the Annual Report is herein incorporated by reference.

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

         Pages 4 through 16 of the Annual Report is herein incorporated by
reference.

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

         (a) Financial Statements

         The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1997, is incorporated by
reference in this Annual Report on Form 10-KSB as Exhibit 13.

Annual Report Section                                     Pages in Annual Report
-----------------------                                  -----------------------
Common Stock and Related Information                               43

Selected Financial and Other Data                                 2-3

Management's Discussion and Analysis                              4-16
 of Financial Condition and Results
 of Operations

Independent Auditors' Report                                       17

Consolidated Balance Sheets as of                                  18
  December 31, 1997 and 1996

Consolidated Statements of Operations                              19
  for Years Ended December 31, 1997,
  1996 and 1995

Consolidated Statements of Stockholders'                           20
 Equity for Years Ended December 31,
 1997, 1996 and 1995

Consolidated Statements of Cash Flows                              21
 for Years Ended December 31, 1997,
 1996 and 1995

Notes to Consolidated Financial                                  22-42
 Statements

         With the exception of the aforementioned information, the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997 is not deemed filed as part of this Annual Report on Form 10-KSB.

                                      37

<PAGE>


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

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


                                   PART III


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

         Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year.

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

         Information concerning executive compensation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.

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

         Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1998, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.

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

         Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held in 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year.

                                      38

<PAGE>


                                    PART IV

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

         (a)  Exhibits
<TABLE>
<CAPTION>

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

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

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

***      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, 1997.

                                      39

<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.
<TABLE>
<CAPTION>
                                                 MIDWEST BANCSHARES, INC.

<S>                                                 <C>
Date: March 30, 1998                             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 Officer and          Chairman of the Board
Director (Principal Executive Officer)

Date: March 30, 1998                            Date: March 30, 1998
      -------------------------------------           --------------------------------


/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 30, 1998                            Date: March 30, 1998
      -------------------------------------           -------------------------------


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

Date: March 30, 1998                            Date: March 30, 1998
      -------------------------------------           -------------------------------


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

Date: March 30, 1998
      -------------------------------------
</TABLE>

                                      40

<PAGE>



                                 Exhibit Index



                                                                    Sequential
 Exhibit No.                          Document                      Page Number
------------           ---------------------------------------      ------------
   13                Annual Report
   21                Subsidiaries of Registrant
   23                Consent of KPMG Peat Marwick LLP
   27                Financial Data Schedule