<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                  FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED]
     For the fiscal year ended June 30, 1996
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
     For the transition period from ____________________ to ___________________

                         Commission File Number 0-22742

                               GFS BANCORP,INC.
--------------------------------------------------------------------------------
                (Name of small business issuer in its charter)

                 Delaware                                  42-1410536 
---------------------------------------------  ---------------------------------
(State or other jurisdiction of incorporation  (IRS Employer Identification No.)
               or organization)

    1025 Main Street, Grinnell, Iowa                               50112-0030
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:         (515) 236-3121
                                                    ----------------------------

          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 $0.01 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 filing 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 the issuer's revenues for its most recent fiscal year:  $6.4 million.

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing prices of such stock on the
Nasdaq System as of September 3, 1996, was $7.1 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the
registrant.)

     As of September 3, 1996, there were issued and outstanding 502,600 shares
of the Registrant's Common Stock.

     Transitionally Small Business disclosure format (check one): yes     no  X
                                                                      ---    ---
      
                      DOCUMENTS INCORPORATED BY REFERENCE

     Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended June 30, 1996.

     Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting of
Stockholders.
<PAGE>
 
                                     PART I

Item 1.  Description of Business
         -----------------------

General

     The Company.  GFS Bancorp, Inc. (the "Company"), a Delaware corporation,
was formed in September 1993 to act as the holding company for Grinnell Federal
Savings Bank ("Grinnell Federal" or the "Bank") upon the completion of the
Bank's conversion from the mutual to the stock form (the "Conversion").  The
Company received approval from the Office of Thrift Supervision (the "OTS") to
acquire all of the common stock of the Bank to be outstanding upon completion of
the Conversion.  The Conversion was completed on January 5, 1994.  The primary
business activity of the Company is to act as the holding company of the Bank.
The Company also invests in U.S. government obligations, common and preferred
stocks and mutual funds.

     The executive offices of the Company and its subsidiary are located at 1025
Main Street, Grinnell, Iowa 50112 and the telephone number at that address is
(515) 236-3121.

     Grinnell Federal.  Grinnell Federal, originally chartered in 1935, is a
federally chartered savings bank headquartered in Grinnell, Iowa.  Its deposits
are insured up to the maximum allowable amount by the Federal Deposit Insurance
Corporation (the "FDIC").  As a federally chartered savings bank, the Bank is
regulated by the Office of Thrift Supervision, Department of the Treasury
("OTS").

     Grinnell Federal primarily serves Poweshiek County, as well as, parts of
Marshall, Iowa, and Jasper Counties, Iowa through its office located at 1025
Main Street, Grinnell, Iowa  50112.  The Bank competes in loan originations and
in attracting deposits with approximately six financial institutions serving its
primary market area.

     Grinnell Federal has been, and intends to continue to be, a community-
oriented financial institution offering a variety of financial services to meet
the needs of the communities it serves.  The Bank attracts deposits from the
general public and uses the deposits, together with borrowings and other funds,
to originate loans secured by first mortgages on owner-occupied one- to four-
family residences.  To a lesser extent, the Bank also 

                                       2
<PAGE>
 
originates loans secured by commercial and multi-family real estate, and
construction, consumer and commercial business loans.

     In addition, in order to supplement loan demand in its market area,
Grinnell Federal has purchased whole loans and participation interests in loans
secured by one- to four-family owner-occupied real estate in the Des Moines,
Iowa metropolitan area, and multi-family and commercial real estate in the
Madison and Milwaukee, Wisconsin metropolitan areas, originated by a mortgage
broker located in Wisconsin and other savings institutions headquartered in
Iowa.  All of such purchased loans meet the Bank's underwriting standards.

     The Bank also invests in U.S. Government and agency securities, municipal
bonds and other investment securities.  See "- Investment Activities."

     The Bank offers a variety of accounts having a wide range of interest rates
and terms.  The Bank only solicits deposits in its primary market area and does
not accept brokered deposits.

     Market Area.  The office of the Bank is located at 1025 Main Street,
Grinnell, Iowa  50112.  Through this office, Grinnell Federal currently serves
primarily Poweshiek County and, to a lesser extent, portions of Marshall, Iowa,
and Jasper Counties, Iowa.

     Grinnell, Iowa is located in Poweshiek County, and is approximately 55
miles east of Des Moines, Iowa.  Poweshiek County has a population of
approximately 19,000 persons, and Grinnell's population is estimated at 8,900
people.  Grinnell has a mixed industrial and agricultural economy consisting of
some 200 retail and service enterprises serving the Grinnell area.  Major
employers include Grinnell College, Grinnell Mutual Reinsurance Company, DeLong
Sportswear, GTE, Grinnell Regional Medical Center, Donaldson Company and
CertainTeed Company.

Lending Activities

     General.  Historically, the Bank originated fixed-rate mortgage loans.
Since the early 1980s, however, the Bank has emphasized, subject to market
conditions, 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 

                                       3
<PAGE>
 
of assets in its portfolio with more frequent repricing or shorter maturities.
In response to customer demand, however, the Bank continues to originate for its
loan portfolio fixed-rate mortgages with terms not greater than 30 years.

     The Bank's primary focus in lending activities is on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences.  The Bank also originates and purchases loans secured by commercial
and multi-family real estate and a limited number of construction, consumer and
commercial business loans.  During fiscal 1996, the Bank originated $14.6
million and purchased $22.9 million in loans which contributed to the increase
in the Bank's loan portfolio.  Of the $22.9 million in loans purchased during
the 1996 fiscal year, $9.3 million in participation interests were sold to other
financial institutions with the bank retaining the servicing.  See 
"- Originations, Purchases and Sales of Loans and Mortgage-Backed Securities"
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1996 Annual Report to Stockholders
attached hereto as Exhibit 13 (the "Annual Report").  At June 30, 1996, the
Bank's net loan portfolio totaled $71.8 million.

     All members of the Board of Directors serve as Loan Committee members.  At
any given time, the approval of at least two outside directors and one inside
director is required to approve loans for which approval of the Loan Committee
is required.  Loan Committee approval is required for unsecured consumer loans
greater than $25,000, secured consumer loans over $50,000,  and commercial (non-
real estate) loans of more than $50,000.  The Loan Committee must also approve
all loans secured by real estate over $300,000.

     The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank can invest in any one real estate project
is, with certain exceptions, generally the greater of 15% of unimpaired capital
and surplus or $500,000.  See "Regulation - Federal Regulation of Savings
Associations."  At June 30, 1996, the maximum amount which the Bank could have
lent to any one borrower and the borrower's related entities was approximately
$1.4 million.  At June 30, 1996, the Bank had no loans with aggregate
outstanding balances in excess of this amount.  Since the Bank's current lending
policy generally limits loans secured by real estate to $500,000 and consumer
loans 

                                       4
<PAGE>
 
to $50,000, the Bank has not been materially restricted by this lending limit.

     At June 30, 1996, the Bank had four (4) lending relationships exceeding
$750,000 secured primarily by multi-family and commercial real estate
properties.  At June 30, 1996, the foregoing loans were performing in accordance
with their loan repayment terms.

     Loan Portfolio Composition.  The following table presents the composition
of the Bank's loan portfolios in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
 
 
                                                              June 30,                  
                                               ------------------------------------     
                                                      1996              1995            
                                               -----------------  -----------------     
                                                Amount   Percent   Amount   Percent     
                                               --------  -------  --------  -------     
                                                       (Dollars in Thousands)           
                                                                                        
     Real Estate Loans:                                                                 
     ------------------                                                                 
     <S>                                       <C>       <C>       <C>       <C>        
      One-to four-family.....................  $49,015     65.3    $38,337     67.4%    
      Multi-family...........................   11,589     15.4      7,118     12.5     
      Commercial.............................    8,184     10.9      6,946     12.2     
      Construction and land..................    3,721      5.0      3,222      5.7     
                                               -------    -----    -------    -----     
                                                                                        
          Total real estate loans............   72,509     96.6     55,623     97.8     
                                               -------    -----    -------    -----     
     Other Loans:                                                                       
     ------------                                                                       
      Consumer Loans:                                                                   
       Deposit account.......................       42       .1         96       .2     
       Automobile............................      669       .9        412       .7     
       Home equity line of credit............      274       .3         41       .1     
       Home improvement......................        7      ---          6      ---     
       Other.................................      296       .4        133       .2     
                                               -------    -----    -------    -----     
          Total consumer loans...............    1,288      1.7        688      1.2     
       Commercial business/1/................    1,297      1.7        561      1.0     
                                               -------    -----    -------    -----     
          Total other loans..................    2,585      3.4      1,249      2.2     
                                               -------    -----    -------    -----     
                                                                                        
          Total loans........................   75,094    100.0%    56,872    100.0%    
                                                          =====               =====     
                                                                                        
     Less:                                                                              
     -----                                                                              
      Loans in process.......................    2,473               1,308              
      Deferred fees and discounts............      207                 165              
      Allowance for losses...................      641                 400              
                                               -------             -------              
      Total loans receivable, net............  $71,773             $54,999              
                                               =======             =======              
</TABLE> 

------------------------
     /1/Includes commercial leases totaling $437,000 at June 30, 1996.

                                       5
<PAGE>
 
     The following table shows the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
 
<TABLE> 
<CAPTION> 

                                                         June 30,              
                                                         --------
                                               1996                1995        
                                           ----------------   ---------------- 
                                           Amount   Percent   Amount   Percent 
                                           ------   -------   ------   ------- 
                                                (Dollars in Thousands)         
     Fixed-Rate Loans:                                                         
     -----------------                                                         
     <S>                                   <C>       <C>      <C>        <C>   
                                                                               
      Real estate:                                                             
       One- to four-family..............   $22,568    30.1%   $15,288     26.9%
       Multi-family.....................     1,236     1.6        862      1.5
       Commercial.......................     1,174     1.6      1,043      1.8
       Construction and land............     3,469     4.7         19       .1
                                           -------   -----    -------    -----

         Total fixed-rate real
           estate loans.................    28,447    38.0     17,212     30.3

      Non-real estate:
       Consumer.........................     1,014     1.3        647      1.1
       Commercial business..............       695      .9        286       .5
                                           -------   -----    -------    -----

         Total fixed-rate loans.........    30,156    40.2     18,145     31.9
                                           -------   -----    -------    -----

     Adjustable-Rate Loans:
     ----------------------

      Real estate:
       One- to four-family..............    26,447    35.2     23,049     40.5
       Multi-family.....................    10,353    13.8      6,256     11.0
       Commercial.......................     7,010     9.3      5,903     10.4
       Construction and land............       252      .3      3,203      5.6
                                           -------   -----    -------    -----

         Total adjustable-rate
          real estate loans.............    44,062    58.6     38,411     67.5

      Non-real estate:
       Home equity line of credit.......       274      .4         41       .1
       Commercial business..............       602      .8        275       .5
                                           -------   -----    -------    -----
         Total adjustable-rate loans....    44,938    59.8     38,727     68.1
                                           -------   -----    -------    -----

         Total loans....................    75,094   100.0%    56,872    100.0%
                                                     =====               =====

     Less:
     -----
      Loans in process..................     2,473              1,308
      Deferred fees and discounts.......       207                165
      Allowance for loan losses.........       641                400
                                           -------            -------

         Total loans receivable, net....   $71,773            $54,999
                                           =======            =======
</TABLE>

                                       6
<PAGE>
 
     The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at June 30, 1996.  Mortgages which have adjustable or
renegotiable interest rates are shown as maturing 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      Multi-family    Construction/(1)/              Commercial             
                                four-family   and Commercial      and Land         Consumer    Business     Total
                                -----------   --------------   -----------------   --------   ----------    ----- 

                                   Amount         Amount            Amount          Amount      Amount      Amount
                                  --------       --------          --------        --------    --------    --------
                                                                (Dollars in Thousands)
<S>                             <C>           <C>              <C>                 <C>        <C>           <C> 
Due During Years Ending
June 30,

1997.....................          $   368        $   ---           $ 3,219         $ 244       $ 113       $ 3,944          
1998.....................              186            442               100           225          46           999          
1999.....................              327            137               150           184         333         1,131          
2000 and 2001............            1,672            288                18           353         509         2,840          
2002 to 2006.............            7,127         11,309               ---           282         122        18,840          
2007 to 2011.............           10,674          3,858                 9           ---          25        14,566          
2011 and thereafter......           28,661          3,739               225           ---         149        32,774          
</TABLE>

-------------------------------
/(1)/Assumes the term during the construction phase.


     At June 30, 1996 the total amount of loans due after June 30, 1997 which
had fixed interest rates was $26.2 million, while the total amount of loans due
after such dates which had floating or adjustable interest rates was $44.9
million.

     One- to Four-Family Residential Mortgage Lending.  Residential loan
originations are generated by the Bank's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders.  The Bank 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 June 30, 1996, the Bank's one- to four-family
residential mortgage loans totaled $49.0 million, or 65.3%, of the Bank's loan
portfolio.

     The Bank currently makes adjustable-rate one- to four-family residential
mortgage loans in amounts of up to 90% of the lesser of the appraised value or
selling price of the security property.  For loans with loan-to-value ratios of
greater than 80%, the Bank typically requires private mortgage insurance to
reduce the Bank's exposure to 70% of the appraised value or selling price of the
security property.

                                       7
<PAGE>
 
     The Bank currently offers one-year, three-year and five-year ARM loans at
rates determined in accordance with market and competitive factors for a term of
up to 30 years. The interest rate charged on adjustable-rate mortgage loans
currently originated by the Bank is based upon the one year, three year and five
year Treasury Constant Maturity rate. The adjustable-rate loans currently
originated by the Bank provide for a 1% to 3% annual cap and floor, and a 5% to
6% lifetime cap on the interest rate over the rate in effect on the date of
origination. The annual and lifetime caps on increases in interest rates reduce
the extent to which these loans can help protect the Bank against interest rate
risk. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" in the Annual Report.
Approximately 46.2% of the loans secured by one- to four-family real estate
originated by the Bank during fiscal 1996 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 but 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 Bank believes that these risks have not had a material
adverse effect on the Bank to date.

     The Bank also originates fixed-rate mortgage loans. These fixed-rate loans
currently originated by the Bank have terms of up to 30 years. Interest rates
charged on these fixed-rate loans are competitively priced according to local
market conditions.

     In underwriting residential real estate loans, the Bank evaluates both the
borrower's ability to make monthly payments, employment history, credit history
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. Borrowers on adjustable-rate loans are currently qualified at the fully
indexed rate. However, in the past, the Bank qualified borrowers at the initial
rate.

          An appraisal or evaluation report of the security property from Board-
approved appraisers is obtained on all mortgage loan applications.  In
connection with origination of residential real 

                                       8
<PAGE>
 
estate loans, the Bank generally requires that the borrower obtain an opinion
from an attorney regarding the title to the property and fire and casualty
insurance to protect the Bank's interest.

     In addition, in order to supplement loan demand in the Bank's primary
market area, the Bank has purchased whole loans secured by one- to four-family
real estate located in Iowa, Texas, Colorado, Utah, and Wisconsin originated by
financial institutions and mortgage companies. Generally the loans purchased by
the Bank over the last 2 years are being serviced by the Bank. The potential
risks associated with out of area lending include the lack of control over loan
servicing when loans are serviced by others and the inability to closely monitor
and inspect the property. In order to mitigate these risks, the Bank only
purchases loans that meet its underwriting standards used in originating loans
in its market area.

     During fiscal 1996, the Bank purchased 68 loans secured by one- to four-
family real estate totalling $8.5 million; substantially all of which were
located in the States of Iowa and Wisconsin. Of this $8.5 million in purchased
one- to four-family loans, $1.2 million were sold to other financial
institutions. At June 30, 1996, approximately $7.5 million, or 15.3% of the
Bank's one- to four-family residential mortgage loan portfolio was purchased by
the Bank. See "- Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities."

     The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank 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
Bank on occasion 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. One- to four-family
real estate loans may be assumed provided home buyers meet the Bank's
underwriting standards and the loan terms are modified, to the extent necessary,
to conform with the Bank's present yield and maturity requirements.

     Construction and Land Lending. The Bank also originates and purchases
construction loans for the construction of one- to four-family, multi-family and
commercial real estate, and loans secured 

                                       9
<PAGE>
 
by land. At June 30, 1996, the Bank's construction and land loan portfolio
totaled $3.7 million.

     Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to 12 months.  These construction loans have rates and terms
which match any one- to four-family loans then offered by the Bank, except that
during the construction phase, the borrower pays interest only.  Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans.

     Construction loans are obtained principally through continued business
from individuals who have previously borrowed from the Bank, as well as
referrals from existing customers and walk-in customers.  The application
process includes a submission to the Bank of accurate plans, specifications and
costs of the project to be constructed/developed.  These items are used as a
basis to determine the appraised value of the subject property.  Loans are
limited to a percentage of the lesser of current appraised value and/or the cost
of construction (land plus building).

     In addition, the Bank has originated and purchased construction loans for
the construction of multi-family and commercial properties located in its market
area and the Madison and Milwaukee, Wisconsin area. Construction loans on
commercial real estate projects may be secured by strip shopping centers,
apartments, small office building, churches or other property and are structured
to be converted to permanent loans at the end of the construction phase, which
generally runs up to 12 months. These construction loans have rates and terms
which match the permanent non-residential real estate loans then offered by the
Bank, except that during the construction phase, the borrower pays interest
only. These loans generally provide for the payment of interest and loan fees
from loan proceeds. At June 30, 1996, the Bank had $786,000 of outstanding loans
for the construction of commercial and multi-family buildings. See "Multi-Family
Commercial Real Estate Lending" and "Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities."

     No construction loan is approved unless there is evidence of a commitment
for permanent financing upon completion of the property, whether through the
Bank or another financial institution.

                                       10
<PAGE>
 
     Because of the uncertainties inherent in estimating construction costs, it
is relatively difficult to evaluate accurately the total loan funds required to
complete a project. Also, the funding of loan fees and interest during the
construction phase makes the monitoring of the progress of the project
particularly important, as customary early warning signals of project
difficulties may not be present.

     To a very limited extent, the Bank originates or purchases loans secured by
raw land in its market area and in the Madison, Wisconsin area. Such loans carry
fixed and adjustable rates and terms of one to ten years. At June 30, 1996,
there was $502,000 in outstanding loans secured by raw land.

     Multi-Family/Commercial Real Estate Lending.  The Bank has purchased whole
loans and participation interests in loans originated by other lenders and, to a
limited extent, has originated loans secured by multi-family and commercial real
estate. At June 30, 1996, the Bank had $19.8 million in multi-family and
commercial real estate loans, representing 26.3% of the bank's loan portfolio.

     In the past, the Bank purchased whole loans and interests in loans secured
by multi-family and commercial real estate from financial institutions and
mortgage companies located throughout the United States. Approximately 75.2% of
the property securing the Bank's multi-family and commercial real estate loan
portfolio is located outside the State of Iowa. Many of these properties
securing these purchased loans and participations are located in Texas,
Colorado, Wisconsin and Utah. Some of these areas have experienced adverse
economic conditions, including a general softening in the real estate markets
and local economies, which resulted in increased delinquencies and loan losses
during prior years. However, many of the Bank's multi-family and commercial real
estate loans are now seasoned. During the 1993, 1994, and 1995 fiscal years, the
Bank had no significant delinquencies in this portfolio. In the current fiscal
year, the Bank has experienced several delinquencies in its Wisconsin
multifamily and commercial real estate portfolio. See discussion under "Asset
Quality" herein.

     On October 5, 1995, the Bank entered into an exclusive agreement effective
November 1, 1995 ("Agreement") with Bache Funding Corp. of Wisconsin ("Bache"),
a mortgage banking firm headquartered in Madison, Wisconsin. Under the
Agreement, the Bank

                                       11
<PAGE>
 
has a right of first refusal on any real estate loans generated by Bache,
including one-to-four family, multi-family, commercial real estate, and land
development loans secured by properties located primarily in the Madison,
Wisconsin metropolitan area. The Bank anticipates that it will sell majority
participation interests in these loans to financial institutions located in Iowa
and contiguous states. The Bank has had experience with Bache originated loans
prior to November 1995. During fiscal 1994 and 1995, the Bank purchased
participation interests totalling approximately $8.8 million in Bache originated
loans from another financial institution.

     Since entering into the Agreement with Bache, the Bank purchased $6.0
million one-to-four family, $8.1 million multi-family, $2.1 million commercial,
and $1.0 million residential land development loans from Bache. The dollar
volume of loans for the purpose of land development is not expected to be a
material percentage of Bache originations in future periods. Of the $17.2
million in one-to-four family, commercial, multi-family, and land development
loans purchased from Bache during the period November 1, 1995 through June 30,
1996, $9.3 million in participation interests were sold to other financial
institutions with the Bank retaining the servicing. It is the Bank's policy to
only purchase loans that meet its underwriting standards used in originating
loans in its market area and to perform periodic site inspections.

     The table below sets forth by type of security property of the Bank's 
multi-family and commercial real estate loans (including construction loans) at
June 30, 1996.

<TABLE>
<CAPTION>
                                                     Outstanding      Amount
                                         Number of    Principal   Non-Performing
                                           Loans       Balance    or of Concern
                                         ---------   -----------  --------------
                                                  (Dollars in Thousands)
<S>                                      <C>         <C>          <C>
Office Buildings and
   business facilities...................    36         $ 7,733        $  488
Multi-family.............................    44          11,856           751
Hotel/Motel..............................     2             971           ---
                                            ---         -------        ------

  Total commercial and multi-family
     real estate loans/(1)/..............    82         $20,560        $1,239
</TABLE>                                    ===         =======        ======
 
------------
/(1)/  Includes $786,000 of multi-family and commercial real estate construction
       loans.

                                       12
<PAGE>
 
     Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from 10 to 25 years and up to 30-year amortization
schedules.  Rates on such loans generally either (i) adjust (subject, in some
cases, to specified interest rate caps) at one, three and five year intervals to
specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates.  Under the Bank's current loan policy, multi-family and
commercial real estate loans (other than loans to facilitate) are written in
amounts of up to 75% of the appraised value of the properties.

     Appraisals on properties securing multi-family and commercial real estate
property loans originated by the Bank are performed by an independent appraiser
approved by the Bank at the time the loan is made.  All appraisals on multi-
family and commercial real estate loans are reviewed by the Bank's management.
In addition, the Bank's underwriting procedures generally require verification
of the borrower's credit history, income and financial statements, banking
relationships and income projections for the property.  Personal guarantees are
generally obtained for all or a portion of most of the Bank's multi-family and
commercial real estate loans.  While the Bank continues to monitor multi-family
and commercial real estate loans on a regular basis after origination, updated
appraisals are not normally obtained after closing unless the Bank believes that
there are questions regarding the progress of the loan or the value of the
collateral.

     Multi-family and commercial real estate lending affords the Bank 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 multi-family and commercial 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 Bank has attempted to minimize these risks through its
underwriting standards and by lending primarily on existing income-producing
properties.

                                       13
<PAGE>
 
     Consumer Lending.  Consumer loans generally have shorter terms to maturity
(thus reducing Grinnell 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 June 30, 1996, the Bank's consumer loan portfolio totaled
$1.3 million, or 1.7%, of its loan portfolio.  Under applicable federal law, the
Bank is authorized to invest up to 35% of its assets in consumer loans.

     Grinnell Federal offers a variety of secured consumer loans, including home
improvement loans, home equity line of credit loans, auto loans, mobile home
loans and loans secured by savings deposits and other consumer collateral.  The
Bank also offers a limited amount of unsecured loans.  The Bank currently
originates substantially all of its consumer loans in its market area.  Consumer
loan terms vary according to the type of collateral, length of contract and
creditworthiness of the borrower.  The Bank's consumer loans generally have a
fixed-rate of interest.

     The Bank 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 Bank 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.

     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 

                                       14
<PAGE>
 
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 Bank's consumer loan portfolio has generally been low (at June 30, 1996,
two consumer loans totalling $1,400 were 60 days or more delinquent), there can
be no assurance that delinquencies will not increase in the future.

     Commercial Business Lending.  Federally chartered savings institutions,
such as Grinnell Federal, are authorized to make secured or unsecured loans and
issue letters of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a maximum of 10%
of total assets.

     At June 30, 1996, Grinnell Federal had $1.3 million in commercial business
loans outstanding, representing 1.7% of the Bank's total loan portfolio, with no
additional commercial business loan commitments.  Included in the $1.3 million
in commercial business loans, were $437,000 in commercial equipment leases.
These leases are currently non-performing.  Payments on the leases were
suspended in March 1996 when the seller/servicer filed bankruptcy.  See "Non-
Performing Assets".  In addition, at June 30, 1996, Grinnell Federal had no
letters of credit outstanding.

     Most of the Bank's commercial business loans have terms to maturity of 10
years or less and fixed or adjustable interest rates.  The Bank's loan policy
provides that commercial loans may not exceed $100,000, without prior Board
approval.

     Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business.  As a result, the availability of funds for the
repayment of commercial business loans may be dependent upon the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment).  The Bank's commercial business loans almost always
include personal guarantees and are usually, but not always, secured by business
assets, such as accounts receivable, equipment

                                       15
<PAGE>
 
and inventory as well as real estate.  However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.

     The Bank recognizes the generally increased risks associated with
commercial business lending.  Grinnell Federal's commercial business lending
policy emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy of
the borrower's capital and collateral as well as an evaluation of the industry
conditions affecting the borrower.  Analysis of the borrower's past, present and
future cash flows is also an important aspect of Grinnell Federal's credit
analysis.

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

     The Bank originates real estate loans through marketing efforts, the Bank's
customer base, walk-in customers and referrals from real estate brokers.  The
Bank originates both adjustable-rate and fixed-rate loans.  Its ability to
originate loans is dependent upon the relative 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 and competition.

     Historically, the Bank has purchased loans and loan participations for one-
to four-family, multi-family and commercial real estate loans.  Such purchases
have enabled Grinnell Federal to offset the relatively low level of loan demand
in the Bank's principal market area, to take advantage of favorable lending
opportunities in other markets, to diversify its portfolio and to limit
origination expenses while generally providing the Bank with a higher yield than
was available on mortgage-backed securities.  During fiscal 1994, the Bank
purchased loans from two Iowa-based financial institutions secured by one- to
four-family and multi-family real estate located in the Des Moines, Iowa
metropolitan area and the Madison and Milwaukee, Wisconsin areas, respectively.
During fiscal 1996, 1995 and 1994, the Bank purchased $5.7 million, $11.8
million and $10.1 million, respectively, of loans pursuant to these agreements.

                                       16
<PAGE>
 
     In addition, during fiscal 1996, the Bank entered into an agreement with
Bache Funding, Inc.("Bache"), a mortgage banking firm headquartered in Madison,
Wisconsin giving the Bank the right of first refusal on any real estate loans
generated by Bache, including one-to-four family, multi-family, commercial real
estate, and land development loans secured by properties located primarily in
the Madison, Wisconsin metropolitan area.  The Bank has sold and plans to
continue to sell majority participation interests in these loans to financial
institutions located in Iowa and contiguous states.  Since entering into this
agreement, the Bank purchased $6.0 million one-to-four family, $8.1 million
multi-family, $2.1 million commercial, and $1.0 million residential land
development loans.  Of the $17.2 million in one-to-four family,  commercial,
multi-family, and land development  loans purchased from Bache during the period
November 1, 1995 through June 30, 1996, $9.3 million in participation interests
were sold to other financial institutions with the Bank retaining the servicing.
See "Multi-Family/Commercial Real Estate Lending".

     The Bank has underwritten its loan purchases utilizing the same criteria it
uses in originating loans.  Prior to November 1995, servicing of purchased
multi-family and commercial real estate loans was generally done by the seller.
At June 30, 1996, approximately $16.7 million of Grinnell Federal's loan
portfolio was serviced by others.  One- to four-family real estate loans
purchased by the Bank during the past two years and all loans purchased from
Bache are serviced by the Bank.

     In addition, the Bank has purchased mortgage-backed securities in the past
to supplement loan demand.  During fiscal 1995 and 1996, however, the Bank did
not purchase any mortgage-backed securities.  The mortgage-backed securities
purchased in the past generally had fixed rates and maturities of seven to 30
years.  See "Investment Activities."

                                       17
<PAGE>
 
     The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                         Year Ended
                                                    ---------------------
                                                           June 30,
                                                    ---------------------
                                                       1996       1995
                                                    ---------- ----------
                                                        (In Thousands)
<S>                                                 <C>        <C>

Originations by type
--------------------
 Adjustable-rate:
  Real estate - one- to four-family................  $ 5,441     $ 2,101
              - multi-family.......................      ---          55
              - commercial.........................      163          15
  Non-real estate - consumer.......................      ---          47
                  - commercial business............      202         284
                                                     -------     -------
         Total adjustable-rate.....................    5,806       2,502
                                                     -------     -------

 Fixed-rate:
  Real estate - one- to four-family................    6,336       3,227
              - multi-family.......................      ---         ---
              - commercial.........................      548         322
  Non-real estate - consumer.......................    1,422         740
                  - commercial business............      518         283
                                                     -------     -------
         Total fixed-rate..........................    8,824       4,572
                                                     -------     -------
         Total loans originated....................   14,630       7,074
                                                     -------     -------

Purchases
---------
  Real Estate - one- to four-family/(1)/...........    8,472       5,621
              - multi-family/(2)/..................   10,829       3,496
              - commercial and land/(3)/...........    3,589       2,635
                                                     -------     -------
         Total loans purchased.....................   22,890      11,752
  Mortgage-backed securities.......................      ---         ---
                                                     -------     -------
         Total loans and mortgage-backed
            securities purchased...................   22,890      11,752
                                                     -------     -------
Sales
-----
  Real Estate - one- to four-family................    1,211         ---
                multi-family.......................    6,245         ---
                commercial and land................    1,843         ---
                                                     -------     -------
         Total Sales...............................    9,299         ---
</TABLE>
                              -------------------
/(1)/ Includes $2.4 million of loans for the construction of one- to four-family
      residences.
/(2)/ Includes $266,000 of loans for the construction of multi-family real
      estate.
/(3)/ Includes $520,000 of loans for the construction of commercial buildings.

                                       18
<PAGE>
 
Asset Quality

     General.  When a borrower fails to make a required payment on a loan, the
Bank attempts to cause the delinquency to be cured by  contacting the borrower.
In the case of loans secured by real estate, a late notice is sent by the 10th
of the month if payment for the prior month is not received.  If the delinquency
is not cured by the 15th of the month, contact with the borrower is made by
phone.  Additional written and verbal contacts are made with the borrower to the
extent necessary.  If the  delinquency is not cured or a payment plan arranged
by the 60th day, the Bank will send a second late notice followed by additional
phone contacts and meetings with the borrower.  If the delinquency is not cured
by the 90th day, a 35-day default letter is sent and, once that period lapses,
appropriate action to foreclose on the property is initiated.  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 a sheriff's sale and may be
purchased by the Bank.  Delinquent consumer loans are handled in a similar
manner.  If these efforts fail to bring the loan current, appropriate action may
be taken to collect any loan payment that remains delinquent.  The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Iowa consumer protection laws.

     Real estate acquired by Grinnell Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated fair
value at the date of acquisition, and any write down resulting therefrom is
charged to the allowance for losses on loans.  Upon acquisition, all costs
incurred in maintaining the property are expensed.  However, costs relating to
the development and improvement of the property are capitalized to the extent of
net realizable value.

     Non-Performing Assets.  The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio.  Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful (Generally when loans are past due 90 days or more).  For all
years presented, the Bank 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).  Foreclosed assets include
assets acquired in settlement of loans and reflect the lower of cost or fair
value less selling expense.

                                       19
<PAGE>
 
<TABLE>
<CAPTION>
                                                      June 30,
                                                -------------------
                                                  1996       1995
                                                --------   --------
                                                    (Dollars in
                                                     Thousands)
<S>                                             <C>        <C>
Non-accruing loans:
  One- to four-family..........................  $  298     $   6
  Non-mortgage commercial loans................     437         8

Foreclosed assets:
  Commercial real estate.......................     227       ---
                                                 ------     -----

Total non-performing assets....................  $  962     $  14
                                                 ======     =====
Total as a percentage of total assets..........    1.15%      .02%
                                                 ======     =====
</TABLE>

     Total non-performing assets (defined as non-accruing loans for which
payments have been due and uncollected for a period in excess of 90 days plus
foreclosed assets) increased $948,000 to $962,000, or 1.15% of total assets at
June 30, 1996, from $14,000, or 0.02% of total assets at June 30, 1995. This
increase reflects the addition of a $286,000 single family home loan in Houston,
Texas, a $227,000 commercial real estate parcel in the Madison, Wisconsin
metropolitan area and a $437,000 package of equipment leases owned by the Bank.
The commercial real estate parcel consists of a combination retail and four (4)
unit apartment located in Madison, Wisconsin. A lake lot provides additional
collateral. The collateral property was placed in judgement in April 1996.
Management expects no loss on disposition of the property as the borrower has
accepted a purchase offer which is expected to result in a full payoff by
September 30, 1996. The referenced equipment leases were sold and serviced by
Bennett Funding Group and its affiliates (the "Bennett Group"), certain of which
companies have been charged by the Securities and Exchange Commission with,
among other things, the illegal sale of fictitious equipment leases. On April 1,
1996, the Bennett Group filed for Chapter 11 Bankruptcy, resulting in the
suspension of payments on the Bank's leases. On June 27, 1996, the Company
learned that approximately half of the leases may have been pledged more than
once, thus raising a question as to the priority of the Bank's security
interest. Based on the facts available at this time and the Bank's level of
provisions for loan losses, management does not currently expect these events to
have a material adverse effect on the Company's earnings or financial condition.
This conclusion, however, may be altered by future developments in this matter.
Write-downs of this 

                                       20
<PAGE>
 
asset may be necessary, though the size of any such write-downs cannot be
predicted with accuracy at this time.

     For the fiscal year ended June 30, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $16,200.  No interest was included in interest
income on such loans for the fiscal year ended June 30, 1996.

     Other Assets of Concern.  In addition, at June 30, 1996, other assets of
concern totaled $1.5 million and included eleven loans totaling $231,000 secured
by single-family residences, one loan totaling $234,000 secured by commercial
real estate located in Colorado, one loan totaling $254,000 secured by
commercial real estate located in Grinnell, Iowa, which was paid off in August
1996, and three loans totaling $751,000 secured by multi-family real estate
located in Madison, Wisconsin.  While these loans raise concerns as to timely
collectibility, based upon information currently available, management does not
anticipate any material loss on these assets.

     Management has considered non-performing assets and loans of concern in
establishing the Bank's allowance for loan losses.

     Classified Assets.  Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss."  An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected.  Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.

     When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances

                                       21
<PAGE>
 
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 Bank regularly reviews
problem loans and real estate acquired through foreclosure in its portfolio to
determine whether such assets require classification in accordance with
applicable regulations.  Classified assets of the Bank at June 30, 1996, all of
which are included in the table of non-performing assets above or are described
under the caption "- Other Loans of Concern" above, were as follows:


<TABLE>
<CAPTION>
                                          June 30,
                                    -------------------
                                      1996       1995
                                    --------   --------
<S>                                 <C>        <C>
                                       (In Thousands)

Special mention...................  $   714     $  340
Substandard.......................    1,789         78
Doubtful..........................      ---        ---
Loss..............................      ---        ---
                                    -------     ------
  Total classified assets and
   assets requiring special
   mention........................  $ 2,503     $  418
                                    =======     ======
</TABLE>

     Classified assets appearing in the table above are included in the non-
performing assets table or discussed under the caption "Other Loans of Concern."
The specific reserves established with respect to assets classified as "loss"
are included in the allowance for real estate acquired through foreclosure or as
a reduction in the book value of the real estate.

     Allowance for Loan Losses.  The allowance for loan losses is established
through a provision for loan losses based on 

                                       22
<PAGE>
 
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 for 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 allowance.
Future adjustments to the allowance may be necessary, and net income could be
significantly affected if circumstances differ substantially from the
assumptions used in making the initial determinations. At June 30, 1996, the
Bank had an allowance for loan losses of $641,000.

     The Bank had $249,000 in additions to its allowance for loan losses in
fiscal 1996 as compared to no additions in fiscal 1995 due to the increased
levels of non-performing assets and the increased balance of the loan portfolio.

     The following table sets forth an analysis of the Bank's allowance for loan
losses.


<TABLE>
<CAPTION>
                                                    At June 30,
                                                   --------------
                                                   1996      1995
                                                   ----      ----
                                                    (Dollars in
                                                     Thousands)

<S>                                              <C>       <C>
Balance at beginning of period..................   $400      $400

Total Chargeoffs................................      8       ---

Recoveries:
Real Estate:
  Multi-family..................................    ---       ---
                                                  -----     -----

Net charge-offs.................................      8       ---
Additions (reductions) charged (credited) to
  operations....................................    249       ---
                                                  -----     -----
Balance at end of period........................   $641      $400
                                                  =====     =====
Ratio of net charge-offs (recoveries) during
  the period to average loans outstanding
  during the period.............................    .01%    (---)%
                                                  =====     =====

Ratio of net charge-offs (recoveries)
  during the period to average
  non-performing assets.........................  2.81%     (---)%
</TABLE>                                          =====     =====

                                       23
<PAGE>
 
     The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:

<TABLE>
<CAPTION>
                                               June 30,
                               ----------------------------------------
                                      1996                  1995
                               -------------------  -------------------
                                         Percent              Percent
                                         of Loans             of Loans
                                         in Each              in Each
                                         Category             Category
                                         to Total             to Total
                                Amount    Loans      Amount    Loans
                               -------- ----------  -------- ----------
                                        (Dollars In Thousands)

    <S>                        <C>      <C>         <C>      <C>
    Real Estate:
     One- to four-family.....   $  72       65.3%     $  63      67.4%
     Multi-family and
      commercial.............     241       26.3        146      24.7
     Construction............      31        5.0         21       5.7
     Consumer................      18        1.7          7       1.2
     Commercial business.....     119        1.7          6       1.0
     Unallocated.............     160        ---        157       ---
                                -----      -----      -----     -----
         Total...............   $ 641      100.0%     $ 400     100.0%
                                =====      =====      =====     =====
</TABLE>


Investment Activities

     General.  Grinnell 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 Bank 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.  At June 30, 1996, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 6.7%.  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

                                       24
<PAGE>
 
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 Company and the Bank is to invest
funds among various categories of investments and maturities based upon their
liquidity needs, asset/liability management policies, investment quality and
marketability and performance objectives.

     Securities.  At June 30, 1996, Company's interest-bearing deposits with
banks totaled $2.0 million, or 2.4% of total assets, and its investment
securities totaled $3.3 million, or 4.0% of total assets.  As of such date, the
Bank also had a $1.2 million investment in FHLB stock, satisfying its
requirement for membership in the FHLB of Des Moines.  It is the general policy
of the Bank to purchase investment securities which are U.S. Government
securities or federal agency obligations or other issues, such as municipal
bonds, that are rated investment grade.  At June 30, 1996, the average term to
maturity or repricing of the securities portfolio was 4.6 years.

     In June 1993, the Financial Accounting Standards Board ("FASB") adopted the
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").  SFAS 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities.  Such
investments should be classified in three categories and accounted for as
follows:  (i) debt securities that the entity has the positive intent and
ability to hold to maturity are to be classified as held to maturity and
reported at amortized cost; (ii) debt and equity securities that are held for
current resale are to be classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either securities held to maturity or
trading securities are to be classified as securities available for sale and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity. Management adopted
SFAS 115 effective July 1, 1994.

                                       25
<PAGE>
 
          At June 30, 1996, the Company held no securities for trading purposes,
     but did have $757,000 in mutual funds and $916,000 in corporate stock, all
     of which are held as available for sale and are carried at the lower of
     cost or market value. The following table sets forth the composition of the
     Company's securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                   June 30,
                                      ----------------------------------
                                            1996              1995
                                      ----------------  ----------------
                                      Carrying   % of   Carrying   % of
                                       Value    Total    Value    Total
                                      --------  ------  --------  ------
                                            (Dollars in Thousands)

<S>                                   <C>       <C>     <C>       <C>
Investment Securities:
  U.S. Agency Securities............   $1,497    33.9%   $1,552    22.5%
  U.S. Government Securities........      ---     ---       ---     ---
  Certificates of Deposit...........       85     1.9       ---     ---


  Corporate stock/(1)/..............      916    20.8       907    13.1
  Mutual Funds/(1)/.................      757    17.1     1,814    27.1
  Municipal Securities/(1)/.........      ---     ---     1,749    25.3
                                       ------   -----    ------   -----
     Subtotal.......................   $3,255    73.7     6,078    88.0

  FHLB Stock........................    1,159    26.3       832    12.0
                                       ------   -----    ------   -----

Total Investment Securities
  and FHLB Stock....................   $4,414   100.0%   $6,910   100.0%
                                       ======   ======   ======   ======
Average remaining life or
term to repricing of
securities and other
interest-earning assets,
excluding FHLB stock and
other marketable equity
securities..........................   4.6 yrs           3.1 yrs

Other Interest-Earning Assets:
  Interest-earning deposits
  with banks........................   $2,049            $4,007
                                       ======            ======
</TABLE>
 
     -------------------
 
     /(1)/Classified as securities available for sale. All other securities are
     classified as held to maturity.
 

                                       26
<PAGE>
 
     The composition and maturities of securities portfolio, excluding FHLB
stock and equity securities, are indicated in the following table.

<TABLE>
<CAPTION>
                                                June 30, 1996
                                 -------------------------------------------
                                 Less Than    1 to 5    Over 5 to     Over       Total Investment
                                  1 Year       Years     10 Years   10 Years        Securities
                                  ------       -----     --------   --------        ----------    
                                 Carrying    Carrying    Carrying   Carrying    Carrying   Market
                                   Value       Value      Value       Value       Value     Value
                                   -----       -----      -----       -----       -----     ----- 
                                                       (Dollars in Thousands)
 
<S>                              <C>         <C>        <C>         <C>         <C>        <C>
U.S. agency securities            $  ---      $1,497    $    ---    $    ---      $1,497   $1,472
Certificate of Deposit                85          --         ---         ---          85       85
                                   -----      ------   ---------    --------      ------   ------
  Total Securities                $   85      $1,497    $    ---    $    ---      $1,582   $1,557
                                                                                  
Weighted average yield              6.30%       6.53%        ---%        ---%       6.52%    6.52%
                                   =====      ======   =========    ========      ======   ======
</TABLE>

     At June 30, 1996 the Company's securities portfolio did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Company's stockholders' equity, excluding securities issued by the United States
Government or its agencies.

     The Company's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors.  Investments may be made by
the Company's officers within specified limits and must be approved in advance
by the Board of Directors for transactions over certain limits.

     Mortgage-Backed Securities.  Grinnell Federal has in the past purchased
mortgage-backed securities in order to supplement loan demand in its market
area.  Although such securities are held for investment, they can serve as
collateral for borrowings and, through repayments, as a source for liquidity.
The Bank did not purchase any mortgage-backed securities during fiscal 1996.  At
June 30, 1996, the Company's mortgage-backed securities totaled $3.4 million.

     The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at June 30, 1996.

<TABLE>
<CAPTION>
                                                                      June 30, 1996
                                 Less than  1 to 5  5 to 10  Over 10     Balance
                                  1 Year    Years    Years    Years    Outstanding
                                 ---------  ------  -------  -------  -------------
<S>                              <C>        <C>     <C>      <C>      <C>
Federal Home Loan Mortgage
   Corporation..................    $  ---  $  742   $   44   $  127      $  913
Government National Mortgage
   Association..................       ---     ---      ---    2,522       2,522
                                    ------  ------   ------   ------      ------

     Total......................    $  ---  $  742   $   44   $2,649      $3,435
                                    ======  ======   ======   ======      ======
</TABLE>

                                       27
<PAGE>
 
     For information regarding the carrying and market values of the Company's
mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition" in the Annual Report.

     Under the OTS's risk-based capital requirements, Government National
Mortgage Association ("GNMA") mortgage-backed securities have a zero percent
risk weighting 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.

Sources of Funds

     General.  The Company's primary sources of funds are:  deposits,
amortization and repayment of loan principal (including mortgage-backed
securities); sales or maturities of investment securities, mortgage-backed
securities and short-term investments;  FHLB advances; and funds provided from
operations.

     Borrowings are used to compensate for seasonal reductions in deposits or
deposit inflows at less than projected levels, and to support lending
activities.  At June 30, 1996, the only borrowings outstanding were FHLB
advances totalling $19.3 million.  See "- Borrowings" and Note 7 of the Notes to
Consolidated Financial Statements in the Annual Report.

   Deposits.   Grinnell Federal offers a variety of deposit accounts having a
wide range of interest rates and terms.  The Bank's deposits include savings
accounts, money market savings accounts, NOW, money market checking and regular
checking accounts, and certificate accounts with terms of 3 to 60 months.  The
Bank relies primarily on advertising, competitive pricing policies and customer
service to attract and retain these deposits.  Grinnell 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 Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand.  The Bank has become more susceptible to short-term

                                       28
<PAGE>
 
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its savings, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.

                                       29
<PAGE>
 
          The following table sets forth the dollar amount of savings deposits
     in the various types of deposit programs offered by the Bank for the dates
     indicated and the rates offered.



<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                      -------------------------------------------
                                                               1996                  1995
                                                      ---------------------  --------------------
                                                                   Percent               Percent
                                                       Amount     of Total   Amount     of Total
                                                      --------    ---------  -------    ---------
                                                               (Dollars in Thousands)
Transactions and Savings Deposits:
---------------------------------

<S>                                                   <C>         <C>        <C>        <C>
Savings Accounts (2.50-2.50%)........................  $ 4,192      7.89%    $ 3,513       7.62%
NOW Accounts (2.00-5.14%)............................    3,626      6.83       1,482       3.22
Money Market Savings (3.25-5.51%)....................    5,948     11.20       2,468       5.35
Non-interest bearing checking........................    1,026      1.93         555       1.21
                                                       -------    ------     -------     ------

Total Non-Certificates...............................   14,792     27.85       8,018      17.40
                                                       -------    ------     -------     ------

Certificates:
------------

 3.00 -  3.99%.......................................      164       .31         779       1.69
 4.00 -  5.99%.......................................   27,392     51.56      20,574      44.65
 6.00 -  7.99%.......................................   10,774     20.28      16,699      36.24
 8.00 -  9.99%.......................................      ---       ---          12        .02
10.00 - 11.99%.......................................      ---       ---         ---        ---
12.00% and over......................................      ---       ---         ---        ---
                                                       -------    ------     -------     ------

Total Certificates...................................   38,330     72.15      38,064      82.60
                                                       -------    ------     -------     ------
Total Deposits.......................................  $53,122    100.00%    $46,082     100.00%
                                                       =======    ======     =======     ======

</TABLE>

          The following table sets forth the savings flows at the Bank during
     the periods indicated. Net increase refers to the amount of deposits during
     a period less the amount of withdrawals during the period.

<TABLE>
<CAPTION>
                                      Year Ended June 30,
                                     ----------------------
                                        1996        1995
                                     ----------  ----------
                                     (Dollars in Thousands)

<S>                                  <C>         <C>
     Opening balance................ $  46,082    $ 42,016
     Deposits.......................   108,377      63,028
     Withdrawals....................  (103,249)    (60,452)
     Interest credited..............     1,912       1,490
                                     ---------    --------

     Ending balance................. $  53,122    $ 46,082
                                     =========    ========

     Net increase (decrease)........ $   7,040    $  4,066
                                     =========    ========

     Percent increase (decrease)....      15.3%       9.68%
                                     =========    ========
</TABLE>

                                       30
<PAGE>
 
     The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1996.

<TABLE>
<CAPTION>
                                             Maturity
                               -------------------------------------
                                          Over     Over
                               3 Months  3 to 6   6 to 12    Over
                               or Less   Months   Months   12 months   Total
                               --------  -------  -------  ---------  -------
<S>                            <C>       <C>      <C>      <C>        <C>
                                                 (In Thousands)

Certificates of deposit
 less than $100,000...........  $6,210    $3,903  $11,327    $13,077  $34,517
Certificates of deposit of
 $100,000 or more.............     103       513    1,085      1,709    3,410
Public funds/(1)/.............     ---       403      ---        ---      403
                                ------    ------  -------    -------  -------
Total certificates of
 deposit......................  $6,313    $4,819  $12,412    $14,786  $38,330
                                ======    ======  =======    =======  =======
</TABLE>
-------------------
/(1)/  Deposits from governmental and other public entities.

     Borrowings.  Although deposits are the Bank's primary source of funds, the
Bank'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
Bank has relied upon borrowings for short-term liquidity needs.

    Grinnell Federal may obtain advances from the FHLB of Des Moines upon the
security of its capital stock in the FHLB of Des Moines and certain of its
mortgage loans and mortgage-backed securities.  Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities.


      The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
                                             Year Ended June 30,
                                           ----------------------
                                              1996         1995
                                           ----------    --------
                                               (In Thousands)

<S>                                        <C>           <C>
       Maximum Balance:
       ---------------
         FHLB advances..................   $22,749        $14,578
                                  
       Average Balance:           
       ---------------            
         FHLB advances..................   $18,711        $ 8,851
 
</TABLE> 

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

<TABLE> 
<CAPTION> 
                                                        June 30,
                                                 ----------------------
                                                    1996        1995
                                                 ----------  ----------
                                                      (Dollars in 
                                                       Thousands)

<S>                                              <C>          <C> 
FHLB advances ..................................  $19,318      $14,578
 
Weighted average interest
 rate of FHLB advances .........................    5.98%        6.34%
</TABLE>

                                       31
<PAGE>
 
Service Corporation Activities

     Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In addition, federal associations may invest up to 50% of their regulatory
capital in conforming loans to their service corporations.  In addition to
investments in service corporations, federal associations are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.

     Grinnell Federal has one service corporation, Grinnell Service Corporation,
Inc. ("GSCI"), located in Grinnell, Iowa.  GSCI was organized by the Bank in
1970 in order to purchase land located in Grinnell, Iowa for development of
single-family building sites.  Due to low demand for such land, GSCI experienced
losses of $30,000 and $83,000 for fiscal years ended June 30, 1993 and 1992,
respectively.  As a result, the Bank determined to discontinue the development
activities engaged in by its service corporation.  During fiscal 1994, GSCI
completed the sale of its remaining lots for a gain of $34,000.  GSCI has not
engaged in any real estate development or other substantive activities since
June 30, 1994.

Regulation

     General.  Grinnell Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government.  Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations.  The Bank is a
member of the FHLB of Des Moines and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve (the "Federal Reserve Board").  As
the savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The Bank is a member of the Savings
Association Insurance Fund (the "SAIF") and the deposits of the Bank are insured
by the FDIC.  As a result, the FDIC has certain regulatory and examination
authority over the Bank.

     Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this Form 10-KSB.

     Federal Regulation of Savings Associations.  The OTS has extensive
authority over the operations of savings associations.  As part of this
authority, the Bank is required to file periodic 

                                       32
<PAGE>
 
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of Grinnell Federal were as of
May 1996 and May 1991, respectively. When these examinations are conducted by
the OTS and the FDIC, the examiners may require the Bank 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. The Bank's OTS assessment for the fiscal year
ended June 30, 1996, was $23,173.

     The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank 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 Bank 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.  The Bank is in compliance with the noted restrictions.

     The Bank'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 June 30, 1996, the Bank's lending limit under this restriction was $1.4
million.  At June 30, 1996, the Bank had no loans in excess of this limit.  The
Bank is in compliance with the loans-to-one-borrower limitation.

                                       33
<PAGE>
 
     The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, 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.  The Bank is a member of
the SAIF, which is administered by the FDIC.  Deposits are insured up to
applicable limits by the FDIC.  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 FDIC.  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, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation.  Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core or Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern pay the highest premium.  Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.

     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 

                                       34
<PAGE>
 
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on SAIF members to repay amounts borrowed
from the United States Treasury or for any other reason deemed necessary by the
FDIC.

     As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the Bank Insurance Fund
(the "BIF") of the FDIC in order to maintain the reserve ratio of the BIF at
1.25% of BIF insured deposits.  The FDIC has revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits.  As a
result, such institutions generally pay lower premiums than SAIF-insured
institutions and thus have a competitive advantage over SAIF-insured
institutions such as Grinnell Federal.  The revisions became effective in the
third quarter of 1995.  Subsequently, the BIF assessment rate has been lowered
to the statutory minimum of $2,000 per year.

     The SAIF is not expected to attain the designated reserve ratio until the
year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s.  As a result, SAIF members will
generally be subject to higher deposit insurance premiums than BIF members
until, all things being equal, the SAIF attains the required reserve ratio.

     The effect of this disparity on the Bank and other SAIF members is
uncertain at this time.  It may have the effect of permitting BIF insured
institutions to offer loan and deposit  products on more attractive terms than
SAIF members due to the cost savings achieved through lower deposit premiums,
thereby placing SAIF members at a competitive disadvantage.  The House of
Representatives and the Senate of the United States provided for a resolution of
the recapitalization of the SAIF in the Balanced Budget Act of 1995 (the
"Reconciliation Bill") which was vetoed by the President in December 1995 for
reasons unrelated to the recapitalization of the SAIF.  The Reconciliation Bill
provided that all SAIF member institutions would pay a special assessment
recently estimated to be a one-time charge of 0.85% of the Company's total SAIF-
assessable deposits as of June 30, 1996, or approximately $284,000 after tax.
Such special assessment would be in addition to the Company's annual deposit
insurance premium.  However, it is anticipated that after the recapitalization
of the 

                                       35
<PAGE>
 
SAIF, the premiums of SAIF-insured institutions would be reduced to a level
comparable to those currently being assessed BIF-insured commercial banks. A
balanced budget bill subsequently was enacted and signed by the President in
April 1996. That bill did not provide for the recapitalization of the SAIF, and
there can be no assurance whether the SAIF will be recapitalized, whether the
premium disparity between SAIF and BIF insured institutions will be reduced or
eliminated or whether a special assessment will be charged. There can be no
assurance that any particular proposal will be implemented or that premiums for
either BIF or SAIF members will not be adjusted in the future by the FDIC or by
legislative action. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operation" in the Annual
Report.

     Regulatory Capital Requirements.  Federally insured savings associations,
such as the Bank, 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 calculating compliance with
the requirement.  At June 30, 1996, the Bank did not have any intangible assets.

     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 

                                       36
<PAGE>
 
ownership.  For excludable subsidiaries, the debt and equity investments in such
subsidiaries are deducted from assets and capital.  All subsidiaries of the Bank
are includable subsidiaries.

     At June 30, 1996, the Bank had tangible capital of $8.4 million, or 10.2%
of adjusted total assets, which is approximately $7.1 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 June 30, 1996, the
Bank had no intangibles which were subject to these tests.

     At June 30, 1996, the Bank had core capital equal to $8.4 million, or 10.2%
of adjusted total assets, which is $5.9 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 June 30, 1996, the Bank had no
capital instruments that qualify as supplementary capital and $586,000 of
general loss reserves, which was 1.25% of risk-weighted assets.

     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 

                                      37
<PAGE>
 
excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying
capital instruments. The Bank had a no exclusion from capital and assets at June
30, 1996.

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

     The OTS has adopted a final rule that requires 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 (the "NPV") 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).  NPV is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts.  The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital.  The
rule 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.  The Bank meets the criteria for an exemption from this requirement
and has not been advised by the OTS that it is otherwise subject to this rule.

     On June 30, 1996, the Bank had total capital of $9.0 million (including
$8.4 million in core capital and $586,000 in qualifying supplementary capital)
and risk-weighted assets of $46.8 million (the Bank had no converted off-balance
sheet assets), or total capital of 19.2% of risk-weighted assets.  This amount
was $5.2 million above the 8% requirement in effect on that date.

                                      38
<PAGE>
 
     The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements.  The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio).  Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions.  The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.

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

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

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

                                      39
<PAGE>
 
     The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability.  Company shareholders 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 or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital.  OTS
regulations prohibit an 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.

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

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

                                      40
<PAGE>
 
     Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution.  Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution.  As a subsidiary of the Company, the Bank is required to give
the OTS 30 days' notice prior to declaring any dividend on its stock.  The OTS
may object to the distribution during that 30-day period based on safety and
soundness concerns.  See "- Regulatory Capital Requirements."

     Liquidity.  All savings associations, including the Bank, 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.  This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations.  At the present time, the minimum
liquid asset ratio is 5%.

     In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings.  Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement.  At June 30, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 6.7% and a short-term liquid
assets ratio of 3.9%.

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

                                      41
<PAGE>
 
     The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP by the OTS, to 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
Bank, 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.  Such assets primarily consist of
residential housing related loans and investments.  At June 30, 1996, the Bank
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

                                      42
<PAGE>
 
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 the Bank, 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 the Bank.  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 Bank may be required to devote additional funds for
investment and lending in its local community.  The Bank was examined for CRA
compliance in September 1994 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 the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to affiliates engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates.  The Bank's subsidiaries are not deemed affiliates.
However, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.

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

     Holding Company Regulation.  The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS.  As such, the
Company is registered and files reports with the OTS and is subject to
regulation and examination by the OTS.  In 

                                      43
<PAGE>
 
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 Bank 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 Bank 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.

                                      44
<PAGE>
 
     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).  At June 30, 1996, the Bank 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 Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs ("FHLB System"), that administers the
home financing credit function of savings associations.  Each FHLB serves as a
reserve or central bank for its members within its assigned region.  It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System.  It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the board of directors of the FHLB,
which are subject to the 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, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines.  At June 30, 1996, the Bank had $1.2 million in FHLB stock,
which was in compliance with this requirement.  In past years, the Bank has
received substantial dividends on its FHLB stock.  For the fiscal year ended
June 30, 1996, dividends paid by the FHLB of Des Moines to the Bank totaled

                                      45
<PAGE>
 
$75,000, which constitutes a $10,000 decrease over the amount of dividends
received in the fiscal year ended June 30, 1995.

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

     Change in Control Regulations.  Federal law provides that no company
"directly or indirectly or acting in concert with one or more persons, or
through one or more subsidiaries, or through one or more transactions," may
acquire "control" of a savings association at any time without the prior
approval of the OTS.  In addition, federal regulations require that, prior to
obtaining control of a savings association, a person, other than a company, must
give 60 days' prior notice to the OTS and have received no OTS objection to such
acquisition of control.  Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company.  Under federal law (as well as
the regulations referred to below) the term "savings association" includes state
and federally chartered SAIF-insured institutions and federally chartered Banks
whose accounts are insured by the FDIC's BIF and holding companies thereof.

     Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution.  Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations.  Such control factors include
the acquiror being one of the two largest stockholders.  The determination of
control may be rebutted by

                                      46
<PAGE>
 
submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings.  The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or approval of the OTS, as applicable.

Federal and State Taxation

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

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

     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.

     Legislation that is effective for tax years beginning after December 31,
1995 requires savings associations to recapture into taxable income the portion
of the tax loan reserve that exceeds the 1987 tax loan loss reserve.
Approximately $90,000 of the Banks tax 

                                      47
<PAGE>
 
loan loss reserve at June 30, 1996 were post 1987 loan loss reserves that will
be subject to this provision. A deferred tax liability has been recorded by the
Bank for this item. The Bank will no longer be allowed to use the reserve method
for tax loan loss provisions, but would be allowed to use either the experience
method or the specific charge-off method of accounting for bad debts.

     In addition to the regular income tax, corporations, including savings
associations such as the Bank, 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.  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
Bank, 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
$2.0 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).

     The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.  Savings
associations, such as the Bank, 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.

                                      48
<PAGE>
 
     The Company and its consolidated subsidiaries have not been audited by the
IRS with respect to consolidated federal income tax returns during the past
seven years.  In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Company) would not result in a deficiency which could have a
material adverse effect on the financial condition, results of operations or
liquidity of the Company and its consolidated subsidiaries.

     Iowa Taxation.  The Bank currently files an Iowa franchise tax return, and
the Company and the Bank's service corporation file an Iowa corporation tax
return.

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

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

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

                                      49
<PAGE>
 
Competition

     Grinnell 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 commercial banks.  The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of services it provides to
borrowers.

     The Bank attracts most of its deposits from Poweshiek County where the
Bank's office is located and parts of Marshall, Jasper, and Iowa, Counties,
Iowa.  Competition for those deposits is principally from commercial banks and
credit unions located in the same community.  The ability of the Bank to attract
and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors.  The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates and convenient business hours.

Employees

     At June 30, 1996, the Bank had a total of 16 full-time and two part-time
employees.  The Company's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.

Item 2.   Description of Property
          -----------------------

     The Bank owns its main office located at 1025 Main Street, Grinnell, Iowa
50112.  The total net book value of the Bank's premises and equipment at June
30, 1996, was $234,000.

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

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

                                      50
<PAGE>
 
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 June 30, 1996.

                                    PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters
          ---------------------------------------------------------------------
     Page 44 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.

Item 6.   Management's Discussion and Analysis of Financial Condition and
          ---------------------------------------------------------------
          Results of Operation
          --------------------------------------------------------------------
     Pages 4 through 18 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.

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

     The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1996, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
<TABLE> 
<CAPTION> 
                                                                   Pages in
Annual Report Section                                            Annual Report
---------------------                                            -------------
 
<S>                                                              <C>
Independent Auditors' Report......................................     19
 
Consolidated Balance Sheets as of June 30,
1996 and 1995.....................................................     20
 
Consolidated Statements of Income for the
Years Ended June 30, 1996, 1995 and 1994..........................     21
 
Consolidated Statements of Changes in
Stockholders' Equity for Years Ended
June 30, 1996, 1995 and 1994......................................     22
 
Consolidated Statements of Cash Flows for
Years Ended June 30, 1996, 1995 and 1994..........................  23-24
 
Notes to Consolidated Financial Statements........................  25-43
</TABLE>

                                      51
<PAGE>
 
     With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1996, is not deemed filed as
part of this Annual Report on Form 10-KSB.

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

     On August 18, 1995, the Company dismissed Vroman, McGowen, Hurst, Clark &
Smith, P.C.  ("Vroman  McGowen") as their independent auditors.  The change of
independent auditors was recommended by the Audit Committee and subsequently
approved by the Board of Directors.  There have been no disagreements between
the Company and Vroman McGowen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope of procedure in
connection with the audit of the consolidated financial statements of the
Company for two years ended June 30, 1995 and subsequent interim periods through
August 18, 1995, which, if not resolved to the satisfaction of Vroman McGowen,
would have caused them to make reference to the subject matter of such
disagreements in connection with their report.  The reports of Vroman  McGowen
on the consolidated financial statements of the Company for the two years ended
June 30, 1995 did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.

     Effective September 15, 1995, the Board of Directors engaged McGladrey &
Pullen, LLP to be its auditors for the 1996 fiscal year, subject to the
ratification of the appointment by the Company's stockholders.  The appointment
was ratified at the Annual Meeting of Stockholders held on October 25, 1995.

                                    PART III

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

     For information concerning the Board of Directors and executive officers of
the Company, the information contained under the section captioned 
"Proposal I -- Election of Directors" in the Company's definitive proxy 
statement for the Company's 1996 Annual Meeting of Stockholders (the "Proxy 
Statement") is incorporated herein by reference.

                                      52
<PAGE>
 
Compliance with Section 16(a)
-----------------------------

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company.  Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.

     To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal years ended June 30, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.

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

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

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

    (a) Security Ownership of Certain Beneficial Owners

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

    (b) Security Ownership of Management

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

                                      53
<PAGE>
 
    (c) Changes in Control

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

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

     The Information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Certain
Transactions" in the Proxy Statement.
 
Item 13. Exhibits and Reports on Form 8-K
         --------------------------------

(a)  Exhibits
     --------
    The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB:                               
        
<TABLE> 
<CAPTION> 
                                                           Sequential
                                                           Page Number
                                                          Where Attached
                                                           Exhibits Are
                                                           Located in
                                                              This
Regulation S-B                                             Form 10-KSB
Exhibit Number                  Document                      Report
--------------    --------------------------------------  -------------
<C>               <S>                                     <C> 
    3             (a) Articles of Incorporation,
                      including amendments thereto

                  (b) By-Laws

    4             Instruments defining the rights of
                  security holders, including
                  debentures

   10             Material Contracts

                  (a)  Employment Contracts between
                       the Bank and Messrs. Meredith,
                       Opsal, Nassif and Ms. Rose
 
                  (b)  1993 Stock Option and Incentive Plan

                  (c)  Recognition and Retention Plan

                  (d)  Salary Continuation Plan
 
   13             Annual Report to Security Holders

   21             Subsidiaries of Registrant

   23             Consent of McGladrey & Pullen, LLP

   27             Financial Data Schedule
</TABLE> 

                                      54
<PAGE>
 
(b)  Reports on Form 8-K
     -------------------

     On June 24, 1996, the Company filed a press release announcing the
increase in its quarterly cash dividend from $.075 per share to $.10 per share
under a Current Report on Form 8-K.  No other reports on Form 8-K were filed
during the three-month period ended June 30, 1996.







                                      55
<PAGE>
 
                                   SIGNATURES
                                   ----------

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                        GFS BANCORP, INC.


Date:  September 25, 1996               /s/ Steven L. Opsal
       -----------------------------    --------------------------------------
                                        Steven L. Opsal (Duly
                                        Authorized Representative)

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

/s/ Steven L. Opsal                     /s/ LeRoy E. Meredith       
------------------------------------    --------------------------------------
Steven L. Opsal, President,             LeRoy E. Meredith, Chairman of
Chief Executive Officer and             the Board and Director
Director (Principal Executive
Officer)

Date: September 25, 1996                Date:  September 25, 1996
      ------------------------------           -------------------------------

/s/ Theodore Mokricky                   /s/ David Clay
------------------------------------    --------------------------------------
Theodore Mokricky, Vice                 David Clay, Director
Chairman of the Board

Date: September 25, 1996                Date:  September 25, 1996
      ------------------------------           -------------------------------

/s/ Thomas M. Groth                     /s/ Scott A. Jensen
------------------------------------    --------------------------------------
Thomas M. Groth, Director               Scott A. Jensen, Director

Date: September 25,1996                 Date:  September 25, 1996
      ------------------------------           -------------------------------

/s/ Albert C. Eisenman                  /s/ Donald H. Howig
------------------------------------    --------------------------------------
Albert C. Eisenman, Director            Donald H. Howig, Director
 
Date: September 25, 1996                Date:  September 25, 1996
      ------------------------------           -------------------------------

/s/ Katherine A. Rose
------------------------------------
Katherine A. Rose, Senior Vice
President and Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)

Date:  September 25, 1996
       -----------------------------


                                      56

<PAGE>
 
                               Index to Exhibits



                                                                   Sequentially
                                                                  Numbered Page
                                                                  Where Attached
 Exhibit                                                             Exhibits
  Number                                                           are Located
 --------                                                         --------------


   3      (a)  Articles of Incorporation,
               including amendments thereto
          (b)  By-laws

   4      Instruments defining the rights of
          security holders, including debentures

  10      Material Contracts
          (a)  Employment Contracts between the
               Bank and Messrs. Meredith, Opsal, 
               Nassif, and Ms. Rose
          (b)  1993 Stock Option and Incentive Plan
          (c)  Recognition and Retention Plan
          (d)  Salary Continuation Plan

  13      Annual Report to Security Holders

  21      Subsidiaries of Registrant

  23      Consent of McGladrey & Pullen, LLP

  27      Financial Data Schedule