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

                                   FORM 10-KSB

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

           For the fiscal year ended June 30, 1999

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      Commission file number 0-22790

                         STATEFED FINANCIAL CORPORATION
      -----------------------------------------------------------------------
                 (Name of small business issuer in its charter)

              Delaware                                     42-1410788
     ------------------------------------             -----------------------
    (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                      Identification No.)

      519 Sixth Avenue, Des Moines, Iowa                       50309
      -----------------------------------------------------------------------
   (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:   (515) 282-0236
                                                   --------------------------
           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 revenue for the most recent fiscal year: $7.5 million.

      The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the NASDAQ System as of September 22, 1999, was $13.8 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 22, 1999, there were issued and outstanding 1,509,100
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year ended
June 30, 1999.

Part III of Form 10-KSB - Proxy Statement for 1999 Annual Meeting of
Stockholders.
<PAGE>

                                     PART I

Item 1. Description of Business

General

      The Company. StateFed Financial Corporation (the "Company"), a Delaware
corporation, was formed in September, 1993 to act as the holding company for
State Federal Savings and Loan Association of Des Moines ("State Federal" or the
"Association") upon the completion of the Association'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 Association to be outstanding upon completion of the Conversion. The
Conversion was completed on January 4, 1994. Unless the context otherwise
requires, all references to the Company include the Company and the Association
on a consolidated basis.

      At June 30, 1999, the Company had $90.8 million of assets and
stockholders' equity of $16.1 million (or 17.73% of total assets).

      State Federal is a federally chartered savings and loan association
headquartered in Des Moines, Iowa. Its deposits are insured up to applicable
limits by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC"), which is backed by the full faith and credit
of the United States.

      The principal business of the Association consists of attracting retail
deposits from the general public and investing those funds primarily in
one-to-four family residential mortgage and commercial and multi-family real
estate loans, and, to a lesser extent, construction and consumer loans primarily
in the Association's market area. The Association also invests in U.S.
Government and agency obligations and other permissible investments. At June 30,
1999, substantially all of the Association's real estate mortgage loans were
secured by properties located in Iowa.

      The Association's revenues are derived primarily from interest on mortgage
loans and investments, income from service charges and loan originations, and
income from real estate operations. The Association does not originate loans to
fund leveraged buyouts and has no loans to foreign corporations or governments.

      The Association offers a variety of accounts having a wide range of
interest rates and terms. The Association's deposits include passbook accounts,
money market savings accounts, NOW and certificate accounts with terms of three
months to 60 months. Currently, the Association only solicits deposits in its
primary market area and does not accept brokered deposits, although management
may on occasion accept brokered deposits in the future as market conditions may
dictate.

      The main office of the Association is located at 519 Sixth Avenue, Des
Moines, Iowa, which is located in Polk County. Its telephone number at that
address is (515) 282-0236. The Association maintains one other office in Des
Moines, Iowa. The Association considers its primary market area to comprise
parts of Polk, Dallas and Warren Counties.

Forward-Looking Statements

      When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's


                                       2
<PAGE>

actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.

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

Impact of Year 2000

      General. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000.

      Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, suppliers and borrowers. These statements also require
each federally regulated financial institution to survey its exposure, measure
risk and prepare a plan to address the Y2K issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, such as the Association, to assure resolution
of any Y2K problems. The federal banking agencies have asserted that Y2K testing
and certification is a key safety and soundness issue in conjunction with
regulatory examinations and, thus, that an institution's failure to address
appropriately the Y2K issue could result in supervisory action, including the
reduction of the institution's supervisory ratings, the denial of applications
for approval of mergers or acquisitions, or the imposition of civil money
penalties.

      Risk. Like most financial institution service providers, the Company and
its operations may be significantly affected by the Y2K issue due to its
dependence on technology and date-sensitive data. Computer software and hardware
and other equipment, both within and outside the Company's direct control and
third parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and the
Company could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on the Company's operations
and, in turn, its financial condition and results of operations.

      State of Readiness. During November 1997, the Company formulated its plan
to address the Y2K issue. Since that time, the Bank has taken the following
steps:

      o     Established senior management advisory and review responsibilities;

      o     Completed a Company-wide inventory of applications and system
            software;

      o     Completed renovation and testing of the Company's mission-critical
            systems;

      o     Built an internal tracking database for application and vendor
            software;

      o     Developed compliance plans and schedules for all lines of business;

      o     Monitored vendor compliance verification;


                                       3
<PAGE>

      o     Provided awareness and education activities for employees through
            existing internal communication channels;

      o     Continued a process to respond to customer inquiries as well as help
            educate customers on the Y2K issue; and

      o     Completed a detailed contingency plan in the event of interruptions
            of service from our outside vendors and service providers.

      The following paragraphs summarize the phases of the Company's Y2K plan:

            Awareness Phase. The Company formally established a Y2K plan headed
      by a senior manager, and a project team was assembled for management of
      the Y2K project. The project team created a plan of action that includes
      milestones, budget estimates, strategies, and methodologies to track and
      report the status of the project. Members of the project team also
      attended conferences and information sharing sessions to getting more
      insight into the Y2K issue and potential strategies for addressing it.
      This phase is substantially complete.

            Assessment Phase. The Company's strategies were further developed
      with respect to how the objectives of the Y2K plan would be achieved, and
      a Y2K business risk assessment was made to quantify the extent of the
      Company's Y2K exposure. A corporate inventory (which is periodically
      updated as new technology is acquired and as systems progress through
      subsequent phases) was developed to identify and monitor Y2K readiness for
      information systems (security systems, facilities, etc.). Systems were
      prioritized based on business impact and available alternatives.
      Mission-critical systems supplied by vendors were researched to determine
      Y2K readiness. If Y2K-ready versions were not available, the Company began
      identifying functional replacements, which were either upgradable or
      currently Y2K-ready, and a formal plan was developed to repair, upgrade or
      replace all mission-critical systems. This phase is substantially
      complete.

            The Company also contacted its most significant borrowers informing
      them of the Y2K issue. Because the Company's loan portfolio is primarily
      real estate-based and is diversified with regard to individual borrowers
      and types of businesses, and the Company's primary market area is not
      significantly dependent on one employer or industry, the Company does not
      expect any significant or prolonged Y2K-related difficulties that will
      affect net earnings or cash flow. As part of the current credit approval
      process, all new and renewed loans are evaluated for Y2K risk.

            Renovation Phase. The Company's corporate inventory revealed that
      Y2K upgrades were available for all vendor-supplied mission-critical
      systems, and all these Y2K-ready versions have been delivered and placed
      into production and have entered the validation process.

            Validation Phase. The validation phase is designed to test the
      ability of hardware and software to accurately process date sensitive
      data. The Company currently is near completion of testing of each
      mission-critical system, with the degree of completion of such testing at
      97%. The Company's validation phase is expected to be completed by
      October, 1999 for all mission-critical systems. During the validation
      testing process to date, no significant Y2K problems have been identified
      relating to any modified or upgraded mission-critical system.

            Implementation Phase. The Company's plan calls for putting Y2K-ready
      code into production before having actually completed Y2K validation
      testing. Y2K-ready modified or upgraded versions have been installed and
      placed into production with respect to all mission-critical systems.

            Company Resources Invested. The Company's Y2K project team has been
      assigned the task of ensuring that all systems across the Company are
      identified, analyzed for Y2K compliance,


                                       4
<PAGE>

      corrected, if necessary, tested, and changes put into service by October
      31, 1999. The Y2K project team members represent all functional areas of
      the Company, including branches, data processing, loan administration,
      accounting, item processing and operations, compliance, internal audit,
      human resources, and marketing. The team is headed by a vice president who
      reports directly to a member of the Company's senior management team. The
      Company's Board of Directors oversees the Y2K plan and provides guidance
      and resources to, and receives quarterly updates from, the Y2K project
      team.

            The Company expenses all costs associated with the required system
      changes as those costs are incurred, and such costs are being funded
      through operating cash flows. The Company does not anticipate incurring
      significant additional expense to implement additional corrective actions.

      Contingency Plans. During the assessment phase, the Company developed
backup contingency plans for each of its mission-critical systems. Virtually all
the Company's mission-critical systems are dependent upon third party vendors or
service providers. These vendors have been monitored throughout the 1998-1999
year and all have provided evidence of their efforts to comply with the Y2K
problem. All that we consider as our primary providers have appeared to have
resolved any Y2K problems that they may have had, with the exception of some of
the public utilities, which have issued statements periodically through the
local press. As a backup plan to the possibility of electrical service being
interrupted, the Company has made arrangements to have an electrical generator
on site large enough to totally power one of the branch offices. All other
vendors and suppliers that we consider part of our mission-critical systems have
provided statements of assurance and have shown due diligence as to their own
readiness. The Company has also put into place provisions to have additional
currency available and will have limitations on withdrawals in the event of
aggressive pressures on the Company's cash on hand.

Lending Activities

      General. Historically, the Association has originated fixed-rate,
one-to-four family mortgage loans. In the early 1980's, the Association began to
focus on the origination of adjustable-rate mortgage ("ARM") loans, in order to
increase the percentage of loans in its portfolio with more frequent repricing
than fixed-rate mortgage loans. While the Association has continued to originate
fixed-rate mortgage loans in response to customer demand, it also continues to
offer ARMs. The Association also, from time to time, purchases loans.

      While the Association primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied one-to-four
family residences, it also originates multi-family and commercial real estate
and, to a lesser extent, construction and consumer loans in its primary market
area. At June 30, 1999, the Association's net loan portfolio totaled $72.3
million.

      The Loan Committee of the Association, comprised of executive officers
Golden, Wood and Black, loan officers Komma and Stravers and Director of
Development Joe Sinnwell, has the immediate responsibility for the supervision
of the Association's loan portfolio. The Association's loan policy requires full
Board approval on all loans. The Board relies heavily on the recommendation of
CEO Golden in making its decisions. The Board of Directors has responsibility
for the overall supervision of the Association's loan portfolio and in addition,
reviews all foreclosure actions or the taking of deeds-in-lieu of foreclosure.

      The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Association could have invested in
any one real estate project is generally the greater of 15% of unimpaired
capital and surplus or $500,000. See "Regulation Federal Regulation of Savings
Associations." At June 30, 1999, the maximum amount which the Association could
have lent to any one borrower and the borrower's related entities was
approximately $1.2 million. At that date the largest loan to one borrower or
group of related borrowers consisted of 44 loans to one borrower totaling $2.4
million. All of such loans were performing in accordance with their terms.
Currently, it is the Association's general policy to limit its loans to one
borrower to the maximum regulatory limit. The Association reserves the right to
discontinue, adjust or create new lending programs to respond to its needs and
to competitive factors.


                                       5
<PAGE>

      Loan Portfolio Composition. The following table presents the composition
of the Company's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and the allowances
for loan losses) of total loans as of the dates indicated.

<TABLE>
<CAPTION>
                                                                   June 30,
                                      -------------------------------------------------------------------
                                              1999                   1998                    1997
                                      -------------------------------------------------------------------
                                       Amount      Percent      Amount    Percent      Amount     Percent
                                      -------------------------------------------------------------------
                                                             (Dollars in Thousands)
<S>                                   <C>           <C>       <C>           <C>       <C>           <C>
Real Estate Loans
 One-to-four family ...............   $ 46,178      62.55%    $ 44,441      63.41%    $ 44,582      63.93%
 Multi-family and Commercial ......     24,340      32.91       23,115      32.98       20,469      29.35
 Construction or development ......      2,025       2.74        1,535       2.19        3,549       5.09
                                      --------     ------     --------     ------     --------     ------
     Total real estate loans ......     72,543      98.26       69,091      98.58       68,600      98.37

Other Loans:
 Consumer Loans:
 Deposit account ..................        141       0.19          159       0.23          242        .35
 Other ............................      1,140       1.55          838       1.19          891       1.28
                                      --------     ------     --------     ------     --------     ------
     Total consumer loans .........      1,281       1.74          997       1.42        1,133       1.63
                                      --------     ------     --------     ------     --------     ------
     Total loans ..................     73,824     100.00%      70,088     100.00%      69,733     100.00%
                                                   ======                  ======                  ======

Less:
 Loans in process .................       (963)                   (605)                   (999)
 Deferred fees and discounts ......       (288)                   (297)                   (335)
 Allowance for losses .............       (242)                   (206)                   (221)
                                      --------                --------                --------
 Total loans receivable, net ......   $ 72,331                $ 68,980                $ 68,178
                                      ========                ========                ========
</TABLE>


                                       6
<PAGE>

      The following table shows the composition of the Company's loan portfolio
by fixed and adjustable rate at the dates indicated.

<TABLE>
<CAPTION>
                                                                         June 30,
                                      -----------------------------------------------------------------------------
                                               1999                       1998                        1997
                                      -----------------------------------------------------------------------------
                                       Amount       Present        Amount       Present         Amount      Percent
                                      -----------------------------------------------------------------------------
                                                                   (Dollars in Thousands)
<S>                                   <C>             <C>         <C>             <C>         <C>             <C>
Fixed Rate Loans:
 Real estate:
  One-to-four family ..............   $ 28,310        38.35%      $ 21,041        30.02%      $ 14,119        20.25%
  Multi-family and Commercial .....     14,330        19.41         12,582        17.95          9,456        13.56
  Construction or development .....      2,025         2.74          1,535         2.19          3,549         5.09
                                      --------       ------       --------       ------       --------       ------
     Total real estate loans ......     44,665        60.50         35,158        50.16         27,124        38.90
 Consumer .........................      1,281         1.74            997         1.42          1,133         1.62
                                      --------       ------       --------       ------       --------       ------
     Total fixed-rate loans .......     45,946        62.24         36,155        51.58         28,257        40.52

Adjustable Rate Loans:
 Real estate:
  One-to-four family ..............     17,868        24.20         23,400        33.39         30,463        43.69
  Multi-family and Commercial .....     10,010        13.56         10,533        15.03         11,013        15.79
                                      --------       ------       --------       ------       --------       ------
     Total real estate loans ......     27,878        37.76         33,933        48.42         41,476        59.48
 Consumer .........................         --           --             --           --             --           --
                                      --------       ------       --------       ------       --------       ------
     Total adjustable rate loans ..     27,878           --         33,933        48.42         41,476        59.48
                                      --------       ------       --------       ------       --------       ------
     Total loans ..................     73,824       100.00%        70,088       100.00%        69,733       100.00%
                                                     ======                      ======                      ======
Less:
 Loans in process .................       (963)                       (605)                       (999)
 Deferred fees and discounts ......       (288)                       (297)                       (335)
 Allowance for loan losses ........       (242)                       (206)                       (221)
                                      --------                    --------                    --------
    Total loans receivable, net ..    $ 72,331                    $ 68,980                    $ 68,178
                                      ========                    ========                    ========
</TABLE>


                                       7
<PAGE>

      The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 1999. Mortgages which have fixed,
adjustable or renegotiable interest rates are shown as maturing at the
contractual maturity date. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                                                               Real Estate
                                       ---------------------------------------------------------------------------------------------
                                                           Multi-family and   Construction
                                       One-to-four family     Commercial      or Development        Consumer            Total
                                       ------------------  ----------------  ----------------   -----------------   ----------------
                                               Weighted            Weighted          Weighted            Weighted          Weighted
                                                Average             Average           Average             Average           Average
                                        Amount    Rate     Amount    Rate    Amount     Rate     Amount    Rate     Amount   Rate
                                        ------  ---------  ------  --------  ------  --------    ------  --------   ------   -------
                                                                           (Dollars in Thousands)
<S>                                    <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>     <C>       <C>
Due During Years Ending June 30, (1)
2000 ...............................   $   503    9.23%   $ 2,112    8.77%   $   984    9.20%   $   147    8.89%   $ 3,746   8.95%
2001 ...............................       333    9.31        472    8.76         --      --        247    9.08      1,052   9.01
2002 ...............................       977    8.74      1,190    8.90         --      --        224    9.24      2,391   8.87
2003-2007 ..........................     8,927    8.41      9,123    8.63         --      --        626    8.95     18,676   8.53
After 2007 .........................    35,438    7.85     11,443    8.60    $ 1,041    8.41         37   10.50     47,959   8.04
</TABLE>

----------
(1)   Includes construction loans which the Association reclassifies as
      permanent loans once the construction phase is completed.

      The total amount of loans due after June 30, 2000 which have fixed
interest rates is $43.2 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $26.8 million.


                                       8
<PAGE>

      One-to-four family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Company's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents and
builders. The Company focuses its lending efforts primarily on the origination
of loans secured by first mortgages on owner-occupied, one-to-four family
residences. At June 30, 1999, the Company's one-to-four family residential
mortgage loans totaled $46.2 million, or approximately 62.6% of the Company's
total gross loan portfolio.

      The Company currently offers ARM payment and fixed-rate mortgage loans.
During the year ended June 30, 1999, the Association originated $2.1 million of
adjustable-rate real estate loans, which were secured by one-to-four family
residential real estate. During the same period, the Company originated $9.1
million of fixed-rate real estate loans, secured by one-to-four family
residential real estate. The Company's one-to-four family residential mortgage
originations are primarily in its market and surrounding areas, and no such
loans were sold during the three year period ended June 30, 1999.

      The Company currently originates up to a maximum of 30-year, fixed-rate,
one-to-four family residential mortgage loans in amounts up to 90% of the
appraised value of the security property provided that private mortgage
insurance is obtained in an amount sufficient to reduce the Company's exposure
to at or below the 80% loan-to-value level. The Company may consider raising the
loan-to-value ratio in the future as regulations permit. Due to consumer demand,
the Company also has offered fixed-rate 10- through 15-year mortgage loans, most
of which conform to secondary market standards (i.e., Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA"), and
Federal Home Loan Mortgage Corporation ("FHLMC") standards).

      Interest rates charged on these fixed-rate loans are priced according to
market conditions, although management does not currently anticipate offering
rates at the most competitive end of the market. Residential loans generally do
not include prepayment penalties. As with all loans the Company originates, the
Company retains its fixed-rate loans in its portfolio.

      The Company also currently offers thirty year amortization ARM loans with
interest rate adjustments occurring after one, and to a lesser extent, three,
five and seven year terms with an interest rate margin generally 3.00 basis
points over one year Treasury rates. These loans have a fixed-rate for the
stated period and, thereafter, such loans adjust periodically, pursuant to the
contractual term. These loans provide for up to a 100 basis point annual cap and
a lifetime cap of 600 basis points over the initial rate although the bulk of
the Association's ARMs are estimated by management to have 500 basis point
lifetime caps. Under the current ARM program, a 500 basis point lifetime cap is
being utilized. Under the contractual terms, the majority of such loans do not
adjust below the initial rate. As a consequence of using an initial fixed-rate
and caps, the interest rates on these loans may not be as rate sensitive as is
the Association's cost of funds. The Company's ARMs do not permit negative
amortization of principal. The Association generally qualifies borrowers above
the fully indexed rate.

      In underwriting one-to-four family residential real estate loans, State
Federal evaluates, among other things, both the borrower's ability to make
monthly payments and the value of the property securing the loan. Currently,
virtually all properties securing real estate loans made by State Federal are
appraised by independent fee appraisers approved by the Board of Directors or by
in-house appraisers. State Federal generally requires borrowers to obtain an
attorney's title opinion, and fire and property insurance (including flood
insurance, if necessary) in an amount not less than the amount of the loan.
State Federal does not generally require title insurance. Real estate loans
originated by the Association generally contain a "due on sale" clause allowing
the Association to declare the unpaid principal balance due and payable upon the
sale of the security property.

      Multi-Family and Commercial Real Estate Lending. The Company has also
engaged in commercial and multi-family real estate lending in its market area
and surrounding areas and has purchased participation interests in such loans
from other financial institutions throughout Iowa. At June 30, 1999, the Company
had $24.3 million of commercial and multi-family real estate loans, which
represented 33.0% of the Company's gross loan portfolio. All of the
Association's commercial and multi-family real estate loans were performing in
accordance with their repayment terms with the exception of one loan aggregating
$525,000 secured by a multi-family dwelling. Such loan was 30 days past due at
September 1, 1999. A substantial portion of the Company's multi-family and
commercial real estate loans were secured by properties located in Iowa.
However, the Company had multi-family and commercial real estate loans, with


                                       9
<PAGE>

an aggregate balance of $5.3 million at June 30, 1999, secured by real estate
located in Texas, Colorado, Nebraska, Minnesota, Nevada, California, Illinois
and Wisconsin.

      Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four
family residential mortgage loans. Because payments on loans secured by
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 Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings and, to a lesser extent, office
buildings, strip shopping centers, motels, nursing homes, and churches.
Multifamily and commercial real estate loans generally have terms that do not
exceed 30 years. The Company has a variety of rate adjustment features and other
terms in its commercial and multi-family real estate loan portfolio. Generally,
the loans are made in amounts up to 80% of the appraised value of the security
property. Multi-family and commercial real estate loans provide for a margin
over a designated index which is generally the one-year Treasury bill rate. The
Company currently analyzes the financial condition of the borrower, the
borrower's credit history, and the reliability and predictability of the cash
flow generated by the property securing the loan. The Company requires personal
guaranties of the borrowers. Appraisals on properties securing commercial real
estate loans originated by the Association are performed by independent
appraisers.

      The following table breaks out the Company's commercial loan portfolio by
type of loan at the dates indicated.

                                                     June 30,
                                        --------------------------------
                                         1999         1998          1997
                                         ----         ----          ----
                                                 (In Thousands)
        Multi-family ............       $ 9,222      $10,141      $ 8,231
        Nursing homes ...........         1,697        1,638        1,671
        Churches ................         1,129        1,208        1,164
        Motels ..................         3,321        1,688        1,336
        Shopping Centers ........         1,136        1,568        1,155
        Commercial Buildings ....         7,835        6,872        6,912
                                        -------      -------      -------
             Total ..............       $24,340      $23,115      $20,469
                                        =======      =======      =======

      This portfolio grew by $1.2 million from fiscal 1998 to fiscal 1999, and
the portfolio comprised the same percentage of total loans, 33.0%, in fiscal
1999 as it did in fiscal 1998, when commercial loans also comprised 33.0% of
total loans.

      Construction Lending. The Company engages in limited amounts of
construction lending to individuals for the construction of their residences as
well as to builders for the construction of single family homes and commercial
properties in the Company's primary market area and surrounding areas. At June
30, 1999, the Company had $2.0 million of gross construction loans.

      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 for twelve months. 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.

      All construction loans to builders require payment of interest only for up
to 12 months. At June 30, 1999, all of the Company's construction loans were
performing in accordance with their repayment terms.

      Because of the uncertainties inherent in estimating construction costs and
the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than


                                       10
<PAGE>

owner-occupants also involve many of the same risks discussed above regarding
multi-family and commercial real estate loans and tend to be more sensitive to
general economic conditions than many other types of loans. 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.

      Consumer Lending. To a lesser extent, State Federal offers secured
consumer loans, including auto loans, home equity loans, and loans secured by
savings deposits. The Association currently originates all of its consumer loans
in its primary market area. The Association originates consumer loans on a
direct basis by extending credit directly to the borrower.

      Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 1999, none of the loans in the consumer loan portfolio
was non-performing. There can be no assurance that delinquencies will not occur
in the future.

      The largest component of State Federal's consumer loan portfolio consists
of auto loans. At June 30, 1999, such loans totaled $1.0 million or
approximately 1.4% of the Association's gross loan portfolio. During the fiscal
year ended June 30, 1999, the Association originated $829,000 in auto loans as
compared to $418,000 originated in the same period ended June 30, 1998. At June
30, 1999, the Association's consumer loan portfolio totaled $1.3 million or
1.74% of its total gross loan portfolio.

      Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Association are currently originated for up to 90% of
the account balance with a hold placed on the account restricting the withdrawal
of the account balance. The interest rate on such loans is typically equal to
200 basis points above the deposit contract rate.

      The underwriting standards employed by the Association for consumer loans,
other than loans secured by deposits, include an application, a determination of
the applicant's payment history on other debts and an assessment of 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.

Originations and Purchases of Loans

      Real estate loans are generally originated by State Federal's staff of
salaried loan officers. Loan applications are taken and processed in the office
and the branch of the Association.

      While the Company originates both adjustable-rate and fixed-rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
The Company is currently a portfolio lender.

      In fiscal 1999, the Company originated $16.6 million of loans, compared to
$16.5 million and $15.3 million in fiscal 1998 and 1997, respectively. The
Company has experienced significant repayments of loans during the last three
fiscal years. Principal repayments in fiscal 1999 decreased by $500,000 to $17.7
million from $18.2 million in fiscal 1998.

      In periods of economic uncertainty, the ability of financial institutions,
including State Federal, to originate large dollar volumes of real estate loans
may be substantially reduced or restricted, with a resultant decrease in related
loan origination fees, other fee income and operating earnings.


                                       11
<PAGE>

      The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.

                                                       Year Ended June 30,
                                                 -------------------------------
                                                 1999        1998          1997
                                                 ----        ----          ----
                                                         (In Thousands)
Originations by type:
 Adjustable rate:
  Real estate - one-to-four family ......      $ 2,093      $ 2,361      $ 5,020
        - commercial ....................           --           60           96
  Non-real estate - consumer ............           --           --           --
                                               -------      -------      -------
      Total adjustable-rate .............        2,093        2,421        5,116
 Fixed rate:
  Real estate - one-to-four family ......        9,077        8,160        4,910
        - commercial ....................        4,396        5,399        4,625
  Non-real estate - consumer ............        1,034          540          667
                                               -------      -------      -------
      Total fixed-rate ..................       14,507       14,099       10,202
                                               -------      -------      -------
      Total loans originated ............       16,600       16,520       15,318

Purchases:
  Real estate - one-to-four family ......      $    --      $    --      $    --
        - commercial ....................        2,416        2,213          768
  Non-real estate - consumer ............           --           --           --
                                               -------      -------      -------
      Total loans .......................        2,416        2,213          768
  Mortgage-backed securities ............           --           --           --
                                               -------      -------      -------
      Total purchases ...................        2,416        2,213          768
                                               -------      -------      -------

Repayments:
  Principal repayments ..................      $17,650      $18,241      $12,735
                                               -------      -------      -------
      Total reductions ..................       17,650       18,241       12,735
                                               -------      -------      -------
Increase (decrease) in other items,
 net ....................................        1,985          310        2,118
                                               -------      -------      -------
      Net increase (decrease) ...........      $ 3,351      $   802      $ 5,469
                                               =======      =======      =======

Non-Performing Assets and Classified Assets

      When a borrower fails to make a required payment on real estate secured
loans and consumer loans at fifteen days a late charge is automatically assessed
and a notice is sent. At 30 days after the payment is due, the Company generally
institutes collection procedures by mailing a delinquency notice. The customer
is contacted again, by notice and/or telephone, when the payment is 60 days past
due. In most cases, delinquencies are cured promptly; however, if a loan secured
by real estate or other collateral has been delinquent for more than 90 days,
satisfactory payment arrangements must be adhered to or the Company will
initiate foreclosure or repossession.

      Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.


                                       12
<PAGE>

      The following table sets forth information concerning delinquent mortgage
and other loans at June 30, 1999. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                      Real Estate
                               ------------------------------------------------------------
                                                                      Commercial and
                                     One-to-four family                Multi-Family
                               ---------------------------     ----------------------------
                               Number     Amount   Percent     Number     Amount    Percent
                               ------     ------   -------     ------     ------    -------
                                                      (Dollars in Thousands)
<S>                                <C>    <C>        <C>            <C>   <C>        <C>
Loans delinquent for:

 30-59 days ...............        17     $  893     1.93%          5     $1,039     4.27%
 60-89 days ...............         9        636     1.38          --         --       --
 90 days and over .........         7        353     0.77           1        525     2.16
                               ------     ------     ----      ------     ------     ----

 Total delinquent loans            33     $1,882     4.08%          6     $1,564     6.43%
                               ======     ======     ====      ======     ======     ====
</TABLE>

      At June 30, 1999, there were two delinquent construction loans totaling
$219,000 and 8 consumer loans totaling $42,000. The ratio of delinquent loans to
total loans (net) was 5.13% at June 30, 1999.

      The table below sets forth the amounts and categories of non-performing
assets in the Association's loan portfolio at the dates indicated. Loans are
generally placed on non-accrual status when the collection of principal and/or
interest become doubtful or when the loan is in excess of 90 days delinquent.
Foreclosed assets include assets acquired in settlement of loans.

                                                             June 30,
                                                 ------------------------------
                                                  1999        1998        1997
                                                  ----        ----        ----
                                                        (Dollars in Thousands)
Non-accruing loans:
 One-to-four family ........................     $   --      $   96      $  810
                                                 ------      ------      ------
  Total ....................................         --          96         810

Accruing loans delinquent more
than 90 days:
 One-to-four family ........................        353           4         181
 Multi-family and commercial real estate ...        525          --          --
                                                 ------      ------      ------
  Total ....................................        878           4         181

Foreclosed assets:
 One-to-four family ........................        345         484         334
 Multi-family and commercial real estate ...        788         805          --
                                                 ------      ------      ------
  Total ....................................      1,133       1,289         334

Total non-performing assets ................     $2,011      $1,389      $1,325
                                                 ======      ======      ======
Total as a percentage of total assets ......       2.21%       1.55%       1.54%
                                                 ======      ======      ======

      Non-Performing Assets. Included in total non-performing assets are eight
mortgage loans secured by a one-to-four family dwellings totaling $353,000 and
one mortgage loan for $525,000 secured by a multi-family dwelling. The
multifamily loan is currently 30 days past due. One loan totaling $72,000 has
now been paid current. One loan totaling $70,000 is in the foreclosure process
and no loss is expected.

      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


                                       13
<PAGE>

savings association 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 a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association 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 association's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
association's District Director at the regional OTS office, who may order the
establishment of additional general or specific loss allowances.

      In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Association regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 1999, the Association had
classified a total of $1.1 million of its assets as substandard, none were
classified as doubtful, and none were classified as loss.

      At June 30, 1999, total classified assets comprised $1.1 million or 13.3%
of the Association's capital, or 1.26% of the Association's total assets.

      At June 30, 1999 the Association had a total of $1.1 million in property
acquired in settlement of loans. Included in this total is $345,000 in a one- to
four-family dwelling and $788,000 in commercial real estate. Both of the
properties are presently leased with offers pending.

      Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of 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.

      Real estate properties acquired through foreclosure are recorded at fair
value. If fair value at the date of foreclosure is lower than the balance of the
related loan, the difference will be charged-off to the allowance at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.

      Although management believes that it uses the best information available
to determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Association's allowances will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. At June 30, 1999, the Association had a total allowance
for loan losses of $242,000 or 0.33% of loans receivable, net. See Notes A and E
of the Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report to Stockholders attached hereto as Exhibit 13.


                                       14
<PAGE>

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

<TABLE>
<CAPTION>
                                                              Year Ended June 30,
                                                           -------------------------
                                                           1999     1998        1997
                                                           ----     ----        ----
                                                              (Dollars in Thousands)
<S>                                                       <C>       <C>         <C>
Balance at beginning of period ......................     $ 206     $ 221       $ 240

Charge-offs .........................................        --       (67)        (55)
Recoveries ..........................................        --        --          --
                                                          -----     -----       -----
Net charge-offs .....................................        --       (67)        (55)
Transfer to allowance for decline in
 value of foreclosed real estate ....................        --        --          --
Additions charged to operations .....................        36        52          36
                                                          -----     -----       -----
Balance at end of period ............................     $ 242     $ 206       $ 221
                                                          =====     =====       =====

Ratio of net charge-offs during the period to average
 loans outstanding during the period ................       --%       .10%        .08%
                                                          =====     =====       =====

Ratio of net charge-offs during the period to average
 non-performing assets ..............................       --%      4.69%       4.59%
                                                          =====     =====       =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                            June 30
                                    -----------------------------------------------------------
                                          1999                 1997                 1996
                                    -----------------   ------------------    -----------------
                                              Percent              Percent              Percent
                                             of Loans             of Loans             of Loans
                                              in Each              in Each              in Each
                                             Category             Category             Category
                                             to Total             to Total             to Total
                                    Amount     Loans     Amount     Loans     Amount     Loans
                                    ------   --------    ------   --------    ------   --------
                                                        (Dollars In thousands)
<S>                                  <C>       <C>        <C>       <C>        <C>       <C>
One- to four- family ...........     $ 69      62.55%     $ 67      63.41%     $ 67      63.93%

Multi-family and commercial real
estate .........................       61      32.97        58      32.98        51      29.35
Construction ...................       --       2.74        --       2.19        --       5.09
Consumer .......................       12       1.74        10       1.42        11       1.63
Unallocated ....................      100         --        71         --        92         --
                                     ----     ------      ----     ------      ----     ------
  Total ........................     $242     100.00%     $206     100.00%     $221     100.00%
                                     ====     ======      ====     ======      ====     ======
</TABLE>


                                       15
<PAGE>

Investment Activities

      State Federal must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Association has generally
maintained its liquid assets above the minimum requirements imposed by the OTS
regulations and at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit outflows. The
Association's investment policy objective in this regard sets the Association's
desired liquidity between 6% and 12%. As of June 30, 1999, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 15.19%. See "Regulation - Liquidity."

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

      Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the
Association's need for liquidity, to achieve the proper balance between its
desire to minimize risk and maximize yield, to provide collateral for
borrowings, and to fulfill the Association's asset/liability management
policies.

      Cash and Investments in Certificates of Deposit and Other Investments. At
June 30, 1999, the Company's cash and interest-bearing deposits in other
financial institutions totaled $8.5 million, or 9.36% of its total assets.
Certificates of deposits invested in other institutions totaled $884,000 or
0.97% of its total assets. The Association has a $1.1 million investment in the
common stock of the FHLB of Des Moines in order to satisfy the requirement for
membership in such institution. The Company has $1.4 million or 1.54% of its
total assets invested in corporate securities, which includes preferred common
stocks and mutual funds. The Company has $406,000 or 0.45% of its assets
invested in federal agency securities. See Note D of Notes to Consolidated
Financial Statements in the Annual Report to Stockholders attached hereto as
Exhibit 13.

      OTS regulations restrict investments in corporate debt and most equity
securities by the Association. These restrictions include prohibitions against
investments in the federal agency debt securities of any one issuer in excess of
15% of the Association's unimpaired capital and unimpaired surplus as defined by
federal regulations, plus an additional 10% if the investments are fully secured
by readily marketable collateral. See "Regulation - Federal Regulation of
Savings Associations" for a discussion of additional restrictions on the
Association's investment activities.


                                       16
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             June 30,
                                                    --------------------------------------------------------------
                                                         1999                  1998                     1997
                                                    --------------       ----------------        -----------------
                                                    Book      % of        Book       % of        Book        % of
                                                    Value     Value       Value      Value       Value       Total
                                                    -----     -----       -----      -----       -----       -----
                                                                        (Dollars in Thousands)
<S>                                               <C>          <C>       <C>          <C>       <C>          <C>
Investment Securities:
  Corporate equity securities ................    $ 1,438      46.51%    $ 1,301      35.23%    $ 1,221      27.58%
  Federal agency debt securities .............        406      13.13       1,443      39.07       2,256      50.96
  Municipal bonds ............................        100       3.23          --         --          --         --
FHLB stock ...................................      1,148      37.13         949      25.70         950      21.46
                                                  -------    -------     -------    -------     -------    -------
  Total investment securities and FHLB
  stock ......................................    $ 3,092     100.00%    $ 3,693     100.00%    $ 4,427     100.00%
                                                  =======    =======     =======    =======     =======    =======

Other Interest-Earning Assets:
 Interest-bearing deposits with banks ........    $ 8,212      90.28%    $ 9,107      86.03%    $ 3,453      43.80%
 Certificates of deposit invested
 in other institutions .......................        884       9.72       1,479      13.97       4,430      56.20
                                                  -------    -------     -------    -------     -------    -------
  Total ......................................    $ 9,096     100.00%    $10,586     100.00%    $ 7,883     100.00%
                                                  =======    =======     =======    =======     =======    =======
Average remaining life or term to repricing of
  certificates of deposit ....................     1 year                 1 year                 1 year
</TABLE>

Contractual maturities of federal agency debt securities and municipal bonds are
shown below:

                                                        June 30, 1999
                                                     ----------------------
                                                                   Weighted
                                                      Book         Average
                                                      Value         Yield
                                                     ------        --------
                                                    (Dollars in Thousands)
         Due in one year or less ..............       $202          8.35%
         Due after one year through five years          --            --
         Due after five years through ten years        204          7.45
         Due after ten years ..................        100          5.00
                                                      ----
                                                      $506
                                                      ====


                                       17
<PAGE>

Sources of Funds

      General. The Company's primary sources of funds are deposits, borrowings,
repayment of loan principal, sales of loan participations, maturing investments
in certificates of deposit, and funds provided from operations.

      Borrowings, consisting of FHLB advances, may be used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, and may be used on a longer-term basis to support expanded
lending activities.

      Deposits. State Federal offers a variety of deposit accounts having a wide
range of interest rates and terms. The Association's deposits consist of
passbook savings accounts, NOW, and money market accounts, and certificate
accounts ranging in terms from three months to 60 months. The Association only
solicits deposits from its market area and does not currently use brokers to
obtain deposits. The Association relies primarily on competitive pricing
policies, advertising and customer service to attract and retain these deposits.

      The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.

      The variety of deposit accounts offered by the Association has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Association has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The ability of the Association to attract and maintain certificates
of deposit accounts and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.

      The following table sets forth the savings flows at the Association during
the periods indicated.

                                                 Year Ended June 30,
                                         --------------------------------
                                         1999          1998          1997
                                         ----          ----          ----
                                             (Dollars in Thousands)

        Opening balance ...........    $ 53,672      $ 50,346      $ 45,732
        Deposits ..................      66,888        57,637        58,944
        Withdrawals ...............     (68,735)      (57,179)      (56,885)
        Interest credited .........       2,888         2,868         2,555
                                       --------      --------      --------

        Ending balance ............    $ 54,713      $ 53,672      $ 50,346
                                       ========      ========      ========

        Net increase (decrease) ...    $  1,041      $  3,326      $  4,614
                                       ========      ========      ========

        Percent increase (decrease)        1.94%         6.61%        10.09%
                                       ========      ========      ========


                                       18
<PAGE>

      The following table indicates the amount of the Association's certificates
of deposit and other deposits by time remaining until maturity as of June 30,
1999.

<TABLE>
<CAPTION>
                                                  Maturity
                                -----------------------------------------
                                             Over       Over
                                3 Months    3 to 6     6 to 12    Over
                                or Less     Months     Months   12 months    Total
                                -------     ------     ------   ---------    -----
                                              (Dollars in Thousands)
<S>                             <C>        <C>        <C>        <C>        <C>
Certificates of deposit less
 than $100,000 .............    $ 6,803    $ 6,383    $10,289    $13,571    $37,046
Certificates of deposit of
 $100,000 or more ..........      1,164      1,996      2,172      1,849      7,181
                                -------    -------    -------    -------    -------
Total certificates of
 deposit ...................    $ 7,967    $ 8,379    $12,461    $15,420    $44,227
                                =======    =======    =======    =======    =======
</TABLE>

      Borrowings. Although deposits are the Association's primary source of
funds, the Association's policy has been to utilize borrowings when they are a
less costly source of funds, can be invested at a positive interest rate spread
or when the Association desires additional capacity to fund loan demand.

      State Federal's borrowings historically have consisted of advances from
the FHLB of Des Moines upon the security of a blanket collateral agreement of a
percentage of unencumbered loans. Such advances can be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At June 30, 1999, the Association had $18.9 million in FHLB
advances.

      At June 30, 1999, the Association had no repurchase agreements or other
borrowings not mentioned above outstanding.

      The following table sets forth certain information including the maximum
month-end balance and average balance of FHLB advances at the dates indicated.

                                                        Year Ended June 30,
                                                     ------------------------
                                                     1999      1997      1996
                                                     ----      ----      ----
                                                        (Dollars In Thousands)
Maximum Balance:
 FHLB advances .................................   $19,000    $19,000   $19,000
                                                   =======    =======   =======

Average Balance:
 FHLB advances .................................   $18,918    $18,992   $18,500
                                                   =======    =======   =======

 Weighted average interest rate of FHLB advances      5.70%      5.98%     6.34%
                                                   =======    =======   =======


                                       19
<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 used 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 in which a federal association may engage directly.

      State Federal has one service corporation, State Service Corporation,
located in Des Moines, Iowa. State Service Corporation was organized by State
Federal in 1976. State Service Corporation owns and operates a 60-unit apartment
complex, in Pleasant Hill, Iowa.

      During the fiscal year ended June 30, 1999, State Service Corporation's
gross revenues from property management activities (consisting of rental income)
totaled approximately $328,400 and expenses (consisting of depreciation,
interest, property taxes, management fees, and maintenance) were $251,200.
Income tax expense totaled $36,300 for 1999. State Service Corporation has not
had significant capital expenditures with regard to its real estate operation
over the past three fiscal years. Revenues from State Service Corporation's
interest income on real estate contracts totaled $18,700. See Note G to the
Notes to Consolidated Financial Statements in the 1999 Annual Report to
Stockholders attached hereto as Exhibit 13.

                                   REGULATION

General

      State Federal is a federally chartered savings and loan association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, State Federal is subject to broad
federal regulation and oversight extending to all its operations. The
Association 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 System
("Federal Reserve Board"). As the savings and loan holding company of State
Federal, the Holding Company also is subject to federal regulation and
oversight. The purpose of the regulation of the Holding Company and other
holding companies is to protect subsidiary savings associations. The Association
is a member of the Savings Association Insurance Fund ("SAIF"), which together
with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of the Association are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over State Federal.

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

Federal Regulation of Savings Associations

      The OTS has extensive authority over the operations of savings
associations. As part of this authority, State Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular examination of State Federal was as of December
31, 1997. When these examinations are conducted by the OTS and the FDIC, the
examiners may require the Association 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 Association's OTS assessment for the fiscal year
ended June 30, 1999 was approximately $27,500.

      The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including State Federal and the
Holding 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,


                                       20
<PAGE>

these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.

      In addition, the investment, lending and branching authority of the
Association is prescribed by federal law 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. State Federal is in compliance with the noted
restrictions.

      The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1999, the Association's lending
limit under this restriction was approximately $1.2 million.

      The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, 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

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

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

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

      Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than


                                       21
<PAGE>

January 1, 2000, when BIF insured institutions fully participate in the
assessment. These assessments, which may be revised based upon the level of BIF
and SAIF deposits will continue until the bonds mature in the year 2017.

Regulatory Capital Requirements

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

      The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.

      The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital.

      At June 30, 1999 the Association had tangible capital of $7.7 million, or
9.01 % of adjusted total assets, which is approximately $6.5 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, 1999, the Association had core capital equal to $7.7 million,
or 9.01% of adjusted total assets, which is $5.2 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, 1999, State Federal had
no capital instruments that qualify as supplementary capital and $242,000 of
general loss reserves, which was less than 0.46% 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 excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. State Federal had no such
exclusions from capital and assets at June 30, 1999.

      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.


                                       22
<PAGE>

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

      On June 30, 1999, the Association had total risk-based capital of $8.0
million (including $7.7 million in core capital and $242,000 in qualifying
supplementary capital) and risk-weighted assets of $52.8 million or total
risk-based capital of 15.13% of risk-weighted assets. This amount was $3.8
million above the 8% requirement in effect on that date.

      The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-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 authorities of the OTS or FDIC, including the
appointment of a conservator or a receiver.

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

      The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on the Association's
operations and profitability. Holding Company shareholders do not have
preemptive rights, and therefore, if the Holding 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 Holding Company.

Limitations on Dividends and Other Capital Distributions

      OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be


                                       23
<PAGE>

reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.

      Generally, savings associations, such as State Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. State Federal may
pay dividends in accordance with this general authority.

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

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

Liquidity

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

      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, 1999, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 15.19% and a short-term
liquid assets ratio of 15.19%.

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 Association is in compliance with these amended
rules.


                                       24
<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 Association, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the Savings Association may maintain 60% of its assets specified in
Section 770(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At June
30, 1999, the Association met the test and has always met the test since its
effectiveness.

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

Community Reinvestment Act

      Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of State
Federal to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by State
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.

      The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Association may be required to devote additional funds for
investment and lending in its local community. The Association examined for CRA
compliance in 1998 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 State Federal include the Holding Company
and any company which is under common control with the Association. In addition,
a savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Association's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.


                                       25
<PAGE>

      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 Holding Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Holding Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Holding 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 Holding Company
generally is not subject to activity restrictions. If the Holding 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 Holding Company and any of its subsidiaries (other than the Association or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.

      If the Association fails the QTL test, the Holding 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 Holding 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 Holding 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 Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.

      Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding 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,
1999, the Association was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "-- Liquidity."

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


                                       26
<PAGE>

Federal Home Loan Bank System

      The Association is a member of the FHLB of Des Moines, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, 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, State Federal is required to purchase and maintain stock in
the FHLB of Des Moines. At June 30, 1999, State Federal had $1.1 million in FHLB
stock, which was in compliance with this requirement. In past years, the
Association has received substantial dividends on its FHLB stock. Over the past
five fiscal years such dividends have averaged 7.05% and were 6.44% for fiscal
year 1999.

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

      For the fiscal year ended June 30, 1999, dividends paid by the FHLB of Des
Moines to State Federal totaled $71,200 which constitutes a $6,500 increase from
the amount of dividends received in the fiscal year ended June 30, 1998. The
$17,900 dividend received for the quarter ended June 30, 1999 reflects an
annualized rate of 6.25%, which decreased 0.75% from the same quarter ended June
30, 1998, which was a rate of 7.0%.

Federal and State Taxation

      Prior to the year ended June 30, 1997, savings associations such as the
Association that meet certain definitional tests relating to the composition of
assets and other conditions prescribed by the Internal Revenue Code of 1986, as
amended (the "Code"), were 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 bad debt reserve deduction for "non-qualifying loans"
are 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) was to 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 was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8% for the
years 1987-1995. The percentage bad debt deduction thus computed was reduced by
the amount permitted as a deduction for non-qualifying loans under the
experience method. The availability of this percentage-of-taxable-income method
permitted qualifying savings associations to be taxed at a lower effective
federal income tax rate than that applicable to corporations generally
(approximately 31.3% assuming the maximum percentage bad debt deduction).
Pursuant to changes in Federal tax law enacted in August 1996, the percentage
bad debt deduction has been eliminated for tax years beginning after December
31, 1995.

      The federal tax legislation enacted in August 1996 imposes a requirement
to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Association, the base-year reserves are the balances as of
December 31, 1987. Recapture of the excess reserves will occur over a six-year
period which will begin for the bank either in fiscal year 1998, 1999, or 2000,
depending on whether it meets certain residential lending requirements. The Bank
previously established, and will continue to


                                       27
<PAGE>

maintain, a deferred tax liability with respect to its Federal tax bad debt
reserves in excess of the base-year balances; accordingly, the legislative
changes will have no effect on total income tax expense for financial reporting
purposes.

      Also, under the August 1996 legislation, the Association's base-year
Federal tax bad debt reserves are "frozen" and subject to current recapture only
in very limited circumstances. Generally, recapture of all or a portion of the
base-year reserves will be required if the Association pays a dividend in excess
of its current or accumulated earnings or profits, redeems any of its stock or
is liquidated. The Association has not established a deferred federal tax
liability under Statement of Financial Accounting Standards ("SFAS") No. 109 for
its base-year Federal tax bad debt reserves, as it does not anticipate engaging
in any of the transactions that would cause such reserves to be recaptured. The
unrecognized deferred tax liability was $520,000 at June 30, 1999.

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

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

      Iowa Taxation. The Holding Company and the Association's subsidiaries file
Iowa corporation tax returns while the Association files an Iowa franchise tax
return.

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

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

      Delaware Taxation. As a Delaware holding company, the Holding 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 Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.

Competition

      State Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings associations,
credit unions and mortgage bankers making loans secured by real estate located
in the Association's market area. The


                                       28
<PAGE>

Association competes for real estate and other loans principally on the basis of
the quality of services it provides to borrowers, and loan fees it charges, and
the types of loans it originates.

      The Association attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations and credit unions located in the same
communities. The Association competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.

      The Association's primary concentration is Des Moines, Iowa. There are
four savings institutions, over 21 commercial banks and approximately 30 credit
unions in the Association's market area. The Association estimates its share of
the savings market in its primary market area to be approximately 1.0%.

Employees

      At June 30, 1999, the Company and its subsidiary had a total of 18
employees. The Association's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.


                                       29
<PAGE>

Item 2. Properties

      The Association conducts its business at its main office and one other
location in its primary market area. The following table sets forth information
relating to each of the Association's offices as of June 30, 1999.

      The Association owns its branch office and its main office. The total net
book value of the Association's premises and equipment (including land,
building, furniture, fixtures and equipment) at June 30, 1999 was $1.2 million.
See Note I of Notes to Consolidated Financial Statements in the Annual Report to
Stockholders attached hereto as Exhibit 13.

                                             Total
                                          Approximate
                               Date          Square        Net Book Value at
        Location             Acquired       Footage          June 30, 1999
        --------             --------       -------          -------------
Main Office:
 519 Sixth Avenue        January 3, 1995     3,300             $732,300
 Des Moines, Iowa

Branch Office:
 4018 University
 Des Moines, Iowa              1985          4,000             $290,143

      The Association conducts its data processing through a service bureau, NCR
Corporation. The net book value of the data processing and computer equipment
utilized by the Association at June 30, 1999 was $106,600. The net book value of
other furniture and equipment at June 30, 1999 was $36,700.

Item 3. Legal Proceedings

      State Federal is involved from time to time as plaintiff or defendant in
various legal actions arising in the normal course of its business. State
Service Corporation, the Association's wholly-owned subsidiary is not a party to
any legal action. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing State Federal in the proceedings, that the resolution
of these proceedings should not have a material effect on State Federal's
consolidated financial position or results of operations.

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

      No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1999.

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

      Page 47 of the attached 1999 Annual Report to Stockholders is herein
incorporated by reference. The dividend payout ratio for June 30, 1999 was
37.3%.


                                       30
<PAGE>

Item 6. Management's Discussion and Analysis of Financial Condition and Results
        of Operation and Selected Financial Data

      Pages 6 through 17 of the attached 1999 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, 1999 is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.

Annual Report Section                                 Pages in Annual Report
---------------------                                 ----------------------

Independent Auditors' Report                                    19

Consolidated Balance Sheets as of
 June 30, 1999 and 1998                                         20

Consolidated Statements of Income
 for the Years Ended June 30, 1999,
 1998 and 1997                                                  21

Consolidated Statements of
 Stockholders' Equity for Years
 Ended June 30, 1999, 1998 and 1997                             23

Consolidated Statements of Cash Flows
 for Years Ended June 30, 1999, 1998
 and 1997                                                       24

Notes to Consolidated Financial
 Statements                                                     25


      With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1999 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

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


                                       31
<PAGE>

                                    PART III

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

Directors

      Information concerning directors and executive officers of the Company is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.

Item 10. Executive Compensation

      Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.

Item 11. Security Ownership of Certain Beneficial Owners and Management

      Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

Item 12. Certain Relationships and Related Transactions

      Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.


                                       32
<PAGE>

                                     PART IV

Item 13. Exhibits and Reports on Form 8-K
         (a)  Exhibits
                                                       Reference to Prior Filing
S-B Exhibit                                                or Exhibit Number
 Number               Document                             Attached Hereto
 ------               --------                             ---------------
   3(i)   Articles of Incorporation, including                    *
          amendments thereto
   3(ii)  By-Laws                                                3(ii)
   4      Instruments defining the rights of                      *
          security holders, including
          debentures
   9      Voting Trust Agreement                                 None
  10      Executive Compensation Plans and                        *
          Arrangements
          (a) Employment Contract between:                       *
              (I)   John F. Golden and the Association
              (ii)  Andra K. Black and the Association
              (iii) Craig Wood and the Association
          (b) 1993 Stock Option and Incentive                    *
              Plan
          (c) 1993 Management Recognition and                    *
              Retention Plan
          (d) Deferred Compensation Agreement                    *
  11      Statement re:  computation of per                      None
          share earnings
  13      Annual Report to Security Holders                       13
  16      Letter re:  change in certifying                       None
          accountants
  18      Letter re:  change in accounting                       None
          principles
  21      Subsidiaries of Registrant                              21
  22      Published report regarding                             None
          matters submitted to vote
          of security holders
  23      Consents of Experts and Counsel                         23
  24      Power of Attorney                                  Not required
  27      Financial Data Schedule                                None
  28      Information from reports                               None
          furnished to state insurance
          regulatory authorities
  99      Additional Exhibits                                    None

          (b) Reports on Form 8-K

           None.

----------------
*     Filed as exhibits to the Company's Form S-1 registration statement filed
      on September 23, 1993 (File No. 33-69314) pursuant to Section 5 of the
      Securities Act of 1933. All of such previously filed documents are hereby
      incorporated herein by reference in accordance with Item 601 of Regulation
      S-K.


                                       33
<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.

                                     STATEFED FINANCIAL CORPORATION


Date:     September 28, 1999         By:     /s/ John F. Golden
     -------------------------------     --------------------------------------
                                             John F. Golden
                                             (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/ John F. Golden                    /s/ Craig Wood

JOHN F. GOLDEN                        CRAIG WOOD
Chairman of the Board                 Director and Senior Vice
 President and Chief Executive        President
 Officer

Date:     September 28, 1999          Date:   September 28, 1999
     -------------------------------       -------------------------------------


/s/ Harry A. Winegar                  /s/ Eugene M. McCormick

HARRY A. WINEGAR                      EUGENE M. MCCORMICK
Director                              Director

Date:     September 28, 1999          Date:   September 28, 1999
     -------------------------------       -------------------------------------


/s/ Sidney M. Ramey                   /s/ Kevin J. Kruse

SIDNEY M. RAMEY                       KEVIN J. KRUSE
Director                              Director

Date:     September 28, 1999          Date:   September 28, 1999
     -------------------------------       -------------------------------------


                                      /s/ Andra K. Black

                                      ANDRA K. BLACK
                                      Director, Executive Vice
                                         President, Secretary and Chief
                                         Financial and Accounting
                                         Officer

                                      Date:   September 28, 1999