FIRST FEDERAL CAPITAL CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended.................................... JUNE 30, 2003

Commission file number.................................................. 0-18046

FIRST FEDERAL CAPITAL CORP
(Exact name of Registrant as specified in its charter)

WISCONSIN 39-1651288
(State or other jurisdiction of (IRS employer
incorporation or organization) identification)

605 STATE STREET
LA CROSSE, WISCONSIN 54601
(Address of principal executive office) (Zip code)

Registrant's telephone number, including area code: (608) 784-8000

NOT APPLICABLE
(Former name, former address, and former fiscal year,
if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period as the Registrant has
been subject to such requirements), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class: COMMON STOCK--$.10 PAR VALUE. Outstanding as of August 12, 2003:
19,789,298 (excludes 426,635 shares held as treasury stock).

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FORM 10-Q TABLE OF CONTENTS

PART I--FINANCIAL INFORMATION Page

Item 1--Financial Statements ................................................................. 2

Item 2--Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 13

Item 3--Quantitative and Qualitative Disclosures about Market Risk........................... 26

Item 4--Controls and Procedures.............................................................. 27

PART II--OTHER INFORMATION

Item 1--Legal Proceedings.................................................................... 28

Item 2--Changes in Securities................................................................ 28

Item 3--Defaults Upon Senior Securities...................................................... 28

Item 4--Submission of Matters to Vote of Security Holders.................................... 28

Item 5--Other Information.................................................................... 28

Item 6--Exhibits and Reports on Form 8-K..................................................... 28

SIGNATURES................................................................................................ 30

CERTIFICATIONS............................................................................................ 31

1

PART I--FINANCIAL INFORMATION

ITEM 1--FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2003, and December 31, 2002

JUNE 30 DECEMBER 31
2003 2002
ASSETS (UNAUDITED)
- ------ ---------------- ----------------

Cash and due from banks $ 84,181,935 $ 84,482,722
Interest-bearing deposits with banks 133,807,232 179,755,367
Mortgage-backed and related securities:
Available for sale, at fair value 639,608,938 366,075,106
Held for investment, at cost (fair value of $2,673,502 and $30,192,176,
respectively) 2,663,281 30,029,690
Loans held for sale 84,860,663 50,237,199
Loans held for investment, net 2,025,233,473 2,100,641,557
Federal Home Loan Bank stock 57,222,200 55,634,400
Accrued interest receivable, net 16,129,770 17,522,581
Office properties and equipment 38,069,139 35,647,335
Mortgage servicing rights, net 26,181,528 30,171,341
Intangible assets 43,433,499 43,818,386
Other assets 25,705,462 31,608,545
---------------- ----------------

Total assets $ 3,177,097,120 $ 3,025,624,228
================ ================

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposit liabilities $ 2,499,811,344 $ 2,355,148,292
Federal Home Loan Bank advances 376,250,000 400,600,000
Other borrowings 15,278,940 17,012,682
Advance payments by borrowers for taxes and insurance 8,088,173 11,906,038
Accrued interest payable 2,565,540 3,119,227
Other liabilities 54,968,742 32,385,986
---------------- ----------------
Total liabilities 2,956,962,739 2,820,172,225
---------------- ----------------
Preferred stock, $.10 par value (5,000,000 shares authorized, none outstanding) - -
Common stock, $.10 par value (100,000,000 shares authorized, 20,215,933
outstanding) 2,021,593 2,021,593
Additional paid-in capital 46,577,431 46,577,431
Retained earnings 175,709,179 165,628,148
Treasury stock, at cost (429,021 and 511,497 shares, respectively) (8,510,179) (10,178,374)
Unearned restricted stock (4,583) (32,083)
Accumulated non-owner adjustments to equity, net 4,340,940 1,435,289
---------------- ----------------
Total stockholders' equity 220,134,381 205,452,003
---------------- ----------------

Total liabilities and stockholders' equity $ 3,177,097,120 $ 3,025,624,228
================ ================

Refer to accompanying Notes to Consolidated Financial Statements.

2

CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 2003 and 2002

THREE MONTHS ENDED JUNE 30
--------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
------------- -------------

Interest on loans $ 30,791,501 $ 34,097,904
Interest on mortgage-backed and related securities 4,619,180 5,706,702
Interest and dividends on investments 1,201,817 1,207,952
------------- -------------
Total interest income 36,612,497 41,012,558
------------- -------------
Interest on deposit liabilities 12,977,324 13,788,770
Interest on FHLB advances and other borrowings 5,136,234 5,705,962
------------- -------------
Total interest expense 18,113,558 19,494,732
------------- -------------
Net interest income 18,498,939 21,517,826
Provision for loan losses 139,130 770,948
------------- -------------
Net interest income after provision for loan losses 18,359,809 20,746,878
------------- -------------
Community banking revenue 10,048,223 8,253,088
Mortgage banking revenue 9,867,403 4,132,466
Other income 554,773 591,751
------------- -------------
Total non-interest income 20,470,400 12,977,305
------------- -------------
Compensation and employee benefits 14,759,383 12,977,965
Occupancy and equipment 3,299,953 2,654,393
Communications, postage, and office supplies 1,675,398 1,615,933
ATM and debit card transaction costs 1,175,517 1,036,603
Advertising and marketing 997,975 933,916
Amortization of intangibles 202,781 178,284
Other expenses 2,738,800 1,859,996
------------- -------------
Total non-interest expense 24,849,807 21,257,090
------------- -------------
Income before income taxes 13,980,401 12,467,095
Income tax expense 5,209,773 4,278,197
------------- -------------

Net income $ 8,770,628 $ 8,188,897
============= =============

PER SHARE INFORMATION
- ---------------------
Diluted earnings per share $ 0.44 $ 0.40
Basic earnings per share 0.44 0.41
Dividends paid per share 0.14 0.13
============= =============

Refer to accompanying Notes to Consolidated Financial Statements.

3

CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended June 30, 2003 and 2002

SIX MONTHS ENDED JUNE 30
--------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
------------- -------------

Interest on loans $ 63,217,480 $ 67,154,669
Interest on mortgage-backed and related securities 8,097,835 11,122,000
Interest and dividends on investments 2,455,226 2,168,632
------------- -------------
Total interest income 73,770,541 80,445,301
------------- -------------
Interest on deposit liabilities 26,633,939 28,802,783
Interest on FHLB advances and other borrowings 10,356,465 11,495,015
------------- -------------
Total interest expense 36,990,404 40,297,797
------------- -------------
Net interest income 36,780,137 40,147,504
Provision for loan losses 518,029 1,418,349
------------- -------------
Net interest income after provision for loan losses 36,262,109 38,729,156
------------- -------------
Community banking revenue 18,875,952 15,559,161
Mortgage banking revenue 18,379,729 9,069,353
Loss on sale of investments - (166,264)
Other income 1,155,697 1,428,295
------------- -------------
Total non-interest income 38,411,379 25,890,545
------------- -------------
Compensation and employee benefits 28,755,147 25,056,443
Occupancy and equipment 6,425,033 5,057,467
Communications, postage, and office supplies 3,523,875 3,010,066
ATM and debit card transaction costs 2,265,144 1,877,212
Advertising and marketing 1,677,696 1,498,085
Amortization of intangibles 384,887 307,843
Other expenses 4,943,273 3,582,812
------------- -------------
Total non-interest expense 47,975,054 40,389,930
------------- -------------
Income before income taxes 26,698,433 24,229,770
Income tax expense 9,913,336 8,373,381
------------- -------------

Net income $ 16,785,097 $ 15,856,390
============= =============

PER SHARE INFORMATION
- ---------------------
Diluted earnings per share $ 0.84 $ 0.78
Basic earnings per share 0.85 0.79
Dividends paid per share 0.27 0.25
------------- -------------

Refer to accompanying Notes to Consolidated Financial Statements.

4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three months ended June 30, 2003 and 2002

COMMON
STOCK AND ACCUMULATED
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
- --------- ----------- ------------ ------------ ---------- ---------- ------------

Balance at March 31, 2002 $48,599,024 $147,007,647 ($2,968,406) ($73,333) $1,290,691 $193,855,623
------------
Net income 8,188,897 8,188,897
Securities valuation
adjustment, net of income taxes 2,561,261 2,561,261
------------
Net income and non-owner
adjustments to equity 10,750,158
------------
Dividends paid (2,601,295) (2,601,295)
Exercise of stock options (1,056,934) 1,542,113 485,179
Purchase of treasury stock (5,237,000) (5,237,000)
Amortization of restricted stock 291,528 13,750 305,278
----------- ------------ ------------ ---------- ---------- ------------

Balance at June 30, 2002 $48,599,024 $151,829,842 ($6,663,293) ($59,583) $3,851,952 $197,557,941
=========== ============ =========== ========= ========== ============

UNAUDITED
- ---------

Balance at March 31, 2003 $48,599,024 $170,956,527 ($10,180,511) ($18,333) $1,903,644 $211,260,351
------------
Net income 8,770,628 8,770,628
Securities valuation
adjustment, net of income taxes 2,437,296 2,437,296
------------
Net income and non-owner
adjustments to equity 11,207,924
------------
Dividends paid (2,769,048) (2,769,048)
Exercise of stock options (1,428,333) 1,670,332 241,999
Amortization of restricted stock 179,406 13,750 193,156
----------- ------------ ------------ ---------- ---------- ------------

Balance at June 30, 2003 $48,599,024 $175,709,179 ($8,510,179) ($4,583) $4,340,940 $220,134,381
=========== ============ =========== ======= ========== ============

Refer to accompanying Notes to Consolidated Financial Statements.

5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2003 and 2002

COMMON
STOCK AND ACCUMULATED
ADDITIONAL UNEARNED NON-OWNER
PAID-IN RETAINED TREASURY RESTRICTED ADJUSTMENTS
UNAUDITED CAPITAL EARNINGS STOCK STOCK TO EQUITY TOTAL
- --------- ----------- ------------ ------------ ---------- ---------- ------------

Balance at December 31, 2001 $48,627,928 $141,717,089 - ($87,083) $2,139,769 $192,397,703
------------
Net income 15,856,390 15,856,390
Securities valuation adjustment,
net of income taxes 1,604,111 1,604,111
Reclassification adjustment for
loss on securities included in
income, net of income taxes 108,072 108,072
------------
Net income and non-owner
adjustments to equity 17,568,573
------------
Dividends paid (5,020,884) (5,020,884)
Exercise of stock options (28,904) (1,231,053) $2,002,823 742,866
Purchase of treasury stock (8,666,116) (8,666,116)
Amortization of restricted stock 508,300 27,500 535,800
----------- ------------ ------------ ---------- ---------- ------------

Balance at June 30, 2002 $48,599,024 $151,829,842 ($6,663,293) ($59,583) $3,851,952 $197,557,941
=========== ============ =========== ======= ========== ============

UNAUDITED
- ---------

Balance at December 31, 2002 $48,599,024 $165,628,148 ($10,178,374) ($32,083) $1,435,289 $205,452,003
------------
Net income 16,785,097 16,785,097
Securities valuation
adjustment, net of income taxes 2,905,651 2,905,651
------------
Net income and non-owner
adjustments to equity 19,690,748
------------
Dividends paid (5,330,973) (5,330,973)
Exercise of stock options (1,572,383) 2,211,387 639,004
Purchase of treasury stock (474,112) (474,112)
Amortization of restricted stock 369,210 27,500 396,710
Other activity (169,920) (69,080) (239,000)
----------- ------------ ------------ ---------- ---------- ------------

Balance at June 30, 2003 $48,599,024 $175,709,179 ($8,510,179) ($4,583) $4,340,940 $220,134,381
=========== ============ =========== ======= ========== ============

Refer to accompanying Notes to Consolidated Financial Statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 2003 and 2002

THREE MONTHS JUNE 30
---------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
------------- -------------

Cash flows from operating activities:
Net income $ 8,770,628 $ 8,188,897
Adjustments to reconcile net income to net cash provided (used) by operations:
Provision for loan and real estate losses 105,619 732,975
Increase in mortgage servicing rights valuation allowance 1,000,000 -
Net loan costs deferred (1,373,016) (794,595)
Amortization of mortgage servicing rights 10,739,235 3,057,788
Other amortization 3,984,610 2,053,835
Depreciation 974,250 795,193
Gains on sales of mortgage loans (18,393,195) (4,339,195)
Decrease (increase) in accrued interest receivable 677,990 (27,611)
Decrease in accrued interest payable (252,743) (159,887)
Decrease in current and deferred income taxes (5,578,454) (1,297,888)
Other accruals and prepaids, net (1,190,613) (131,594)
------------- -------------
Net cash provided (used) by operations before loan originations and sales (535,689) 8,077,918
Loans originated for sale (867,053,825) (165,624,448)
Sales of loans originated for sale or transferred from held for investment 864,803,843 202,362,599
------------- -------------
Net cash provided (used) by operations (2,785,671) 44,816,069
------------- -------------
Cash flows from investing activities:
Increase in interest-bearing deposits with banks (23,188,100) (43,069,202)
Purchases of mortgage-backed and related securities available for sale (204,275,726) (52,129,581)
Principal repayments on mortgage-backed and related securities available for sale 147,024,631 44,817,732
Principal repayments on mortgage-backed and related securities held for investment 6,767,705 14,935,367
Loans originated for investment (303,152,762) (275,229,742)
Loans purchased for investment (40,253,010) (4,161,111)
Loan principal repayments 343,091,743 221,246,922
Increase in Federal Home Loan Bank stock (897,100) (660,300)
Additions to office properties and equipment (2,285,917) (2,166,655)
Purchase of net assets of other financial institutions - (7,914,840)
Other, net (1,645,391) (3,064,414)
------------- -------------
Net cash used by investing activities (78,813,927) (107,395,824)
------------- -------------
Cash flows from financing activities:
Increase in deposit liabilities 59,930,655 90,906,816
Repayment of long-term Federal Home Loan Bank advances - (300,000)
Increase in other borrowings 1,757,760 9,097,953
Increase in advance payments by borrowers for taxes and insurance 3,652,642 3,560,587
Purchase of treasury stock - (5,237,000)
Dividends paid (2,769,048) (2,601,294)
Other, net 15,072,520 2,401,171
------------- -------------
Net cash provided by financing activities 77,644,529 97,828,233
------------- -------------
Net increase (decrease) in cash and due from banks (3,955,069) 35,248,478
Cash and due from banks at beginning of period 88,137,004 52,211,204
------------- -------------
Cash and due from banks at end of period $ 84,181,935 $ 87,459,682
============= =============
Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $ 37,290,488 $ 40,984,947
Interest paid on deposits and borrowings 18,366,301 19,654,619
Income taxes paid 10,907,000 6,189,300
Income taxes refunded 119,687 613,214
Transfer of loans from held for investment to held for sale 24,718,003 27,491,626
============= ============

Refer to accompanying Notes to Consolidated Financial Statements.

7

CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002

SIX MONTHS JUNE 30
-------------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
--------------- ---------------

Cash flows from operating activities:
Net income $ 16,785,097 $ 15,856,390
Adjustments to reconcile net income to net cash provided (used) by operations:
Provision for loan and real estate losses 329,559 1,382,198
Increase (decrease) in mortgage servicing rights valuation allowance 2,800,000 (1,850,000)
Net loan costs deferred (2,551,839) (1,270,400)
Amortization of mortgage servicing rights 19,434,104 7,175,979
Other amortization 7,652,048 3,907,234
Depreciation 1,939,159 1,553,028
Gains on sales of mortgage loans (34,503,469) (8,956,577)
Loss on sales of investments - 166,264
Decrease in accrued interest receivable 1,392,811 1,542,972
Decrease in accrued interest payable (553,687) (885,431)
Increase (decrease) in current and deferred income taxes (1,153,399) 1,113,152
Other accruals and prepaids, net (2,202,750) (1,218,243)
--------------- ---------------
Net cash provided by operations before loan originations and sales 9,367,634 18,516,566
Loans originated for sale (1,500,679,127) (331,203,685)
Sales of loans originated for sale or transferred from held for investment 1,540,044,876 423,130,072
--------------- ---------------
Net cash provided by operations 48,733,383 110,442,953
--------------- ---------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits with banks 45,948,135 (63,547,165)
Sales of investment securities - 35,098,150
Purchases of mortgage-backed and related securities available for sale (531,315,491) (137,185,310)
Principal repayments on mortgage-backed and related securities available for sale 258,911,669 104,516,788
Principal repayments on mortgage-backed and related securities held for investment 27,159,627 39,056,912
Loans originated for investment (587,555,900) (475,051,665)
Loans purchased for investment (40,253,010) (4,161,111)
Loan principal repayments 641,722,883 449,392,917
Increase in Federal Home Loan Bank stock (1,587,800) (26,054,200)
Additions to office properties and equipment (4,607,852) (3,917,091)
Purchase of net assets of other financial institutions - (7,914,840)
Other, net 11,317,278 13,110,985
--------------- ---------------
Net cash used by investing activities (180,260,461) (76,655,630)
--------------- ---------------
Cash flows from financing activities:
Increase in deposit liabilities 144,663,052 3,670,645
Repayment of long-term Federal Home Loan Bank advances (24,350,000) (13,900,000)
Decrease in short-term Federal Home Loan Bank borrowings - (12,500,000)
Increase (decrease) in other borrowings (1,733,742) 11,234,606
Increase (decrease) in advance payments by borrowers for taxes and insurance (3,817,865) 6,268,110
Purchase of treasury stock (474,112) (8,666,116)
Dividends paid (5,330,973) (5,020,884)
Other, net 22,269,931 1,829,292
--------------- ---------------
Net cash provided (used) by financing activities 131,226,291 (17,084,346)
--------------- ---------------
Net increase (decrease) in cash and due from banks (300,787) 16,702,977
Cash and due from banks at beginning of period 84,482,722 70,756,705
--------------- ---------------
Cash and due from banks at end of period $ 84,181,935 $ 87,459,682
=============== ===============

Supplemental disclosures of cash flow information:
Interest and dividends received on loans and investments $ 75,163,352 $ 81,988,273
Interest paid on deposits and borrowings 37,544,091 41,183,228
Income taxes paid 11,186,400 7,874,325
Income taxes refunded 119,687 613,214
Transfer of loans from held for investment to held for sale 56,033,454 56,614,039
=============== ===============

Refer to accompanying Notes to Consolidated Financial Statements.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts and balances
of First Federal Capital Corp (the "Corporation"), First Federal Capital Bank
(the "Bank"), and the Bank's wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

NOTE 2--BASIS OF PRESENTATION

The accompanying interim consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles ("GAAP"). However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three and six month
periods ended June 30, 2003, may not necessarily be indicative of the results
that may be expected for the entire year ending December 31, 2003.

Certain 2002 balances have been reclassified to conform to the 2003
presentation.

NOTE 3--EARNINGS PER SHARE

Basic and diluted earnings per share data are based on the
weighted-average number of common shares outstanding during each period. Diluted
earnings per share is further adjusted for potential common shares that were
dilutive and outstanding during the period. Potential common shares generally
consist of stock options outstanding under the Corporation's stock incentive
plans. The dilutive effect of potential common shares is computed using the
treasury stock method. All stock options are assumed to be 100% vested for
purposes of the earnings per share computations. The computation of earnings per
share for the three and six month periods ended June 30, 2003 and 2002, is as
follows:

THREE MONTHS ENDED JUNE 30
--------------------------------------------------------------
2003 2002
--------------------------------------------------------------
DILUTED BASIC DILUTED BASIC
----------- ----------- ----------- -----------

Net income $ 8,770,628 $ 8,770,628 $ 8,188,897 $ 8,188,897
=========== =========== =========== ===========
Average common shares issued, net of actual treasury shares 19,766,629 19,766,629 20,002,367 20,002,367
Potential common shares issued under stock options (treasury
stock method) 211,701 - 332,328 -
----------- ----------- ----------- -----------
Average common shares and potential common shares 19,978,330 19,766,629 20,334,695 20,002,367
=========== =========== =========== ===========
Earnings per share $ 0.44 $ 0.44 $ 0.40 $ 0.41
=========== =========== =========== ===========

SIX MONTHS ENDED JUNE 30
--------------------------------------------------------------
2003 2002
--------------------------------------------------------------
DILUTED BASIC DILUTED BASIC
----------- ----------- ----------- -----------

Net income $16,785,097 $16,785,097 $15,856,390 $15,856,390
=========== =========== =========== ===========
Average common shares issued, net of actual treasury shares 19,732,813 19,732,813 20,057,325 20,057,325
Potential common shares issued under stock options (treasury
stock method) 234,855 - 279,616 -
----------- ----------- ----------- -----------
Average common shares and potential common shares 19,967,668 19,732,813 20,336,941 20,057,325
=========== =========== =========== ===========
Earnings per share $ 0.84 $ 0.85 $ 0.78 $ 0.79
=========== =========== =========== ===========

NOTE 4--CONTINGENCIES

The Corporation and its subsidiaries are engaged in various routine
legal proceedings occurring in the ordinary course of business, which considered
together are believed by management to be immaterial to the consolidated
financial condition and operations of the Corporation.

9

First Cap Holdings, Inc. ("FCHI"), a wholly-owned subsidiary of the
Bank, has not been subject to taxation in Wisconsin since FCHI's formation in
1993. However, the Wisconsin Department of Revenue ("WDR") recently began an
examination of the Bank specifically aimed at the Bank's relationship with FCHI.
Management believes the WDR may take the position that the income of FCHI is
taxable in Wisconsin. Management believes the Bank, as well as FCHI, have
complied with the tax rules relating to the income of out-of-state subsidiaries,
as well as the private rulings the WDR issued in 1993 and 1997 in connection
with the Bank's formation and operation of FCHI. However, the WDR has indicated
that it may repudiate these rulings. If the WDR is successful in these efforts,
it may have a substantial negative impact on the earnings of the Corporation.
Management is uncertain at this time whether the WDR exam will result in an
assessment or whether any such assessment will be upheld upon appeal.

NOTE 5--SEGMENT INFORMATION

REPORTABLE SEGMENTS The Corporation tracks profitability in six major
areas: (i) residential lending, (ii) commercial real estate lending, (iii)
consumer lending, (iv) education lending, (v) business banking, and (vi)
investment and mortgage-related securities. Residential lending is divided into
two profit centers for segment reporting purposes: (i) a mortgage banking profit
center that is responsible for loan origination, sales of loans in the secondary
market, and servicing of residential loans, and (ii) a residential loan
portfolio that consists of loans held by the Corporation for investment purposes
(loans held for sale are included in the mortgage banking profit center). This
profit center also includes mortgage-backed securities that are collateralized
by loans that were originated by the Corporation. Commercial real estate lending
consists of the Corporation's portfolio of multi-family and non-residential
mortgage loans, excluding loans assigned to the business banking profit center,
as well as functions related to the origination and servicing of such loans.
Consumer lending consists of the Corporation's second mortgage, automobile, and
other consumer installment loans, excluding loans assigned to the business
banking profit center, as well as functions related to the origination and
servicing of such loans. Education lending consists of the Corporation's
portfolio of education loans, as well as functions related to the origination
and servicing of such loans. Business banking consists of the Corporation's
portfolio of commercial business loans, in addition to commercial real estate
loans, and consumer loans assigned to the business banking profit center, as
well as functions related to the origination and servicing of such loans.
Finally, the Corporation's investment and mortgage-related securities portfolio
is considered a profit center for segment reporting purposes. As previously
noted, however, mortgage-backed securities collateralized by loans originated by
the Corporation are included in the residential loan profit center, rather than
the investment and mortgage-related securities portfolio.

The Corporation's extensive branch network, which delivers checking,
savings, certificates of deposit and other financial products and services to
customers, is considered a support department for segment reporting purposes, as
more fully described in a subsequent paragraph.

MEASUREMENT OF SEGMENT PROFIT (LOSS) Management evaluates the after-tax
performance of the Corporation's profit centers as if each center were a
separate entity--each with its own earning assets, actual and/or allocated
non-earning assets, and allocated funding resources. Each profit center has its
own interest income, non-interest income, and non-interest expense as captured
by the Corporation's accounting systems. Interest expense is allocated to each
profit center according to its use of the Corporation's funding sources, which
consist primarily of deposit liabilities, wholesale borrowings, and equity. In
general, all funding sources are allocated proportionately to each profit
center. However, in certain instances specific funding sources may be matched
against specific assets of profit centers. For example, deposits from business
customers are matched against the assets of the business banking profit center.
In addition, wholesale borrowings drawn to originate or purchase specific assets
are matched against the appropriate profit center.

The net cost of operating the Corporation's support departments is
allocated to the Corporation's profit centers and to the branch network using a
variety of methods deemed appropriate by management. In general, these net costs
are included in the non-interest expense of each profit center. In addition,
certain allocations of revenues and expenses are made between profit centers
when they perform services for each other. Such amounts, however, are not
generally material in nature.

10

The Corporation's branch network is considered a support department
center for segment reporting purposes. Community banking fees and revenues are
deducted from the non-interest expense of operating the network (to include an
allocation of net costs from the Corporation's other support departments) to
arrive at net costs for the branch network. This net cost is then allocated to
each profit center based on its use of deposit liabilities to fund its
operations. This amount is reported as "net cost to acquire and maintain deposit
liabilities" and is included as an adjustment to the net interest income of each
profit center.

For segment reporting purposes, management makes certain non-GAAP
adjustments and reclassifications to the results of operations and financial
condition of the Corporation that, in management's judgment, more fairly reflect
the performance and/or financial condition of certain of the Corporation's
profit centers.

SEGMENT PROFIT (LOSS) STATEMENTS AND OTHER INFORMATION The following
table summarizes the profit (loss) and average assets of each of the
Corporation's reportable segments for the three month and six month periods
ended June 30, 2003 and 2002. In addition to the after-tax performance of profit
centers, management of the Corporation closely monitors the net cost to acquire
and maintain deposit liabilities, which consists principally of the net costs to
operate the Corporation's branch network, as previously described. The net cost
to acquire and maintain deposit liabilities was 1.23% and 1.40% of average
deposit liabilities outstanding during the three months ended June 30, 2003 and
2002, respectively. For the six month periods ended June 30, 2003 and 2002, the
net cost to acquire and maintain deposit liabilities was 1.31% and 1.34%,
respectively.

THREE MONTHS ENDED JUNE 30
--------------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
PROFIT CENTER PROFIT (LOSS) AVERAGE ASSETS PROFIT (LOSS) AVERAGE ASSETS
--------------- --------------- --------------- ---------------

Mortgage banking $ 4,981,595 $ 120,416,498 $ 1,056,394 $ 68,062,982
Residential loans 832,135 755,003,659 1,952,763 770,300,981
Commercial real estate lending 2,182,477 527,943,370 2,489,898 567,292,887
Consumer lending 1,345,403 483,499,330 1,676,897 457,152,253
Education lending 295,723 207,836,005 718,785 209,599,043
Business banking (59,698) 200,360,697 - -
Investment and mortgage-related securities (96,070) 748,981,139 665,356 581,874,824
Other segments (166,049) 1,378,713 (129,209) 53,007,892
--------------- --------------- --------------- ---------------
Subtotal 9,315,515 3,045,419,411 8,430,884 2,707,290,862
Non-GAAP adjustments (544,887) 33,352,746 (241,987) 27,788,611
--------------- --------------- --------------- ---------------
Net income/total average assets $ 8,770,628 $ 3,078,772,157 $ 8,188,897 $ 2,735,079,473
=============== =============== =============== ===============

SIX MONTHS ENDED JUNE 30
--------------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
PROFIT CENTER PROFIT (LOSS) AVERAGE ASSETS PROFIT (LOSS) AVERAGE ASSETS
--------------- --------------- --------------- ---------------

Mortgage banking $ 9,448,170 $ 106,825,892 $ 2,272,933 $ 74,270,544
Residential loans 1,916,023 800,238,436 3,922,823 781,488,005
Commercial real estate lending 4,826,532 521,764,133 4,764,919 560,383,776
Consumer lending 2,752,848 477,968,839 2,900,550 417,007,986
Education lending 584,828 210,353,317 1,473,213 213,562,658
Business banking (216,916) 193,881,309 - -
Investment and mortgage-related securities (867,685) 711,873,317 1,044,756 552,613,774
Other segments (297,439) 1,319,721 (183,109) 46,879,995
--------------- --------------- --------------- ---------------
Subtotal 18,146,360 3,024,224,963 16,196,085 2,646,206,737
Non-GAAP adjustments (1,361,263) 29,613,276 (339,695) 22,328,655
--------------- --------------- --------------- ---------------
Net income/total average assets $ 16,785,097 $ 3,053,838,239 $ 15,856,390 $ 2,668,535,391
=============== =============== =============== ===============

NOTE 6--STOCK-BASED COMPENSATION

As permitted by GAAP, the Corporation has not adopted the "fair value
method" of expense recognition for stock-based compensation awards. Rather, the
Corporation records expense relative to stock-based compensation using the
"intrinsic value method". Since the intrinsic value of the Corporation's stock
options is generally "zero" at the time of the award, no expense is recorded.
The following table provides pro forma disclosure of the effects of the
Corporation's stock incentive plans using the fair value method.

11

THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------------------------------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------

Net income as reported $ 8,770,628 $ 8,188,897 $ 16,785,097 $ 15,856,389
Stock-based compensation, net of tax (115,179) (258,634) (259,852) (501,557)
--------------- --------------- --------------- ---------------
Pro forma net income $ 8,655,449 $ 7,930,263 $ 16,525,245 $ 15,354,832
=============== =============== =============== ===============

Basic earnings per share as reported $ 0.44 $ 0.41 $ 0.85 $ 0.79
Pro forma basic earnings per share $ 0.44 $ 0.40 $ 0.84 $ 0.77
Diluted earnings per share as reported $ 0.44 $ 0.40 $ 0.84 $ 0.78
Pro forma diluted earnings per share $ 0.43 $ 0.39 $ 0.82 $ 0.76
=============== =============== =============== ===============

With respect to restricted stock awards, the intrinsic value is
generally equal to the fair value of the Corporation's common stock on the date
of the initial contingent award, adjusted retroactively for any changes in the
value of the stock between the initial award date and the final measurement
date. Such value is amortized as expense over the measurement period of the
award.

12

ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
include words and phrases such as "will likely result", "are expected to", "will
continue", "is anticipated", "is estimated", "is projected", "intends to", or
similar expressions. Forward-looking statements are based on management's
current expectations. Examples of factors which could cause future results to
differ from management's expectations include, but are not limited to, the
following: general economic and competitive conditions; legislative and
regulatory initiatives; monetary and fiscal policies of the federal government;
general market rates of interest; interest rates on competing investments;
interest rates on funding sources; consumer and business demand for deposit and
loan products and services; consumer and business demand for other financial
services; changes in accounting policies or guidelines; and changes in the
quality or composition of the Corporation's loan and investment portfolios.
Readers are cautioned that forward-looking statements are not guarantees of
future performance and that actual results may differ materially from
management's current expectations. Furthermore, management of the Corporation
does not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

CRITICAL JUDGMENTS AND ESTIMATES For a summary of the Corporation's
significant accounting policies, refer to Note 1 of the Corporation's Audited
Consolidated Financial Statements included in Part II, Item 8, of its 2002 Form
10-K. Particular attention should be paid to two accounting areas that in
management's judgment, require significant judgments and/or estimates on the
part of management because of the inherent uncertainties surrounding these areas
and/or the subjective nature of the areas. These areas are itemized and
referenced as follows.

MORTGAGE SERVICING RIGHTS For a detailed discussion of the
judgments and estimates relating to the initial recording of and ongoing
accounting for mortgage servicing rights ("MSRs"), refer to the appropriate
section in Note 1 of the Corporation's Audited Consolidated Financial
Statements, included in Part II, Item 8, of its 2002 Form 10-K. Additional
discussion is also available in the 2002 Form 10-K "Residential Lending" section
of Part I, Item 1, "Business--Lending Activities". Finally, information on the
impact mortgage servicing rights have had on the Corporation's financial
condition and results of operations for the three and six month periods ended
June 30, 2003 and 2002, can be found below, in the sections entitled "Financial
Condition--Mortgage Servicing Rights" and "Results of Operations--Non-Interest
Income--Mortgage Banking Revenue".

ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE For a detailed
discussion of the judgments and estimates relating to allowances for losses on
loans and real estate, refer to the appropriate section in Note 1 of the
Corporation's Audited Consolidated Financial Statements, included in Part II,
Item 8, of its 2002 Form 10-K. Additional discussion is also available in the
2002 Form 10-K "Non-Performing and Other Classified Assets" section and the
"Allowances for Losses on Loans and Real Estate" section of Part I, Item 1,
"Business--Lending Activities". Finally, information on the impact loss
allowances have had on the Corporation's financial condition and results of
operations for the three and six month periods ended June 30, 2003 and 2002, can
be found below, in the sections entitled "Financial Condition--Non-Performing
Assets" and "Results of Operations--Provisions for Loan Losses".

NEW ACCOUNTING STANDARDS AND POLICIES During the six months ended June
30, 2003 and 2002, the Corporation adopted no new accounting standards or
policies that, in management's judgment, had a material impact on its financial
condition or results of operations. However, two new accounting standards were
adopted in 2002 that were significant to the financial services industry as a
whole. These standards are itemized in the paragraphs that follow.

13

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 141, "BUSINESS
COMBINATIONS" ("SFAS 141") This standard requires the purchase method of
accounting for all mergers and acquisitions, except in very limited instances.
The Corporation adopted SFAS 141 in January 2002. This adoption did not have a
material impact on the Corporation because the acquisitions completed in 2002
would have been accounted for using the purchase method regardless of SFAS 141.
For additional discussion, refer to Note 15 of the Corporation's Audited
Consolidated Financial Statements, in Part II, Item 8, of its 2002 Form 10-K.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS" ("SFAS 142") The Corporation adopted SFAS 142 in
January 2002. For further discussion, refer to "Goodwill and Intangible Assets"
in Note 1, as well as Note 6, of the Corporation's Audited Consolidated
Financial Statements, included in Part II, Item 8, of its 2002 Form 10-K.

RESULTS OF OPERATIONS

QUARTER OVERVIEW The Corporation's net income for the three months
ended June 30, 2003, was $8.8 million or $0.44 per diluted share compared to
$8.2 million or $0.40 in the same period last year. These amounts represented a
return on average assets of 1.14% and 1.20%, respectively, and a return on
average equity of 16.25% and 16.63%, respectively.

The increase in net income from 2002 to 2003 was primarily attributable
to a $5.7 million increase in mortgage banking revenue, a $1.8 million increase
in community banking revenue, and a $632,000 decrease in provision for loan
losses. These developments were offset in large part by a $3.6 million increase
in non-interest expense, a $3.0 million decrease in net interest income, and a
$932,000 increase in income tax expense.

SIX MONTH OVERVIEW The Corporation's net income for the six months
ended June 30, 2003, was $16.8 million or $0.84 per diluted share compared to
$15.9 million or $0.78 in the same period last year. These amounts represented a
return on average assets of 1.10% and 1.19%, respectively, and a return on
average equity of 15.81% and 16.20%, respectively.

The increase in net income from 2002 to 2003 was primarily attributable
to a $9.3 million increase in mortgage banking revenue, a $3.3 million increase
in community banking revenue, and a $900,000 decrease in provision for loan
losses. These developments were offset in large part by a $7.6 million increase
in non-interest expense, a $3.4 million decrease in net interest income, and a
$1.5 million increase in income tax expense.

The following paragraphs discuss the aforementioned changes in more
detail along with other changes in the components of net income during the three
and six month periods ended June 30, 2003 and 2002.

NET INTEREST INCOME Net interest income decreased by $3.0 million or
14.0% and by $3.4 million or 8.4% during the three and six month periods ended
June 30, 2003, as compared to the same periods in the previous year. These
declines occurred despite the fact that the Corporation's average
interest-earning assets increased by $305 million or 12.0% and by $341 million
or 13.7% between these periods. The principal source of this growth occurred in
the Corporation's consumer and single-family residential loan portfolios, as
well as mortgage-related securities. Contributing to a lesser extent was an
increase in the Corporation's commercial real estate and business loan
portfolios. This growth was largely funded by increases in deposit liabilities,
primarily certificates of deposit, and non-interest-bearing deposits.

The Corporation's interest rate spread declined from 3.00% and 2.83%
during the three and six month periods ended June 30, 2002, to 2.13% and 2.15%,
during the same periods in 2003, respectively. This development more than offset
the increase in net interest income caused by growth in interest-earning assets.
Market interest rates declined dramatically in 2002 and have remained at
historically low levels into 2003. As a result, the Corporation experienced a
larger decline in the yield on its earning assets than it did on its cost of
funding sources, due principally to high levels of refinance activity and the
build-up of liquidity on the Corporation's balance sheet. In March 2003,
management lowered rates on certificates of deposit and certain other deposit
offerings to improve the Corporation's interest rate spread. These steps
contributed to an 11 basis point reduction in the Corporation's

14

cost of interest-bearing liabilities during the three month period ended June
30, 2003, and helped to minimize further declines in interest rate spread.
Despite these adjustments, management believes the Corporation's deposit
products continue to be attractively priced relative to competitors.
Additionally, a substantial portion of the Corporation's existing certificates
of deposit and wholesale borrowings will mature during the next three months and
will likely be replaced at significantly lower costs. As a result, management
expects the Corporation's interest rate spread to stabilize or improve slightly
during the remainder of 2003, although there can be no assurances.

Net interest income in 2003 benefited from an increase in average
non-interest-bearing deposits, which was the principal reason the Corporation's
ratio of average interest-earning assets to interest-bearing liabilities
improved during the three and six month periods ended June 30, 2003. The
increase in non-interest-bearing deposits was due principally to a substantial
increase in custodial accounts related to mortgage loans serviced for third
parties. Refer to "Financial Condition--Deposit Liabilities" for additional
discussion.

The following tables set forth information regarding the average
balances of the Corporation's assets, liabilities, and equity, as well as the
interest earned or paid and the average yield or cost of each. The information
is based on daily average balances during the three and six month periods ended
June 30, 2003 and 2002.

Dollars in thousands THREE MONTHS ENDED JUNE 30, 2003 THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------- -------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ---------- ---------- ---------- ----------

Interest-earning assets:
Single-family mortgage loans $ 757,939 $ 9,889 5.22% $ 695,574 $ 11,504 6.62%
Commercial real estate loans 562,753 9,507 6.76 540,588 10,390 7.69
Consumer loans 515,841 8,615 6.68 431,325 8,447 7.83
Education loans 197,798 1,932 3.91 202,206 3,005 5.94
Commercial business loans 66,048 849 5.15 48,388 752 6.22
---------- ---------- ---------- ---------- ---------- ----------
Total loans 2,100,379 30,792 5.86 1,918,081 34,098 7.11
Mortgage-backed and related securities 588,616 4,619 3.14 435,533 5,707 5.24
Interest-bearing deposits with banks 94,713 305 1.29 127,966 548 1.71
Other earning assets 56,325 897 6.37 53,457 660 4.94
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 2,840,033 36,612 5.16 2,535,038 41,013 6.47
Non-interest-earning assets:
Office properties and equipment 37,776 32,336
Other assets 200,963 167,705
---------- ----------
Total assets $3,078,772 $2,735,079
========== ==========
Interest-bearing liabilities:
Regular savings accounts $ 179,583 $ 112 0.25% $ 165,754 $ 412 0.99%
Checking accounts 139,991 129 0.37 111,108 289 1.04
Money market accounts 242,016 472 0.78 235,728 810 1.37
Certificates of deposit 1,430,761 12,266 3.43 1,283,412 12,278 3.83
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 1,992,351 12,977 2.61 1,796,002 13,789 3.07
FHLB advances 378,468 5,059 5.35 441,135 5,677 5.15
Other borrowings 20,835 79 1.52 11,369 29 1.02
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,391,654 18,114 3.03 2,248,505 19,495 3.47
Non-interest-bearing liabilities:
Non-interest-bearing deposits 430,687 262,556
Other liabilities 40,603 27,043
---------- ----------
Total liabilities 2,862,945 2,538,105
Stockholders' equity 215,828 196,974
---------- ----------
Total liabilities and stockholders'
equity $3,078,772 $2,735,079
========== ==========
Net interest income $ 18,499 $ 21,518
========== ==========
Interest rate spread 2.13% 3.00%
========== ==========
Net interest income as a percent of average
earning assets 2.61% 3.40%
========== ==========
Average interest-earning assets to average
interest-bearing liabilities 118.75% 112.74%
========== ==========

15

SIX MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ---------- ---------- ---------- ----------

Interest-earning assets:
Single-family mortgage loans $ 787,433 $ 20,543 5.22% $ 710,146 $ 23,497 6.62%
Commercial real estate loans 545,367 19,683 7.22 535,441 20,689 7.73
Consumer loans 510,423 17,276 6.77 394,077 15,567 7.90
Education loans 200,328 3,919 3.91 204,957 6,058 5.91
Commercial business loans 70,316 1,797 5.11 43,057 1,343 6.24
---------- ---------- ---------- ---------- ---------- ----------
Total loans 2,113,868 63,217 5.98 1,887,679 67,155 7.12
Mortgage-backed and related securities 507,201 8,098 3.19 425,804 11,122 5.22
Investment securities - - - 5,730 92 3.14
Interest-bearing deposits with banks 143,909 867 1.20 118,566 1,022 1.72
Other earning assets 56,106 1,588 5.66 42,564 1,054 4.95
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 2,821,083 73,771 5.23 2,480,342 80,445 6.49
Non-interest-earning assets:
Office properties and equipment 37,229 31,719
Other assets 195,526 156,474
---------- ----------
Total assets $3,053,838 $2,668,535
========== ==========
Interest-bearing liabilities:
Regular savings accounts $ 172,709 $ 214 0.25% $ 155,772 $ 770 0.99%
Checking accounts 136,605 211 0.31 103,770 419 0.81
Money market accounts 240,650 992 0.82 225,807 1,691 1.50
Certificates of deposit 1,446,947 25,217 3.49 1,258,175 25,922 4.12
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 1,996,911 26,634 2.67 1,743,524 28,803 3.30
FHLB advances 383,609 10,187 5.31 450,598 11,444 5.08
Other borrowings 19,230 169 1.76 8,600 51 1.19
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,399,750 36,990 3.08 2,202,722 40,298 3.66
Non-interest-bearing liabilities:
Non-interest-bearing deposits 397,445 242,558
Other liabilities 44,284 27,478
---------- ----------
Total liabilities 2,841,479 2,472,758
Stockholders' equity 212,359 195,776
---------- ----------
Total liabilities and stockholders'
equity $3,053,838 $2,668,535
========== ==========
Net interest income $ 36,780 $ 40,148
========== ==========
Interest rate spread 2.15% 2.83%
========== ==========

Net interest income as a percent of average
earning assets 2.61% 3.24%
========== ==========
Average interest-earning assets to average
interest-bearing liabilities 117.56% 112.60%
========== ==========

PROVISION FOR LOAN LOSSES Provision for loan losses was $139,000 and
$771,000 during the three months ended June 30, 2003 and 2002, respectively. It
was $518,000 and $1.4 million during the six month periods ended as of the same
dates, respectively. In response to a third straight quarterly decline in loans
held for investment, the Corporation did not record any loan loss provisions
over-and-above its actual charge-off activity in the first six months of 2003.
Also affecting the most recent quarter was the recapture of specific loss
provisions that were established in the fourth quarter of 2002 on two business
loan relationships that paid off during the period. On an annualized basis, net
charge-offs were 0.12% and 0.11% of average loans outstanding during the three
and six month periods in 2003, respectively. These amounts compared to 0.08% and
0.09% during the same periods in 2002. As of June 30, 2003, and December 31,
2002, the Corporation's allowance for loan losses was $11.1 million and $11.7
million, respectively, or 0.55% and 0.55% of loans held for investment,
respectively. The allowance for loan losses was 178% and 217% of non-performing
loans as of the same dates, respectively. Although management believes that the
Corporation's present level of allowance for loan losses is adequate, there can
be no assurance that future adjustments to the allowance will not be necessary,
which could adversely affect the Corporation's results of operations. For
additional discussion, refer to "Financial Condition--Non-Performing Assets".

NON-INTEREST INCOME Non-interest income for the three month period
ended June 30, 2003 and 2002, was $20.5 million and $13.0 million, respectively.
These amounts represented 53% and 38% of the Corporation's total revenue during
such periods. Non-interest income for the six month periods ending as of the
same dates were $38.4

16

million and $25.9 million, respectively, or 51% and 39% of total revenue,
respectively. The following paragraphs discuss the principal components of
non-interest income and the primary reasons for their changes from 2002 to 2003.

COMMUNITY BANKING REVENUE Community banking revenue increased
by $1.8 million or 21.7% and by $3.3 million or 21.3% during the three and six
months ended June 30, 2003, respectively, as compared to the same periods in the
previous year. The following table shows the Corporation's community banking
revenue for the three and six month periods ended June 30, 2003 and 2002.

THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
Dollars in thousands 2003 2002 2003 2002
-------- -------- -------- --------

Overdraft fees $ 5,050 $ 3,989 $ 9,433 $ 7,393
ATM and debit card fees 2,924 2,494 5,471 4,583
Account service charges 587 549 1,208 1,040
Other fee income 416 351 825 693
-------- -------- -------- --------
Total deposit account revenue 7,383 16,937 13,709 8,977
-------- -------- -------- --------
Consumer loan insurance premiums and commissions 287 258 457 467
Other consumer loan fees 79 77 185 162
-------- -------- -------- --------
Total consumer loan revenue 366 335 642 629
-------- -------- -------- --------
Investment services revenue 705 535 1,298 1,221
-------- -------- -------- --------
Total community banking revenue $ 10,048 $ 8,253 $ 18,876 $ 15,559
======== ======== ======== ========

Deposit account revenue increased by $1.6 million or 21.6%
during the three months ended June 30, 2003, as compared to the same period in
the previous year. This increase was due in part to a $1.1 million or
approximately 27% increase in overdraft fees and a $431,000 or 17.3% increase in
ATM and debit card fees. These increases were due in part to an 8.7% growth in
the number of checking accounts serviced by the Corporation. Also contributing
was an increase in per-item charges, as well as changes in charging routines for
certain services.

Consumer loan revenue increased by $31,000 or 9.3% during the
three months ended June 30, 2003, as compared to the same period in the previous
year. The Corporation's principal source of consumer loan revenue consists of
sales of credit life and disability insurance policies to consumer loan
customers. During the three months ended June 30, 2003, premium and commission
revenue from the sales of such products improved as a result of increased
consumer loan originations.

Investment services revenue increased by $170,000 or 32%
during the three months ended June 30, 2003, as compared to the same period in
the previous year. The Corporation's principal sources of investment services
revenue consist of commissions from sales of tax-deferred annuities, mutual
funds, and other debt and equity securities. The improvement in investment
services revenue was due primarily to higher sales of mutual funds and equity
securities.

The explanations for the changes in community banking revenue
for the six month periods ended June 30, 2003 and 2002, were substantially the
same as those given in previous paragraphs.

MORTGAGE BANKING REVENUE Mortgage banking revenue increased by
$5.7 million or nearly 140% and by $9.3 million or over 102% during the three
and six months ended June 30, 2003, respectively, as compared to the same
periods in the previous year. The following table shows the Corporation's
mortgage banking revenue for the three and six month periods ended June 30, 2003
and 2002.

THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
Dollars in thousands 2003 2002 2003 2002
-------- -------- -------- --------

Gross servicing fees $ 2,631 $ 2,383 $ 5,155 $ 4,734
Mortgage servicing rights amortization (10,739) (3,058) (19,434) (7,176)
Mortgage servicing rights valuation (loss) recovery (1,000) - (2,800) 1,850
-------- -------- -------- --------
Total loan servicing fees, net (9,108) (675) (17,080) (592)
-------- -------- -------- --------
Gains on sales of mortgage loans 18,393 4,339 34,503 8,957
Other mortgage-related income 582 468 957 704
-------- -------- -------- --------
Total mortgage banking revenue $ 9,867 $ 4,132 $ 18,380 $ 9,069
======== ======== ======== ========

17

Gross servicing fees increased by $248,000 or 10.4% during the
three months ended June 30, 2003, as compared to the same period in the previous
year. This increase was due primarily to $365 million or 13.3% growth in average
loans serviced for others, compared to the year-ago period. This growth was
caused by a significant increase in the origination and sale of fixed-rate
mortgage loans, as described in a later paragraph.

Amortization of mortgage servicing rights was $10.7 million
and $3.1 million during the three months ended June 30, 2003 and 2002,
respectively. With market interest rates at historically low levels in 2003,
loan prepayment activity increased dramatically as borrowers refinanced older,
higher-rate residential mortgage loans, into lower-rate loans. As a result of
this activity, the Corporation recorded significantly more amortization of
mortgage servicing rights in 2003 than it did in the year-ago period.

During the three months ended June 30, 2003, the Corporation
added $1.0 million to its valuation allowance for mortgage servicing rights.
This adjustment was principally the result of an increase in prepayment
expectations caused by a historically-low interest rate environment.

Management expects that interest rates will remain at
historically low levels in the near future. If this trend continues, the
Corporation will most likely continue to experience high levels of amortization
on its MSRs as a result of high levels of loan prepayment activity. Such
amortization, however, will most likely be offset by high levels of gains on
sales of mortgage loans, although there can be no assurances. It should be
noted, however, that declines in market interest rates may also expose the
Corporation to unfavorable fair value adjustments against its portfolio of
MSRs--primarily because of increases in market expectations for future
prepayments. Although management believes that most of the Corporation's loans
that prepay are replaced by a new loan to the same customer or even a different
customer (thus preserving the future servicing cash flow), GAAP requires
allowances for impairment based on fair value which reflects losses resulting
from increases in market expectations for future prepayments to be recorded in
the current period. However, the offsetting gain on the sale of the new loan, if
any, cannot be recorded until the customer actually prepays the old loan and the
new loan is sold in the secondary market. As of June 30, 2003, the Corporation
had recorded $6.2 million in unfavorable fair value adjustments against its
mortgage servicing rights. If interest rates increase, management expects that
future prepayment expectations will decline. If such occurs, the Corporation may
recapture through earnings some or all of the fair value adjustment on its MSRs.

At June 30, 2003, and 2002, loans serviced for others were
$3.2 billion and $2.8 billion, respectively. As of the same dates, mortgage
servicing rights were $26.2 million and $31.5 million, respectively, net of the
$6.2 million valuation allowance.

Gains on sales of loans increased by $14.1 million from $4.3
million during the three months ended June 30, 2002, to $18.4 million during the
same period in 2003. This increase was primarily attributable to a $662 million
or more than 325% increase in the Corporation's mortgage loan sales. This
increase was due to a historically low interest rate environment that resulted
in increased originations and sales of fixed-rate mortgage loans in the
secondary market.

Market interest rates have remained at historically low levels
in recent months. Although there can be no assurances, management expects this
trend to continue in the near future. As such, management expects the
Corporation's gains on sales of mortgage loans to remain high by historical
standards. These gains, however, may be offset to some degree by increased
amortization of MSRs and/or unfavorable fair value adjustments on MSRs, as more
fully described in a previous paragraph.

Other mortgage-related income increased by $115,000 or almost
25% during the three months ended June 30, 2003, as compared to the same period
in the previous year. This increase was due partly to an increase in premiums
earned on the sales of mortgage impairment insurance policies. Also contributing
was an increase in fees received on loans originated as agent for the Wisconsin
State Veterans Administration and the Wisconsin Housing and Economic Development
Authority.

18

The explanations for the changes in mortgage banking revenue
for the six month periods ended June 30, 2003 and 2002 were substantially the
same as those given in previous paragraphs. The $2.8 million valuation loss on
mortgage servicing rights for the six months ended June 30, 2003, was
principally the result of an increase in future prepayment expectations. This
development contrasted with a $1.9 million recovery in the valuation during the
first six months of 2002 during which time prepayment expectations were
declining.

OTHER NON-INTEREST INCOME Other non-interest income decreased
by $37,000 or 6.3% and by $272,000 or 19.0% during the three and six month
periods ended June 30, 2003, respectively, as compared to the same periods in
the previous year. The decrease in the most recent quarterly period was
primarily due to a decline in earnings on the Corporations bank-owned life
insurance policies. The decrease in the six month period was due principally to
the receipt of a special dividend in 2002 related to the Corporation's ownership
in its primary ATM network provider.

NON-INTEREST EXPENSE Non-interest expense for the three months ended
June 30, 2003 and 2002, was $24.9 million and $21.3 million, respectively, which
was 3.23% and 3.11% of average assets during such periods, respectively.
Non-interest expense for the six months ended June 30, 2003 and 2002 was $48.0
million and $40.4 million, respectively, which was 3.15% and 3.03% of average
assets during such periods, respectively. The following paragraphs discuss the
principal components of non-interest expense and the primary reasons for their
changes from 2002 to 2003.

COMPENSATION AND EMPLOYEE BENEFITS Compensation and employee
benefits increased by $1.8 million or 13.7% during the three months ended June
30, 2003, as compared to the same period in the previous year. In general, the
increase was due to normal annual merit increases, as well as growth in the
number of banking facilities operated by the Corporation and the resulting
increase in the number of employees. Since June 30, 2002, the Corporation has
increased the number of its banking facilities from 84 to 92. In April 2002, the
Corporation completed the purchase of three banking locations from another
financial institution in Rochester, Minnesota. In September 2002, the
Corporation acquired four banking facilities in south-eastern Minnesota from
another financial institution. As of June 30, 2003, the Corporation had 1,269
full-time equivalent employees. This compared to 1,213 and 1,171 as of December
31, 2002, and June 30, 2002, respectively.

Also contributing to the increase in compensation and employee
benefits in 2003 were increased salaries to employees hired over the past year
to support the implementation of the Corporation's business banking product
line. During the first quarter of 2003, the Corporation began offering business
banking products in its Oshkosh, Wisconsin, market. The Corporation intends to
expand its offering of business banking products in additional markets in 2003,
although there can be no assurances.

Compensation and employee benefits in the first quarter of
2003 was also impacted by an increase in employee pension costs. Such costs rose
by $242,000 or over 160% during the three months ended June 30, 2003, as
compared to the same period in the previous year. In late 2002, management
completed a review of the Corporation's pension plan established for the benefit
of its full-time employees. As a result of changes in assumptions implemented in
conjunction with the review, as well as certain amendments to the pension plan,
the Corporation's pension expense will be substantially higher in 2003. Pension
expense for 2003 is expected to approximate $1.6 million compared to $734,000 in
2002. Furthermore, management has reduced the assumption for the expected return
on plan assets to 8.50% in 2003, which compared to 9.00% in 2002.

Compensation and employee benefits increased by $3.7 million
or 14.8% during the six months ended June 30, 2003, as compared to the same
period in the previous year. The explanations for the change between these
periods were substantially the same as those given in previous paragraphs. In
addition, expenditures for the Corporation's postretirement employee benefits
plan and 401(k) savings plan increased $336,000 and $235,000, during the six
months ended June 30, 2003, respectively, as compared to the same period in the
previous year. The reasons for these increases are similar to those described in
earlier paragraphs.

OCCUPANCY AND EQUIPMENT Occupancy and equipment expense
increased by $646,000 or 24.3% and $1.4 million or 27% during the three and six
months ended June 30, 2003, respectively, as compared to the same

19

periods in the previous year. These increases were primarily attributable to
growth in the number of banking facilities operated by the Corporation, as well
as increases in the number of full-time equivalent employees and in the number
of customers served by the Corporation.

COMMUNICATIONS, POSTAGE, AND OFFICE SUPPLIES Communications,
postage, and office supplies expense increased by $59,000 or 3.7% and by
$514,000 or 17.1% during the three and six months ended June 30, 2003,
respectively, as compared to the same periods in the previous year. These
increases were also caused principally by growth in the number of banking
facilities operated by the Corporation, as well as increases in the number of
full-time equivalent employees and in the number of customers served by the
Corporation.

ATM AND DEBIT CARD TRANSACTION COSTS ATM and debit card
transaction costs increased by $139,000 or 13.4% and by $388,000 or 20.7% during
the three and six months ended June 30, 2003, respectively, as compared to the
same periods in the previous year. These increases can be attributed to
increased use by the Corporation's customers of ATM and debit card networks, as
well as an increase in the number of ATMs operated by the Corporation. The
Corporation currently operates over 115 ATMs in communities located throughout
Wisconsin, northern Illinois, and south-eastern Minnesota.

ADVERTISING AND MARKETING Advertising and marketing costs
increased by $64,000 or 6.9% and by $180,000 or 12.0% during the three and six
months ended June 30, 2003, respectively, as compared to the same periods in the
previous year. These increases can be attributed to growth in the number of
banking facilities operated by the Corporation, as previously described, as well
as an increase in the number of market areas served by the Corporation.

AMORTIZATION OF INTANGIBLES Amortization of intangible assets,
which consists primarily of deposit-based intangibles, increased by $25,000 or
14.0% and by $77,000 or 25% during the three and six months ended June 30, 2003,
respectively, as compared to the same periods in the previous year. These
increases were caused by increased amortization of the deposit-based intangibles
recorded in connection with the Corporation's acquisitions in the second and
third quarters of 2002.

OTHER NON-INTEREST EXPENSE Other non-interest expense
increased by $879,000 or 47% and by $1.4 million or 38% during the three and six
months ended June 30, 2003, respectively, as compared to the same periods in the
previous year. These increases were caused by a variety of factors, the most
significant of which was increased costs related to servicing of loans for the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan Bank of
Chicago ("FHLB"). Under the terms of the servicing agreements with these
agencies, the Corporation is required to pay a full month's interest when
certain loans are repaid, regardless of the actual date of the loan payoff. A
declining interest rate environment and increased prepayment activity in 2003
resulted in increased payment of loan pay-off interest to FNMA and FHLB. This
development was partially offset by a decline in merger-related expenditures.

INCOME TAX EXPENSE Income tax expense for the three months ended June
30, 2003 and 2002, was $5.2 million and $4.3 million, respectively, or 37.2% and
34.3% of pretax income, respectively. Income tax expense for the six months
ended June 30, 2003 and 2002, was $9.9 million and $8.4 million, respectively,
or 37.1% and 34.6% of pretax income, respectively. The Corporation's effective
tax rate has increased in recent periods due principally to a higher mix of
taxable earnings in the States of Wisconsin, Minnesota, and Illinois, relative
to the State of Nevada, where the Corporation has established a wholly-owned
investment subsidiary, FCHI, and which has no corporate state income tax.

FCHI has not been subject to taxation in Wisconsin since FCHI's
formation in 1993. However, the Wisconsin Department of Revenue ("WDR") recently
began an examination of the Bank specifically aimed at the Bank's relationship
with FCHI. Management believes the WDR may take the position that the income of
FCHI is taxable in Wisconsin. Management believes the Bank, as well as FCHI,
have complied with the tax rules relating to the income of out-of-state
subsidiaries, as well as the private rulings the WDR issued in 1993 and 1997 in
connection with the Bank's formation and operation of FCHI. However, the WDR has
indicated that it may repudiate these rulings. If the WDR is successful in these
efforts, it may have a substantial negative impact on the

20

earnings of the Corporation. Management is uncertain at this time whether the
WDR exam will result in an assessment or whether any such assessment will be
upheld upon appeal.

SEGMENT INFORMATION The following paragraphs contain a discussion of
the financial performance of each of the Corporation's reportable segments
(hereafter referred to as "profit centers") for the three month and six month
periods ended June 30, 2003 and 2002. Refer to the table in Note 5 of the
Corporation's Unaudited Consolidated Financial Statements, included herein under
Part I, Item I, "Financial Statements", for a summary of the after-tax profit
(loss) of each of the Corporation's profit centers.

MORTGAGE BANKING Profits from the Corporation's mortgage
banking activities were $5.0 million in the second quarter of 2003 compared to
$1.1 million in the same period last year. Year-to-date, profits were up $7.2
million compared to 2002. Loan origination volumes and loan servicing fees are
the principal drivers of performance in this profit center. In the first six
months of 2003, the Corporation's mortgage banking operation originated $1.7
million in single-family residential loans compared to $563 million in the same
period of the previous year. However, these improvements were offset by a
substantial increase in amortization of MSRs. Beginning in 2001 and continuing
through 2003, market interest rates for mortgage loans declined dramatically and
have remained at historically low levels. As a result, amortization of MSRs has
increased relative to prior periods. Refer to "Results of
Operations--Non-Interest Income" for additional discussion.

RESIDENTIAL LOANS Profits from the Corporation's residential
loan portfolio decreased by $1.1 million or 57% and $2.0 million or 51% during
the three and six month periods ended June 30, 2003, respectively, compared to
the same periods in the previous year. The decline in this profit center's
earnings was primarily due to a decline in interest rate spread. This profit
center is funded by a mix of deposit liabilities and wholesale borrowings. The
Corporation's average cost of interest-bearing liabilities declined by 58 basis
points between the six month period in 2002 and the same period in 2003. In
contrast, the yield on the profit center's single-family residential loans
declined by 140 basis points between the periods.

During the six months ended June 30, 2003, the average assets
assigned to this profit center were $800 million, a $19 million or 2.4% increase
from the same period in 2002. This contrasts with average assets during the most
recent quarter, which declined by $15.3 million or 2.0% compared to the second
quarter of 2002. Refer to "Financial Condition--Loans Held For Investment" for
additional discussion.

The decline in net interest income was partially offset by a
$172,000 increase in net recoveries on sales of foreclosed properties during the
six months ended June 30, 2003, as compared to the same period in 2002.

COMMERCIAL REAL ESTATE LENDING Profits from commercial real
estate lending increased by $62,000 or 1.3% over the six months ended June 30,
2003, as compared to the same period in 2002. These improvements were
principally the result of an increase in the profit center's interest rate
spread in 2003 compared to 2002. This profit center is primarily funded by
deposit liabilities and, to a lesser extent, by wholesale borrowings. The
Corporation's average cost of interest-bearing liabilities declined by 58 basis
points in 2003 compared to 2002. The yield on commercial real estate loans,
however, declined by only 51 basis points between these years. During the six
months ended June 30, 2003, this profit center originated $63 million in
commercial real estate loans compared to $53 million in the same period last
year

During the three month period ended June 30, 2003, profits
declined by $307,000 compared to the same period in 2002 due to a decrease in
interest rate spread. For the three months ended June 30, 2003, the yield on
commercial real estate loans declined by 93 basis points compared to 2002. The
Corporation's average cost of interest-bearing liabilities only declined by only
44 basis points between these periods. Also contributing to the decrease in
profits from commercial real estate lending was a $39 million or 6.9% decrease
in the average assets assigned to the profit center for the three months ended
June 30, 2003, compared to the previous year. The significant decline in yield
on commercial real estate loans was caused by the fact that the yield in
previous periods had been sustained by a high level of prepayment fees on
refinanced loans. Prepayment fees have declined in recent months as customers'
opportunities to refinance loans have been exhausted.

21

CONSUMER LENDING Profits from the Corporation's consumer
lending activities decreased by $331,000 or 19.8% and $148,000 or 5.1% during
the three and six month periods ended June 30, 2003, respectively, as compared
to the same periods in the previous year. This decrease was primarily
attributable to a decline in the profit center's interest rate spread in the
most recent year, compared to the same timeframe in 2002. Similar to commercial
real estate loans, this profit center is principally funded by deposit
liabilities and, to a lesser extent, by wholesale borrowings. The yield on
consumer loans declined by 113 basis points between the first six months of 2003
and the same period in the previous year. The Corporation's average cost of
interest-bearing liabilities, however, only declined by 58 basis points between
these same periods.

During the six months ended June 30, 2003, the average assets
assigned to this profit center were $478 million, a $61 million or 14.6%
increase over the same period last year. Year-to-date, this profit center has
originated $249 million in loans in 2003 compared to $199 million in 2002.

EDUCATION LENDING Profits from education lending declined by
$423,000 or 59% and $888,000 or 60% during the three and six month periods ended
June 30, 2003, respectively, as compared to the same periods in the previous
year. These declines were primarily due to a decrease in the profit center's
interest rate spread in 2003 compared to 2002. During 2003, the average yield on
education loans has declined more than the average cost of the funding sources
for the profit center, which consist primarily of money market demand accounts.
Education loans have variable rates. As such, their yield responds quickly to
changes in market interest rates. Management expects the yield on this portfolio
to decline by 50 basis points or more in the third quarter.

During the six months ended June 30, 2003, the average assets
assigned to this profit center were $210 million, a $3.2 million or 1.5% decline
from the same period last year. Year-to-date, this profit center has originated
$27.1 million in loans in 2003 compared to $17.7 million in 2002. Competition
for education lending has increased significantly in recent years. As a result,
management has found it difficult to increase the size of this portfolio.
Management expects this trend to continue into the foreseeable future.

BUSINESS BANKING Losses from the Corporation's business
banking operations were $60,000 and $217,000 for the three and six month periods
ended June 30, 2003. The results of this profit center include costs associated
with the development of business banking services and the expansion of business
banking into additional geographic markets. The financial results of this profit
center have not been reported separately for 2002 due to efforts in that year to
design these products on the Corporation's systems, as well as efforts to
develop departmental allocations of costs and revenues necessary to fairly
present the operating results of this line of business.

INVESTMENT AND MORTGAGE-RELATED SECURITIES Loss from the
Corporation's investment securities portfolio was $96,000 in the three month
period ended June 30, 2003, compared to a profit of $665,000 in the same period
in 2002. On a year-to-date basis, the loss was $868,000 in 2003 compared to a
profit of $1.0 million in 2002. These declines were primarily due to a decrease
in the profit center's interest rate spread in 2003 compared to 2002. This
profit center is principally funded by deposit liabilities and, to a lesser
extent, by wholesale borrowings. The Corporation's average cost of
interest-bearing liabilities declined by 58 basis points between the first six
months of 2003 and the same period in the previous year. However, the yield on
the investment securities portfolio declined by 150 basis points between these
same periods due to accelerated prepayments of higher yielding securities, as
well as the buildup of low-yielding overnight investments in the profit center.

During the six months ended June 30, 2003, the average assets
assigned to this profit center were $712 million, a $159 million or 29% increase
from the same period last year.

OTHER SEGMENTS This segment consists of the parent holding
company and certain of the Bank's wholly-owned subsidiaries. In addition, in
2002 this profit center contained the preliminary results of the Corporation's
new line of business--business banking. The financial results of this profit
center were not reported separately in 2002 due to continuing efforts to develop
the departmental allocations of costs and revenues necessary to fairly present
the operating results of this line of business.

22

NON-GAAP ADJUSTMENTS Non-GAAP adjustments were ($545,000) in the second quarter
of 2003 compared to ($242,000) in the second quarter of 2002. Year-to-date,
these adjustments were ($1.4) million in 2003 compared to ($340,000) in 2002.
These declines were due to $2.8 million in unfavorable fair value adjustments
against the Corporation's mortgage servicing rights during the six months ended
June 30, 2003, as compared to a $1.9 million recovery in the same period of
2002. This decline was partially offset by an $1.0 million increase in the
difference between the Corporation's loan loss provision under GAAP and net
charge-offs used by the product profitability model during the same periods.

NET COST TO ACQUIRE AND MAINTAIN DEPOSIT LIABILITIES In
addition to the after-tax performance of the aforementioned profit centers,
management of the Corporation closely monitors the net cost to acquire and
maintain deposit liabilities. The Corporation's profit centers are allocated a
share of the net cost to acquire and maintain deposit liabilities according to
their proportionate use of such deposits as a funding source. As such, changes
in the net cost to acquire and maintain deposit liabilities will impact most of
the Corporation's profit centers.

The net cost to acquire and maintain deposit liabilities was
1.23% and 1.40% of average deposit liabilities outstanding during the three
months ended June 30, 2003 and 2002, respectively. On a year-to-date basis, the
net cost was 1.31% and 1.34%, respectively. The decrease in net cost between
these periods was the result of a larger increase in the Corporation's average
deposit liabilities than its net costs of operating its branch network.

FINANCIAL CONDITION

OVERVIEW The Corporation's total assets increased by $151 million or
5.0% during the six months ended June 30, 2003. This increase was due primarily
to an increase in mortgage-related securities, which was funded by an increase
in deposit liabilities, as well as the proceeds from declines in overnight
investments and loans held for investment.

OVERNIGHT INVESTMENTS Interest-bearing deposits with banks, which
consist of overnight investments at the FHLB, short-term money market accounts,
and federal funds purchased, decreased by $45.9 million or 26% from $180 million
at December 31, 2002, to $134 million at June 30, 2003. This decrease was the
result of the reinvestment of proceeds from loan sales and increases in deposit
liabilities into other interest-earning assets such as mortgage-related
securities.

MORTGAGE-BACKED AND RELATED SECURITIES The Corporation's aggregate
investment in its mortgage-backed and related securities portfolios increased by
$246 million or over 60% during the six months ended June 30, 2003. During this
period, the Corporation's purchased $531 million in short- and medium-term,
fixed- and adjustable-rate collateralized mortgage obligations ("CMOs"). This
development was offset in part by the repayment of $286 million in
mortgage-backed and related securities.

LOANS HELD FOR SALE The Corporation's loans held for sale increased by
$34.6 million or nearly 70% during the six months ended June 30, 2003. Declining
interest rates and high levels of refinance activity during 2003, resulted in a
high level of loans held for sale.

LOANS HELD FOR INVESTMENT The Corporation's loans held for investment
decreased by $75.4 million or 3.6% during the six months ended June 30, 2003.
During 2002 and continuing into 2003, the interest rate environment has had a
significant impact on the ability of the Corporation to maintain its
internally-originated portfolio of loans held for investment. This situation has
developed because low interest rates tend to increase customer preference for
fixed-rate mortgage loans, as opposed to adjustable-rate loans. In addition, a
low interest rate environment encourages borrowers to refinance their existing
adjustable-rate residential loans into fixed-rate loans to "lock-in" a lower
long-term rate. Given the Corporation's policy of selling these types of loans
in the secondary market, its internally-originated portfolio of adjustable-rate
residential loans declined in the most recent period.

23

The Corporation will continue to explore alternatives to maintain
growth in its interest-earning assets in the near term. These alternatives
include, but are not limited to, the purchase of adjustable-rate residential
mortgage loans from third-party financial institutions, the purchase of
mortgage-backed and related securities, and the retention of certain fixed-rate
loans that are currently sold by the Corporation in the secondary market.
However, there are many considerations involved in such decisions and there can
be no assurances that the Corporation will elect to continue any of these
strategies to increase its interest-earning assets.

MORTGAGE SERVICING RIGHTS The Corporation's mortgage servicing rights,
net of valuation allowances, were $26.2 million and $30.2 million as of June 30,
2003, and December 31, 2002, respectively. These amounts were 0.83% and 1.02% of
the outstanding principal of loans serviced for others, which amounted to $3.2
billion and $3.0 billion at June 30, 2003, and December 31, 2002, respectively.
The valuation allowance for MSR losses was $6.2 million and $3.4 million at June
30, 2003, and December 31, 2002, respectively.

DEPOSIT LIABILITIES The Corporation's deposit liabilities increased by
$145 million or 6.1% during the six months ended June 30, 2003. The
Corporation's deposit liabilities were impacted by a $154 million or over 110%
increase in custodial deposit accounts during 2003. The Corporation maintains
borrowers' principal and interest payments in such accounts on a temporary basis
pending their remittance to the third-party owners of the loans. Balances in
these accounts increased substantially in 2003 due to significant increases in
loan prepayment activity.

Excluding the increase in custodial deposits, the Corporation's deposit
liabilities decreased by $9.5 million or 0.4% during the six months ended June
30, 2003. In March 2003, management lowered rates on certificates of deposit and
certain other deposit offerings in an effort to improve the Corporation's
interest rate spread. Although the Corporation's certificate of deposits remain
competitively priced, management believes growth in the Corporation's deposit
liabilities may slow or even be negative in the near term as the Corporation's
most rate-sensitive customers move deposits to competitors offering higher
rates.

FHLB ADVANCES The Corporation's FHLB advances decreased by $24.4
million or 6.1% during the six months ended June 30, 2003. During 2003, the
Corporation did not incur any new borrowings with the FHLB. This funding source
was replaced by increases in deposit liabilities, as previously described.

NON-PERFORMING ASSETS The Corporation's non-performing assets
(consisting of non-accrual loans, real estate acquired through foreclosure or
deed-in-lieu thereof, and real estate in judgment) amounted to $10.4 million or
0.33% of total assets at June 30, 2003, compared to $9.1 million or 0.30% of
total assets at December 31, 2002. The Corporation's allowance for loan and real
estate losses was 108% and 130% of total non-performing assets as of the same
dates, respectively.

In addition to non-performing assets, at June 30, 2003, management was
closely monitoring $13.4 million in assets, which it had classified as doubtful
or substandard, but which were performing in accordance with their terms. This
compares to $22.6 million in such assets at December 31, 2002. The decrease from
2002 was due primarily to three business relationships that refinanced with
other financial institutions.

LIQUIDITY AND CAPITAL RESOURCES

The Corporation's primary sources of funds are deposits obtained
through its branch office network, borrowings from the FHLB and other sources,
amortization, maturity, and prepayment of outstanding loans and investments, and
sales of loans and other assets. During the first six months of 2003, the
Corporation used these sources of funds to fund loan commitments, purchase
mortgage-related securities, and cover maturing liabilities and deposit
withdrawals. Management believes that the Corporation has adequate resources to
fund all of its obligations or commitments, that all of its obligations or
commitments will be funded by the required date, and that the Corporation can
adjust the rates it offers on certificates of deposit to retain such deposits in
changing interest rate environments.

The Corporation's stockholders' equity ratio as of June 30, 2003, was
6.93% of total assets. The Corporation's long-term goal is to maintain its
stockholders' equity ratio at approximately 7.0%, which is consistent

24

with the Corporation's long-term objectives for return on equity of at least 15%
per year and return on assets of at least 1% per year. The Corporation's
tangible stockholders' equity ratio was 5.64% as of June 30, 2003.

The Bank is also required to maintain specified amounts of capital
pursuant to regulations promulgated by the OTS and the FDIC. The Bank's
objective is to maintain its regulatory capital in an amount sufficient to be
classified in the highest regulatory capital category (i.e., as a "well
capitalized" institution). At June 30, 2003, the Bank's regulatory capital
exceeded all regulatory minimum requirements as well as the amount required to
be classified as a "well capitalized" institution.

The Corporation paid cash dividends of $5.3 million and $5.0 million
during the six months ended June 30, 2003 and 2002, respectively. These amounts
equated to dividend payout ratios of 31.8% and 31.7% of the net income in such
periods, respectively. It is the Corporation's objective to maintain its
dividend payout ratio in a range of 25% to 35% of net income, which is
consistent with the Corporation's long-term earnings and asset growth rate
objectives of 10% per year and a return on equity objective of 15% per year.
However, the Corporation's dividend policy and/or dividend payout ratio will be
impacted by considerations such as the level of stockholders' equity in relation
to the Corporation's stated goal, as previously described, regulatory capital
requirements for the Bank, as previously described, and certain dividend
restrictions in effect for the Bank. Furthermore, unanticipated or non-recurring
fluctuations in earnings may impact the Corporation's ability to pay dividends
and/or maintain a given dividend payout ratio.

On April 22, 2003, the Corporation's Board of Directors declared a
regular quarterly dividend of $0.14 per share payable on June 5, 2003, to
shareholders of record on May 15, 2003.

During the six month period ending June 30, 2003, the Corporation
repurchased 24,551 shares under its 2000 stock repurchase plan (the "2000 Plan")
at a cost of approximately $474,000. In April 2002, the Corporation's Board of
Directors adopted another stock repurchase plan (the "2002 Plan") that
authorizes the repurchase of up to 1,001,678 shares or approximately 5% of the
Corporation's outstanding common stock. In April 2003, the Corporation's Board
of Directors extended the 2000 and 2002 Plans for another twelve months. Both
the 2000 and 2002 Plans authorize the Corporation to repurchase shares from
time-to-time in open-market transactions as, in the opinion of management,
market conditions warrant. The repurchased shares will be held as treasury stock
and will be available for general corporate purposes.

During the six month period ending June 30, 2003, the Corporation
reissued 111,427 shares of common stock out of its inventory of treasury stock
with a cost basis of approximately $2.2 million. In general, these shares were
issued upon the exercise of stock options by, or the issuance of restricted
stock to, employees and directors of the Corporation.

25

ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation manages the exposure of its operations to changes in
interest rates ("interest rate risk" or "market risk") by monitoring its ratios
of interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates (i.e., its one- and three-year
"gaps"). Management has sought to control the Corporation's one- and three-year
gaps, thereby limiting the affects of changes in interest rates on its future
earnings, by selling substantially all of its long-term, fixed-rate,
single-family mortgage loan production, investing in adjustable-rate
single-family mortgage loans, investing in consumer, education, and commercial
business loans, which generally have shorter terms to maturity and/or floating
rates of interest, and investing in commercial real estate loans, which also
tend to have shorter terms to maturity and/or floating rates of interest. The
Corporation also invests from time-to-time in adjustable-rate and short- and
medium-term fixed- and adjustable-rate CMOs and MBSs. As a result of this
strategy, the Corporation's exposure to interest rate risk is significantly
impacted by its funding of the aforementioned asset groups with deposit
liabilities and FHLB advances that tend to have average terms to maturity of
less than one year or carry floating rates of interest.

In general, it is management's long-term goal to maintain the
Corporation's one-year gap in a range of +/- 30% and its three-year gap in a
range of +/- 10%, although typically the Corporations' one- and three-year gaps
will be negative. Management believes this strategy takes advantage of the fact
that market yield curves tend to be upward sloping, which increases the spread
between the Corporation's earning assets and interest-bearing liabilities.
Furthermore, management of the Corporation does not believe that this strategy
exposes the Corporation to unacceptable levels of interest rate risk as
evidenced by the fact that the Corporation's three-year gap is generally
maintained in a narrow band around zero, which implies that the Corporation is
exposed to little interest rate risk over a three-year horizon. In addition, it
should be noted that for purposes of its gap analysis, the Corporation
classifies its interest-bearing checking, savings, and money market deposits in
the shortest category, due to their potential to reprice. However, it is the
Corporation's experience that these deposits do not reprice as quickly or to the
same extent as other financial instruments, especially in a rising rate
environment. In addition, the Corporation classifies certain FHLB advances that
are redeemable prior to maturity (at the option of the FHLB) according to their
redemption dates, which are earlier than their maturity dates.

Although management believes that its asset/liability management
strategies reduce the potential effects of changes in interest rates on the
Corporation's operations, material and prolonged increases in interest rates may
adversely affect the Corporation's operations because the Corporation's
interest-bearing liabilities which mature or reprice within one year are greater
than the Corporation's interest-earning assets which mature or reprice within
the same period. Alternatively, material and prolonged decreases in interest
rates may benefit the Corporation's operations.

The Corporation is also required by the OTS to estimate the sensitivity
of its net portfolio value of equity ("NPV") to immediate and sustained changes
in interest rates and to measure such sensitivity on at least a quarterly basis.
NPV is defined as the estimated net present value of an institution's existing
assets, liabilities, and off-balance sheet instruments at a given level of
market interest rates. In general, it is management's goal to limit estimated
changes in the Corporation's NPV under specified interest rate scenarios such
that the Corporation will continue to be classified by the OTS as an institution
with minimal exposure to interest rate risk.

As of June 30, 2003, the Corporation was in compliance with its
management polices with respect to exposure to interest rate risk. Furthermore,
there was no material change in its interest rate risk exposure since December
31, 2002.

26

ITEM 4--CONTROLS AND PROCEDURES

The Corporation's senior management, with the participation of the
Corporation's chief executive officer and chief financial officer, evaluated the
effectiveness of the Corporation's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
2003. Based on this evaluation, the Corporation's chief executive officer and
chief financial officer concluded that, as of June 30, 2003, the disclosure
controls and procedures were (1) designed to ensure that material information
relating to the Corporation, including the Bank and the Bank's wholly-owned
subsidiaries, is made known to the Corporation's chief executive officer and
chief financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be disclosed in the
reports that the Corporation files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.

27

PART II--OTHER INFORMATION

ITEM 1--LEGAL PROCEEDINGS

Refer to Note 4 of the Corporation's Consolidated Financial Statements.

ITEM 2--CHANGES IN SECURITIES

None.

ITEM 3--DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5--OTHER INFORMATION

None.

ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits.

Exhibit Number Description

31.1 Certification of President and Chief Executive
Officer of First Federal Capital Corp

31.2 Certification of Senior Vice President and Chief
Financial Officer of First Federal Capital Corp

31.3 Certification of Controller of First Federal Capital
Corp

32.1 Certification required by Section 906 of the
Sarbanes-Oxley act of 2002 signed by President and
Chief Executive Officer of First Federal Capital Corp

32.2 Certification required by Section 906 of the
Sarbanes-Oxley act of 2002 signed by Senior Vice
President and Chief Financial Officer of First
Federal Capital Corp

32.3 Certification required by Section 906 of the
Sarbanes-Oxley act of 2002 signed by Controller of
First Federal Capital Corp

b) Reports on Form 8-K.

During 2003, First Federal Capital Corp filed the following
reports on Form 8-K:

28

Report filed April 10, 2003. The report included a press release
announcing that First Federal Capital Corp entered into a definitive
merger agreement to acquire Liberty Bancshares Inc., St. Paul, MN. The
agreement and plan of merger was included by exhibit.

Report filed April 17, 2003. The report included a press release
announcing earnings for First Federal Capital Corp for the three months
ended March 31, 2003.

Report filed July 7, 2003. The report included a press release
announcing that First Federal Capital Corp, on June 30, engaged
Deloitte & Touche LLP as its independent accountant, replacing Ernst &
Young LLP. The letter of concurrence was included by exhibit. No
disagreements were cited.

29

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

FIRST FEDERAL CAPITAL CORP

/s/ Jack C. Rusch August 13, 2003
Jack C. Rusch
President and Chief Executive Officer
(duly authorized officer)

/s/ Michael W. Dosland August 13, 2003
Michael W. Dosland
Senior Vice President and
Chief Financial Officer

/s/ Kenneth C. Osowski August 13, 2003
Kenneth C. Osowski
Vice President and Controller

30

Exhibit Index

Exhibit Number Description

31.1 Certification of President and Chief Executive
Officer of First Federal Capital Corp

31.2 Certification of Senior Vice President and Chief
Financial Officer of First Federal Capital Corp

31.3 Certification of Controller of First Federal Capital
Corp

32.1 Certification required by Section 906 of the
Sarbanes-Oxley act of 2002 signed by President and
Chief Executive Officer of First Federal Capital Corp

32.2 Certification required by Section 906 of the
Sarbanes-Oxley act of 2002 signed by Senior Vice
President and Chief Financial Officer of First
Federal Capital Corp

32.3 Certification required by Section 906 of the
Sarbanes-Oxley act of 2002 signed by Controller of
First Federal Capital Corp

31